-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UsrqNkGICet8hYDx0BQIR3+3XtAqs5BWZNLj0rL86hISbeEvbIZYfSKFVq35P7GS gKUWyYJckGyaa14BVjmNZw== 0000950129-01-504660.txt : 20020413 0000950129-01-504660.hdr.sgml : 20020413 ACCESSION NUMBER: 0000950129-01-504660 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011226 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING CHEMICALS HOLDINGS INC /TX/ CENTRAL INDEX KEY: 0000795662 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 760502785 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10059 FILM NUMBER: 1822683 BUSINESS ADDRESS: STREET 1: 1200 SMITH ST, SUITE 1900 CITY: HOUSTON STATE: TX ZIP: 77002-4312 BUSINESS PHONE: 7136503700 MAIL ADDRESS: STREET 1: 1200 SMITH ST SUITE 1900 CITY: HOUSTON STATE: TX ZIP: 77002-4312 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS HOLDINGS INC DATE OF NAME CHANGE: 19960828 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS INC /TX/ DATE OF NAME CHANGE: 19961218 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING CHEMICAL INC CENTRAL INDEX KEY: 0001014669 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 760502785 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-04343-01 FILM NUMBER: 1822684 BUSINESS ADDRESS: STREET 1: 1200 SMITH STREET STREET 2: SUITE 1900 CITY: HOUSTON STATE: TX ZIP: 77002-4312 BUSINESS PHONE: 7136503700 MAIL ADDRESS: STREET 1: C/O STERLING GROUP INC STREET 2: EIGHT GREENWAY PLAZA, SUITE 702 CITY: HOUSTON STATE: TX ZIP: 77046 FORMER COMPANY: FORMER CONFORMED NAME: STX CHEMICALS CORP DATE OF NAME CHANGE: 19960516 10-K 1 h92951e10-k.txt STERLING CHEMICALS HOLDINGS, INC. - 09/30/01 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K --------------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10059 STERLING CHEMICALS HOLDINGS, INC. (Exact name of Registrant as specified in its charter) DELAWARE 76-0185186 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1200 SMITH STREET, SUITE 1900 713) 650-3700 HOUSTON, TEXAS 77002-4312 (Registrant's telephone number, including area (Address of principal executive offices) code)
COMMISSION FILE NUMBER 333-04343-01 STERLING CHEMICALS, INC. (Exact name of Registrant as specified in its charter) DELAWARE 76-0502785 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1200 SMITH STREET SUITE 1900 (713) 650-3700 HOUSTON, TEXAS 77002-4312 (Registrant's telephone number, including area (Address of principal executive offices) code)
--------------------- Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of each of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. ____________ As of December 3, 2001, Sterling Chemicals Holdings, Inc. had 12,776,678 shares of common stock outstanding. As of such date, the aggregate market value of such common stock held by nonaffiliates, based upon the last sales price of these shares as reported on the OTC Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc., was approximately $511,000. As of December 3, 2001, all outstanding equity securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals Holdings, Inc. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- Important Information Regarding this Form 10-K.............. 2 PART I Item 1. Business.................................................... 4 Recent Developments......................................... 4 Business Strategy........................................... 7 Industry Overview........................................... 8 Product Summary............................................. 10 Products.................................................... 11 Sales and Marketing......................................... 13 Contracts................................................... 14 Raw Materials for Products and Energy Resources............. 15 Technology and Licensing.................................... 17 Competition................................................. 17 Environmental Matters....................................... 18 Employees................................................... 21 Insurance................................................... 21 Item 2. Properties.................................................. 22 Item 3. Legal Proceedings........................................... 22 Item 4. Submission of Matters to Vote of Security Holders........... 24 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 24 Item 6. Selected Financial Data..................................... 25 Item 7.... Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 27 Overview.................................................... 27 Liquidity and Capital Resources............................. 31 New Accounting Standards.................................... 36 Certain Known Events, Trends, Uncertainties and Risk Factors..................................................... 37 Results of Operations....................................... 42 Comparison of Fiscal 2001 to Fiscal 2000.................... 42 Comparison of Fiscal 2000 to Fiscal 1999.................... 44 Item 7A. Qualitative and Quantitative Disclosure about Market Risk... 47 Item 8. Financial Statements and Supplementary Data................. 49 Item 9.... Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................. 136 PART III Item 10. Directors and Executive Officers of the Registrant.......... 136 Item 11. Executive Compensation...................................... 140 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 150 Item 13. Certain Relationships and Related Transactions.............. 153 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K......................................... 154
1 IMPORTANT INFORMATION REGARDING THIS FORM 10-K Readers should consider the following information as they review this Form 10-K. PRESENTATION OF FINANCIAL STATEMENTS This Form 10-K includes four separate sets of financial statements and related notes: - The first set of financial statements and related notes present both the consolidated financial position, results of operations and cash flows of Sterling Chemicals Holdings, Inc. ("Holdings") and its subsidiaries and the consolidated financial position, results of operations and cash flows of Sterling Chemicals, Inc. ("Chemicals") and its subsidiaries. Holdings directly or indirectly owns all of the other subsidiaries whose financial results are included in this Form 10-K and Chemicals is the primary operating subsidiary of Holdings. - The second set of financial statements and related notes present the combined financial position, results of operations and cash flows of the Guarantors and their subsidiaries (discussed below). - The third and fourth sets of financial statements and related notes present the consolidated financial position, results of operations and cash flows of Sterling Canada, Inc. and its subsidiaries ("Sterling Canada") and the financial position, results of operations and cash flows of Sterling Pulp Chemicals, Ltd. ("Sterling Pulp"), our two significant subsidiaries whose securities are pledged to secure a series of debt securities issued by Chemicals. Under SEC rules, specified financial information is required to be provided with respect to subsidiaries of an issuer of debt securities that guarantee the repayment of those debt securities. In July of 1999, Chemicals issued $295 million of its 12 3/8% Senior Secured Notes due 2006. The obligations of Chemicals related to the 12 3/8% Notes were guaranteed by most of its subsidiaries incorporated in the United States (the "Guarantors"). In addition, all of the capital stock of each of the Guarantors was pledged to secure the repayment of the 12 3/8% Notes. Finally, 65% of the capital stock of three of Chemicals' subsidiaries incorporated outside of the United States was pledged to secure the repayment of the 12 3/8% Notes, but these subsidiaries did not guarantee the repayment of the 12 3/8% Notes. In order to comply with these SEC rules, the financial statements of the Guarantors, each of which guaranteed the repayment of the 12 3/8% Notes, and the financial statements of Sterling Canada and Sterling Pulp, our significant subsidiaries whose securities are pledged to secure the repayment of the 12 3/8% Notes, are included with this Form 10-K. The financial statements of the Guarantors are included in this Form 10-K under Item 8 and the financial statements of Sterling Canada and Sterling Pulp are filed as exhibits to this Form 10-K. FORWARD-LOOKING STATEMENTS This Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Form 10-K, including without limitation the statements under "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Qualitative and Quantitative Disclosure about Market Risk" regarding the cyclicality of our industry, current and future industry conditions, the potential effects of such matters on our business strategy, results of operations or financial position, the adequacy of our liquidity and our market sensitive financial instruments and other statements identified by such words as "expects," "projects," "plans" and similar expressions, are forward-looking statements. The forward-looking statements are based upon current information and expectations. Estimates, forecasts and other statements contained in or implied by the forward-looking statements speak only as of the date on which they are made, are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to evaluate and predict. Although we believe that the expectations reflected in the forward-looking statements are reasonable, no assurances can be given that such expectations will prove to have been correct. Certain important factors that could cause actual results to differ materially from our expectations or what is expressed, implied or forecasted by or in the forward-looking statements include developments in our Chapter 11 proceedings, the timing and extent of changes in 2 commodity prices and global economic conditions, industry production capacity and operating rates, the supply-demand balance for our products, competitive products and pricing pressures, increases in raw material costs, our ability to obtain raw materials and energy at acceptable prices, in a timely manner and on acceptable terms, federal and state regulatory developments, our high financial leverage, petitions or motions filed or actions taken in connection with our bankruptcy proceedings, the availability of skilled personnel and our ability to attract or retain high quality employees and operating hazards attendant to the industry. Additional factors that could cause actual results to differ materially from our expectations or what is expressed, implied or forecasted by or in the forward-looking statements are stated herein in cautionary statements made in conjunction with the forward-looking statements or are included elsewhere in this Form 10-K. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Known Events, Trends, Uncertainties and Risk Factors." SUBSEQUENT EVENTS, ETC. All statements contained in this Form 10-K, including the forward-looking statements discussed above, are made as of December 20, 2001, unless those statements are expressly made as of another date. We disclaim any responsibility for the correctness of any information contained in this Form 10-K to the extent such information is affected or impacted by events, circumstances or developments occurring after December 20, 2001 or by the passage of time after such date and, except as required by applicable securities laws, we do not intend to update such information and disclaim any responsibility to do so. DOCUMENT SUMMARIES Statements contained in this Form 10-K describing documents and agreements are provided in summary form only and such summaries are qualified in their entirety by reference to the actual documents and agreements filed as exhibits to this Form 10-K. FISCAL YEAR We keep our books of record and accounts based on annual accounting periods ending on September 30 of each year. Accordingly, all references in this Form 10-K to a particular fiscal year refer to the 12 calendar month period ending on September 30 of that year. 3 PART I This combined Form 10-K is separately filed by Holdings and Chemicals. Information contained herein relating to Chemicals is filed by Holdings and separately by Chemicals on its own behalf. Unless otherwise indicated, Holdings and its subsidiaries, including Chemicals, are collectively referred to as the "Company," "we," "our," "ours" and "us." ITEM 1. BUSINESS We were organized as a Delaware corporation in 1986 and have our principal executive offices in Houston, Texas. As a result of our recapitalization and reorganization on August 21, 1996, we are now organized under a holding company structure and the only material asset of Holdings is the capital stock of Chemicals, its wholly-owned operating subsidiary. Through Chemicals and its subsidiaries, we own or operate facilities for the manufacture of eight commodity petrochemicals at our Texas City, Texas plant. We also manufacture chemicals for use primarily in the pulp and paper industry at five plants in Canada and a plant in Valdosta, Georgia and acrylic fibers at our plant near Pensacola, Florida. At our Texas City facility, we have production capacity for styrene, acrylonitrile, acetic acid, plasticizers, methanol, tertiary butylamine ("TBA"), sodium cyanide and disodium iminodiacetic acid ("DSIDA"). We generally sell our petrochemicals products to customers for use in the manufacture of other chemicals and products, which in turn are used in the production of a wide array of consumer goods and industrial products. We produce specialty textile fibers and technical fibers at our acrylic fibers facility, as well as licensing our acrylic fibers manufacturing technology to producers worldwide. Sodium chlorate is produced at our five plants in Canada and our Valdosta facility. Sodium chlorite is produced at one of our Canadian locations. In addition, chlor-alkali and calcium hypochlorite are produced at one of our Canadian locations. We also license, engineer and oversee construction of large-scale chlorine dioxide generators for the pulp and paper industry as part of our pulp chemicals business. These generators convert sodium chlorate into chlorine dioxide at pulp mills. RECENT DEVELOPMENTS CHAPTER 11 PROCEEDINGS On July 16, 2001 (the "Petition Date"), Holdings, Chemicals and most of their U.S. subsidiaries (collectively, the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") in the U.S. Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") and began operating their business as debtors-in-possession pursuant to the Bankruptcy Code. None of our foreign subsidiaries, including our Canadian subsidiaries, were included in the Chapter 11 filings. The 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 weak demand for petrochemical products caused by declines in general worldwide economic conditions, the relative strength of the U.S. dollar, which has caused their export sales to be at a competitive disadvantage and higher raw material and energy costs. As a result of these conditions, the Debtors have incurred significant operating losses. The reorganization contemplated by the Chapter 11 filings is designed to permit the Debtors to preserve cash and to give the Debtors the opportunity to restructure their debt. During the pendency of the Chapter 11 cases, with approval of the Bankruptcy Court, the Debtors may assume favorable pre-petition contracts and leases, reject unfavorable pre-petition contracts and leases and sell or otherwise dispose of assets. The confirmation of a plan of reorganization is the primary objective of the Debtors. Unless otherwise ordered by the Bankruptcy Court, the Debtors have the exclusive right to propose a plan of reorganization until March 13, 2002, and the exclusive right to seek acceptances of any plan proposed by them until May 12, 2002. A plan of reorganization, when filed, will set forth the means for treating claims, including liabilities subject to compromise and interests in the Debtors. Such means may take a number of different forms. A plan of reorganization may result in, among other things, significant dilution or elimination of certain classes of existing equity interests as a result of the issuance of equity securities to creditors or new investors. The Debtors are in the early stages of formulating a 4 plan of reorganization. The confirmation of any plan of reorganization will require creditor acceptance as required under the Bankruptcy Code and approval of the Bankruptcy Court. At this time, it is not possible to predict the outcome of the bankruptcy cases in general or the effect on the business of the Debtors, the claims of creditors of the Debtors or the interests of stockholders of Holdings. As a result of the bankruptcy filings, most of the Debtors' liabilities incurred prior to the Petition Date, including certain secured debt, could be subject to compromise. However, the ultimate resolution of these liabilities is not presently determinable. Effective July 19, 2001, the Debtors (excluding Holdings) entered into a Revolving Credit Agreement with a group of lenders led by Tyco Capital (formerly The CIT Group/Business Credit, Inc.) to provide up to $195 million in Debtor-In-Possession financing (the "DIP Financing"). By interim order dated July 18, 2001 and final order dated September 14, 2001, the Bankruptcy Court approved up to $155 million in lending commitments under the DIP Financing (the "Base Facility"), consisting of an $85 million "current assets revolver" and a $70 million "fixed assets revolver." The initial draw under the DIP Financing was used to repay all amounts outstanding under the Debtors' previous revolving credit facilities. Additional borrowings under the DIP Financing may be used to fund the Debtors' post-petition operating expenses and supplier and employee obligations throughout the reorganization process. The final order dated September 14, 2001 is on appeal to the U.S. District Court, but no stay of the final order has been sought or imposed, and the order remains fully effective. While no assurances can be given, we do not believe the final order will be overturned on appeal. Borrowings under the DIP Financing are subject to customary funding conditions, including borrowing base restrictions under the current assets revolver. The Base Facility is secured by substantially all of the assets of the Debtors, but some of the liens have been granted super-priority administrative expense claims for the amount of the DIP Financing which, subject to certain carve outs, will entitle the DIP lenders to be paid before any other claims against the Debtors are paid. The DIP Financing is designed to give the Debtors the opportunity, during the reorganization process, to develop a new capital structure that will support them over the long-term, including during recurring cyclical downturns in the markets for the Debtors' petrochemicals products. At September 30, 2001, the total credit available under the DIP Financing was $112.8 million due to borrowing base restrictions under the current assets revolver. At September 30, 2001, $42.3 million was drawn under the fixed assets revolver and there were no borrowings outstanding under the current assets revolver. In addition, approximately $4.4 million of letters of credit were outstanding under the current assets revolver, leaving at September 30, 2001, unused borrowing capacity under the secured revolving credit facilities of approximately $66.1 million. As a result of a priming order entered by the Bankruptcy Court on November 2, 2001 and reinstated on December 19, 2001, the lending commitments under the current assets revolver were increased from $85 million to $125 million. The priming order grants the lenders under the currents assets revolver a priming lien on our fixed assets located in the United States and the capital stock of most of our domestic subsidiaries, prior in right to the existing liens in favor of the 12 3/8% Notes. Although the priming order was entered by the Bankruptcy Court on November 2, 2001, it was appealed to the U.S. District Court by the indenture trustee for the 12 3/8% Notes. By order dated December 17, 2001, the U.S. District Court reversed the priming order and remanded the matter to the Bankruptcy Court for a determination of a compensatory adjustment in favor of the 12 3/8% Notes, which the U.S. District Court suggested would be satisfied by a 4% increase of the interest rate payable on up to $40 million. On remand, the Bankruptcy Court entered an order dated December 19, 2001, reinstating the priming order subject to an appropriate compensatory adjustment in favor of the 12 3/8% Notes of four percentage points of additional interest on up to $40 million. In addition, the Bankruptcy Court scheduled a hearing for January 2, 2002 to determine certain technical details regarding implementation of this 4% increase. The Debtors anticipate that the priming order will be further appealed by the indenture trustee. The priming order will remain effective pending the outcome of any appeal unless stayed by an appellate court. The Debtors will take all reasonable actions necessary, either before the Bankruptcy Court or on appeal, to maintain the effectiveness of the priming order and the additional liquidity provided by the priming order. If the priming order is stayed or is not ultimately upheld on appeal, the Debtors will need to seek additional sources of financing or revise their business plan and operations consistent with the level of 5 available financing. However, we can give no assurances that the priming order will not be stayed or will be upheld on appeal or, if stayed or not upheld on appeal, that additional sources of financing will be available or adequate or that our available financing will be adequate after implementing revisions to the Debtors' business plan and operations. As of July 11, 2001, our principal Canadian subsidiary, Sterling Pulp, entered into a financing agreement with Tyco Capital Business Credit (Canada) Inc. ("Tyco Canada") to provide up to the Canadian dollar equivalent of U.S. $30 million (the "Canadian Financing Agreement"). The initial advance under this facility, approximately U.S. $20 million, was used by Sterling Pulp to discharge a portion of an intercompany debt and was ultimately transferred to the Debtors through an intercompany loan. The intercompany loan was approved by the Bankruptcy Court's interim order entered on July 18, 2001 and final order entered on September 14, 2001, which is a subject of the appeal of the final order discussed above. At September 30, 2001, $20 million was drawn under the Canadian Financing Agreement. The Debtors are permitted to continue to operate their businesses and manage their properties in the ordinary course without prior approval from the Bankruptcy Court. Transactions outside of the ordinary course of business, including certain types of capital expenditures, certain sales of assets and certain requests for additional financings, will require approval by the Bankruptcy Court. There is no assurance that the Bankruptcy Court will grant any requests for such approvals. On July 18, 2001, the Bankruptcy Court issued an order permitting the Debtors to pay pre-petition salaries, wages and benefits to all of their employees. The Bankruptcy Court also authorized the payment of certain other pre-petition claims, in limited circumstances, as necessary to avoid undue disruption to the Debtors' operations. Generally, actions to enforce or otherwise effect repayment of pre-petition liabilities of, as well as all pending litigation against, the Debtors are stayed while the Debtors continue to operate their business as debtors-in-possession. The ultimate amount and settlement terms for such liabilities will be subject to a plan of reorganization and, accordingly, are not presently determinable. The Debtors' trade creditors, including vendors, will be paid their post-petition claims in the normal course of business. As our foreign subsidiaries are not included in the Chapter 11 filings, all of their creditors, including vendors, will be paid their claims in the ordinary course of business, irrespective of whether the claims arose prior to or after the Chapter 11 filings. As a result of the bankruptcy filings and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, confirmation of a plan of reorganization, or disapproval thereof, could change the amounts reported in the financial statements. The ability of the Debtors to continue as a going concern is dependent upon, among other things, (i) the Debtors' ability to comply with the terms of the DIP Financing and related orders entered by the Bankruptcy Court in connection with the Chapter 11 cases, (ii) the ability of the Debtors to access the incremental $40 million in DIP Financing that is dependent on an effective priming order (iii) the ability of the Debtors to maintain adequate cash on hand, (iv) the ability of the Debtors to generate sufficient cash from operations, (v) the ability of the Debtors' subsidiaries that are not included in the Chapter 11 cases to obtain necessary financing, (vi) confirmation of a plan or plans of reorganization under the Bankruptcy Code and (vii) the Debtors' ability to achieve profitability following such confirmation. As the Debtors can give no assurances that they will accomplish any of the foregoing, there is substantial doubt about the Debtors', and therefore the Company's, ability to continue as a going concern. The accompanying financial statements do not include any adjustments that may result from the resolution of these uncertainties. MANAGEMENT CHANGES On December 19, 2001 we announced that Frank P. Diassi had elected to terminate his employment, effective immediately. Mr. Diassi joined Sterling in 1996 as executive Chairman of the Board and continued in that position until his termination. Earlier this year he was elected Co-Chief Executive Officer along with David G. Elkins, our President. Mr. Diassi has asserted that he had "good reason" to terminate his 6 employment and is claiming that he is entitled to receive payments under our employee retention and severance plans. Our Compensation Committee is evaluating the merits of Mr. Diassi's claim. Mr. Diassi will continue in his role as director. Succeeding Mr. Diassi as Co-Chief Executive Officer is Richard K. Crump. Since joining us in 1986, Mr. Crump has served in a variety of management positions, most recently as Executive Vice President-Operations. Mr. Crump has also been elected to our Board of Directors, increasing the size of the Board of Directors to seven. In a separate action, Robert W. Roten was elected non-executive Chairman of the Board of Directors, having served as a director since 1996 and as Vice Chairman of the Board of Directors since 1998. Mr. Roten was employed by us for 25 years, eventually attaining the positions of President and CEO before he retired in 1998. FIBERS On March 8, 2001, we announced our decision to withdraw from the traditional commodity textile business and, thereafter, significantly reduced our operations and staffing at our acrylic fibers plant in Santa Rosa, Florida. The decision came after our rationalization and cost reduction programs failed to return this business to profitable levels. We made this reduction due to extremely difficult operating conditions now facing the domestic acrylic textile industry, including conditions caused by the importation of finished goods by offshore producers and higher domestic energy and raw materials costs. We continue to produce our specialty and technical fibers products at this facility, and are examining strategic alternatives with respect to this business. We are also examining alternative uses of the portions of the plant idled by this reduction. SECURITY Since the terrorists attacks of September 11, 2001, we have worked with local, state and federal agencies as well as several security consultants to enhance our Texas City facility's security. The plant has increased the number of security personnel on duty and, on an as-needed basis, added armed patrols along its perimeter. In addition, the perimeter fencing and lighting at the plant have been improved, permanent concrete barriers have been installed at all unmanned gates and surveillance cameras along with observation towers have been added at strategic locations. At the current time, we are working with the City of Texas City to install road barricades adjacent to the plant to control access into the plant. In addition to the physical changes at the Texas City plant, plant employees have received additional security training, participated in security and emergency response drills and all security procedures and protocols have been updated to reflect recommendations from security consultants and governmental procedural changes. Additional security measures have also been instituted at our other plants to restrict access into the plants and we have increased surveillance. BUSINESS STRATEGY Our objectives are to improve our capital structure, to be a premier producer of chemicals, to maintain a strong market position, to achieve first quartile cost performance in all of our major products and to provide superior customer service. Our management team has adopted the following strategies in pursuit of these objectives: - continue to improve our cost structure; - pursue improvements to our businesses and facilities through expansions, upgrades and strategic alliances; and - optimize capacity utilization rates through long-term supply arrangements. The cyclicality of the markets for our primary products, however, subjects us to periods of overcapacity accompanied by lower prices and profit margins. In addition, the instruments governing the DIP Financing 7 and the Canadian Financing Agreement limit our ability to incur additional debt. These and other factors, including our Chapter 11 filings, limit our ability to successfully implement our business strategy. INDUSTRY OVERVIEW PETROCHEMICALS Styrene. Current global styrene annual capacity is approximately 52 billion pounds. Current total North American annual styrene capacity is approximately 15 billion pounds. As is the case with other petrochemicals, styrene from time to time experiences periods of strong demand resulting in tight supply and high prices and margins. This tight balance in supply and demand often results in new capacity additions. In most cases, incremental capacity comes in the form of large new plants or major expansions of existing facilities. As this new capacity comes on line, it often exceeds current demand growth and results in a decline in prices and margins. Following a period of strong demand growth and high utilization rates from 1994 to 1996, several major petrochemical producers announced new capacity increases in 1997 and 1998, particularly in the Far East. At the time of this announced new capacity, there was a general slowdown in the economic growth rate in the Far East, prompting petrochemical customers to begin utilizing their available inventories and decrease purchases of additional product. As a result, our average styrene prices declined from fiscal 1997 through fiscal 1999, as the previously announced new capacity came on line at the same time that economic events in various Asian countries significantly reduced demand growth for styrene. During fiscal 2000, styrene prices and margins increased significantly from levels experienced in fiscal 1999. These improvements were driven by a combination of stronger market demand, operating problems experienced at several of our competitors and generally low inventory levels worldwide. Styrene prices and margins peaked in April of 2000 at a published spot price of $0.48 per pound and decreased over the second half of 2000. During fiscal 2001, U.S. and world economies experienced a general slowdown which has negatively impacted demand for most petrochemicals. Raw material and energy costs spiked upward during the first half of fiscal 2001, increasing significantly from the prior year, primarily due to the sharp increase in natural gas prices. As a result, U.S. Gulf Coast petrochemicals producers experienced significant margin erosion in most of their products. Due to these conditions, many U.S. Gulf Coast petrochemicals producers, including us, reduced production levels. During the second half of fiscal 2001, raw material and energy costs began to moderate, although demand has remained weak due to the continued economic slowdown. Reported styrene spot prices averaged from $0.17 to $0.19 per pound during September 2001. We cannot predict future increases or decreases in styrene prices and margins. Acrylonitrile. Current global acrylonitrile capacity is approximately 13 billion pounds per year. The acrylonitrile market exhibits similar characteristics to those of styrene regarding capacity utilization, selling prices and profit margins. Moreover, as a high percentage of our acrylonitrile sales are made in the export market, demand for our acrylonitrile is significantly influenced by export customers, particularly those that supply acrylic fibers to customers in China. During 1995, strong demand for acrylic fibers and ABS resins, particularly in China, increased demand for acrylonitrile, resulting in high prices and margins. High utilization rates and prices prompted many major producers to announce new capacity increases and approximately two billion pounds of capacity increases came on line between 1996 and 1998. As new acrylonitrile capacity in the United States and Asia came on line, demand growth in Asian markets weakened, causing acrylonitrile prices and margins to decrease significantly from 1996 through 1999. Beginning in early fiscal 2000, acrylonitrile prices increased significantly due to improved market demand, operating problems experienced at several of our competitors and generally low inventory levels. Due to the general slowdown of U.S. and world economies, along with higher raw material and energy costs, acrylonitrile prices and margins weakened significantly in fiscal 2001. As a result, we rescheduled maintenance turnaround work at our Texas City acrylonitrile facility, performing this work during the second quarter of fiscal 2001 rather than later in the year. The adverse economic conditions that made it commercially impracticable to operate our acrylonitrile and other nitriles production units, and that served as the basis for our decision to advance the timing of the turnaround, 8 persisted beyond the completion of this maintenance turnaround work. Consequently, we elected to postpone restarting our acrylonitrile facilities and other nitriles production units until it is commercially practicable to operate these facilities. Our other nitriles production units include the sodium cyanide, TBA and DSIDA production units, all of which are dependent on the acrylonitrile facilities for feedstocks. Our conversion agreement with Flexsys America L.P. ("Flexsys") for the production of TBA terminates as of December 31, 2001. We are currently evaluating our options related to TBA production following the termination of this contract. Acetic Acid. Current North American acetic acid capacity is approximately 6 billion pounds per year. Several capacity additions occurred in 1998 and 1999, including an expansion of our acetic acid unit in Texas City from 800 million pounds of rated annual production capacity to one billion pounds. In addition, in late 2000, BP Chemicals Inc. ("BP Chemicals") and Celanese AG began operating 880 million-pound and 1,100 million-pound acetic acid production units in Malaysia and Singapore, respectively. The North American acetic acid market is mature and well developed, with demand being linked to the demand for vinyl acetate monomer, a key intermediate in the production of a wide array of polymers. Vinyl acetate monomer is the largest derivative of acetic acid, representing about 50% of total demand. Plasticizers. Our rated plasticizers capacity is 280 million pounds per year. We have an agreement with BASF Corporation ("BASF") pursuant to which we sell all of our plasticizers production to BASF through 2007. Our plasticizers are produced from linear alpha olefins (an ethylene-based technology), while many of our competitors use propylene-based technology. Our plasticizers typically receive a premium over certain propylene-based products due to their performance enhancing properties. However, the financial performance of our business can be affected by the cost of underlying raw materials, especially when the cost of one olefin rises faster than the other, or by the introduction of new products. Acrylic Fibers. On March 8, 2001, we announced our decision to withdraw from the traditional commodity textile business and, thereafter, significantly reduced our operations and staffing at our acrylic fibers plant in Santa Rosa, Florida. The decision came after our rationalization and cost reduction programs failed to return this business to profitable levels. We made this reduction due to extremely difficult operating conditions now facing the domestic acrylic textile industry, including conditions caused by the importation of finished goods by offshore producers and higher domestic energy and raw materials costs. We continue to produce our specialty and technical fibers products at this facility, and are examining strategic alternatives with respect to this business. We are also examining alternative uses of the portions of the plant idled by this reduction. PULP CHEMICALS Sodium Chlorate. Historically, sodium chlorate has also experienced cycles in capacity utilization, selling prices and profit margins, although not to the extremes seen in the petrochemicals markets. Since 1990, North American demand for sodium chlorate has grown at an average annual rate of approximately 7% as pulp mills have accelerated substitution of chlorine dioxide for elemental chlorine in bleaching applications. Substitution of chlorine dioxide for elemental chlorine is driven primarily by environmental concerns. Chlorine dioxide is produced from sodium chlorate, which is one of our primary pulp chemicals products. Under the United States Environmental Protection Agency's "Cluster Rules," effective April 2001, elemental chlorine cannot be used in bleaching applications, which has resulted in increased substitution of chlorine dioxide for elemental chlorine by the North American pulp and paper industry. In 1999, demand for sodium chlorate did not increase at historical rates due to weak market conditions and lower operating rates in the pulp and paper industry. In addition, new sodium chlorate production capacity was added while implementation of the Cluster Rules was delayed. However, during fiscal 2000 and 2001, average sodium chlorate prices increased due to increased operating rates at pulp mills and the continued conversion to elemental chlorine free bleaching at pulp mills. The industry average market price (as reported by Chemical Week Associates) increased by approximately 6% from fiscal 1999 to fiscal 2000 and increased approximately 10% from fiscal 2000 to fiscal 2001. We and two other companies collectively account for more than 65% of North American sodium chlorate production capacity. 9 PRODUCT SUMMARY The following table summarizes our principal products, including our capacity, primary end uses, raw materials and major competitors for each product. "Capacity" represents rated annual production capacity at September 30, 2001, which is calculated by estimating the number of days in a typical year a production facility is capable of operating after allowing for downtime for regular maintenance and multiplying that number by an amount equal to the facility's optimal daily output based on the design feedstock mix. As the capacity of a facility is an estimated amount, actual production may be more or less than capacity, and the following table does not reflect whether the facility is presently operating at capacity.
STERLING PRODUCT (CAPACITY) INTERMEDIATE PRODUCTS PRIMARY END PRODUCTS RAW MATERIALS MAJOR COMPETITORS - ---------------- --------------------- -------------------- ------------- ----------------- PETROCHEMICALS Polystyrene, ABS/SAN Building products, Ethylene and benzene Dow Chemical Company, Styrene resins, styrene boat and automotive Lyondell Chemical (1.7 billion pounds butadiene latex and components, Company, BP Chemicals per year) unsaturated polyester disposable cups and Inc., Chevron resins trays, packaging and Chemical Company, containers, Shell Chemicals, housewares, tires, Inc., Cos- Mar (a audio and video joint venture of cassettes, luggage, General Electric children's toys, Company and FINA paper coating, Inc.) and Nova appliance parts and Corporation carpet backing Acrylonitrile Acrylic fibers and Apparel, furnishings, Ammonia and propylene BP Chemicals Inc., (740 million pounds ABS/SAN resins upholstery, household Cytec Industries per year) appliances, carpets Inc., E.I. du Pont de and plastics for Nemours and Company, automotive parts Asahi Chemical using ABS and SAN Industry Company, polymers Ltd., EC Ammonia and Erdoelchemie GmbH, and Solutia Inc. Acrylic Fibers NA Apparel, fleece, Acrylonitrile, vinyl Solutia, Inc., Cydsa, (150 million pounds hosiery, sweaters, acetate, sodium S.A. de C.V. and per year) pile fabrics, outdoor thiocyanate, sodium Bayer AG furniture, friction bisulfate and finish materials, gaskets, oil specialty papers and non-wovens Acetic Acid Vinyl acetate, Adhesives, PET Methanol and carbon Celanese AG, Eastman (1 billion pounds per terephthalic acid, bottles, fibers and monoxide Chemical Company and year) and acetate solvents surface coatings Millennium Chemicals Inc. Methanol Acetic acid, MTBE and Adhesives, surface Natural gas, steam Methanex Corporation, (150 million gallons formaldehyde coatings, gasoline and carbon dioxide Lyondell Methanol per year) oxygenate and octane Company, L.P., enhancer and plywood Celanese AG and Terra adhesives Industries Plasticizers Polyvinyl chloride Flexible plastics, Alpha-olefins, carbon ExxonMobil (280 million pounds (PVC) such as shower monoxide, hydrogen, Corporation, Sunoco per year) curtains and liners, and orthoxylene Chemicals and Eastman floor coverings, Chemical Company cable insulation, upholstery and plastic molding TBA NA Pesticides, solvents, Isobutylene, sulfuric BASF Corporation and (21 million pounds pharmaceuticals and acid, caustic soda Nitto Chemical per year) synthetic rubber and hydrogen cyanide Industry Co., Ltd.
10
STERLING PRODUCT (CAPACITY) INTERMEDIATE PRODUCTS PRIMARY END PRODUCTS RAW MATERIALS MAJOR COMPETITORS - ---------------- --------------------- -------------------- ------------- ----------------- DSIDA NA Herbicide Caustic soda and Solutia, Inc. (80 million pounds hydrogen cyanide per year) Sodium Cyanide NA Electroplating and Caustic soda and Degussa-Huls and FMC (85 million pounds precious metals hydrogen cyanide Corporation per year) recovery PULP CHEMICALS Chlorine dioxide Bleaching agent for Electricity, salt and Akzo Nobel, N.V., Sodium Chlorate wood pulp production; water Nexen Inc., Kerr- (500,000 tons per downstream products McGee Corporation and year) include high quality Finnish Chemicals office and coated North America papers Chlorine Dioxide NA Chlorine dioxide for NA Akzo Nobel, N.V. Generators use in the bleaching of wood pulp Sodium Chlorite Chlorine dioxide Antimicrobial agent Sodium chlorate and Vulcan Chemicals (3,500 tons per year) for municipal water hydrochloric acid treatment and disinfectant for fresh produce Chlor Alkali NA Bleaching and Electricity, salt and Occidental Chemical digesting agent for water Company and Dow pulp and paper, Chemical Company widely used in potable water and wastewater treatment programs and in swimming pools Calcium Hypochlorite NA Sanitizing agent to Lime, water, caustic Olin Corporation and (9,000 metric tons control bacteria and soda, and chlorine PPG Industries per year) algae in swimming pools
PRODUCTS PETROCHEMICALS Styrene. We have the fourth largest production capacity for styrene in North America. Our styrene unit, located at our Texas City facility, is one of the largest in the world and has a rated annual production capacity of approximately 1.7 billion pounds, which represents approximately 11% of total North American capacity. We sold approximately 26% of our styrene sales volumes pursuant to conversion and other long-term agreements during fiscal 2001. Approximately 44% of our styrene sales volumes were exported in fiscal 2001, principally to Asia and Mexico. Acrylonitrile. We have the third largest production capacity for acrylonitrile in North America. Our acrylonitrile unit, located at our Texas City facility, has a rated annual production capacity of approximately 740 million pounds, which represents approximately 19% of total North American capacity. As stated previously, our acrylonitrile unit has not operated since the second quarter of fiscal 2001 due to adverse economic conditions. We sold approximately 83% of our acrylonitrile sales volumes pursuant to conversion and other long-term agreements during fiscal 2001. Approximately 72% of our acrylonitrile production in fiscal 2001 was exported. All of our acrylonitrile sold in Asia and South America is sold through ANEXCO, LLC, our joint venture with BP Chemicals. During fiscal 2001, we used a portion of our hydrogen cyanide, a by-product of acrylonitrile manufacturing, as a raw material for the production of TBA, DSIDA and sodium cyanide and burned the rest as fuel. Acetic Acid. We have the second largest production capacity for acetic acid in North America. Our acetic acid unit, located at our Texas City facility, has a rated annual production capacity of approximately 11 one billion pounds, which represents approximately 17% of total North American capacity. All of our acetic acid production is sold to BP Chemicals pursuant to a long-term contract that expires in 2016. Methanol. We own a methanol unit at our Texas City facility with a rated annual production capacity of approximately 150 million gallons. On June 29, 2000, we, in conjunction with BP Chemicals, announced a multi-year contract with Methanex Corporation ("Methanex") for the purchase of our respective methanol requirements from Methanex. At that time, we granted Methanex exclusive rights to acquire the output of our methanol plant, which we continue to own. Under this agreement, Methanex chose to discontinue production at our methanol plant on July 1, 2000, and provide our methanol requirements with methanol produced in countries that have a significant advantage in the cost of natural gas, the primary raw material in the production of methanol. However, Methanex may elect to restart our methanol facility at any time, subject to notice requirements and the payment of related expenses. Plasticizers. We produce plasticizers at our Texas City facility for BASF Corporation. Under our long-term agreement with BASF, which expires in 2007, we sell all of our plasticizers production to BASF. Our rated annual production capacity of plasticizers is approximately 280 million pounds. TBA. Our rated annual production capacity for TBA is approximately 21 million pounds. In fiscal 2001, we used a portion of our hydrogen cyanide by-product from our Texas City acrylonitrile facility to produce TBA, which we sold to Flexsys pursuant to a conversion agreement. In December 1999, Flexsys notified us of their intention to terminate the contract as of December 31, 2001. We are currently evaluating our options related to TBA production following the termination of this contract. Since the second quarter of fiscal 2001, the TBA unit has not operated due to the continued shutdown of our acrylonitrile unit. Sodium Cyanide. Pursuant to a long-term arrangement, we operate a sodium cyanide unit at our Texas City facility which is owned by E. I. du Pont de Nemours and Company ("DuPont"). This sodium cyanide unit uses hydrogen cyanide by-product from our Texas City acrylonitrile facility as a raw material. The rated annual production capacity of this unit is approximately 85 million pounds. Since the second quarter of fiscal 2001, the sodium cyanide unit has not operated due to the continued shutdown of our acrylonitrile unit. DSIDA. Near the end of the first quarter of fiscal 2001, we began operating a DSIDA plant at our Texas City facility that is owned by Monsanto Company ("Monsanto"). DSIDA is an essential intermediate in the production of Monsanto's Roundup(R), a glyphosate based herbicide. Under long-term arrangements with Monsanto, we operate the DSIDA plant on behalf of Monsanto and supply hydrogen cyanide by-product from our Texas City acrylonitrile facility as a raw material. The rated annual production capacity of the DSIDA plant is 80 million pounds. Since the second quarter of fiscal 2001, the DSIDA unit has not operated due to the continued shutdown of our acrylonitrile unit. Acrylic Fibers. On March 8, 2001, we announced our decision to withdraw from the traditional commodity textile business and, thereafter, significantly reduced our operations and staffing at our acrylics fiber plant in Santa Rosa, Florida. We continue to produce specialty textile fibers and technical fibers at this facility. Specialty textile fibers are targeted for specific applications or end uses and typically have higher margins than regular textile fibers. Technical fibers are specially engineered for industrial, non-textile uses such as brake linings and typically have higher margins than textile fibers. PULP CHEMICALS Sodium Chlorate. We are the second largest producer of sodium chlorate in North America. Our six sodium chlorate facilities have an aggregate rated annual production capacity of approximately 500,000 tons, which represents approximately 23% of total North American capacity. Chlorine Dioxide Generators. Through our ERCO Systems Group ("ERCO"), we are the largest worldwide supplier of patented technology for generators that certain pulp mills use to convert sodium chlorate into chlorine dioxide. Each mill that uses chlorine dioxide requires at least one generator. We receive revenue when a generator is sold to a mill and also receive royalties from the mill after start-up, generally over a ten-year period, based on the amount of chlorine dioxide produced by the generator. We have supplied approximately two-thirds of all existing modern pulp mill generators worldwide. 12 The research and development group of ERCO works to develop new and more efficient generators. When pulp mills move to higher levels of substitution of chlorine dioxide for elemental chlorine, they are usually required to upgrade generator capacity or purchase new generator technology. Pulp mills may also convert to a newer generator to take advantage of efficiency advances and technological improvements. Each upgrade or conversion requires a licensing agreement, which generally provides for payment of an additional ten-year royalty. Sodium Chlorite. We have a rated annual production capacity of sodium chlorite of approximately 3,500 tons, with a second plant to be added to supply the increased demand for chlorine dioxide as a primary disinfectant for municipal drinking water. For historical information presented on a segmented basis for our petrochemicals business and pulp chemicals business, see Note 9 of the Notes to Consolidated Financial Statements included in this Form 10-K. SALES AND MARKETING We sell our petrochemicals products pursuant to: - multi-year contracts; - conversion agreements; and - spot transactions in both the domestic and export markets. We have certain long-term agreements that provide for the dedication of 100% of our production of acetic acid, plasticizers, sodium cyanide, methanol and DSIDA, each to one customer. We also have various sales and conversion agreements that dedicate significant portions of our production of styrene and acrylonitrile to certain customers. Some of these agreements provide for cost recovery plus an agreed profit margin based upon market prices. These agreements are intended to: - optimize capacity utilization rates; - lower our selling, general and administrative expenses; - reduce our working capital requirements; and - insulate our operations, to some extent, from the effects of declining markets and changes in raw materials prices. We compete on the basis of product price, quality and deliverability. Prices for our petrochemicals products are determined by global market factors that are largely beyond our control and, except with respect to a number of our multi-year contracts, we generally sell these products at prevailing market prices. Some of our multi-year contracts for our petrochemicals products are structured as conversion agreements, pursuant to which the customer furnishes raw materials that we process into finished products. In exchange, we receive a fee typically designed to cover our fixed and variable costs of production and to generally provide an element of profit depending on the existing market conditions for the product. These conversion agreements are intended to help us maintain lower levels of working capital and, in some cases, gain access to certain improvements in manufacturing process technology. Our conversion agreements are designed to insulate us to some extent from the effects of declining markets and changes in raw materials prices, while allowing us to share in the benefits of favorable market conditions for most of the products sold under these arrangements. The balance of our petrochemicals products are sold by our direct sales force or through ANEXCO, LLC, our marketing joint venture with BP Chemicals. Our acrylic fibers facility currently markets products in North America through our internal sales staff and to international customers through non-affiliated agents. Acrylic fibers are priced based upon market 13 conditions, which include, but are not limited to, raw materials costs, prices of competing and alternative products and type of end use. We sell sodium chlorate primarily in Canada and the United States, generally under one to five-year supply contracts, most of which provide for minimum and maximum volumes or a percentage of requirements at market prices. In addition, some of our sodium chlorate sales contracts contain certain "meet or release" pricing clauses and restrictions on the amount and timing of future price increases. However, the percentage of our sales subject to these clauses is decreasing over time as these contracts expire or otherwise terminate. We market chlorine dioxide generators worldwide to the pulp and paper industry, providing licenses for technology and making sales of the requisite equipment. In addition to being paid for the technology and equipment, we receive royalties based on the amount of chlorine dioxide produced by the generator, generally over a ten-year period. For information regarding our export sales and domestic and foreign operations, see Note 9 of the Notes to Consolidated Financial Statements included in this Form 10-K. CONTRACTS Our key multi-year contracts, which collectively accounted for 18% of our fiscal 2001 revenues, are described below. BP Chemicals accounted for approximately 12%, 11% and 10% of our revenues in fiscal 2001, 2000 and 1999, respectively. No other single customer accounted for more than 10% of our revenues in the last three fiscal years. All of the Debtors' contracts and agreements continue in effect in accordance with their terms notwithstanding our Chapter 11 filings, unless otherwise ordered by the Bankruptcy Court. The Bankruptcy Code provides the Debtors with the opportunity at any time prior to emergence from bankruptcy to reject any contracts or agreements that are burdensome or to assume any contracts or agreements that are favorable or otherwise necessary to their business operations. The Debtors are currently evaluating all of their contracts to determine whether those contracts should be rejected or assumed. ACRYLONITRILE-BP CHEMICALS In 1988, we entered into a long-term production agreement with BP Chemicals under which BP Chemicals contributed the majority of the capital expenditures required for starting the third acrylonitrile reactor train at our Texas City acrylonitrile facility. Under this agreement, BP Chemicals has the option to take up to approximately one-sixth of our total acrylonitrile capacity. BP Chemicals furnishes the necessary raw materials, pays us a conversion fee for the amount of acrylonitrile it takes and reimburses us for a portion of the fixed costs related to acrylonitrile production at our Texas City facility. To protect BP Chemicals in the event we default under the production agreement, BP Chemicals has a first priority security interest in the third reactor and related equipment and in the first acrylonitrile produced in our three reactor units to the extent BP Chemicals is entitled to purchase acrylonitrile under this production agreement. This agreement was amended and restated during April of 1998 to, among other things, encourage increased manufacturing and technical cooperation. During fiscal 2001, we delivered approximately 15% of our acrylonitrile production to BP Chemicals pursuant to this agreement. We have incorporated certain BP Chemicals technological improvements into two of our acrylonitrile reactors under a separate license agreement. We have the right to incorporate these and any future improvements into our remaining acrylonitrile reactor. In order to enhance the marketing of our acrylonitrile, we and BP Chemicals formed ANEXCO, LLC, an exclusive 50/50 joint venture to market acrylonitrile in Asia and South America. During fiscal 2001, we sold approximately 60% of our acrylonitrile production through ANEXCO, LLC. 14 ACETIC ACID-BP CHEMICALS In 1986, we entered into a long-term production agreement with BP Chemicals, which has since been amended, under which BP Chemicals has the exclusive right to purchase all of our acetic acid production until August of 2016 and is obligated to make certain unconditional monthly payments to us until August of 2006 and reimburse us for our operating costs. We are also entitled to receive a portion of the profits earned by BP Chemicals from the sale of the acetic acid we produce. METHANOL-BP CHEMICALS-METHANEX In August of 1996, we entered into a long-term production and sales agreement with BP Chemicals, under which BP Chemicals contributed a significant portion of the capital expenditures required for the construction of our methanol production facility at our Texas City facility and obtained the right to receive a substantial portion of our methanol production. The initial term of this agreement expires July 31, 2016. Historically, a portion of the output of the methanol facility was used in our acetic acid unit and the remainder was marketed by BP Chemicals in the merchant market and in BP Chemicals' worldwide acetic acid business. On June 29, 2000, we, in conjunction with BP Chemicals, announced a multi-year contract with Methanex for the purchase of our respective methanol requirements from Methanex. At that time, we granted Methanex exclusive rights to acquire the output of our methanol plant, which we continue to own. Under this agreement, Methanex chose to discontinue production at our methanol plant on July 1, 2000, and provide our methanol requirements with methanol produced in countries that have a significant advantage in the cost of natural gas, the primary raw material in the production of methanol. However, Methanex may elect to restart our methanol facility at any time, subject to notice requirements and the payment of related expenses. The initial term of these arrangements expires December 31, 2003, with automatic annual renewals thereafter unless we or Methanex elect to terminate these arrangements. PLASTICIZERS-BASF Since 1986, we have sold all of our plasticizers production to BASF pursuant to a product sales agreement that has previously been amended and expires at the end of 2007. BASF provides us with some of the required raw materials and markets the plasticizers we produce. BASF is obligated to make certain quarterly payments to us and to reimburse us monthly for actual production costs. In addition, we share in the profits and losses realized by BASF in connection with the plasticizers we produce. RAW MATERIALS FOR PRODUCTS AND ENERGY RESOURCES For most of our products, the cost of raw materials and energy resources, including utilities in the case of pulp chemicals, is far greater than all other production costs combined. Thus, an adequate supply of raw materials and utilities at reasonable prices and on acceptable terms is critical to the success of our business. Most of the raw materials we use are global commodities which are made by a large number of producers. Prices for many of these raw materials are subject to wide fluctuations for a variety of reasons beyond our control. Although we believe that we will continue to be able to secure adequate supplies of our raw materials and energy, there can be no assurance that we will be able to do so at acceptable prices or payment terms. See "Certain Known Events, Trends, Uncertainties and Risk Factors." PETROCHEMICALS Styrene. We manufacture styrene by converting ethylene and benzene into ethylbenzene, which we then process into styrene. Ethylene and benzene are both commodity petrochemicals. Prices for each can fluctuate widely due to significant changes in the availability of these products. We have multi-year arrangements with several major ethylene and benzene suppliers that provide a significant percentage of our estimated requirements for purchased ethylene and benzene at generally prevailing and competitive market prices. Our conversion agreements require that the other parties to these agreements furnish us with the ethylene or benzene necessary to fulfill our conversion obligations. Approximately 17% of our fiscal 2001 benzene requirements and approximately 23% of our fiscal 2001 ethylene requirements were furnished by customers 15 pursuant to conversion arrangements. If various customers for whom we now manufacture styrene under conversion agreements were to cease furnishing their own raw materials, our requirements for purchased benzene and ethylene could significantly increase. Acrylonitrile. We produce acrylonitrile by reacting propylene and ammonia. Propylene and ammonia are both commodity chemicals and the price for each can fluctuate widely due to significant changes in the availability of these products. The propylene or ammonia needed for the acrylonitrile we produce under conversion agreements is furnished to us by our customers. We purchase the rest of the propylene and ammonia we need for acrylonitrile production. Approximately 23% of our fiscal 2001 propylene requirements and approximately 15% of our fiscal 2001 ammonia requirements were furnished by customers pursuant to conversion agreements. If various customers for whom we now manufacture acrylonitrile under conversion agreements were to cease furnishing their own raw materials and seek only to purchase acrylonitrile from us without supplying their own raw materials, our requirements for purchased propylene and ammonia could significantly increase. Acetic Acid. Acetic acid is manufactured primarily from carbon monoxide and methanol. In the past, we produced all of the methanol required by our acetic acid unit. However, under the previously discussed multi-year agreements with Methanex, we have purchased all of our methanol requirements from Methanex since July 1, 2000. In 1996, Praxair Hydrogen Supply, Inc. constructed a partial oxidation unit at our Texas City facility that supplies us with all of the carbon monoxide we require for the production of acetic acid. Plasticizers. The primary raw materials for plasticizers are alpha-olefins and orthoxylene, which are supplied by BASF under our long-term conversion agreement. DSIDA. DSIDA is manufactured from hydrogen cyanide and caustic soda. We use hydrogen cyanide provided as a by-product of our acrylonitrile manufacturing process and we supply the caustic soda. Sodium Cyanide. Sodium cyanide is manufactured from hydrogen cyanide and caustic soda. We use hydrogen cyanide produced as a by-product of our acrylonitrile manufacturing process and DuPont supplies the caustic soda under our long-term conversion agreement. Acrylic Fibers. Acrylonitrile is the most significant raw material used in the production of acrylic fibers, representing approximately 50% of the total cash cost of production. Pursuant to our supply agreement with Cytec Industries, Inc. ("Cytec"), which we assumed in connection with our purchase of the acrylic fibers facility from Cytec, our acrylic fibers facility was required to purchase all of its acrylonitrile requirements from Cytec until February 28, 2002. However, on May 3, 2001, Cytec discontinued supplying acrylonitrile to our acrylic fibers facility and, since that time, we have either purchased the acrylonitrile from outside sources, or supplied the acrylonitrile from existing inventory at our Texas City facility. PULP CHEMICALS Sodium Chlorate. Sodium chlorate is manufactured by passing an electric current through an undivided cell containing a solution of sodium chloride. The primary raw materials for the production of sodium chlorate are electricity, salt and water. Of these, electric power typically represents approximately 65% of the variable cost of production. Consequently, the rates charged by local electric utilities are an important competitive factor among sodium chlorate producers. Electric power is purchased by each of our pulp chemicals facilities pursuant to contracts with local electric utilities. On average, we believe that our electrical power costs at our pulp chemical facilities are competitive with other producers in the areas in which we operate. The current trend towards deregulation of electric power makes our future cost for electric power uncertain in the short term. We purchase most of the sodium chloride that we use in the manufacture of sodium chlorate under requirements contracts with major suppliers. SODIUM CHLORITE Sodium chlorite is manufactured from sodium chlorate, which is converted to chlorine dioxide and then converted to sodium chlorite. Consequently, the same factors which impact sodium chlorate costs, primarily power costs, impact sodium chlorite. 16 TECHNOLOGY AND LICENSING PETROCHEMICALS In 1986, Monsanto granted us a non-exclusive, irrevocable and perpetual right and license to use Monsanto's technology and other technology Monsanto acquired through third-party licenses in effect at the time of the acquisition of our Texas City facility from Monsanto. We use these licenses in the production of styrene, acrylonitrile, methanol, TBA, acetic acid and plasticizers. During 1991, BP Chemicals Ltd. ("BPCL") purchased the acetic acid technology from Monsanto, subject to existing licenses. Under an Acetic Acid Technology Agreement with BP Chemicals and BPCL, BPCL granted us a non-exclusive, irrevocable and perpetual right and license to use acetic acid technology owned by BPCL and some of its affiliates at our Texas City facility, including any new acetic technology developed by BPCL at its acetic acid facilities in England during the term of such agreement or pursuant to the research and development program provided by BPCL under the terms of such agreement. BPCL has also granted us a non-exclusive, irrevocable and perpetual royalty-free license to use its acrylonitrile technology at our Texas City facility as part of the 1988 acrylonitrile expansion project. This license automatically terminates upon the termination of our acrylonitrile production agreement with BP Chemicals. We have agreed with BPCL to cross-license any technology or improvements relating to the manufacture of acrylonitrile at our Texas City facility. We believe that the manufacturing processes we utilize at our Texas City facility are cost effective and competitive. Although we do not engage in alternative process research with respect to our Texas City facility, we do monitor new technology developments and, when we believe it is necessary, we typically seek to obtain licenses for process improvements. We own substantially all of the technology used in our acrylic fibers operations. We license certain of our acrylic fibers manufacturing technology to producers worldwide. Approximately 15% of the world's total acrylic fibers capacity is based on our technology. PULP CHEMICALS We produce sodium chlorate using state-of-the-art metal cell technology. Our principal technology business is the design, sale and technical service of custom-built patented chlorine dioxide generators. ERCO is involved in the technical support of our sales and marketing group through joint calling efforts which define the scope of a project, as well as producing technical schedules and cost estimates. We perform detailed design of chlorine dioxide generators, which are then fabricated by contractors. Plant installation, instrumentation testing and generator start-up are supervised by our joint engineering/technical service team. Our pulp chemicals research and development activities are carried out at our Toronto, Ontario laboratories. Activities include the development of new or improved chlorine dioxide generation processes and research into new technologies focusing on electrochemical and membrane technology related to chlorine dioxide, including improvement of quality and reduction of quantity of pulp mill effluents and treatment of municipal water supplies. COMPETITION The industries in which we operate are highly competitive. Many of our competitors, particularly in the petrochemicals industry, are larger and have substantially greater financial resources than we have. Among our competitors are some of the world's largest chemical companies that, in contrast to us, have their own raw materials resources. In addition, a significant portion of our business is based upon widely available technology. The entrance of new competitors into the industry and the addition by existing competitors of new capacity could have a negative impact on our ability to maintain existing market share or maintain or increase profit margins, even during periods of increased demand for our products. You can find a list of our principal competitors in the "Product Summary" table. 17 Historically, profitability of the petrochemicals industry has been affected by vigorous price competition, which may intensify due to, among other things, new domestic and foreign industry capacity. Our businesses are subject to changes in the world economy, including changes in currency exchange rates. In general, weak economic conditions, either in the United States or worldwide, tend to reduce demand and put pressure on the margins for our products. Operations outside the United States are subject to the economic and political risks inherent in the countries in which they operate. Additionally, export and domestic markets can be affected significantly by import laws and regulations. During 2001, our export sales were approximately 24% of our total revenues. It is not possible to predict accurately how changes in raw material costs, market conditions, developments in our Chapter 11 proceedings or other factors will affect future sales volumes, prices and margins for our products. ENVIRONMENTAL MATTERS GENERAL Our operations involve the handling, production, transportation, treatment and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental and health and safety laws, regulations and permit requirements. Environmental permits required for our operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacture, handling, processing, distribution and use of our chemical products and, if so affected, our business and operations may be materially and adversely affected. In addition, changes in environmental requirements can cause us to incur substantial costs in upgrading or redesigning our facilities and processes, including our waste treatment, storage, disposal and other waste handling practices and equipment. We conduct environmental management programs designed to maintain compliance with applicable environmental requirements at all of our facilities. We routinely conduct inspection and surveillance programs designed to detect and respond to leaks or spills of regulated hazardous substances and to correct identified regulatory deficiencies. We believe that our procedures for waste handling are consistent with industry standards and applicable requirements. In addition, we believe that our operations are consistent with good industry practice. We continue to participate in Responsible Care(R) initiatives as a part of our membership in several trade groups which are partner associations in the American Chemistry Council in the United States and the Canadian Chemical Producers Association in Canada. Notwithstanding our efforts and beliefs, a business risk inherent in chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees and nearby landowners and occupants. While we believe our business operations and facilities generally are operated in compliance with all applicable environmental and health and safety requirements in all material respects, we cannot be sure that past practices or future operations will not result in material claims or regulatory action, require material environmental expenditures or result in exposure or injury claims by employees, contractors and their employees and the public. Some risk of environmental costs and liabilities is inherent in our operations and products, as it is with other companies engaged in similar businesses. Our operating expenditures for environmental matters, mostly waste management and compliance, were approximately $34 million for fiscal 2001 and $31 million for fiscal 2000. We also spent approximately $2 million for environmentally related capital projects in fiscal 2001 and $1 million for these types of capital projects in fiscal 2000. In fiscal 2002, we anticipate spending approximately $1 million to $2 million for capital projects related to waste management and environmental compliance. There are no capital expenditures related to remediation of environmental conditions projected for fiscal 2002. In light of our historical expenditures and expected future results of operations and sources of liquidity, we believe we will have adequate resources to conduct our operations in compliance with applicable environmental and health and safety requirements. Nevertheless, we may be required to make significant site and operational modifications that are not currently contemplated in order to comply with changing facility permitting requirements and regulatory standards. Additionally, we have incurred and may continue to incur liability for investigation and cleanup of waste or contamination at our own facilities or at facilities operated by 18 third parties where we have disposed of waste. We continually review all estimates of potential environmental liabilities but can give no assurances that all potential liabilities arising out of our past or present operations have been identified or fully assessed or that the amount necessary to investigate and remediate such conditions will not be significant to us. It is our policy to make safety, environmental and replacement capital expenditures a priority in order to ensure adequate safety and compliance at all times. In the event we should not have available to us, at any time, liquidity sources sufficient to fund any of these expenditures, prudent business practice might require that we cease operations at the affected facility to avoid exposing our employees and contract workers, the surrounding community and the environment to potential harm. We believe that we would be able to recover certain losses that may arise out of claims related to environmental conditions at each of our facilities that existed prior to their acquisition by us through contractual indemnities and/or statutory law and common law principles, although there can be no assurance that we would prevail against any prior owner of any of our facilities with respect to any such claim. Claims for environmental liabilities arising prior to our Chapter 11 filings will be addressed in the Chapter 11 cases. In general, monetary claims relating to remedial actions at off-site locations used for disposal prior to the Chapter 11 filings and penalties resulting from violations of environmental requirements before that time will be treated as general unsecured claims. Actions by governmental authorities to determine liability for and the amount of such penalties will generally not be subject to the automatic stay. We will be obliged to comply with environmental requirements in the conduct of our business as a debtor-in-possession, including the potential obligation to conduct remedial actions at facilities we own or operate, regardless of when the contamination at those facilities occurred. PETROCHEMICALS Air emissions from our Texas City facility and our acrylic fibers facility are subject to certain permit requirements and self-implementing emission limitations and standards under state and federal laws. Our Texas City facility is located in an area that the Environmental Protection Agency has classified as not having attained the ambient air quality standards for ozone, which is controlled by direct regulation of volatile organic compounds and nitrogen oxide. The Texas Natural Resource Conservation Commission has imposed strict requirements on regulated facilities, including our Texas City facility, to ensure that the air quality control region will achieve the ambient air quality standards for ozone. Our acrylic fibers facility is located in an area currently designated as being in attainment for ozone under the Clean Air Act. Our Texas City facility and our acrylic fibers facility are subject to the federal government's June 1997 National Ambient Air Quality Standards which lower the ozone and particulate matter threshold for attainment. Local authorities also may impose new ozone and particulate matter standards. Compliance with these stricter standards may substantially increase our future nitrogen oxide and particulate matter control costs, the amount and full impact of which cannot be determined at this time. In addition, in fiscal 2001, the Texas Natural Resource Conservation Commission enacted new regulations requiring significant reductions of nitrogen oxide which apply to our Texas City facility. The TNRCC is also expected to propose similar regulations requiring the reduction of particulate matter which will apply to our Texas City facility. The nitrogen oxide regulations covering the Houston/Galveston Area State Implementation Plan were approved by the United States Environmental Protection Agency on October 15, 2001. Under these regulations, we are required to reduce emissions of nitrogen oxide at our Texas City facility by up to approximately 90%, which we estimate would require Chemicals to make between $25 million and $30 million in capital improvements at our Texas City facilities. The majority of these capital expenditures would be expected in fiscal 2002 through 2005. Under our production agreements with BP Chemicals, we would be able to recover a small portion of these costs from BP Chemicals. We are currently evaluating several alternative methods of reducing nitrogen oxide emissions at our Texas City facility that would require less capital expenditures; however, we cannot give any assurances that any alternative methods will be available to us or that, even if available, these alternative methods would reduce the amount of capital expenditures required to be made by a meaningful amount. In addition to reducing nitrogen oxide emissions, some of these expenditures could result in a reduction in operating costs, however, there can be no assurances that we will be able to reduce our operating costs. We are also evaluating the potential impact of a settlement agreement between TNRCC and an industry group, the Business 19 Coalition for Clean Air which could result in modification of the ozone reduction requirements, including possible reductions in permissible levels of emissions of volatile organic compounds (total or reactive), and a possible reduction of the nitrogen oxide reduction target from 90% to 70%. Due to the undefined nature and uncertainty of these potential changes, it is impossible to predict the impact of these regulations and changes on our business or financial condition. To reduce the risk of offsite consequences from unanticipated events, we acquired a greenbelt buffer zone adjacent to our Texas City facility in 1991 and, in connection with the acquisition of our acrylic fibers facility, acquired a greenbelt area for our acrylic fibers facility. We also participate in a regional air monitoring network to monitor ambient air quality in the Texas City community. On June 11, 2001, we received a notice from the U.S. Department of Justice, Environment and Natural Resources Division, in which the Department alleged that on April 1, 1998 an ethylbenzene release at our Texas City facility violated the general duty clause of the Clean Air Act and invited us to engage in settlement discussion with respect to the matter. Although we believe that the April 1, 1998 ethylbenzene release did not constitute a violation of the general duty clause of the Clean Air Act, we have engaged in discussions with the Department in an attempt to settle the matter on a consensual basis. However, any alleged liability would constitute a pre-petition claim and any settlement would require approval by the Bankruptcy Court. We do not believe that this matter will have a material adverse effect on our business, financial position, results of operations or cash flow, although we cannot give any assurances to that effect. A settlement agreement entered into by the Environmental Protection Agency, the Florida Department of Environmental Protection and an environmental group potentially applies to our acrylic fibers facility. This settlement agreement imposes a no-migration standard for injection wells in underground drinking water zones without regard to actual risk considerations. We and several similarly situated companies have been contesting this settlement. An April 1999 ruling by the United States Court of Appeals for the 11th Circuit may reduce the likelihood that the no-migration rule is enforceable, although we can give you no assurances in that regard. In the event that the no-migration rule becomes enforceable, we may incur material costs in redesigning our wastewater handling systems. However, in September 2000, the Florida Department of Environmental Protection awarded us a five-year permit to operate the deepwell injection facilities at our acrylic fibers facilities. Under this permit, we were granted an "injection into an aquifer" exemption, subject to monitoring of groundwater. As a result, during the life of this permit, we would not be subject to this no-migration rule even if it became enforceable, assuming that this permit is not revised in any material way. PULP CHEMICALS Our pulp chemicals business is sensitive to potential environmental regulations. On November 14, 1997, the Environmental Protection Agency enacted regulations that support substitution of chlorine dioxide for elemental chlorine in paper pulp bleaching processes to reduce the amount of absorbable organic halides and other chlorine derivatives in bleach plant effluent. Chlorine dioxide is produced from sodium chlorate, which is one of our pulp chemicals products. Therefore, regulations restricting, but not completely banning, absorbable organic halides and other chlorine derivatives in bleach plant effluent have a favorable effect on our business. Conversely, a significant ban on all chlorine containing compounds could have a materially adverse effect on us. British Columbia has a regulation in place requiring elimination of the use of all chlorine products, including chlorine dioxide, in the bleaching process by the year 2002. The pulp and paper industry believes that a ban of chlorine dioxide in the bleaching process will yield no measurable environmental or public health benefit and is working to change this regulation. In April of 2001, a new government came into power in British Columbia. This new administration is aware of the issues surrounding this regulation and has agreed to negotiate amendments to the regulation. We are working through the Alliance for Environmental Technology and the Canadian Chemical Producers' Association to provide information to the British Columbia Ministry of Environment to assist with these negotiations. We acquired four of our Canadian pulp chemicals facilities from Tenneco Canada, Inc. in 1992 and our Saskatoon facility from Weyerhauser Canada Ltd. in 1997. Groundwater data obtained during the acquisition of the Tenneco facilities indicated elevated concentrations of certain chemicals in the soil and groundwater. 20 Prior to completion of that acquisition, we conducted a focused baseline sampling of groundwater conditions beneath the facilities and confirmed that previous data. We have addressed or are addressing elevated soil or groundwater concentrations of chemicals that we have encountered from time to time at the facilities we acquired from Tenneco. We also reviewed air emissions sources during the acquisition of these facilities and considered all available dustfall and vegetation stress studies. This review indicated emission excursion episodes at specific locations in the scrubber systems at the Thunder Bay, Buckingham and Vancouver facilities. The conditions at these three sites have been addressed and satisfactorily resolved. We believe that all of the facilities we acquired from Tenneco are otherwise in compliance in all material respects with all permit requirements under applicable provincial law. At our Saskatoon facility, remediation plans regarding ground water contamination from prior operations are under negotiation. Weyerhauser Canada Ltd. and Crown Investments Corporation, who previously owned the facility, along with the Saskatchewan Environmental Resource Ministry and ourselves, are participants in the negotiations. Currently, our role is to coordinate the activities and the prior owners are expected to fund the remediation costs. EMPLOYEES As of September 30, 2001, we had approximately 923 employees, including approximately 539 assigned to our petrochemicals operations and approximately 384 assigned to our pulp chemicals operations. Approximately 42% of our employees are covered by union agreements. The primary union agreement at our Texas City facility is with the Texas City, Texas Metal Trades Council, AFL-CIO, of Galveston County, Texas, which covers all hourly employees at our Texas City facility. This agreement was renegotiated as of December 28, 1998 and will expire on May 1, 2002. The agreement continues to be in effect notwithstanding our Chapter 11 filing. Under the Bankruptcy Code, the agreement may be assumed or rejected, but any rejection would require that we comply with the special provisions of the Bankruptcy Code related to collective bargaining agreements. We do not currently intend to reject the agreement prior to its expiration date and expect to negotiate with the union concerning the terms of a new agreement to take effect after the expiration date. Approximately 76% of our employees at our Vancouver facility are represented by the Pulp, Paper and Woodworkers Union. The Vancouver labor agreement was renegotiated in November 2000 and is subject to further renegotiations in November of 2003. Employees at our Buckingham facility are represented by either the Communications, Energy and Paperworkers Union or an office and professional workers union. Both Buckingham labor agreements were renegotiated in November of 1999 and are subject to renegotiation in November 2002. Approximately 77% of the employees at our Saskatoon facility are represented by the Communications, Energy and Paperworkers of Canada. Our collective bargaining agreement with this union was renegotiated on June 25, 2001 and is subject to further renegotiation in September 2004. The union agreements relating to our Vancouver, Buckingham and Saskatoon facilities, to which certain of our non-debtor Canadian subsidiaries are parties, are not affected by our Chapter 11 filings. Although we believe our relationship with our employees is generally good, a strike by one or more of the unions representing our employees could have a material adverse effect on our business. INSURANCE We maintain full replacement value insurance coverage for property damage to all of our facilities and business interruption insurance. Nevertheless, a significant interruption in the operation of one or more of our facilities could have a material adverse effect on our business. We also maintain other insurance coverages for various risks associated with our business. There can be no assurance that we will not incur losses beyond the limits of, or outside the coverage of, our insurance. From time to time various types of insurance for companies in the chemical industry have been very expensive or, in some cases, unavailable. As a result of the September 11, 2001 terrorist attacks, many insurers have placed their respective insureds, including us, on notice that acts of terrorism will be excluded from coverage after December 31, 2001. There can be no assurance that in the future we will be able to maintain our existing coverage or that premiums will not increase substantially. 21 ITEM 2. PROPERTIES Our petrochemicals facility is located in Texas City, Texas, approximately 45 miles south of Houston, on a 290-acre site on Galveston Bay near many other chemical manufacturing complexes and refineries. We have facilities to load our products in trucks, railcars, barges and ocean-going vessels for shipment to customers. The site offers room for future expansion and includes a greenbelt around the northern edge of the plant site. We own or lease all of the real property which comprises our Texas City facility and all of the equipment and facilities located there, other than the sodium cyanide unit which is owned by DuPont, a cogeneration facility owned by a joint venture between us and Praxair Energy Resources, Inc., the partial oxidation unit which is owned by Praxair Hydrogen Supply, Inc. and the DSIDA plant which is owned by Monsanto. We also own storage facilities, approximately 197 rail cars and an acetic acid barge in connection with our petrochemicals business. Our acrylic fibers facility is located on 1,100 acres near Pensacola in Santa Rosa County, Florida. We own all of the real property on which our acrylic fibers facility is situated and own or lease all of the facilities and equipment located there. In July 1999, we entered into an agreement for the construction of a cogeneration facility at our acrylic fibers facility that will be owned by Santa Rosa Energy, U.S. Our pulp chemicals business includes five manufacturing facilities in Canada and our Valdosta, Georgia facility. We own the property on which our Buckingham, Quebec and Vancouver, British Columbia manufacturing facilities are located, with each site comprising approximately 20 acres. We also own the property on which our Saskatoon manufacturing facility is located, which consists of approximately 270 acres. We lease the property for our Thunder Bay, Ontario and Grande Prairie, Alberta manufacturing facilities. Our Valdosta facility was constructed in conjunction with and is leased from the Valdosta-Lowndes County Industrial Authority. We also lease approximately 638 rail cars in connection with our pulp chemicals business. Headquarters for our pulp chemicals operations are located in Toronto, Ontario in an office building that we lease. We lease our principal executive offices, located at 1200 Smith Street, Suite 1900 in Houston, Texas. We believe our properties and equipment are sufficient to conduct our business. ITEM 3. LEGAL PROCEEDINGS As previously discussed, the Debtors filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code on July 16, 2001. As a result of the commencement of the Chapter 11 cases, an automatic stay has been imposed against the commencement or continuation of legal proceedings against the Debtors outside of the Bankruptcy Court. The automatic stay will not apply, however, to governmental authorities exercising their police or regulatory powers, including the application of environmental laws. Claimants against the Debtors may assert their claims in the Chapter 11 cases by filing a timely proof of claim, to which the Debtors may object and seek a determination from the Bankruptcy Court as to the allowability of the claim. Claimants who desire to liquidate their claims in legal proceedings outside of the Bankruptcy Court will be required to obtain relief from the automatic stay by order of the Bankruptcy Court. If such relief is granted, the automatic stay will remain in effect with respect to the collection of liquidated claim amounts. As a general rule, all claims against the Debtors that seek a recovery from assets of the Debtors' estates will be addressed in the Chapter 11 cases and paid only pursuant to the terms of a confirmed plan of reorganization. ETHYLBENZENE RELEASE On April 1, 1998, a chemical leak occurred when a line failed in the ethylbenzene unit at our Texas City facility. The released chemicals included ethylbenzene, benzene, polyethylbenzene and hydrochloric acid. We do not believe any serious injuries were sustained, although a number of citizens sought medical examinations at local hospitals after a precautionary alert was given to neighboring communities. 22 The following ethylbenzene lawsuits are outstanding: 1. Zabrina Alexander, et al. v. Sterling Chemicals Holdings, Inc., et al.; Cause No. 00CV0217; In the 10th Judicial District Court of Galveston County, Texas; 2. James Allen, et al. v. Sterling Chemicals, Inc., et al.; Cause No. 200015823; In the 152nd Judicial District Court of Harris County, Texas 3. Bobbie Adams, et al. v. Sterling Chemicals International, Inc., et al.; Cause No. 00CV0311; In the 212th Judicial District Court of Galveston County, Texas; 4. Nettie Allen, et al. v. Sterling Chemicals, Inc., et al.; Cause No. 00CV0304; In the 10th Judicial District Court of Galveston County, Texas. 5. Ida Goldman, et al. v. Sterling Chemicals, Inc., et al.; Cause No. 00CV0338; In the 56th Judicial District Court of Galveston County, Texas; 6. Joe L. Kimble, et al. v. Sterling Chemicals, Inc., et al.; Cause No. 00CV0333; In the 56th Judicial District Court of Galveston, County, Texas; and 7. Olivia Ellis v. Sterling Chemicals, Inc.; Cause No. JC7096; In Justice Court No. 5 of Galveston County, Texas. The 7 lawsuits, and an additional 3 interventions, involve approximately 821 plaintiffs/intervenors who seek an unspecified amount for damages. We believe that all or substantially all of our future out-of-pocket costs and expenses relating to these lawsuits, including settlement payments and judgments, will be covered by our liability insurance policies or indemnification from third parties. We do not believe that the claims and litigation arising out of this incident will have a material adverse effect on our business, financial position, results of operations or cash flows, although we cannot give any assurances to that effect. Unless otherwise ordered by the Bankruptcy Court, all of these claims and litigation are subject to the automatic stay and recoveries (if any) sought thereon from assets of the Debtors will be addressed in the Chapter 11 cases. To date, the Bankruptcy Court has lifted the automatic stay in the cases of Bobbie Adams, et al., James C. Allen, et al. and Nettie Allen, et al. for the sole purpose of allowing the plaintiffs to proceed against our liability insurance policies. Small cash settlements, to be funded by our liability insurance policies, have been negotiated with the plaintiffs in one of the interventions and in the cases of Ida Goldman, et al. and Joe L. Kimble, et al., have been approved by the Bankruptcy Court. On June 11, 2001, we received a notice from the U.S. Department of Justice, Environment and Natural Resources Division, in which the Department alleged that on April 1, 1998 an ethylbenzene release at our Texas City facility violated the general duty clause of the Clean Air Act and invited us to engage in settlement discussion with respect to the matter. Although we believe that the April 1, 1998 release did not constitute a violation of the general duty clause of the Clean Air Act, we have engaged in discussions with the Department in an attempt to settle the matter on a consensual basis. However, any alleged liability would constitute a pre-petition claim and any settlement would require approval by the Bankruptcy Court. We do not believe that this matter will have a material adverse effect on our business, financial position, results of operations or cash flow, although we cannot give any assurances to that effect. OTHER CLAIMS We are subject to various other claims and legal actions that arise in the ordinary course of our business. Claims and legal actions against the Debtors that existed as of the Chapter 11 filing date are subject to the automatic stay, and recoveries sought thereon from assets of the Debtors will be required to be dealt with in the Chapter 11 cases. 23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for Holdings' common stock, par value $.01 per share, although our common stock is traded on the OTC Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc. under the symbol "STXX.OB" The following table sets forth the high and low bid information of our common stock as reported on the OTC Electronic Bulletin Board for the fiscal years ended September 30, 2001 and 2000.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 2001 High............................................. $2.125 $0.781 $ 0.51 $ 0.28 Low.............................................. $0.375 $0.375 $ 0.25 $ 0.09 2000 High............................................. $ 5.75 $7.125 $ 6.25 $ 3.50 Low.............................................. $ 3.50 $ 4.00 $2.625 $1.375
As of December 3, 2001, there were approximately 560 record holders of Holdings' common stock. Holdings has not paid dividends on its common stock in any of the last three fiscal years and does not anticipate paying dividends in the foreseeable future. Any future payment of dividends will depend upon a variety of conditions, including the outcome of the Chapter 11 cases. Due to the Chapter 11 filings, none of the Debtors may pay dividends on their shares of common stock until after they emerge from bankruptcy. It is possible, however, that a plan of reorganization will result in the significant dilution or elimination of all equity interests in Holdings. The payment of dividends on Holdings' common stock is also restricted by the terms of the indenture governing Holdings' 13 1/2% Senior Secured Discount Notes due 2008 and the terms of both of Holdings' outstanding series of preferred stock. In addition, our subsidiaries (including Chemicals, Sterling Pulp and our Saskatoon subsidiary) are parties to various debt agreements that limit their ability to provide funds to us by way of dividends, distributions or advances. 24 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data with respect to our consolidated financial condition and consolidated results of operations and should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and related notes in Item 8 of this Form 10-K.
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------- 2001 2000 1999 1998 1997(1) --------- ---------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA: Revenues.......................... $ 743,565 $1,096,451 $ 739,552 $ 842,990 $ 926,787 Gross profit (loss)............... (13,845) 140,891 38,158 77,267 85,522 Net loss attributable to common stockholders(2)................ (223,868) (89,960) (112,712) (48,579) (28,965) Net cash provided by (used in) operating activities........... 8,281 48,133 (13,890) 45,884 47,314 Net cash used in investing activities..................... (16,892) (28,797) (25,957) (26,622) (196,351) Net cash provided by (used in) financing activities........... 17,264 (26,443) 43,274 (15,238) 151,610 EBITDA(3)......................... 6,695 159,474 54,134 88,753 107,318 PER SHARE DATA: Net loss per common share......... (17.27) (7.13) (8.94) (3.99) (2.58) Cash dividends.................... -- -- -- -- -- BALANCE SHEET DATA (AT YEAR END): Working capital(4)................ $ 71,775 $ 83,505 $ 91,399 $ 91,910 $ 120,104 Total assets...................... 510,143 710,212 775,099 765,956 878,971 Long-term debt (excluding current maturities)(5)................. 61,084 961,570 964,555 873,616 876,281 Redeemable preferred stock........ 27,272 23,928 20,932 18,249 15,793 Stockholders' equity (deficiency in assets)..................... (775,725) (547,722) (455,387) (348,179) (288,528)
- --------------- (1) During fiscal 1997, we acquired our acrylic fibers facility and our Saskatoon facility. (2) During fiscal 2001, approximately $7.1 million in pre-tax charges were recorded in connection with the withdrawal from the traditional commodity textile business of our acrylic fibers operations, which related to $2 million in severance payments and a write-down of finished goods and stores inventory to their net realizable value and $56.8 million of deferred tax expense was recorded to reflect a full valuation allowance on our U.S. deferred tax assets. During fiscal 2000, we recorded pre-tax charges of $2 million for costs associated with workforce reductions and a $60 million non-cash charge related to the write down of our acrylic fibers production assets. During fiscal 1999, we recorded pre-tax charges of $4 million for costs associated with workforce reductions, $6.8 million non-cash charge related to early retirement programs and benefit changes and a $26.4 million non-cash charge related to the write down of our methanol production assets. During fiscal 1998, we recorded a pre-tax charge of $6 million for costs associated with workforce reductions. (3) EBITDA (earnings before interest, taxes, depreciation, amortization, stock appreciation rights ("SARs"), certain merger-related expenses, impairment of assets and certain non-cash charges related to an early retirement program and benefit changes) is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. It is not intended as an alternative measure of performance to net loss. Because EBITDA excludes some, but not all, items that affect net loss and may vary among companies, the EBITDA calculation presented above may not be comparable to similarly 25 titled measures of other companies. Certain non-cash charges related to an early retirement program and benefit changes were $6.8 million for the year ended September 30, 1999. Non-cash charges related to the write-down of our production assets were $60 million for acrylic fibers in the fiscal year ended September 30, 2000 and $26.4 million for methanol in the fiscal year ended September 30, 1999. (4) Working capital at September 30, 2001 excludes pre-petition liabilities subject to companies -- see Note 3 of the Notes to Holdings Consolidated Financial Statements included in this Form 10-K. (5) Excludes long-term debt of $603.8 million (net of related debt issue costs) and $295.0 million, classified as pre-petition liabilities -- subject to compromise and pre-petition liabilities -- not subject to compromise, respectively, on the consolidated balance sheet at September 30, 2001. SELECTED FINANCIAL DATA FOR CHEMICALS The following table sets forth selected financial data with respect to Chemicals' consolidated financial condition and consolidated results of operations and should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Chemicals' Consolidated Financial Statements and related notes in Item 8 of this Form 10-K. All issued and outstanding shares of Chemicals are held by Holdings and, accordingly, per share data is not presented.
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------- 2001 2000 1999 1998 1997(1) --------- ---------- --------- --------- --------- (DOLLARS IN THOUSANDS) OPERATING DATA: Revenues......................... $ 743,565 $1,096,451 $ 739,552 $ 842,990 $ 926,787 Gross profit (loss).............. (13,845) 140,891 38,158 77,267 85,522 Net loss......................... (181,710) (63,847) (94,722) (33,669) (14,851) BALANCE SHEET DATA: Working capital.................. $ 73,638 $ 84,587 $ 92,927 $ 91,997 $ 119,829 Total assets..................... 511,850 677,143 752,106 762,503 875,317 Long-term debt (excluding current maturities)................... 61,084 791,684 816,927 745,709 768,870 Stockholder's equity (deficiency in assets).................... (563,582) (377,790) (309,590) (220,445) (175,587)
26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Holdings is a holding company whose only material asset is its investment in Chemicals, our primary operating subsidiary. Chemicals and its subsidiaries own substantially all of our consolidated operating assets. Other than additional interest expense associated with our 13 1/2% Senior Secured Discount Notes due 2008, our results of operations are essentially the same as Chemicals. CHAPTER 11 PROCEEDINGS On July 16, 2001 (the "Petition Date"), Holdings, Chemicals and most of their U.S. subsidiaries (collectively, the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") in the U.S. Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") and began operating their business as debtors-in-possession pursuant to the Bankruptcy Code. None of our foreign subsidiaries, including our Canadian subsidiaries, were included in the Chapter 11 filings. The 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 petrochemical products caused by declines in general worldwide economic conditions, the relative strength of the U.S. dollar which has caused their export sales to be at a competitive disadvantage and higher raw material and energy costs. As a result of these conditions, the Debtors have incurred significant operating losses. The reorganization contemplated by the Chapter 11 filings is designed to permit the Debtors to preserve cash and to give the Debtors the opportunity to restructure their debt. During the pendency of the Chapter 11 cases, with approval of the Bankruptcy Court, the Debtors may assume favorable pre-petition contracts and leases, reject unfavorable pre-petition contracts and leases and sell or otherwise dispose of assets. The confirmation of a plan of reorganization is the primary objective of the Debtors. Unless otherwise ordered by the Bankruptcy Court, the Debtors have the exclusive right to propose a plan of reorganization until March 13, 2002, and the exclusive right to seek acceptances of any plan proposed by them until May 12, 2002. A plan of reorganization, when filed, will set forth the means for treating claims, including liabilities subject to compromise and interests in the Debtors. Such means may take a number of different forms. A plan of reorganization may result in, among other things, significant dilution or elimination of certain classes of existing interests as a result of the issuance of equity securities to creditors or new investors. The Debtors are in the early stages of formulating a plan of reorganization. The confirmation of any plan of reorganization will require creditor acceptance as required under the Bankruptcy Code and approval of the Bankruptcy Court. At this time, it is not possible to predict the outcome of the bankruptcy cases in general or the effect on the business of the Debtors, the claims of creditors of the Debtors or the interest of stockholders of Holdings. As a result of the bankruptcy filings, most of the Debtors' liabilities incurred prior to the Petition Date, including certain secured debt, could be subject to compromise. However, the ultimate resolution of these liabilities is not presently determinable. Effective July 19, 2001, the Debtors (excluding Holdings) entered into a Revolving Credit Agreement with a group of lenders led by Tyco Capital (formerly The CIT Group/Business Credit, Inc.) to provide up to $195 million in Debtor-In-Possession financing (the "DIP Financing"). By interim order dated July 18, 2001 and final order dated September 14, 2001, the Bankruptcy Court approved up to $155 million in lending commitments under the DIP Financing (the "Base Facility"), consisting of an $85 million "current assets revolver" and a $70 million "fixed assets revolver." The initial draw under the DIP Financing was used to repay all amounts outstanding under the Debtors' previous revolving credit facilities. Additional borrowings under the DIP Financing may be used to fund the Debtors' post-petition operating expenses and supplier and employee obligations throughout the reorganization process. The final order dated September 14, 2001 is on appeal to the U.S. District Court, but no stay of the final order has been sought or imposed, and the order remains fully effective. While no assurances can be given, we do not believe the final order will be overturned on appeal. 27 Borrowings under the DIP Financing are subject to customary funding conditions, including borrowing base restrictions under the current assets revolver. The Base Facility is secured by substantially all of the assets of the Debtors, but some of the liens have been granted super-priority administrative expense claims for the amount of the DIP Financing which, subject to certain carve outs, will entitle the DIP lenders to be paid before any other claims against the Debtors are paid. The DIP Financing is designed to give the Debtors the opportunity, during the reorganization process, to develop a new capital structure that will support them over the long-term, including during recurring cyclical downturns in the markets for the Debtors' petrochemicals products. At September 30, 2001, the total credit available under the DIP Financing was $112.8 million due to borrowing base restrictions under the current assets revolver. At September 30, 2001, $42.3 million was drawn under the fixed assets revolver and there were no borrowings outstanding under the current assets revolver. In addition, approximately $4.4 million of letters of credit were outstanding under the current assets revolver, leaving at September 30, 2001, unused borrowing capacity under the secured revolving credit facilities of approximately $66.1 million. As a result of a priming order entered by the Bankruptcy Court on November 2, 2001 and reinstated on December 19, 2001, the lending commitments under the current assets revolver were increased from $85 million to $125 million. The priming order grants the lenders under the currents assets revolver a priming lien on our fixed assets located in the United States and the capital stock of most of our domestic subsidiaries, prior in right to the existing liens in favor of the 12 3/8% Notes. Although the priming order was entered by the Bankruptcy Court on November 2, 2001, it was appealed to the U.S. District Court by the indenture trustee for the 12 3/8% Notes. By order dated December 17, 2001, the U.S. District Court reversed the priming order and remanded the matter to the Bankruptcy Court for a determination of a compensatory adjustment in favor of the 12 3/8% Notes, which the U.S. District Court suggested would be satisfied by a 4% increase of the interest rate payable on up to $40 million. On remand, the Bankruptcy Court entered an order dated December 19, 2001, reinstating the priming order subject to an appropriate compensatory adjustment in favor of the 12 3/8% Notes of four percentage points of additional interest on up to $40 million. In addition, the Bankruptcy Court scheduled a hearing for January 2, 2002 to determine certain technical details regarding implementation of this 4% increase. The Debtors anticipate that the priming order will be further appealed by the indenture trustee. The priming order will remain effective pending the outcome of any appeal unless stayed by an appellate court. The Debtors will take all reasonable actions necessary, either before the Bankruptcy Court or on appeal, to maintain the effectiveness of the priming order and the additional liquidity provided by the priming order. If the priming order is stayed or is not ultimately upheld on appeal, the Debtors will need to seek additional sources of financing or revise their business plan and operations consistent with the level of available financing. However, we can give no assurances that the priming order will not be stayed or will be upheld on appeal or, if stayed or not upheld on appeal, that additional sources of financing will be available or adequate or that our available financing will be adequate after implementing revisions to the Debtors' business plan and operations. In addition, as of July 11, 2001, our principal Canadian subsidiary, Sterling Pulp Chemicals, Ltd. ("Sterling Pulp"), entered into a financing agreement with Tyco Capital Business Credit (Canada) Inc. ("Tyco Canada") to provide up to the Canadian dollar equivalent of U.S. $30 million (the "Canadian Financing Agreement"). The initial advance under this facility, approximately U.S. $20 million, was used by Sterling Pulp to discharge a portion of an intercompany debt and was ultimately transferred to the Debtors through an intercompany loan. The intercompany loan was approved by the Bankruptcy Court's interim order entered on July 18, 2001 and final order entered on September 14, 2001 which is a subject of the appeal of the final order discussed above. The Debtors are permitted to continue to operate their businesses and manage their properties in the ordinary course without prior approval from the Bankruptcy Court. Transactions outside of the ordinary course of business, including certain types of capital expenditures, certain sales of assets and certain requests for additional financings, will require approval by the Bankruptcy Court. There is no assurance that the Bankruptcy Court will grant any requests for such approvals. On July 18, 2001, the Bankruptcy Court issued an order permitting the Debtors to pay pre-petition salaries, wages and benefits to all of their employees. The Bankruptcy Court also authorized the payment of 28 certain other pre-petition claims, in limited circumstances, as necessary to avoid undue disruption to the Debtors' operations. Generally, actions to enforce or otherwise effect repayment of pre-petition liabilities of, as well as all pending litigation against, the Debtors are stayed while the Debtors continue to operate their business as debtors-in-possession. The ultimate amount and settlement terms for such liabilities will be subject to a plan of reorganization and, accordingly, are not presently determinable. The Debtors' trade creditors, including vendors, will be paid their post-petition claims in the normal course of business. As our foreign subsidiaries are not included in the Chapter 11 filings, all of their creditors, including vendors, will be paid their claims in the ordinary course of business, irrespective of whether the claims arose prior to or after the Chapter 11 filings. As a result of the bankruptcy filings and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, confirmation of a plan of reorganization, or disapproval thereof, could change the amounts reported in the financial statements. The ability of the Debtors to continue as a going concern is dependent upon, among other things, (i) the Debtors' ability to comply with the terms of the DIP Financing and any related orders entered by the Bankruptcy Court in connection with the Chapter 11 cases, (ii) the ability of the Debtors to access the incremental $40 million in DIP Financing that is dependent on an effective priming order, (iii) the ability of the Debtors to maintain adequate cash on hand, (iv) the ability of the Debtors to generate sufficient cash from operations, (v) the ability of the Debtors' subsidiaries that are not included in the Chapter 11 cases to obtain necessary financing, (vi) confirmation of a plan or plans of reorganization under the Bankruptcy Code and (vii) the Debtors' ability to achieve profitability following such confirmation. As the Debtors can give no assurances that they will achieve any of the forgoing, there is substantial doubt about the Debtors', and therefore the Company's, ability to continue as a going concern. The accompanying financial statements do not include any adjustments that may result from the resolution of these uncertainties. MANAGEMENT CHANGES On December 19, 2001 we announced that Frank P. Diassi had elected to terminate his employment, effective immediately. Mr. Diassi joined us in 1996 as executive Chairman of the Board and continued in that position until his termination. Earlier this year he was elected Co-Chief Executive Officer along with David G. Elkins, our President. Mr. Diassi has asserted that he had "good reason" to terminate his employment and is claiming that he is entitled to receive payments under our employee retention and severance plans. Our Compensation Committee is evaluating the merits of Mr. Diassi's claim. Mr. Diassi will continue in his role as director. Succeeding Mr. Diassi as Co-Chief Executive Officer will be Richard K. Crump. Since joining us in 1986, Mr. Crump has served in a variety of management positions, most recently as Executive Vice President-Operations. Mr. Crump has also been elected to our Board of Directors, increasing the size of the Board of Directors to seven. In a separate action, Robert W. Roten was elected non-executive Chairman of the Board of Directors, having served as a director since 1996 and as Vice Chairman of the Board of Directors since 1998. Mr. Roten was employed by us since our inception, eventually attaining the positions of President and Chief Executive Officer before he retired in 1998. MARKET CONDITIONS The primary markets in which we compete, especially styrene and acrylonitrile, are cyclical and are sensitive to factors such as: - changes in the balance between supply and demand; - the price of raw materials; 29 - currency exchange rates; and - the level of general worldwide economic activity. Styrene prices are cyclical and sensitive to overall supply relative to demand and the level of general business activity. As is the case with other petrochemicals, styrene from time to time experiences periods of strong demand resulting in tight supply and high prices and margins. This tight balance in supply and demand often results in new capacity additions. In most cases, incremental capacity comes in the form of large new plants or major expansions of existing facilities. As this new capacity comes on line, it often exceeds current demand growth and results in a decline in prices and margins. Following a period of strong demand growth and high utilization rates from 1994 to 1996, several major producers announced new capacity increases in 1997 and 1998, particularly in the Far East. At the time of this announced new capacity, there was a general slowdown in the economic growth rate in the Far East, prompting customers to begin utilizing their available inventories and decrease purchases of additional product. As a result, our average styrene prices declined from fiscal 1997 through fiscal 1999, as the previously announced new capacity came on line at the same time that economic events in various Asian countries significantly reduced demand growth for styrene. During fiscal 2000, styrene prices and margins increased significantly from levels experienced in fiscal 1999. These improvements were driven by a combination of stronger market demand, operating problems experienced at several of our competitors and generally low inventory levels worldwide. Styrene prices and margins peaked in April of 2000 at a published spot price of $0.48 per pound and decreased over the second half of 2000. During fiscal 2001, U.S. and world economies experienced a general slowdown which has negatively impacted demand for most petrochemicals. Raw material and energy costs spiked upward during the first half of fiscal 2001, increasing significantly from the prior year, primarily due to the sharp increase in natural gas prices. As a result, U.S. Gulf Coast petrochemicals producers experienced significant margin erosion in most of their products. Due to these conditions, many U.S. Gulf Coast petrochemicals producers, including us, reduced production levels. During the second half of fiscal 2001, raw material and energy costs began to moderate, although demand has remained weak due to the continued economic slowdown. Reported styrene spot prices averaged $0.17 to $0.19 per pound in September 2001. We cannot predict future increases or decreases in styrene prices and margins. The acrylonitrile market exhibits similar characteristics to those of styrene regarding capacity utilization, selling prices and profit margins. Moreover, as a high percentage of our acrylonitrile sales are made in the export market, demand for our acrylonitrile is significantly influenced by export customers, particularly those that supply acrylic fibers to customers in China. During 1995, strong demand for acrylic fibers and ABS resins, particularly in China, increased demand for acrylonitrile, resulting in high prices and margins. High utilization rates and prices prompted many major producers to announce new capacity increases and approximately two billion pounds of capacity increases came on line between 1996 and 1998. As new acrylonitrile capacity in the United States and Asia came on line, demand growth in Asian markets weakened, causing our acrylonitrile prices and margins to decrease significantly from 1996 through 1999. Beginning in early fiscal 2000, acrylonitrile prices increased significantly due to improved market demand, operating problems experienced at several of our competitors and generally low inventory levels. However, we were not able to fully capitalize on this opportunity as a result of planned shutdowns related to the construction by Monsanto of the DSIDA plant at our Texas City facility and several plant operating problems. Due to the general slowdown of U.S. and world economies, along with higher raw material and energy costs described above, acrylonitrile prices and margins weakened significantly in fiscal 2001. As a result, we rescheduled maintenance turnaround work at our Texas City acrylonitrile facility, performing this work during the second quarter of fiscal 2001 rather than later in the year. The adverse economic conditions that made it commercially impracticable to operate our acrylonitrile and other nitriles production units, and that served as the basis for our decision to advance the timing of the turnaround, persisted beyond the completion of this maintenance turn-around work. Consequently, we elected to postpone restarting our acrylonitrile facilities and other nitriles production units until it is commercially practicable to operate these facilities. Our other nitriles production units include the sodium cyanide, TBA and DSIDA production units, all of which are dependent on the acrylonitrile facilities for feedstocks. Our 30 conversion agreement with Flexsys terminates as of December 31, 2001. We are currently evaluating our options related to TBA production following the termination of this contract. The sodium chlorate market has also historically experienced cycles in capacity utilization, selling prices and profit margins. Since 1990, North American demand for sodium chlorate has grown at an average annual rate of approximately 7% as pulp mills have accelerated substitution of chlorine dioxide for elemental chlorine in bleaching applications. In 1999, demand for sodium chlorate did not increase at historical rates as a result of weak market conditions and lower operating rates in the pulp and paper industry. In addition, new production capacity was added while implementation of the Cluster Rules was delayed. During fiscal 2000 and 2001, average sodium chlorate prices increased due to increased operating rates at pulp mills and the continued conversion to elemental chlorine free bleaching at pulp mills. The industry average market price (as reported by Chemical Week Associates) increased by approximately 6% from fiscal 1999 to fiscal 2000 and increased approximately 10% from fiscal 2000 to fiscal 2001. We cannot predict future increases or decreases in sodium chlorate prices and margins. We market a significant portion of our volumes of petrochemicals and generate a significant portion of our revenues under our conversion and long-term agreements. Under our conversion agreements, the customer furnishes some or all of the raw materials, which we process into petrochemicals in exchange for a fee designed to cover our fixed and variable costs of production. These conversion agreements are intended to help us maintain lower levels of working capital and, in some cases, gain access to certain improvements in manufacturing process technology. Our petrochemicals conversion agreements are intended to: - optimize capacity utilization rates; - lower our selling, general and administrative expenses; - reduce our working capital requirements; and - insulate our operations to some extent from the effects of declining markets and changes in raw materials prices. LIQUIDITY AND CAPITAL RESOURCES DIP FINANCING AND CANADIAN FINANCING AGREEMENT Effective July 19, 2001, the Debtors (excluding Holdings) entered into a Revolving Credit Agreement with a group of lenders led by Tyco Capital (formerly The CIT Group/Business Credit, Inc.) to provide up to $195 million in Debtor-In-Possession financing (the "DIP Financing"). By interim order dated July 18, 2001 and final order dated September 14, 2001, the Bankruptcy Court approved up to $155 million in lending commitments under the DIP Financing (the "Base Facility"), consisting of an $85 million "current assets revolver" and a $70 million "fixed assets revolver." The initial draw under the DIP Financing was used to repay all amounts outstanding under the Debtors' previous revolving credit facilities. Additional borrowings under the DIP Financing may be used to fund the Debtors' post-petition operating expenses and supplier and employee obligations throughout the reorganization process. The final order dated September 14, 2001 is on appeal to the U.S. District Court, but no stay of the final order has been sought or imposed, and the order remains fully effective. While no assurances can be given, the Company does not believe the final order will be overturned on appeal. Borrowings under the DIP Financing are subject to customary funding conditions, including borrowing base restrictions under the current assets revolver. The Base Facility is secured by substantially all of the assets of the Debtors, but some of the liens have been granted super-priority administrative expense claims for the amount of the DIP Financing which, subject to certain carve outs, will entitle the DIP lenders to be paid before any other claims against the Debtors are paid. The DIP Financing is designed to give the Debtors the opportunity, during the reorganization process, to develop a new capital structure that will support them over the long-term, including during recurring cyclical downturns in the markets for the Debtors' petrochemicals products. At September 30, 2001, the total credit available under the DIP Financing was $112.8 million due to borrowing base restrictions under the current assets revolver. At September 30, 2001, $42.3 million was drawn 31 under the fixed assets revolver and there were no borrowings outstanding under the current assets revolver. In addition, approximately $4.4 million of letters of credit were outstanding under the current assets revolver, leaving at September 30, 2001, unused borrowing capacity under the secured revolving credit facilities of approximately $66.1 million. As a result of a priming order entered by the Bankruptcy Court on November 2, 2001 and reinstated on December 19, 2001, the lending commitments under the current assets revolver were increased from $85 million to $125 million. The priming order grants the lenders under the currents assets revolver a priming lien on our fixed assets located in the United States and the capital stock of most of our domestic subsidiaries, prior in right to the existing liens in favor of the 12 3/8% Notes. Although the priming order was entered by the Bankruptcy Court on November 2, 2001, it was appealed to the U.S. District Court by the indenture trustee for the 12 3/8% Notes. By order dated December 17, 2001, the U.S. District Court reversed the priming order and remanded the matter to the Bankruptcy Court for a determination of a compensatory adjustment in favor of the 12 3/8% Notes, which the U.S. District Court suggested would be satisfied by a 4% increase of the interest rate payable on up to $40 million. On remand, the Bankruptcy Court entered an order dated December 19, 2001, reinstating the priming order subject to an appropriate compensatory adjustment in favor of the 12 3/8% Notes of four percentage points of additional interest on up to $40 million. In addition, the Bankruptcy Court scheduled a hearing for January 2, 2002 to determine certain technical details regarding implementation of this 4% increase. The Debtors anticipate that the priming order will be further appealed by the indenture trustee. The priming order will remain effective pending the outcome of any appeal unless stayed by an appellate court. The Debtors will take all reasonable actions necessary, either before the Bankruptcy Court or on appeal, to maintain the effectiveness of the priming order and the additional liquidity provided by the priming order. If the priming order is stayed or is not ultimately upheld on appeal, the Debtors will need to seek additional sources of financing or revise their business plan and operations consistent with the level of available financing. However, we can give no assurances that the priming order will not be stayed or will be upheld on appeal or, if stayed or not upheld on appeal, that additional sources of financing will be available or adequate or that our available financing will be adequate after implementing revisions to the Debtors' business plan and operations. As of July 11, 2001, our principal Canadian subsidiary, Sterling Pulp, entered into a financing agreement with Tyco Capital Business Credit (Canada) Inc., ("Tyco Canada") to provide up to the Canadian dollar equivalent of U.S. $30 million (the "Canadian Financing Agreement"). The initial advance under this facility, approximately U.S. $20 million, was used by Sterling Pulp to discharge a portion of an intercompany debt and was ultimately transferred to the Debtors through an intercompany loan. The intercompany loan was approved by the Bankruptcy Court's interim order entered on July 18, 2001 and final order entered on September 14, 2001, which is a subject of the appeal of the final order discussed above. At September 30, 2001, $20 million was drawn under the Canadian Financing Agreement. Under the DIP Financing, the Debtors (excluding Holdings) are co-borrowers and are jointly and severally liable for any indebtedness thereunder. The Base Facility consists of: - a $70 million fixed assets revolving credit facility secured by: - first priority liens on all of the capital stock of Chemicals and the other co-borrowers, all of our United States production facilities and related assets and 35% of the capital stock of certain of our subsidiaries incorporated outside the United States; and - second priority liens on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers and 65% of the capital stock of certain of our subsidiaries incorporated outside the United States; and - an $85 million current assets revolving credit facility secured by: - a first priority lien on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers; 32 - a second priority lien on 35% of the capital stock of certain of our subsidiaries incorporated outside the United States; and - third priority liens on the remaining 65% of that stock, all of the capital stock of Chemicals and the other co-borrowers and all of our United States production facilities and related assets. Available credit under the fixed assets revolving credit facility is not subject to a borrowing base. At September 30, 2001, available credit under the current assets revolving credit facility was subject to a monthly borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory, with an inventory cap of $42.5 million. In addition, the borrowing base for the current assets revolver is required to exceed outstanding borrowings thereunder by $12 million at all times, with a maximum of $85 million available under the current asset revolving credit facility. Assuming the priming order is not overturned on appeal, (i) maximum availability under the current assets revolving credit facility is $125 million, (ii) the monthly borrowing base consist of 85% of eligible accounts receivable, the lesser of $10 million or 33% of specified estimated future royalty payments related to the Debtors' chlorine dioxide technology and 65% of eligible inventory, with an inventory cap of $62.5 million, and (iii) the borrowing base for the current assets revolver is required to exceed outstanding borrowings by only $6 million at all times. If the priming order remains effective and the total commitments under the current assets revolver are increased to $125 million, the incremental $40 million is secured by first priority liens on all of our United States production facilities and related assets and all of the capital stock of the co-borrowers (excluding Chemicals) to secure up to $40 million under the current assets revolver, as well as all of the same collateral securing the initial $85 million current assets revolver. Consequently, after giving effect to the priming order, the DIP Financing consists of: - a $70 million fixed assets revolving credit facility secured by: - a first priority lien on all of the capital stock of Chemicals; - second priority liens on all of our United States production facilities and related assets, all of the capital stock of the co-borrowers (excluding Chemicals), all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers and 35% of the capital stock of certain of our subsidiaries incorporated outside the United States; and - a third priority lien on the remaining 65% of that stock; and - a $125 million current assets revolving credit facility: - $40 million of which is secured by first priority liens on all of our United States production facilities and related assets, all of the capital stock of the co-borrowers (excluding Chemicals) and 35% of the capital stock of certain of our subsidiaries incorporated outside the United States and a second priority lien on the remaining 65% of that stock; and - all of which is secured by a first priority lien on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers, third priority liens on all of the capital stock of Chemicals and 35% of the capital stock of certain of our subsidiaries incorporated outside the United States and fourth priority liens on the remaining 65% of that stock, all of the capital stock of the co- borrowers (excluding Chemicals) and all of our United States production facilities and related assets. At September 30, 2001, the total credit available under the DIP Financing was $112.8 million due to the current assets revolver borrowing base limitations discussed above. At September 30, 2001, $42.3 million was drawn under the fixed assets revolver and there were no borrowings outstanding under the current assets revolver. In addition, approximately $4.4 million of letters of credit were outstanding, leaving at September 30, 2001, unused borrowing capacity under the secured revolving credit facilities of approximately $66.1 million. At September 30, 2001, $20 million was drawn under the Canadian Financing Agreement. 33 The DIP Financing and the Canadian Financing Agreement contain numerous covenants, including, but not limited to, restrictions on the ability to incur indebtedness, create liens and sell assets, as well as certain financial maintenance covenants. OTHER DOMESTIC BORROWINGS As of September 30, 2001, other domestic borrowings consisted of: - Chemicals' 11 1/4% Senior Subordinated Notes due 2007, 11 3/4% Senior Subordinated Notes due 2006 and 12 3/8% Senior Secured Notes due 2006; and - Holdings' 13 1/2% Senior Secured Discount Notes due 2008. The 12 3/8% Notes are senior secured obligations of Chemicals and rank equally in right of payment with all other existing and future senior indebtedness of Chemicals and senior in right of payment to all existing and future subordinated indebtedness of Chemicals. The 12 3/8% Notes are fully and unconditionally guaranteed by most of Chemicals' existing direct and indirect United States subsidiaries on a joint and several basis. Each subsidiary's guarantee ranks equally in right of payment with all of that subsidiary's existing and future senior indebtedness and senior in right of payment to all existing and future subordinated indebtedness of that subsidiary. The 12 3/8% Notes and the subsidiary guarantees are secured by: - a second priority lien on all of our United States production facilities and related assets; - a second priority pledge of all of the capital stock of each subsidiary guarantor; and - a first priority pledge of 65% of the stock of certain of our subsidiaries incorporated outside of the United States. As a result of the priming order, the second priority liens held by the 12 3/8% Notes on all of our United States production facilities and related assets and the capital stock of each subsidiary guarantor became third priority liens. The priming order does not affect the priority of the pledge held by the 12 3/8% Notes of 65% of the stock of certain of our subsidiaries incorporated outside of the United States. As discussed above, we anticipate that the priming order will be appealed by the indenture trustee for the 12 3/8% Notes. The indentures governing the 13 1/2% Notes, the 12 3/8% Notes, the 11 3/4% Notes and the 11 1/4% Notes contain numerous covenants, including, but not limited to, restrictions on our ability to incur indebtedness, pay dividends, create liens, sell assets, engage in mergers and acquisitions and refinance existing indebtedness. Upon the filing of the Chapter 11 cases by the Debtors, an Event of Default occurred under each of the indentures and all of the indebtedness was accelerated and became immediately due and payable. The Debtors may pay the indebtedness under the indentures only pursuant to a confirmed plan of reorganization or order of the Bankruptcy Court. During the pendency of the Chapter 11 cases, the Debtors will not, for the most part, be subject to the restrictions contained in any of the indentures. SASKATOON FACILITY In July 1997, Sterling Pulp Chemicals (Sask) Ltd., our Canadian subsidiary that operates our Saskatoon facility, entered into a credit agreement with JP Morgan Chase of Canada, individually and as administrative agent, and certain other financial institutions (the "Saskatoon Credit Agreement"). The indebtedness under the Saskatoon Credit Agreement is secured by substantially all of the assets of this subsidiary, including the Saskatoon facility. The Saskatoon Credit Agreement requires that certain amounts of "Excess Cash Flow" be used to prepay amounts outstanding under the term portion of the credit facility. The Saskatoon Credit Agreement provides a revolving credit facility of Cdn. $8 million to be used by our Saskatoon subsidiary solely for its general corporate purposes. No borrowings were outstanding under the Saskatoon revolving credit facility as of September 30, 2001. We believe the credit available under the Saskatoon revolving credit facility, when added to internally generated funds and other sources of capital, will be sufficient to meet our Saskatoon subsidiary's liquidity needs for the reasonably foreseeable future, although we can give no assurances to that effect. 34 Because of restrictions in the Saskatoon Credit Agreement, we generally do not have access to the cash flows of our Saskatoon subsidiary. In addition, because of its designation as an "Unrestricted Subsidiary" under the DIP Financing, our Prior Revolvers and the indentures for the 13 1/2% Notes, the 12 3/8% Notes, the 11 3/4% Notes and the 11 1/4% Notes, our Saskatoon subsidiary's results are not considered in determining compliance with the covenants contained therein. The Saskatoon Credit Agreement contains provisions which restrict the payment of advances, loans and dividends from our Saskatoon subsidiary to us or Chemicals. The most restrictive of these covenants limits such payments during fiscal 2001 to approximately $1 million, plus any amounts due to us from our Saskatoon subsidiary under the intercompany tax sharing agreement. An Event of Default occurred under the Saskatoon Credit Agreement as a result of the Chapter 11 filings by the Debtors. However, the lenders under the Saskatoon Credit Agreement executed a forbearance agreement under which they have temporarily agreed to not exercise their remedies under that agreement. In connection with obtaining the lenders' agreement to enter into the forbearance arrangement, the Saskatoon Credit Agreement was amended in several respects, including the elimination of the exceptions to the provisions restricting the payment of advances, loans and dividends from our Saskatoon subsidiary to us or Chemicals and the inclusion of a restriction on our ability to draw upon the revolving credit facility during the remainder of calendar year 2001. The Saskatoon subsidiary has not drawn on the revolver since its inception in 1997 and, as of September 30, 2001, has approximately $11.8 million in cash and cash equivalents on hand. The forbearance agreement expires on December 31, 2001. We are currently negotiating a waiver and amending agreement with the lenders and expect to have that agreement executed in the near-term; however, no assurance can be given that this waiver and amending agreement will be executed or that the forbearance arrangement will be extended beyond December 31, 2001. KEY EMPLOYEES We believe that our success will depend to a significant extent upon the efforts and abilities of our executive officers and senior management. In addition, we will continue to depend upon the retention of our key sales and purchasing personnel to maintain customer and supplier relationships. However, due to uncertainty about our financial condition, it may be difficult to retain our key employees or attract qualified replacements. On August 6, 2001, the Debtors filed a motion with the Bankruptcy Court seeking authorization to continue existing and implement additional retention and severance plans to ameliorate the effects of the Chapter 11 filings on our key employees. This motion was approved on October 31, 2001. Benefits totaling approximately $4.7 million are estimated to be paid during and at the conclusion of the reorganization process. STANDBY EQUITY COMMITMENTS In December 1998, we entered into separate Standby Purchase Agreements with each of Gordon A. Cain, William A. McMinn, James Crane, Frank P. Diassi, Frank J. Hevrdejs and Koch Capital Services, Inc. Under each of the Standby Purchase Agreements, we were able to require the purchasers to purchase shares if we are able to satisfy certain conditions precedent relating to our financial condition, and then only if we believed that the equity infusion was necessary to maintain, reestablish or enhance Chemicals' borrowing rights under its revolving credit facilities or to satisfy any requirement thereunder to raise additional equity. As of September 30, 2001, we were not able to meet the conditions to our ability to draw on the Standby Purchase Agreements and, on December 15, 2001, they expired in accordance with their terms. WORKING CAPITAL Working capital at September 30, 2001 was $71.8 million, a decrease of $11.7 million from September 30, 2000. Working capital at September 30, 2001 excludes pre-petition liabilities subject to compromise -- see Note 3 of the Notes to Consolidated Financial Statements included in this Form 10-K. Significant reductions in accounts receivable and inventory were offset by reductions in accounts payable and accrued liabilities reflecting market conditions and lower operating rates. Current portion of long-term debt increased 35 by $30.7 million primarily due to the Event of Default under the Saskatoon Credit Agreement discussed above. CASH FLOW Net cash provided by our operations was $8.3 million in fiscal 2001, a decrease of $40 million compared to the net cash provided by our operations in fiscal 2000. This decrease in net cash resulted primarily from an increase in net losses between fiscal 2001 and fiscal 2000, primarily from our petrochemicals business. Net cash flow used in our investing activities was $16.9 million in fiscal 2001 compared to $28.8 million in fiscal 2000. Net cash flow provided by our financing activities was $17. 3 million in fiscal 2001 compared to net cash flows used in our financing activities of $26.4 million in fiscal 2000. CAPITAL EXPENDITURES Our capital expenditures were approximately $17 million in fiscal 2001, $29 million in fiscal 2000 and $30 million in fiscal 1999. Our capital expenditures in fiscal 2001 were primarily related to routine safety, environmental and replacement capital. Our capital expenditures in fiscal 2000 were primarily related to the DSIDA project, a water disposal project and routine safety, environmental and replacement capital. Our fiscal 1999 capital expenditures were primarily related to the acetic acid expansion, our project to reduce the levels of phenylacetylene, or "PA," in the styrene produced at our Texas City facility and routine safety, environmental and replacement capital. Capital expenditures are expected to be approximately $30 to $35 million in fiscal 2002, with about $20 to $25 million dedicated to our petrochemicals business and approximately $10 million dedicated to our pulp chemicals business. These capital expenditures will primarily be for routine safety, environmental and replacement capital. Our capital expenditures for environmentally-related prevention, containment and process improvements were $1 million for both fiscal 2001 and fiscal 2000. We anticipate spending approximately $2 to 4 million on these types of expenditures during fiscal 2002. During fiscal 2001 and fiscal 2000, we did not incur any other infrequent or non-recurring material environmental expenditures which were required under existing environmental regulations. See "Certain Known Events, Trends, Uncertainties and Risk Factors." NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. As of October 1, 2000, the transition adjustment related to the adoption of these statements was not material. We have an agreement relating to the supply of a portion of the electrical energy at one of our Canadian sodium chlorate production facilities. This agreement, which was previously designated as a normal purchase under SFAS No. 133, does not meet the criteria of a normal purchase based on guidance issued by the Derivative Implementation Group (the "DIG") and cleared by the Financial Accounting Standards Board in June 2001. All purchases under this agreement, which expires on December 31, 2001, are used in the ordinary course of business; however, effective July 1, 2001, this agreement is required to be marked-to-market. At September 30, 2001, the value of this agreement was a loss of approximately $1.2 million based on current market prices and quantities to be delivered. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations be accounted for under the purchase method and requires separate identification and recognition of intangible assets, other than goodwill. The statement applies to all business combinations initiated after June 30, 2001. 36 SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which must be applied to fiscal years beginning after June 15, 2002, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We are in the process of evaluating the impact of SFAS No. 143 on our financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS 144 is effective for fiscal years beginning after December 15, 2001, with early adoption permitted. We are currently evaluating the provisions of SFAS No. 144. We do not believe that the adoption of SFAS No. 141, 142, 143 or 144 will have a significant impact on our financial statements. CERTAIN KNOWN EVENTS, TRENDS, UNCERTAINTIES AND RISK FACTORS THERE ARE SIGNIFICANT UNCERTAINTIES RELATING TO OUR BANKRUPTCY PROCEEDINGS. Our future results are dependent upon the successful confirmation and implementation of a plan of reorganization. We have not yet submitted such a plan to the Bankruptcy Court for approval and cannot make any assurances that we will be able to obtain any such approval in a timely manner. Failure to obtain this approval in a timely manner could adversely affect our operating results, as our ability to obtain financing to fund our operations and our relations with our customers and suppliers may be harmed by protracted bankruptcy proceedings. Furthermore, we cannot predict the ultimate amount of all settlement terms for our liabilities that will be subject to a plan of reorganization. The deadline for filing proofs of claim against the Debtors was December 17, 2001 (or January 14, 2002 in the case of governmental units). We are currently reviewing the proofs of claim filed against the Debtors and, in the event that the amount of claims asserted in filed proofs of claim exceed the $1,070.5 million in accrued liabilities recorded in the Consolidated Financial Statements as of September 30, 2001 as "Pre-petition liabilities subject to compromise" and "Pre-petition liabilities not subject to compromise," we believe the excess will be attributable to claims that are duplicative or without merit and will not have a material effect on the Consolidated Financial Statements. Once a plan of reorganization is approved and implemented, our operating results may be adversely affected by the possible reluctance of prospective lenders, customers and suppliers to do business with a company that recently emerged from bankruptcy proceedings. Other negative consequences that could arise as a result of the bankruptcy proceedings include: - making us more vulnerable to a continued downturn in our industry or a downturn in the economy in general; - limiting our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate; - the incurrence of significant costs associated with the reorganization; - impacts on the availability of raw materials and payment terms from our suppliers; - impacts on our relationship with suppliers and customers, including loss of confidence in our ability to fulfill contractual obligations due to financial uncertainty; - placing us at a competitive disadvantage compared to our competitors; 37 - limiting our ability to borrow additional funds; and - employee attrition. WE ARE HIGHLY LEVERAGED AND HAVE SUBSTANTIAL DEBT OBLIGATIONS. We are currently in default under many of our pre-petition debt obligations. During the pendency of our bankruptcy proceedings, the Debtors may obtain post-petition debt financing only with the approval of the Bankruptcy Court and have already obtained approval for the DIP Financing discussed above. As of December 14, 2001, there have been $48.8 million cash borrowings made under the DIP Financing and letters of credit in the aggregate amount of $4.4 million have been issued under the DIP Financing, leaving unused borrowing capacity under the DIP Financing, after giving affect to the priming order, of approximately $57 million. Unless amended, the DIP Financing matures on the earlier of July 19, 2003 or the effective date of a plan of reorganization. Depending on the resolution of our bankruptcy proceedings, we could emerge from bankruptcy highly leveraged with substantial debt service obligations. Thus we would continue to be particularly susceptible to adverse changes in our industry, the economy and the financial markets. In addition, our ability to obtain additional debt financing after emergence may be limited by restrictive covenants under the terms of credit agreements and any other debt instruments. Those limits on financing may restrict our ability to service our debt obligations through additional debt financing if cash flow from operations is insufficient to service such obligations. WE HAVE LIMITED LIQUIDITY, WHICH MAY PROVE INADEQUATE DURING OUR REORGANIZATION PROCESS. The Debtors are currently funding their liquidity needs out of operating cash flow and from borrowings under the DIP Financing. The DIP Financing is limited in amount and is also subject to numerous funding conditions which are largely beyond the control of the Debtors, including borrowing base requirements and compliance with the EBITDA covenant contained in the DIP Financing. The ability of the Debtors to obtain additional financing during the reorganization process is severely limited by a variety of factors, including the debt incurrence restrictions imposed by the DIP Financing, numerous procedural requirements and uncertainties relating to the bankruptcy proceedings, including any continuing challenge to the priming order, and the Debtors' current financial condition and prospects. Accordingly, no assurances can be given that the Debtors' existing sources of liquidity will be adequate to fund their liquidity needs throughout the reorganization process or, if additional sources of liquidity become necessary during the reorganization process, that they would be available to the Debtors or adequate. Any liquidity shortages during the reorganization process would likely have a material adverse effect on the Debtors' business and financial condition as well as their ability to successfully restructure and emerge from bankruptcy. THE INDUSTRIES IN WHICH WE PARTICIPATE ARE CYCLICAL AND DEPRESSED MARKET CONDITIONS FOR OUR MAJOR PRODUCTS CAN NEGATIVELY AFFECT OUR BUSINESS AND MAKE IT DIFFICULT FOR US TO RESTRUCTURE SUCCESSFULLY. Demand for our petrochemicals and pulp products are cyclical and are influenced by, among other things, the health of the global economy and changes in overall supply relative to demand. An economic slowdown or a prolonged downturn in our petrochemicals markets will impact both the sales volumes and sales prices of our products and could have a material adverse effect on our financial results. As prices decline, our profit margins generally decrease, which adversely affects our business and our cash flows. Large global capacity additions of styrene and acrylonitrile were completed between 1997 and 2001. For styrene, approximately eight billion pounds of net new capacity was added and, for acrylonitrile, approximately three billion pounds of net new capacity was added. Further, reduced operating rates at North American pulp mills have reduced the rate of demand growth in North America for our pulp chemicals products and services. The resulting impact on prices and margins negatively impacted our pulp chemicals' results in fiscal 1998, 1999 and 2001 and could negatively impact our results in the future. If the markets for our primary petrochemicals products worsen, it will be more difficult for us to successfully restructure and emerge from bankruptcy. 38 THE PETROCHEMICALS, ACRYLIC FIBERS AND PULP CHEMICALS INDUSTRIES ARE HIGHLY COMPETITIVE. Many of our competitors, particularly in the petrochemicals industry, are larger and have substantially greater financial resources than we have. We compete with some of the world's largest chemical companies, many of whom, in contrast to us, supply much of their own raw materials requirements. In addition, a significant portion of our petrochemicals business is based upon widely available technology. The entrance of new competitors into the industry or the addition by existing competitors of new capacity may reduce our ability to maintain profit margins or preserve our market share, even during periods of increased demand for our petrochemical products. OUR BUSINESS MAY BE ADVERSELY AFFECTED BY DEREGULATION OF ELECTRIC POWER OR IF WE ARE UNABLE TO OBTAIN RAW MATERIALS AND ENERGY RESOURCES FROM THIRD-PARTY SUPPLIERS AT REASONABLE PRICES OR ON ACCEPTABLE TERMS. For most of our products, the combined cost of raw materials and energy resources, including utilities in the case of pulp chemicals, is far greater than all other costs of production combined. Therefore, an adequate supply of raw materials at reasonable prices and on acceptable terms is critical to the success of our business. If we are unable to obtain raw materials at reasonable prices and on acceptable terms, our results of operations would be negatively impacted. Most of the raw materials we use are supplied by others and many of them are subject to wide price fluctuations for a variety of reasons beyond our control. For example, changes in the availability of these products may result from major capacity additions or significant facility operating problems. The current trend towards deregulation of electric power makes our short-term future cost for electric power uncertain. Electricity is the largest cost of manufacturing sodium chlorate. In addition, natural gas is a significant cost of production for some of our petrochemicals and pulp chemicals, as well as for our suppliers of raw materials. Significant increases in natural gas prices may increase our total costs of production and we may not be able to recover this increase in costs through higher selling prices. We can give no assurances that we will continue to be able to secure adequate supplies of electric power or any of our raw materials or energy resources at reasonable prices or on acceptable terms. OUR INDUSTRY IS SUBJECT TO EXTENSIVE ENVIRONMENTAL REGULATION, WHICH CREATES UNCERTAINTY REGARDING FUTURE ENVIRONMENTAL EXPENDITURES AND LIABILITIES. Our operations involve the handling, production, transportation, treatment and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental and health and safety laws, regulations and permit requirements. These regulations, and the potential for further expanded regulations may increase our costs and thereby negatively affect our business. Environmental permits required for our operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements and the potential for further expanded regulation may increase our costs and thereby negatively affect our business. Changing and increasingly strict environmental requirements can affect the manufacturing, handling, processing, distribution and use of our products and, if so affected, our business and operations may be materially and adversely affected. In addition, changes in these requirements may cause us to incur substantial costs in upgrading or redesigning our facilities and processes, including our waste treatment, storage, disposal and other waste handling practices and equipment. For these reasons, we are uncertain as to the amount of our future environmental expenditures and liabilities. In addition, the Texas Natural Resource Conservation Commission has enacted new regulations requiring significant reductions of nitrogen oxide which will apply to our Texas City facility. The TNRCC is also expected to propose similar regulations requiring the reduction of particulate matter which will apply to our Texas City facility. The nitrogen oxide regulations covering the Houston/Galveston Area State Implementation Plan were approved by the United States Environmental Protection Agency on October 15, 2001. Under these regulations, we are required to reduce emissions of nitrogen oxide at our Texas City facility by up to approximately 90%, which we estimate would require Chemicals to make between $25 million and $30 million in capital improvements at our Texas City facilities. The majority of these capital expenditures would be expected in fiscal 2002 through 2005. 39 THE REGULATORY OUTLOOK FOR OUR PULP CHEMICALS BUSINESS IS UNCERTAIN. Our pulp chemicals business is sensitive to environmental regulations. Regulations restricting, but not completely banning, absorbable organic halides and other chlorine derivatives in bleach plant effluent have a favorable effect on our pulp chemicals business. Conversely, any significant ban on all chlorine-containing compounds in the pulp bleaching process could have a material adverse effect on our financial condition and results of operations. British Columbia has a regulation in place requiring elimination of the use of all chlorine products, including chlorine dioxide, in the bleaching process by the year 2002. The pulp and paper industry believes that a ban of chlorine dioxide in the bleaching process will yield no measurable environmental or public health benefit and is working to change this regulation. In April 2001, a new government came into power in British Colombia. This new administration is aware of the issues surrounding this regulation and has agreed to negotiate amendments to the regulation. We are working through the Alliance for Environmental Technology and the Canadian Chemical Producers' Association to provide information to the British Columbia Ministry of Environment to assist with these negotiations. WE ARE SUBJECT TO MANY OPERATING RISKS, SOME OF WHICH MAY NOT BE COVERED BY INSURANCE. A business risk inherent in all chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees and nearby landowners and occupants. While we attempt to operate our facilities responsibly and in compliance in all material respects with all applicable environmental and health and safety requirements, we may face expenses and liabilities as a result of our past or future operations. Some risk of environmental costs and liabilities is inherent in our operations and products, as it is with other companies engaged in similar businesses, and we maintain insurance at levels that we believe are typical for our industry. A major incident or other event at any of our facilities, however, could result in liabilities in excess of our insurance coverages or uncovered liabilities or claims beyond the financial ability of the insurance carrier to pay. All of our facilities have strengthened their respective security programs since September 11, 2001, however the eventual exclusion of terrorism coverage from our policies could result in an uninsured loss. CURRENT AND FUTURE LEGAL PROCEEDINGS MAY HAVE UNFAVORABLE OUTCOMES. We are currently a party to several legal proceedings and additional legal proceedings could be filed against us in the future. We are not able to predict the final outcome of the current proceedings and we cannot guarantee that the ultimate resolution of current or future proceedings will not have a material adverse effect on us. Legal proceedings in which claims against the Debtors that existed prior to the filing of Chapter 11 cases are asserted are subject to the automatic stay, and any such claims would be payable from assets of the Debtors only pursuant to a confirmed plan of reorganization or order of the Bankruptcy Court. For more information, see Note 8 of the Notes to Consolidated Financial Statement included in this Form 10-K. WE DEPEND UPON THE CONTINUED OPERATION OF OUR TEXAS CITY FACILITY. All of the petrochemicals we manufacture, including all of our styrene, acrylonitrile and acetic acid, are produced at our Texas City facility. Significant unscheduled downtime at our Texas City facility could have a material adverse effect on our results. Unanticipated downtime can occur for a variety of reasons, including equipment breakdowns, interruptions in the supply of raw materials, power failures, sabotage, natural forces or other normal hazards associated with the production of petrochemicals. Although we maintain business interruption insurance, we cannot guarantee that a significant interruption in the operation of our Texas City facility would be covered by this insurance or would not otherwise have a material adverse effect on us. WE DEPEND UPON OUR LONG-TERM CONTRACTS AND SIGNIFICANT CUSTOMERS. We sell significant portions of our acrylonitrile and styrene production and all of our acetic acid and plasticizers production under long-term contracts. These contracts are intended to provide stability in the event that the demand for or prices of these products decline significantly, but also limit our ability to take full advantage of attractive market conditions during periods of higher prices for these products. The loss of one or 40 more of these contracts, or a material reduction in the amount of product purchased under one or more of these contracts, could have a material adverse effect on us. WE FACE RISKS RELATED TO OUR FOREIGN OPERATIONS THAT MAY NEGATIVELY AFFECT OUR BUSINESS. Approximately 31% of our fiscal 2001 revenues were derived from our Canadian-based pulp chemicals business and approximately 24% were derived from export sales of our products. Our international operations and exports to foreign markets make us subject to a number of special risks such as: - currency exchange rate fluctuations; - foreign economic conditions; - trade barriers; - exchange controls; - national and regional labor strikes; - political risks and risks of increases in duties; - taxes; - governmental royalties; and - changes in laws and policies governing operations of foreign-based companies. The occurrence of any one or a combination of these factors may increase our costs or have other negative effects on our business. In addition, earnings of foreign subsidiaries and intercompany payments are subject to foreign income tax rules that may reduce cash flow available to meet our required debt service and other obligations. As we derive most of our pulp chemicals revenues from production and sales by our subsidiaries within Canada, we have organized our subsidiary structure and our operations in part based on assumptions regarding various Canadian tax laws, currency exchange laws, capital repatriation laws and other relevant laws. While we believe that these assumptions are correct, we cannot guarantee that Canadian taxing or other authorities will reach the same conclusion. If our assumptions are incorrect, or if the Canadian government changes or modifies such laws or the current interpretations thereof, we may suffer material adverse tax and financial consequences. A portion of our expenses and sales are denominated in Canadian dollars and, accordingly, our revenues, cash flows and earnings may be affected by fluctuations in the exchange rate between the United States dollar and the Canadian dollar, which may also have material adverse tax consequences. These currency fluctuations could have a material adverse impact on us as increases in the value of the Canadian dollar relative to the United States dollar have the effect of increasing the United States dollar equivalent of cost of goods sold and other expenses with respect to our Canadian production facilities. RESTRICTIONS ON ABILITY TO MOVE FUNDS BETWEEN DEBTORS AND OTHER SUBSIDIARIES MAY NEGATIVELY AFFECT LIQUIDITY. As a result of the provisions contained in the DIP Financing, the Canadian Financing Agreement and the Saskatoon Credit Agreement, our ability to transfer funds between the Debtors and our subsidiaries not in bankruptcy is severely limited. These restrictions could negatively affect our liquidity and that of our non-debtor subsidiaries. FUTURE PROBLEMS WITH LABOR RELATIONS MAY NEGATIVELY AFFECT OUR BUSINESS. Approximately 42% of our employees are covered under various union contracts. Approximately 47% of our employees at our Texas City facility are covered by one union contract which expires on May 1, 2002. This contract continues to be in effect notwithstanding our Chapter 11 filings. Although we have the right to reject 41 this contract under the Bankruptcy Code, any rejection would be subject to the special provisions of the Bankruptcy Code governing collective bargaining agreements. Approximately 77% of our employees at our Saskatoon facility are covered by one union contract which is subject to renegotiation in September 2004. Approximately 76% of our employees at our Vancouver facility are covered by a union contract which is subject to renegotiation in November 2003. Neither of the Canadian union contracts are affected by the Chapter 11 case. Although we believe our relationship with our employees is generally good, a strike by one or more of the unions representing our employees could have a material adverse effect on our financial condition, results of operations or cash flows. RESULTS OF OPERATIONS The following table sets forth revenues, gross profit (loss) and operating income (loss) for our segments for the years ended September 30, 2001, 2000 and 1999.
YEAR ENDED SEPTEMBER 30, -------------------------- 2001 2000 1999 ------ -------- ------ (DOLLARS IN MILLIONS) REVENUES: Petrochemicals.............................................. $515 $ 870 $533 Pulp Chemicals.............................................. 229 226 207 ---- ------ ---- $744 $1,096 $740 ==== ====== ==== GROSS PROFIT (LOSS): Petrochemicals.............................................. $(65) $ 93 $ -- Pulp Chemicals.............................................. 51 48 38 ---- ------ ---- $(14) $ 141 $ 38 ==== ====== ==== OPERATING INCOME (LOSS): Petrochemicals.............................................. $(89) $ 5 $(64) Pulp Chemicals.............................................. 42 35 27 ---- ------ ---- $(47) $ 40 $(37) ==== ====== ====
COMPARISON OF FISCAL 2001 TO FISCAL 2000 Our revenues were approximately $744 million in fiscal 2001, a decrease of 32% from the approximately $1,096 million in revenues we recorded in fiscal 2000. This decrease in revenues resulted primarily from lower styrene and acrylonitrile sales volumes and sales prices. We recorded a net loss attributable to common stockholders of approximately $224 million, or $17.27 per share, for fiscal 2001, compared to the net loss attributable to common stockholders of approximately $90 million, or $7.13 per share, that we recorded for fiscal 2000. Chemicals' net loss was approximately $182 million for fiscal 2001, compared to a net loss of approximately $64 million for fiscal 2000. This increase in net loss was primarily due to the level of net loss from our styrene and acrylonitrile operations, along with the additional valuation allowance taken for our deferred tax assets. Revenues, Gross Profit (Loss) and Operating Income (Loss) Petrochemicals. Revenues from our petrochemicals operations were approximately $515 million in fiscal 2001, a decrease of approximately 41% from the $870 million in revenues received in fiscal 2000. This decrease in revenues was caused primarily by decreases in styrene and acrylonitrile sales volumes and prices and decreased methanol sales volumes in fiscal 2001. Our petrochemicals operations recorded an operating loss of approximately $89 million for fiscal 2001, whereas these operations recorded operating income of 42 approximately $5 million for fiscal 2000. This difference resulted primarily from lower styrene and acrylonitrile sales volumes and prices, as well as higher energy costs. Revenues from our styrene operations were approximately $257 million in fiscal 2001, a decrease of approximately 48% from the approximately $492 million in revenues from these operations during fiscal 2000. Sales prices for styrene during fiscal 2001 decreased approximately 24% from those realized during fiscal 2000. In addition, our total sales volumes for styrene in fiscal 2001 decreased approximately 31% from those realized during fiscal 2000. These decreases in sales prices and sales volumes resulted primarily from a continued slowdown in demand attributable, to a large extent, to a slowdown in general worldwide economic activity. During fiscal 2001, prices for benzene, one of the primary raw materials for styrene, were approximately 9% lower than the prices we paid for benzene in fiscal 2000 and prices for ethylene, the other primary raw material for styrene, were approximately 8% lower than the prices we paid for ethylene in fiscal 2000. Average costs for natural gas during fiscal 2001 increased 78% compared to average costs during fiscal 2000. Margins on our styrene sales during fiscal 2001 decreased from those realized during fiscal 2000, primarily as a result of the decrease in sales prices and volumes and the increase in energy costs, partially offset by the decreases in the costs of benzene and ethylene. Revenues from our acrylonitrile and derivatives operations were approximately $87 million in fiscal 2001, a decrease of approximately 47% from the approximately $164 million in revenues from those operations in fiscal 2000. Total sales volumes of our acrylonitrile decreased approximately 61% in fiscal 2001 compared to fiscal 2000 due to our continued shutdown of our acrylonitrile facility for most of fiscal 2001 due to unfavorable market conditions. Direct sales prices for acrylonitrile in fiscal 2001 decreased approximately 10% from those realized in fiscal 2000. During fiscal 2001, prices for propylene, one of the primary raw materials for acrylonitrile, were approximately 4% higher than the prices we paid for propylene during fiscal 2000 and prices for ammonia, the other primary raw material for acrylonitrile, were approximately 28% higher than the prices we paid for ammonia in fiscal 2000. Margins on our acrylonitrile sales in fiscal 2001 decreased from those realized in fiscal 2000, primarily as a result of higher raw materials costs and lower operating rates. Revenues from our acrylic fibers operations were approximately $47 million in fiscal 2001, a decrease of approximately 35% from the approximately $73 million in revenues from these operations during fiscal 2000. Sales volumes of our acrylic fibers during fiscal 2001 decreased approximately 42% from those experienced in fiscal 2000. Sales prices for our acrylic fibers in fiscal 2001 increased approximately 14% from those realized during fiscal 2000. These decreases in revenues and sales volumes resulted primarily from our withdrawal from the traditional commodity textile business in the third quarter of fiscal 2001 and corresponding significant reduction in our operations at our acrylic fibers plant. We continue to produce our specialty and technical fibers products at this facility. Revenues from our other petrochemicals operations, including acetic acid, plasticizers, and methanol, were $124 million in fiscal 2001, a decrease from the $141 million in revenues from these operations during fiscal 2000. Our other petrochemicals operations reported an increase in operating earnings for fiscal 2001 compared to that realized during fiscal 2000, primarily due to the positive impact of our methanol plant shutdown and the benefit of our methanol requirements contract. Also favorably impacting operating income during fiscal 2001 were net proceeds of $3 million recorded in connection with a dispute related to the construction of our methanol facility, the proceeds of which were received in April of 2001. Pulp Chemicals. Revenues from our pulp chemicals operations were approximately $229 million in fiscal 2001, an increase of approximately 1% from the approximately $226 million in revenues from these operations during fiscal 2000. An increase in sodium chlorate revenue was partially offset by a reduction in chlorine dioxide generator royalties. Sales prices of our sodium chlorate increased approximately 6% during fiscal 2001 compared to fiscal 2000, while sodium chlorate sales volumes increased approximately 2% during this period. Our pulp chemicals operations recorded operating income of approximately $42 million in fiscal 2001 compared to operating income of approximately $35 million during fiscal 2000. These increases in revenues, sales prices, sales volumes and operating income resulted primarily from the continued conversion to elemental chlorine free bleaching at pulp mills. 43 Selling, General and Administrative ("SG&A") Expenses Our SG&A expenses in fiscal 2001 were approximately $25 million, compared to approximately $39 million in fiscal 2000. This decrease was primarily the result of the accrual in fiscal 2000 of variable compensation related to our fiscal 2000 financial performance with no corresponding accruals in fiscal 2001, cost reductions in our acrylic fibers business and general cost containment efforts. Other Expense We incurred other expense of approximately $3 million in fiscal 2001, which was primarily for professional fees incurred in preparation of our filing for reorganization under Chapter 11, compared to the $2 million incurred in fiscal 2000 related to the workforce reductions in our acrylic fibers operations. Reorganization Items Reorganization items incurred during fiscal 2001 were approximately $5.4 million, which was primarily for professional fees incurred after our filing for reorganization under Chapter 11. Interest and Debt Related Expenses Interest and debt related expenses were approximately $113.4 million in fiscal 2001 compared to $122.4 million in fiscal 2000. This reduction was due to the fact that after the Chapter 11 filings, interest on liabilities subject to compromise was not accrued. The contractual interest expense not accrued during fiscal 2001 due to the Chapter 11 filings was $15.3 million. Provision (Benefit) for Income Taxes As of September 30, 2001, we had an available U.S. net operating loss carryforward ("U.S. NOL") of approximately $318 million, which expires during 2018-21. In assessing the value of the deferred tax assets, management considers whether it is more likely than not that all of the deferred tax assets will be realized. Projected future income tax planning strategies and the expected reversal of deferred tax liabilities are considered in making this assessment and determining the valuation allowance. In fiscal 2001, based on the uncertainty as to the effect of the Chapter 11 filings on the utilization of the U.S. NOL and the future realization of other net deferred tax assets, we were not able to conclude that it was more likely than not that we would be able to realize the future benefit of our U.S. deferred tax assets. Certain reductions to our U.S. NOL may result from confirmation of our plan of reorganization. Further, at such time as we emerge from bankruptcy, we will likely undergo an ownership change for tax purposes which may cause our utilization of the U.S. NOL to become subject to limitations. Since numerous variables could affect the bankruptcy proceedings (including the fact that a plan of reorganization has not yet been submitted to the Bankruptcy Court for approval), it is not currently possible to determine whether our U.S. NOL will produce tax benefits in the future. Accordingly, an additional valuation allowance of $116.3 million was recorded during fiscal 2001, of which Chemicals' was approximately $91.7 million, thus bringing the total valuation allowance as of September 30, 2001 to $149.8 million. The ability to utilize part or all of our currently estimated $318 million U.S. NOL will be an important consideration in developing our plan of reorganization. However, the success of such strategies may depend on the terms of the plan of reorganization as accepted by creditors and confirmed by the Bankruptcy Court. Accordingly, there can be no assurances that such strategies will be successful. COMPARISON OF FISCAL 2000 TO FISCAL 1999 Our revenues were approximately $1,096 million in fiscal 2000, an increase of approximately 48% from the approximately $740 million in revenues we received in fiscal 1999. This increase in our revenues resulted primarily from increased styrene sales prices and sales volumes and, to a lesser extent, increased acrylonitrile, sodium chlorate and methanol sales prices and sales volumes. We recorded a net loss attributable to common stockholders of approximately $90.0 million, or $7.13 per share, for fiscal 2000 compared to the net loss attributable to common stockholders of approximately $112.7 million, or $8.94 per share, that we recorded for 44 fiscal 1999. Our improved performance was primarily due to increased styrene margins and sales volumes and, to a lesser extent, increased acrylonitrile and sodium chlorate margins and sales volumes. Our improved performance was partially offset by increased interest expense and a $60 million non-cash charge related to the write down of our acrylic fibers business production assets. Our performance in fiscal 1999 was negatively impacted by a $26 million non-cash charge related to the write down of our methanol production assets. Revenues, Gross Profit and Operating Income (Loss) Petrochemicals. Revenues from our petrochemicals operations were approximately $870 million in fiscal 2000, an increase of approximately 63% from the approximately $533 million in revenues we received from these operations in fiscal 1999. This increase in revenues resulted primarily from increased styrene sales prices and sales volumes and, to a lesser extent, increased acrylonitrile and methanol sales prices and sales volumes. Our petrochemicals operations recorded operating income of approximately $5 million for fiscal 2000, compared to operating losses of approximately $64 million from our petrochemicals operations for fiscal 1999. This increase in income resulted primarily from increased styrene margins and sales volumes and, to a lesser extent, increased acrylonitrile margins and sales volumes, partially offset by a larger impairment expense recorded in fiscal 2000 than that recorded in fiscal 1999. Revenues from our styrene operations were approximately $492 million in fiscal 2000, an increase of approximately 100% from the approximately $246 million in revenues we received from these operations in fiscal 1999. Average sales prices for our styrene increased approximately 78% in fiscal 2000 from average sales prices for our styrene in fiscal 1999. In addition, sales volume of our styrene increased approximately 17% for fiscal 2000 from sales volumes of our styrene for fiscal 1999. These increases in revenues, sales prices and volumes for our styrene resulted primarily from the combination of stronger market demand, operating problems experienced at several of our competitors and generally low inventory levels worldwide. However, styrene market conditions peaked in April of 2000 with spot prices of $0.48 per pound and decreased to $0.31 per pound as of September 30, 2000. During fiscal 2000, prices for benzene, one of the primary raw materials for styrene, were approximately 56% higher than the prices we paid for benzene in fiscal 1999 and prices for ethylene, the other primary raw material for styrene, were approximately 47% higher than the prices we paid for ethylene in fiscal 1999. Margins on our styrene sales during fiscal 2000 increased from margins on our styrene sales during fiscal 1999, primarily as a result of higher sales prices, which more than offset our higher raw materials costs. Revenues from our acrylonitrile and derivatives operations, including sodium cyanide and TBA, were approximately $164 million in fiscal 2000, an increase of approximately 76% from the approximately $93 million in revenues we received from these operations in fiscal 1999. Average sales prices for our acrylonitrile increased approximately 122% in fiscal 2000 from average sales prices for our acrylonitrile in fiscal 1999. Sales volume of our acrylonitrile increased approximately 19% in fiscal 2000 from sales volumes of our acrylonitrile in fiscal 1999. These increases in revenues, sales prices and volumes for our acrylonitrile resulted primarily from the combination of stronger market demand, operating problems experienced at several of our competitors and generally low inventory levels worldwide. During fiscal 2000, prices for propylene, one of the primary raw materials for acrylonitrile, were approximately 79% higher than the prices we paid for propylene in fiscal 1999 and prices for ammonia, the other primary raw material for acrylonitrile, were approximately 27% higher than the prices we paid for ammonia in fiscal 1999. Margins on our acrylonitrile sales during fiscal 2000 increased from the margins we received in fiscal 1999, primarily as a result of higher sales prices, which more than offset our higher raw materials costs. Revenues from our other petrochemicals operations, including acetic acid, plasticizers and methanol, were approximately $141 million in fiscal 2000, an increase of approximately 12% from the approximately $126 million in revenues we received from these operations in fiscal 1999. This increase in revenues was primarily due to increased methanol volumes and sales prices during the first nine months of fiscal 2000. Our other petrochemicals operations reported a decrease in operating earnings in fiscal 2000 compared to fiscal 1999. This decrease in operating earnings resulted primarily from a reduction in margins for our plasticizers and acetic acid caused by higher raw material and energy costs. 45 Revenues from our acrylic fibers operations were approximately $73 million in fiscal 2000, an increase of approximately 6% from the approximately $69 million in revenues we received from these operations in fiscal 1999. Sales volumes of our acrylic fibers in fiscal 2000 increased 6% from those realized during fiscal 1999. Sales prices for our acrylic fibers in fiscal 2000 remained approximately the same with those realized in fiscal 1999. The financial performance of our acrylic fibers operations in fiscal 2000 was below the performance of these operations in fiscal 1999 due to weak market conditions, imports from foreign suppliers and higher acrylonitrile and energy costs. Pulp Chemicals. Revenues from our pulp chemicals operations were approximately $226 million for fiscal 2000, an increase of approximately 9% from the approximately $207 million in revenues we received from these operations in fiscal 1999. Sales volumes of our sodium chlorate, our primary pulp chemical product, in fiscal 2000 increased approximately 7% from those realized in fiscal 1999. Sales prices of our sodium chlorate in fiscal 2000 increased approximately 4% from those realized in fiscal 1999. Our pulp chemicals operations recorded operating earnings of approximately $35 million in fiscal 2000, compared to operating earnings of approximately $27 million in fiscal 1999. These increases in revenues, sales volumes, sales prices and operating earnings resulted primarily from increased operating rates at pulp mills and the continued conversion to elemental chlorine free bleaching at pulp mills. Selling, General and Administrative Expenses Our SG&A expenses in fiscal 2000 were approximately $39 million, whereas we had SG&A expenses of approximately $38 million in fiscal 1999. Our SG&A expenses were impacted favorably in fiscal 2000 by reduced costs for upgrades of certain of our information technology systems, including year 2000 compliance activities. However, these positive impacts were more than offset by increased costs in fiscal 2000 primarily related to an increase in variable compensation accrued as a result of improved business performance. Other Expense We had other expense of approximately $2 million in fiscal 2000 related to workforce reductions in our acrylic fibers operations. We had other expense of approximately $11 million in fiscal 1999 from one-time non-cash charges related to early retirement programs, benefit changes and workforce reductions. Interest and Debt Related Expenses Our interest and debt related expense was approximately $122 million for fiscal 2000 compared to approximately $104 million in fiscal 1999. This increase resulted primarily from the higher interest rates we paid on some of our indebtedness after we refinanced that indebtedness in July of 1999 and the payment of interest on additional indebtedness we incurred at that time. Provision (Benefit) for Income Taxes Our provision for income taxes in fiscal 2000 was approximately $5 million, reflecting the foreign tax provision on the income of our Canadian subsidiaries. Due to the recurring losses of our United States subsidiaries, in fiscal 2000 we recorded a valuation allowance in an amount equal to the benefit for income taxes generated by the losses from our United States subsidiaries. Our benefit for income taxes in fiscal 1999 was approximately $35 million. Extraordinary Item We had a $4 million after-tax ($6 million pre-tax) extraordinary item in fiscal 1999 related to unamortized debt issue costs which were expensed in fiscal 1999 as a result of the refinancing of some of our indebtedness in July of 1999. 46 ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The table below provides information about our market sensitive financial instruments and constitutes a "forward-looking statement." The table excludes pre-petition debt of the Debtors due to the uncertainty related to the ultimate resolution of these liabilities during the Chapter 11 proceedings. Our major financial market risk exposure is changing interest rates, primarily in the United States. Interest rate swaps may be used to adjust interest rate exposure, when appropriate, based upon market conditions. A portion of our borrowings and transactions are denominated in foreign currencies which exposes us to market risk associated with exchange rate movements. All items described stated in United States dollars.
FAIR VALUE SEPTEMBER 30, EXPECTED MATURITY DATES 2002 2003 2004 2005 2006 THEREAFTER TOTAL 2001 - ----------------------- ------- ------- ------- ------- ------- ---------- ------- ------------- (IN THOUSANDS) DEBT United States $ denominated............. $28,098 $42,270 $ 1,100 $ -- $ -- $ -- $71,468 $71,468 Average interest rates -- variable.... (a) Interest rate swaps(b).... $ 8,929 $ -- $ -- $ -- $ -- $ -- $ 8,929 $ (179) Canadian $ denominated.... $ 5,162 $ 1,810 $15,904 $ -- $ -- $ -- $22,876 $22,876 Average interest rates -- variable.... (c)(d) (d) (d) DERIVATIVE POWER CONTRACTS Power Purchase Agreement(e)............ $ 1,200 $ -- $ -- $ -- $ -- $ -- $ 1,200 $(1,200)
- --------------- (a) Borrowings under our fixed assets revolver bear interest, at our option, at an annual rate of either the "LIBOR Rate" plus 3.75% or the "Alternate Base Rate" plus 2.25%. Borrowings under our current assets revolver bear interest, at our option, at an annual rate of either the LIBOR Rate plus 3.50% or the Alternate Base Rate plus 2.00%. The "Alternate Base Rate" is equal to the greater of the "Base Rate" as announced from time to time by The Chase Manhattan Bank in New York, New York or the "Federal Funds Effective Rate" plus 1/2%. At September 30, 2001, the weighted average interest rate in effect for our fixed assets revolver was 7.2% and there were no amounts outstanding under our current assets revolver. (b) Expected maturity amounts represent notional amounts. Fair value of September 30, 2001 represents unrealized gain (loss). The interest rate swap converts interest on $8.9 million of debt from a floating rate, based on LIBOR, to a fixed rate of 6.7%. (c) The Saskatoon tranche A term loan, which is denominated in Canadian dollars, and the Saskatoon revolver borrowings bear interest, at Saskatoon's option, at an annual rate of either the "Bankers Acceptance Rate" or the "Base Rate" plus an "Applicable Margin" of 2.5% and 1.5%, respectively, through September 30, 2001 and 3.0% and 2.0%, respectively, thereafter. The Saskatoon tranche B term loan, which is denominated in United States dollars, bears interest, at Saskatoon's option, at an annual rate of either the "Eurodollar Rate" or the "Base Rate" plus an Applicable Margin of 3.0% and 2.0% respectively, through September 30, 2001 and 3.5% and 2.5%, respectively, thereafter. The "Base Rate" for the tranche A term loan and the Saskatoon revolver is equal to the greater of the Prime Rate for Canadian Dollar commercial loans made in Canada, as announced from time to time by the agent bank or the rate for Canadian Dollar Bankers Acceptances accepted by the agent with a term to maturity of 30 days plus 1%. The "Base Rate" for the tranche B term loan is equal to the greater of the Prime Rate as announced from time to time by the agent bank, the "Federal Funds Effective Rate" plus 1/2% or the "Base CD Rate" plus 1%. At September 30, 2001, the interest rates in effect for the Saskatoon tranche A and tranche B term loans were 5.6% and 6.1%, respectively. 47 (d) Borrowings under the revolving loan of the Canadian Financing Agreement bear interest at the Canadian Imperial Bank of Commerce Rate (CIBC) "Bank Rate" plus 2.00% per annum on Canadian Dollar loans and CIBC "Base Rate" plus 2.00% per annum on American Dollar loans. At September 30, 2001, the interest rates in effect were 7.25% and 8.50% on the Canadian and American dollar loans. Borrowings under the Canadian dollar term loan of the Canadian Facility bears interest at the "Bank Rate" plus 2.50% per annum. At September 30, 2001, the interest rate in effect was 7.75%. (e) Our Canadian subsidiaries periodically enter fixed price agreements for a portion of their electrical energy requirements. We have an agreement relating to the supply of a portion of the electrical energy at one of our Canadian sodium chlorate production facilities This agreement, which was previously designated as a normal purchase under SFAS No. 133, does not meet the criteria of a normal purchase based on guidance issued by the DIG and cleared by the Financial Accounting Standards Board in June 2001. All purchases under this agreement, which expires on December 31, 2001, are used in the ordinary course of business; however, effective July 1, 2001, this agreement is required to be marked-to-market. At September 30, 2001, the value of this agreement was a loss of approximately $1.2 million based on current market prices and quantities to be delivered. 48 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
STERLING CHEMICALS HOLDINGS, INC. AND STERLING CHEMICALS, INC. Sterling Chemicals Holdings, Inc. Consolidated Statements of Operations for the years ended September 30, 2001, 2000 and 1999.................................................. 50 Sterling Chemicals Holdings, Inc. Consolidated Balance Sheets as of September 30, 2001 and 2000............................... 51 Sterling Chemicals Holdings, Inc. Consolidated Statements of Changes in Stockholders' Equity (Deficiency in Assets) for the years ended September 30, 2001, 2000 and 1999......... 52 Sterling Chemicals Holdings, Inc. Consolidated Statements of Cash Flows for the years ended September 30, 2001, 2000 and 1999.................................................. 53 Sterling Chemicals, Inc. Consolidated Statements of Operations for the years ended September 30, 2001, 2000 and 1999.................................................. 54 Sterling Chemicals, Inc. Consolidated Balance Sheets as of September 30, 2001 and 2000............................... 55 Sterling Chemicals, Inc. Consolidated Statements of Changes in Stockholder's Equity (Deficiency in Assets) for the years ended September 30, 2001, 2000 and 1999............. 56 Sterling Chemicals, Inc. Consolidated Statements of Cash Flows for the years ended September 30, 2001, 2000 and 1999...................................................... 57 Notes to Consolidated Financial Statements.................. 58 Independent Auditors' Reports............................... 102 STERLING CHEMICALS GUARANTORS Sterling Chemicals Guarantors Combined Statements of Operations for the years ended September 30, 2001, 2000 and 1999.................................................. 104 Sterling Chemicals Guarantors Combined Balance Sheets as of September 30, 2001 and 2000............................... 105 Sterling Chemicals Guarantors Combined Statements of Changes in Stockholder's Equity (Deficiency in Assets) for the years ended September 30, 2001, 2000 and 1999............. 106 Sterling Chemicals Guarantors Combined Statements of Cash Flows for the years ended September 30, 2001, 2000 and 1999...................................................... 107 Notes to Combined Financial Statements...................... 108 Independent Auditors' Report................................ 133 Report of Management........................................ 134
49 STERLING CHEMICALS HOLDINGS, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, ---------------------------------------------- 2001 2000 1999 ------------- -------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues.................................................. $ 743,565 $1,096,451 $ 739,552 Cost of goods sold........................................ 757,410 955,560 701,394 --------- ---------- --------- Gross profit (loss)....................................... (13,845) 140,891 38,158 Selling, general and administrative expenses.............. 24,636 39,327 37,649 Impairment of assets...................................... -- 60,000 26,369 Other expense............................................. 2,960 1,554 10,832 Reorganization items...................................... 5,422 -- -- Interest and debt related expenses, net of interest income(1)............................................... 113,372 122,414 104,061 --------- ---------- --------- Loss before taxes and extraordinary item.................. (160,235) (82,404) (140,753) Provision (benefit) for income taxes...................... 60,289 4,560 (34,936) --------- ---------- --------- Loss before extraordinary item............................ (220,524) (86,964) (105,817) Extraordinary item, loss on early extinguishment of debt, net of tax.............................................. -- -- 4,212 --------- ---------- --------- Net loss.................................................. (220,524) (86,964) (110,029) Preferred stock dividends................................. 3,344 2,996 2,683 --------- ---------- --------- Net loss attributable to common stockholders.............. $(223,868) $ (89,960) $(112,712) ========= ========== ========= Per share data: Loss before extraordinary item............................ $ (17.27) $ (7.13) $ (8.60) Extraordinary item........................................ -- -- (0.34) --------- ---------- --------- Net loss per common share................................. $ (17.27) $ (7.13) $ (8.94) ========= ========== =========
- --------------- (1) Contractual interest for the year ended September 30, 2001 totaled $128,671. The accompanying notes are an integral part of the consolidated financial statements. 50 STERLING CHEMICALS HOLDINGS, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, ----------------------- 2001 2000 ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents................................. $ 15,830 $ 7,667 Accounts receivable, net.................................. 100,690 160,294 Inventories............................................... 48,318 83,726 Prepaid expenses.......................................... 3,358 1,027 Deferred income tax benefit............................... -- 8,470 --------- --------- Total current assets............................... 168,196 261,184 Property, plant and equipment, net.......................... 284,944 318,626 Deferred income tax benefit................................. -- 48,351 Other assets................................................ 57,003 73,051 --------- --------- Total assets....................................... $ 510,143 $ 701,212 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) Current liabilities: Accounts payable.......................................... $ 27,436 $ 83,883 Accrued liabilities....................................... 35,725 91,216 Current portion of long-term debt......................... 33,260 2,580 --------- --------- Total current liabilities.......................... 96,421 177,679 Pre-petition liabilities -- subject to compromise........... 744,857 -- Pre-petition liabilities -- not subject to compromise....... 325,655 -- Long-term debt.............................................. 61,084 961,570 Deferred income tax liability............................... 14,504 11,294 Deferred credits and other liabilities...................... 15,786 70,944 Common stock held by ESOP................................... 289 3,519 Redeemable preferred stock.................................. 27,272 23,928 Commitments and contingencies (Note 8)...................... Stockholders' equity (deficiency in assets): Common stock, $.01 par value, 20,000,000 shares authorized, 12,422,000 shares issued and 12,199,000 outstanding at September 30, 2001; and 12,307,000 shares issued and 12,094,000 outstanding at September 30, 2000.................................................... 123 123 Additional paid-in capital................................ (546,056) (542,712) Retained earnings (accumulated deficit)................... (189,199) 28,099 Accumulated other comprehensive income.................... (38,053) (30,736) Deferred compensation..................................... (3) (12) --------- --------- (773,188) (545,238) Treasury stock, at cost, 223,000 and 213,000 shares at September 30, 2001 and 2000, respectively............... (2,537) (2,484) --------- --------- Total stockholders' equity (deficiency in assets)......................................... (775,725) (547,722) --------- --------- Total liabilities and stockholders' equity (deficiency in assets).......................... $ 510,143 $ 701,212 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 51 STERLING CHEMICALS HOLDINGS, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
RETAINED ACCUMULATED COMMON STOCK ADDITIONAL EARNINGS OTHER --------------- PAID-IN (ACCUMULATED COMPREHENSIVE DEFERRED TREASURY SHARES AMOUNT CAPITAL DEFICIT) INCOME COMPENSATION STOCK TOTAL ------ ------ ---------- ------------ ------------- ------------ -------- --------- (AMOUNTS IN THOUSANDS) Balance, September 30, 1998... 12,073 $123 $(542,701) $ 229,590 $(32,680) $(111) $(2,400) $(348,179) Comprehensive loss: Net loss...................... -- -- -- (110,029) -- -- -- Other comprehensive loss, net of tax: Translation adjustment...... -- -- -- -- 3,972 -- -- Pension adjustment.......... -- -- -- -- (60) -- -- Comprehensive loss........ (106,117) Common stock issued in connection with the exercise of warrants................. 32 -- -- -- -- -- -- -- Preferred stock dividends..... -- -- -- (2,683) -- -- -- (2,683) Treasury shares issued as restricted stock............ 1 -- (11) -- -- (7) 18 -- Revaluation of ESOP shares to independently appraised market value................ -- -- -- 1,612 -- -- -- 1,612 Amortization of deferred compensation................ -- -- -- -- -- 60 -- 60 Treasury stock purchases...... (9) -- -- -- -- -- (80) (80) ------ ---- --------- --------- -------- ----- ------- --------- Balance, September 30, 1999... 12,097 123 (542,712) 118,490 (28,768) (58) (2,462) (455,387) Comprehensive loss: Net loss...................... -- -- -- (86,964) -- -- -- Other comprehensive loss, net of tax: Translation adjustment...... -- -- -- -- (2,015) -- -- Pension adjustment.......... -- -- -- -- 47 -- -- Comprehensive loss........ (88,932) Common stock issued in connection with the exercise of warrants................. 1 -- -- -- -- -- -- -- Preferred stock dividends..... -- -- -- (2,996) -- -- -- (2,996) Revaluation of ESOP shares to independently appraised market value................ -- -- -- (431) -- -- -- (431) Amortization of deferred compensation................ -- -- -- -- -- 46 -- 46 Treasury stock purchases...... (4) -- -- -- -- -- (22) (22) ------ ---- --------- --------- -------- ----- ------- --------- Balance, September 30, 2000... 12,094 123 (542,712) 28,099 (30,736) (12) (2,484) (547,722) Comprehensive loss: Net loss...................... -- -- -- (220,524) -- -- -- Other comprehensive loss, net of tax: Translation adjustment...... -- -- -- -- (4,053) -- -- Pension adjustment.......... -- -- -- -- (3,264) -- -- Comprehensive loss........ (227,841) Shares issued to Non-Employee Directors................... 38 -- -- -- -- -- -- -- ESOP shares distributed to employees................... 77 -- -- -- -- -- -- -- Preferred stock dividends..... -- -- (3,344) -- -- -- -- (3,344) Revaluation of ESOP shares to independently appraised market value................ -- -- -- 3,226 -- -- -- 3,226 Amortization of deferred compensation................ -- -- -- -- -- 9 -- 9 Treasury stock purchases...... (10) -- -- -- -- -- (53) (53) ------ ---- --------- --------- -------- ----- ------- --------- Balance, September 30, 2001... 12,199 $123 $(546,056) $(189,199) $(38,053) $ (3) $(2,537) $(775,725) ====== ==== ========= ========= ======== ===== ======= =========
The accompanying notes are an integral part of the consolidated financial statements. 52 STERLING CHEMICALS HOLDINGS, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, -------------------------------- 2001 2000 1999 --------- -------- --------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss.................................................... $(220,524) $(86,964) $(110,029) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization............................. 53,558 59,003 57,677 Interest amortization..................................... 4,047 6,057 3,105 Extraordinary item, loss on early extinguishment of debt.................................................... -- -- 4,212 Deferred tax expense (benefit)............................ 53,980 (257) (38,024) Early retirement programs and benefit changes............. -- -- 6,781 Discount notes amortization............................... 19,362 21,638 19,483 Impairment of assets...................................... -- 60,000 26,369 Inventory valuation reserve............................... 8,183 -- -- Other..................................................... 2,052 726 1,016 Change in assets/liabilities: Accounts receivable....................................... 55,741 (20,217) (11,547) Inventories............................................... 28,284 (13,475) 3,207 Prepaid expenses.......................................... (2,383) 4,104 (10,760) Other assets.............................................. (2,678) 4,959 (1,477) Accounts payable.......................................... (12,830) 10,987 19,137 Accrued liabilities....................................... 8,219 12,864 4,619 Other liabilities......................................... 13,270 (11,292) 12,341 --------- -------- --------- Net cash provided by (used in) operating activities......... 8,281 48,133 (13,890) --------- -------- --------- Cash flows from investing activities: Capital expenditures...................................... (16,892) (28,797) (29,540) Proceeds from sale of assets.............................. -- -- 3,583 --------- -------- --------- Net cash used in investing activities....................... (16,892) (28,797) (25,957) --------- -------- --------- Cash flows from financing activities: Payment on term loans..................................... -- -- (274,000) Net proceeds from issuance of notes....................... -- -- 287,968 Payment on Saskatoon term loans........................... (2,850) (9,141) (5,507) Net changes in Prior Revolvers............................ (37,206) (17,279) 54,643 Net borrowings under DIP Facility......................... 42,270 -- -- Borrowings under Canadian Credit Agreement................ 20,003 -- -- Debt issuance costs....................................... (4,901) -- (16,480) Purchase of treasury stock................................ (52) (22) (80) Other..................................................... -- (1) (3,270) --------- -------- --------- Net cash provided by (used in) financing activities......... 17,264 (26,443) 43,274 Effect of United States /Canadian exchange rate on cash..... (490) (147) 326 --------- -------- --------- Net increase (decrease) in cash and cash equivalents........ 8,163 (7,254) 3,753 Cash and cash equivalents -- beginning of year.............. 7,667 14,921 11,168 --------- -------- --------- Cash and cash equivalents -- end of year.................... $ 15,830 $ 7,667 $ 14,921 ========= ======== ========= Supplemental disclosures of cash flow information: Interest paid, net of interest income received............ $ (62,936) $(96,134) $ (83,167) Income taxes (paid) received.............................. (2,784) (1,194) 4,750 Cash paid for reorganization items........................ (11) -- --
The accompanying notes are an integral part of the consolidated financial statements. 53 STERLING CHEMICALS, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, ---------------------------------- 2001 2000 1999 --------- ---------- --------- (DOLLARS IN THOUSANDS) Revenues.................................................. $ 743,565 $1,096,451 $ 739,552 Cost of goods sold........................................ 757,410 955,560 701,394 --------- ---------- --------- Gross profit (loss)....................................... (13,845) 140,891 38,158 Selling, general and administrative expenses.............. 23,573 38,901 36,980 Impairment of assets...................................... -- 60,000 26,369 Other expense............................................. 2,960 1,554 10,832 Reorganization items...................................... 5,422 -- -- Interest and debt related expenses(1)..................... 93,223 99,723 83,897 --------- ---------- --------- Loss before taxes and extraordinary item.................. (139,023) (59,287) (119,920) Provision (benefit) for income taxes...................... 42,687 4,560 (29,410) --------- ---------- --------- Loss before extraordinary item............................ (181,710) (63,847) (90,510) Extraordinary item, loss on early extinguishment of debt, net of tax.............................................. -- -- 4,212 --------- ---------- --------- Net loss.................................................. $(181,710) $ (63,847) $ (94,722) ========= ========== =========
- --------------- (1) Contractual interest for the year ended September 30, 2001 totaled $103,470. The accompanying notes are an integral part of the consolidated financial statements. 54 STERLING CHEMICALS, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, ----------------------- 2001 2000 ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents................................. $ 14,459 $ 5,740 Accounts receivable, net.................................. 103,933 163,116 Inventories............................................... 48,318 83,726 Prepaid expenses.......................................... 3,349 1,027 Deferred income tax benefit............................... -- 8,470 --------- --------- Total current assets.............................. 170,059 262,079 Property, plant and equipment, net.......................... 284,944 318,626 Deferred income tax benefit................................. -- 30,748 Other assets................................................ 56,847 65,690 --------- --------- Total assets...................................... $ 511,850 $ 677,143 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS) Current liabilities: Accounts payable.......................................... $ 27,436 $ 83,883 Accrued liabilities....................................... 35,725 91,029 Current portion of long-term debt......................... 33,260 2,580 --------- --------- Total current liabilities......................... 96,421 177,492 Pre-petition liabilities -- subject to compromise........... 561,692 -- Pre-petition liabilities -- not subject to compromise....... 325,655 -- Long-term debt.............................................. 61,084 791,684 Deferred income tax liability............................... 14,504 11,294 Deferred credits and other liabilities...................... 15,787 70,944 Common stock held by ESOP................................... 289 3,519 Commitments and contingencies (Note 8)...................... Stockholder's equity (deficiency in assets): Common stock, $.01 par value.............................. -- -- Additional paid-in capital................................ (141,786) (141,786) Accumulated deficit....................................... (383,740) (205,256) Accumulated other comprehensive income.................... (38,053) (30,736) Deferred compensation..................................... (3) (12) --------- --------- Total stockholder's equity (deficiency in assets)......................................... (563,582) (377,790) --------- --------- Total liabilities and stockholder's equity (deficiency in assets).......................... $ 511,850 $ 677,143 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 55 STERLING CHEMICALS, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
RETAINED ACCUMULATED COMMON STOCK ADDITIONAL EARNINGS OTHER --------------- PAID-IN (ACCUMULATED COMPREHENSIVE DEFERRED SHARES AMOUNT CAPITAL DEFICIT) INCOME COMPENSATION TOTAL ------ ------ ---------- ------------ ------------- ------------ --------- (AMOUNTS IN THOUSANDS) Balance, September 30, 1998..... 1 $ -- $(139,786) $ (47,868) $(32,680) $(111) $(220,445) Comprehensive loss: Net loss........................ -- -- -- (94,722) -- -- Other comprehensive loss, net of tax: Translation adjustment........ -- -- -- -- 3,972 -- Pension adjustment............ -- -- -- -- (60) -- Comprehensive loss.......... (90,810) Issuance of restricted stock of Holdings...................... -- -- -- -- -- (7) (7) Revaluation of ESOP shares to independently appraised market value......................... -- -- -- 1,612 -- -- 1,612 Amortization of deferred compensation.................. -- -- -- -- -- 60 60 ---- ----- --------- --------- -------- ----- --------- Balance, September 30, 1999..... 1 -- (139,786) (140,978) (28,768) (58) (309,590) Comprehensive loss:............. -- -- -- (63,847) -- -- Net loss........................ Other comprehensive loss, net of tax: Translation adjustment........ -- -- -- -- (2,015) -- Pension adjustment............ -- -- -- -- 47 -- Comprehensive loss.......... (65,815) Issuance of restricted stock of Holdings...................... -- -- (2,000) -- -- -- (2,000) Revaluation of ESOP shares to independently appraised market value......................... -- -- -- (431) -- -- (431) Amortization of deferred compensation.................. -- -- -- -- -- 46 46 ---- ----- --------- --------- -------- ----- --------- Balance, September 30, 2000..... 1 -- (141,786) (205,256) (30,736) (12) (377,790) Net loss........................ -- -- -- (181,710) -- -- Other comprehensive loss, net of tax: Translation adjustment........ -- -- -- -- (4,053) -- Pension adjustment............ -- -- -- -- (3,264) -- Comprehensive loss.......... (189,027) Revaluation of ESOP shares to independently appraised market value......................... -- -- -- 3,226 -- -- 3,226 Amortization of deferred compensation.................. -- -- -- -- -- 9 9 ---- ----- --------- --------- -------- ----- --------- Balance, September 30, 2001..... 1 $ -- $(141,786) $(383,740) $(38,053) $ (3) $(563,582) ==== ===== ========= ========= ======== ===== =========
The accompanying notes are an integral part of the consolidated financial statements. 56 STERLING CHEMICALS, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, -------------------------------- 2001 2000 1999 --------- -------- --------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss.................................................... $(181,710) $(63,847) $ (94,722) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization............................. 53,118 64,567 60,349 Interest amortization..................................... 4,047 -- -- Deferred tax expense (benefit)............................ 36,378 (257) (32,498) Extraordinary item, loss on early extinguishment of debt.................................................... -- -- 4,212 Early retirement and benefit charges...................... -- -- 6,781 Impairment of assets...................................... -- 60,000 26,368 Inventory valuation reserve............................... 8,183 -- -- Other..................................................... 2,052 726 1,016 Change in assets/liabilities: Accounts receivable....................................... 55,741 (20,347) (10,877) Inventories............................................... 28,284 (13,475) 3,207 Prepaid expenses.......................................... (2,383) 4,967 (11,522) Other assets.............................................. (2,678) 4,096 4,811 Accounts payable.......................................... (13,736) 10,791 17,797 Accrued liabilities....................................... 8,219 12,864 4,619 Other liabilities......................................... 13,270 (11,857) 6,556 --------- -------- --------- Net cash provided by (used in) operating activities......... 8,785 48,228 (13,903) --------- -------- --------- Cash flows from investing activities: Capital expenditures...................................... (16,892) (28,797) (29,540) Proceeds from sale of assets.............................. -- -- 3,583 --------- -------- --------- Net cash used in investing activities....................... (16,892) (28,797) (25,957) --------- -------- --------- Cash flows from financing activities: Payment on term loans..................................... -- -- (274,000) Net proceeds from issuance of notes....................... -- -- 287,968 Payment on Saskatoon term loans........................... (2,850) (9,141) (5,507) Net changes in Prior Revolvers............................ (37,206) (17,279) 54,643 Net borrowings under DIP Facility......................... 42,270 -- -- Borrowings under Canadian Credit Agreement................ 20,003 -- -- Debt issuance costs....................................... (4,901) -- (16,480) Dividends paid to Holdings................................ -- (2,000) -- Other..................................................... -- (23) (3,350) --------- -------- --------- Net cash provided by (used in) financing activities......... 17,316 (28,443) 43,274 Effect of United States /Canadian exchange rate on cash..... (490) (147) 326 --------- -------- --------- Net increase (decrease) in cash and cash equivalents........ 8,719 (9,159) 3,740 Cash and cash equivalents -- beginning of period............ 5,740 14,899 11,159 --------- -------- --------- Cash and cash equivalents -- end of year.................... $ 14,459 $ 5,740 $ 14,899 ========= ======== ========= Supplement disclosures of cash flow information: Interest paid, net of interest income received............ (63,095) $(96,139) $ (83,180) Income taxes (paid) received.............................. (2,784) (1,194) 4,750 Cash paid for reorganization items........................ (11) -- --
The accompanying notes are an integral part of the consolidated financial statements. 57 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Sterling Chemicals Holdings, Inc. ("Holdings" and, together with its subsidiaries, unless otherwise indicated, are collectively referred to as "we," "our," "ours," and "us") through its subsidiaries owns or operates facilities for the manufacture of eight commodity petrochemicals at our Texas City, Texas plant. Additionally, we manufacture chemicals for use primarily in the pulp and paper industry at five plants in Canada and a plant in Valdosta, Georgia and manufacture acrylic fibers at our plant in Santa Rosa County, Florida. At our Texas City plant, we have production capacity for styrene, acrylonitrile, acetic acid, plasticizers, methanol, disodium iminodiacetic acid ("DSIDA"), tertiary butylamine ("TBA") and sodium cyanide. We generally sell our petrochemicals products to customers for use in the manufacture of other chemicals and products, which in turn are used in the production of a wide array of consumer goods and industrial products. We produce specialty textiles and technical fibers at our Santa Rosa plant, as well as licensing our acrylic fibers manufacturing technology to producers worldwide. Sodium chlorate is produced at our five plants in Canada and our Valdosta plant. Sodium chlorite is produced at one of our Canadian locations. In addition, chlor-alkali and calcium hypochlorite are produced at one of our Canadian locations. We also license, engineer and oversee construction of large-scale chlorine dioxide generators for the pulp and paper industry as part of the pulp chemicals business. These generators convert sodium chlorate into chlorine dioxide at pulp mills. Holdings is a holding company whose only material asset is its investment in Sterling Chemicals, Inc. ("Chemicals"). Chemicals and its subsidiaries own substantially all of our consolidated operating assets. Our significant accounting policies are described below. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared on the going concern basis of accounting, which contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities in the ordinary course of business. On July 16, 2001 (the "Petition Date"), Holdings, Chemicals and most of their U.S. subsidiaries (collectively, the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code ("Bankruptcy Code") in the U.S. Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") and began operating their business as debtors-in-possession pursuant to the Bankruptcy Code. None of our foreign subsidiaries, including our Canadian subsidiaries, were included in the Chapter 11 filings. The accompanying consolidated financial statements have been presented in conformity with the AICPA's Statement of Position 90-7, "Financial Reporting By Entities in Reorganization Under the Bankruptcy Code," ("SOP 90-7"). The statement requires a segregation of liabilities subject to compromise by the Bankruptcy Court as of the bankruptcy filing date, and identification of all transactions and events that are directly associated with the reorganization of the Debtors. The Chapter 11 petitions were driven by the Debtors' inability to meet their funded debt obligations over the long-term, largely brought about by weak demand for petrochemical products caused by declines in general worldwide economic conditions, the relative strength of the U.S. dollar which has caused their export sales to be at a competitive disadvantage and higher raw material and energy costs. As a result of these conditions, the Debtors have incurred significant operating losses. The reorganization contemplated by the Chapter 11 filings is designed to permit the Debtors to preserve cash and to give the Debtors the opportunity to restructure their debt. During the pendency of the Chapter 11 cases, with approval of the Bankruptcy Court, the Debtors may assume favorable pre-petition contracts and leases, reject unfavorable pre-petition contracts and leases and sell or otherwise dispose of assets. The confirmation of a plan of reorganization is the primary objective of the Debtors. Unless otherwise ordered by the Bankruptcy Court, the Debtors have the exclusive right to propose a plan of reorganization until March 13, 2002, and the exclusive right to seek acceptances of any plan proposed by them until May 12, 2002. A plan of reorganization, when filed, will set forth the means 58 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for treating claims, including liabilities subject to compromise and interests in the Debtors. Such means may take a number of different forms. A plan of reorganization may result in, among other things, significant dilution or elimination of certain classes of existing equity interests as a result of the issuance of securities to creditors or new investors. The Debtors are in the early stages of formulating a plan of reorganization. The confirmation of any plan of reorganization will require creditor acceptance as required under the Bankruptcy Code and approval of the Bankruptcy Court. At this time, it is not possible to predict the outcome of the bankruptcy cases, in general, or the effect on the business of the Debtors, the claims of creditors of the Debtors or the interests of stockholders of Holdings. As a result of the bankruptcy filings, most of the Debtors' liabilities incurred prior to the Petition Date, including certain secured debt, could be subject to compromise. However, the ultimate resolution of these liabilities is not presently determinable. Reorganization items reflected in the Statement of Operations for fiscal 2001 are composed primarily of professional fees directly related to the bankruptcy cases. As a result of the bankruptcy filings and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, confirmation of a plan of reorganization, or disapproval thereof, could change the amounts reported in the financial statements. The ability of the Debtors to continue as a going concern is dependent upon, among other things, (i) the Debtors' ability to comply with the terms of the DIP Financing and any related orders entered by the Bankruptcy Court in connection with the Chapter 11 cases, (ii) the ability of the Debtors to access the incremental $40 million in DIP Financing that is dependent on an effective priming order, (iii) the ability of the Debtors to maintain adequate cash on hand, (iv) the ability of the Debtors to generate sufficient cash from operations, (v) the ability of the Debtors' subsidiaries that are not included in the Chapter 11 cases to obtain necessary financing, (vi) confirmation of a plan or plans of reorganization under the Bankruptcy Code and (vii) the Debtors' ability to achieve profitability following such confirmation. As the Debtors can give no assurances that they will accomplish any of the foregoing, there is substantial doubt about the Debtors', and therefore our ability to continue as a going concern. We have limited liquidity, which may prove inadequate during our reorganization process. The Debtors are currently funding their liquidity needs out of operating cash flow and from borrowings under the DIP Financing. The DIP Financing is limited in amount and is also subject to numerous funding conditions which are largely beyond the control of the Debtors, including borrowing base requirements and compliance with the EBITDA covenant contained in the DIP Financing. The ability of the Debtors to obtain additional financing during the reorganization process is severely limited by a variety of factors, including the debt incurrence restrictions imposed by the DIP Financing, numerous procedural requirements and uncertainties relating to the bankruptcy proceedings, including any continuing challenge to the priming order, and the Debtors' current financial condition and prospects. Accordingly, no assurances can be given that the Debtors' existing sources of liquidity will be adequate to fund their liquidity needs throughout the reorganization process or, if additional sources of liquidity become necessary during the reorganization process, that they would be available to the Debtors or adequate. Any liquidity shortages during the reorganization process would likely have a material adverse effect on the Debtors' business and financial condition as well as their ability to successfully restructure and emerge from bankruptcy. See Note 4 for additional information regarding the status of the challenge to the priming order and the impact on our business. The accompanying financial statements do not include any adjustments that may result from the resolution of these uncertainties. 59 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of all of our wholly owned and majority-owned subsidiaries, with all significant intercompany accounts and transactions having been eliminated. Our 50% equity investments in a cogeneration joint venture and an acrylonitrile marketing joint venture are accounted for under the equity method, with our share of the operating results of the joint ventures recorded in the Statement of Operations. CASH EQUIVALENTS We consider all investments having a remaining maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Cost is primarily determined on the first-in, first-out basis, except for stores and supplies, which are valued at average cost. We enter into agreements with other companies to exchange chemical inventories in order to minimize working capital requirements and to facilitate distribution logistics. Balances related to quantities due to or payable by us are included in inventory. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Major renewals and improvements which extend the useful lives of equipment are capitalized. Major planned maintenance expenses are accrued for during the periods prior to the maintenance, while routine repair and maintenance expenses are charged to operations as incurred. Disposals are removed at carrying cost less accumulated depreciation with any resulting gain or loss reflected in operations. Depreciation is provided using the straight-line method over estimated useful lives ranging from 5 to 25 years, with the predominant life of plant and equipment being 15 years. We capitalize interest costs which are incurred as part of the cost of constructing major facilities and equipment. The amount of interest capitalized for fiscal 2001, 2000 and 1999 was $0.5 million, $2.2 million and $1.4 million, respectively. IMPAIRMENT OF LONG-LIVED ASSETS Impairment tests of long-lived assets are made when conditions indicate their carrying cost may not be recoverable. Such impairment tests are based on a comparison of undiscounted future cash flows or the market value of similar assets to the carrying cost of the asset. If an impairment is indicated, the asset value is written down to its estimated fair value. We incurred an impairment loss of $26.4 million related to our methanol production assets in fiscal 1999 and an impairment loss of $60 million related to our acrylic fibers business in fiscal 2000. PATENTS AND ROYALTIES The costs of patents are amortized on a straight-line basis over their estimated useful lives, which approximate ten years. We capitalized the value of our chlorine dioxide generator technology acquired in fiscal 1992 based on the net present value of all estimated remaining royalty payments associated with this technology. The resulting intangible amount is included in other assets and is amortized over the average life for these royalty payments of ten years. 60 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DEBT ISSUE COSTS Debt issue costs relating to long-term debt are amortized over the term of the related debt instrument using the straight line method, which is materially consistent with the effective interest method, and are included in other assets. Debt issue costs for debt subject to compromise are included as a valuation of the related debt. When the debt subject to compromise becomes an allowed claim, and if the allowed claim differs from the net carrying amount of the debt subject to compromise, the recorded amount will be adjusted to the amount of the allowed claim, with the difference reflected in reorganization items. As a result of the DIP Financing, $2.0 million of debt issue costs were expensed as interest and debt related expense in fiscal 2001. INCOME TAXES Deferred income taxes are recorded to reflect the tax effect of the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at enacted rates. REVENUE RECOGNITION We generate revenues through sales in the open market, raw material conversion agreements and long-term supply contracts. In addition, we have entered into profit sharing arrangements with respect to some of our petrochemicals products. We recognize revenue from sales in the open market, raw material conversion agreements and long-term supply contracts when the products are shipped. Revenues from profit sharing arrangements are estimated and accrued monthly. Deferred credits are amortized over the life of the contracts which gave rise to them. We also generate revenues from the construction and sale of chlorine dioxide generators, which are recognized using the percentage of completion method. We also receive prepaid royalties, which are recognized over a period, which is typically ten years. In addition, we generate revenues from the sale of acrylic fibers manufacturing technology to producers worldwide, which are recognized as earned. We classify shipping and handling costs associated with product delivered to customers as cost of goods sold. FOREIGN CURRENCY TRANSLATION Our Canadian subsidiaries use the Canadian dollar as their functional currency. For financial reporting purposes, assets and liabilities of these subsidiaries denominated in Canadian dollars are translated into United States dollars at year-end exchange rates and revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are included in accumulated other comprehensive income, while transaction gains and losses are included in operations when incurred. EARNINGS (LOSS) PER SHARE For purposes of computing net loss per common share, net loss has been adjusted by an amount equal to the fair market value of "Released Shares," which are shares held by Chemicals' employee stock ownership plan that have been allocated to the ESOP accounts of our employees, minus amounts previously recognized as compensation expense with respect to Released Shares, adjusted to reflect the amount of depreciation/ appreciation in value of Released Shares in prior periods. This adjustment to net loss is made because we are obligated, under certain circumstances, to purchase from participants under the plan any shares of Holdings' common stock distributed by the ESOP to these participants. Accordingly, the weighted average number of 61 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) outstanding shares of the common stock of Holdings and the computation of the net loss per common share are as follows (in thousands):
YEAR ENDED SEPTEMBER 30, -------------------------------- 2001 2000 1999 --------- -------- --------- Net loss attributable to common stockholders....... $(223,868) $(89,960) $(112,712) Adjustment for depreciation (appreciation) in value of Released Shares............................... 3,226 (431) 1,048 --------- -------- --------- Net loss for purpose of computing net loss per share............................................ $(220,642) $(90,391) $(111,664) ========= ======== ========= Net loss per common share.......................... $ (17.27) $ (7.13) $ (8.94) ========= ======== ========= Weighted average shares outstanding................ 12,779 12,670 12,495 ========= ======== =========
As losses were incurred in fiscal 2001, 2000 and 1999, basic and diluted earnings per share are the same for these periods. COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS):
CUMULATIVE TRANSLATION PENSION ADJUSTMENT ADJUSTMENT TOTAL ----------- ---------- -------- Balance, September 30, 1998......................... $(32,559) $ (121) $(32,680) Changes............................................. 3,972 (60) 3,912 -------- ------- -------- Balance, September 30, 1999......................... (28,587) (181) (28,768) Changes............................................. (2,015) 47 (1,968) -------- ------- -------- Balance, September 30, 2000......................... (30,602) (134) (30,736) Changes............................................. (4,053) (3,264) (7,317) -------- ------- -------- Balance, September 30, 2001......................... $(34,655) $(3,398) $(38,053) ======== ======= ========
There is no tax expense or benefit associated with the cumulative translation adjustment amounts above. The pension adjustment amounts are net of tax provision (benefit) of zero, $24,000 and $(32,000), for the fiscal years ended September 30, 2001, 2000 and 1999, respectively. ENVIRONMENTAL COSTS Environmental costs are expensed as incurred unless the expenditures extend the economic useful life of the relevant assets. Costs that extend the economic life of assets are capitalized and depreciated over the remaining life of those assets. Liabilities are recorded when environmental assessments or remedial efforts are probable and the cost can be reasonably estimated. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In preparing disclosures about the fair value of financial instruments, we have assumed that the carrying amount approximates fair value for cash and cash equivalents, receivables, accounts payable and certain accrued expenses due to the short maturities of these instruments. The fair values of long-term debt instruments are estimated based upon quoted market values (if applicable) or on the current interest rates available to us for debt with similar terms and remaining maturities. The fair value of pre-petition liabilities subject to compromise and pre-petition liabilities not subject to compromise is not possible to determine given 62 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the uncertainty of the impact of the bankruptcy proceedings. Considerable judgment is required in developing these estimates and, accordingly, no assurance can be given that the estimated values presented herein are indicative of the amounts that would be realized in a free market exchange. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Significant estimates include environmental reserves, litigation contingencies, maintenance costs related to shut downs, taxes and revenues. Actual results could differ from these estimates. RECLASSIFICATION Certain amounts reported in the financial statements for the prior periods have been reclassified to conform with the current financial statement presentation with no effect on net loss or stockholders' equity (deficiency in assets). 2. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
SEPTEMBER 30, ----------------------- 2001 2000 ---------- ---------- (DOLLARS IN THOUSANDS) Inventories: Finished products......................................... $ 25,660 $ 53,746 Raw materials............................................. 9,006 14,107 --------- --------- Inventories at cost......................................... 34,666 67,853 Inventories under exchange agreements..................... 749 (3,666) Stores and supplies....................................... 12,903 19,539 --------- --------- $ 48,318 $ 83,726 ========= ========= Property, plant and equipment: Land...................................................... $ 10,153 $ 10,237 Buildings................................................. 56,368 57,074 Plant and equipment....................................... 731,546 726,099 Construction in progress.................................. 12,491 9,837 Less: accumulated depreciation............................ (525,614) (484,621) --------- --------- $ 284,944 $ 318,626 ========= ========= Other assets: Patents and technology, net............................... $ 10,061 $ 15,641 Debt issue costs, net..................................... 18,987 30,791 Other..................................................... 27,955 26,619 --------- --------- $ 57,003 $ 73,051 ========= =========
63 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, ----------------------- 2001 2000 ---------- ---------- (DOLLARS IN THOUSANDS) Accrued liabilities: Repairs................................................... $ 14,704 $ 13,500 Interest.................................................. 414 20,650 Compensation.............................................. 2,086 27,018 Property taxes............................................ 1,748 6,469 Other..................................................... 16,773 23,579 --------- --------- $ 35,725 $ 91,216 ========= ========= Deferred credits and other liabilities: Deferred revenue.......................................... $ 5,836 $ 4,659 Accrued postretirement, pension and post employment benefits............................................... 6,502 57,583 Other..................................................... 3,448 8,702 --------- --------- $ 15,786 $ 70,944 ========= =========
3. PRE-PETITION LIABILITIES LIABILITIES SUBJECT TO COMPROMISE The principal categories of claims classified as liabilities subject to compromise under reorganization proceedings are identified below. All amounts below may be subject to future adjustment depending on Bankruptcy Court action, further developments with respect to disputed claims or other events, including the reconciliation of claims filed with the Bankruptcy Court to amounts recorded in the accompanying consolidated financial statements. Additional pre-petition claims may arise from rejection of additional executory contracts or unexpired leases by the Debtors. Under a confirmed plan of reorganization, all pre- petition claims subject to compromise may be paid and discharged at amounts substantially less than their allowed amounts. On a consolidated basis, recorded liabilities subject to compromise under Chapter 11 proceedings as of September 30, 2001, consisted of the following:
(DOLLARS IN THOUSANDS) Accrued litigation.......................................... $ 3,454 Trade accounts payable...................................... 34,486 Accrued interest............................................ 19,201 Debt:(1) 11 1/4% Notes............................................. 149,500 11 3/4% Notes............................................. 268,885 13 1/2% Notes............................................. 185,436 Employee benefits........................................... 64,853 Accrued taxes............................................... 4,811 Other....................................................... 14,231 -------- Total liabilities subject to compromise..................... $744,857 ========
- --------------- (1) Debt liabilities are presented net of unamortized debt issue costs of $12.9 million. 64 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As a result of the bankruptcy filing, principal and interest payments may not be made on pre-petition debt without Bankruptcy Court approval or until a plan of reorganization defining the repayment terms has been confirmed. The total interest on pre-petition debt that was not paid or charged to earnings for the period from July 16, 2001 to September 30, 2001, was $15.3 million. Such interest is not being accrued since management believes it is not probable that it will be treated as an allowed claim. The Bankruptcy Code generally disallows the payment of post-petition interest that accrues with respect to unsecured or undersecured claims. LIABILITIES NOT SUBJECT TO COMPROMISE The principal categories of claims classified as liabilities not subject to compromise under reorganization proceedings are identified below. Management believes all amounts below are fully secured liabilities that are not expected to be compromised. On a consolidated basis, recorded liabilities not subject to compromise under Chapter 11 proceedings as of September 30, 2001, consisted of the following:
(DOLLARS IN THOUSANDS) 12 3/8% Senior Secured Notes................................ $295,000 Accrued interest on 12 3/8% Senior Secured Notes............ 25,983 Employee benefits........................................... 4,672 -------- Total liabilities not subject to compromise................. $325,655 ========
4. LONG-TERM DEBT This note contains information regarding our debt as of September 30, 2001. As a result of the filing of the Chapter 11 cases previously described, no payments will be made by the Debtors on pre-petition debt except as approved by the Bankruptcy Court. 65 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Borrowings consisted of the following:
SEPTEMBER 30, ----------------------- DOMESTIC BORROWINGS 2001 2000 - ------------------- ----------- --------- (DOLLARS IN THOUSANDS) DIP Financing............................................... $ 42,270 $ -- Other Domestic Borrowings: Prior Revolver............................................ -- 37,206 11 1/4% notes............................................. 150,000 152,154 11 3/4% notes............................................. 275,000 275,000 12 3/8% notes............................................. 295,000 295,000 ---------- -------- Chemicals' domestic borrowings.............................. 762,270 759,360 Holdings' 13 1/2% notes..................................... 191,750 169,886 ---------- -------- Total domestic borrowings................................. 954,020 929,246 ---------- -------- Canadian Borrowings Canadian Credit Agreement................................... 20,003 -- Saskatoon term loans........................................ 32,054 34,904 ---------- -------- Total Canadian borrowings................................. 52,057 34,904 ---------- -------- Total borrowings.......................................... 1,006,077 964,150 Less: Current portion not subject to compromise............. (33,260) (2,580) Less: Borrowings subject to compromise (see Note 3)......... (616,733) -- Less: Borrowings not subject to compromise (see Note 3)..... (295,000) -- ---------- -------- Long-term debt............................................ $ 61,084 $961,570 ========== ========
Upon the filing of the Chapter 11 cases by the Debtors, an Event of Default occurred under the Prior Credit Agreement (as defined below) and each of the indentures governing our outstanding notes and all of this indebtedness was accelerated and became immediately due and payable. The Prior Revolvers (as defined below) were completely paid off with the proceeds of the initial draw under the DIP Financing. However, the Debtors may pay the indebtedness under the indentures only pursuant to a confirmed plan of reorganization or order of the Bankruptcy Court. During the pendency of the Chapter 11 cases, the Debtors will not, for the most part, be subject to the restrictions contained in the Prior Credit Agreement (as defined below) or any of the indentures. However, the Debtors will be subject to the restrictions contained in the DIP Financing, Sterling Pulp Chemicals, Ltd. ("Sterling Pulp") will be subject to restrictions contained in both the DIP Financing and the Canadian Financing Agreement (as defined below) and our Saskatoon subsidiary will be subject to the restrictions contained in its credit facility. Effective July 19, 2001, the Debtors (excluding Holdings) entered into a Revolving Credit Agreement with a group of lenders led by Tyco Capital (formerly The CIT Group/Business Credit, Inc.) to provide up to $195 million in Debtor-In-Possession financing (the "DIP Financing"). By interim order dated July 18, 2001 and final order dated September 14, 2001, the Bankruptcy Court approved up to $155 million in lending commitments under the DIP Financing (the "Base Facility"), consisting of an $85 million "current assets revolver" and a $70 million "fixed assets revolver." The initial draw under the DIP Financing was used to repay all amounts outstanding under the Debtors' previous revolving credit facilities. Additional borrowings under the DIP Financing may be used to fund the Debtors' post-petition operating expenses and supplier and employee obligations throughout the reorganization process. The final order dated September 14, 2001 is on 66 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) appeal to the U.S. District Court, but no stay of the final order has been sought or imposed, and the order remains fully effective. While no assurances can be given, we do not believe the final order will be overturned on appeal. Borrowings under the DIP Financing are subject to customary funding conditions, including borrowing base restrictions under the current assets revolver. The Base Facility is secured by substantially all of the assets of the Debtors, but some of the liens have been granted super-priority administrative expense claims for the amount of the DIP Financing which, subject to certain carve outs, will entitle the DIP lenders to be paid before any other claims against the Debtors are paid. The DIP Financing is designed to give the Debtors the opportunity, during the reorganization process, to develop a new capital structure that will support them over the long-term, including during recurring cyclical downturns in the markets for the Debtors' petrochemicals products. At September 30, 2001, the total credit available under the DIP Financing was $112.8 million due to borrowing base restrictions under the current assets revolver. At September 30, 2001, $42.3 million was drawn under the fixed assets revolver and there were no borrowings outstanding under the current assets revolver. In addition, approximately $4.4 million of letters of credit were outstanding under the current assets revolver, leaving at September 30, 2001, unused borrowing capacity under the secured revolving credit facilities of approximately $66.1 million. As a result of a priming order entered by the Bankruptcy Court on November 2, 2001 and reinstated on December 19, 2001, the lending commitments under the current assets revolver were increased from $85 million to $125 million. The priming order grants the lenders under the currents assets revolver a priming lien on our fixed assets located in the United States and the capital stock of most of our domestic subsidiaries, prior in right to the existing liens in favor of the 12 3/8% Notes. Although the priming order was entered by the Bankruptcy Court on November 2, 2001, it was appealed to the U.S. District Court by the indenture trustee for the 12 3/8% Notes. By order dated December 17, 2001, the U.S. District Court reversed the priming order and remanded the matter to the Bankruptcy Court for a determination of a compensatory adjustment in favor of the 12 3/8% Notes, which the U.S. District Court suggested would be satisfied by a 4% increase of the interest rate payable on up to $40 million. On remand, the Bankruptcy Court entered an order dated December 19, 2001, reinstating the priming order subject to an appropriate compensatory adjustment in favor of the 12 3/8% Notes of four percentage points of additional interest on up to $40 million. In addition, the Bankruptcy Court scheduled a hearing for January 2, 2002 to determine certain technical details regarding implementation of this 4% increase. The Debtors anticipate that the priming order will be further appealed by the indenture trustee. The priming order will remain effective pending the outcome of any appeal unless stayed by an appellate court. The Debtors will take all reasonable actions necessary, either before the Bankruptcy Court or on appeal, to maintain the effectiveness of the priming order and the additional liquidity provided by the priming order. If the priming order is stayed or is not ultimately upheld on appeal, the Debtors will need to seek additional sources of financing or revise their business plan and operations consistent with the level of available financing. However, we can give no assurances that the priming order will not be stayed or will be upheld on appeal or, if stayed or not upheld on appeal, that additional sources of financing will be available or adequate or that our available financing will be adequate after implementing revisions to the Debtors' business plan and operations. As of July 11, 2001, our principal Canadian subsidiary, Sterling Pulp, entered into a financing agreement with Tyco Capital Business Credit (Canada) Inc. ("Tyco Canada") to provide up to the Canadian dollar equivalent of U.S. $30 million (the "Canadian Financing Agreement"). The initial advance under this facility, approximately U.S. $20 million, was used by Sterling Pulp to discharge a portion of an intercompany debt and was ultimately transferred to the Debtors through an intercompany loan. The intercompany loan was approved by the Bankruptcy Court's interim order entered on July 18, 2001 and final order entered on September 14, 2001, which is a subject of the appeal of the final order discussed above. The initial term of the Canadian Financing Agreement extends to July 2004. The Canadian Financing Agreement may be terminated by either 67 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Sterling Pulp or Tyco Canada thereafter only by giving 60 days written notice of termination prior to each subsequent anniversary date. At September 30, 2001, $20 million was drawn under the Canadian Financing Agreement. Under the DIP Financing, the Debtors (excluding Holdings) are co-borrowers and are jointly and severally liable for any indebtedness thereunder. The Base Facility consists of: - a $70 million fixed assets revolving credit facility secured by: - first priority liens on all of the capital stock of Chemicals and the other co-borrowers, all of our United States production facilities and related assets and 35% of the capital stock of certain of our subsidiaries incorporated outside the United States; and - second priority liens on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers and 65% of the capital stock of certain of our subsidiaries incorporated outside the United States; and - an $85 million current assets revolving credit facility secured by: - a first priority lien on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers; - a second priority lien on 35% of the capital stock of certain of our subsidiaries incorporated outside the United States; and - third priority liens on the remaining 65% of that stock, all of the capital stock of Chemicals and the other co-borrowers and all of our United States production facilities and related assets. Available credit under the fixed assets revolving credit facility is not subject to a borrowing base. At September 30, 2001, available credit under the current assets revolving credit facility was subject to a monthly borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory, with an inventory cap of $42.5 million. In addition, the borrowing base for the current assets revolver was required to exceed outstanding borrowings thereunder by $12 million at all times with a maximum of $85 million available under the current asset revolving credit facility. Assuming the priming order is not overturned on appeal, (i) maximum availability under the current assets revolving credit facility is $125 million, (ii) the monthly borrowing base consists of 85% of eligible accounts receivable, the lesser of $10 million or 33% of specified estimated future royalty payments related to the Debtors' chlorine dioxide generator technology and 65% of eligible inventory, with an inventory cap of $62.5 million and, (iii) the borrowing base for the current assets revolver is required to exceed outstanding borrowings by only $6 million at all times. If the priming order remains effective and the total commitments under the current assets revolver are increased to $125 million, the incremental $40 million is secured by first priority liens on all of our United States production facilities and related assets and all of the capital stock of the co-borrowers (excluding Chemicals) to secure up to $40 million under the current assets revolver, as well as all of the same collateral securing the initial $85 million current assets revolver. Consequently, after giving effect to the priming order, the DIP Financing consists of: - a $70 million fixed assets revolving credit facility secured by: - a first priority lien on all of the capital stock of Chemicals; - second priority liens on all of our United States production facilities and related assets, all of the capital stock of the co-borrowers (excluding Chemicals), all accounts receivable, inventory and 68 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) other specified assets of Chemicals and the other co-borrowers and 35% of the capital stock of certain of our subsidiaries incorporated outside the United States; and - a third priority lien on the remaining 65% of that stock; and - a $125 million current assets revolving credit facility: - $40 million of which is secured by first priority liens on all of our United States production facilities and related assets, all of the capital stock of the co-borrowers (excluding Chemicals) and 35% of the capital stock of certain of our subsidiaries incorporated outside the United States and a second priority lien on the remaining 65% of that stock; and - all of which is secured by a first priority lien on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers, third priority liens on all of the capital stock of Chemicals and 35% of the capital stock of certain of our subsidiaries incorporated outside the United States and fourth priority liens on the remaining 65% of that stock, all of the capital stock of the co- borrowers (excluding Chemicals) and all of our United States production facilities and related assets. Borrowings under the fixed assets revolving credit facility bear interest, at Chemicals' option, at an annual rate of either the "LIBOR Rate" (as defined in the DIP Financing) plus 3.75% or the "Alternate Base Rate" (as defined in the DIP Financing) plus 2.25%. Borrowings under the current assets revolving credit facility bear interest, at Chemicals' option, at an annual rate of either the LIBOR Rate plus 3.50% or the Alternate Base Rate plus 2.00%. At September 30, 2001, the weighted average interest rate in effect was 7.2%. The DIP Financing also requires Chemicals and the co-borrowers to pay an aggregate commitment fee ranging from 0.75% to 1.25% on the unused portion of the commitment for the fixed assets revolving credit facility, depending on the amount drawn, and an aggregate commitment fee of 0.5% on the unused portion of the commitment for the current assets revolving credit facility. At September 30, 2001, the total credit available under the DIP Financing was $112.8 million due to the current assets revolver borrowing base limitations discussed above. At September 30, 2001, $42.3 million was drawn under the fixed assets revolver and there were no borrowings outstanding under the current assets revolver. In addition, approximately $4.4 million of letters of credit were outstanding under the current assets revolver, leaving at September 30, 2001, unused borrowing capacity under the secured revolving credit facilities of approximately $66.1 million. At September 30, 2001, $20 million was drawn under the Canadian Financing Agreement. Borrowings under the Canadian Financing Agreement bear interest at the CIBC Bank Rate (as defined in the Canadian Financing Agreement) plus between 2.0% and 2.5%, or at the LIBOR Rate plus 3.5%. The DIP Financing and the Canadian Financing Agreement contain numerous covenants, including, but not limited to, restrictions on the ability to incur indebtedness, create liens and sell assets, as well as maintenance of certain financial covenants. On July 23, 1999, Chemicals completed a private offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006. On November 5, 1999, Chemicals completed a registered exchange offer pursuant to which all of these notes were exchanged for publicly registered 12 3/8% Notes with substantially similar terms (the "12 3/8% Notes"). The 12 3/8% Notes are senior secured obligations of Chemicals and rank equally in right of payment with all other existing and future senior indebtedness of Chemicals and senior in right of payment to all existing and future subordinated indebtedness of Chemicals. The 12 3/8% Notes are guaranteed by all of Chemicals' existing direct and indirect United States subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) on a joint and several basis. Each subsidiary's guarantee ranks equally in right of payment with all of that subsidiary's existing and future senior indebtedness and senior in right of payment to all existing and 69 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) future subordinated indebtedness of that subsidiary. The 12 3/8% Notes and the subsidiary guarantees are secured by: - a second priority lien on all of our United States production facilities and related assets; - a second priority pledge of all of the capital stock of each subsidiary guarantor; and - a first priority pledge of 65% of the stock of certain of the Company's subsidiaries incorporated outside of the United States. As a result of the priming order, the second priority liens held by the 12 3/8% Notes on all of our United States production facilities and related assets and the capital stock of each subsidiary guarantor became third priority liens. The priming order does not affect the priority of the pledge held by the 12 3/8% Notes of 65% of the stock of certain of our subsidiaries incorporated outside of the United States. The 12 3/8 Notes bear interest at the annual rate of 12 3/8%, payable semi-annually on January 15 and July 15 of each year commencing January 15, 2000. During the pendency of the Chapter 11 cases, interest may accrue to the extent permitted by the Bankruptcy Code but is not payable unless ordered by the Bankruptcy Court. Without regard to the Chapter 11 filings, and except as otherwise provided below, the 12 3/8% Notes may not be redeemed by Chemicals prior to July 15, 2003. From that date until July 15, 2004, the 12 3/8% Notes may be redeemed at a premium of the principal amount thereof at maturity of 106.188% and, from July 15, 2004 until July 15, 2005, the 12 3/8% Notes may be redeemed at a premium of the principal amount thereof at maturity of 103.094%. Thereafter, Chemicals may redeem the 12 3/8% Notes at their face value plus accrued and unpaid interest. Prior to July 15, 2002, Chemicals may redeem in the aggregate up to 35% of the original principal amount of the 12 3/8% Notes with the proceeds of one or more specified Public Equity Offerings. Such redemptions may be made at a redemption price of 112.375% of the face value of the 12 3/8% Notes plus accrued and unpaid interest to the redemption date. After such redemption, at least $191.75 million aggregate principal amount of the 12 3/8% Notes must remain outstanding. No redemptions will be made during the pendency of the Chapter 11 cases. The terms of a plan of reorganization will determine any redemption rights thereafter. On July 23, 1999, Chemicals also established two secured revolving credit facilities providing up to $155,000,000 in revolving credit loans (the "Prior Revolvers") under a single Revolving Credit Agreement (the "Prior Credit Agreement"). Under the Prior Credit Agreement, Chemicals and each of its direct and indirect United States subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) were co-borrowers and were jointly and severally liable for any indebtedness thereunder. The Prior Revolvers consisted of (i) an $85,000,000 revolving credit facility secured by a first priority lien on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers and (ii) a $70,000,000 revolving credit facility secured by a first priority lien on all of our United States production facilities and related assets, all of the capital stock of Chemicals and all of the capital stock of each co-borrower and a second priority lien on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers. As mentioned above, the initial draw under the DIP Financing was used to repay all amounts under the Prior Revolvers. As part of our recapitalization in August of 1996, Chemicals issued $275.0 million of its 11 3/4% Senior Subordinated Notes due 2006 (the "11 3/4% Notes") and Holdings issued 191,751 Units, with each Unit consisting of one 13 1/2% Senior Secured Discount Note due 2008 (collectively, the "13 1/2% Notes") and one warrant to purchase three shares of the common stock, par value $0.01 per share, of Holdings ("Holdings Common Stock") for $0.01 per share. Holdings received $100 million in initial proceeds upon issuing $191.8 million of 13 1/2% Notes under the Units offering. On April 7, 1997, Chemicals issued $150.0 million of its 11 1/2% Senior Subordinated Notes due 2007 (the "11 1/2% Notes"). 70 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The 11 3/4% Notes are unsecured senior subordinated obligations of Chemicals, ranking subordinate in right of payment to all existing and future senior debt of Chemicals, but pari passu with the 11 1/4% Notes and all future senior subordinated indebtedness. The 11 3/4% Notes bear interest at the annual rate of 11 3/4%, payable semi-annually on February 15 and August 15 of each year commencing February 15, 1997. However, no interest will be paid during the pendency of the Chapter 11 cases. As management believes this liability is subject to compromise, interest expense is not being recorded after the Petition Date. The 11 3/4% Notes were not redeemable by Chemicals prior to August 15, 2001. Under the indenture for the 11 3/4% Notes, from that date through August 15, 2004, the 11 3/4% Notes may be redeemed at a premium of the principal amount thereof at maturity varying between 105.875% and 101.958% and, after August 15, 2004, Chemicals may redeem the 11 3/4% Notes at their face value plus accrued and unpaid interest. However, notwithstanding the foregoing, no redemptions may be made during the pendency of the Chapter 11 cases and the terms of a plan of reorganization will determine any redemption rights thereafter. The 11 1/4% Notes are unsecured senior subordinated obligations of Chemicals, ranking subordinate in right of payment to all existing and future senior debt of Chemicals, but pari passu with the 11 3/4 % Notes and all future senior subordinated indebtedness of Chemicals. The 11 1/4% Notes bear interest at the annual rate of 11 1/4%, payable semi-annually on April 1 and October 1 of each year commencing October 1, 1997. However, no interest will be paid during the pendency of the Chapter 11 cases. As management believes this liability is subject to compromise, interest expense is not being recorded after the Petition Date. Under the indenture for the 11 1/4% Notes, the 11 1/4% Notes may not be redeemed by Chemicals prior to April 1, 2002 and, from that date through April 1, 2005, the 11 1/4% Notes may be redeemed at a premium of the principal amount thereof at maturity varying between 105.625% and 101.875%. After April 1, 2005, Chemicals may redeem the 11 1/4% Notes at their face value plus accrued and unpaid interest. However, notwithstanding the foregoing, no redemptions may be made during the pendency of the Chapter 11 cases and the terms of a plan of reorganization will determine any redemption rights thereafter. The 13 1/2% Notes are senior secured obligations of Holdings and rank equally in right of payment with all other senior indebtedness of Holdings and senior in right of payment to all subordinated indebtedness of Holdings. The 13 1/2% Notes accreted interest until August 15, 2001, with no interest payable in cash until February 15, 2002, at an annual rate of 13 1/2%, compounded semi-annually. Commencing in 2002, interest becomes payable under the terms of the 13 1/2% Notes semi-annually on February 15 and August 15 of each year until maturity. However, no interest will be paid during the pendency of the Chapter 11 cases. As management believes this liability is subject to compromise, interest expense is not being recorded after the Petition Date. Under the indenture for the 13 1/2% Notes, the 13 1/2% Notes may be redeemed by Holdings through August 15, 2006 at a premium of the principal amount thereof at maturity varying between 106.75% and 101.35% and, after August 15, 2006, at their principal amount plus accrued interest. However, notwithstanding the foregoing, no redemptions may be made during the pendency of the Chapter 11 cases and the terms of a plan of reorganization will determine any redemption rights thereafter. On July 10, 1997, Sterling Pulp Chemicals (Sask) Ltd. ("Sterling Sask"), an indirect wholly owned subsidiary of Holdings and Chemicals, acquired substantially all of the assets of Saskatoon Chemicals Ltd. ("Saskatoon Chemicals"), a subsidiary of Weyerhaeuser Canada Ltd. (the "Saskatoon Acquisition"). In connection with the Saskatoon Acquisition, Sterling Sask entered into a credit agreement (the "Saskatoon Credit Agreement") with JP Morgan of Canada, individually and as administrative agent. Funding under the Saskatoon Credit Agreement occurred July 10, 1997, upon consummation of the Saskatoon Acquisition. The Saskatoon Credit Agreement provides for a revolving credit facility of Cdn. $8.0 million (the "Saskatoon Revolver") and a term loan facility consisting of a Cdn. $25.0 million Tranche A term loan due June 30, 2003 and a $36.4 million Tranche B term loan due June 30, 2005 (the "Saskatoon Term Loans"). Advances under the Saskatoon Revolver are subject to a borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory, with an inventory cap of 50% of the borrowing base. At September 30, 2001, the 71 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) borrowing base did not limit available credit and there were no borrowings outstanding under the Saskatoon Revolver. Sterling Sask's obligations under the Saskatoon Credit Agreement are secured by substantially all of the assets of Sterling Sask. The Saskatoon Credit Agreement requires Sterling Sask to satisfy certain financial covenants and tests. In addition, the Saskatoon Credit Agreement requires that certain amounts of "Excess Cash Flow" be used to prepay amounts outstanding under the Saskatoon Term Loans. The Sterling Sask Tranche A term loan and the Saskatoon Revolver borrowings bear interest, at Sterling Sask's option, at an annual rate of either the Bankers Acceptance Rate or the Base Rate plus an Applicable Margin (as such terms are defined in the Saskatoon Credit Agreement) of 2.5% and 1.5%, respectively, until September 30 2001, and 3.0% and 2.0% thereafter. The Tranche B term loan bears interest, at Sterling Sask's option, at an annual rate of either the Eurodollar Rate or the Base Rate plus an Applicable Margin of 3.0% and 2.0%, respectively, through September 30, 2001, and 3.5% and 2.5%, respectively, thereafter. The "Base Rate" for the Tranche A term loan and the Saskatoon Revolver is equal to the greater of the Prime Rate for Canadian Dollar commercial loans made in Canada, as announced from time to time by the agent bank or the rate for Canadian Dollar Bankers Acceptances accepted by the agent with a term to maturity of 30 days plus 1% (as such terms are defined in the Saskatoon Credit Agreement). The "Base Rate" for the Tranche B term loan is equal to the greater of the Prime Rate as announced from time to time by the agent bank, the "Federal Funds Effective Rate" plus 1/2% or the "Base CD Rate" plus 1% (as such terms are defined in the Saskatoon Credit Agreement). At September 30, 2001, the interest rates in effect for the Tranche A and Tranche B term loans were 6.3% and 6.1%, respectively. The Saskatoon Credit Agreement also requires Sterling Sask to pay a commitment fee in the amount of 1/2% commitment under the Saskatoon Revolver. The Saskatoon Credit Agreement contains provisions which currently prohibit the payment of advances, loans and dividends from Sterling Sask to Chemicals or Holdings. An Event of Default occurred under the Saskatoon Credit Agreement as a result of the Chapter 11 filings by the Debtors. However, the lenders under the Saskatoon Credit Agreement have executed a forbearance agreement under which they have temporarily agreed to not exercise their remedies under that agreement. In connection with obtaining the lenders' agreement to enter into the forbearance arrangement, the Saskatoon Credit Agreement was amended in several respects, including the elimination of the exceptions to the provisions restricting the payment of advances, loans and dividends from our Saskatoon subsidiary to us or Chemicals and the inclusion of a restriction on our ability to draw upon the revolving credit facility during the remainder of calendar year 2001. The Saskatoon subsidiary has not drawn on the revolver since its inception in 1997 and as of September 30, 2001, had approximately $11.8 million in cash and cash equivalents on hand. The forbearance agreement expires on December 31, 2001. We are currently negotiating a waiver and amending agreement with the lenders and expect to have this agreement executed in the near-term; however, no assurance can be given that this waiver and amending agreement will be executed or that the forbearance arrangement will be extended beyond December 31, 2001. 72 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DEBT MATURITIES The estimated remaining principal payments on the outstanding debt of our subsidiaries that have not filed Chapter 11 are as follow:
YEAR ENDING SEPTEMBER 30, PRINCIPAL PAYMENTS - ------------- ---------------------- (DOLLARS IN THOUSANDS) 2002........................................................ $33,260 2003........................................................ 1,810 2004........................................................ 16,987 2005........................................................ -- 2006........................................................ -- Thereafter.................................................. -- ------- Total debt of subsidiaries that have not filed Chapter 11...................................... $52,057 =======
5. CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY The following condensed combined financial statements are presented in accordance with SOP 90-7: STERLING CHEMICALS HOLDINGS, INC. (DEBTOR-IN-POSSESSION) CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2001 ----------------------------------------------------------- ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINED PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS -------------- --------------- ------------ --------- (DOLLARS IN THOUSANDS) Revenues................................... $ 569,519 $175,640 $(1,594) $ 743,565 Cost of goods sold......................... 617,774 141,487 (1,851) 757,410 --------- -------- ------- --------- Gross profit (loss)........................ (48,255) 34,153 257 (13,845) Selling, general and administrative expenses................................. 18,348 6,288 -- 24,636 Other expense.............................. 2,960 -- -- 2,960 Reorganization items....................... 5,422 -- -- 5,422 Interest and debt related expenses, net.... 107,677 5,695 -- 113,372 --------- -------- ------- --------- Income (loss) before income taxes.......... (182,662) 22,170 257 (160,235) Income tax expense (benefit)............... 52,262 8,027 -- 60,289 --------- -------- ------- --------- Net income (loss).......................... $(234,924) $ 14,143 $ 257 $(220,524) ========= ======== ======= =========
73 STERLING CHEMICALS HOLDINGS, INC. (DEBTOR-IN-POSSESSION) CONDENSED COMBINED BALANCE SHEETS
SEPTEMBER 30, 2001 ----------------------------------------------------------------- ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION PROCEEDINGS PROCEEDINGS ELIMINATIONS COMBINED TOTALS -------------- --------------- ------------ --------------- (DOLLARS IN THOUSANDS) ASSETS: Cash and cash equivalents.............. $ 3,975 $ 11,855 $ -- $ 15,830 Accounts receivable, net............... 74,080 26,018 592 100,690 Inventories............................ 37,535 10,844 (61) 48,318 Prepaid expenses....................... 2,327 1,031 -- 3,358 Property, plant and equipment, net..... 181,446 103,498 -- 284,944 Other assets........................... 91,262 26,620 (60,879) 57,003 --------- -------- -------- --------- Total Assets................. $ 390,625 $179,866 $(60,348) $ 510,143 ========= ======== ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS): Current liabilities.................... $ 73,144 $ 51,780 $(28,503) $ 96,421 Liabilities subject to compromise...... 744,857 -- -- 744,857 Liabilities not subject to compromise........................... 325,655 -- -- 325,655 Long-term debt......................... 42,287 18,797 -- 61,084 Non-current liabilities................ 9,670 20,909 -- 30,579 Redeemable preferred stock............. 27,272 -- -- 27,272 Stockholders' equity (deficiency in assets).............................. (832,260) 88,380 (31,845) (775,725) --------- -------- -------- --------- Total Liabilities and Stockholders' Equity (Deficiency in Assets)........ $ 390,625 $179,866 $(60,348) $ 510,143 ========= ======== ======== =========
74 STERLING CHEMICALS HOLDINGS, INC. (DEBTOR-IN-POSSESSION) CONDENSED COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 2001 ------------------------------------------- ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINED PROCEEDINGS PROCEEDINGS TOTALS -------------- --------------- -------- (DOLLARS IN THOUSANDS) Net cash provided by (used in) operating activities.... $ (7,740) $ 16,021 $ 8,281 Cash flows from investing activities: Capital expenditures................................. (10,517) (6,375) (16,892) -------- -------- -------- Net cash used in investing activities:................. (10,517) (6,375) (16,892) Cash flows from financing activities: Proceeds from financing.............................. 42,270 20,003 62,273 Repayments of long-term debt......................... (37,206) (2,850) (40,056) Intercompany loan activity........................... 19,409 (19,409) -- Debt issuance costs.................................. (3,789) (1,112) (4,901) Other................................................ (52) -- (52) -------- -------- -------- Net cash provided by (used in) financing activities.... 20,632 (3,368) 17,264 Effect of exchange rate changes on cash................ -- (490) (490) -------- -------- -------- Net increase (decrease) in cash and cash equivalents... 2,375 5,788 8,163 Cash and cash equivalents at: Beginning of year.................................... 1,600 6,067 7,667 -------- -------- -------- End of year.......................................... $ 3,975 $ 11,855 $ 15,830 ======== ======== ========
75 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. INCOME TAXES A reconciliation of federal statutory income taxes to our effective tax provision (benefit) before extraordinary item follows:
YEAR ENDED SEPTEMBER 30, ------------------------------ 2001 2000 1999 -------- -------- -------- (DOLLARS IN THOUSANDS) Benefit for income taxes at statutory rates.......... $(56,082) $(28,841) $(51,526) Taxable foreign dividends............................ 4,423 2,889 4,295 Change in valuation allowance........................ 116,286 31,093 1,514 Non-deductible expenses.............................. 453 879 815 State and foreign income taxes....................... (95) (1,437) 550 Other................................................ (4,696) (23) 9,416 -------- -------- -------- Effective tax provision (benefit).................... $ 60,289 $ 4,560 $(34,936) ======== ======== ========
The provision (benefit) for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30, --------------------------- 2001 2000 1999 ------- ------ -------- (DOLLARS IN THOUSANDS) Current federal......................................... $ -- $ -- $ 2,246 Deferred federal........................................ 52,261 -- (36,724) Current foreign......................................... 3,290 3,328 -- Deferred foreign........................................ 1,719 (257) (1,300) Provincial and state income taxes....................... 3,019 1,489 842 ------- ------ -------- Total tax provision (benefit)........................... $60,289 $4,560 $(34,936) ======= ====== ========
76 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of our deferred income tax assets and liabilities are summarized below:
YEAR ENDED SEPTEMBER 30, ------------------------ 2001 2000 ----------- ---------- (DOLLARS IN THOUSANDS) Deferred tax assets: Accrued liabilities......................................... $ 10,412 $ 11,513 Accrued postretirement cost................................. 13,977 13,638 Tax loss and credit carry forwards.......................... 111,794 58,982 Discount note interest...................................... 29,406 24,466 Other....................................................... 17,205 16,275 --------- -------- Total deferred tax assets................................... 182,794 124,874 --------- -------- Deferred tax liabilities: Property, plant and equipment............................... $ (44,752) $(42,018) Other....................................................... (3,653) (4,722) --------- -------- Total deferred tax liabilities.............................. (48,405) (46,740) Valuation allowance......................................... (148,893) (32,607) --------- -------- Net deferred tax assets (liabilities)....................... (14,504) 45,527 Less: current deferred tax assets........................... -- (8,470) --------- -------- Long-term deferred tax assets (liabilities)................. $ (14,504) $ 37,057 ========= ========
We have approximately $318 million in United States net operating losses ("U.S. NOL") which will expire during fiscal 2018-2021. In assessing the value of the deferred tax assets, management considers whether it is more likely than not that all of the deferred tax assets will be realized. Projected future income tax planning strategies and the expected reversal of deferred tax liabilities are considered in making this assessment and determining the valuation allowance. In June 2001, based on the uncertainty as to the effect of the Chapter 11 filings on the utilization of the U.S. NOL and the future realization of other net deferred tax assets, we were not able to conclude that it was more likely than not that we would be able to realize the future benefit of our U.S. deferred tax assets and the valuation allowance was increased to reduce U.S. deferred tax assets to zero. Certain reductions to our U.S. NOL may result from confirmation of our plan of reorganization. Further, at such time as we emerge from bankruptcy, we will likely undergo an ownership change for federal income tax purposes which may cause our utilization of our U.S. NOL to become subject to limitations. Since numerous variables could affect the bankruptcy proceedings (including the fact that the a plan of reorganization has not yet been submitted to the Bankruptcy Court for approval), it is not currently possible to determine whether our U.S. NOL will produce tax benefits in the future. Benefit was not provided for these loss carryforwards at September 30, 2001. 7. EMPLOYEE BENEFITS The Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of their pre-petition obligations, including payments for employee wages and salaries, benefits and other employee obligations. The Debtors' obligations under its employee benefit plans are liabilities that are subject to compromise under the Chapter 11 reorganization proceedings. See Note 3 for further information on liabilities subject to compromise. 77 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) We have established the following benefit plans: RETIREMENT BENEFIT PLANS We have non-contributory pension plans in the United States and employer and employee contributory plans in Canada which cover all salaried and wage employees. The benefits under these plans are based primarily on years of service and employees' pay near retirement. For our employees who were employed as of September 30, 1986 and who were previously employed by Monsanto Company, we recognize their Monsanto pension years of service for purposes of determining benefits under our plans. For our employees who were employed on August 21, 1992 and who were previously employed by Tenneco Inc., we recognize their Tenneco Inc. pension years of service for purposes of determining benefits under our plans. For our employees who were employed as of January 31, 1997 and who (i) were previously employed by Cytec Industries Inc. and (ii) elected to retire on or before January 31, 1999, we supplement the standard pension payable such that the employee's total combined pension from us and from the Cytec Nonbargaining Employees' Retirement Plan equals the amount the employee would have received had he or she remained an employee of Cytec until retirement. The estimated liability for such supplements as of September 30, 2001 and 2000 is immaterial. Our funding policy is consistent with the funding requirements of federal law and regulations. Plan assets consist principally of common stocks and government and corporate securities. Information concerning the pension obligation, plan assets, amounts recognized in our financial statements and underlying actuarial assumptions is stated below.
SEPTEMBER 30, ----------------------- 2001 2000 ---------- ---------- (DOLLARS IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year................... $117,541 $114,390 Currency rate conversion.................................. (855) (293) Service cost.............................................. 4,309 4,498 Interest cost............................................. 8,503 8,446 Plan amendments........................................... 195 -- Plan curtailment.......................................... (957) -- Actuarial loss (gain)..................................... 3,324 (2,158) Benefits paid............................................. (7,623) (7,342) -------- -------- Benefit obligation at end of year......................... $124,437 $117,541 ======== ======== Change in plan assets: Fair value at beginning of year........................... $110,610 $ 99,291 Currency rate conversion.................................. (865) (276) Actual return (loss) on plan assets....................... (15,441) 15,201 Employer contributions.................................... 3,885 3,736 Benefits paid............................................. (7,623) (7,342) -------- -------- Fair value at end of year................................. $ 90,566 $110,610 ======== ========
78 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, ----------------------- 2001 2000 ---------- ---------- (DOLLARS IN THOUSANDS) Development of net amount recognized: Funded status............................................. $(33,870) $ (6,931) Unrecognized cost: Actuarial loss (gain).................................. $ 15,361 $(13,051) Prior service cost..................................... 6,031 6,764 Transition liability................................... 605 979 -------- -------- Net amount recognized..................................... $(11,873) $(12,239) ======== ======== Amounts recognized in the statement of financial position: Prepaid pension cost........................................ $ 353 $ 418 Accrued pension cost........................................ (20,120) (12,909) Intangible asset............................................ 4,496 45 Accumulated other comprehensive income (pre-tax)............ 3,398 207 -------- -------- Net amount recognized....................................... $(11,873) $(12,239) ======== ========
All plans have projected benefit obligations in excess of plan assets at September 30, 2001. For plans with accumulated benefit obligations in excess of plan assets, the accumulated benefit obligation and fair value of plan assets were $91.6 million and $77.1 million, respectively, at September 30, 2001. Net periodic pension costs consist of the following components:
SEPTEMBER 30, --------------------------- 2001 2000 1999 ------- ------- ------- (DOLLARS IN THOUSANDS) Components of net pension costs: Service cost-benefits earned during the year.......... $ 4,309 $ 4,498 $ 5,198 Interest on prior year's projected benefit obligation......................................... 8,503 8,446 6,735 Expected return on plan assets........................ (9,373) (8,537) (7,538) Net amortization: Actuarial loss (gain).............................. 805 809 634 Prior service cost................................. (206) 7 73 Transition liability............................... 373 375 376 Settlement/curtailment loss (gain).................... (863) -- 11,337 ------- ------- ------- Net pension costs..................................... $ 3,548 $ 5,598 $16,815 ======= ======= ======= Weighted-average assumptions: Discount Rate......................................... 7.25% 7.50% 7.50% Rates of increase in salary compensation level........ 5.37% 5.38% 5.38% Expected long-term rate of return on plan assets...... 8.51% 8.76% 8.77%
79 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS We provide certain health care benefits and life insurance benefits for retired employees. Substantially all of our employees become eligible for these benefits at early retirement age. We accrue the cost of these benefits during the period in which the employee renders the necessary service. Health care benefits are provided to employees who retire from us with ten or more years of credited service except for Canadian employees covered by collective bargaining agreements. Some of our employees are eligible for postretirement life insurance. Postretirement health care benefits for United States plans are contributory. Benefit provisions for most hourly and some salaried employees are subject to collective bargaining. In general, retiree health care benefits are paid as covered expenses are incurred. For United States employees, postretirement medical plan deductibles are assumed to increase at the same rate as long-term health care costs. Information concerning the plan obligation, the funded status, amounts recognized in our financial statements and underlying actuarial assumptions are stated below.
SEPTEMBER 30, ----------------------- 2001 2000 ---------- ---------- (DOLLARS IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year................... $ 40,062 $ 45,674 Service cost.............................................. 576 751 Interest cost............................................. 3,108 2,759 Plan amendments, curtailments and special termination benefit................................................ (447) (82) Actuarial loss (gain)..................................... 4,227 (6,168) Benefits paid............................................. (2,580) (2,872) -------- -------- Benefit obligation at end of year......................... $ 44,946 $ 40,062 ======== ======== Development of net amount recognized: Funded status............................................. $(44,946) $(40,062) Unrecognized cost: Actuarial loss......................................... 8,131 4,862 Prior service cost..................................... (4,619) (5,447) -------- -------- Net amount recognized..................................... $(41,434) $(40,647) ======== ========
Net periodic plan costs consist of the following components:
SEPTEMBER 30, ------------------------- 2001 2000 1999 ------ ------ ------- (DOLLARS IN THOUSANDS) Components of net plan costs: Service cost............................................ $ 576 $ 751 $ 1,200 Interest cost........................................... 3,108 2,759 3,005 Net amortization: Actuarial loss....................................... 625 268 340 Prior service cost................................... (486) (496) (233) Curtailment and special termination benefits............ (457) -- (1,150) ------ ------ ------- Net plan costs.......................................... $3,366 $3,282 $ 3,162 ====== ====== ======= Weighted-average assumptions: Discount Rate........................................... 7.25% 7.50% 6.75%
80 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The weighted average annual assumed health care trend rate is assumed to be 7.5% for 2001. The rate is assumed to decrease gradually to 5.8% in 2027 and remain level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care trend rates would have the following effects:
1% INCREASE 1% DECREASE ----------- ----------- (DOLLARS IN THOUSANDS) Effect on total of service and interest cost components..... $ 204 $ (178) Effect on post-retirement benefit obligation................ 2,151 (1,867)
During fiscal 2001, we recorded a curtailment gain of $2.0 million due to our staffing reductions at our acrylic fibers plant associated with us significantly reducing those operations. We recorded a $10.2 million charge, included in other expense, increasing our pension liability and other postretirement benefits liability in the second quarter of fiscal 1999 as a result of an early retirement program for employees at our Texas City plant and certain benefit changes for all of our U.S. employees. The early retirement program resulted in curtailment expense for the pension plan and special termination benefits expenses for both the pension and the other postretirement benefits plans, partially offset by the curtailment gain from the reduction of postretirement life insurance benefits for our currently active U.S. employees. EMPLOYEE STOCK OWNERSHIP TRUST In connection with our recapitalization in August of 1996, an Employee Stock Ownership Trust (the "ESOT") was established which covers substantially all United States employees. Allocations of shares of common stock were made annually to participants. The ESOT primarily invests in shares of Holdings Common Stock and, in fiscal 1996, borrowed $6.5 million from Chemicals (the "ESOP Loan") to purchase approximately 542,000 shares of Holdings Common Stock. In addition, during fiscal 1999 the ESOT purchased 14,000 shares of Holdings Common Stock. In fiscal 2000 and 1999, 163,000 and 160,000 respectively, ESOT shares were allocated to employees. We recorded $0.9 million and $0.7 million of expense related to the ESOT in fiscal 2000 and 1999, respectively. There were no shares allocated to employees and there was no expense recorded in fiscal 2001. The shares of Holdings Common Stock purchased by the ESOT in August of 1996 were pledged as security for the ESOP Loan. As of September 30, 2001, the ESOP Loan had been repaid in full and all shares of Holdings Common Stock held by the ESOT had been released and allocated to the ESOT participants' accounts. No additional allocations are contemplated at this time. We are currently in the process of terminating our ESOP and the ESOT and, upon any such termination, all shares of our common stock held by the ESOT will be distributed to the participants in this plan. SAVINGS AND INVESTMENT PLAN Our Sixth Amended and Restated Savings and Investment Plan covers substantially all United States employees, including executive officers. This Plan is qualified under Section 401(k) of the Internal Revenue Code. Each participant has the option to defer taxation of a portion of his or her earnings by directing us to contribute a percentage of such earnings to the Plan. A participant may direct up to a maximum of 20% of eligible earnings to this Plan, subject to certain limitations set forth in the Internal Revenue Code. A participant's contributions become distributable upon the termination of his or her employment. We did not make any contribution to this plan in fiscal 2000 or 1999. Beginning October 1, 2000, we began matching 50% of a participant's contributions, to the extent such contributions do not exceed 7% of such participant's base compensation (excluding bonuses, profit sharing and similar types of compensation). Such contributions amounted to $1.1 million in fiscal 2001. 81 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EMPLOYEE SAVINGS PLAN We introduced an employee savings plan for all eligible full-time Canadian employees effective as of October 1, 2000. Each participant has the option to contribute a percentage of his or her earnings to the Canadian savings plan, with no limit on the maximum percentage contributed. Beginning October 1, 2000 we began matching 100% of a participant's contributions, to the extent such contributions do not exceed 3.5% of such participant's base compensation (excluding bonuses, profit sharing and similar types of compensation). Such contributions amounted to $0.3 million in fiscal 2001. PROFIT SHARING AND BONUS PLANS In January 1997, our Board of Directors, upon recommendation of its Compensation Committee, approved the establishment of a Profit Sharing Plan that is designed to benefit all qualified employees and a Bonus Plan that is designed to provide certain of our exempt salaried employees with the opportunity to earn bonuses depending, among other things, on our annual financial performance. We incurred $3.7 million and $7.4 million of expenses related to the Profit Sharing Plan and Bonus Plan, respectively, in fiscal 2000. No expenses for profit sharing or bonuses were incurred in fiscal 2001 or 1999. OMNIBUS STOCK AWARDS AND INCENTIVE PLAN In April 1997, our Board of Directors approved the establishment of our Omnibus Stock Awards and Incentive Plan (as amended, the "Omnibus Plan"). Under the Omnibus Plan, we may grant our key employees incentive and nonqualified stock options, SARs, restricted stock awards, performance awards and phantom stock awards. Our Board of Directors approved an amendment to the Omnibus Plan which increased the total number of shares available for issuance under the Omnibus Plan to 2,000,000, which was ratified and approved by our stockholders at their annual meeting held on January 24, 2001. Of the 2,000,000 shares of Holdings Common Stock available for issuance under the Omnibus Plan, 1,221,845 shares are the subject of outstanding grants. The terms and amounts of the awards (including vesting schedule) are determined by the Compensation Committee of our Board of Directors. Generally, outstanding stock options become exercisable (vest) in equal annual installments beginning a year from date of grant and ending five years from date of grant. In the event of a specified change of control of Holdings or a qualified public offering of Holdings Common Stock, all awards immediately vest and become exercisable. During fiscal 2001, we granted options to purchase 515,000 shares of our common stock for prices ranging between $0.50 and $6.00 per share (all of which were completely vested upon their grant). During fiscal 1999 we issued 1,500 restricted stock awards to one of our employees. This restricted stock award vested 25% immediately, with an additional 25% of this award vesting each year after the date of grant. AMENDED AND RESTATED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS In April 1997, our Board of Directors approved the establishment of our 1997 Nonqualified Stock Option Plan for Non-Employee Directors. Under this plan, each eligible director who was serving on our Board of Directors on each subsequent October 1st was automatically granted an option to acquire 1,000 shares of Holdings Common Stock (2,000 shares for the Vice-Chairman). Effective as of April 26, 2000, our 1997 Nonqualified Stock Option Plan was amended and restated as our Amended and Restated Stock Plan for Non-Employee Directors. Under our Amended and Restated Stock Plan, each of our non-employee directors received $15,000 in shares of our common stock and options to purchase 2,000 shares of our common stock on October 1, 2000. This grant of shares was valued at the average market price for a share of our common stock during the 90-day period ending on the date of grant. Under both our 1997 Nonqualified Stock Option Plan and our Amended and Restated Stock Plan, each of our non-employee directors were eligible to participate and each had the ability to elect not to participate. All options issued under these plans expire ten years from 82 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the date of grant, were granted with an exercise price at or above the fair market value of a share of Holdings Common Stock on the date of grant (as determined by our Board of Directors) and vested and became exercisable immediately. On March 7, 2001, our Board of Directors elected to terminate this plan with respect to future grants. KEY EMPLOYEE PROTECTION PLAN On January 26, 2000, our Board approved our Key Employee Protection Plan, which has subsequently been amended several times. This plan was established by our Board to help us retain certain of our employees and motivate them to continue to exert their best efforts on our behalf during periods when we may be susceptible to a change of control and to assure their continued dedication and objectivity during those periods. This plan, as amended, was approved by the Bankruptcy Court in our bankruptcy proceedings on October 31, 2001. A select group of management or highly compensated employees has been designated as participants under the plan and their respective applicable multipliers and other variables for determining benefits have been established. Our Compensation Committee is authorized to designate additional management or highly compensated employees as participants under our Key Employee Protection Plan and set their applicable multipliers. Our Compensation Committee may also terminate any participant's participation under this plan on 60 days' notice if it determines that the participant is no longer one of our key employees. Approximately $0.8 million was paid during fiscal 2001 pursuant to this plan. RETENTION BONUS PLAN On July 13, 2001, our Board approved our Retention Bonus Plan, which was subsequently amended. This plan was established by our Board to help us retain our employees whose resignations would cause significant disruption to our operations and whose skills would be particularly difficult and costly to replace, to improve their morale during the pendency of our bankruptcy proceedings and help us incentivize these employees to work diligently toward the resolution of our bankruptcy proceedings. The plan, as amended, was approved by the Bankruptcy Court in our bankruptcy proceedings on October 31, 2001. A select group of management or highly compensated employees has been designated as participants under the plan and their respective benefits have been established. Each participant in the plan is entitled to payments under the plan on specified dates, unless the participant's employment with us terminates prior to that payment date for any reason other than a termination by the participant for "Good Reason" or a termination by us for any reason other than "Misconduct" or "Disability." Payments under the plan are based on specified percentages of the participant's annual compensation, including payments under our Supplemental Pay Plan. Each participant who becomes entitled to payments under the plan will be paid 25% of the total amount payable to that participant on the earlier of April 15, 2002 and the date on which a plan of reorganization in our bankruptcy proceedings is confirmed, an additional 25% on the earliest to occur of October 15, 2002, the date on which a plan of reorganization is confirmed in our bankruptcy proceedings and the date on which all or substantially all of our assets are sold or otherwise transferred, and the final 50% on the earlier to occur of the date on which a plan of reorganization is confirmed in our bankruptcy proceedings and the date on which all or substantially all of our assets are sold or otherwise transferred. However, if payments are made solely as a result of the sale of all or substantially all of our assets, a participant is not entitled to any payments under the plan unless such sale or transfer occurs after April 15, 2002 and, for any sale or transfer that occurs after that date, the participant is only entitled to receive one-half of the final 50% payment. Approximately $0.6 million was accrued during fiscal 2001 pursuant to this Plan. We may amend our Retention Bonus Plan at any time but any amendment that adversely affects a participant's rights or benefits under the plan or reduces our obligations under the plan will not be effective with respect to any person who was a participant at the time of such amendment. In addition, we may 83 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) terminate our Retention Bonus Plan at any time, but all benefits payable under the plan must be paid in full notwithstanding any termination or amendment of the plan. SEVERANCE PLAN On March 8, 2001, our Board approved our Severance Pay Plan, which has subsequently been amended. This plan covers all of our non-unionized United States employees and was established by our Board to help us retain these employees by assuring them that they will receive some compensation in the event that their employment is adversely affected in specified ways in connection with a change of control. This plan as amended was approved by the Bankruptcy Court in our bankruptcy proceedings on October 31, 2001. Under our Severance Pay Plan, any participant that terminates his or her employment for "Good Reason" or is terminated by us for any reason other than "Misconduct" or "Disability" during the period commencing 180 days prior to the date on which a specified change of control occurs and ending 180 days after such change of control is entitled to benefits under the plan. If a participant becomes entitled to benefits under the plan, we are required to provide the participant with a lump sum cash payment in an amount equivalent to two weeks of such participant's base salary for each credited year of service, with a minimum payment of six months' base salary and a maximum payment of one year's base salary. The amount of this lump sum payment is reduced, however, by the amount of any other separation, severance or termination payments made by us to the participant under any other plan or agreement, including our Key Employee Protection Plan, or pursuant to law. In addition, a pro rata portion of any lump sum amount paid to a participant under the plan must be repaid by the participant if the participant is rehired by us or our successor within 90 days after the participant's termination date. In addition to the lump sum payment, for a period of six months after the participant's termination date, the COBRA premium required to be paid by such participant for coverage under our medical and dental plans may not be increased beyond that required to be paid by active employees for similar coverage under those plans, as long as the participant makes a timely COBRA election and pays the regular employee premiums required under those plans and otherwise continues to be eligible for coverage under those plans. We may terminate or amend our Severance Pay Plan at any time and for any reason but no termination or amendment of the plan may be effective with respect to any participant if the termination or amendment is related to, in anticipation of or during the pendency of a change of control, is for the purpose of encouraging or facilitating a change of control or is made within 180 days prior to any change of control. Finally, no termination or amendment of our Severance Pay Plan can affect the rights or benefits of any participant that are accrued under the plan at the time of termination or amendment or that accrue thereafter on account of a change of control that occurred prior to the termination or amendment or within 180 days after such termination or amendment. SUPPLEMENTAL BONUS PLAN On July 13, 2001, our Board approved our Supplemental Bonus Plan, which was subsequently amended. The plan is designed to help us retain certain of our employees during the pendency of our bankruptcy proceedings and provide us with the ability to reward our employees who have made extraordinary contributions and personal sacrifices in connection with our bankruptcy proceedings. Our Supplemental Bonus Plan, as amended, was approved by the Bankruptcy Court in our bankruptcy proceedings on October 31, 2001. Our Board has the ability to designate employees as participants under the plan and determine the amount payable to those participants, subject to an overall limit of $1.4 million in payments under the plan. However, our Board may not designate any of our employees as a participant under the plan if that employee is a participant under our Retention Bonus Plan, and no participant under our Retention Bonus Plan may receive any payment under our Supplemental Bonus Plan. Each participant in the plan is entitled to receive the 84 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amount designated by our Board at the conclusion of our bankruptcy proceedings, unless the participant's employment with us terminates prior to that time for any reason other than a termination by the participant for "Good Reason" or a termination by us for any reason other than "Misconduct" or "Disability." We may amend our Supplemental Bonus Plan at any time but any amendment that adversely affects a participant's rights or benefits under the plan or reduces our obligations under the plan will not be effective with respect to any person who was a participant at the time of such amendment. In addition, we may terminate our Supplemental Bonus Plan at any time, but all benefits payable under the plan must be paid in full notwithstanding any termination or amendment of the plan. SUPPLEMENTAL PAY PLAN On March 8, 2001, our Board approved our Supplemental Pay Plan, which was approved by the Bankruptcy Court in our bankruptcy proceedings on October 31, 2001. Historically, we have paid our senior level employees below-market salaries with the opportunity to earn above-market compensation through stock based incentives and significant bonuses in years when we achieve targeted levels of EBITDA. Due to our financial difficulties, the opportunity to earn additional compensation through these programs was significantly reduced, if not entirely eliminated. As a result, our Board established this plan to address their concern that the overall compensation provided to our senior level employees would always be below-market and, consequently, not adequate to retain these employees or attract new highly-qualified employees. A select group of management or highly compensated employees has been designated as participants under the plan and their respective benefits have been established. Each payment under the plan is a specified percentage of the participant's annual base salary and payments are paid on or before the tenth day after the last day of each calendar quarter. The participant must be employed by us on the relevant payment date in order to be eligible to receive that payment under the plan. We may amend or terminate our Supplemental Pay Plan at any time but any amendment or termination of the plan can only become effective on a payment date and may not affect the rights of participants under the plan that have accrued as of that effective date, including the right to receive supplemental pay on that payment date. OUTSTANDING STOCK OPTIONS A summary of the status of our outstanding stock options as of September 30, 2001, 2000 and 1999 and changes during the years then ended is presented below:
2001 2000 1999 --------------------------- --------------------------- ------------------------------ SHARES WEIGHTED- SHARES WEIGHTED- SHARES WEIGHTED- (IN AVERAGE (IN AVERAGE (IN AVERAGE THOUSANDS) EXERCISE PRICE THOUSANDS) EXERCISE PRICE THOUSANDS) EXERCISE PRICE(1) ---------- -------------- ---------- -------------- ---------- ----------------- Outstanding at beginning of year..................... 778 $6.13 682 $6.14 692 $11.74 Granted.................... 527 $0.93 123 $6.00 95 $ 6.08 Forfeited.................. (83) $6.00 (27) $6.00 (105) $ 6.00 ----- --- ---- Outstanding at end of year..................... 1,222 $3.90 778 $6.13 682 $ 6.14 ===== === ==== Options exercisable at end of year.................. 1,185 360 178 ===== === ====
- --------------- (1) On December 14, 1998, we issued to all of our employees who held stock options on that date new options with an exercise price of $6.00 per share. The new options were issued in exchange for and in cancellation of stock options previously issued to those employees for the same number of shares and with the same vesting schedules. 85 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The range of exercise prices for options outstanding at September 30, 2001, was $0.50 -- $12.00, with all exercisable options having an exercise price range of $0.50-$12.00. All stock options are granted with an exercise price at or above fair market value of a share of Holdings Common Stock at the grant date. The weighted average fair value of the stock options granted during fiscal 2000 and 1999 was $0.6 million and $0.6 million, respectively. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for the grants in fiscal 2000 and 1999; risk free interest rate of 5.8% and 5.9%, respectively; expected dividend yield of 0.0% for all years; expected life of ten years for all years; and expected volatility of 83% and 59%, respectively. Stock options generally expire ten years from the date of grant and fully vest after five years. The outstanding stock options at September 30, 2001 have a weighted average contractual life of approximately four years. Depending on its terms, a plan of reorganization for the Debtors may result in the elimination of all stock options. Due to the Chapter 11 filings, it is unlikely that any of the options granted will be exercised. As such, it is difficult to predict the value, if any, of the options granted during fiscal 2001. In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," we utilize the intrinsic value method of accounting for stock-based compensation and no compensation costs have been recognized for stock option awards described above. Had compensation cost for all option issuances been determined consistent with SFAS No. 123, it would not have had a material impact on our net loss and loss per share for fiscal 2001, 2000 and 1999. 8. COMMITMENTS AND CONTINGENCIES PRODUCT CONTRACTS We have certain long-term agreements, which provide for the dedication of 100% of our production of acetic acid, methanol, plasticizers, sodium cyanide, calcium hypochlorite and DSIDA, each to one customer. We also have various sales and conversion agreements, which dedicate significant portions of our production of styrene and acrylonitrile to various customers. Some of these agreements generally provide for cost recovery plus an agreed margin or element of profit based upon market price. All of the Debtors' contracts and agreements continue in effect in accordance with their terms notwithstanding our Chapter 11 filings, unless otherwise ordered by the Bankruptcy Court. The Bankruptcy Code provides the Debtors with the opportunity to reject any pre-petition contracts or agreements that are burdensome or assume any pre-petition contracts or agreements that are favorable or otherwise necessary to their business operations. LEASE COMMITMENTS We have entered into various long-term operating leases. Future minimum lease commitments at September 30, 2001, are as follows: fiscal 2002 -- $6.9 million; fiscal 2003 -- $6.1 million; fiscal 2004 -- $5.6 million; fiscal 2005 -- $4.6 million; and thereafter -- $8.5 million. All of the Debtors' operating leases continue in effect in accordance with their terms notwithstanding our Chapter 11 filings, unless otherwise ordered by the Bankruptcy Court. The Bankruptcy Code provides the Debtors with the opportunity to reject any pre-petition leases that are burdensome or assume any pre-petition leases that are favorable or otherwise necessary to their business operations. 86 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ENVIRONMENTAL AND SAFETY MATTERS Our operations involve the handling, production, transportation, treatment and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental, health and safety laws, regulations and permit requirements. Environmental permits required for our operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacturing, handling, processing, distribution and use of our chemical products and the raw materials used to produce such products and, if so affected, our business and operations may be materially and adversely affected. In addition, changes in environmental requirements can cause us to incur substantial costs in upgrading or redesigning our facilities and processes, including waste treatment, storage, disposal and other waste handling practices and equipment. We conduct environmental management programs designed to maintain compliance with applicable environmental requirements at all of our facilities. We routinely conduct inspection and surveillance programs designed to detect and respond to leaks or spills of regulated hazardous substances and to correct identified regulatory deficiencies. We believe that our procedures for waste handling are consistent with industry standards and applicable requirements. In addition, we believe that our operations are consistent with good industry practice. We continue to participate in Responsible Care(R)initiatives as a part of our membership in several trade groups which are partner associations in the American Chemistry Council in the United States and the Canadian Chemical Producers Association in Canada. Notwithstanding our efforts and beliefs, a business risk inherent in chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees and nearby landowners and occupants. While we believe our business operations and facilities generally are operated in compliance with all applicable environmental and health and safety requirements in all material respects, we cannot be sure that past practices or future operations will not result in material claims or regulatory action, require material environmental expenditures or result in exposure or injury claims by employees, contractors and their employees and the public. Some risk of environmental costs and liabilities is inherent in our operations and products, as it is with other companies engaged in similar businesses. Our operating expenditures for environmental matters, mostly waste management and compliance, were approximately $34 million for fiscal 2001 and $31 million for fiscal 2000. We also spent approximately $1 million for environmentally related capital projects in both fiscal 2001 and fiscal 2000. In fiscal 2002, we anticipate spending approximately $2 million to $4 million for capital projects related to waste management and environmental compliance. There are no capital expenditures related to remediation of environmental conditions projected for fiscal 2002. The Texas Natural Resource Conservation Commission enacted new regulations requiring significant reductions of nitrogen oxide which apply to our Texas City facility. The TNRCC is also expected to propose similar regulations requiring the reduction of particulate matter which will apply to our Texas City facility. The nitrogen oxide regulations covering the Houston/Galveston Area State Implementation Plan were approved by the United States Environmental Protection Agency on October 15, 2001. Under these regulations, we are required to reduce emissions of nitrogen oxide at our Texas City facility by up to approximately 90%, which we estimate would require Chemicals to make between $25 million and $30 million in capital improvements at our Texas City facilities. The majority of these capital expenditures would be expected in fiscal 2002 through 2005. A significant ban on all chlorine containing compounds could have a materially adverse effect on us. British Columbia has a regulation in place requiring elimination of the use of all chlorine products, including chlorine dioxide, in the bleaching process by the year 2002. The pulp and paper industry believes that a ban of chlorine dioxide in the bleaching process will yield no measurable environmental or public health benefit and 87 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) is working to change this regulation. In April 2001, a new government came into power in British Colombia. This new administration is aware of the issues surrounding this regulation and has agreed to negotiate amendments to the regulation. We are working through the Alliance for Environmental Technology and the Canadian Chemical Producers' Association to provide information to the British Columbia Ministry of Environment to assist with these negotiations. Claims for environmental liabilities arising prior to our Chapter 11 filings will be addressed in the Chapter 11 cases. In general, monetary claims relating to remedial actions at off-site locations used for disposal prior to the Chapter 11 filings and penalties resulting from violations of environmental requirements before that time will be treated as general unsecured claims. Actions by governmental authorities to determine liability for and the amount of such penalties will generally not be subject to the automatic stay. We will be obliged to comply with environmental requirements in the conduct of our business as a debtor-in-possession, including the potential obligation to conduct remedial actions at facilities we own or operate, regardless of when the contamination at those facilities occurred. LEGAL PROCEEDINGS As previously discussed, the Debtors filed petitions for reorganization under Chapter 11 of the Bankruptcy Code on July 16, 2001. As a result of the commencement of the Chapter 11 cases, an automatic stay has been imposed against the commencement or continuation of legal proceedings against the Debtors outside of the Bankruptcy Court. The automatic stay will not apply, however, to governmental authorities exercising their police or regulatory powers, including the application of environmental laws. Claimants against the Debtors may assert their claims in the Chapter 11 cases by filing a timely proof of claim, to which the Debtors may object and seek a determination from the Bankruptcy Court as to the allowability of the claim. Claimants who desire to liquidate their claims in legal proceedings outside of the Bankruptcy Court will be required to obtain relief from the automatic stay by order of the Bankruptcy Court. If such relief is granted, the automatic stay will remain in effect with respect to the collection of liquidated claim amounts. As a general rule, all claims against the Debtors that seek a recovery from assets of the Debtors' estates will be addressed in the Chapter 11 cases and paid only pursuant to the terms of a confirmed plan of reorganization. Ethylbenzene Release On April 1, 1998, a chemical leak occurred when a line failed in the ethylbenzene unit at our Texas City facility. The released chemicals included ethylbenzene, benzene, polyethylbenzene and hydrochloric acid. We do not believe any serious injuries were sustained, although a number of citizens sought medical examinations at local hospitals after a precautionary alert was given to neighboring communities. The seven lawsuits, and an additional three interventions, involve approximately 821 plaintiffs/intervenors who seek an unspecified amount for damages. We believe that all or substantially all of our future out-of-pocket costs and expenses relating to these lawsuits, including settlement payments and judgments, will be covered by our liability insurance policies or indemnification from third parties. We do not believe that the claims and litigation arising out of this incident will have a material adverse effect on our business, financial position, results of operations or cash flows, although we cannot give any assurances to that effect. Unless otherwise ordered by the Bankruptcy Court, all of these claims and litigation are subject to the automatic stay and recoveries (if any) sought thereon from assets of the Debtors will be addressed in the Chapter 11 cases. To date, the Bankruptcy Court has lifted the automatic stay in the cases of Bobbie Adams, et al., James C. Allen, et al. and Nettie Allen, et al. for the sole purpose of allowing the plaintiffs to proceed against our liability insurance policies. Small cash settlements, to be funded by our liability insurance policies, have been negotiated with the plaintiffs in one of the interventions and in the cases of Ida Goldman, et al. and Joe L. Kimble, et al., and have been approved by the Bankruptcy Court. 88 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On June 11, 2001, we received a notice from the U.S. Department of Justice, Environment and Natural Resources Division, in which the Department alleged that on April 1, 1998 an ethylbenzene release at our Texas City facility violated the general duty clause of the Clean Air Act and invited us to engage in settlement discussion with respect to the matter. Although we believe that the April 1, 1998 ethylbenzene release did not constitute a violation of the general duty clause of the Clean Air Act, we have engaged in discussions with the Department in an attempt to settle the matter on consensual basis. However, any alleged liability would constitute a pre-petition claim, and any settlement would require approval by the Bankruptcy Court. We do not believe that this matter will have a material adverse effect on our business, financial position, results of operations or cash flow, although we cannot given any assurances to that effect. Other Claims We are subject to various other claims and legal actions that arise in the ordinary course of its business. Claims and legal actions against the Debtors that existed as of the Chapter 11 filing date are subject to the automatic stay, and recoveries sought thereon from assets of the Debtors will be required to be dealt with in the Chapter 11 cases. LITIGATION CONTINGENCY We have made estimates of the reasonably possible range of liability with regard to our outstanding litigation for which we may incur any liability. These estimates are based on our judgment using currently available information, as well as consultation with our insurance carriers and outside legal counsel. A number of the claims in these litigation matters are covered by our insurance policies or by third party indemnification. Therefore, we have also made estimates of our probable recoveries under insurance policies or from third- party indemnitors based on our judgment, our understanding of our insurance policies and indemnification arrangements, discussions with our insurers and indemnitors and consultation with outside legal counsel. Based on the foregoing, as of September 30, 2001, we had approximately $3.5 million accrued as our estimate of our contingent liability for these matters and have also recorded aggregate receivables from our insurers and third-party indemnitors of approximately $2.5 million. At September 30, 2001, we estimate that the aggregate reasonably possible range of loss for all litigation combined, in addition to the amount accrued, is between zero and $21 million. The timing of probable insurance and indemnity recoveries and payment of liabilities, if any, are not expected to have a material adverse effect on our business, financial position, results of operations or cash flows, although we cannot give any assurances to that effect. While we have based our estimates on our evaluation of available information and the other matters described above, much of the litigation remains in the discovery stage and it is impossible to predict with certainty the ultimate outcome. We will adjust our estimates as necessary as additional information is developed and evaluated. However, we believe that the final resolution of these contingencies will not have a material adverse effect on our business, financial position, results of operations or cash flows, although we cannot give any assurances to that effect. Moreover, such contingencies represent pre-petition claims and, unless otherwise ordered by the Bankruptcy Court, all of these claims are subject to the automatic stay and recoveries (if any) sought thereon from the Debtors will be addressed in the Chapter 11 cases. 9. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION Our operations are divided into two reportable segments: petrochemicals and pulp chemicals. The petrochemicals segment is based in the U.S. and manufactures commodity petrochemicals and acrylic fibers. The pulp chemicals segment is primarily based in Canada and manufactures chemicals for use primarily in the 89 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) pulp and paper industry, and constructs chlorine dioxide generators for use by pulp mills. Operating segment information for 2001, 2000 and 1999 is presented below.
YEAR ENDED SEPTEMBER 30, -------------------------------- 2001 2000 1999 -------- ---------- -------- (DOLLARS IN THOUSANDS) Revenues: Petrochemicals.................................... $515,219 $ 870,130 $533,027 Pulp chemicals.................................... 228,346 226,321 206,525 -------- ---------- -------- Total............................................... $743,565 $1,096,451 $739,552 Operating income (loss): Petrochemicals.................................... $(89,036) $ 5,330 $(63,710) Pulp chemicals.................................... 42,173 34,680 27,018 -------- ---------- -------- Total............................................... $(46,863) $ 40,010 $(36,692) Depreciation and amortization expenses: Petrochemicals.................................... $ 29,199 $ 33,988 $ 34,001 Pulp chemicals.................................... 24,359 25,015 23,676 -------- ---------- -------- Total............................................... $ 53,558 $ 59,003 $ 57,677 Capital expenditures: Petrochemicals.................................... $ 9,829 $ 21,126 $ 21,252 Pulp chemicals.................................... 7,063 7,671 8,288 -------- ---------- -------- Total............................................... $ 16,892 $ 28,797 $ 29,540 Property, plant and equipment, net: Petrochemicals.................................... $137,114 $ 153,853 $223,519 Pulp chemicals.................................... 147,830 164,773 179,204 -------- ---------- -------- Total............................................... $284,944 $ 318,626 $402,723
Sales to individual customers constituting 10% or more of total revenues and export sales were as follows:
YEAR ENDED SEPTEMBER 30, ------------------------------ 2001 2000 1999 -------- -------- -------- (DOLLARS IN THOUSANDS) Major Customers: British Petroleum plc and subsidiaries............. $ 86,360 $125,942 $ 71,803 Export Sales: Export revenues.................................... $181,925 $460,046 $200,448 Percentage of total revenues....................... 24% 42% 27%
10. FINANCIAL INSTRUMENTS FOREIGN EXCHANGES We have previously entered into forward foreign exchange contracts to reduce risk due to Canadian dollar exchange rate movements. The forward foreign exchange contracts had varying maturities with none exceeding 18 months. We made net settlements of United States dollars for Canadian dollars at rates agreed to at inception of the contracts. We do not engage in currency speculation. The last of our existing forward 90 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) exchange contracts expired in March 2000, and we do not intend to enter into any additional forward exchange contracts. GAS HEDGES We hedged a portion of our natural gas to be used in the production of styrene and methanol during fiscal 1999 and we had a net loss of $1.5 million in fiscal 1999 due to such natural gas hedging contracts. During fiscal 2000, fiscal 2001 and at September 30, 2001, there were no outstanding natural gas hedges. ELECTRICITY CONTRACTS Our Canadian subsidiaries periodically enter fixed price agreements for a portion of their electrical energy requirements. We have an agreement relating to the supply of a portion of the electrical energy at one of our Canadian sodium chlorate production facilities. This agreement, which was previously designated as a normal purchase under SFAS No. 133, does not meet the criteria of a normal purchase based on guidance issued by the Derivative Implementation Group (the "DIG") and cleared by the Financial Accounting Standards Board in June 2001. All purchases under this agreement, which expires on December 31, 2001, are used in the ordinary course of business; however, effective July 1, 2001, this agreement is required to be marked-to-market. At September 30, 2001, the value of this agreement was a loss of approximately $1.2 million based on current market prices and quantities to be delivered. INTEREST RATE SWAP We have entered into a declining balance interest rate swap that had, at September 30, 2001, a notional amount of $8.9 million outstanding. Under the swap, we pay a fixed rate of 6.66% and receive a floating rate based on LIBOR. The swap is settled on a quarterly basis, with the interest rate differential received or paid by us recognized as an adjustment to interest expense. This swap was entered into to protect against interest rate volatility; however, it does not meet hedge criteria under SFAS No. 133. Accordingly, the swap is marked-to-market and reflected in the balance sheet as an asset or liability. At September 30, 2001, the swap had an estimated fair value of ($0.2) million. CONCENTRATIONS OF RISK We sell our products primarily to companies involved in the petrochemicals, acrylic fibers and pulp and paper manufacturing industries. We perform ongoing credit evaluations of our customers and generally do not require collateral for accounts receivable. However, letters of credit are required by us on many of our export sales. Historically, our credit losses have been minimal. We maintain cash deposits with major banks, which from time to time may exceed federally insured limits. We periodically assess the financial condition of these institutions and believe that the likelihood of any possible loss is minimal. Approximately 42% of our employees are covered by union agreements. Approximately 23% of our employees are covered by union agreements which could expire within one year. The primary union agreement at our Texas City facility will expire on May 1, 2002. This agreement continues to be in effect notwithstanding our Chapter 11 filing. Under the Bankruptcy Code, the agreement may be assumed or rejected, but any rejection would require that we comply with the special provisions of the Bankruptcy Code related to collective bargaining agreements. We do not currently intend to reject this agreement prior to its expiration date and expect to negotiate with the union concerning the terms of a new agreement to take effect after the expiration date. 91 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INVESTMENTS It is our policy to invest our excess cash in investment instruments or securities whose value is not subject to market fluctuations, such as certificates of deposit, repurchase agreements or Eurodollar deposits with domestic or foreign banks or other financial institutions. Other permitted investments include commercial paper of major United States corporations with ratings of A1 by Standard & Poor's Ratings Group or P1 by Moody's Investor Services, Inc., loan participations of major United States corporations with a short term credit rating of A1/P1 and direct obligations of the United States Government or its agencies. In addition, we will not invest more than $5 million with any single bank, financial institution or United States corporation. As a result of the Chapter 11 filings, the Bankruptcy Court requires excess cash presently held by Holdings to be invested in United States Treasury Bills or as certificates of deposit with Chase Bank, N.A. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reflected in the consolidated balance sheet for cash and cash equivalents, receivables, payables and certain accrued expenses approximate fair value due to the short maturities of these instruments. The following table presents the carrying values and fair values of our long term debt (including current maturities) at September 30, 2001:
CARRYING VALUE FAIR VALUE -------------- ---------- (DOLLARS IN THOUSANDS) DIP Financing............................................... $42,270 $42,270 Canadian Financing Agreement................................ 20,003 20,003 Saskatoon Term Loans........................................ 32,054 32,054
Due to the uncertainty resulting from the Bankruptcy filings discussed in Note 1, it is difficult to estimate the fair value of the Debtors' borrowings and other pre-petition liabilities. Due to the DIP Financing, the Canadian Financing Agreement and the Saskatoon Term Loans having variable interest rates, the fair value approximates their carrying value. At September 30, 2001, our interest rate swap had a fair market value of ($0.2) million, based on our estimate of what we would have to pay to terminate the swap at September 30, 2001. At September 30, 2001, our forward power contract had a fair market value of ($1.2) million, based on our estimate of current energy prices and quantities to be delivered under the contract. 11. RELATED PARTY TRANSACTIONS In May of 1999, we engaged Credit Suisse First Boston Corporation ("CSFB") and Donaldson Lufkin & Jenrette Securities Corporation ("DLJ") as Joint-Book Running Managers in connection with the issuance by Chemicals of the 12 3/8% Notes. CSFB and DLJ also underwrote the Prior Credit Agreement with Tyco Capital, as Administrative Agent. We paid CSFB a total of $5,218,750 under these arrangements in fiscal 1999. John L. Garcia, one of our former directors, was a Managing Director and the Head of the Global Chemical Investment Banking Group of CSFB from 1994 until April of 1999. Since October 1, 1991, we have had ongoing commercial relationships in the ordinary course of business with certain affiliates of Koch Industries, Inc., including agreements for the supply of raw materials, sales of petrochemicals and transportation of natural gas. During our fiscal years ended September 30, 2001, 2000 and 1999: - we made product sales to and purchased raw materials from Koch Chemical and Koch Nitrogren Company, indirect wholly owned subsidiaries of Koch Industries, Inc.; 92 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - we made payments to John Zink Company, an indirect wholly owned subsidiary of Koch Industries, Inc., in consideration for certain contracting and construction services performed at our Texas City facility; and - we made payments to Koch Gateway Pipeline Company for the transportation of natural gas to our acrylic fibers plant through a pipeline in which it is a partner. Each of these relationships represented less than 5% of our revenues in each of such fiscal years. In addition, in 1998 we filed a lawsuit against John Zink Company seeking recovery for certain types of damages sustained in connection with a release of nickel carbonyl from our methanol unit on July 30, 1997. This lawsuit has been voluntarily dismissed but, under a tolling agreement between the parties, may be refiled at any time. In May of 2000, we entered into a new 3 1/2 year ammonia supply agreement with Koch Nitrogen. The new ammonia supply agreement replaced our prior ammonia supply agreement with Koch Nitrogen which was not scheduled to expire until 2002. The new ammonia supply agreement requires us to purchase the same annual quantity of ammonia from Koch Nitrogen but at a revised pricing formula. In connection with the execution of the new ammonia supply agreement, we made a payment to Koch Nitrogen of $1.2 million to settle a dispute under the old ammonia supply agreement and we also made a one-time payment to Koch Nitrogen of $1.8 million in exchange for the revised pricing formula. Koch Capital Services, Inc., an affiliate of Koch Industries, Inc., is one of our significant stockholders and, under the Voting Agreement described below, has the right to designate a member of our Board of Directors. Koch Capital has elected to waive its right to designate a member of our board. The holders of 6,653,583 shares of Holdings Common Stock, representing approximately 52% of our outstanding shares, are parties to a Third Amended and Restated Voting Agreement dated as of February 1, 1999 (the "Voting Agreement"). Three of our directors, Frank P. Diassi, Frank J. Hevrdejs and T. Hunter Nelson, and one of our former directors, William A. McMinn, are parties to the Voting Agreement. Other parties to the Voting Agreement include Koch Capital Services, Inc. (an affiliate of Koch Industries), affiliates of Clipper ("The Clipper Group"), affiliates of Olympus, CSFB and Gordon A. Cain. The parties to the Voting Agreement are required to vote any shares of Holdings Common Stock owned by them in favor of three nominees to the Board of Directors of Holdings, one to be designated by each of Koch Capital Services, Inc., The Clipper Group and Mr. Cain. Rolf H. Towe is the current designee of The Clipper Group. Mr. Cain did not designate a nominee to our Board following the resignation of his prior nominee on October 26, 2000. Koch Capital has elected to waive its right to designate a member of our Board. The rights of each of Koch Capital Services, Inc. and The Clipper Group to designate nominees under the Voting Agreement terminate on the earlier of August 21, 2006 or the time at which they beneficial own less than 5% of the outstanding shares of our Common Stock, respectively. The right of Mr. Cain to designate a nominee terminated on December 15, 2001. As of December 15, 1998, we entered into separate Standby Purchase Agreements with each of Gordon A. Cain, William A. McMinn, James Crane, Frank P. Diassi, Frank J. Hevrdejs and Koch Capital Services, Inc. as described below in Note 12. 12. CAPITAL STOCK In connection with the issuance of the 13 1/2% Notes (see Note 4), Holdings issued 191,751 warrants to purchase three shares of Holdings Common Stock for $0.01, exercisable from August 1998 until August 2008. During fiscal 2000 and 1999, 1,515 and 32,460 shares, respectively, of Holdings Common Stock were issued as a result of 505 and 10,820, respectively, of these warrants being exercised. There were no warrants exercised during fiscal 2001. In connection with the Saskatoon Acquisition, Holdings also issued to holders of the Series B Preferred Stock warrants to purchase 201,048 shares of Holdings Common Stock for $0.01, 93 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) exercisable from July 1997 until December 2007. A plan of reorganization for the Debtors may result in the elimination of all stock interests, including warrants. In December 1998, we entered into separate Standby Purchase Agreements with each of Gordon A. Cain, William A. McMinn, James Crane, Frank P. Diassi, Frank J. Hevrdejs and Koch Capital Services, Inc. Under each of the Standby Purchase Agreements, we had the right to require the purchasers to purchase shares only if we were able to satisfy certain conditions precedent relating to our financial condition, and then only if we believed that the equity infusion was necessary to maintain, reestablish or enhance Chemicals' borrowing rights under its revolving credit facilities or to satisfy any requirement thereunder to raise additional equity. As of September 30, 2001, we were not able to meet the conditions to our ability to draw on the Standby Purchase Agreements, and, on December 15, 2001, they expired in accordance with their terms. At September 30, 2001, warrants to purchase an aggregate of 697,203 shares Holdings Common Stock were outstanding. 13. MANDATORY REDEEMABLE PREFERRED STOCK In connection with the acquisition of our acrylic fibers facility, we authorized 350,000 shares and issued 104,110 shares of non-voting Series A Preferred Stock with a fair value and carrying value of $10.0 million. The Series A Preferred Stock has a cumulative dividend rate of 10%, payable in kind semi-annually on January 1 and July 1 of each year commencing July 1, 1997. However, no dividends will be paid during the pendency of the Chapter 11 cases. Under the terms of the Series A Preferred Stock, we may redeem all or any number of shares of Series A Preferred Stock at any time with proper written notice at a price of $100 per share plus accrued and unpaid dividends. The holders of Series A Preferred Stock may elect to have us redeem shares on any dividend payment date after June 30, 2009, with proper written notice, at a price of $100 per share plus accrued and unpaid dividends. However, no redemptions will occur during the pendency of the Chapter 11 cases. The carrying value of the Series A Preferred Stock at September 30, 2001 and 2000, was $15.8 million and $14.3 million, respectively (liquidation value of $100 per share). A plan of reorganization for the Debtors may result in the elimination of the Series A Preferred Stock for little or no consideration. In connection with the Saskatoon Acquisition, we authorized 58,000 shares and issued approximately 7,532 shares of non-voting Series B Preferred Stock with a fair value of $4.9 million. The Series B Preferred Stock has a 14% dividend rate through July 10, 2002 and thereafter a variable rate between 14% and 18% depending on payment terms until redeemed. The dividend is payable in kind on January 1, April 1, July 1 and October 1 of each year, commencing October 1, 1997. However, no dividends will be paid during the pendency of the Chapter 11 cases. Under the terms of the Series B Preferred Stock, we may redeem all or any number of shares of Series B Preferred Stock at any time with proper written notice at a price of $1,000 per share plus a premium ranging from 5% to 1% depending on the date of redemption plus accrued and unpaid dividends. The holders of Series B Preferred Stock may elect to have us redeem shares on any dividend payment date after June 30, 2009, with proper written notice, at a price of $1,000 per share plus accrued and unpaid dividends. However, no redemptions will occur during the pendency of the Chapter 11 cases. The carrying value of the Series B Preferred Stock at September 30, 2001 and 2000, was $11.5 million and $9.6 million, respectively, based on liquidation value of $1,000 per share, reflecting a reduction in the carrying value of the Series B Preferred Stock in an amount equal to the fair market value of warrants issued to the holders of the Series B Preferred Stock in connection with the financing. The difference in the carrying value and the redemption amount is accreted as a charge to equity over the holding period using the effective interest rate method. A plan of reorganization for the Debtors may result in the elimination of the Series B Preferred Stock for little or no consideration. 94 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. NEW ACCOUNTING STANDARDS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. As of October 1, 2000 the transition adjustment relating to the adoption of these statements was not material. We have an agreement relating to the supply of a portion of the electrical energy at one of our Canadian sodium chlorate production facilities. This agreement, which was previously designated as a normal purchase under SFAS No. 133, does not meet the criteria of a normal purchase based on guidance issued by the DIG and cleared by the Financial Accounting Standards Board in June 2001. All purchases under this agreement, which expires on December 31, 2001, are used in the ordinary course of business; however, effective July 1, 2001, this agreement is required to be marked-to-market. At September 30, 2001, the value of this agreement was a loss of approximately $1.2 million based on current market prices and quantities to be delivered. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method and requires separate identification and recognition of intangible assets, other than goodwill. The statement applies to all business combinations initiated after June 30, 2001. SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001. We do not believe that the adoption of SFAS No. 141 or 142 will have a significant impact on our financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which must be applied to fiscal years beginning after June 15, 2002, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We are in the process of evaluating the impact of SFAS No. 143 on our financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We are currently evaluating the provisions of SFAS No. 144. 95 STERLING CHEMICALS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Except as modified below, the Notes to Holdings' Consolidated Financial Statements are incorporated herein by reference insofar as they relate to Chemicals. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INCOME TAXES Chemicals is included in the consolidated federal tax return filed by its parent, Holdings. A tax sharing agreement between Holdings and Chemicals defines the computation of Chemicals' obligations to Holdings. Chemicals' provision for income taxes is computed as if Chemicals and its subsidiaries file their annual tax return on a separate company basis. Deferred income taxes are recorded to reflect the tax effect of the temporary differences between the financial reporting basis and the tax basis of Chemicals' assets and liabilities at enacted rates. EARNINGS PER SHARE All issued and outstanding shares of Chemicals are held by Holdings and accordingly, earnings per share are not presented. 2. PRE-PETITION LIABILITIES LIABILITIES SUBJECT TO COMPROMISE The principal categories of claims classified as liabilities subject to compromise under reorganization proceedings are identified below. All amounts below may be subject to future adjustment depending on Bankruptcy Court action, further developments with respect to disputed claims or other events, including the reconciliation of claims filed with the Bankruptcy Court to amounts recorded in the accompanying consolidated financial statements. Additional pre-petition claims may arise from rejection of additional executory contracts or unexpired leases by the Debtors. Under a confirmed plan of reorganization, all pre- petition claims subject to compromise may be paid and discharged at amounts substantially less than their allowed amounts. On a combined basis, recorded liabilities subject to compromise under Chapter 11 proceedings as of September 30, 2001, consisted of the following:
(DOLLARS IN THOUSANDS) Accrued litigation.......................................... $ 3,454 Trade accounts payable...................................... 34,486 Accrued interest............................................ 19,201 Debt:(1) 11 1/4% Notes............................................. 149,500 11 3/4% Notes............................................. 268,885 Employee benefits........................................... 64,853 Accrued taxes............................................... 4,811 Other....................................................... 16,502 -------- Total liabilities subject to compromise..................... $561,692 ========
- --------------- (1) Debt liabilities are presented net of unamortized debt issue costs of $6.6 million. As a result of the bankruptcy filing, principal and interest payments may not be made on pre-petition debt without Bankruptcy Court approval or until a plan of reorganization defining the repayment terms has been 96 STERLING CHEMICALS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) confirmed. The total interest on pre-petition debt that was not paid or charged to earnings for the period from July 16, 2001 to September 30, 2001, was $10.2 million. Such interest is not being accrued since management believes it is not probable that it will be treated as an allowed claim. The Bankruptcy Code generally disallows the payment of post-petition interest that accrues with respect to unsecured or undersecured claims. LIABILITIES NOT SUBJECT TO COMPROMISE The principal categories of claims classified as liabilities not subject to compromise under reorganization proceedings are identified below. Management believes all amounts below are fully secured liabilities that are not expected to be compromised. On a combined basis, recorded liabilities not subject to compromise under Chapter 11 proceedings as of September 30, 2001, consisted of the following:
(DOLLARS IN THOUSANDS) 12 3/8% Senior Secured Notes................................ $295,000 Accrued interest on 12 3/8% Senior Secured Notes............ 25,983 Employee benefits........................................... 4,672 -------- Total liabilities not subject to compromise................. $325,655 ========
3. CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY The following condensed combined financial statements are presented in accordance with SOP 90-7: STERLING CHEMICALS, INC. (DEBTOR-IN-POSSESSION) CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2001 ----------------------------------------------------------- ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINED PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS -------------- --------------- ------------ --------- (DOLLARS IN THOUSANDS) Revenues................................... $ 569,519 $175,640 $(1,594) $ 743,565 Cost of goods sold......................... 617,774 141,487 (1,851) 757,410 --------- -------- ------- --------- Gross profit (loss)........................ (48,255) 34,153 257 (13,845) Selling, general and administrative expenses................................. 17,285 6,288 -- 23,573 Other expense.............................. 2,960 -- -- 2,960 Reorganization items....................... 5,422 -- -- 5,422 Interest and debt related expenses, net.... 87,528 5,695 -- 93,223 --------- -------- ------- --------- Income (loss) before income taxes.......... (161,450) 22,170 257 (139,023) Income tax expense (benefit)............... 34,660 8,027 -- 42,687 --------- -------- ------- --------- Net income (loss).......................... $(196,110) $ 14,143 $ 257 $(181,710) ========= ======== ======= =========
97 STERLING CHEMICALS, INC. (DEBTOR-IN-POSSESSION) CONDENSED COMBINED BALANCE SHEETS
SEPTEMBER 30, 2001 ----------------------------------------------------------- ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINED PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS -------------- --------------- ------------ --------- (DOLLARS IN THOUSANDS) ASSETS: Cash and cash equivalents.................. $ 2,604 $ 11,855 $ -- $ 14,459 Accounts receivable, net................... 77,322 26,018 593 103,933 Inventories................................ 37,535 10,844 (61) 48,318 Prepaid expenses........................... 2,318 1,031 -- 3,349 Property, plant and equipment, net......... 181,446 103,498 -- 284,944 Other assets............................... 91,107 26,620 (60,880) 56,847 --------- -------- -------- --------- Total Assets............................. $ 392,332 $179,866 $(60,348) $ 511,850 ========= ======== ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS): Current liabilities........................ $ 73,143 $ 51,780 $(28,502) $ 96,421 Liabilities subject to compromise.......... 561,692 -- -- 561,692 Liabilities not subject to compromise...... 325,655 -- -- 325,655 Long-term debt............................. 42,287 18,797 -- 61,084 Non-current liabilities.................... 9,671 20,909 -- 30,580 Stockholders' equity (deficiency in assets).................................. (620,116) 88,380 (31,846) (563,582) --------- -------- -------- --------- Total Liabilities and Stockholders' Equity (Deficiency in Assets)................... $ 392,332 $179,866 $(60,348) $ 511,850 ========= ======== ======== =========
98 STERLING CHEMICALS, INC. (DEBTOR-IN-POSSESSION) CONDENSED COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 2001 ------------------------------------------- ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINED PROCEEDINGS PROCEEDINGS TOTALS -------------- --------------- -------- (DOLLARS IN THOUSANDS) Net cash provided by (used in) operating activities.... $ (7,236) $16,021 $ 8,785 Cash flows from investing activities: Capital expenditures................................. (10,517) (6,375) (16,892) -------- ------- -------- Net cash used in investing activities.................. (10,517) (6,375) (16,892) -------- ------- -------- Cash flows from financing activities: Proceeds from financing.............................. 42,270 20,003 62,273 Repayments of long-term debt......................... (37,206) (2,850) (40,056) Intercompany loan activity........................... 19,409 (19,409) -- Debt issuance costs.................................. (3,789) (1,112) (4,901) -------- ------- -------- Net cash provided by (used in) financing activities.... 20,684 (3,368) 17,316 Effect of exchange rate changes on cash................ -- (490) (490) -------- ------- -------- Net increase (decrease) in cash and cash equivalents... 2,931 5,788 8,719 Cash and cash equivalents at: Beginning of year.................................... (327) 6,067 5,740 -------- ------- -------- End of year.......................................... $ 2,604 $11,855 $ 14,459 ======== ======= ========
99 STERLING CHEMICALS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. INCOME TAXES A reconciliation of federal statutory income taxes to Chemicals' effective tax provision (benefit) before extraordinary item follows:
YEAR ENDED SEPTEMBER 30, ------------------------------ 2001 2000 1999 -------- -------- -------- (DOLLARS IN THOUSANDS) Benefit for income taxes at statutory rates.......... $(48,658) $(20,750) $(44,235) Taxable foreign dividends............................ 4,423 2,889 4,295 Change in valuation allowance........................ 91,747 23,700 1,514 Non-deductible expenses.............................. (34) 182 195 State and foreign income taxes....................... (94) (1,437) 550 Other................................................ (4,697) (24) 8,271 -------- -------- -------- Effective tax provision (benefit).................... $ 42,687 $ 4,560 $(29,410) ======== ======== ========
The provision (benefit) for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30, --------------------------- 2001 2000 1999 ------- ------ -------- (DOLLARS IN THOUSANDS) Current federal......................................... $ -- $ -- $ 2,246 Deferred federal........................................ 34,659 -- (31,198) Current foreign......................................... 3,290 3,328 -- Deferred foreign........................................ 1,719 (257) (1,300) Provincial and state income taxes....................... 3,019 1,489 842 ------- ------ -------- Total tax provision (benefit)........................... $42,687 $4,560 $(29,410) ======= ====== ========
100 STERLING CHEMICALS, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of Chemicals' deferred income tax assets and liabilities are summarized below:
SEPTEMBER 30, ---------------------- 2001 2000 ---------- --------- (DOLLARS IN THOUSANDS) Deferred tax assets: Accrued liabilities......................................... $ 10,412 $ 11,513 Accrued postretirement cost................................. 13,977 13,638 Tax loss and credit carryforward and other.................. 111,794 58,452 Other....................................................... 17,205 16,275 --------- -------- Total deferred tax assets................................... 153,388 99,878 --------- -------- Deferred tax liabilities: Property, plant and equipment............................... $ (44,752) $(42,018) Other....................................................... (3,653) (4,722) --------- -------- Total deferred tax liabilities.............................. (48,405) (46,740) Valuation allowance......................................... (119,487) (25,214) --------- -------- Net deferred tax assets (liabilities)....................... (14,504) 27,924 Less current deferred tax assets............................ -- (8,470) --------- -------- Long-term deferred tax assets (liabilities)................. $ (14,504) $ 19,454 ========= ========
101 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Sterling Chemicals Holdings, Inc. We have audited the accompanying consolidated balance sheets of Sterling Chemicals Holdings, Inc. and subsidiaries (Debtors-in-Possession) (the "Company") as of September 30, 2001 and 2000 and the related consolidated statements of operations, changes in stockholders' equity (deficiency in assets) and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2001 and 2000 and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2001 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1, on July 16, 2001, the Debtors (as defined in Note 1) filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The accompanying financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do no purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to pre-petition liabilities, the amounts that may be allowed for claims or contingencies or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in the Company's business. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company's recurring losses from operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 1. The financial statements do not include adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Houston, Texas December 20, 2001 102 INDEPENDENT AUDITORS' REPORT To the Stockholder of Sterling Chemicals, Inc. We have audited the accompanying consolidated balance sheets of Sterling Chemicals, Inc. and subsidiaries (Debtors-in-Possession) ("Chemicals") as of September 30, 2001 and 2000 and the related consolidated statements of operations, changes in stockholder's equity (deficiency in assets) and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of Chemicals' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Chemicals as of September 30, 2001 and 2000 and the results of its operations and its cash flows for each of the years in the period ended September 30, 2001 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1, on July 16, 2001, the Debtors (as defined in Note 1) filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The accompanying financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do no purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to pre-petition liabilities, the amounts that may be allowed for claims or contingencies or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of Chemicals; or (d) as to operations, the effect of any changes that may be made in Chemicals' business. The accompanying financial statements have been prepared assuming that Chemicals will continue as a going concern. As discussed in Note 1, Chemicals' recurring losses from operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 1. The financial statements do not include adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Houston, Texas December 20, 2001 103 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, ------------------------------ 2001 2000 1999 -------- -------- -------- (DOLLARS IN THOUSANDS) Revenues.................................................... $241,274 $263,502 $242,916 Cost of goods sold.......................................... 214,013 229,732 208,859 -------- -------- -------- Gross profit................................................ 27,261 33,770 34,057 Selling, general and administrative expenses................ 12,396 24,290 19,280 Impairment of assets........................................ -- 60,000 -- Other expense............................................... 977 -- -- Reorganization items........................................ 1,789 -- -- Interest and debt related expenses, net of interest income(1)................................................. 38,652 43,051 41,743 -------- -------- -------- Loss before income taxes.................................... (26,553) (93,571) (26,966) Equity in earnings of joint venture, net of tax............. (847) (747) (2,549) Provision (benefit) for income taxes........................ 19,575 2,951 (4,530) -------- -------- -------- Net loss.................................................... $(45,281) $(95,775) $(19,887) ======== ======== ========
- --------------- (1) Contractual interest for the year ended September 30, 2001 totaled $45,681. The accompanying notes are an integral part of the combined financial statements. 104 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) COMBINED BALANCE SHEETS
SEPTEMBER 30, ---------------------- 2001 2000 ---------- --------- (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 1,396 $ 499 Accounts receivable, net.................................. 36,372 46,190 Inventories............................................... 18,009 31,252 Prepaid expenses.......................................... 604 301 --------- -------- Total current assets.............................. 56,381 78,242 Property, plant and equipment, net.......................... 116,728 127,667 Due from affiliates......................................... 183,398 165,531 Other assets................................................ 19,121 30,720 --------- -------- Total assets...................................... $ 375,628 $402,160 ========= ======== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS) Current liabilities: Accounts payable.......................................... $ 16,835 $ 20,397 Accrued liabilities....................................... 5,944 24,041 Current portion of long-term debt......................... 1,206 -- --------- -------- Total current liabilities......................... 23,985 44,438 Pre-petition liabilities -- subject to compromise........... 233,572 -- Pre-petition liabilities -- not subject to compromise....... 139,572 -- Long-term debt.............................................. 18,797 351,337 Deferred income taxes....................................... 9,171 8,338 Deferred credits and other liabilities...................... 12,326 11,574 Commitments and contingencies (Note 9)...................... Stockholder's equity (deficiency in assets): Common stock.............................................. -- -- Additional paid-in capital................................ 92,735 92,735 Accumulated deficit....................................... (122,510) (77,229) Accumulated other comprehensive income.................... (32,020) (29,033) --------- -------- Total stockholder's equity (deficiency in assets)......................................... (61,795) (13,527) --------- -------- Total liabilities and stockholder's equity (deficiency in assets).......................... $ 375,628 $402,160 ========= ========
The accompanying notes are an integral part of the combined financial statements. 105 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
RETAINED ADDITIONAL EARNINGS ACCUMULATED OTHER COMMON PAID-IN (ACCUMULATED COMPREHENSIVE STOCK CAPITAL DEFICIT) INCOME TOTAL ------ ---------- ------------ ------------------- -------- (AMOUNTS IN THOUSANDS) Balance, September 30, 1998...... $ -- $92,735 $ 38,433 $(30,813) $100,355 Comprehensive income: Net loss....................... -- -- (19,887) -- Translation adjustment......... -- -- -- 3,313 Comprehensive loss.......... (16,574) ----- ------- --------- -------- -------- Balance, September 30, 1999...... -- 92,735 18,546 (27,500) 83,781 Comprehensive income: Net loss....................... -- -- (95,775) -- Translation adjustment......... -- -- -- (1,533) Comprehensive loss.......... (97,308) ----- ------- --------- -------- -------- Balance, September 30, 2000...... -- 92,735 (77,229) (29,033) (13,527) Net loss....................... -- -- (45,281) -- Pension adjustment............. -- -- -- (52) Translation adjustment......... -- -- -- (2,935) Comprehensive loss.......... (48,268) ----- ------- --------- -------- -------- Balance, September 30, 2001...... $ -- $92,735 $(122,510) $(32,020) $(61,795) ===== ======= ========= ======== ========
The accompanying notes are an integral part of the combined financial statements. 106 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, ------------------------------ 2001 2000 1999 -------- -------- -------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss............................................. $(45,281) $(95,775) $(19,887) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization...................... 17,428 26,050 24,153 Impairment of asset................................ -- 60,000 -- Inventory valuation reserve........................ 6,167 -- -- Deferred tax expense (benefit)..................... 14,610 1,066 206 Other.............................................. (20) 66 (234) Change in assets/liabilities: Accounts receivable................................ 9,818 (950) (6,499) Inventories........................................ 7,076 (2,045) 3,325 Prepaid expenses................................... (303) 1,368 4,421 Due from affiliates................................ (34,631) (9,181) 3,512 Other assets....................................... 8,504 8,673 1,841 Accounts payable................................... 1,453 (2,298) 712 Accrued liabilities................................ 2,539 7,524 238 Other liabilities.................................. 873 4,342 (4,792) -------- -------- -------- Net cash flows provided by (used in) operating activities......................................... (11,767) (1,160) 6,996 -------- -------- -------- Cash flows from investing activities: Capital expenditures............................... (6,247) (7,604) (7,682) Proceeds from sale of assets....................... -- -- 3,583 -------- -------- -------- Net cash used in investing activities................ (6,247) (7,604) (4,099) -------- -------- -------- Cash flows from financing activities: Borrowings under Canadian Financing Agreement...... 20,003 -- -- Net change in long-term debt due to Parent......... -- -- 2,099 Debt issuance costs................................ (1,112) -- -- -------- -------- -------- Net cash provided by financing activities............ 18,891 -- 2,099 -------- -------- -------- Effect of United States/Canadian exchange rate on cash............................................... 20 (60) 234 -------- -------- -------- Net increase (decrease) in cash and cash equivalents........................................ 897 (8,824) 5,230 Cash and cash equivalents -- beginning of year....... 499 9,323 4,093 -------- -------- -------- Cash and cash equivalents -- end of year............. $ 1,396 $ 499 $ 9,323 ======== ======== ======== Supplemental disclosures of cash flow information: Income taxes paid.................................. $ (1,953) $ (696) $ (749)
The accompanying notes are an integral part of the combined financial statements. 107 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS On July 23, 1999, Sterling Chemicals, Inc. ("Chemicals"), a wholly owned subsidiary of Sterling Chemicals Holdings, Inc. ("Holdings"), completed a private offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006. On November 5, 1999, Chemicals completed a registered exchange offer pursuant to which all of these notes were exchanged for publicly registered 12 3/8% Notes with substantially similar terms (the "12 3/8% Notes"). The 12 3/8% Notes are guaranteed by all of Chemicals' existing direct and indirect United States subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) on a joint and several basis and are secured by, among other things, a pledge of 100% of the stock of these subsidiaries. These subsidiaries consist of Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Chemicals Energy, Inc., Sterling Chemicals International, Inc. and Sterling Fibers, Inc. and, together with two Canadian subsidiaries of Sterling Canada, Inc., are collectively referred to as the "Guarantors." The consolidated financial statements of each of these guarantor subsidiaries have been combined to produce the accompanying financial statements. The Guarantors manufacture chemicals for use primarily in the pulp and paper industry at four plants in Canada and a plant in Valdosta, Georgia and manufacture acrylic fibers at a plant in Santa Rosa County, Florida. Sodium chlorate is produced at the four plants in Canada and the Valdosta plant. Sodium chlorite is produced at one of the Canadian locations. The Guarantors also license, engineer and oversee construction of large-scale chlorine dioxide generators, which convert sodium chlorate into chlorine dioxide, for the pulp and paper industry. The Guarantors produce regular textiles, specialty textiles and technical fibers at the Santa Rosa plant, as well as licensing their acrylic fibers manufacturing technology to producers worldwide. On March 8, 2001, the Guarantors' announced their decision to withdraw from the traditional commodity textile business and, thereafter, significantly reduced their operations and staffing at their acrylic fibers plant in Santa Rosa, Florida. The Guarantors continue to produce specialty textile fibers and technical fibers at this facility. CHAPTER 11 PROCEEDINGS The accompanying combined financial statements have been prepared on the going concern basis of accounting, which contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities in the ordinary course of business. On July 16, 2001 (the "Petition Date"), Holdings, Chemicals and all of the Guarantors except for the two Canadian subsidiaries of Sterling Canada, Inc., (collectively the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") in the U.S. Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") and began operating their business as debtors-in-possession pursuant to the Bankruptcy Code. The accompanying combined financial statements have been presented in conformity with the AICPA's Statement of Position 90-7 "Financial Reporting By Entities In Reorganization Under the Bankruptcy Code" ("SOP 90-7"). The statement requires a segregation of liabilities subject to compromise by the Bankruptcy Court as of the Petition Date and identification of all transactions and events that are directly associated with the reorganization of the Debtors. The Chapter 11 petitions were driven by the Debtors' inability to meet their funded debt obligations over the long-term, largely brought about by weak demand for petrochemical products caused by declines in general worldwide economic conditions, the relative strength of the U.S. dollar which has caused their export sales to be at a competitive disadvantage and higher raw material and energy costs. As a result of these conditions, the Debtors have incurred significant operating losses. The reorganization contemplated by the Chapter 11 filings is designed to permit the Debtors to preserve cash and to give the Debtors the opportunity to restructure their debt. During the pendency of the Chapter 11 cases, with approval of the Bankruptcy Court, the Debtors may assume favorable pre-petition contracts and leases, reject unfavorable pre-petition contracts 108 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) and leases and sell or otherwise dispose of assets. The confirmation of a plan of reorganization is the primary objective of the Debtors. Unless otherwise ordered by the Bankruptcy Court, the Debtors have the exclusive right to propose a plan of reorganization until March 13, 2002, and the exclusive right to seek acceptances of any plan proposed by them until May 12, 2002. A plan of reorganization, when filed will set forth the means for treating claims, including liabilities subject to compromise and interests in the Debtors. Such means may take a number of different forms. A plan of reorganization may result in, among other things, significant dilution or elimination of certain classes of existing interests as a result of the issuance of equity securities to creditors or new investors. The Debtors are in the early stages of formulating a plan of reorganization. The confirmation of any plan of reorganization will require creditor acceptance as required under the Bankruptcy Code and approval of the Bankruptcy Court. At this time, it is not possible to predict the outcome of the bankruptcy cases in general, or the effect on the business of the Debtors or the claims of creditors of the Debtors. As a result of the bankruptcy filings, most of the Debtors' liabilities incurred prior to the Petition Date, including certain secured debt, could be subject to compromise. However, the ultimate resolution of these liabilities is not presently determinable. Reorganization items reflected in the Statement of Operations for fiscal 2001 are composed primarily of professional fees directly related to the bankruptcy cases. As a result of the bankruptcy filings and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, confirmation of a plan of reorganization, or disapproval thereof, could change the amounts reported in the financial statements. The ability of the Debtors to continue as a going concern is dependent upon, among other things, (i) the Debtors' ability to comply with the terms of the DIP Financing described below and any related orders entered by the Bankruptcy Court in connection with the Chapter 11 cases, (ii) the ability of the Debtors to access the incremental $40 million in DIP Financing that is dependent on an effective priming order, (iii) the ability of the Debtors to maintain adequate cash on hand, (iv) the ability of the Debtors to generate sufficient cash from operations, (v) the ability of the Debtors' subsidiaries that are not included in the Chapter 11 cases to obtain necessary financing, (vi) confirmation of a plan or plans of reorganization under the Bankruptcy Code and (vii) the Debtors' ability to achieve profitability following such confirmation. As the Debtors can give no assurances that they will accomplish any of the foregoing, there is substantial doubt about the Debtors', and therefore the Guarantors', ability to continue as a going concern. The Guarantors have limited liquidity, which may prove inadequate during their reorganization process. The Debtors are currently funding their liquidity needs out of operating cash flow and from borrowings under the DIP Financing. The DIP Financing is limited in amount and is also subject to numerous funding conditions which are largely beyond the control of the Debtors, including borrowing base requirements and compliance with the EBITDA covenant contained in the DIP Financing. The ability of the Debtors to obtain additional financing during the reorganization process is severely limited by a variety of factors, including the debt incurrence restrictions imposed by the DIP Financing, numerous procedural requirements and uncertainties relating to the bankruptcy proceedings, including any continuing challenge to the priming order, and the Debtors' current financial condition and prospects. Accordingly, no assurances can be given that the Debtors' existing sources of liquidity will be adequate to fund their liquidity needs throughout the reorganization process or, if additional sources of liquidity become necessary during the reorganization process, that they would be available to the Debtors or adequate. Any liquidity shortages during the reorganization process would likely have a material adverse effect on the Debtors' business and financial condition as well as their ability to successfully restructure and emerge from bankruptcy. See Note 5 for additional information regarding the status of the challenge to the priming order and the impact on our business. 109 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The accompanying financial statements do not include any adjustments that may result from the resolution of these uncertainties. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies of the Guarantors are described below. PRINCIPLES OF COMBINATION The combined financial statements include the accounts of all wholly owned and majority-owned subsidiaries of the combined entities. All significant intercompany accounts and transactions among entities included in the combined financial statements have been eliminated. The Guarantors' investment in a cogeneration joint venture in which the Guarantors have a fifty percent interest is accounted for under the equity method. CASH EQUIVALENTS The Guarantors consider all investments with a remaining maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Cost is primarily determined on the first-in, first-out basis, except for stores and supplies which are valued at average cost. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Major renewals and improvements, which extend the useful lives of equipment, are capitalized. Major planned maintenance expenses are accrued for during the periods prior to the maintenance, while routine repair and maintenance expenses are charged to operations as incurred. Disposals are removed at carrying cost less accumulated depreciation with any resulting gain or loss reflected in operations. Depreciation is provided using the straight-line method over estimated useful lives ranging from 5 to 25 years, with the predominant life of the plant and equipment being 15 years. IMPAIRMENT OF LONG-LIVED ASSETS Impairment tests of long-lived assets are made when conditions indicate their carrying cost may not be recoverable. Such impairment tests are based on a comparison of undiscounted future cash flows or the market value of similar assets to the carrying cost of the asset. If an impairment is indicated, the asset value is written down to its estimated fair value. During fiscal 2000, the Guarantors incurred an impairment loss of $60.0 million related to their acrylic fibers business. PATENTS AND ROYALTIES The costs of patents are amortized on a straight-line basis over their estimated useful lives, which approximate ten years. The Guarantors capitalized the value of their chlorine dioxide generator technology acquired in fiscal 1992 based on the net present value of all estimated remaining royalty payments associated with this technology. The resulting intangible amount is included in other assets and is amortized over an average life for these royalty payments of ten years. 110 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES The Guarantors are included in the consolidated United States federal income tax returns filed by Holdings. The Guarantors' provision (benefit) for United States income taxes has been allocated by Holdings as if the Guarantors filed their annual tax returns on a separate return basis. The Guarantors' Canadian subsidiaries file separate federal Canadian tax returns, as well as returns in the provinces in which they operate. Deferred income taxes are recorded to reflect the tax effect of the temporary differences between the financial reporting basis and the tax basis of the Guarantors' assets and liabilities. REVENUE RECOGNITION The Guarantors generate revenues through sales in the open market and long-term supply contracts and recognize these revenues as the products are shipped. Deferred credits are amortized over the life of the contracts which gave rise to them. The Guarantors also generate revenues from the construction and sale of chlorine dioxide generators, which are recognized using the percentage of completion method. The Guarantors also receive prepaid royalties, which are typically recognized over a period of ten years. In addition, the Guarantors generate revenues from the sale of acrylic fibers manufacturing technology to producers worldwide, which are recognized as earned. The Guarantors classify shipping and handling costs associated with product delivered to customers as costs of goods sold. FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE The Canadian companies included in the combined financial statements of the Guarantors use the Canadian dollar as the functional currency. For financial reporting purposes, assets and liabilities of these companies denominated in Canadian dollars are translated into United States dollars at year-end exchange rates and revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are included in accumulated other comprehensive income, while transaction gains and losses are included in operations when incurred. EARNINGS PER SHARE All issued and outstanding shares of the entities included in Guarantors' financial statements are held directly or indirectly by Chemicals and Holdings and, accordingly, earnings per share information is not presented. ENVIRONMENTAL COSTS Environmental costs are expensed as incurred unless the expenditures extend the economic useful life of the relevant assets. Costs that extend the economic life of assets are capitalized and depreciated over the remaining life of those assets. Liabilities are recorded when environmental assessments or remedial efforts are probable and the cost can be reasonably estimated. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In preparing disclosures about the fair value of financial instruments, the Guarantors have assumed that the carrying amount approximates fair value for cash and cash equivalents, receivables, accounts payable and certain accrued expenses due to the short maturities of those instruments. The fair values of long-term debt instruments allocated to the Guarantors by Chemicals are estimated based upon quoted market values (if applicable) or on the current interest rates available for debt with similar terms and remaining maturities. The fair value of pre-petition liabilities subject to compromise and pre-petition liabilities not subject to compromise is not possible to determine given the uncertainty of the impact of the bankruptcy proceedings. 111 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Considerable judgment is required in developing these estimates and, accordingly, no assurance can be given that the estimated values presented herein are indicative of the amounts that would be realized in a free market exchange. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Significant estimates include environmental reserves, litigation contingencies and taxes. Actual results could differ from these estimates. ALLOCATIONS The Guarantors are directly or indirectly wholly owned by Chemicals, which incurs certain direct and indirect expenses for the benefit and support of the Guarantors. These services include, among others, tax planning, treasury, legal, risk management and the maintenance of insurance coverage for the Guarantors. Chemicals allocated $2.9 million, $4.9 million and $3.5 million of such expenses to the Guarantors in fiscal years 2001, 2000 and 1999, respectively, which are included in selling, general and administrative expenses. Additionally, Chemicals allocated $1.0 million of other expense and $1.8 million of reorganization items during fiscal 2001. Allocations are based on the Guarantors' proportionate share of the respective amounts and are determined using various criteria including headcount, payroll, number of vehicles, amount of pre-petition liabilities and revenue. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities," establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Guarantors adopted these statements as of October 1, 2000. The transition adjustment relating to the adoption of these statements was not material. The Guarantors have an agreement relating to the supply of a portion of the electrical energy at one of their Canadian sodium chlorate production facilities. This agreement, which was previously designated as a normal purchase under SFAS No. 133, does not meet the criteria of a normal purchase based on guidance issued by the Derivative Implementation Group (the "DIG") and cleared by the Financial Accounting Standards Board in June 2001. All purchases under this agreement, which expires on December 31, 2001, are used in the ordinary course of business; however, effective July 1, 2001, this agreement is required to be marked-to-market. At September 30, 2001, the value of this agreement was a loss of approximately $1.2 million based on current market prices and quantities to be delivered. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method and further requires separate identification and recognition of intangible assets, other than goodwill. The statement applies to all business combinations initiated after June 30, 2001. SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but shall be tested 112 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001. The Guarantors do not believe that the adoption of SFAS No. 141 or 142 will have a significant impact on their financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which must be applied to fiscal years beginning after June 15, 2002, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Guarantors are in the process of evaluating the impact of SFAS No. 143 on their financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Guarantors are currently evaluating the provisions of SFAS No. 144. RECLASSIFICATION Certain amounts reported in the financial statements for prior periods have been reclassified to conform with the current financial statement presentation with no effect on net loss or stockholder's equity (deficiency in assets). 113 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
SEPTEMBER 30, ----------------------- 2001 2000 ---------- ---------- (DOLLARS IN THOUSANDS) Inventories: Finished products......................................... $ 11,308 $ 20,119 Raw materials............................................. 1,634 2,222 --------- --------- Inventories at cost......................................... 12,942 22,341 Inventories under exchange agreements..................... 80 277 Stores and supplies....................................... 4,987 8,634 --------- --------- $ 18,009 $ 31,252 ========= ========= Property, plant and equipment: Land...................................................... $ 2,705 $ 2,773 Buildings................................................. 35,004 35,442 Plant and equipment....................................... 246,719 244,364 Construction in progress.................................. 1,271 2,170 --------- --------- Property, plant and equipment at cost..................... 285,699 284,749 Less: accumulated depreciation............................ (168,971) (157,082) --------- --------- $ 116,728 $ 127,667 ========= ========= Other assets: Patents and technology, net............................... $ 8,793 $ 14,790 Other..................................................... 10,328 15,930 --------- --------- $ 19,121 $ 30,720 ========= ========= Accrued liabilities: Accrued compensation...................................... $ 614 $ 5,048 Accrued interest.......................................... 136 6,559 Other..................................................... 5,194 12,434 --------- --------- $ 5,944 $ 24,041 ========= =========
4. PRE-PETITION LIABILITIES LIABILITIES SUBJECT TO COMPROMISE The principal categories of claims classified as liabilities subject to compromise under reorganization proceedings are identified below. All amounts below may be subject to future adjustment depending on Bankruptcy Court action, further developments with respect to disputed claims or other events, including the reconciliation of claims filed with the bankruptcy court to amounts recorded in the accompanying consolidated financial statements. Additional pre-petition claims may arise from rejection of additional executory contracts or unexpired leases by the Debtors. Under a confirmed plan of reorganization, all pre-petition claims subject to compromise may be paid and discharged at amounts substantially less than their allowed amounts. 114 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Recorded liabilities subject to compromise under Chapter 11 proceedings as of September 30, 2001, consisted of the following:
(DOLLARS IN THOUSANDS) Trade accounts payable...................................... $ 5,015 Accrued interest............................................ 8,538 Allocated Debt from Parent(1) 11 1/4% Notes............................................. 72,415 11 3/4% Notes............................................. 146,932 Accrued taxes............................................... 493 Other....................................................... 179 -------- Total liabilities subject to compromise..................... $233,572 ========
- --------------- (1) Debt liabilities are presented net of allocated unamortized debt issue costs of $4.0 million. As a result of the bankruptcy filing, principal and interest payments may not be made on pre-petition debt without Bankruptcy Court approval or until a plan of reorganization defining the repayment terms has been confirmed. The total interest on pre-petition debt that was not paid or charged to earnings for the period from July 16, 2001 to September 30, 2001, was $7.0 million. Such interest is not being accrued since management believes it is not probable that it will be treated as an allowed claim. The Bankruptcy Code generally disallows the payment of interest that accrues postpetition with respect to unsecured or undersecured claims. LIABILITIES NOT SUBJECT TO COMPROMISE The principal categories of claims classified as liabilities not subject to compromise under reorganization proceedings are identified below. The Guarantors believe all amounts below are fully secured liabilities that are not expected to be compromised. Recorded liabilities not subject to compromise under Chapter 11 proceedings as of September 30, 2001, consisted of the following:
(DOLLARS IN THOUSANDS) Allocated 12 3/8% Senior Secured Notes from Parent.......... $128,025 Accrued interest on 12 3/8% Senior Secured Notes............ 11,310 Other....................................................... 237 -------- Total liabilities not subject to compromise................. $139,572 ========
5. LONG-TERM DEBT This note contains information regarding debt of the Guarantors as of September 30, 2001. As a result of the filing of the Chapter 11 cases previously described, no payments will be made by the Debtors on pre-petition debt except as approved by the Bankruptcy Court. Upon the filing of the Chapter 11 cases by the Debtors, an Event of Default occurred under the Prior Credit Agreement (as defined below) and each of the indentures governing outstanding notes of Chemicals and Holdings and all of this indebtedness was accelerated and became immediately due and payable. The Prior Revolvers (as defined below) were completely paid off with the proceeds of the initial draw under the DIP Financing. However, the Debtors may pay the indebtedness under the indentures only pursuant to a confirmed plan of reorganization or order of the Bankruptcy Court. During the pendency of the Chapter 11 115 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) cases, the Debtors will not, for the most part, be subject to the restrictions contained in the Prior Credit Agreement (as defined below) or any of the indentures. However, the Debtors and the Guarantors will be subject to the restrictions contained in the DIP Financing and Sterling Pulp Chemicals, Ltd. ("Sterling Pulp"), one of the Canadian companies included in the combined financial statements of the Guarantors, will be subject to the restrictions contained in the Canadian Financing Agreement (as defined below). Effective July 19, 2001, the Debtors (excluding Holdings) entered into a Revolving Credit Agreement with a group of lenders led by Tyco Capital (formerly The CIT Group/Business Credit, Inc.) to provide up to $195 million in Debtor-In-Possession financing (the "DIP Financing"). By interim order dated July 18, 2001 and final order dated September 14, 2001, the Bankruptcy Court approved up to $155 million in lending commitments under the DIP Financing (the "Base Facility"), consisting of an $85 million "current assets revolver" and a $70 million "fixed assets revolver." The initial draw under the DIP Financing was used to repay all amounts outstanding under the Debtors' previous revolving credit facilities. Additional borrowings under the DIP Financing may be used to fund the Debtors' post-petition operating expenses and supplier and employee obligations throughout the reorganization process. The final order dated September 14, 2001 is on appeal to the U.S. District Court, but no stay of the final order has been sought or imposed, and the order remains fully effective. While no assurances can be given, we do not believe the final order will be overturned on appeal. Borrowings under the DIP Financing are subject to customary funding conditions, including borrowing base restrictions under the current assets revolver. The Base Facility is secured by substantially all of the assets of the Debtors, but some of the liens have been granted super-priority administrative expense claims for the amount of the DIP Financing which, subject to certain carve outs, will entitle the DIP lenders to be paid before any other claims against the Debtors are paid. The DIP Financing is designed to give the Debtors the opportunity, during the reorganization process, to develop a new capital structure that will support them over the long-term, including during recurring cyclical downturns in the markets for the Debtors' petrochemicals products. At September 30, 2001, the total credit available under the DIP Financing was $112.8 million due to borrowing base restrictions under the current assets revolver. At September 30, 2001, $42.3 million was drawn under the fixed assets revolver and there were no borrowings outstanding under the current assets revolver. In addition, approximately $4.4 million of letters of credit were outstanding under the current assets revolver, leaving at September 30, 2001, unused borrowing capacity under the secured revolving credit facilities of approximately $66.1 million. As a result of a priming order entered by the Bankruptcy Court on November 2, 2001 and reinstated on December 19, 2001, the lending commitments under the current assets revolver were increased from $85 million to $125 million. The priming order grants the lenders under the currents assets revolver a priming lien on Chemicals' fixed assets located in the United States and the capital stock of most of Chemicals' domestic subsidiaries, prior in right to the existing liens in favor of the 12 3/8% Notes. Although the priming order was entered by the Bankruptcy Court on November 2, 2001, it was appealed to the U.S. District Court by the indenture trustee for the 12 3/8% Notes. By order dated December 17, 2001, the U.S. District Court reversed the priming order and remanded the matter to the Bankruptcy Court for a determination of a compensatory adjustment in favor of the 12 3/8% Notes, which the U.S. District Court suggested would be satisfied by a 4% increase of the interest rate payable on up to $40 million. On remand, the Bankruptcy Court entered an order dated December 19, 2001, reinstating the priming order subject to an appropriate compensatory adjustment in favor of the 12 3/8% Notes of four percentage points of additional interest on up to $40 million. In addition, the Bankruptcy Court scheduled a hearing for January 2, 2002 to determine certain technical details regarding implementation of this 4% increase. The Debtors anticipate that the priming order will be further appealed by the indenture trustee. The priming order will remain effective pending the outcome of any appeal unless stayed by an appellate court. The Debtors will take all reasonable actions necessary, either before the Bankruptcy Court or on appeal, to maintain the effectiveness of the priming order and the 116 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) additional liquidity provided by the priming order. If the priming order is stayed or is not ultimately upheld on appeal, the Debtors will need to seek additional sources of financing or revise their business plan and operations consistent with the level of available financing. However, we can give no assurances that the priming order will not be stayed or will be upheld on appeal or, if stayed or not upheld on appeal, that additional sources of financing will be available or adequate or that our available financing will be adequate after implementing revisions to the Debtors' business plan and operations. As of July 11, 2001, Sterling Pulp entered into a financing agreement with Tyco Capital Business Credit (Canada) Inc. ("Tyco Canada") to provide up to the Canadian dollar equivalent of U.S. $30 million (the "Canadian Financing Agreement"). The initial advance under this facility, approximately U.S. $20 million, was used by Sterling Pulp to discharge a portion of an intercompany debt and was ultimately transferred to the Debtors through an intercompany loan. The intercompany loan was approved by the Bankruptcy Court's interim order entered on July 18, 2001 and final order entered on September 14, 2001, which is a subject of the appeal of the final order discussed above. The initial term of the Canadian Financing Agreement extends to July 2004. The Canadian Financing Agreement may be terminated by either Sterling Pulp or Tyco Canada thereafter only by giving 60 days written notice of termination prior to each subsequent anniversary date. At September 30, 2001, $20 million was drawn under the Canadian Financing Agreement. Under the DIP Financing, the Debtors (excluding Holdings) are co-borrowers and are jointly and severally liable for any indebtedness thereunder. The Base Facility consists of: - a $70 million fixed assets revolving credit facility secured by: - first priority liens on all of the capital stock of Chemicals and the other co-borrowers, all of Chemicals' United States production facilities and related assets and 35% of the capital stock of certain of Chemicals' subsidiaries incorporated outside the United States; and - second priority liens on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers and 65% of the capital stock of certain of Chemicals' subsidiaries incorporated outside the United States; and - an $85 million current assets revolving credit facility secured by: - a first priority lien on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers; - a second priority lien on 35% of the capital stock of certain of Chemicals' subsidiaries incorporated outside the United States; and - third priority liens on the remaining 65% of that stock, all of the capital stock of Chemicals and the other co-borrowers and all of Chemicals' United States production facilities and related assets. Available credit under the fixed assets revolving credit facility is not subject to a borrowing base. At September 30, 2001, available credit under the current assets revolving credit facility was subject to a monthly borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory, with an inventory cap of $42.5 million. In addition, the borrowing base for the current assets revolver was required to exceed outstanding borrowings thereunder by $12 million at all times with a maximum of $85 million available under the current asset revolving credit facility. Assuming the priming order is not overturned on appeal, (i) maximum availability under the current assets revolving credit facility is $125 million, (ii) the monthly borrowing base consists of 85% of eligible accounts receivable, the lesser of $10 million or 33% of specified estimated future royalty payments related to the Debtors' chlorine dioxide generator technology and 65% of eligible inventory, with an inventory cap of 117 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) $62.5 million, and (iii) the borrowing base for the current assets revolver is required to exceed outstanding borrowing by only $6 million at all times. If the priming order remains effective and the total commitments under the current assets revolver are increased to $125 million, the incremental $40 million is secured by first priority liens on all of our United States production facilities and related assets and all of the capital stock of the co-borrowers (excluding Chemicals) to secure up to $40 million under the current assets revolver, as well as all of the same collateral securing the initial $85 million current assets revolver. Consequently, after giving effect to the priming order, the DIP Financing consists of: - a $70 million fixed assets revolving credit facility secured by: - a first priority lien on all of the capital stock of Chemicals; - second priority liens on all of Chemicals' United States production facilities and related assets, all of the capital stock of the co-borrowers (excluding Chemicals), all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers and 35% of the capital stock of certain of Chemicals' subsidiaries incorporated outside the United States; and - a third priority lien on the remaining 65% of that stock; and - a $125 million current assets revolving credit facility: - $40 million of which is secured by first priority liens on all of Chemicals' United States production facilities and related assets, all of the capital stock of the co-borrowers (excluding Chemicals) and 35% of the capital stock of certain of Chemicals' subsidiaries incorporated outside the United States and a second priority lien on the remaining 65% of that stock; and - all of which is secured by a first priority lien on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers, third priority liens on all of the capital stock of Chemicals and 35% of the capital stock of certain of Chemicals' subsidiaries incorporated outside the United States and fourth priority liens on the remaining 65% of that stock, all of the capital stock of the co-borrowers (excluding Chemicals) and all of Chemicals' United States production facilities and related assets. Borrowings under the fixed assets revolving credit facility bear interest, at Chemicals' option, at an annual rate of either the "LIBOR Rate" (as defined in the DIP Financing) plus 3.75% or the "Alternate Base Rate" (as defined in the DIP Financing) plus 2.25%. Borrowings under the current assets revolving credit facility bear interest, at Chemicals' option, at an annual rate of either the LIBOR Rate plus 3.50% or the Alternate Base Rate plus 2.00%. At September 30, 2001, the weighted average interest rate in effect was 7.2%. The DIP Financing also requires Chemicals and the co-borrowers to pay an aggregate commitment fee ranging from 0.75% to 1.25% on the unused portion of the commitment for the fixed assets revolving credit facility, depending on the amount drawn, and an aggregate commitment fee of 0.5% on the unused portion of the commitment for the current assets revolving credit facility. At September 30, 2001, the total credit available under the DIP Financing was $112.8 million due to current assets revolver borrowing base limitations discussed above. At September 30, 2001, $42.3 million was drawn under the fixed assets revolver and there were no borrowings outstanding under the current assets revolver. In addition, approximately $4.4 million of letters of credit were outstanding under the current assets revolver, leaving at September 30, 2001, unused borrowing capacity under the secured revolving credit facilities of approximately $66.1 million. None of these borrowings were allocated to the Guarantors. 118 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) At September 30, 2001, $20 million was drawn under the Canadian Financing Agreement. Borrowings under the Canadian Financing Agreement bear interest at the CIBC Bank Rate (as defined in the Canadian Financing Agreement) plus between 2.0% and 2.5%, or at the LIBOR Rate plus 3.5%. The DIP Financing and the Canadian Financing Agreement contain numerous covenants, including, but not limited to, restrictions on the Debtors' ability to incur indebtedness, create liens and sell assets, as well as maintenance of certain financial covenants. In August of 1996, in connection with a recapitalization transaction, Chemicals allocated $276.8 million of debt to the Guarantors. In addition, $81 million of debt incurred at the time Chemicals acquired its acrylic fibers business was allocated to the Guarantors. Principal payments are allocated to the Guarantors by Chemicals as scheduled principal payments are made on a basis consistent with the original allocation. In addition, the Guarantors have made payments to Chemicals, from time to time, out of available cash which were applied by Chemicals as a reduction of the principal of the previously allocated debt. Interest expense is allocated to the Guarantors based on the terms of Chemicals' debt agreements. At September 30, 2001, interest rates on the allocated debt ranged from 11.25% to 12.375%. Debt issue costs relating to allocated long-term debt have been allocated to the Guarantors by Chemicals on a basis consistent with long-term debt and are included as a valuation against pre-petition liabilities -- subject to compromise. On July 23, 1999, Chemicals completed a private offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006 which were subsequently exchanged for the 12 3/8% Notes. The proceeds of the offering of the 12 3/8% Notes were used to fully repay and terminate Chemicals' three outstanding term loans. Upon consummation of the offering of the 12 3/8% Notes in 1999, the debt allocated to the Guarantors by Chemicals increased to $351.3 million. The 12 3/8% Notes are guaranteed by all of the Guarantors (other than the two Canadian subsidiaries of Sterling Canada, Inc.) on a joint and several basis. Each guarantee ranks equally in right of payment with all of the relevant Guarantor's existing and future senior indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness. However, the 12 3/8% Notes and the guarantees are subordinated to the extent of the collateral securing the DIP Financing. Prior to the entry by the Bankruptcy Court of the priming order, the 12 3/8% Notes and the guarantees were secured by; - a second priority lien on all of Chemicals' and the Guarantors' United States production facilities and related assets; - a second priority pledge of all of the capital stock of each Guarantor incorporated in the United States; and - a first priority pledge of 65% of the stock of the Guarantors' subsidiaries incorporated outside of the United States. As a result of the priming order, the second priority liens held by the 12 3/8% Notes on all of the Guarantors' United States production facilities and related assets and the capital stock of each Guarantor became third priority liens. The priming order did not affect the priority of the pledge held by the 12 3/8% notes of 65% of the stock of certain of the Guarantors' subsidiaries incorporated outside of the United States. On July 23, 1999, Chemicals also established two secured revolving credit facilities providing for up to $155,000,000 in revolving credit loans (the "Prior Revolvers") under a single Revolving Credit Agreement (the "Prior Credit Agreement"). Under the Prior Credit Agreement, Chemicals and the Guarantors (other than the two Canadian subsidiaries of Sterling Canada, Inc.) were co-borrowers and were jointly and severally liable for any indebtedness thereunder. The Prior Revolvers consisted of (i) an $85,000,000 revolving credit facility secured by a first priority lien on all accounts receivable, inventory and other specified assets of 119 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Chemicals and the Guarantors incorporated in the United States and (ii) a $70,000,000 revolving credit facility secured by a first priority lien on all United States production facilities and related assets of Chemicals and the Guarantors incorporated in the United States, all of the capital stock of Chemicals and the Guarantors incorporated in the United States and a second priority lien on all accounts receivable, inventory and other specified assets of Chemicals and the Guarantors incorporated in the United States. At September 30, 2000, approximately $37.2 million was drawn by Chemicals under the Prior Revolvers, none of which was allocated to the Guarantors. As mentioned above, the initial draw under the DIP Financing was used to repay all amounts under the Prior Revolvers. 6. CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY The following condensed combined financial statements are presented in accordance with SOP 90-7: STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2001 ---------------------------------------------------------- ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINED PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS -------------- --------------- ------------ -------- (DOLLARS IN THOUSANDS) Revenues.................................... $109,879 $134,989 $(3,594) $241,274 Cost of goods sold.......................... 105,005 112,602 (3,594) 214,013 -------- -------- ------- -------- Gross profit (loss)......................... 4,874 22,387 -- 27,261 Selling, general and administrative expenses.................................. 6,434 5,962 -- 12,396 Other expense............................... 977 -- -- 977 Reorganization items........................ 1,789 -- -- 1,789 Interest and debt related expenses, net..... 38,291 361 -- 38,652 -------- -------- ------- -------- Income (loss) before income taxes........... (42,617) 16,064 -- (26,553) Equity in earnings of joint venture, net of tax....................................... (847) -- -- (847) Income tax expense (benefit)................ 14,600 4,975 -- 19,575 -------- -------- ------- -------- Net income (loss)........................... $(56,370) $ 11,089 $ -- $(45,281) ======== ======== ======= ========
120 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) CONDENSED COMBINED BALANCE SHEETS
SEPTEMBER 30, 2001 ----------------------------------------------------------------- ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION PROCEEDINGS PROCEEDINGS ELIMINATIONS COMBINED TOTALS -------------- --------------- ------------ --------------- (DOLLARS IN THOUSANDS) ASSETS: Cash and cash equivalents.............. $ 1,382 $ 14 $ -- $ 1,396 Accounts receivable, net............... 17,092 22,359 (3,079) 36,372 Inventories............................ 10,575 7,434 -- 18,009 Prepaid expenses....................... -- 604 -- 604 Property, plant and equipment, net..... 53,967 62,761 -- 116,728 Other assets........................... 199,717 22,211 (19,409) 202,519 --------- -------- --------- -------- Total Assets......................... $ 282,733 $115,383 $ (22,488) $375,628 ========= ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) Current liabilities.................... $ 9,422 $ 17,642 $ (3,079) $ 23,985 Liabilities subject to compromise...... 233,572 -- -- 233,572 Liabilities not subject to compromise........................... 139,572 -- -- 139,572 Long-term debt......................... 19,409 18,797 (19,409) 18,797 Non-current liabilities................ 8,144 13,353 -- 21,497 Stockholders' Equity (deficiency in assets).............................. (127,386) 65,591 -- (61,795) --------- -------- --------- -------- Total Liabilities and Stockholders' Equity (Deficiency in Assets)........ $ 282,733 $115,383 $ (22,488) $375,628 ========= ======== ========= ========
121 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 2001 ------------------------------------------- ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINED PROCEEDINGS PROCEEDINGS TOTALS -------------- --------------- -------- (DOLLARS IN THOUSANDS) Net cash provided by (used in) operating activities.... $(24,084) $ 12,317 $(11,767) Cash flows from investing activities: Capital expenditures................................. (1,120) (5,127) (6,247) Intercompany investors activity...................... 6,764 (6,764) -- -------- -------- -------- Net cash used in investing activities.................. 5,644 (11,891) (6,247) Cash flows from financing activities: Borrowings under Canadian Financing Agreement........ -- 20,003 20,003 Debt issuance costs.................................. -- (1,112) (1,112) Intercompany loan activity........................... 19,409 (19,409) -- -------- -------- -------- Net cash provided by financing activities.............. 19,409 (518) 18,891 -------- -------- -------- Effect of exchange rate changes on cash................ -- 20 20 -------- -------- -------- Net increase (decrease) in cash and cash equivalents... 969 (72) 897 Cash and cash equivalents at: Beginning of year.................................... 413 86 499 -------- -------- -------- End of year.......................................... $ 1,382 $ 14 $ 1,396 ======== ======== ========
122 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS 7. INCOME TAXES The Guarantors are included in the consolidated federal United States tax return filed by Holdings. The Guarantors' provision (benefit) for United States income taxes has been allocated as if the Guarantors filed their annual federal United States tax returns on a separate return basis. As of September 30, 2001 and 2000, zero and $14.6 million, respectively, of deferred income tax assets were included in Due from Affiliates. For the years ended September 30, 2001, 2000 and 1999, the Guarantors recorded $14.6 million, zero, and ($4.0) million, respectively, of United States income tax expense (benefit) in the provision (benefit) for income taxes. Canadian deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and the financial reporting amounts at each year-end. A reconciliation of the Canadian income taxes to the Canadian effective tax provision follows:
YEAR ENDED SEPTEMBER 30, ------------------------- 2001 2000 1999 ------- ------- ----- (DOLLARS IN THOUSANDS) Provision for federal income tax at the statutory rate...... $3,713 $2,308 $259 Provincial income taxes at the statutory rate............... 2,072 1,114 88 Federal and provincial manufacturing and processing tax credits................................................... (810) (477) (50) Other....................................................... -- -- 16 ------ ------ ---- Total Canadian tax provision................................ $4,975 $2,945 $313 ====== ====== ====
The provision for Canadian income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30, -------------------------- 2001 2000 1999 ------ ------- ------- (DOLLARS IN THOUSANDS) Current federal.......................................... $2,898 $ 3,328 $ 2,098 Deferred federal......................................... 5 (1,380) (1,859) Current provincial....................................... 2,067 1,702 619 Deferred provincial...................................... 5 (705) (545) ------ ------- ------- Total Canadian tax provision............................. $4,975 $ 2,945 $ 313 ====== ======= =======
123 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The components of the Guarantors' Canadian deferred income tax assets and liabilities are summarized below:
SEPTEMBER 30, ----------------------- 2001 2000 ---------- ---------- (DOLLARS IN THOUSANDS) Deferred tax assets: Accrued liabilities....................................... $ 452 $ 249 Accrued postretirement cost............................... 1,522 1,339 Investment tax credits.................................... 115 1,408 -------- -------- 2,089 2,996 -------- -------- Deferred tax liabilities: Property, plant and equipment............................. (11,260) (11,334) -------- -------- Net deferred tax liabilities................................ $ (9,171) $ (8,338) ======== ========
8. EMPLOYEE BENEFITS The Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of their pre-petition obligations, including payments for employee wages and salaries, benefits and other employee obligations. The Guarantors' allocation of obligations under the employee benefit plans, which are reflected in due from Affiliates, are liabilities that are subject to compromise under the Chapter 11 reorganization proceedings. See Note 4 for further information on liabilities subject to compromise The Guarantors' United States employees participate in various employee benefit plans of Chemicals. Costs, assets and liabilities associated with United States employees participating in these various plans are allocated to the Guarantors by Chemicals based on the number of employees. In addition, the Guarantors sponsor various employee benefit plans in Canada. RETIREMENT BENEFIT PLANS Chemicals has non-contributory pension plans in the United States which cover all salaried and wage employees. The benefits under these plans are based primarily on years of service and employees' pay near retirement. Chemicals' funding policy is consistent with the funding requirements of federal law and regulations. Plan assets consist principally of common stocks and government and corporate securities. The liability relating to United States employees allocated to the Guarantors by Chemicals for the retirement benefit plans and included in Due from Affiliates was $4.0 million and $4.8 million at September 30, 2001 and 2000, respectively. The total pension expense relating to United States employees allocated to the Guarantors was $0.6 million, $1.2 million, and $1.1 million for the years ended September 30, 2001, 2000 and 1999, respectively. During fiscal 2001, the Guarantors recorded a curtailment gain of $2.0 million due to their staffing reductions at their acrylic fibers plant associated with them significantly reducing those operations. 124 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The Guarantors have employer and employee contributor plans in Canada which cover all salaried and wage employees. Information for Canadian benefit plans concerning the pension obligation, plan assets, amounts recognized in the Guarantors' financial statements and underlying actuarial assumptions is stated below.
SEPTEMBER 30, ---------------------- 2001 2000 ---------- --------- (DOLLARS IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year................... $ 17,608 $16,283 Currency rate conversion.................................. (855) (293) Service cost.............................................. 713 716 Interest cost............................................. 1,293 1,240 Plan amendments........................................... 196 -- Actuarial loss (gain)..................................... 985 (31) Benefits paid............................................. (470) (307) -------- ------- Benefit obligation at end of year......................... $ 19,470 $17,608 ======== ======= Change in plan assets: Fair value at beginning of year........................... $ 17,817 $15,330 Currency rate conversion.................................. (865) (276) Actual return on plan assets.............................. (2,348) 2,412 Employer contributions.................................... 722 658 Benefits paid............................................. (470) (307) -------- ------- Fair value at end of year................................. $ 14,856 $17,817 ======== ======= Development of net amount recognized: Funded status............................................. $ (4,613) $ 209 Unrecognized cost: Actuarial loss (gain).................................. 3,449 (1,318) Prior service cost..................................... 452 298 -------- ------- Net amount recognized..................................... $ (712) $ (811) ======== ======= Amounts recognized in the statement of financial position: Prepaid pension cost...................................... $ 353 $ 418 Accrued pension cost...................................... (1,246) (1,229) Intangible asset.......................................... 129 -- Accumulated other comprehensive income.................... 52 -- -------- ------- Net amount recognized..................................... $ (712) $ (811) ======== =======
125 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Net periodic pension costs for the Canadian pension plan consist of the following components:
SEPTEMBER 30, -------------------------- 2001 2000 1999 ------- ------- ------ (DOLLARS IN THOUSANDS) Components of net pension costs: Service cost-benefits earned during the year........... $ 713 $ 716 $ 919 Interest on prior year's projected benefit obligation.......................................... 1,292 1,240 1,112 Expected return on plan assets......................... (1,281) (1,144) (963) Net amortization: Actuarial loss (gain)............................... (89) 28 68 Prior service cost.................................. 27 (2) 29 ------- ------- ------ Net pension costs...................................... $ 662 $ 838 $1,165 ======= ======= ====== Weighted-average assumptions: Discount Rate.......................................... 7.3% 7.5% 7.5% Rates of increase in salary compensation level......... 4.5% 4.5% 4.5% Expected long-term rate of return on plan assets....... 7.5% 7.5% 7.5%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Chemicals and the Guarantors provide certain health care benefits and life insurance benefits for retired employees. Substantially all employees become eligible for these benefits at normal retirement age. The cost of these benefits are accrued during the period in which the employee renders the necessary service. Health care benefits are provided to employees who retire with ten or more years of service except for Canadian employees covered by collective bargaining agreements. All employees are eligible for postretirement life insurance. Postretirement health care benefits for United States plans are non-contributory. Benefit provisions for most hourly and some salaried employees are subject to collective bargaining. In general, the plans stipulate that retiree health care benefits are paid as covered expenses are incurred. The liability relating to United States employees allocated to the Guarantors by Chemicals for the postretirement benefits other than pensions and included in Due from Affiliates was $7.7 and $7.6 million at September 30, 2001 and 2000, respectively. The total postretirement benefits other than pensions expense for United States employees allocated to the Guarantors was $0.7 million, $0.7 million and $0.8 million for the years ended September 30, 2001, 2000 and 1999, respectively. In addition, a curtailment gain of $0.8 million was allocated to the Guarantors during fiscal 1999 related to the reduction of postretirement life insurance benefits for currently active U.S. employees of the Guarantors. 126 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Information for Canadian benefit plans with respect to the plan obligation, the funded status, amounts recognized in the Guarantors' financial statements and underlying actuarial assumptions is stated below.
SEPTEMBER 30, ----------------------- 2001 2000 ---------- ---------- (DOLLARS IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year................... $ 4,751 $ 4,886 Service cost.............................................. 238 314 Interest cost............................................. 355 329 Actuarial loss (gain)..................................... 407 (754) Benefits paid............................................. (200) (24) ------- ------- Benefit obligation at end of year......................... $ 5,551 $ 4,751 ======= ======= Development of net amount recognized: Funded status............................................. $(5,551) $(4,751) Unrecognized cost: Actuarial loss......................................... 267 (91) ------- ------- Net amount recognized..................................... $(5,284) $(4,842) ======= =======
Net periodic plan costs for the Canadian postretirement benefit consist of the following components:
SEPTEMBER 30, ------------------------ 2001 2000 1999 ------ ------ ------ (DOLLARS IN THOUSANDS) Components of net plan costs: Service cost.............................................. $238 $314 $307 Interest cost............................................. 355 329 299 Net amortization-actuarial loss........................... 7 16 32 ---- ---- ---- Net plan costs............................................ $600 $659 $638 ==== ==== ==== Weighted-average assumptions: Discount Rate............................................. 7.25% 7.50% 6.75%
The weighted average annual assumed health care trend rate is assumed to be 7.5% for 2001. The rate is assumed to decrease gradually to 5.8% in 2027 and remain level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care trend rates would have the following effects:
1% INCREASE 1% DECREASE ----------- ----------- (DOLLARS IN THOUSANDS) Effect on total of service and interest cost components..... $ 33 $ (31) Effect on post-retirement benefit obligation................ 268 (233)
SAVINGS AND INVESTMENT PLAN Chemicals' Sixth Amended and Restated Savings and Investment Plan covers substantially all United States employees of the Guarantors, including executive officers. This United States Plan is qualified under Section 401(k) of the Internal Revenue Code. Each participant has the option to defer taxation of a portion of 127 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) his or her earnings by directing the Guarantors to contribute a percentage of such earnings to this Plan. A participant may direct up to a maximum of 20% of eligible earnings to this Plan, subject to certain limitations set forth in the Internal Revenue Code. A participant's contributions become distributable upon the termination of his or her employment. The Guarantors did not make any contributions to this Plan in fiscal 2000 or fiscal 1999. Beginning October 1, 2000, the Guarantors began matching 50% of a participant's contributions, to the extent such contributions do not exceed 7% of such participant's cash compensation (excluding bonuses, profit sharing and similar types of compensation). Such contributions amounted to $0.2 million in fiscal 2001. EMPLOYEE SAVINGS PLAN The Guarantors introduced an employee savings plan for all eligible full-time Canadian employees with an effective date of October 1, 2000. Each participant has the option to contribute a percentage of his or her earnings to the Canadian savings plan, with no limit on the maximum percentage contributed. The Guarantors will match 100% of a participant's contributions, to the extent such contributions do not exceed 3.5% of such participant's cash compensation (excluding bonuses, profit sharing and similar types of compensation). Such contributions amounted to $0.3 in fiscal 2001. PROFIT SHARING AND BONUS PLANS In January of 1997, the Board of Directors of Holdings, upon recommendation of its Compensation Committee, approved the establishment of a profit sharing plan that is designed to benefit all qualified employees and a bonus plan that is designed to provide certain exempt salaried employees of the Guarantors with the opportunity to earn bonuses, depending, among other things, on the annual financial performance of Holdings. The Guarantors incurred no expenses for the profit sharing plan or bonus plan in 2001 or 1999. The Guarantors incurred $2.0 million of expenses related to each of the profit sharing plan and bonus plan in fiscal 2000. PHANTOM STOCK PLAN The Guarantors have a phantom stock plan for all eligible full-time Canadian employees. The effective date of this plan was August 21, 1996 and the expiration date was December 31, 2000. At the end of each plan year, the plan administrator establishes a "determined percentage" for the preceding plan year. This percentage is then multiplied by each participant's compensation for the plan year to determine the award amount. The award amount is then divided by the fair market value of one share of the common stock of Holdings as of December 31 of that plan year, to determine the number of rights to be credited to the participant. Upon termination of employment, the benefit amount becomes payable to the participant. The benefit amount is the number of vested rights in the participant's account, multiplied by the fair market value of one share of common stock of Holdings as of the most recent valuation date. The Guarantors have recorded (income) and expense of $(0.4) million, $0.2 million and $0.2 million related to the phantom stock plan for fiscal 2001, 2000 and 1999, respectively. 9. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Guarantors have entered into various long-term noncancelable operating leases, some of which have been allocated to commonly controlled companies. Future minimum lease commitments at September 30, 128 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 2001, are as follows: fiscal 2002 -- $5.6 million; fiscal 2003 -- $4.9 million; fiscal 2004 -- $4.6 million; fiscal 2005 -- $3.8 million; fiscal 2006 -- $2.6 million; and thereafter -- $4.5 million. All of the Debtors' operating leases are in effect in accordance with their terms notwithstanding their Chapter 11 filings, unless otherwise ordered by the Bankruptcy Court. The Bankruptcy Code provides the Debtors with the opportunity to reject any pre-petition leases that are burdensome or assume any pre-petition leases that are favorable or otherwise necessary to their business operations. ENVIRONMENTAL AND SAFETY MATTERS The Guarantors' operations involve the handling, production, transportation, treatment and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental, health and safety laws, regulations and permit requirements. Environmental permits required for the Guarantors' operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacturing, handling, processing, distribution and use of the Guarantors' chemical products and the raw materials used to produce such products and, if so affected, the Guarantors' business and operations may be materially and adversely affected. In addition, changes in environmental requirements can cause the Guarantors to incur substantial costs in upgrading or redesigning their facilities and processes, including their waste treatment, storage, disposal and other waste handling practices and equipment. The Guarantors conduct environmental management programs designed to maintain compliance with applicable environmental requirements at all of their facilities. The Guarantors routinely conduct inspection and surveillance programs designed to detect and respond to leaks or spills of regulated hazardous substances and to correct identified regulatory deficiencies. The Guarantors believe that their procedures for waste handling are consistent with industry standards and applicable requirements. In addition, the Guarantors believe that their operations are consistent with good industry practice. However, a business risk inherent with chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees and nearby landowners and occupants. While the Guarantors believe that their business operations and facilities generally are operated in compliance with all applicable environmental, health and safety requirements in all material respects, they cannot be sure that past practices or future operations will not result in material claims or regulatory action, require material environmental expenditures or result in exposure or injury claims by employees, contractors and their employees or the public. Some risk of environmental costs and liabilities is inherent in the operations and products of the Guarantors, as it is with other companies engaged in similar businesses. In addition, a catastrophic event at any of the Guarantors' facilities could result in the incurrence of liabilities substantially in excess of their insurance coverages. A significant ban on all chlorine containing compounds could have a materially adverse effect on the Guarantors' financial condition and results of operations. British Columbia has a regulation in place requiring elimination of the use of all chlorine products, including chlorine dioxide, in the bleaching process by the year 2002. The pulp and paper industry believes that a ban of chlorine dioxide in the bleaching process will yield no measurable environmental or public health benefit and is working to change this regulation. In April of 2001, a new government came into power in British Columbia. This new administration is aware of the issues surrounding this regulation and has agreed to negotiate amendments to the regulation. The Guarantors are working through the Alliance for Environmental Technology and the Canadian Chemical Producers' Association to provide information to the British Columbia Ministry of Environment to assist with these negotiations. The Guarantors operating expenditures for environmental matters, mostly waste management and compliance, were approximately $3.9 million for fiscal 2001 and $3.3 million for fiscal 2000. The Guarantors 129 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) also spent approximately $0.6 million for environmentally related capital projects in fiscal 2001 and $0.7 million for these types of capital projects in fiscal 2000. In fiscal 2002, the Guarantors anticipate spending approximately $2.6 million for capital projects related to waste management and environmental compliance. There are no capital expenditures related to remediation of environmental conditions projected for fiscal 2002. Claims for environmental liabilities arising prior to the Debtors' Chapter 11 filings will be addressed in the Chapter 11 cases. In general, monetary claims relating to remedial actions at off-site locations used for disposal prior to the Chapter 11 filings and penalties resulting from violations of environmental requirements before that time will be treated as general unsecured claims. Actions by governmental authorities to determine liability for and the amount of such penalties will generally not be subject to the automatic stay. The Guarantors will be obliged to comply with environmental requirements in the conduct of their business as a debtor-in-possession, including the potential obligation to conduct remedial actions at facilities they own or operate, regardless of when the contamination at those facilities occurred. LEGAL PROCEEDINGS As previously discussed, the Debtors filed petitions for reorganization under Chapter 11 of the Bankruptcy Code on July 16, 2001. As a result of the commencement of the Chapter 11 cases, an automatic stay has been imposed against the commencement or continuation of legal proceedings against the Debtors, including those Guarantors incorporated in the United States, outside of the Bankruptcy Court. The automatic stay will not apply, however, to governmental authorities exercising their police or regulatory powers, including the application of environmental laws. Claimants against the Debtors may assert their claims in the Chapter 11 cases by filing a timely proof of claim, to which the Debtors may object and seek a determination from the Bankruptcy Court as to the allowability of the claim. Claimants who desire to liquidate their claims in legal proceedings outside of the Bankruptcy Court will be required to obtain relief from the automatic stay by order of the Bankruptcy Court. If such relief is granted, the automatic stay will remain in effect with respect to the collection of liquidated claim amounts. As a general rule, all claims against the Debtors that seek a recovery from assets of the Debtors' estates will be addressed in the Chapter 11 cases and paid only pursuant to the terms of a confirmed plan of reorganization. Other Claims The Guarantors are subject to various other claims and legal actions that arise in the ordinary course of their business. The Guarantors believe that the ultimate liability, if any, with respect to these claims and legal actions will not have a material effect on their financial position, results of operations or cash flows, although the Guarantors cannot give any assurances to that effect. Claims and legal actions against the Debtors that existed as of the Chapter 11 filing date are subject to the automatic stay, and recoveries sought thereon from assets of the Debtors will be required to be dealt with in the Chapter 11 cases. PLEDGE OF COMMON STOCK In order to secure the repayment of the DIP Financing, the following pledges of stock were made by the holders of that stock: - In order to secure the fixed assets revolving credit facility, a first priority pledge of 100% of the common stock of the Guarantors incorporated in the United States and 35% of the common stock of the Guarantors incorporated outside the United States, and a second priority pledge of the remaining 65% of that stock; and - In order to secure the current assets revolving credit facility, a third priority pledge of 100% of the common stock of the Guarantors incorporated in the United States and 65% of the common stock of 130 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) the Guarantors incorporated outside the United States and a second priority pledge of the remaining 35% of that stock; and As a result of the priming order, in order to secure the additional $40 million of the current assets revolving credit facility, there is a first priority pledge of 100% of the common stock of the Guarantors incorporated in the United States and 35% of the common stock of the Guarantors incorporated outside the United States, and a second priority pledge of the remaining 65% of that stock, which will result in the lowering by one level of priority of each of the pledges described above. In order to secure the repayment of the 12 3/8% Notes, the holders of the following stock initially made a second priority pledge of 100% of the common stock of each of the Guarantors incorporated in the United States and a first priority pledge of 65% of the common stock of each of the Guarantors incorporated outside of the United States. If the priming order remains effective, the priority of the pledge of the common stock of the Guarantors incorporated in the United States will be a third priority pledge. 10. FINANCIAL INSTRUMENTS FOREIGN EXCHANGE The Guarantors have previously entered into forward foreign exchange contracts to reduce risk due to Canadian dollar exchange rate movements. The forward foreign exchange contracts had varying maturities with none exceeding 18 months. The Guarantors made net settlements of United States dollars for Canadian dollars at rates agreed to at inception of the contracts. The Guarantors do not engage in currency speculation. The last of the Guarantors' existing forward exchange contracts expired in March 2000, and they do not intend to enter into any additional forward exchange contracts. ELECTRICITY CONTRACTS The Guarantors' Canadian subsidiaries periodically enter fixed price agreements for a portion of their electrical energy requirements. The Guarantors have an agreement relating to the supply of a portion of the electrical energy at one of their Canadian sodium chlorate production facilities. This agreement, which was previously designated as a normal purchase under SFAS No. 133, does not meet the criteria of a normal purchase based on guidance issued by the Derivative Implementation Group (the "DIG") and cleared by the Financial Accounting Standards Board in June 2001. All purchases under this agreement, which expires on December 31, 2001, are used in the ordinary course of business; however, effective July 1, 2001, this agreement is required to be marked-to-market. At September 30, 2001, the value of this agreement was a loss of approximately $1.2 million based on current market prices and quantities to be delivered. CONCENTRATIONS OF RISK The Guarantors sell their products primarily to companies involved in the acrylic fibers and pulp and paper manufacturing industries. The Guarantors perform ongoing credit evaluations of their customers and generally do not require collateral for accounts receivable. However, letters of credit are required by the Guarantors on many of their export sales. Historically, the Guarantors' credit losses have been minimal. The Guarantors maintain cash deposits with major banks, which from time to time may exceed federally insured limits. The Guarantors periodically assess the financial condition of these institutions and believe that any possible loss is minimal. Approximately 31% of the Guarantors' employees are covered by union agreements. None of these union agreements expire within the next year. These agreements are not affected by the Chapter 11 cases. 131 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) INVESTMENTS It is the policy of the Guarantors to invest their excess cash in investment instruments or securities whose value is not subject to market fluctuations, such as certificates of deposit, repurchase agreements or Eurodollar deposits with domestic or foreign banks or other financial institutions. Other permitted investments include commercial paper of major United States corporations with ratings of A1 by Standard & Poor's Ratings Group or P1 by Moody's Investor Services, Inc., loan participations of major United States corporations with a short term credit rating of A1/P1 and direct obligations of the United States Government or its agencies. In addition, not more than $5 million will be invested by the Guarantors with any single bank, financial institution or United States corporation. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reflected in the consolidated balance sheet for cash and cash equivalents, receivables, payables and certain accrued expenses approximate fair value due to the short maturities of these instruments. The fair value of pre-petition liabilities subject to compromise and pre-petition liabilities not subject to compromise is not possible to determine given the uncertainty of the impact of the bankruptcy proceedings. Due to the Canadian Financing Agreement having variable interest rates, the fair value approximates its carrying value. 132 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of Sterling Canada, Inc. Sterling Fibers, Inc. Sterling Chemicals International, Inc. Sterling Chemicals Energy, Inc. Sterling Pulp Chemicals, Inc. Sterling Pulp Chemicals US, Inc. We have audited the accompanying combined balance sheets of the Guarantors (Debtors-in-Possession) (as defined in Note 1) as of September 30, 2001 and 2000 and the related combined statements of operations, changes in stockholder's equity (deficiency in assets) and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of the Guarantors' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the financial position of the Guarantors as of September 30, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1, on July 16, 2001, the Debtors (as defined in Note 1) filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The accompanying financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do no purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to pre-petition liabilities, the amounts that may be allowed for claims or contingencies or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Guarantors; or (d) as to operations, the effect of any changes that may be made in the Guarantors' business. The accompanying financial statements for the year ended September 30, 2001 have been prepared assuming that the Guarantors will continue as a going concern. As discussed in Note 1, the Debtors' recurring losses from operations raise substantial doubt about the Debtors' and, therefore, about the Guarantors' ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 1. The financial statements do not include adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Houston, Texas December 20, 2001 133 REPORT OF MANAGEMENT Management is responsible for the preparation and content of the financial statements and other information included in this annual report and in the exhibits to this annual report. The financial statements have been prepared in conformity with generally accepted accounting principles appropriate under the circumstances to reflect, in all material respects, the substance of events and transactions that should be included. The financial statements reflect management's judgments and estimates as to the effects of events and transactions that are accounted for or disclosed. Management maintains accounting systems which are supported by internal accounting controls that provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. The concept of reasonable assurance is based on the recognition that the cost of a system of internal accounting controls should not exceed the benefits. Deloitte & Touche LLP performed an independent audit of our financial statements for fiscal years 2001, 2000 and 1999, for the purpose of determining that the statements are presented fairly and in accordance with accounting principles generally accepted in the United States. The independent auditors are appointed by the Board of Directors and meet regularly with the Audit and Compliance Committee of the Board of Directors. The Audit and Compliance Committee meets periodically with our senior officers and independent accountants to review the adequacy and reliability of our accounting, financial reporting and internal controls. DAVID G. ELKINS President and Co-Chief Executive Officer JOHN R. BEAVER Corporate Controller -- Principal Accounting Officer December 20, 2001 134 STERLING CHEMICALS HOLDINGS, INC. SUPPLEMENTAL FINANCIAL INFORMATION QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL FIRST SECOND THIRD FOURTH YEAR QUARTER QUARTER QUARTER QUARTER ------ -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues.................................... 2001 $253,854 $199,057 $155,254 $135,400 2000 251,121 269,527 297,349 278,454 Gross profit (loss)......................... 2001 9,014 (10,736) (7,103) (5,020) 2000 30,568 44,355 43,523 22,445 Net income (loss)(1)........................ 2001 (30,442) (52,715) (99,828) (40,883) 2000 (10,362) 3,301 575 (80,478) Net income (loss) attributable to common stockholders.............................. 2001 $ (2.45) (4.19) (7.88) (3.00) 2000 $ (.88) 0.20 (0.05) (6.39)
- --------------- (1) During the third quarter of fiscal 2001, tax expense of $56.8 million was recorded to provide a valuation allowance against all of our U.S. deferred tax assets. During the second quarter fiscal 2001, approximately $7.1 million in pre-tax charges were recorded in connection with the withdrawal from the traditional commodity textile business of our acrylic fibers operations which related to $2.0 million in severance payments and a write-down of finished goods and stores inventory to their net realizable value. During the fourth quarter of fiscal 2000, $1.6 million of expense was recorded related to workforce reductions at our acrylic fibers operations. We also recorded non-cash expense related to the impairment of our acrylic fibers production assets of $60.0 million in the fourth quarter of fiscal 2000. 135 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT BOARD OF DIRECTORS Our Board oversees our management, reviews our long-term strategic plans and exercises direct decision making authority in key areas. Four of our six directors are not our employees and only non-employee directors are eligible to serve on our Audit and Compliance Committee or our Compensation Committee. Personal information on each of our directors is provided below. With the exception of David G. Elkins, who was appointed to our Board upon his promotion to President on January 24, 2001 and Richard K. Crump, who was appointed to our Board upon his promotion to Co-Chief Executive Officer on December 18, 2001, each of our current directors was elected by our stockholders at our last annual meeting. Our Board held 21 meetings in fiscal 2001. On average, our directors attended 90% of the meetings of our Board or any of our Board committees on which they served. Our only director who attended less than 75% of the meetings of our Board and all committees on which he served was Allan R. Dragone, who attended three of five such meetings prior to his resignation in March of 2001. Frank P. Diassi Mr. Diassi is Managing General Partner of The Unicorn Group, Age 68 L.L.C., a private financial organization. He organized The Director since August 1996 Unicorn Group in 1981 and has originated investments in over 40 entrepreneurial companies. Prior to the effective date of his termination of employment on December 18, 2001, Mr. Diassi served as our Chairman of our Board of Directors since August of 1996 and our Co-Chief Executive Officer since September 18, 2001. Prior to September 18, 2001, Mr. Diassi exercised the duties of our Chief Executive Officer due to the vacancy created by the retirement of our former Chief Executive Officer on May 8, 2000. Mr. Diassi has been Chairman of the Board of Hawkeye Chemical Company and was a director of Arcadian Corporation, at the time the largest nitrogen fertilizer company in the Western Hemisphere. Mr. Diassi also currently serves as Chairman of the Board of Software Plus, Inc., a human resource and payroll service supplier, and Amerlux, Inc., a manufacturer of lighting fixtures for commercial and retail markets, and a director of Fibreglass Holdings, Inc., a truck accessory manufacturer. In addition, he is a founding director and a member of the Safety, Health and Environmental Committee of Mail-Well, Inc., a NYSE company that manufacturers envelopes and provides commercial printing services.
136 Robert W. Roten Mr. Roten spent the first 25 years of his career with Age 67 Monsanto Company and served as Vice President for sales and Director Since August 1996 marketing for El Paso Products Company from 1981 to 1983. Mr. Roten was President of Materials Exchange, Inc., a Houston-based petrochemicals and plastics marketing firm, from 1983 until 1986. He served as our Vice President -- Commercial from August of 1986 until September of 1991, when he became our Vice President -- Corporate Development. Mr. Roten served as our Executive Vice President and Chief Operating Officer from April of 1993 until August of 1996, and served as our President and Chief Executive Officer from August 21, 1996 until April of 1998. Mr. Roten served as the Vice Chairman of our Board of Directors from April of 1998 until his appointment as our non-executive Chairman of the Board on December 18, 2001. Mr. Roten is currently a principal in Double R Companies, Inc., a private investment company, and President of Hickory Acquisition Group, a chemical asset acquisition company in which he has been a principal and a director since April of 1999. Mr. Roten is also currently President of Xnet, Inc., a Houston-based computer and systems consulting company, and has served on its Board of Directors since June of 1995. David G. Elkins Mr. Elkins has been our President since January 24, 2001 and Age 59 our Co-Chief Executive Officer since September 18, 2001. Director Since January 2001 Prior to his appointment as our President, Mr. Elkins served as our General Counsel and Corporate Secretary since January 1, 1998 and our Executive Vice President -- Administration and Law since May 1, 2000. Prior to May 1, 2000, Mr. Elkins served as one of our Vice Presidents. Mr. Elkins previously was a senior partner in the law firm of Andrews & Kurth L.L.P., where he specialized in corporate and securities matters. Frank J. Hevrdejs Mr. Hevrdejs is a principal and President of The Sterling Age 56 Group, L.P., which he co-founded in 1982. Mr. Hevrdejs has Director Since August 1996 actively participated in acquisitions of over 40 businesses in the past 20 years. He is Chairman of First Sterling Ventures Corp., an investment company, and a director of Enduro Holdings, Inc., a structural and electrical manufacturing company, and Fibreglass Holdings, Inc., a truck accessory manufacturer. He is also a founding director and a member of the Compensation Committee of Mail-Well, Inc., a NYSE company that manufactures envelopes and provides commercial printing services, and a director and member of the Compensation Committee and Audit Committee of Eagle USA, an air-freight company. Mr. Hevrdejs previously served as a director of Chase Bank of Texas, National Association, a national banking association, and is currently a member of the Advisory Board of Chase Manhattan Bank, N.A. Hunter Nelson Mr. Nelson is currently a principal of The Sterling Group, Age 49 L.P. Prior to joining The Sterling Group in 1989, he served Director Since August 1996 as vice president of administration and general counsel of Fiber Industries, Inc., a producer of polyester fibers. Mr. Nelson was previously a partner in the law firm of Andrews & Kurth L.L.P., specializing in corporate and securities laws. Mr. Nelson served on the Board of Directors of Sterling Diagnostic Imaging, Inc. until it was sold in May of 1999.
137 Rolf H. Towe Mr. Towe has served as Senior Managing Director of The Age 63 Clipper Group, L.P. since its formation in 1991 and is Vice Director Since January 1998 President of Clipper Asset Management, Inc. He was the Chairman of Executive Partner Limited, an executive consulting firm, from 1989 to 1995. Earlier in his career, Mr. Towe held various management positions over a period of nearly 20 years in Union Carbide Corporation, a multinational chemicals and plastics manufacturer. Mr. Towe also serves as a director of several private companies. Mr. Crump has served as our Co-Chief Executive Officer since December 18, 2001. Richard K. Crump Prior to that time, Mr. Crump served as our Executive Vice Age 55 President -- Operations since May 1, 2000, our Vice Director Since December 2001 President -- Strategic Planning from December 1, 1996 until May 1, 2000, our Vice President -- Commercial from October of 1991 until December 1, 1996 and our Director -- Commercial from August of 1986 until October of 1991. Prior to joining us, Mr. Crump was Vice President of Sales for Rammhorn Marketing from 1984 until August of 1986 and Vice President of Materials Management for El Paso Products Company from 1976 through 1983.
The holders of 6,673,213 shares of our common stock, representing approximately 52% of our outstanding shares, are parties to a Third Amended and Restated Voting Agreement dated as of February 1, 1999. The parties to the Voting Agreement and its most pertinent terms are described in detail in this Form 10-K under Item 13. Certain Relationships and Related Transactions. The parties to the Voting Agreement are required to vote all of their shares of our common stock in favor of three nominees to our Board; one to be designated by certain affiliates of Clipper Capital Partners, L.P. who are commonly referred to collectively as "The Clipper Group," one to be designated by Gordon A. Cain and one to be designated by Koch Capital Services, Inc. Mr. Towe is the current designee of The Clipper Group. Mr. Cain's right to designate a member of our Board under the Voting Agreement expired on December 15, 2001 and Koch Capital has waived its right to designate a member of our Board. DIRECTOR COMPENSATION Our employees who serve as members of our Board do not receive additional compensation for serving on our Board or any Board committees, although all of our directors are reimbursed for their travel expenses related to their services as a director. Each of our non-employee directors is currently paid a fee of $5,000 per quarter for his service as a director. Prior to January 1, 2001, only our Vice Chairman was paid a fee of $5,000 per quarter, as our other non-employee directors were paid a fee of $2,500 per quarter. Our non-employee directors also receive $1,000 for each Board meeting held in person that they attend and $400 for each telephonic meeting in which they participate that lasts at least 30 minutes. Each of our non-employee directors that serves as the Chairman of one of our Board committees is paid $1,700 for each meeting of that committee that he attends, and our other non-employee directors that serve on our Board committees are paid $700 per meeting. In addition, each of our non-employee directors that serves as the Chairman of one of our Board Committees is paid an annual retainer of $1,000 for service as Chairman on that committee. Under our Amended and Restated Stock Plan for Non-Employee Directors, each of our non-employee directors received $15,000 in shares of our common stock and fully vested options to purchase 2,000 shares of our common stock on October 1, 2000. This grant of shares under our Stock Plan for Non-Employee Directors was valued at the average market price for a share of our common stock during the 90-day period ending on the date of grant. On March 7, 2001, our Board elected to terminate this plan with respect to future grants. BOARD COMMITTEES Our Board of Directors has created various standing committees to help carry out its duties, including a Compensation Committee and an Audit and Compliance Committee. Generally speaking, our Board committees work on key issues in greater detail than would be possible at full Board meetings. We do not have a standing nominating committee. 138 COMPENSATION COMMITTEE Our Compensation Committee is currently comprised of two of our non-employee directors, Frank J. Hevrdejs (Chairman) and Rolf H. Towe, and met four times in fiscal 2001. Our Compensation Committee is responsible for discharging the compensation responsibilities of our Board, reviews general compensation issues, determines the compensation of all of our senior executives and other key employees and recommends and administers our employee benefit plans that provide benefits to our senior executives. Our Compensation Committee consults, from time to time, with outside experts concerning the performance of its duties. AUDIT AND COMPLIANCE COMMITTEE Our Audit and Compliance Committee is currently comprised of two of our non-employee directors, Hunter Nelson (Chairman) and Robert W. Roten, and met seven times in fiscal 2001. This Committee operates under a written charter adopted by our Board. Our Audit and Compliance Committee recommends the appointment of our independent auditors to our Board, meets with these auditors to review their report on the financial statements of our business and approves the audit and other services to be provided by these auditors. In addition, our Audit and Compliance Committee reviews our Form 10-K and Form 10-Q reports and our practices in preparing published financial statements. Our Audit and Compliance Committee also provides oversight with respect to the establishment of and adherence to corporate compliance programs, codes of conduct and other policies and procedures concerning our business and our compliance with all relevant laws. Mr. Nelson is considered "independent" under the listing standards of the New York Stock Exchange, the American Stock Exchange and the National Association of Securities' Dealers. Mr. Roten was a party to a Consulting Agreement with Holdings dated as of February 16, 2001 pursuant to which Mr. Roten was paid $10,000 per month and was reimbursed his expenses in exchange for consulting and advisory services related to our sales, marketing and energy and raw material procurement practices. This Consulting Agreement expired on August 31, 2001. Due to the existence of this Consulting Agreement, Mr. Roten is not considered independent under any of these listing standards. EXECUTIVE OFFICERS OF THE COMPANY Personal information with respect to each of our executive officers is set forth below. David G. Elkins Mr. Elkins has been our President since January 24, 2001 and Age 59 our Co- Chief Executive Officer since September 18, 2001. Prior to his appointment as our President, Mr. Elkins served as our General Counsel and Corporate Secretary since January 1, 1998 and our Executive Vice President -- Administration and Law since May 1, 2000. Prior to May 1, 2000, Mr. Elkins served as one of our Vice Presidents. Mr. Elkins previously was a senior partner in the law firm of Andrews & Kurth L.L.P., where he specialized in corporate and securities matters. Mr. Crump has served as our Co-Chief Executive Officer since December 18, 2001. Richard K. Crump Prior to that time, Mr. Crump served as our Executive Vice Age 55 President -- Operations since May 1, 2000, our Vice Director Since December 2001 President -- Strategic Planning from December 1, 1996 until May 1, 2000, our Vice President -- Commercial from October of 1991 until December 1, 1996 and our Director -- Commercial from August of 1986 until October of 1991. Prior to joining us, Mr. Crump was Vice President of Sales for Rammhorn Marketing from 1984 until August of 1986 and Vice President of Materials Management for El Paso Products Company from 1976 through 1983.
139 Paul G. Vanderhoven Mr. Vanderhoven has been our Chief Financial Officer since Age 48 March 21, 2001 and our Vice President-Finance since October of 2000. Prior to becoming our Chief Financial Officer, Mr. Vanderhoven served as our Corporate Controller from October of 1989 through March 21, 2001, and our Manager Finance from August of 1986 through October of 1989. Before joining us, Mr. Vanderhoven held various positions with Monsanto Company from 1977 through August of 1986.
We have entered into an employment agreement with Mr. Elkins which is described in detail in this Form 10-K under Executive Compensation. ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table shows the compensation we paid during the three fiscal years ended September 30, 2001 to each individual who served as our Chief Executive Officer or acted in a similar capacity during fiscal 2001 and our other four most highly compensated officers during fiscal 2001.
LONG-TERM COMPENSATION AWARDS ---------------------------- ANNUAL COMPENSATION RESTRICTED SECURITIES NAME AND FISCAL -------------------- STOCK UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) AWARD(S) OPTIONS/SARS(3) COMPENSATION(4) - ------------------ ------ --------- -------- ---------- --------------- --------------- Frank P. Diassi......... 2001 $419,278 $719,250 $0 0 $ 35,586 Chairman of the Board.............. 2000 350,016 0 0 0 29,568 And Co-CEO 1999 333,344 0 0 158,730 35,406 David G. Elkins(5)...... 2001 372,292 438,847 0 500,000 32,378(6) President and Co-CEO 2000 218,750 50,000 0 0 20,162 1999 200,000 20,000 0 60,000 27,546 Richard K. Crump........ 2001 316,667 318,425 0 0 19,403 Executive Vice 2000 214,583 0 0 0 8,953 President -- Operations 1999 200,000 10,000 0 50,265 9,885 Gary M Spitz(7)......... 2001 111,269 318,425 0 0 20,862(8) Executive Vice 2000 217,917 50,000 0 0 3,541 President -- Finance 1999 193,333 0 0 45,000 3,478 and CFO Paul G. Vanderhoven(9)........ 2001 204,583 112,495 0 0 6,694 Vice President-Finance 2000 144,667 10,000 0 4,000 561 and CFO 1999 135,850 0 0 6,000 884
- --------------- (1) Includes amounts paid under our Supplemental Pay Plan and amounts deferred under our 401(k) Savings and Investment Plan. 140 (2) Includes amounts paid under our Bonus Plan and our Profit Sharing Plan and other bonuses paid by us as follows:
FISCAL PROFIT YEAR BONUS PLAN SHARING PLAN OTHER BONUSES ------ ---------- ------------ ------------- Frank P. Diassi.......................... 2001 $700,000 $19,250 $ 0 2000 0 0 0 1999 0 0 0 David G. Elkins.......................... 2001 305,500 12,925 120,422 2000 0 0 50,000 1999 0 0 20,000 Richard K. Crump......................... 2001 305,500 12,925 0 2000 0 0 0 1999 0 0 10,000 Gary M. Spitz............................ 2001 305,500 12,925 0 2000 0 0 50,000 1999 0 0 0 Paul G. Vanderhoven...................... 2001 104,300 8,195 0 2000 0 0 10,000 1999 0 0 0
(3) On December 14, 1998, we repriced all outstanding stock options to lower the exercise price to $6 per share. With the exception of Mr. Vanderhoven, no options were granted to any of our officers appearing in this table during fiscal 1999. For all of our officers other than Mr. Vanderhoven, figures for fiscal 1999 are included solely to reflect the repricing of options granted during fiscal 1997 and fiscal 1998. For Mr. Vanderhoven, figures for fiscal 1999 include options to acquire 3,000 shares of our common stock that were granted in fiscal 1999, as well as options granted during fiscal 1997 and fiscal 1998 that were repriced on December 14, 1998. (4) Includes premiums for group life insurance and premiums for executive life insurance paid by us and matching contributions paid by us under our 401(k) Savings and Investment Plan as follows:
FISCAL EXECUTIVE 401(K) MATCHING YEAR GROUP LIFE LIFE CONTRIBUTIONS ------ ---------- --------- --------------- Frank P. Diassi........................... 2001 $10,556 $19,080 $5,950 2000 10,488 19,080 0 1999 16,326 19,080 0 David G. Elkins........................... 2001 3,639 18,385 8,006 2000 2,527 17,635 0 1999 3,618 23,928 0 Richard K. Crump.......................... 2001 2,870 8,527 8,006 2000 1,323 7,630 0 1999 2,255 7,630 0 Gary M. Spitz............................. 2001 484 0 3,770 2000 810 2,731 0 1999 747 2,731 0 Paul G. Vanderhoven....................... 2001 708 0 5,986 2000 561 0 0 1999 884 0 0
(5) Mr. Elkins was promoted to President on January 24, 2001 and Co-Chief Executive Officer on September 18, 2001, meaning that his annual compensation for fiscal 2001 reflects compensation paid to 141 him in his prior capacity as Executive Vice President-Administration and Law, General Counsel and Secretary for approximately 3 1/2 months and compensation paid to him in his capacity as President (including approximately two weeks as Co-Chief Executive Officer) for approximately 8 1/2 months. (6) Includes premiums for liability insurance paid by us of $2,348. (7) Mr. Spitz resigned from employment with us on March 21, 2001, meaning that he was employed by us during fiscal 2001 for only approximately 5 1/2months. (8) Includes compensation for unused vacation time of $16,608 paid upon Mr. Spitz's resignation from employment with us. (9) Mr. Vanderhoven was promoted to Chief Financial Officer on March 21, 2001, meaning that his annual compensation for fiscal 2001 reflects compensation paid to him in his prior capacity as Corporate Controller and Vice President-Finance for approximately 5 1/2 months and compensation paid to him in his capacity as Chief Financial Officer and Vice President-Finance for approximately 6 1/2 months. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information relating to options to purchase shares of our common stock granted in fiscal 2001 to each of our executive officers named in the Executive Compensation Table. All of these options were granted under our Omnibus Stock Awards and Incentive Plan (the "Omnibus Plan").
POTENTIAL REALIZABLE VALUE AT NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF SECURITIES TOTAL STOCK PRICE UNDERLYING OPTIONS PERCENT OF TOTAL OPTIONS OPTIONS GRANTED TO EXERCISE GRANTED TO GRANTED EMPLOYEES IN PRICE EXPIRATION ------------------------------ (#) FISCAL YEAR PER SHARE DATE(1) 0% 5% 10% ---------- ------------ --------- ---------------- ----- --------- ---------- David G. Elkins...... 250,000 50% $1.00 January 24, 2011 $0 $ 0 $ 53,975 David G. Elkins...... 250,000 50% $0.50 January 24, 2011 0 65,900 178,975
- --------------- (1) All options were completely vested upon their issuance. (2) The dollar amounts set forth under these columns are the result of calculations of assumed annual rates of stock price appreciation from the date of grant of the options awarded to the date of expiration of such options of 0%, 5% and 10%. Based on these assumed annual rates of stock price appreciation of 0%, 5% and 10%, our stock price at January 24, 2011 is projected to be $0.4688, $0.7636 and $1.2159, respectively. These assumptions are not intended to forecast future appreciation of our stock price. Our stock price may increase or decrease in value over the time period set forth above. Mr. Elkins will not realize value under his option grants without stock price appreciation, which will benefit all stockholders. The potential realizable value computation does not take into account federal or state income tax consequences of option exercises or sales of appreciated stock. AGGREGATE YEAR-END OPTION VALUES The following table provides information on the value of unexercised stock options, as of September 30, 2001, held by each of our executive officers named in the Executive Compensation Table. There were no 142 exercises of options or stock appreciation rights during fiscal 2001 by any of these officers, and none of these officers held any stock appreciation rights at September 30, 2001.
NUMBER OF VALUE OF UNEXERCISED SECURITIES UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS OPTIONS/SARS AT SEPTEMBER 30, 2001 AT SEPTEMBER 30, 2001* --------------------------- --------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ------------- ----------- ------------- Frank P. Diassi........................ 146,032 12,698 -- -- David G. Elkins........................ 545,000 15,000 -- -- Richard K. Crump....................... 46,244 4,021 -- -- Gary M. Spitz.......................... 0 0 -- -- Paul G. Vanderhoven.................... 4,760 5,240 -- --
- --------------- * The "value" of unexercised options is based on the amount, if any, by which the market price of a share of our common stock on the relevant date exceeds the exercise price of the option. The actual gain, if any, that one of our officers realizes from the exercise of options will depend on the market price of a share of our common stock at the time of exercise. An "In-The-Money" option is an option for which the exercise price is lower than the market price of a share of our common stock on the relevant date. None of our officers held options with an exercise price below the market price of a share of our common stock as of September 30, 2001. PENSION PLANS Salaried Employees' Pension Plan.......................... Most of our salaried employees, including each of our executive officers named in the Executive Compensation Table, participate in our defined benefit Salaried Employees' Pension Plan. We determine the pension costs under this Plan each year on an actuarial basis and make all necessary contributions. The pension benefits payable under this Plan are determined by multiplying the employee's "vested percentage" by the sum of (i) the number of years the employee is given credit as having worked for us times 1.2% of his or her "Average Earnings" plus (ii) the number of years the employee is given credit as having worked for us (not to exceed 35) times 0.45% of the amount which his or her "Average Earnings" exceeds the average (without indexing) of his or her Social Security taxable wage bases during the 35-year period ending on December 31 of the year in which he or she attains Social Security retirement age. Generally, an employee's "Average Earnings" will be either the average compensation received by the employee during the three years in which the employee was paid the most in his or her final five years of employment or the average compensation received by the employee during the last 36 months of his or her employment, whichever is larger, excluding amounts received under our Profit Sharing and Bonus Plans. However, due to certain limitations imposed under the Internal Revenue Code, benefits payable to an employee under this Plan are effectively limited in amount to those benefits that would be payable to an employee having Average Earnings of $170,000. Pension Benefit Equalization Plan.......................... Each of our salaried employees who is eligible to participate in our Pension Plan is also eligible to participate in our Pension Benefit Equalization Plan. Our Equalization Plan pays additional benefits to employees whose benefits under our Pension Plan are limited as 143 a result of specified limitations under the Internal Revenue Code. The amount of benefits payable under our Equalization Plan is designed to eliminate the effect of these limitations on the aggregate pension benefits payable to the participants but not provide any additional benefits beyond that amount. These benefits are generally payable at the times we pay benefits under our Pension Plan. We have paid benefits under our Equalization Plan to former employees. Supplemental Employee Retirement Plan............... Each of our employees who are a part of management or who are considered "highly compensated" and subject to limitations on the amount of Pension Plan benefits they may receive under the Internal Revenue Code is also eligible to participate in our Supplemental Employee Retirement Plan. Our Supplemental Plan pays additional benefits to employees whose benefits under our Pension Plan are limited as a result of such employee's Average Earnings exceeding $170,000 or due to the removal of certain Social Security integration benefits from the Pension Plan. The amount of benefits payable under our Supplemental Plan is designed to eliminate the effect of these limitations on the aggregate pension benefits payable to the participants but not provide any additional benefits beyond that amount. These benefits are generally payable at the same time as when we pay benefits under our Pension Plan. We have paid benefits under our Supplemental Plan to former employees. The following table sets forth the aggregate amount of annual normal retirement benefits that would be payable under our Pension Plan, Equalization Plan and Supplemental Plan if an employee retired during calendar 2001 at the age of 65 with the years of service shown (assuming the continued existence of our Pension Plan, Equalization Plan and Supplemental Plan without substantial change and payment in the form of a single life annuity).
YEARS OF SERVICE AVERAGE ---------------------------------------------------- EARNINGS 15 20 25 30 35 - -------- -------- -------- -------- -------- -------- $125,000........................ $ 28,426 $ 37,901 $ 47,376 $ 56,851 $ 66,327 150,000........................ 34,613 46,151 57,689 69,226 80,764 175,000........................ 40,801 54,401 68,001 81,601 95,202 200,000........................ 46,988 62,651 78,314 93,976 109,639 250,000........................ 59,363 79,151 98,939 118,726 138,514 300,000........................ 71,738 95,651 119,564 143,476 167,389 400,000........................ 96,488 128,651 160,814 192,976 225,139 450,000........................ 108,863 145,151 181,439 217,726 254,014 500,000........................ 121,238 161,651 202,064 242,476 282,889
For our executive officers, the compensation covered by these Plans is solely that compensation reported under the salary column in the executive compensation table appearing in this Form 10-K and may, as to a particular executive officer for a given year, differ by more than 10% from that executive officer's total annual compensation reported in the executive compensation table, depending on the amount of bonuses and other annual compensation paid to that executive officer during the relevant year. 144 As of September 30, 2001, the credited years of service under these Plans of each of our executive officers named in the Executive Compensation Table were: Frank P. Diassi............................................. 5 years David G. Elkins............................................. 4 years Richard K. Crump............................................ 15 years Gary M. Spitz............................................... 3 years Paul G. Vanderhoven......................................... 25 years
Assuming retirement at age 65 (or after five years of service, if later) and the continuation of their current levels of base salary until retirement, the total retirement benefits payable to each of our executive officers named in the Executive Compensation Table under the Equalization and Supplemental Plans would be:
NET PAYMENT GROSS PAYMENT REDUCTION FOR PAYMENTS UNDER EQUALIZATION UNDER ALL PLANS UNDER PENSION PLAN AND SUPPLEMENTAL PLANS --------------- ---------------------- ---------------------- Frank P. Diassi(1)............. $ 30,628 $13,946 $16,682 David G. Elkins(2)............. 50,390 23,388 27,002 Richard K. Crump............... 116,264 63,020 53,244 Gary M Spitz(3)................ 0 0 0 Paul G. Vanderhoven............ 115,354 95,518 19,836
- --------------- (1) Mr. Diassi's pension benefits are calculated as of September 30, 2001. (2) Excludes supplemental pension benefits payable to Mr. Elkins under his Employment Agreement. (3) Mr. Spitz resigned as of March 21, 2001 and is no longer eligible for payments under these Plans. All of the benefits appearing in the pension plan table are computed on a single-life annuity basis and are not subject to any deduction for Social Security or other offset amounts. However, our Supplemental Plan does contain an alternative formula for determining benefits which includes a Social Security offset. We have never used this alternative formula to determine the amount of any benefits paid under our Supplemental Plan. EMPLOYMENT AGREEMENT -- DAVID G. ELKINS On November 12, 1997, we entered into an Employment Agreement with Mr. Elkins under which we engaged Mr. Elkins to serve as our General Counsel and Corporate Secretary and one of our Vice Presidents. Mr. Elkins' Employment Agreement has been amended as of the date of his promotion to President to, among other things, reflect his change in position. Under his Employment Agreement, Mr. Elkins currently earns a base salary of $350,000 per year (subject to increase at the discretion of our Board) and he participates in our bonus and incentive plans. In addition, when Mr. Elkins signed his Employment Agreement, we granted Mr. Elkins 5,000 shares of our common stock (none of which remain subject to forfeiture) and options to purchase 60,000 shares of our common stock for $12 per share (with 25% of such options vesting annually on each January 1, commencing with January 1, 1999). On December 14, 1998, we reduced the exercise price of these options to $6 per share. Mr. Elkins was also granted the right to purchase up to 80,000 shares of our common stock but that right expired on April 30, 1998 without having been exercised. Upon Mr. Elkins' promotion to President, we granted Mr. Elkins options to purchase 250,000 shares of our common stock for $1 per share and options to purchase 250,000 shares of our common stock for $0.50 per share (all of which were completely vested upon their grant), which grants are referred to in the amendment to his Employment Agreement. Either we or Mr. Elkins may terminate Mr. Elkins' Employment Agreement at any time, for any reason or for no reason. However, if Mr. Elkins terminates his employment for a Good Reason (as defined in his Employment Agreement) or we terminate Mr. Elkins' employment for any reason other than Misconduct or 145 Disability (as those terms are defined in his Employment Agreement), Mr. Elkins is entitled to continuing coverage under all of our life, healthcare, medical and dental insurance plans and programs (excluding disability) for 36 months, so long as Mr. Elkins pays any required employee premiums under these plans or programs or COBRA. However, we are not required to make these payments or provide these coverages if Mr. Elkins' obtains other employment where he is provided with substantially similar benefits. Finally, if Mr. Elkins' Employment Agreement is terminated under these circumstances, all vesting and similar requirements and all conditions to entitlement to benefits are deemed satisfied under these plans and programs, meaning that all unvested options held by Mr. Elkins would immediately vest. Under his Employment Agreement, Mr. Elkins is entitled to participate in, and receive benefits under, most of our employee benefit plans as if his employment with us commenced on January 1, 1993 or, in the case of our post-retirement healthcare plan, January 1, 1988. In addition, Mr. Elkins is entitled under his Employment Agreement to receive pension benefits which are supplemental to the pension benefits payable to Mr. Elkins under our Pension Plan, Equalization Plan and Supplemental Plan. KEY EMPLOYEE PROTECTION PLAN On January 26, 2000, our Board approved our Key Employee Protection Plan, which has subsequently been amended several times. This Plan was established by our Board to help us retain certain of our employees and motivate them to continue to exert their best efforts on our behalf during periods when we may be susceptible to a change of control, and to assure their continued dedication and objectivity during those periods This Plan was approved by the Bankruptcy Court in our bankruptcy proceedings on October 31, 2001. A select group of management or highly compensated employees has been designated as participants under the Plan and their respective applicable multipliers and other variables for determining benefits have been established. Our Compensation Committee is authorized to designate additional management or highly compensated employees as participants under our Key Employee Protection Plan and set their applicable multipliers. Our Compensation Committee may also terminate any participant's participation under this Plan on 60 days' notice if it determines that the participant is no longer one of our key employees. Under our Key Employee Protection Plan, any participant under the Plan that terminates his or her employment for "Good Reason" or is terminated by us for any reason other than "Misconduct" or "Disability" within his or her "Protection Period" is entitled to benefits under the Plan. A participant's Protection Period commences 180 days prior to the date on which a specified change of control occurs and ends either two years or 18 months after the date of that change of control, depending on the size of the participant's applicable multiplier. A participant may also be entitled to receive payments under the Plan in the absence of a change of control but at a reduced level of payment. If a participant becomes entitled to benefits under our Key Employee Protection Plan, we are required to provide the participant with a lump sum cash payment that is determined by multiplying the participant's applicable multiplier by the sum of the participant's highest annual base compensation during the last three years plus the participant's targeted bonus for the year of termination, and then deducting the sum of any other separation, severance or termination payments made by us to the participant under any other plan or agreement or pursuant to law, plus 50% of the aggregate cash compensation paid to the participant by us or our successor following the confirmation of a plan of reorganization in our bankruptcy proceedings. In addition, if the participant is entitled to a lump sum payment under the Plan in the absence of a change of control, his or her applicable multiplier is reduced by 50%. Similarly, if a participant becomes entitled to benefits under the Plan in connection with the liquidation of all or substantially all of our assets for salvage or equivalent value, the lump sum amount payable to him or her is reduced by 25%. If a participant is not one of our senior executives, he or she is not entitled to receive the lump sum payment if his or her termination date is after his or her normal retirement date. Finally, a pro rata portion of any lump sum amount paid to a participant under the Plan must be repaid by the participant if the participant is rehired by us or our successor within one year after the participant's termination date. In addition to the lump sum payment, the participant is entitled to receive any accrued but unpaid compensation, compensation for unused vacation time and any unpaid vested benefits earned or accrued under any of our benefit plans (other than qualified plans). Also, for a period of 24 months (including 18 months COBRA coverage), the participant will continue to be covered by all of our life, health care, medical and 146 dental insurance plans and programs (other than disability), as long as the participant makes a timely COBRA election and pays the regular employee premiums required under our plans and programs and by COBRA. However, if the participant is not one of our senior executives, the participant is not entitled to continued coverage under our plans and programs if his or her termination date is after his or her normal retirement date. In addition, our obligation to continue to provide coverage under our plans and programs to any participant ceases if and when the participant becomes employed on a full-time basis by a third party which provides the participant with substantially similar benefits. If any payment or distribution under our Key Employee Protection Plan to any participant is subject to excise tax pursuant to Section 4999 of the Internal Revenue Code, the participant is entitled to receive a gross-up payment from us in an amount such that, after payment by the participant of all taxes on the gross-up payment, the amount of the gross-up payment remaining is equal to the excise tax imposed under Section 4999 of the Internal Revenue Code. However, the maximum amount of any gross-up payment is 25% of the sum of the participant's highest annual base compensation during the last three years plus the participant's targeted bonus for the year of payment. We may terminate our Key Employee Protection Plan at any time and for any reason but any termination does not become effective as to any participant until 90 days after we give the participant notice of the termination of the Plan. In addition, we may amend our Key Employee Protection Plan at any time and for any reason but any amendment that reduces, alters, suspends, impairs or prejudices the rights or benefits of any participant in any material respect does not become effective as to that participant until 90 days after we give him or her notice of the amendment of the Plan. In addition, no termination of our Key Employee Protection Plan, or any of these types of amendments to the Plan, can be effective with respect to any participant if the termination or amendment is related to, in anticipation of or during the pendency of a change of control, is for the purpose of encouraging or facilitating a change of control or is made within 180 days prior to any change of control. Finally, no termination or amendment of our Key Employee Protection Plan can affect the rights or benefits of any participant that are accrued under the Plan at the time of termination or amendment or that accrue thereafter on account of a change of control that occurred prior to the termination or amendment or within 180 days after such termination or amendment. SUPPLEMENTAL PAY PLAN On March 8, 2001, our Board approved our Supplemental Pay Plan, which was approved by the Bankruptcy Court in our bankruptcy proceedings on October 31, 2001. Historically, we have paid our senior level employees below-market salaries with the opportunity to earn above-market compensation through stock based incentives and significant bonuses in years when we achieve targeted levels of EBITDA. Due to our financial difficulties, the opportunity to earn additional compensation through these programs was significantly reduced, if not entirely eliminated. As a result, our Board established this Plan to address their concern that the overall compensation provided to our senior level employees would always be below-market and, consequently, not adequate to retain these employees or attract new highly-qualified employees. A select group of management or highly compensated employees has been designated as participants under the Plan and their respective benefits have been established. Each payment under the Plan is a specified percentage of the participant's annual base salary and payments are paid on or before the tenth day after the last day of each calendar quarter. The participant must be employed by us on the relevant payment date in order to be eligible to receive that payment under the Plan. We may amend or terminate our Supplemental Pay Plan at any time but any amendment or termination of the Plan can only become effective on a payment date and may not affect the rights of participants under the Plan that have accrued as of that effective date, including the right to receive supplemental pay on that payment date. RETENTION BONUS PLAN On July 13, 2001, our Board approved our Retention Bonus Plan, which was subsequently amended. This Plan was established by our Board to help us retain our employees whose resignations would cause significant disruption to our operations and whose skills would be particularly difficult and costly to replace, to improve their morale during the pendency of our bankruptcy proceedings and help us incentivize these employees to 147 work diligently toward the resolution of our bankruptcy proceedings. The Plan was approved by the Bankruptcy Court in our bankruptcy proceedings on October 31, 2001. A select group of management or highly compensated employees has been designated as participants under the Plan and their respective benefits have been established. Each participant in the Plan is entitled to payments under the Plan on specified dates, unless the participant's employment with us terminates prior to that payment date for any reason other than a termination by the participant for "Good Reason" or a termination by us for any reason other than "Misconduct" or "Disability." Payments under the Plan are based on specified percentages of the participant's annual compensation, including payments under our Supplemental Pay Plan. Each participant who becomes entitled to payments under the Plan will be paid 25% of the total amount payable to that participant on the earlier of April 15, 2002 and the date on which a plan of reorganization in our bankruptcy proceedings is confirmed, an additional 25% on the earliest to occur of October 15, 2002, the date on which a plan of reorganization is confirmed in our bankruptcy proceedings and the date on which all or substantially all of our assets are sold or otherwise transferred, and the final 50% on the earlier to occur of the date on which a plan of reorganization is confirmed in our bankruptcy proceedings and the date on which all or substantially all of our assets are sold or otherwise transferred. However, if payments are made solely as a result of the sale of all or substantially all of our assets, a participant is not entitled to any payments under the Plan unless such sale or transfer occurs after April 15, 2002 and, for any sale or transfer that occurs after that date, the participant is only entitled to receive one-half of the final 50% payment. We may amend our Retention Bonus Plan at any time but any amendment that adversely affects a participant's rights or benefits under the Plan or reduces our obligations under the Plan will not be effective with respect to any person who was a participant at the time of such amendment. In addition, we may terminate our Retention Bonus Plan at any time, but all benefits payable under the Plan must be paid in full notwithstanding any termination or amendment of the Plan. 148 PERFORMANCE GRAPH The following Stock Performance Graph compares our cumulative total stockholder return on shares of our common stock for a five-year period with the cumulative total return of the Standard & Poor's Stock Index and the Standard & Poor's Chemicals Index. The graph assumes $100 was invested on September 30, 1996 in shares of our common stock, the S&P 500 Index and the S&P Chemicals Index and that dividends were reinvested. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* AMONG STERLING CHEMICALS HOLDINGS, INC., THE S&P 500 INDEX AND THE S&P CHEMICALS INDEX (GRAPH)
- ------------------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 - ------------------------------------------------------------------------------------------- Sterling Chemicals Holdings, Inc. 100.00 100.41 57.79 28.89 15.38 2.12 S&P 500 100.00 140.45 153.15 195.74 221.74 162.71 S&P Chemicals 100.00 130.67 117.33 138.04 103.12 112.71
* $100 Invested on 9/30/1996 in stock or index-including reinvestment of dividends. Fiscal year ending September 30. In connection with our recapitalization in August of 1996, our common stock was delisted from the New York Stock Exchange and is now included in the OTC Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc. We believe that this delisting, combined with the contemporaneous significant reductions in the overall number of outstanding shares and record holders of our common stock, have significantly reduced the liquidity of the trading market for shares of our common stock. We cannot give you any assurance as to future trends in the cumulative total return on shares of our common stock or of the foregoing indices and we do not make or endorse any predictions as to future stock performance. 149 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of our common stock as of December 3, 2001 by (i) each of our directors, (ii) each of our executive officers named in the Executive Compensation Table, (iii) all those known by us to be the beneficial owner of more than 5% of our common stock and (iv) all of our directors and executive officers as a group. Unless otherwise noted, the mailing address of each such owner is 1200 Smith Street, Suite 1900, Houston, Texas 77002-4312. In addition, an aggregate of 566,726 shares of our common stock are held by the Sterling Chemicals ESOP on behalf of our employees and former employees, including certain of our executive officers, representing approximately 4.4% of our outstanding shares of common stock, all of which have been allocated to employees' accounts to date. These shares are held of record by Merrill Lynch & Co. Incorporated, as trustee, who disclaims beneficial ownership of such shares. Each person who has shares allocated to his or her ESOP account has the sole power to vote the allocated shares.
PERCENT OF NUMBER OF RIGHT TO OUTSTANDING NAME SHARES OWNED(1) ACQUIRE(2) TOTAL SHARES - ---- --------------- ---------- --------- ----------- Frank P. Diassi...................... 710,457(3) 178,730 889,187 6.9% Robert W. Roten...................... 169,879 6,000 175,879 1.4% Frank J. Hevrdejs.................... 922,003(4) 27,000 949,003 7.4% Hunter Nelson........................ 67,154 7,000 74,154 * Rolf H. Towe(5)...................... 1,824,744 63,020 1,887,764 14.7% David G. Elkins...................... 21,533 560,000 581,533 4.4% Richard K. Crump..................... 46,750 50,265 97,015 * Gray M. Spitz........................ 16,533 0 16,533 * Paul G. Vanderhoven.................. 6,030 6,400 12,430 * Clipper Capital Associates, Inc.(6)............................ 1,818,345 59,020 1,877,368 14.6% Koch Industries, Inc.(7)............. 1,128,223 49,031 1,177,254 9.2% Fayez Sarofim & Co.(8)............... 687,548 0 687,548 5.4% Olympus Growth Fund II, L.P.(9)...... 620,383 58,387 678,770 5.3% Olympus Executive Fund, L.P.(9)...... 7,293 633 7,926 * Directors and Officers as a Group (12 persons)........................... 3,785,083 898,415 4,683,498 34.3%
- --------------- * Less than 1% (1) Includes shares of our common stock for which the named person: - has sole voting and investment power or - has shared voting and investment power with his or her spouse. Includes shares of our common stock held by Merrill Lynch, as Trustee of our Savings and Investment Plan or as Trustee of our ESOP, and allocated to the named person's account as follows:
SIP ESOP ------ ----- Frank P. Diassi............................................. 0 2,197 Robert W. Roten............................................. 0 850 David G. Elkins............................................. 0 1,533 Richard K. Crump............................................ 7,478 2,197 Gary M. Spitz............................................... 0 442 Paul G. Vanderhoven......................................... 3,478 1,791 Directors and Officers as a Group........................... 10,956 9,010
150 Excludes shares of our common stock that: - are restricted stock holdings or - may be acquired through the exercise of stock options within 60 days Excludes shares of our common stock and currently exercisable warrants to acquire shares of our common stock held by persons other than the named person who are parties to the Voting Agreement described in "Certain Transactions." Each of Messrs. Diassi, Hevrdejs and Nelson, Clipper Capital Associates, Inc., Koch Industries, Inc., Olympus Growth Fund II, L.P., Olympus Executive Fund, L.P. and Fayez Sarofim & Co. is a party to the Voting Agreement. Other parties to the Voting Agreement include William A. McMinn, one of our former directors, who beneficially owns 131,896 shares of our common stock and currently exercisable warrants to acquire 40,000 shares of our common stock, William C. Oehmig, who beneficially owns 361,772 shares of our common stock, The Rheney Living Trust (Susan O. Rheney and Clarke Rheney, Trustees), which beneficially owns 48,307 shares of our common stock, CS First Boston Merchant Investments 1995/96, L.P., which beneficially owns 75,900 shares of our common stock, and Von D. Oehmig, who beneficially owns 2,083 shares of our common stock. In addition, Gordon A. Cain, who beneficially owns currently exercisable warrants to acquire 160,000 shares of our common stock, and James Crane, who beneficially owns currently exercisable warrants to acquire 30,000 shares of our common stock, are parties to the Voting Agreement. All of the parties to the Voting Agreement may be deemed to be members of a "group" within the meaning of Rule 13d-5(b)(1) under the Securities Exchange Act and, as a result, may be deemed to have beneficial ownership of all of the shares of our common stock subject to the Voting Agreement. All shares of our common stock owned by the parties to the Voting Agreement are subject to the Voting Agreement, irrespective of whether such shares are currently owned or subsequently acquired, through purchase, the exercise of warrants or otherwise. The Voting Agreement expires at the time described in "Certain Transactions." Currently, an aggregate of 6,673,213 shares of our common stock, representing approximately 52% of our outstanding shares of common stock, are subject to the Voting Agreement. Each of the named persons expressly disclaims membership in such group and beneficial ownership of any shares of our common stock or warrants to acquire shares of our common stock held by the other parties to the Voting Agreement. (2) Shares of our common stock that can be acquired through the exercise of warrants or stock options within 60 days. (3) Includes (i) 20,000 shares of our common stock held as Trustee of the Gabrielle Diassi Trust, (ii) 40,000 shares of our common stock held as Trustee of the Diassi Children's Trust, (iii) 10,000 shares of our common stock held as Trustee of the Brianna Diassi Trust, (iv) 10,000 shares of our common stock held as Trustee of the Nicholas Diassi Trust, (v) 10,000 shares of our common stock held by Mr. Diassi's wife and (vi) 10,000 shares of our common stock held by Amerlux, Inc., a manufacturer of lighting fixtures for commercial and retail markets of which Mr. Diassi owns 50% of the outstanding equity and serves as Chairman of the Board. Mr. Diassi disclaims beneficial ownership of all of these shares. (4) Includes 3,990 shares of our common stock owned by Mr. Hevrdejs' wife. Mr. Hevrdejs disclaims beneficial ownership of such shares. (5) Represents shares of our common stock and includes warrants to acquire shares of our common stock held by The Clipper Group (see Note 6) with respect to which Mr. Towe, as Senior Managing Director of The Clipper Group, L.P. and Vice President of Clipper Asset Management, Inc., may be deemed to have beneficial ownership. Mr. Towe disclaims beneficial ownership of such shares and warrants. (6) Clipper Capital Associates, Inc. ("Clipper") may be deemed to be the beneficial owner of such shares of our common stock by virtue of its relationship with entities that have beneficial ownership of such shares as discussed herein. Clipper and its affiliated entities described herein are collectively referred to as "The Clipper Group." Clipper is the sole general partner of Clipper Associates, and is a Delaware corporation principally engaged in holding investments, formed for the purpose of serving as general partner of Clipper Associates. The mailing address of Clipper is 650 Madison Ave., 9th Floor, New York, New York 10022. Clipper Associates is a Delaware limited partnership principally engaged in making 151 investments, directly or indirectly through other entities, and is the sole general partner of Clipper Equity Partners I, L.P. ("Clipper I") and Clipper/Merchant Partners, L.P. ("Clipper II"), with sole voting and dispositive power with respect to the securities held by such partnerships. Each of Clipper I and Clipper II is a Delaware limited partnership, principally engaged in making investments. Clipper Associates may be deemed to directly beneficially own 11,831 shares of our common stock and, as of December 3, 2001, indirectly beneficially own 15,940 shares of our common stock by virtue of its status as nominee under certain nominee agreements, pursuant to which it exercises sole voting and dispositive power with respect to such shares. The nominee agreements, which originally covered 201,776 shares of our common stock, have been terminated but, as of December 3, 2001, the transfer of 15,940 shares of our common stock to the beneficial owners had not been completed. Clipper I may be deemed to directly beneficially own 444,537 shares of our common stock. Clipper II may be deemed to directly beneficially own 516,031 shares of our common stock. Each of Clipper/Merban, L.P. ("Clipper III") and Clipper/ European Re, L.P. ("Clipper IV") is a Delaware limited partnership, principally engaged in making investments. Clipper Associates is the sole investment general partner of Clipper III and Clipper IV, having sole voting and dispositive power with respect to securities held by such partnerships. Clipper III may be deemed to directly beneficially own 592,701 shares of our common stock. Clipper IV may be deemed to directly beneficially own 296,328 shares of our common stock. Clipper Curacao, Inc., a corporation organized under the laws of the British Virgin Islands, is the sole administrative general partner of Clipper III and Clipper IV, responsible for the administrative functions of such partnerships. The share amounts set forth in this footnote include warrants to acquire shares of our common stock in the amounts of 28 shares with respect to Clipper Associates, 13,605 shares with respect to Clipper I, 18,149 shares with respect to Clipper II, 18,149 shares with respect to Clipper III and 9,089 shares with respect to Clipper IV. (7) Represents shares of our common stock held by Koch Capital Services, Inc., a wholly owned subsidiary of Koch Industries, Inc. which may be deemed to be the beneficial owner of such shares. The mailing address of Koch Capital Services, Inc. and Koch Industries, Inc. is 4111 East 37th Street North, Wichita, Kansas 67220. (8) Represents shares of our common stock directly beneficially owned by FSI No. 2 Corporation, a wholly owned subsidiary of Fayez Sarofim & Co., which may be deemed to be the beneficial owner of such shares. The majority owner of Fayez Sarofim & Co. is Fayez Sarofim. The mailing address of FSI No. 2 Corporation, Fayez Sarofim & Co. and Fayez Sarofim is Two Houston Center, Suite 2907, Houston, Texas 77010. (9) Olympus Growth Fund II, L.P. and Olympus Executive Fund, L.P. are Delaware limited partnerships principally engaged in making investments. OGP II, L.P., a Delaware limited partnership, is the sole general partner of Olympus Growth Fund II, L.P. and OEF, L.P., a Delaware limited partnership, is the sole general partner of Olympus Executive Fund L.P. Each of OGP II, L.P. and OEF, L.P. has the same three general partners, being LJM, L.L.C., RSM, L.L.C. and Conroy, L.L.C., each of which is a Delaware limited liability company. The majority owners of LJM, L.L.C., RSM, L.L.C. and Conroy, L.L.C. are Louis J. Mischianti, Robert S. Morris and James A. Conroy, respectively. The mailing address of each of these entities and individuals is Metro Center, One Station Place, Stamford, Connecticut 06902. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires our officers, directors and anyone who beneficially owns at least 10% of our common stock to file reports regarding their ownership of our common stock and any changes in that ownership with the SEC. We believe that, during fiscal 2001, our officers, directors and 10% stockholders complied with all Section 16(a) filing requirements, with the following exceptions. One of our directors, Robert W. Roten, filed a Form 5 in November of 2001 to report the acquisition of 186 shares of our common stock that were allocated to his ESOP account in December of 1998. In addition, one of our directors, Frank J. Hevrdejs, filed a Form 5 in November of 2001 to report the acquisition by his wife of 2,000 shares of our stock in April of 1997. Mr. Hevrdejs may be deemed to be the 152 beneficial owner of these shares, although he disclaims any such beneficial interest. In making these statements we have relied on our review of copies of these reports furnished to us and written representations from our officers and directors. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The holders of 6,673,213 shares of our common stock, representing approximately 52% of our outstanding shares, are parties to a Third Amended and Restated Voting Agreement dated as of February 1, 1999. Three of our directors, Messrs. Diassi, Hevrdejs and Nelson, are parties to the Voting Agreement. Other parties to the Voting Agreement include William A. McMinn, one of our former directors, William C. Oehmig, Susan O. Rheney (as Trustee of the Rheney Living Trust), Koch Capital Services, Inc., affiliates of Clipper Capital Partners, L.P. who are commonly referred to collectively as "The Clipper Group", FSI No. 2 Corporation, a wholly owned subsidiary of Fayez Sarofim & Co., Olympus Growth Fund II, L.P., Olympus Executive Fund, L.P., Credit Suisse First Boston, Gordon A. Cain and James Crane. The parties to the Voting Agreement are required to vote any shares of our common stock owned by them in favor of three nominees to our Board of Directors; one to be designated by The Clipper Group, one to be designed by Gordon A. Cain and one to be designated by Koch Capital. Rolf H. Towe is the current designee of The Clipper Group. Mr. Cain did not designate a nominee to our Board following the resignation of his prior nominee on October 26, 2000. Koch Capital has waived its right to designate a member of our Board. The rights of each of The Clipper Group and Koch Capital to designate nominees under the Voting Agreement terminates on the earlier of August 21, 2006 or the time at which they beneficial own less than 5% of our outstanding shares, respectively. The right of Mr. Cain to designate a nominee to our Board under the Voting Agreement terminated on December 15, 2001. The holders of 8,763,302 shares of our common stock, representing approximately 69% of our outstanding shares, were parties to a Stockholders Agreement originally dated as of August 21, 1996 and a Tag-Along Agreement dated as of August 21, 1996. The Stockholders Agreement restricted the transfer of shares of our common stock held by the parties (with certain exceptions), including any disposition of a control position, unless such shares were first offered to be sold to our ESOP, then to us and then to the other parties to the Stockholders Agreement. The Tag-Along Agreement provided that if any party to the agreement, either by themselves or together with others, proposed to transfer a total of 51% or more of our outstanding shares of common stock, that party must have given notice of the proposed transfer to each person that retained shares of our common stock in our recapitalization conducted in August of 1996, and each of these stockholders would have the right to have any shares they retained in that recapitalization included in the transfer on a pro rata basis and on the same terms and conditions. The Stockholders Agreement was terminated effective as of September 15, 2001 by the consent of the requisite number of parties to that agreement, and the Tag-Along Agreement expired by its terms on August 21, 2001. Since October 1, 1991, we have had ongoing commercial relationships in the ordinary course of business with certain affiliates of Koch Industries, Inc., including agreements for the supply of raw materials, sales of petrochemicals and transportation of natural gas. During the fiscal year ended September 30, 2001: - we made product sales to and purchased raw materials from Koch Chemical and Koch Nitrogen Company, indirect wholly owned subsidiaries of Koch Industries; - we made payments to John Zink Company, an indirect wholly owned subsidiary of Koch Industries, in consideration for certain contracting and construction services performed at our facilities in Texas City, Texas; and - we made payments to Koch Gateway Pipeline Company for the transportation of natural gas to our acrylic fiber plant through a pipeline in which it is a partner. Each of these relationships represented less than 1% of our revenues, with the exception that our raw material purchases from Koch Nitrogen and Koch Chemical totaled around 2% of our revenues. In addition, in 1998 we filed a lawsuit against John Zink Company seeking recovery for certain types of damages we sustained in 153 connection with a release of nickel carbonyl from our methanol unit on July 30, 1997. This lawsuit has been voluntarily dismissed but, under a tolling agreement between the parties, may be refiled at any time. PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements, Financial Statement Schedules and Exhibits 1. Consolidated Financial Statements See "Item 8. Financial Statements and Supplementary Data -- Index to Financial Statements." In addition, the consolidated financial statements of Sterling Canada, Inc. and Sterling Pulp Chemicals, Ltd. for the years ended September 30, 2001, 2000, and 1999 are filed as Exhibits 99.1 and 99.2 hereto. 2. All schedules for which provision is made in Regulation S-X of the Securities and Exchange Commission are not required under the related instruction or are inapplicable and, therefore, have been omitted. 3. Exhibits The following exhibits are filed as part of this Form 10-K:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 2.1 -- Amended and Restated Agreement and Plan of Merger between STX Acquisition Corp. and Sterling Chemicals, Inc. dated as of April 24, 1996, incorporated by reference from the Company's Current Report on Form 8-K dated April 24, 1996, as amended by Form 8-K/A. 3.1 -- Restated Certificate of Incorporation of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 3.2 -- Certificate of Incorporation of Sterling Chemicals, Inc., as amended, incorporated by reference from Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. **3.3 -- Amended and Restated Audit and Compliance Committee Charter of Sterling Chemicals Holdings, Inc. 3.4 -- Restated Bylaws of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 3.5 -- Restated Bylaws of Sterling Chemicals, Inc., incorporated by reference from Exhibit 3.2 to the Registration Statement on Form S-4 of Sterling Chemicals, Inc. (Registration No. 333-87471). 4.1 -- Warrant Agreement (including form of Warrant) dated as of August 15, 1996 between Sterling Chemicals Holdings, Inc. and KeyCorp Shareholder Services, Inc., as Warrant Agent, incorporated by reference from Exhibit 4.4 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.2 -- Warrant Agreement dated as of July 10, 1997 between Sterling Chemicals Holdings, Inc. and Harris Trust and Savings Bank, as Warrant Agent, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 4.3 -- Warrant Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Harris Trust and Savings Bank, as Warrant Agent, incorporated by reference from Exhibit 4.3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998.
154
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.4 -- Registration Rights Agreement, incorporated by reference from Exhibit 4.11 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.5 -- Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, incorporated by reference from Exhibit 4.10 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.5(a) -- First Amendment to Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of December 31, 1997, incorporated by reference from Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.5(b) -- Second Amendment to Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of May 1, 1998, incorporated by reference from Exhibit 4.9(b) of the Company's Annual Report on Form 10-K for the fiscal year ending September 30, 1998. **4.5(c) -- Form of Consent to Terminate Stockholders Agreement. 4.6 -- Third Amended and Restated Voting Agreement dated as of February 1, 1999, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. 4.7 -- Tag-Along Agreement dated as of August 21, 1996, incorporated by reference from Exhibit 4.13 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.8 -- Indenture dated as of August 15, 1996 between Sterling Chemicals Holdings, Inc. and Fleet National Bank governing the 13 1/2% Senior Secured Discount Notes due 2008 of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 4.5 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.8(a) -- First Supplemental Indenture dated October 1, 1997 governing the 13 1/2% Senior Secured Discount Notes due 2008 of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.8(b) -- Second Supplemental Indenture dated March 16, 1998 governing the 13 1/2% Senior Secured Discount Notes due 2008 of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.9 -- Indenture dated as of August 15, 1996 between Sterling Chemicals, Inc. and Fleet National Bank governing the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.7 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.9(a) -- First Supplemental Indenture dated October 1, 1997 governing the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.9(b) -- Second Supplemental Indenture dated March 16, 1998 governing the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.9(c) -- Instrument of Resignation, Appointment and Acceptance dated effective as of July 27, 2001 among Sterling Chemicals, Inc., State Street Bank and Trust Company (successor to Fleet National Bank) and HSBC Bank USA related to the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001.
155
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.10 -- Indenture dated as of April 7, 1997 between Sterling Chemicals, Inc. and Fleet National Bank governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997. 4.10(a) -- First Supplemental Indenture dated March 16, 1998 governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.10(b) -- Instrument of Resignation, Appointment and Acceptance dated effective as of July 27, 2001 among Sterling Chemicals, Inc., State Street Bank and Trust Company (successor to Fleet National Bank) and HSBC Bank USA related to the 11 1/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.19 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.11 -- Indenture dated as of July 23, 1999 among Sterling Chemicals, Inc., as Issuer, Sterling Canada Inc., Sterling Chemicals Energy, Inc., Sterling Chemicals International, Inc., Sterling Fibers, Inc., Sterling Pulp Chemicals US, Inc., and Sterling Pulp Chemicals, Inc., as Guarantors, and Harris Trust Company of New York, as Trustee, incorporated by reference from Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.12 -- Second Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 by Sterling Chemicals, Inc., Trustor, to John Dorris, Trustee for the benefit of Harris Trust Company of New York, Beneficiary, incorporated by reference from Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.13 -- Second Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 between Sterling Fibers, Inc., Mortgagor, and Harris Trust Company of New York, Mortgagee, incorporated by reference from Exhibit 4.11 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.14 -- Second Leasehold Deed to Secure Debt, Assignment and Security Agreement dated as of July 23, 1999 by Sterling Pulp Chemicals, Inc., Grantor, to Harris Trust Company of New York, as Collateral Agent, and U.S. Bank Trust National Association, as Georgia co-agent, incorporated by reference from Exhibit 4.12 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.15 -- Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals, Inc., Sterling Pulp Chemicals US, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc., and Sterling Chemicals International, Inc., as Assignors, and Harris Trust Company of New York, as Collateral Agent, incorporated by reference from Exhibit 4.13 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.16 -- Stock Pledge and Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., and Sterling Pulp Chemicals US, Inc., as Pledgors, and Harris Trust Company of New York, as Collateral Agent, incorporated by reference from Exhibit 4.14 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.17 -- Stock Pledge and Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc. and Sterling Canada, Inc., as Pledgors, and Harris Trust Company of New York, as Collateral Agent, incorporated by reference from Exhibit 4.15 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.18 -- Revolving Credit Agreement dated as of July 19, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, and various financial institutions, as the Lenders, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001.
156
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- **4.18(a) -- First Amendment to Revolving Credit Agreement dated as of August 17, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, and various financial institutions, as the Lenders. **4.18(b) -- Second Amendment to Revolving Credit Agreement dated as of August 29, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, and various financial institutions, as the Lenders. **4.18(c) -- Third Amendment to Revolving Credit Agreement dated as of September 7, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, and various financial institutions, as the Lenders. **4.18(d) -- Fourth Amendment to Revolving Credit Agreement dated as of October 10, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, and various financial institutions, as the Lenders. 4.19 -- Fixed Assets Secured Parties Parent Pledge Agreement dated as of July 19, 2001 between Sterling Chemicals Holdings, Inc. and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.20 -- Current Assets Secured Parties Parent Pledge Agreement dated as of July 19, 2001 between Sterling Chemicals Holdings, Inc. and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Current Assets Secured Parties, incorporated by reference from Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.21 -- Fixed Assets Secured Parties Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 19, 2001 by Sterling Chemicals, Inc., Trustor, to R. Christian Brose, Trustee for the benefit of The CIT Group/Business Credit, Inc., as Administrative and Collateral Agent, Beneficiary, incorporated by reference from Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.22 -- Current Assets Secured Parties Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 19, 2001 by Sterling Chemicals, Inc., Trustor, to R. Christian Brose, Trustee for the benefit of The CIT Group/Business Credit, Inc., as Administrative and Collateral Agent, Beneficiary, incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.23 -- Fixed Assets Secured Parties Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 19, 2001 by Sterling Fibers, Inc., Mortgagor, to The CIT Group/Business Credit, Inc., Mortgagee, incorporated by reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.24 -- Current Assets Secured Parties Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 19, 2001 by Sterling Fibers, Inc., Mortgagor, to The CIT Group/Business Credit, Inc., Mortgagee, incorporated by reference from Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001.
157
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.25 -- Fixed Assets Secured Parties Leasehold Deed to Secure Debt, Assignment and Security Agreement dated as of July 19, 2001 by Sterling Pulp Chemicals, Inc. to The CIT Group/ Business Credit, Inc., as Administrative Agent, incorporated by reference from Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.26 -- Current Assets Secured Parties Leasehold Deed to Secure Debt, Assignment and Security Agreement dated as of July 19, 2001 by Sterling Pulp Chemicals, Inc. to The CIT Group/ Business Credit, Inc., as Administrative Agent, incorporated by reference from Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.27 -- Fixed Assets Secured Parties Security Agreement dated as of July 19, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Grantors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.28 -- Current Assets Secured Parties Security Agreement dated as of July 19, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Grantors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Current Assets Secured Parties, incorporated by reference from Exhibit 4.11 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.29 -- Fixed Assets Secured Parties Obligor Pledge Agreement dated as of July 19, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc. and Sterling Pulp Chemicals US, Inc., as the Pledgors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.12 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.30 -- Current Assets Secured Parties Obligor Pledge Agreement dated as of July 19, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc. and Sterling Pulp Chemicals US, Inc., as the Pledgors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Current Assets Secured Parties, incorporated by reference from Exhibit 4.13 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.31 -- Revolving Credit Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, Credit Suisse First Boston, as the Documentation Agent, DLJ Capital Funding, Inc., as the Syndication Agent, and various financial institutions, as the Lenders, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.31(a) -- First Amendment to Revolving Credit Agreement dated effective as of December 17, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, Credit Suisse First Boston, as the Documentation Agent, DLJ Capital Funding, Inc., as the Syndication Agent, and various financial institutions, as the Lenders, incorporated by reference from Exhibit 4.20(a) of the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. 4.32 -- Parent Pledge Agreement dated as of July 23, 1999 between Sterling Chemicals Holdings, Inc. and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999.
158
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.33 -- Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 by Sterling Chemicals, Inc., Trustor, to Linda H. Earle, Trustee for the benefit of The CIT Group/Business Credit, Inc., as Administrative and Collateral Agent, Beneficiary, incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.34 -- Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 by Sterling Fibers, Inc., Mortgagor, to The CIT Group/Business Credit, Inc., Mortgagee, incorporated by reference from Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.35 -- Leasehold Deed to Secure Debt, Assignment and Security Agreement dated as of July 23, 1999 by Sterling Pulp Chemicals, Inc. to The CIT Group/Business Credit, Inc., as Administrative Agent, and U.S. Bank Trust National Association, as Georgia co-agent, incorporated by reference from Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.36 -- Fixed Assets Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Grantors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.37 -- Current Assets Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Grantors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Current Assets Secured Parties, incorporated by reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.38 -- Obligor Pledge Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc. and Sterling Pulp Chemicals US, Inc., as the Pledgors, and The CIT Group/ Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.39 -- Intercreditor Agreement dated as of August 21, 1996 between Texas Commerce Bank National Association and Fleet National Bank, incorporated by reference from Exhibit 4.14 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.39(a) -- Amendment of Intercreditor Agreement dated as of July 23, 1999 among Sterling Chemicals Holdings, Inc., Chase Bank of Texas, N.A. (formerly known as Texas Commerce Bank National Association), as Administrative Agent, and State Street Bank and Trust Company, as Trustee, incorporated by reference from Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.40 -- Senior Debt Intercreditor Agreement dated as of July 23, 1999 among Harris Trust Company of New York, as Trustee, The CIT Group/Business Credit, Inc., as Administrative Agent, and Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.17 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.41 -- Financing Agreement dated as of July 11, 2001 between Sterling Pulp Chemicals, Ltd. and CIT Business Credit Canada Inc., incorporated by reference from Exhibit 4.14 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001 **4.41(a) -- Letter Agreement dated July 26, 2001 between Sterling Pulp Chemicals, Ltd. and CIT Business Credit Canada Inc. amending the Financing Agreement in certain respects. **4.41(b) -- Letter Agreement dated September 14, 2001 between Sterling Pulp Chemicals, Ltd. and CIT Business Credit Canada Inc. amending the Financing Agreement in certain respects.
159
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.42 -- Demand Debenture dated as of July 11, 2001 by Sterling Pulp Chemicals, Ltd. in favour of CIT Business Credit Canada Inc., as Holder, and the Lenders, incorporated by reference from Exhibit 4.15 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.43 -- Debenture Pledge Agreement dated as of July 11, 2001 between Sterling Pulp Chemicals, Ltd. and CIT Business Credit Canada Inc., incorporated by reference from Exhibit 4.16 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.44 -- Deed of Hypothec dated as of July 13, 2001 between Sterling Pulp Chemicals, Ltd. and CIBC Mellon Trust Company, as holder of power of attorney for all present and future holders of the Demand Debenture dated July 11, 2001 by Sterling Pulp Chemicals, Ltd. in favour of CIT Business Credit Canada Inc., incorporated by reference from Exhibit 4.17 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 10.1 -- Amended and Restated Stock Plan for Non-Employee Directors, incorporated by reference from Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. **10.2 -- Third Amended and Restated Key Employee Protection Plan. 10.3 -- Amended and Restated Supplemental Pay Plan, incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. **10.4 -- Amended and Restated Retention Bonus Plan. **10.5 -- Amended and Restated Supplemental Bonus Plan. **10.6 -- Second Amended and Restated Severance Pay Plan. 10.7 -- Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and Incentive Plan, as amended, incorporated by reference from Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.8 -- Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of May 1, 1996), incorporated by reference from Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.8(a) -- First Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of January 31, 1997), incorporated by reference from Exhibit 10.4(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.8(b) -- Second Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of January 1, 1997), incorporated by reference from Exhibit 10.4(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.8(c) -- Third Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of November 1, 1998), incorporated by reference from Exhibit 10.4(c) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.8(d) -- Fourth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of December 31, 1998), incorporated by reference from Exhibit 10.4(d) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.8(e) -- Fifth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of April 1, 1999), incorporated by reference from Exhibit 10.4(e) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.8(f) -- Sixth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of May 14, 1999), incorporated by reference from Exhibit 10.4(f) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000.
160
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10.9 -- Sterling Chemicals, Inc. Pension Benefit Equalization Plan, incorporated by reference from Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020). 10.10 -- Sterling Chemicals, Inc. Amended and Restated Supplemental Employee Retirement Plan, incorporated by reference from Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1989 (Commission File Number 1-10059). 10.11 -- Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of May 1, 1996), incorporated by reference from Exhibit 10.3(c) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.11(a) -- First Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of December 31, 1998), incorporated by reference from Exhibit 10.7(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.11(b) -- Second Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of December 17, 1998), incorporated by reference from Exhibit 10.7(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.11(c) -- Third Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of September 20, 1999), incorporated by reference from Exhibit 10.7(c) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.12 -- Sterling Chemicals, Inc. Sixth Amended and Restated Savings and Investment Plan dated as of October 1, 2000, incorporated by reference from Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.13 -- Sterling Chemicals ESOP, incorporated by reference from Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.13(a) -- Sterling Chemicals ESOP (First Amendment) (Effective as of December 27, 1996), incorporated by reference from Exhibit 10.9(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.13(b) -- Sterling Chemicals ESOP (Second Amendment) (Effective as of August 21, 1996), incorporated by reference from Exhibit 10.9(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.13(c) -- Third Amendment to Sterling Chemicals ESOP (Effective as of January 31, 1997) incorporated by reference from Exhibit 10.9(c) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.13(d) -- Fourth Amendment to Sterling Chemicals ESOP (Effective as of November 1, 1998) incorporated by reference from Exhibit 10.9(d) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.13(e) -- Fifth Amendment to Sterling Chemicals ESOP (Effective as of December 31, 1998) incorporated by reference from Exhibit 10.9(e) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.14 -- Articles of Agreement between Sterling Chemicals, Inc., its successors and assigns, and Texas City, Texas Metal Trades Council, AFL-CIO Texas City, Texas, December 18, 1998 to May 1, 2002, incorporated by reference from Exhibit 10.23 to the Registration Statement on Form S-4 of Sterling Chemicals, Inc. (Registration No. 333-87471). **10.15 -- Agreement between Sterling Pulp Chemicals Ltd., North Vancouver, British Columbia, and Pulp, Paper and Woodworkers of Canada, Local 5, British Columbia, effective December 1, 2000 to November 30, 2003. 10.16 -- Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Frank P. Diassi, incorporated by reference from Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998.
161
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10.17 -- Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Frank J. Hevrdejs, incorporated by reference from Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 10.18 -- Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Koch Capital Services, Inc., incorporated by reference from Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 10.19 -- Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals, Holdings, Inc. and William A. McMinn, incorporated by reference from Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. 10.20 -- Form of Indemnity Agreement executed between the Company and each of its officers and directors, incorporated by reference from Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.21 -- Form of Indemnity Agreement executed between the Company and each of its officers and directors, incorporated by reference from Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.22 -- Severance Agreement dated as of May 1, 2000 among Peter W. De Leeuw and the Company, incorporated by reference from Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.23 -- Employment Agreement dated as of November 12, 1997 between David G. Elkins and the Company, incorporated by reference from Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. 10.24 -- Employment Agreement dated as of January 19, 1998 between Gary M. Spitz and the Company, incorporated by reference from Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. +10.25 -- Amended and Restated Production Agreement dated March 31, 1998 between BP Chemicals, Inc. and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.26 -- Second Amended and Restated Production Agreement dated effective as of August 1, 1996 between BP Chemicals Inc. and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.26(a) -- Amendment to Second Amended and Restated Production Agreement dated as of March 1, 2001 between Sterling Chemicals, Inc. and BP Chemicals Inc., incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001. +10.27 -- Amended and Restated Product Sales Agreement dated effective as of January 1, 1998 between BASF Corporation and Sterling Chemicals, Inc., incorporated by referenced from Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. 10.28 -- License Agreement dated August 1, 1986 between Monsanto Company and Sterling Chemicals, Inc. incorporated by reference from Exhibit 10.25 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020). +10.29 -- Joint Venture Agreement dated March 31, 1998 between Sterling Chemicals, Inc. and BP Chemicals, Inc., incorporated by reference from Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.29(a) -- First Amendment to Joint Venture Agreement dated effective as of March 31, 1998 between Sterling Chemicals, Inc. and BP Chemicals Inc., incorporated by reference from Exhibit 10.26(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. **21.1 -- Subsidiaries of Sterling Chemicals Holdings, Inc.
162
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- **23.1 -- Consent of Deloitte & Touche LLP **99.1 -- Sterling Canada, Inc. consolidated financial statements and notes thereto for the years ended September 30, 2001, 2000, and 1999, including independent auditors' report. **99.2 -- Sterling Pulp Chemicals, Ltd. financial statements and notes thereto for the years ended September 30, 2001, 2000, and 1999, including independent auditors' report.
- --------------- ** Filed herewith. + Confidential treatment has been requested with respect to portions of this Exhibit, and such request has been granted. (b) Reports on Form 8-K. i. On March 13, 2001, the Company filed a Current Report on Form 8-K reporting Items 5 and 7 of such Form related to the resignation of the Company's Chief Financial Officer and the appointment of his replacement. ii. On July 17, 2001, the Company filed a Current Report on Form 8-K reporting Items 3 and 7 of such Form related to the Debtors' Chapter 11 filings. iii. On September 21, 2001, the Company filed a Current Report on Form 8-K reporting Items 3 and 7 of such Form related to the filing of the Debtors' Monthly Operating Reports with the Bankruptcy Court. iv. On November 5, 2001, the Company filed a Current Report on Form 8-K reporting Items 3 and 7 of such Form related to the filing of the Debtors' Monthly Operating Reports with the Bankruptcy Court. v. On December 10, 2001, the Company filed a Current Report on Form 8-K reporting Items 3 and 7 of such Form related to the filing of the Debtors' Monthly Operating Reports with the Bankruptcy Court. 163 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (Registrants) By /s/ DAVID G. ELKINS ------------------------------------ David G. Elkins President and Co-Chief Executive Officer Date: December 20, 2001 Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of each of the Registrants and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- Principal Executive Officers: /s/ DAVID G. ELKINS President and Co-Chief December 20, 2001 ------------------------------------------------ Executive Officer (David G. Elkins) /s/ RICHARD K. CRUMP Chief Operating Officer and December 20, 2001 ------------------------------------------------ Co-Chief Executive Officer (Richard K. Crump) Principal Finance Officer: /s/ PAUL G. VANDERHOVEN Vice President -- Finance and December 20, 2001 ------------------------------------------------ Chief Financial Officer (Paul G. Vanderhoven) Principal Accounting Officer: /s/ JOHN R. BEAVER Controller December 20, 2001 ------------------------------------------------ (John R. Beaver) /s/ ROBERT W. ROTEN Chairman of the Board of December 20, 2001 ------------------------------------------------ Directors (Robert W. Roten) Director December 20, 2001 ------------------------------------------------ (Frank P. Diassi) /s/ FRANK J. HEVRDEJS Director December 20, 2001 ------------------------------------------------ (Frank J. Hevrdejs) /s/ T. HUNTER NELSON Director December 20, 2001 ------------------------------------------------ (T. Hunter Nelson) /s/ ROLF H. TOWE Director December 20, 2001 ------------------------------------------------ (Rolf H. Towe)
164 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 2.1 -- Amended and Restated Agreement and Plan of Merger between STX Acquisition Corp. and Sterling Chemicals, Inc. dated as of April 24, 1996, incorporated by reference from the Company's Current Report on Form 8-K dated April 24, 1996, as amended by Form 8-K/A. 3.1 -- Restated Certificate of Incorporation of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 3.2 -- Certificate of Incorporation of Sterling Chemicals, Inc., as amended, incorporated by reference from Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. **3.3 -- Amended and Restated Audit and Compliance Committee Charter of Sterling Chemicals Holdings, Inc. 3.4 -- Restated Bylaws of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 3.5 -- Restated Bylaws of Sterling Chemicals, Inc., incorporated by reference from Exhibit 3.2 to the Registration Statement on Form S-4 of Sterling Chemicals, Inc. (Registration No. 333-87471). 4.1 -- Warrant Agreement (including form of Warrant) dated as of August 15, 1996 between Sterling Chemicals Holdings, Inc. and KeyCorp Shareholder Services, Inc., as Warrant Agent, incorporated by reference from Exhibit 4.4 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.2 -- Warrant Agreement dated as of July 10, 1997 between Sterling Chemicals Holdings, Inc. and Harris Trust and Savings Bank, as Warrant Agent, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 4.3 -- Warrant Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Harris Trust and Savings Bank, as Warrant Agent, incorporated by reference from Exhibit 4.3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 4.4 -- Registration Rights Agreement, incorporated by reference from Exhibit 4.11 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.5 -- Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, incorporated by reference from Exhibit 4.10 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.5(a) -- First Amendment to Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of December 31, 1997, incorporated by reference from Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.5(b) -- Second Amendment to Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of May 1, 1998, incorporated by reference from Exhibit 4.9(b) of the Company's Annual Report on Form 10-K for the fiscal year ending September 30, 1998. **4.5(c) -- Form of Consent to Terminate Stockholders Agreement. 4.6 -- Third Amended and Restated Voting Agreement dated as of February 1, 1999, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. 4.7 -- Tag-Along Agreement dated as of August 21, 1996, incorporated by reference from Exhibit 4.13 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343).
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.8 -- Indenture dated as of August 15, 1996 between Sterling Chemicals Holdings, Inc. and Fleet National Bank governing the 13 1/2% Senior Secured Discount Notes due 2008 of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 4.5 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.8(a) -- First Supplemental Indenture dated October 1, 1997 governing the 13 1/2% Senior Secured Discount Notes due 2008 of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.8(b) -- Second Supplemental Indenture dated March 16, 1998 governing the 13 1/2% Senior Secured Discount Notes due 2008 of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.9 -- Indenture dated as of August 15, 1996 between Sterling Chemicals, Inc. and Fleet National Bank governing the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.7 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.9(a) -- First Supplemental Indenture dated October 1, 1997 governing the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.9(b) -- Second Supplemental Indenture dated March 16, 1998 governing the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.9(c) -- Instrument of Resignation, Appointment and Acceptance dated effective as of July 27, 2001 among Sterling Chemicals, Inc., State Street Bank and Trust Company (successor to Fleet National Bank) and HSBC Bank USA related to the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.10 -- Indenture dated as of April 7, 1997 between Sterling Chemicals, Inc. and Fleet National Bank governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997. 4.10(a) -- First Supplemental Indenture dated March 16, 1998 governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.10(b) -- Instrument of Resignation, Appointment and Acceptance dated effective as of July 27, 2001 among Sterling Chemicals, Inc., State Street Bank and Trust Company (successor to Fleet National Bank) and HSBC Bank USA related to the 11 1/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.19 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.11 -- Indenture dated as of July 23, 1999 among Sterling Chemicals, Inc., as Issuer, Sterling Canada Inc., Sterling Chemicals Energy, Inc., Sterling Chemicals International, Inc., Sterling Fibers, Inc., Sterling Pulp Chemicals US, Inc., and Sterling Pulp Chemicals, Inc., as Guarantors, and Harris Trust Company of New York, as Trustee, incorporated by reference from Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.12 -- Second Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 by Sterling Chemicals, Inc., Trustor, to John Dorris, Trustee for the benefit of Harris Trust Company of New York, Beneficiary, incorporated by reference from Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.13 -- Second Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 between Sterling Fibers, Inc., Mortgagor, and Harris Trust Company of New York, Mortgagee, incorporated by reference from Exhibit 4.11 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.14 -- Second Leasehold Deed to Secure Debt, Assignment and Security Agreement dated as of July 23, 1999 by Sterling Pulp Chemicals, Inc., Grantor, to Harris Trust Company of New York, as Collateral Agent, and U.S. Bank Trust National Association, as Georgia co-agent, incorporated by reference from Exhibit 4.12 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.15 -- Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals, Inc., Sterling Pulp Chemicals US, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc., and Sterling Chemicals International, Inc., as Assignors, and Harris Trust Company of New York, as Collateral Agent, incorporated by reference from Exhibit 4.13 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.16 -- Stock Pledge and Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., and Sterling Pulp Chemicals US, Inc., as Pledgors, and Harris Trust Company of New York, as Collateral Agent, incorporated by reference from Exhibit 4.14 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.17 -- Stock Pledge and Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc. and Sterling Canada, Inc., as Pledgors, and Harris Trust Company of New York, as Collateral Agent, incorporated by reference from Exhibit 4.15 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.18 -- Revolving Credit Agreement dated as of July 19, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, and various financial institutions, as the Lenders, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. **4.18(a) -- First Amendment to Revolving Credit Agreement dated as of August 17, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, and various financial institutions, as the Lenders. **4.18(b) -- Second Amendment to Revolving Credit Agreement dated as of August 29, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, and various financial institutions, as the Lenders. **4.18(c) -- Third Amendment to Revolving Credit Agreement dated as of September 7, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, and various financial institutions, as the Lenders. **4.18(d) -- Fourth Amendment to Revolving Credit Agreement dated as of October 10, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, and various financial institutions, as the Lenders.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.19 -- Fixed Assets Secured Parties Parent Pledge Agreement dated as of July 19, 2001 between Sterling Chemicals Holdings, Inc. and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.20 -- Current Assets Secured Parties Parent Pledge Agreement dated as of July 19, 2001 between Sterling Chemicals Holdings, Inc. and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Current Assets Secured Parties, incorporated by reference from Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.21 -- Fixed Assets Secured Parties Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 19, 2001 by Sterling Chemicals, Inc., Trustor, to R. Christian Brose, Trustee for the benefit of The CIT Group/Business Credit, Inc., as Administrative and Collateral Agent, Beneficiary, incorporated by reference from Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.22 -- Current Assets Secured Parties Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 19, 2001 by Sterling Chemicals, Inc., Trustor, to R. Christian Brose, Trustee for the benefit of The CIT Group/Business Credit, Inc., as Administrative and Collateral Agent, Beneficiary, incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.23 -- Fixed Assets Secured Parties Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 19, 2001 by Sterling Fibers, Inc., Mortgagor, to The CIT Group/Business Credit, Inc., Mortgagee, incorporated by reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.24 -- Current Assets Secured Parties Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 19, 2001 by Sterling Fibers, Inc., Mortgagor, to The CIT Group/Business Credit, Inc., Mortgagee, incorporated by reference from Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.25 -- Fixed Assets Secured Parties Leasehold Deed to Secure Debt, Assignment and Security Agreement dated as of July 19, 2001 by Sterling Pulp Chemicals, Inc. to The CIT Group/ Business Credit, Inc., as Administrative Agent, incorporated by reference from Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.26 -- Current Assets Secured Parties Leasehold Deed to Secure Debt, Assignment and Security Agreement dated as of July 19, 2001 by Sterling Pulp Chemicals, Inc. to The CIT Group/ Business Credit, Inc., as Administrative Agent, incorporated by reference from Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.27 -- Fixed Assets Secured Parties Security Agreement dated as of July 19, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Grantors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.28 -- Current Assets Secured Parties Security Agreement dated as of July 19, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Grantors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Current Assets Secured Parties, incorporated by reference from Exhibit 4.11 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.29 -- Fixed Assets Secured Parties Obligor Pledge Agreement dated as of July 19, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc. and Sterling Pulp Chemicals US, Inc., as the Pledgors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.12 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.30 -- Current Assets Secured Parties Obligor Pledge Agreement dated as of July 19, 2001 among Sterling Chemicals, Inc., Sterling Canada, Inc. and Sterling Pulp Chemicals US, Inc., as the Pledgors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Current Assets Secured Parties, incorporated by reference from Exhibit 4.13 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.31 -- Revolving Credit Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, Credit Suisse First Boston, as the Documentation Agent, DLJ Capital Funding, Inc., as the Syndication Agent, and various financial institutions, as the Lenders, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.31(a) -- First Amendment to Revolving Credit Agreement dated effective as of December 17, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, Credit Suisse First Boston, as the Documentation Agent, DLJ Capital Funding, Inc., as the Syndication Agent, and various financial institutions, as the Lenders, incorporated by reference from Exhibit 4.20(a) of the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. 4.32 -- Parent Pledge Agreement dated as of July 23, 1999 between Sterling Chemicals Holdings, Inc. and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.33 -- Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 by Sterling Chemicals, Inc., Trustor, to Linda H. Earle, Trustee for the benefit of The CIT Group/Business Credit, Inc., as Administrative and Collateral Agent, Beneficiary, incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.34 -- Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 by Sterling Fibers, Inc., Mortgagor, to The CIT Group/Business Credit, Inc., Mortgagee, incorporated by reference from Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.35 -- Leasehold Deed to Secure Debt, Assignment and Security Agreement dated as of July 23, 1999 by Sterling Pulp Chemicals, Inc. to The CIT Group/Business Credit, Inc., as Administrative Agent, and U.S. Bank Trust National Association, as Georgia co-agent, incorporated by reference from Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.36 -- Fixed Assets Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Grantors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 4.37 -- Current Assets Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Grantors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Current Assets Secured Parties, incorporated by reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.38 -- Obligor Pledge Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc. and Sterling Pulp Chemicals US, Inc., as the Pledgors, and The CIT Group/ Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.39 -- Intercreditor Agreement dated as of August 21, 1996 between Texas Commerce Bank National Association and Fleet National Bank, incorporated by reference from Exhibit 4.14 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.39(a) -- Amendment of Intercreditor Agreement dated as of July 23, 1999 among Sterling Chemicals Holdings, Inc., Chase Bank of Texas, N.A. (formerly known as Texas Commerce Bank National Association), as Administrative Agent, and State Street Bank and Trust Company, as Trustee, incorporated by reference from Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.40 -- Senior Debt Intercreditor Agreement dated as of July 23, 1999 among Harris Trust Company of New York, as Trustee, The CIT Group/Business Credit, Inc., as Administrative Agent, and Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.17 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.41 -- Financing Agreement dated as of July 11, 2001 between Sterling Pulp Chemicals, Ltd. and CIT Business Credit Canada Inc., incorporated by reference from Exhibit 4.14 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001 **4.41(a) -- Letter Agreement dated July 26, 2001 between Sterling Pulp Chemicals, Ltd. and CIT Business Credit Canada Inc. amending the Financing Agreement in certain respects. **4.41(b) -- Letter Agreement dated September 14, 2001 between Sterling Pulp Chemicals, Ltd. and CIT Business Credit Canada Inc. amending the Financing Agreement in certain respects. 4.42 -- Demand Debenture dated as of July 11, 2001 by Sterling Pulp Chemicals, Ltd. in favour of CIT Business Credit Canada Inc., as Holder, and the Lenders, incorporated by reference from Exhibit 4.15 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.43 -- Debenture Pledge Agreement dated as of July 11, 2001 between Sterling Pulp Chemicals, Ltd. and CIT Business Credit Canada Inc., incorporated by reference from Exhibit 4.16 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 4.44 -- Deed of Hypothec dated as of July 13, 2001 between Sterling Pulp Chemicals, Ltd. and CIBC Mellon Trust Company, as holder of power of attorney for all present and future holders of the Demand Debenture dated July 11, 2001 by Sterling Pulp Chemicals, Ltd. in favour of CIT Business Credit Canada Inc., incorporated by reference from Exhibit 4.17 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 10.1 -- Amended and Restated Stock Plan for Non-Employee Directors, incorporated by reference from Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. **10.2 -- Third Amended and Restated Key Employee Protection Plan. 10.3 -- Amended and Restated Supplemental Pay Plan, incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. **10.4 -- Amended and Restated Retention Bonus Plan. **10.5 -- Amended and Restated Supplemental Bonus Plan.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- **10.6 -- Second Amended and Restated Severance Pay Plan. 10.7 -- Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and Incentive Plan, as amended, incorporated by reference from Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.8 -- Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of May 1, 1996), incorporated by reference from Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.8(a) -- First Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of January 31, 1997), incorporated by reference from Exhibit 10.4(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.8(b) -- Second Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of January 1, 1997), incorporated by reference from Exhibit 10.4(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.8(c) -- Third Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of November 1, 1998), incorporated by reference from Exhibit 10.4(c) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.8(d) -- Fourth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of December 31, 1998), incorporated by reference from Exhibit 10.4(d) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.8(e) -- Fifth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of April 1, 1999), incorporated by reference from Exhibit 10.4(e) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.8(f) -- Sixth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of May 14, 1999), incorporated by reference from Exhibit 10.4(f) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.9 -- Sterling Chemicals, Inc. Pension Benefit Equalization Plan, incorporated by reference from Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020). 10.10 -- Sterling Chemicals, Inc. Amended and Restated Supplemental Employee Retirement Plan, incorporated by reference from Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1989 (Commission File Number 1-10059). 10.11 -- Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of May 1, 1996), incorporated by reference from Exhibit 10.3(c) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.11(a) -- First Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of December 31, 1998), incorporated by reference from Exhibit 10.7(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.11(b) -- Second Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of December 17, 1998), incorporated by reference from Exhibit 10.7(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.11(c) -- Third Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of September 20, 1999), incorporated by reference from Exhibit 10.7(c) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10.12 -- Sterling Chemicals, Inc. Sixth Amended and Restated Savings and Investment Plan dated as of October 1, 2000, incorporated by reference from Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.13 -- Sterling Chemicals ESOP, incorporated by reference from Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.13(a) -- Sterling Chemicals ESOP (First Amendment) (Effective as of December 27, 1996), incorporated by reference from Exhibit 10.9(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.13(b) -- Sterling Chemicals ESOP (Second Amendment) (Effective as of August 21, 1996), incorporated by reference from Exhibit 10.9(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.13(c) -- Third Amendment to Sterling Chemicals ESOP (Effective as of January 31, 1997) incorporated by reference from Exhibit 10.9(c) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.13(d) -- Fourth Amendment to Sterling Chemicals ESOP (Effective as of November 1, 1998) incorporated by reference from Exhibit 10.9(d) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.13(e) -- Fifth Amendment to Sterling Chemicals ESOP (Effective as of December 31, 1998) incorporated by reference from Exhibit 10.9(e) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.14 -- Articles of Agreement between Sterling Chemicals, Inc., its successors and assigns, and Texas City, Texas Metal Trades Council, AFL-CIO Texas City, Texas, December 18, 1998 to May 1, 2002, incorporated by reference from Exhibit 10.23 to the Registration Statement on Form S-4 of Sterling Chemicals, Inc. (Registration No. 333-87471). **10.15 -- Agreement between Sterling Pulp Chemicals Ltd., North Vancouver, British Columbia, and Pulp, Paper and Woodworkers of Canada, Local 5, British Columbia, effective December 1, 2000 to November 30, 2003. 10.16 -- Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Frank P. Diassi, incorporated by reference from Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 10.17 -- Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Frank J. Hevrdejs, incorporated by reference from Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 10.18 -- Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Koch Capital Services, Inc., incorporated by reference from Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 10.19 -- Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals, Holdings, Inc. and William A. McMinn, incorporated by reference from Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. 10.20 -- Form of Indemnity Agreement executed between the Company and each of its officers and directors, incorporated by reference from Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.21 -- Form of Indemnity Agreement executed between the Company and each of its officers and directors, incorporated by reference from Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.22 -- Severance Agreement dated as of May 1, 2000 among Peter W. De Leeuw and the Company, incorporated by reference from Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. 10.23 -- Employment Agreement dated as of November 12, 1997 between David G. Elkins and the Company, incorporated by reference from Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10.24 -- Employment Agreement dated as of January 19, 1998 between Gary M. Spitz and the Company, incorporated by reference from Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. +10.25 -- Amended and Restated Production Agreement dated March 31, 1998 between BP Chemicals, Inc. and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.26 -- Second Amended and Restated Production Agreement dated effective as of August 1, 1996 between BP Chemicals Inc. and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.26(a) -- Amendment to Second Amended and Restated Production Agreement dated as of March 1, 2001 between Sterling Chemicals, Inc. and BP Chemicals Inc., incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001. +10.27 -- Amended and Restated Product Sales Agreement dated effective as of January 1, 1998 between BASF Corporation and Sterling Chemicals, Inc., incorporated by referenced from Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. 10.28 -- License Agreement dated August 1, 1986 between Monsanto Company and Sterling Chemicals, Inc. incorporated by reference from Exhibit 10.25 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020). +10.29 -- Joint Venture Agreement dated March 31, 1998 between Sterling Chemicals, Inc. and BP Chemicals, Inc., incorporated by reference from Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.29(a) -- First Amendment to Joint Venture Agreement dated effective as of March 31, 1998 between Sterling Chemicals, Inc. and BP Chemicals Inc., incorporated by reference from Exhibit 10.26(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. **21.1 -- Subsidiaries of Sterling Chemicals Holdings, Inc. **23.1 -- Consent of Deloitte & Touche LLP **99.1 -- Sterling Canada, Inc. consolidated financial statements and notes thereto for the years ended September 30, 2001, 2000, and 1999, including independent auditors' report. **99.2 -- Sterling Pulp Chemicals, Ltd. financial statements and notes thereto for the years ended September 30, 2001, 2000, and 1999, including independent auditors' report.
- --------------- ** Filed herewith. + Confidential treatment has been requested with respect to portions of this Exhibit, and such request has been granted. EX-3.3 3 h92951ex3-3.txt AMENDED AUDIT AND COMPLIANCE COMMITTEE CHARTER EXHIBIT 3.3 STERLING CHEMICALS HOLDINGS, INC. Amended and Restated Audit and Compliance Committee Charter PRELIMINARY STATEMENTS WHEREAS, the Board of Directors (the "Board") of Sterling Chemicals Holdings, Inc. (the "Corporation") has heretofore established and designated a standing committee of the Board known as the Audit and Compliance Committee (the "Committee"); WHEREAS, the Board has heretofore delegated oversight responsibility to the Committee for the financial reporting, control and audit functions of the Board and for compliance and monitoring programs, corporate information and reporting systems and similar matters; and WHEREAS, the Board has heretofore adopted an Audit and Compliance Committee Charter governing the composition, duties and responsibilities of the Committee; and WHEREAS, the Board desires to amend the Audit and Compliance Committee Charter and to restate the Audit and Compliance Committee Charter in its entirety; NOW, THEREFORE, IT IS HEREBY RESOLVED that this Amended and Restated Audit and Compliance Committee Charter (this "Charter") be, and it hereby is, adopted and approved as the Charter of the Committee. ROLE OF THE COMMITTEE The Committee shall act on behalf of the Board and oversee all material aspects of the Corporation's financial reporting, control, audit and compliance functions, except those reserved by the Board and those related to the responsibilities of another standing committee of the Board. The Committee's role includes a particular focus on the qualitative aspects of financial reporting to the Corporation's stockholders, the Corporation's processes for the management of financial risk and compliance with significant applicable legal, ethical and regulatory requirements. The Committee shall review, discuss and assess its own performance, as well as its role and responsibilities, and may make recommendations to the Board regarding changes in the Committee's role or responsibilities or this Charter. The Board shall review the adequacy of this Charter at least once annually. While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee to prepare financial statements, to plan or conduct audits or to assure that the Corporation's financial statements are complete and accurate or in accordance with generally accepted accounting principles. Management is solely responsible for preparing the financial statements and implementing internal controls and the Corporation's external auditors are solely responsible for auditing the financial statements and monitoring the affectiveness of the internal controls. Nor is it the duty of the Committee to conduct investigations, to resolve disagreements (if any) between management and the Corporation's external auditors or to assure compliance with the Corporation's policies or any laws, rules, regulations, permits or licenses. COMPOSITION OF THE COMMITTEE The Committee shall consist of such number of directors (not less than three) as the Board shall determine from time to time. Each member of the Committee, including it chairman and any alternate members, shall be appointed by the Board, shall serve at the pleasure of the Board and may be removed at any time by the Board (with or without cause). Each Committee member shall (i) be independent of management and free from any relationship that, in the opinion of the Board, would interfere with the exercise of independent judgment as a member of the Committee, (ii) have general knowledge of the primary industries in which the Corporation operates, (iii) have the ability to read and understand fundamental financial statements, including a balance sheet, income statement and statement of cash flow and (iv) have the ability to understand key financial risks and related controls and control processes. At least one member of the Committee should be literate in business and financial reporting and control, including knowledge of regulatory requirements, and should have past employment experience in finance or accounting (or other comparable financial sophistication or financial management expertise). No member of the Committee may serve on the Compensation Committee of the Board at any time while such member is a member of the Committee. The term of each member of the Committee shall be determined in accordance with the Bylaws of the Corporation. The Board shall have the power at any time to fill vacancies in, to change the membership of or to dissolve the Committee. COMMITTEE OPERATING PRINCIPLES The Committee shall fulfill its responsibilities within the context of the following overriding principles: o Working Relationships - The Committee should maintain strong, positive working relationships with management, members of other committees of the Board and key advisors, including internal and external auditors, accountants and attorneys. o Communications and Coordination - The Committee should strive to keep fully informed of current and prospective issues facing the Corporation through, communications with senior management, other standing committees of the Board and key advisors, including internal and external auditors, accountants and attorneys. In addition, the Committee should strive to coordinate its compliance activities with the Environmental, Health and Safety Committee of the Corporation and the other standing committees of the Board. -2- o Education - The Committee should regularly review important financial and operating topics that present potential significant risk to the Corporation. Each member of the Committee is encouraged to participate in relevant and appropriate self-study education to assure understanding of the business of the Corporation and its subsidiaries and the environment in which they operate. o Expectations and Information Needs - The Committee should communicate its expectations and the nature, timing and extent of information it requires to management and internal and external auditors, accountants and attorneys. Written materials, including key performance indicators and measures related to key financial risks, should be provided to the Committee by management at least one week in advance of any meeting of the Committee at which such materials will be discussed. The Committee shall have direct access to the financial, legal and other staff and advisors of the Corporation and shall have the authority, at the Corporation's expense, to retain and consult with such professional advisors, independent auditors and other experts in connection with the performance of its duties and the exercise of its authority and powers. MONITORING FINANCIAL REPORTING AND RELATED MATTERS Relationship With External Auditors. The external auditors of the Corporation, in their capacity as independent public accountants, shall be accountable to the Board and the Committee as representatives of the stockholders. The Committee shall have primary responsibility for the relationship between the Corporation and its external auditors. As the Corporation's external auditors review financial reports and other matters, they will be report to the Committee. In executing its oversight role with respect to financial reporting and related matters, the Committee shall: o make recommendations to the Board regarding the selection and termination of the Corporation's external auditors; o review and assess the nature and effect of any non-audit services provided by the external auditors; and o review and assess the external auditors' compensation and the scope and proposed terms of their engagement, including the range of audit and non-audit fees. The Committee shall annually review the performance (effectiveness, objectivity and independence) of the Corporation's internal and external auditors. The Committee shall ensure receipt of a formal written statement from the external auditors consistent with standards set by the Independence Standards Board. Additionally, the Committee shall discuss with the auditor relationships or services that may affect auditor objectivity or independence. If the Committee is -3- not satisfied with any external auditor's assurances of independence, it shall take or recommend to the Board appropriate action to ensure the independence of the external auditor. Financial Reporting and Controls. The Committee shall be charged with the responsibility of reviewing the adequacy of the Corporation's financial statements and financial reporting systems. In this regard, the Committee shall: o review all major financial reports in advance of filings or distributions; o consider major changes and other questions of choice regarding the appropriate auditing and accounting principles and practices to be followed when preparing the Corporation's financial statements, including major financial statement issues and risks and their impact or potential effect on reported financial information and the scope, as well as the level of involvement by external auditors in the preparation and review, of unaudited quarterly or other interim-period information; o review the annual audit plan and the process used to develop the plan and monitor the status of activities; o review the results of each external audit, including any qualifications in the external auditor's opinion, any related management letter, management's responses to recommendations made by the external auditor in connection with the audit and any reports submitted to the Committee by internal auditors (if any) that are material to the Corporation as a whole and management's responses to those reports; o discuss with the Corporation's external auditors (i) methods used to account for significant unusual transactions, (ii) the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus, (iii) the process used by management in formulating particularly sensitive accounting estimates and the basis for the auditor's conclusion regarding reasonableness of such estimates and (iv) disagreements with management over the application of accounting principles, the basis for management's accounting estimates and the disclosures in the financial statements; and o review the Corporation's annual and quarterly financial statements and the views of management and the Corporation's external auditors on the overall quality of the Corporation's annual and interim financial reporting. If any internal or external auditor of the Corporation identifies any significant issue relative to overall Board responsibility that has been communicated to management but, in their judgment, -4- have not been adequately addressed, they should communicate these issues to the chairman of the Committee. Internal Financial Controls. The Committee shall review the appointment and replacement of the senior internal-auditing executive of the Corporation (if any) and any key financial management of the Corporation and shall review the performance of the Corporation's internal auditors (if any). The Corporation's internal auditors (if any) shall be responsible to the Board through the Committee. The Committee shall consider, in consultation with the Corporation's external auditors and the Corporation's senior internal-auditing executive (if any), the adequacy of the Corporation's internal financial controls. The Committee shall meet periodically with the senior internal-auditing executive (if any) to discuss special problems or issues that may have been encountered by the internal auditors (if any) and review the implementation of any recommended corrective actions. The Committee shall also meet periodically with senior management to review the Corporation's major financial risk exposures. Communications With the Board. The Committee shall serve as a channel of communication between the Corporation's external auditors and the Board and between the Corporation's senior internal-auditing executive (if any) and the Board. Regulatory Examinations. The Committee shall review and assess any SEC inquiries and the results of examination by other regulatory authorities in terms of important findings, recommendations and management's response. COMPLIANCE MATTERS Compliance Programs and Procedures. In executing its oversight role with respect to compliance functions, the Committee shall review the adequacy of the Corporation's compliance and monitoring programs, corporate information and reporting systems, codes of conduct, policies, standards, practices and procedures (including compliance guides and manuals) for employees of the Corporation and its subsidiaries. In addition, the Committee shall meet periodically with senior management to discuss their views on whether: o the operations of the Corporation and its subsidiaries are conducted in compliance with all applicable laws, rules, regulations, permits and licenses, including those pertaining to environmental, health, safety, securities, financial and employment matters; o all accounting and reporting financial errors, fraud and defalcations, legal violations and instances of non-compliance with the Corporation's compliance and monitoring programs, corporate information and reporting systems, codes of conduct, policies, standards, practices and procedures are detected; o all violations of legal requirements are promptly reported to appropriate governmental officials when discovered and prompt, voluntary remedial measures are instituted; and -5- o senior management and the Board are provided with timely, accurate information to allow management and the Board to reach informed judgments concerning the Corporation's compliance with law and business performance. Compliance Officers. The Committee shall designate one or more senior level representatives of the Corporation to be in charge of the Corporation's compliance and monitoring programs, corporate information and reporting systems, codes of conduct, policies, standards, practices and procedures, including the day-to-day monitoring of compliance by managers and other employees and agents of the Corporation and its subsidiaries. Each officer so designated by the Committee shall serve at the pleasure of the Committee and may be removed at any time by the Committee (with or without cause). MEETINGS OF THE COMMITTEE Frequency. The Committee shall meet at least once during each fiscal quarter of the Corporation. Additional meetings of the Committee may be scheduled as considered necessary by the Committee or its chairman. Calling Meetings. Meetings of the Committee may be called at any time by the Board or by any member of the Committee. In addition, any internal or external auditor, accountant or attorney may, at any time, request a meeting with the Committee or the chairman of the Committee, with or without management attendance. Agendas. The chairman of the Committee shall be responsible for preparing an agenda for each meeting of the Committee. It is expected that the chairman will seek the participation of management and key advisors in the preparation of agendas. Attendees. The Committee may request members of management, internal auditors (if any), external auditors, accountants and attorneys and such other experts as it may deem advisable to attend any meeting of the Committee. At least once each year, the Committee shall meet in a private session at which only members of the Committee are present. In any case, the Committee shall meet in executive session separately with internal auditors (if any) and external auditors at least annually. Rules of Procedure and Minutes. The Committee may adopt and establish its own rules of procedure; provided, however, that such rules of procedure are not inconsistent with the Certificate of Incorporation or Bylaws of the Corporation or with any specific direction as to the conduct of its affairs as shall have been given by the Board. The Committee shall keep regular minutes of its proceedings and report the same to the Board when requested. Reporting to the Board. The Committee, through its chairman, shall periodically report to the Board on the activities of the Committee. These reports shall occur at least twice each fiscal year of the Corporation. -6- ADDITIONAL POWERS The Committee is authorized, in the name and on behalf of the Corporation and at its expense, to take or cause to be taken any and all such actions as the Committee shall deem appropriate or necessary to carry out its responsibilities and exercise its powers under this Charter. LIMITATIONS ON DUTIES AND RESPONSIBILITIES The Committee shall not have or assume any powers, authority or duties vested in the Board which, under applicable law or any provision of the Certificate of Incorporation or the Bylaws of the Corporation, may not be delegated to a committee of the Board. The grant of authority to the Committee contained in this Charter may be modified from time to time or revoked at any time by the Board in its sole discretion. -7- EX-4.5.C 4 h92951ex4-5_c.txt FORM OF CONSENT TO TERMINATE STOCKHOLDERS AGMT. EXHIBIT 4.5(c) STERLING CHEMICALS HOLDINGS, INC. STOCKHOLDERS AGREEMENT Consent To Terminate THIS CONSENT TO TERMINATE is executed by the undersigned pursuant to Section 12 of that certain Sterling Chemicals Holdings, Inc. Stockholders Agreement dated August 21, 1996 (as amended, the "Stockholders Agreement") among Sterling Chemicals Holdings, Inc. (the "Company"), the undersigned and certain other stockholders of the Company. Capitalized terms used but not defined herein shall have the meanings given such terms in the Stockholders Agreement. The undersigned hereby consents to and approves the termination of the Stockholders Agreement, effective as of the date on which holders of at least the Required Voting Percentage approve such termination. IN WITNESS WHEREOF, the undersigned has executed this Consent to Terminate effective as of September 15, 2001. -------------------------------------- Printed Name: ------------------------ Title: ------------------------------- EX-4.18.A 5 h92951ex4-18_a.txt 1ST AMEND. TO REVOLVING CREDIT AGREEMENT EXHIBIT 4.18(a) FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT AND REVOLVER INTERCREDITOR AGREEMENT THIS FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT AND REVOLVER INTERCREDITOR AGREEMENT (this "Amendment"), dated as of August 17, 2001, is among STERLING CHEMICALS, INC., a Delaware corporation (the "Company"), STERLING CANADA, INC., a Delaware corporation ("Canada"), STERLING PULP CHEMICALS US, INC., a Delaware corporation ("Pulp US"), STERLING PULP CHEMICALS, INC., a Georgia corporation ("Pulp"), STERLING FIBERS, INC., a Delaware corporation ("Fibers"), STERLING CHEMICALS ENERGY, INC., a Delaware corporation ("Energy"), and STERLING CHEMICALS INTERNATIONAL, INC., a Delaware corporation (together with the Company, Canada, Pulp US, Pulp, Fibers and Energy, collectively, the "Borrowers"), the several Lenders (as such term is defined in the hereinafter described Credit Agreement) parties to this Amendment, and THE CIT GROUP/BUSINESS CREDIT, INC., as Administrative Agent for the Lenders (in such capacity, the "Administrative Agent"). RECITALS: A. The Borrowers are parties to a Revolving Credit Agreement dated as of July 19, 2001 (as the same may be amended, modified, restated, supplemented, renewed, extended, increased, rearranged and/or substituted from time to time, the "Credit Agreement") among the Borrowers, the Administrative Agent, and the several Lenders from time to time parties thereto. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement. B. Pursuant to the Credit Agreement, the Maturity Date will occur on the thirtieth (30th) day after the date of the entry of the Interim Order unless by such date (i) the Bankruptcy Court has entered an order or judgment, in form and substance acceptable to Lenders and the Administrative Agent in their sole discretion, approving, among other things, the granting of a senior and first-priority, Priming Lien on all of the Fixed Assets Collateral (other than the Capital Securities of the Company) to secure the repayment of up to $40,000,000 of Current Assets Obligations, or (ii) the Maturity Date has occurred or has been extended pursuant to Section 10.1(e)(i) of the Credit Agreement. C. The Borrowers have requested that the Lenders amend the Credit Agreement to, among other things, extend the Maturity Date pursuant to Section 10.1(e)(i) of the Credit Agreement to allow additional time for the Bankruptcy Court to consider the granting of a Priming Lien. D. The Lenders parties to this Amendment (which Lenders constitute the Lenders required to effect the amendments intended hereby) are willing to agree to such amendment, subject to the performance and observance in full of each of the covenants, terms and conditions, and in reliance upon all of the representations and warranties of the Borrowers, set forth herein. NOW, THEREFORE, in consideration of the premises and the covenants, terms, conditions, representations and warranties herein contained, the parties hereto agree hereby as follows: SECTION 1. AMENDMENTS. Subject to the covenants, terms and conditions set forth herein and in reliance upon the representations and warranties of the Borrowers herein contained, the Borrowers and the several Lenders parties to this Amendment (which Lenders constitute the Lenders required to effect the following amendments) hereby agree to amend the Credit Agreement and the Revolver Intercreditor Agreement as set forth below in this Section 1, in each case effective as of the Amendment Effective Date (as hereinafter defined). (a) AMENDMENTS TO CREDIT AGREEMENT DEFINITIONS. (i) New Definitions. Section 1.01 of the Credit Agreement is amended by inserting the following definition in the appropriate alphabetical position: "Priming Order" means an order or judgment of the Bankruptcy Court after a final hearing pursuant to Section 364 of the Bankruptcy Code and Fed. R. Bankr. P. 4001, in form and substance acceptable to Lenders and the Administrative Agent, in their sole discretion, granting a senior and first-priority, Priming Lien on all of the Fixed Assets Collateral (other than the Capital Securities of the Company) to secure the repayment of up to $40,000,000 of Current Assets Obligations, which order or judgment of the Bankruptcy Court has not been reversed, stayed or otherwise rendered ineffective or modified in any manner, and if such order is the subject of a pending appeal in any respect, neither the making of any Credit Extensions, nor the granting of Superpriority Claim status with respect to the Obligations, nor the granting of the Priming Lien described hereinabove, nor the performance by any of the Borrowers of any of their obligations under this Agreement or any other Loan Document or under any other instrument or agreement referred to in this Agreement shall be the subject of a presently effective stay pending appeal. (ii) Amendments to Existing Definitions. Section 1.01 of the Credit Agreement is amended by deleting the existing definitions of the terms described in this Section 1(a)(ii) below in their entirety and inserting the following definitions in lieu thereof: "Borrowing Base Amount" means, at any time, an amount equal to the sum of (without duplication) (a) 85% of Eligible Accounts; plus (b) on and after the date which is the later to occur of (i) the date of entry of the Priming Order and (ii) the date the Borrowers have fully complied with the proviso to clause (b) of Section 5.2.3, the lesser of (x) $10,000,000 and (y) 33% of Generator Receivables; plus (c) 65% of Eligible Inventory; provided, however, that the amount available pursuant to clause (c) of this definition shall in no event exceed (1) $42,500,000 during such period that the Current Assets Loan Commitment Amount is equal to $85,000,000, (2) $50,000,000 during such period that the Current Assets Loan Commitment Amount is equal to $100,000,000 and (3) $62,500,000 during such period that the Current Assets Loan Commitment Amount is equal to $125,000,000. The 2 Administrative Agent shall have the right to review computations of the Borrowing Base Amount and if, in its reasonable judgment, such computations have not been computed in accordance with the terms of this Agreement, the Administrative Agent shall have the right to correct such errors. "Current Assets Loan Commitment Amount" means, on any date, (a) prior to the date of entry of the Priming Order, a maximum aggregate amount of $85,000,000, and subject to the following sentence, (b) prior to the date the Borrowers have fully complied with conditions set forth in the proviso to clause (b) of Section 5.2.3, but after the date of entry of the Priming Order, a maximum aggregate amount of $100,000,000, and (c) on and after the date which is the later to occur of (i) the date of entry of the Priming Order, and (ii) the date the Borrowers have fully complied with the conditions set forth in the proviso to clause (b) of Section 5.2.3, a maximum aggregate amount of $125,000,000, in each case as such amounts may be permanently reduced from time to time pursuant to Section 2.2 and other provisions of this Agreement. Prior to the date the Bankruptcy Court enters the Final Order, the Current Assets Loan Commitment Amount (subject to reductions pursuant to Section 2.2 and other provisions of this Agreement) shall be an amount equal to the aggregate amount of Current Asset Loans, Swing Line Loans and Letter of Credit Obligations that are authorized by the Interim Order, not to exceed $85,000,000. "Final Order" means an order or judgment of the Bankruptcy Court after a final hearing pursuant to Section 364 of the Bankruptcy Code and Fed. R. Bankr. P. 4001, approving the transactions contemplated by the Loan Documents in form and substance acceptable to Lenders and the Administrative Agent, in their sole discretion, including (i) a finding in favor of the Administrative Agent and the Lenders pursuant to 11 U.S.C. Section 364(e), (ii) the grant of a Superpriority Claim in favor of the Administrative Agent and the Lenders with respect to all of the Obligations, and (iii) granting Liens in the Current Assets Collateral and the Fixed Assets Collateral securing the Obligations as set forth in Section 7.1.8 and the other Loan Documents; and which order or judgment of the Bankruptcy Court has not been reversed, stayed or otherwise rendered ineffective or modified in any manner, and if such order is the subject of a pending appeal in any respect, neither the making of any Credit Extensions, nor the granting of Superpriority Claim status with respect to the Obligations, nor the granting of the Liens described hereinabove, nor the performance by any of the Borrowers of any of their obligations under this Agreement or any other Loan Document or under any other instrument or agreement referred to in this Agreement shall be the subject of a presently effective stay pending appeal. "Financing Order" means (a) prior to the date of entry of the Final Order, the Interim Order, (b) at all times after the date of entry thereof, the Final Order and, if entered, the Priming Order. 3 "Maturity Date" means the earliest to occur of (a) August 30, 2001, if the Final Order has not been entered prior to such date (unless the Maturity Date has been extended pursuant to Section 10.1(e)(i) below), (b) the date on which the Bankruptcy Court enters a final order denying approval of the transactions contemplated in this Agreement (other than the Priming Lien), and (c) the second anniversary of the Effective Date of this Agreement (unless the Maturity Date has been extended pursuant to Section 10.1(e)(i) below). "Minimum Excess Availability" means, at any time, (a) prior to the date which is the date of entry of the Priming Order, $12,000,000, plus the amount of any Availability Reserve (as adjusted from time to time pursuant to the terms of the definition thereof and/or clause (e) of Section 2.7) and (b) on and after the date of entry of the Priming Order, the amount of any Availability Reserve (as adjusted from time to time pursuant to the terms of the definition thereof and/or clause (e) of Section 2.7). "Priming Lien" means the security interest in and Lien on the Fixed Assets Collateral (other than the Capital Securities of the Company) granted, or to be granted, to the Current Assets Secured Parties pursuant to the Priming Order to secure up to $40,000,000 of the Current Assets Obligations and which Lien and security interest is (or will be upon entry of the Priming Order) a first-priority security interest in and Lien on the Fixed Assets Collateral (other than the Capital Securities of the Company), subject to no other prior security interests or Liens other than Existing Leases and the Priority Lien described in clause (c) of the definition thereof. "Priority Liens" means (a) with respect to Fixed Assets Obligations, the Liens on the Current Assets Collateral securing the Current Assets Obligations and, after the date of entry of the Priming Order, the Priming Lien on the Fixed Assets Collateral (other than the Capital Securities of the Company); (b) with respect to Current Assets Obligations, (i) for the period prior to (but not on or after) the date of entry of the Priming Order, the Liens on (A) the Fixed Assets and the Capital Securities of the Borrowers (other than the Company) and the Subsidiaries (other than Unrestricted Subsidiaries) securing the Fixed Assets Obligations and the Senior Secured Notes, and (B) the Capital Securities of the Company securing the Fixed Assets Obligations and the Senior Secured Discount Notes, and (ii) on and after the date of entry of the Priming Order, (A) with respect to any Current Assets Obligations in excess of the amount of Current Assets Obligations secured by the Priming Lien (but in all cases excluding the amount of Current Assets Obligations secured by the Priming Lien), the Liens on (x) Fixed Assets and Capital Securities of the Borrowers (other than the Company) and the Subsidiaries (other than Unrestricted Subsidiaries) securing the Fixed Assets Obligations and the Senior Secured Notes and (y) the Capital Securities of the Company securing the Fixed Assets Obligations and the Senior Secured Discount Notes and (B) with respect to any Current Assets Obligations secured by the Priming Lien, the Liens on the Capital Securities of the Company secured by the Fixed Assets Obligations and the 4 Senior Secured Discount Notes; and (c) with respect to the Obligations, the Lien granted under the agreement with BP Chemicals, Inc. described in clause (b), Part 2, Item 7.2.3(c) of the Disclosure Schedule. (b) AMENDMENT TO RECITAL C OF THE CREDIT AGREEMENT. Recital C of the Credit Agreement is deleted in its entirety and the following is inserted in lieu thereof: "C. The Borrowers have requested that the Lenders provide debtor-in-possession financing in an aggregate principal amount not to exceed $155,000,000; provided that in the event the Priming Order is entered, then such principal amount shall be increased by $15,000,000 to $170,000,000 and provided further that if the Borrowers fully comply with the proviso to clause (b) of Section 5.2.3, such principal amount shall be increased by $25,000,000 to $195,000,000 (the "DIP Financing"), the proceeds of which shall be used: (i) to pay approximately $35,000,000 in principal of Indebtedness outstanding under the Existing Credit Agreement which is secured by the Current Assets (the "Existing Current Asset Loans"), together with accrued interest, commitment fees and letter of credit fees thereon; (ii) to pay approximately $70,000,000 in principal of Indebtedness outstanding under the Existing Credit Agreement which is secured by the Fixed Assets and Capital Securities of the Borrowers (the "Existing Fixed Asset Loans"), together with accrued interest and fees thereon; (iii) to provide for the continuance of the letters of credit which were issued under the Existing Credit Agreement and are still outstanding; (iv) to pay fees and expenses associated with the DIP Financing; and (v) to provide for the ongoing working capital and general corporate needs of the Borrowers." (c) AMENDMENT TO RECITAL E OF THE CREDIT AGREEMENT. Recital E of the Credit Agreement is deleted in its entirety and the following is inserted in lieu thereof: "E. To provide security for the repayment of the Credit Extensions to be made hereunder and the payment of any other Obligations, the Borrowers will provide to the Administrative Agent and the Lenders the following (each as more fully described herein): (a) with respect to all Obligations of the Borrowers hereunder and under the other Loan Documents, an allowed administrative expense claim in each of the Cases pursuant to Section 364(c) of the Bankruptcy Code having priority over all administrative expenses including the kinds specified in Sections 503(b), 507(b) and 546(c) of the Bankruptcy Code; 5 (b) with respect to the Current Assets Obligations, (i) prior to the date of entry of the Priming Order, (A) a first-priority, perfected security interest in and Lien on all right, title and interest of the Borrowers in, to and under all of the Current Assets, subject to no other prior security interests or Liens and (B) a perfected security interest in and Lien on (1) 100% of the Capital Securities of the Borrowers, (2) 100% of the Capital Securities of the Subsidiaries (other than Unrestricted Subsidiaries), and (3) all right, title and interest of the Borrowers in, to and under all of the Fixed Assets, subject, in the case of the Collateral described in clauses (B)(1), (B)(2) and (B)(3) hereinabove, only to the then applicable Priority Liens and (ii) on and after the date of entry of the Priming Order, the Liens and priorities described in the foregoing clause (i), plus the Priming Lien on the Fixed Assets Collateral (other than the Capital Securities of the Company) to secure the repayment of up to $40,000,000 of Current Assets Obligations; and (c) with respect to the Fixed Asset Obligations, (i) prior to the date of entry of the Priming Order, (A) a first-priority, perfected security interest in and Lien on all right, title and interest of the Borrowers in, to and under all of the Fixed Assets, 100% of the Capital Securities of the Borrowers and 35% of the Capital Securities of the Subsidiaries (other than Unrestricted Subsidiaries), subject to no other prior security interests or Liens other than Existing Leases and (B) a perfected security interest in and Lien on all right, title and interest of the Borrowers in, to and under all of the Current Assets and 65% of the Capital Securities of the Subsidiaries (other than Unrestricted Subsidiaries), subject, in the case of the Collateral described in clause (B), only to then applicable Priority Liens and (ii) on and after the date of entry of the Priming Order, the Liens and priorities described in the foregoing clause (i), but in all cases subject to the Priming Lien of the Current Assets Secured Parties." (d) AMENDMENT TO SECTION 3.1.2 OF THE CREDIT AGREEMENT. Paragraph (b) of Section 3.1.2. of the Credit Agreement is deleted in its entirety and the following is inserted in lieu thereof: "(b) Each prepayment of Obligations pursuant to clause (d) and clause (f)(ii) of Section 3.1.1 shall be applied (i) in the case of a Disposition of Fixed Assets Collateral (A) prior to the date of entry of the Priming Order, to a mandatory prepayment of the outstanding Fixed Assets Obligations until all outstanding Fixed Assets Obligations have been repaid in full and (B) on and after the date of entry of the Priming Order, (1) first, to a mandatory prepayment of outstanding Current Assets Obligations secured by the Priming Lien until such outstanding Current Assets Obligations secured by the Priming Lien have been repaid in full (or, with respect to Letters of Credit, Cash Collateralized) and, (2) second, to a mandatory prepayment of the outstanding Fixed Assets Obligations until all outstanding Fixed Assets Obligations have been repaid in full and, in each of the foregoing cases set forth in clauses (A) and (B), immediately upon the Administrative Agent's receipt of 6 such Net Disposition Proceeds, (x) the Fixed Assets Loan Commitment Amount shall be automatically and permanently reduced by the aggregate amount of Net Disposition Proceeds used to prepay the outstanding principal amount of such Fixed Assets Obligations, plus any additional amount of Net Disposition Proceeds relating to Fixed Assets Collateral which remain after the outstanding amount of Fixed Assets Obligations have been reduced to zero (provided that so long as no Default or Event of Default then exists, the Fixed Assets Loan Commitment Amount shall not be reduced by the amount of any Net Disposition Proceeds from a casualty or condemnation of Fixed Assets which are permitted to be used by the Borrowers in connection with the restoration or replacement of the affected assets in accordance with Section 2.3 of the Mortgages), and (y) after the date of entry of the Priming Order, the Availability Reserve shall automatically be increased by the amount of Net Disposition Proceeds (not to exceed $40,000,000) relating to Fixed Assets Collateral which remain after the outstanding amount of Fixed Assets Obligations have been reduced to zero; and (ii) in the case of a Disposition of Current Assets (other than Dispositions of Capital Securities of Unrestricted Subsidiaries), (A) first, to a mandatory prepayment of the outstanding Current Assets Obligations until all outstanding Current Assets Obligations have been repaid in full (or, with respect to Letters of Credit, Cash Collateralized) and, (B) second, to a mandatory prepayment of the outstanding Fixed Assets Obligations until all outstanding Fixed Assets Obligations have been repaid in full; and (iii) in the case of a Disposition of Capital Securities of Unrestricted Subsidiaries or the receipt of Net Equity Proceeds of the type described in clause (b) of the definition thereof, to the Fixed Assets Obligations and the Current Assets Obligations in the order designated by the Company upon receipt of same by any Obligor, or if no such designation is received by the Administrative Agent prior to or upon receipt of such proceeds, then to the Obligations as determined by the Administrative Agent." (e) AMENDMENT TO SECTION 5.2.3. OF THE CREDIT AGREEMENT. Section 5.2.3. of the Credit Agreement is deleted in its entirety and the following is inserted in lieu thereof: "5.2.3. Financing Order. The Interim Order shall be in full force and effect and shall not have been stayed, reversed, modified or amended in any respect (other than by the Final Order and Priming Order as provided hereinbelow); provided that no Lender shall have any obligation to make any Credit Extension if making such Credit Extension would cause the aggregate amount of all Credit Extensions then outstanding, either separately or together, to exceed the lesser of (x) $155,000,000 and (y) the amount thereof which was authorized by the Bankruptcy Court in the Interim Order unless: (a) the Administrative Agent and each of the Lenders shall have received a certified copy (or other evidence satisfactory to the Administrative Agent) of the Final Order which (i) as entered, shall be acceptable in form and substance to the Administrative Agent, (ii) shall have been entered into no later than August 30, 2001, and (iii) shall then be in full force and effect and shall not have been stayed, reversed, modified or amended in any respect; provided that in such case no Lender 7 shall have any obligation to make any Credit Extension if the making of any such Credit Extension would cause the aggregate amount of all Credit Extensions then outstanding, either separately or together, to exceed $155,000,000; or (b) the Administrative Agent and each of the Lenders shall have received a certified copy (or other evidence satisfactory to the Administrative Agent) of the Priming Order which (i) as entered, shall be acceptable in form and substance to the Administrative Agent, (ii) shall have been entered into no later than September 20, 2001, and (iii) shall then be in full force and effect, and shall not have been stayed, reversed, modified or amended in any respect; provided that in such case no Lender shall have any obligation to make any Credit Extension if the making of any such Credit Extension would cause the aggregate amount of all Credit Extensions then outstanding, either separately or together, to exceed $170,000,000 unless (x) Approving Lenders have previously approved and consented to a business plan submitted by the Borrowers that is acceptable to them in their sole discretion and (y) if such business plan contemplates the operation of the Company's acrylonitrile facility, the minimum EBITDA amounts set forth in Section 7.2.7 have been modified to amounts which take into account the acrylonitrile operations during applicable periods and which amounts and periods are acceptable to the Required Lenders. In addition, the Borrowers agree that the Administrative Agent may engage professionals, at the sole cost of the Borrowers, to assist the Lenders in the evaluation of the Borrowers' business plan." (f) AMENDMENT TO SECTION 7.1.8. OF THE CREDIT AGREEMENT. Paragraph (a) of Section 7.1.8. of the Credit Agreement is deleted in its entirety and the following is inserted in lieu thereof: "(a) Each Borrower will execute any documents, financing statements, agreements and/or instruments and take all further action that may be required under applicable law, or that the Administrative Agent may reasonably request to grant, assign and pledge to the Administrative Agent: (i) for its benefit and for the ratable benefit of the Current Assets Lenders, (A) a first priority, perfected security interest in and Lien on all of the Borrowers' right, title and interest in and to the Current Assets, senior to all other Liens and (B) a perfected security interest in and Lien on (x) 100% of the Capital Securities of the Borrowers, 65% of the Capital Securities of the Subsidiaries (other than Unrestricted Subsidiaries) and, subject to the absence of any adverse tax consequences in respect thereof (in which case upon notification thereof by any Borrower to the Administrative Agent, the Lenders agree that such Liens shall be immediately released provided no other security interests in or Liens on 35% of such Capital Securities then exists) 35% of the Capital Securities of the Subsidiaries (other than Unrestricted Subsidiaries) and (y) all of the Borrowers' right, title and interest in and to the Fixed Assets, in each case of clauses (i)(B)(x) and (i)(B)(y), senior to all other Liens other than the then applicable Priority Liens; and (ii) for its benefit and for the ratable benefit of the Fixed Assets Lenders, (A) a first priority, perfected security interest in and Lien on (x) 100% of the Capital Securities of the Borrowers, (y) subject to the absence of any adverse tax consequences in respect thereof (in which case upon notification thereof by any Borrower to the Administrative Agent, the Lenders agree that such Liens shall be immediately released provided no other security 8 interests in or Liens on 35% of such Capital Securities then exists) 35% of the Capital Securities of the Subsidiaries (other than Unrestricted Subsidiaries) and (z) all of the Borrowers' right, title and interest in and to the Fixed Assets, in each case senior to all other Liens other than, after the date of entry of the Priming Order, the then applicable Priority Liens, and (B) a senior, perfected security interest in and Lien on all of the Borrowers' right, title and interest in and to the Current Assets and 65% of the Capital Securities of the Subsidiaries (other than Unrestricted Subsidiaries), senior to all other Liens other than the then applicable Priority Liens; and the Borrowers hereby covenant, represent, and warrant that, upon entry of the Interim Order, pursuant to Bankruptcy Code Sections 364(c), the Obligations shall at all times be secured by the Current Assets and the Fixed Assets Collateral as aforesaid, whether now owned or hereafter existing or in which any Borrower now has or hereafter acquires an interest." (g) AMENDMENT TO SECTION 7.2.21. OF THE CREDIT AGREEMENT. Section 7.2.21. of the Credit Agreement is deleted in its entirety and the following is inserted in lieu thereof: "7.2.21. Loan Availability. On and after the date of entry of the Priming Order, the Borrowers will not permit the difference between the Maximum Loan Amount and the then outstanding Current Assets Obligations (such difference being herein referred to as the "Loan Availability") to be less than (a) $10,000,000, at any time when the Current Assets Obligations are equal to or greater than $100,000,000, or (b) 10% of the then outstanding Current Assets Obligations at any time when the then outstanding Current Asset Obligations are less than $100,000,000, in either case for more than 20 consecutive Business Days; provided that, notwithstanding the foregoing, the Borrowers shall not be deemed in default of this Section 7.2.21 if, (a) on or before the date which is 10 days after such failure of the Borrowers to so maintain such Loan Availability, the Company presents the Administrative Agent with a business plan designed to improve the liquidity of the Borrowers which is consented to by Approving Lenders within 20 days after such failure, or (b) on or before the date which is 10 days after such failure of the Borrowers to so maintain such Loan Availability, engages (or confirms its prior engagement of) a third party professional to actively market for sale the assets of the Borrowers and/or any Subsidiary and to continuously and diligently pursue such sale of assets (including, for these purposes, any Unrestricted Subsidiary) with values sufficient to pay down outstanding Current Assets Loans (in accordance with Section 3.1.1 and Section 3.1.2) to an amount which will be in compliance with the foregoing Loan Availability requirement. Notwithstanding anything to the contrary contained in this Section 7.2.21, it is specifically acknowledged and agreed that (i) the foregoing proviso is not intended to, and shall not be deemed to, require the Company to pursue any particular plan of reorganization in order to receive the benefit thereof, which shall and continue to be the Company's sole determination, and (ii) nothing in this Section 7.2.21 shall obligate the Borrowers, or any of them, to take, or cause to be taken, any action which is prohibited by or contrary to their fiduciary duties to the Debtors' estates or any applicable law or court order." 9 (h) AMENDMENT TO SECTION 10.1 OF THE CREDIT AGREEMENT. Clause (d) of Section 10.1. of the Credit Agreement is deleted in its entirety and the following is inserted in lieu thereof: "(d) increase the Current Assets Loan Commitment Amount (except that the Current Assets Loan Commitment Amount may be automatically increased from $85,000,000 to $100,000,000 on the date of entry of the Priming Order and the Current Assets Loan Commitment Amount may be automatically further increased to $125,000,000 upon the Borrowers' full compliance with the proviso to clause (b) of Section 5.2.3) or the Letter of Credit Commitment Amount or the Current Assets Loan Percentage of any Current Assets Lender, without the consent of each Current Assets Lender adversely affected thereby;" (i) AMENDMENTS TO REVOLVER INTERCREDITOR AGREEMENT RECITALS. The phrase "the Final Order, including the granting of the Priming Lien," is hereby deleted from each location where such phrase appears in the Fourth, Fifth and Sixth "Whereas" clauses of the Revolver Intercreditor Agreement and the phrase "the Priming Order" is inserted in lieu thereof. (j) AMENDMENT TO SECTION 2.1 OF THE REVOLVER INTERCREDITOR AGREEMENT. Clause (b) of Section 2.1 of the Revolver Intercreditor Agreement is deleted in its entirety and the following is inserted in lieu thereof: "(b) With respect to Fixed Assets Collateral, the Fixed Assets Secured Parties' security interests in and Liens on such Fixed Assets Collateral shall be senior and prior to the Current Assets Secured Parties' security interests in and Liens on such Fixed Assets Collateral; provided that, on and after the date of entry of the Priming Order, the Fixed Assets Secured Parties' security interests in and Liens on the Fixed Assets Collateral (other than the Capital Securities of the Company) shall be subject to the Priming Lien." (k) AMENDMENT TO SECTION 2.2 OF THE REVOLVER INTERCREDITOR AGREEMENT. Section 2.2 of the Revolver Intercreditor Agreement is deleted in its entirety and the following is inserted in lieu thereof: "SECTION 2.2. Subordination. With respect to the Obligations, each of the: (a) Fixed Assets Secured Parties agree that (i) its security interests in and Liens on the Current Assets Collateral shall be subordinated and junior in all respects to the Current Assets Secured Parties' security interests in and Liens on the Current Assets Collateral and (ii) on and after the date of entry of the Priming Order, its security interests in and Liens on the Fixed Assets Collateral (other than the Capital Securities of the Company) shall be subordinated and junior to the Current Assets Secured Parties' security interests in and Liens on the Fixed Assets Collateral (other than the Capital Securities of the Company) up to the amount of Current Assets Obligations secured by the Priming Lien. 10 (b) Each of the Current Assets Secured Parties agree that (i) prior to the date of entry of the Priming Order, its security interests in and Liens on the Fixed Assets Collateral shall be subordinated and junior in all respects to the Fixed Assets Secured Parties' security interests in and Liens on the Fixed Assets Collateral and (ii) on and after the date of entry of the Priming Order, its security interests in and Liens on all of the Fixed Assets Collateral (other than the Capital Securities of the Company) shall be prior and senior to the Fixed Assets Secured Parties' security interests in and Liens on all of the Fixed Assets Collateral (other than the Capital Securities of the Company) to the extent of the Priming Lien, but shall be subordinated and junior to the Fixed Assets Security Parties' security interests in and Liens on the Fixed Assets Collateral to the extent and by the amount of the Current Assets Obligations, which are not secured by the Priming Lien. (c) Notwithstanding anything to the contrary contained herein, the Secured Parties acknowledge and agree that on and after the date of entry of the Priming Order, the Current Assets Secured Parties will have a first-priority security interest in and Lien on the Fixed Assets Collateral (other than the Capital Securities of the Company) up to the amount of the Current Assets Obligations secured by such Priming Lien." (l) AMENDMENT TO SECTION 2.3 OF THE REVOLVER INTERCREDITOR AGREEMENT. Clause (b) of Section 2.3 of the Revolver Intercreditor Agreement is deleted in its entirety and the following is inserted in lieu thereof: "(b) subordinates any title, right or interest in any Collateral (i) which is not, in the case of the Current Assets Secured Parties, the Current Assets Collateral, subject however to the rights of the Current Assets Secured Parties with respect to the Fixed Assets Collateral that are granted to the Current Assets Secured Parties in connection with the Priming Lien and (ii) in the case of the Fixed Assets Secured Parties, which is (x) Current Assets Collateral and (y) after the date of entry of the Priming Order, Fixed Assets Collateral (other than the Capital Securities of the Company) but only up to the amount of the Priming Lien, in each case solely by reason of the Current Assets Collateral or the Fixed Assets Collateral (as applicable) location in or on certain of, or certain of the properties constituting, such other Collateral; and" (m) AMENDMENT TO SECTION 3.3 OF THE REVOLVER INTERCREDITOR AGREEMENT. Paragraphs (a), (f), (g) and (h) of Section 3.3 of the Revolver Intercreditor Agreement are deleted in their entirety and the following are respectively inserted in lieu thereof: "(a) The Administrative Agent (in its capacity as secured party for and on behalf of the Current Assets Lenders) shall have the sole and exclusive right to sell, transfer or otherwise dispose of (i) the Current Assets Collateral and (ii) after the occurrence and during the continuance of a Commitment Termination Event and provided that the Priming Order has been entered, the Fixed Assets Collateral (other than the Capital Securities of the Company) up to the amount of the Current Assets Obligations which are secured by the 11 Priming Lien, in each case in any manner deemed necessary or appropriate by it without regard to the security interest or Liens of the Fixed Assets Secured Parties and without the Fixed Assets Secured Parties' consent. Simultaneously with the sale, transfer or other disposition of all or any part of the Collateral described in clauses (i) and (ii) above by the Administrative Agent (in its capacity as secured party for and on behalf of the Current Assets Lenders), the Administrative Agent shall release or otherwise terminate the security interests in and Liens on all of such Current Assets Collateral and such Fixed Assets Collateral which is held by the Fixed Assets Secured Parties." "(f) Each of the Current Assets Lenders agrees that it shall not contest or support any other Person in contesting in any proceeding (including, in the Cases) the legality, validity, binding effect, priority, enforceability or effectiveness of the Fixed Assets Secured Parties' first-priority, perfected security interest in any of the Fixed Assets Collateral other than (after the date of entry of the Priming Order) with respect to the Priming Lien." "(g) The Fixed Assets Secured Parties understand and agree that, so long as any Current Assets Obligations shall not have been paid in cash in full and until all Current Assets Commitments shall have been fully and permanently terminated, the Administrative Agent shall, with respect to the Current Assets Collateral and, after the occurrence and continuance of a Commitment Termination Event (providing that the Priming Order has been entered), the Fixed Assets Collateral (other than the Capital Securities of the Company), accept directions only from the Current Assets Secured Parties." "(h) The Current Assets Secured Parties understand and agree that, so long as any Fixed Assets Obligations shall not have been paid in cash in full and until all Fixed Assets Commitments shall have been fully and permanently terminated, the Administrative Agent shall, with respect to the Fixed Assets Collateral, accept directions only from the Fixed Assets Secured Parties; provided that after the occurrence and continuance of a Commitment Termination Event (provided that the Priming Order has been entered), the Administrative agent shall, with respect to the Fixed Assets Collateral (other than Capital Securities of the Company) accept directions only from the Current Assets Secured Parties until either (i) all of the Current Assets Obligations have been paid in full in cash and all of the Current Assets Commitments have been terminated, or (ii) the Liquidation Proceeds from the sale of Fixed Assets Collateral (other than Capital Securities of the Company) realized as the result of a Current Assets Enforcement equal zero." (n) AMENDMENT TO SECTION 3.4 OF THE REVOLVER INTERCREDITOR AGREEMENT. Section 3.4 of the Revolver Intercreditor Agreement is deleted in its entirety and the following is inserted in lieu thereof: 12 "SECTION 3.4. Allocation of Liquidation Proceeds. (a) Current Assets Liquidation Proceeds shall be paid to the Administrative Agent for application first to the reasonable fees and expense reimbursements then due to the Administrative Agent with respect to this Agreement, second, to the Current Assets Obligations until the Current Assets Obligations are paid in full in cash and all of the Current Assets Commitments have been terminated, third, if any Liquidation Proceeds remain, to the Fixed Assets Obligations, until the Fixed Assets Obligations are paid in full and fourth, if any Current Assets Liquidation Proceeds remain, to the Borrowers or to such other Person which is entitled to such Current Assets Liquidation Proceeds pursuant to applicable law. (b) Fixed Assets Liquidation Proceeds shall be paid to the Administrative Agent for application first to the reasonable fees and expense reimbursements then due to the Administrative Agent with respect to this Agreement, second, (i) prior to the date of entry of the Priming Order, to the Fixed Assets Obligations until the Fixed Assets Obligations are paid in full in cash and the Fixed Assets Commitments are terminated and (ii) on and after the date of entry of the Priming Order, to the Current Assets Obligations, up to the amount of the Priming Lien and then to the Fixed Assets Obligations, third, if any Fixed Assets Liquidation Proceeds remain, to the Current Assets Obligations, until the Current Assets Obligations are paid in full and fourth, if any Fixed Assets Liquidation Proceeds remain, to the Borrowers or to such other Person which is entitled to such Liquidation Proceeds pursuant to applicable law. (c) Each Fixed Assets Lender agrees that if it receives (i) Current Assets Liquidation Proceeds or (ii) after the date of entry of the Priming Order, Fixed Assets Collateral to which it is not entitled pursuant to the terms of this Agreement, then such Fixed Assets Lender shall promptly remit such proceeds to the Administrative Agent for application in accordance with clause (a) of this Section 3.4. For purposes of this Section, Current Assets Liquidation Proceeds shall include proceeds of Current Assets Collateral received by any party hereto from any source whatsoever, including by means of setoff. (d) Each Current Assets Lender agrees that if it receives Fixed Assets Liquidation Proceeds (i) prior to the date of entry of the Priming Order, or (ii) on or after the date of entry of the Priming Order, to which it is not entitled pursuant to the terms of this Agreement, then such Current Assets Lender shall promptly remit such proceeds to the Administrative Agent for application in accordance with clause (b) of this Section 3.4. For purposes of this Section, Fixed Assets Liquidation Proceeds shall include proceeds of Fixed Assets Collateral received by any party hereto from any source whatsoever, including by means of setoff." (o) AMENDMENT TO SECTION 4.2 OF THE REVOLVER INTERCREDITOR AGREEMENT. Paragraph (a) of Section 4.2 of the Revolver Intercreditor Agreement is deleted in its entirety and the following is inserted in lieu thereof: "(a) Notwithstanding anything to the contrary herein, with respect to policies which insure (i) the Current Assets Collateral or, (ii) after the date of entry of the 13 Priming Order, and after the occurrence and during the continuance of a Commitment Termination Event, the Fixed Assets Collateral subject to the Priming Lien, if, pursuant to the Applicable Agreements, the Company is required to obtain satisfactory loss payable endorsements naming the Current Assets Secured Parties and the Fixed Assets Secured Parties, as their interests may appear, as loss payees, or with such other designation as the parties hereto may agree, the Administrative Agent (in its capacity as secured party for and on behalf of the Current Assets Lenders and the Fixed Assets Lenders) shall, subject to the Administrative Agent's rights under the Applicable Agreements, have the sole exclusive right, as against the Fixed Assets Secured Parties, to effect settlement of such insurance policy in the event of any loss to any Current Assets Collateral). All proceeds of such policy shall be paid to the Administrative Agent and apply the proceeds of such policy in accordance with clause (a) of Section 3.4." SECTION 2. CONDITIONS PRECEDENT. The parties hereto agree that this Amendment and the amendments to the Credit Agreement and the Revolver Intercreditor Agreement contained herein shall not be effective until the satisfaction of each of the following conditions precedent: (a) EXECUTION AND DELIVERY OF THIS AMENDMENT. The Administrative Agent shall have received a copy of this Amendment executed and delivered by each of the applicable Obligors and by each of the Lenders. (b) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties made in this Amendment shall be true and correct on and as of the Amendment Effective Date as if made on and as of such date, both before and after giving effect to this Amendment (except to the extent such representations and warranties relate expressly to an earlier date, which representations and warranties are true and correct as of such earlier date). (c) PAYMENT OF FEES AND EXPENSES. The Borrowers shall have paid and the Administrative Agent shall have received all costs and expenses of the Administrative Agent in connection with the preparation, reproduction, execution, and delivery of this Amendment and any other documents prepared in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent. (d) DELIVERY OF AUTHORITY DOCUMENTS. The Administrative Agent shall have received certified copies of resolutions and consents of the Obligors that are signatories hereto authorizing the execution, delivery and performance of this Amendment and any documents or instruments contemplated to be executed and delivered hereunder, and as otherwise reasonably requested by the Administrative Agent, each in form and substance reasonably satisfactory to the Administrative Agent. SECTION 3. REPRESENTATIONS AND WARRANTIES. To induce the Administrative Agent and the several Lenders parties hereto to enter into this Amendment and to agree to the amendment contained herein, each of the Borrowers represents and warrants to the Administrative Agent and the Lenders as follows: 14 (a) AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by the applicable Obligors of this Amendment have been duly authorized by all necessary partnership, corporate or limited liability company action, as applicable, and do not and will not (i) contravene the terms of any Organic Documents of any Obligor, (ii) conflict with or result in any breach or contravention of, or (except as contemplated by the Loan Documents or as otherwise permitted by the Credit Agreement) the creation of any Lien under, any document evidencing any contractual obligation to which any Obligor is a party or, upon entry of the approval of the Bankruptcy Court described in Section 4(i) below, any order, injunction, writ or decree of any Governmental Authority to which any Obligor is a party or its property is subject, or (iii) violate any applicable law binding on or affecting any Obligor. (b) GOVERNMENTAL AUTHORIZATION. Upon entry of the approval of the Bankruptcy Court described in Section 4(i) below, no approval, consent, exemption, authorization or other action by, or notice to, or filing with or approvals required under state blue sky securities laws or by any Governmental Authority is necessary or required in connection with the execution, delivery, performance or enforcement of this Amendment. (c) NO DEFAULT. No Default or Event of Default exists under any of the Loan Documents. No Obligor is in default under or with respect to (i) its Organic Documents or (ii) any material contractual obligation of such Person. The execution, delivery and performance of this Amendment shall not result in any default under any contractual obligation of any Obligor in any respect. (d) BINDING EFFECT. Upon entry of the approval of the Bankruptcy Court described in Section 4(i) below, this Amendment and the Credit Agreement as amended hereby constitute the legal, valid and binding obligations of the Obligors that are parties thereto, enforceable against such Obligors in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles of general applicability. (e) REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in the Credit Agreement and the other Loan Documents are true and correct in all material respects on and as of the Amendment Effective Date, both before and after giving effect to the amendments contemplated in this Amendment, as if such representations and warranties were being made on and as of the Amendment Effective Date (except to the extent such representations and warranties relate expressly to an earlier date, which representations and warranties are true and correct as of such earlier date). SECTION 4. MISCELLANEOUS (a) RATIFICATION AND CONFIRMATION OF LOAN DOCUMENTS. Except for the specific amendments expressly set forth in this Amendment, the terms, provisions, conditions and covenants of the Credit Agreement and the other Loan Documents remain in full force and effect and are hereby ratified and confirmed, and the execution, delivery and performance of this 15 Amendment shall not in any manner operate as a waiver of, consent to or amendment of any other term, provision, condition or covenant of the Credit Agreement or any other Loan Document. (b) FEES AND EXPENSES. The Borrowers jointly and severally agree to pay on demand all reasonable costs and expenses of the Administrative Agent in connection with the preparation, reproduction, execution, and delivery of this Amendment and any other documents prepared in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent. (c) HEADINGS. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. (d) APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. (e) COUNTERPARTS AND AMENDMENT EFFECTIVE DATE. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Amendment shall become effective when (i) each of the conditions precedent set forth in Section 2 of this Amendment have been satisfied and (ii) the Administrative Agent has received counterparts of this Amendment executed by the Borrowers, each of the Obligors that are parties hereto and each of the Lenders (the "Amendment Effective Date"). (f) AFFIRMATION OF OBLIGATIONS. Notwithstanding that such consent is not required thereunder, the undersigned Obligors hereby consent to the execution and delivery of this Amendment by the parties hereto and reaffirm their respective obligations under each of the Loan Documents to which such Obligors are parties. (g) CONFIRMATION OF LOAN DOCUMENTS AND LIENS. As a material inducement to the Lenders to amend the Credit Agreement, the Obligors that are parties hereto hereby (i) acknowledge and confirm the continuing existence, validity and effectiveness of the Loan Documents to which they are parties, including, without limitation the Security Documents, and the Liens granted under the Security Documents, (ii) agrees that the execution, delivery and performance of this Amendment shall not in any way release, diminish, impair, reduce or otherwise affect such Loan Documents and Liens and (iii) acknowledges and agrees that the Liens granted under the Security Documents secure payment of the Obligations under the Loan Documents in the same priority as on the date such Liens were created and perfected, and the performance and observance by the Borrowers and the other Obligors of the covenants, agreements and conditions to be performed and observed by each under the Credit Agreement, as amended hereby. 16 (h) FINAL AGREEMENT. THIS AMENDMENT, TOGETHER WITH THE CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. (i) APPROVAL BY BANKRUPTCY COURT. As a material inducement to the Lenders to amend the Credit Agreement, the Obligors that are parties hereto hereby agree to obtain and provide the Administrative Agent with a copy (or such other evidence satisfactory to Administrative Agent) of an order of the Bankruptcy Court, which order (i) as entered, shall be acceptable in form and substance to the Administrative Agent, (ii) shall be entered on or before August 22, 2001, authorizing the Borrowers to execute, deliver and to perform their respective obligations under this Amendment, (iii) shall have been entered upon a motion satisfactory in form and substance to the Administrative Agent, (iv) shall be in full force and effect, and (v) shall not have been stayed, reversed, modified or amended in any respect. Is further acknowledged and agreed that the failure to obtain and provide a copy (or such other evidence satisfactory to Administrative Agent) of such an order to the Administrative Agent on or before August 22, 2001, shall constitute an Event of Default under the Credit Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES FOLLOW] 17 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers effective as of the Amendment Effective Date. OBLIGORS: STERLING CHEMICALS, INC. By: ----------------------------------- Title: STERLING CANADA, INC. By: ----------------------------------- Title: STERLING PULP CHEMICALS US, INC. By: ----------------------------------- Title: STERLING PULP CHEMICALS, INC. By: ----------------------------------- Title: STERLING FIBERS, INC. By: ----------------------------------- Title: STERLING CHEMICALS ENERGY, INC. By: ----------------------------------- Title: STERLING CHEMICALS INTERNATIONAL, INC. By: ----------------------------------- Title: STERLING CHEMICALS HOLDINGS, INC. By: ----------------------------------- Title: ADMINISTRATIVE AGENT: THE CIT GROUP/BUSINESS CREDIT, INC., as Administrative Agent By: ----------------------------------- Title: LENDERS: THE CIT GROUP/BUSINESS CREDIT, INC. By: ----------------------------------- Title: IBJ WHITEHALL BUSINESS CREDIT CORPORATION By: ----------------------------------- Title: FLEET CAPITAL CORPORATION By: ----------------------------------- Title: TEXTRON FINANCIAL CORP. By: ----------------------------------- Title: TRANSAMERICA BUSINESS CAPITAL CORPORATION By: ----------------------------------- Title: GMAC BUSINESS CREDIT, LLC By: ----------------------------------- Title: THE PROVIDENT BANK By: ----------------------------------- Title: GPSF SECURITIES, INC. By: ----------------------------------- Title: FOOTHILL INCOME TRUST II, L.P. By: ----------------------------------- Title: CONGRESS FINANCIAL CORPORATION By: ----------------------------------- Title: COMERICA BANK By: ----------------------------------- Title: EX-4.18.B 6 h92951ex4-18_b.txt 2ND AMEND. TO REVOLVING CREDIT AGREEMENT EXHIBIT 4.18(b) SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT AND LIMITED WAIVER THIS SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT AND LIMITED WAIVER (this "Amendment"), dated as of August 29, 2001, is among STERLING CHEMICALS, INC., a Delaware corporation (the "Company"), STERLING CANADA, INC., a Delaware corporation ("Canada"), STERLING PULP CHEMICALS US, INC., a Delaware corporation ("Pulp US"), STERLING PULP CHEMICALS, INC., a Georgia corporation ("Pulp"), STERLING FIBERS, INC., a Delaware corporation ("Fibers"), STERLING CHEMICALS ENERGY, INC., a Delaware corporation ("Energy"), and STERLING CHEMICALS INTERNATIONAL, INC., a Delaware corporation (together with the Company, Canada, Pulp US, Pulp, Fibers and Energy, collectively, the "Borrowers"), the several Lenders (as such term is defined in the hereinafter described Credit Agreement) parties to this Amendment, and THE CIT GROUP/BUSINESS CREDIT, INC., as Administrative Agent for the Lenders (in such capacity, the "Administrative Agent"). RECITALS: A. The Borrowers are parties to a Revolving Credit Agreement dated as of July 19, 2001 (as amended by the First Amendment to Revolving Credit Agreement and Revolver Intercreditor Agreement dated as of August 17, 2001, and as the same may be further amended, modified, restated, supplemented, renewed, extended, increased, rearranged and/or substituted from time to time, the "Credit Agreement") among the Borrowers, the Administrative Agent, and the several Lenders from time to time parties thereto. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement. B. The Borrowers have advised the Administrative Agent that (i) events of default have occurred (x) with respect to Section 10(1)(p) of the Canadian Facility, as a result of the Bankruptcy Court not having entered the Final Order prior to the thirtieth (30th) day after the date of the entry of the Interim Order, and (y) with respect to Section 10(1)(q) of the Canadian Facility, as a result of the Bankruptcy Court not having entered an order approving the assumption of the "Inter-Sterling" Material Agreements listed in Schedule 9 thereof within 45 days of the Filing Date (such events of default are hereinafter referred to collectively as the "Canadian Facility Defaults"), and (ii) as a result of the Canadian Facility Defaults, Events of Default have occurred and are continuing pursuant to Section 8.1.5 of the Credit Agreement (such Events of Default are hereinafter referred to as the "Cross Defaults"). C. Pursuant to the Credit Agreement, the Maturity Date will occur on August 30, 2001 unless by such date (i) the Bankruptcy Court has entered the Final Order, or (ii) the Maturity Date has occurred or has been extended pursuant to Section 10.1(e)(i) of the Credit Agreement. D. In order to allow further time to pursue the entry by the Bankruptcy Court of the Final Order, the Borrowers have requested that the Lenders waive the Cross Defaults and amend the Credit Agreement to extend the Maturity Date pursuant to Section 10.1(e)(i) of the Credit Agreement. E. The Lenders parties to this Amendment (which Lenders constitute the Lenders required to effect the amendments intended hereby) are willing to waive the Cross Defaults and to so amend the Credit Agreement, subject to the performance and observance in full of each of the covenants, terms and conditions, and in reliance upon all of the representations and warranties of the Borrowers, set forth herein. NOW, THEREFORE, in consideration of the premises and the covenants, terms, conditions, representations and warranties herein contained, the parties hereto agree hereby as follows: SECTION 1. AMENDMENT TO MATURITY DATE DEFINITION. Subject to the covenants, terms and conditions set forth herein and in reliance upon the representations and warranties herein contained, the Borrowers and the several Lenders parties to this Amendment (which Lenders constitute the Lenders required to effect the following amendment) hereby agree that, effective as of the Amendment Effective Date (as hereinafter defined), the definition of "Maturity Date" is deleted from Section 1.01 of the Credit Agreement and the following definition is inserted in lieu thereof: "Maturity Date" means the earliest to occur of (a) September 7, 2001, if the Final Order has not been entered prior to such date (unless the Maturity Date has been extended pursuant to Section 10.1(e)(i) below), (b) the date on which the Bankruptcy Court enters a final order denying approval of the transactions contemplated in this Agreement (other than the Priming Lien), and (c) the second anniversary of the Effective Date of this Agreement (unless the Maturity Date has been extended pursuant to Section 10.1(e)(i) below). SECTION 2. LIMITED WAIVERS. Subject to the covenants, terms and conditions set forth herein and in reliance upon the representations and warranties herein contained, the Borrowers and the several Lenders parties to this Amendment (which Lenders constitute the Lenders required to effect the following waivers) hereby waive the following Events of Default effective as of the Amendment Effective Date: (a) the Event of Default under Section 8.1.5 of the Credit Agreement arising as a result of the Bankruptcy Court not having entered the Final Order prior to the thirtieth (30th) day after the date of the entry of the Interim Order as required by Section 10(1)(p) of the Canadian Facility; and (b) the Event of Default under Section 8.1.5 of the Credit Agreement arising as a result of the Bankruptcy Court not having entered an order approving the assumption of the "Inter-Sterling" Material Agreements listed in Schedule 9 thereof within 45 days of the Filing Date as required by Section 10(1)(q) of the Canadian Facility; provided in each case that the foregoing Events of Default are waived only if and only for so long as the Canadian Facility Defaults are waived by the lenders under the Canadian Facility pursuant to documentation in form and substance acceptable to the Administrative Agent. 2 SECTION 3. CONDITIONS PRECEDENT. The parties hereto agree that this Amendment and the amendment to the Credit Agreement and waivers contained herein shall not be effective until the satisfaction of each of the following conditions precedent: (a) EXECUTION AND DELIVERY OF THIS AMENDMENT. The Administrative Agent shall have received a copy of this Amendment executed and delivered by each of the applicable Obligors and by each of the Lenders. (b) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties made in this Amendment shall be true and correct on and as of the Amendment Effective Date as if made on and as of such date, both before and after giving effect to this Amendment (except to the extent such representations and warranties relate expressly to an earlier date, which representations and warranties are true and correct as of such earlier date). (c) PAYMENT OF FEES AND EXPENSES. The Borrowers shall have paid and the Administrative Agent shall have received all costs and expenses of the Administrative Agent in connection with the preparation, reproduction, execution, and delivery of this Amendment and any other documents prepared in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent. (d) APPROVAL BY BANKRUPTCY COURT. The Administrative Agent shall have received a copy (or such other evidence satisfactory to Administrative Agent) of an order of the Bankruptcy Court, which order (i) as entered, shall be acceptable in form and substance to the Administrative Agent, (ii) shall be entered on or before August 30, 2001, authorizing the Borrowers to execute, deliver and to perform their respective obligations under this Amendment, (iii) shall be in full force and effect, and (iv) shall not have been stayed, reversed, modified or amended in any respect. SECTION 4. REPRESENTATIONS AND WARRANTIES. To induce the Administrative Agent and the several Lenders parties hereto to enter into this Amendment and to agree to the amendment and waivers contained herein, each of the Borrowers represents and warrants to the Administrative Agent and the Lenders as follows: (a) AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by the applicable Obligors of this Amendment have been duly authorized by all necessary partnership, corporate or limited liability company action, as applicable, and do not and will not (i) contravene the terms of any Organic Documents of any Obligor, (ii) conflict with or result in any breach or contravention of, or (except as contemplated by the Loan Documents or as otherwise permitted by the Credit Agreement) the creation of any Lien under, any document evidencing any contractual obligation to which any Obligor is a party or, upon entry of the approval of the Bankruptcy Court described in Section 3(d) above, any order, injunction, writ or decree of any Governmental Authority to which any Obligor is a party or its property is subject, or (iii) violate any applicable law binding on or affecting any Obligor. (b) GOVERNMENTAL AUTHORIZATION. Upon entry of the approval of the Bankruptcy Court described in Section 3(d) above, no approval, consent, exemption, authorization or other action by, or notice to, or filing with or approvals required under state blue sky securities laws or 3 by any Governmental Authority is necessary or required in connection with the execution, delivery, performance or enforcement of this Amendment. (c) NO DEFAULT. No Default or Event of Default exists under any of the Loan Documents other than the Cross Defaults. No Obligor is in default under or with respect to (i) its Organic Documents or (ii) any material contractual obligation of such Person other than the Canadian Facility Defaults. The execution, delivery and performance of this Amendment shall not result in any default under any contractual obligation of any Obligor in any respect. (d) BINDING EFFECT. Upon entry of the approval of the Bankruptcy Court described in Section 3(d) above, this Amendment and the Credit Agreement as amended hereby constitute the legal, valid and binding obligations of the Obligors that are parties thereto, enforceable against such Obligors in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles of general applicability. (e) REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in the Credit Agreement and the other Loan Documents are true and correct in all material respects on and as of the Amendment Effective Date, both before and after giving effect to the amendments contemplated in this Amendment, as if such representations and warranties were being made on and as of the Amendment Effective Date (except to the extent such representations and warranties relate expressly to an earlier date, which representations and warranties are true and correct as of such earlier date, and except to the extent that such representations and warranties would not be true and correct solely as a result of the Canadian Facility Defaults and the Cross Defaults). SECTION 5. MISCELLANEOUS (a) RATIFICATION AND CONFIRMATION OF LOAN DOCUMENTS. Except for the specific amendment and waivers expressly set forth in this Amendment, the terms, provisions, conditions and covenants of the Credit Agreement and the other Loan Documents remain in full force and effect and are hereby ratified and confirmed, and the execution, delivery and performance of this Amendment shall not in any manner operate as a waiver of, consent to or amendment of any other term, provision, condition or covenant of the Credit Agreement or any other Loan Document. Without limiting the generality of the foregoing, the waivers set forth in Section 2 of this Amendment shall be limited precisely as set forth above, and nothing in this Amendment shall be deemed (i) to constitute a waiver of compliance or consent to noncompliance by any of the Obligors with respect to any other term, provision, covenant or condition of the Credit Agreement or other Loan Documents; (ii) to prejudice any right or remedy that the Administrative Agent or the Lenders may now have or may have in the future under or in connection with the Credit Agreement or any other Loan Document; or (iii) to constitute a waiver of compliance or consent to noncompliance by any Obligor with respect to the terms, provisions, covenants and conditions of the Credit Agreement made subject hereof, other than as specifically set forth herein and for the time periods specifically set forth herein. (b) FEES AND EXPENSES. The Borrowers jointly and severally agree to pay on demand all reasonable costs and expenses of the Administrative Agent in connection with the preparation, 4 reproduction, execution, and delivery of this Amendment and any other documents prepared in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent. (c) HEADINGS. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. (d) APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. (e) COUNTERPARTS AND AMENDMENT EFFECTIVE DATE. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Amendment shall become effective when (i) each of the conditions precedent set forth in Section 3 of this Amendment have been satisfied and (ii) the Administrative Agent has received counterparts of this Amendment executed by the Borrowers, each of the Obligors that are parties hereto and each of the Lenders (the "Amendment Effective Date"). (f) AFFIRMATION OF OBLIGATIONS. Notwithstanding that such consent is not required thereunder, the undersigned Obligors hereby consent to the execution and delivery of this Amendment by the parties hereto and reaffirm their respective obligations under each of the Loan Documents to which such Obligors are parties. (g) CONFIRMATION OF LOAN DOCUMENTS AND LIENS. As a material inducement to the Lenders to amend the Credit Agreement and waive the Cross Defaults, the Obligors that are parties hereto hereby (i) acknowledge and confirm the continuing existence, validity and effectiveness of the Loan Documents to which they are parties, including, without limitation the Security Documents, and the Liens granted under the Security Documents, (ii) agrees that the execution, delivery and performance of this Amendment shall not in any way release, diminish, impair, reduce or otherwise affect such Loan Documents and Liens and (iii) acknowledges and agrees that the Liens granted under the Security Documents secure payment of the Obligations under the Loan Documents in the same priority as on the date such Liens were created and perfected, and the performance and observance by the Borrowers and the other Obligors of the covenants, agreements and conditions to be performed and observed by each under the Credit Agreement, as amended hereby. (h) FINAL AGREEMENT. THIS AMENDMENT, TOGETHER WITH THE CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL 5 AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES FOLLOW] 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers effective as of the Amendment Effective Date. OBLIGORS: STERLING CHEMICALS, INC. By: ------------------------------------------ Title: STERLING CANADA, INC. By: ------------------------------------------ Title: STERLING PULP CHEMICALS US, INC. By: ------------------------------------------ Title: STERLING PULP CHEMICALS, INC. By: ------------------------------------------ Title: STERLING FIBERS, INC. By: ------------------------------------------ Title: STERLING CHEMICALS ENERGY, INC. By: ------------------------------------------ Title: STERLING CHEMICALS INTERNATIONAL, INC. By: ------------------------------------------ Title: STERLING CHEMICALS HOLDINGS, INC. By: ------------------------------------------ Title: ADMINISTRATIVE AGENT: THE CIT GROUP/BUSINESS CREDIT, INC., as Administrative Agent By: ------------------------------------------ Title: LENDERS: THE CIT GROUP/BUSINESS CREDIT, INC. By: ------------------------------------------ Title: IBJ WHITEHALL BUSINESS CREDIT CORPORATION By: ------------------------------------------ Title: FLEET CAPITAL CORPORATION By: ------------------------------------------ Title: TEXTRON FINANCIAL CORP. By: ------------------------------------------ Title: TRANSAMERICA BUSINESS CAPITAL CORPORATION By: ------------------------------------------ Title: GMAC BUSINESS CREDIT, LLC By: ------------------------------------------ Title: THE PROVIDENT BANK By: ------------------------------------------ Title: GPSF SECURITIES, INC. By: ------------------------------------------ Title: FOOTHILL INCOME TRUST II, L.P. By: ------------------------------------------ Title: CONGRESS FINANCIAL CORPORATION By: ------------------------------------------ Title: COMERICA BANK By: ------------------------------------------ Title: EX-4.18.C 7 h92951ex4-18_c.txt 3RD AMEND. TO REVOLVING CREDIT AGREEMENT EXHIBIT 4.18(c) THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT AND LIMITED WAIVER THIS THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT AND LIMITED WAIVER (this "Amendment"), dated as of September 7, 2001, is among STERLING CHEMICALS, INC., a Delaware corporation (the "Company"), STERLING CANADA, INC., a Delaware corporation ("Canada"), STERLING PULP CHEMICALS US, INC., a Delaware corporation ("Pulp US"), STERLING PULP CHEMICALS, INC., a Georgia corporation ("Pulp"), STERLING FIBERS, INC., a Delaware corporation ("Fibers"), STERLING CHEMICALS ENERGY, INC., a Delaware corporation ("Energy"), and STERLING CHEMICALS INTERNATIONAL, INC., a Delaware corporation (together with the Company, Canada, Pulp US, Pulp, Fibers and Energy, collectively, the "Borrowers"), the several Lenders (as such term is defined in the hereinafter described Credit Agreement) parties to this Amendment, and THE CIT GROUP/BUSINESS CREDIT, INC., as Administrative Agent for the Lenders (in such capacity, the "Administrative Agent"). RECITALS: A. The Borrowers are parties to a Revolving Credit Agreement dated as of July 19, 2001 (as amended by the First Amendment to Revolving Credit Agreement and Revolver Intercreditor Agreement dated as of August 17, 2001, the Second Amendment to Credit Agreement and Limited Waiver dated as of August 29, 2001 (the "Second Amendment"), and as the same may be further amended, modified, restated, supplemented, renewed, extended, increased, rearranged and/or substituted from time to time, the "Credit Agreement") among the Borrowers, the Administrative Agent, and the several Lenders from time to time parties thereto. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement. B. Prior to the Second Amendment, the Borrowers advised the Administrative Agent that (i) events of default had occurred (x) with respect to Section 10(1)(p) of the Canadian Facility, as a result of the Bankruptcy Court not having entered the Final Order prior to the thirtieth (30th) day after the date of the entry of the Interim Order, and (y) with respect to Section 10(1)(q) of the Canadian Facility, as a result of the Bankruptcy Court not having entered an order approving the assumption of the "Inter-Sterling" Material Agreements listed in Schedule 9 thereof within 45 days of the Filing Date (such events of default are hereinafter referred to collectively as the "Canadian Facility Defaults"), and (ii) as a result of the Canadian Facility Defaults, Events of Default had occurred pursuant to Section 8.1.5 of the Credit Agreement (such Events of Default are hereinafter referred to as the "Cross Defaults"). C. The Canadian Facility Defaults were waived by the lenders under the Canadian Facility (the "Canadian Facility Lenders") until September 7, 2001, and the Cross Defaults were waived by the Banks pursuant to the Second Amendment for so long as the Canadian Facility Defaults were waived by the Canadian Facility Lenders. D. Pursuant to the Credit Agreement, the Maturity Date will occur on September 7, 2001, unless by such date (i) the Bankruptcy Court has entered the Final Order, or (ii) the Maturity Date has occurred or has been extended pursuant to Section 10.1(e)(i) of the Credit Agreement. E. The Canadian Facility Lenders have extended their waiver of the Canadian Facility Defaults until September 14, 2001. F. In order to allow further time to pursue the entry by the Bankruptcy Court of the Final Order, the Borrowers have requested that the Lenders (i) re-affirm the waivers of the Cross Defaults in connection with the extension by the Canadian Facility Lenders of the Canadian Facility Defaults, and (ii) amend the Credit Agreement to, among other things, extend the Maturity Date pursuant to Section 10.1(e)(i) of the Credit Agreement. G. The Lenders parties to this Amendment (which Lenders constitute the Lenders required to effect the amendments and re-affirm the waivers intended hereby) are willing to so re-affirm the waivers of the Cross Defaults and to so amend the Credit Agreement, subject to the performance and observance in full of each of the covenants, terms and conditions, and in reliance upon all of the representations and warranties of the Borrowers, set forth herein. NOW, THEREFORE, in consideration of the premises and the covenants, terms, conditions, representations and warranties herein contained, the parties hereto agree hereby as follows: SECTION 1. AMENDMENT TO MATURITY DATE DEFINITION. Subject to the covenants, terms and conditions set forth herein and in reliance upon the representations and warranties herein contained, the Borrowers and the several Lenders parties to this Amendment (which Lenders constitute the Lenders required to effect the following amendments) hereby agree to amend the Credit Agreement as set forth below in this Section 1, effective as of the Amendment Effective Date (as hereinafter defined). (a) AMENDMENT TO DEFINITION OF MATURITY DATE. The definition of "Maturity Date" is deleted from Section 1.01 and the following definition is inserted in lieu thereof: "Maturity Date" means the earliest to occur of (a) September 14, 2001, if the Final Order has not been entered prior to such date (unless the Maturity Date has been extended pursuant to Section 10.1(e)(i) below), (b) the date on which the Bankruptcy Court enters a final order denying approval of the transactions contemplated in this Agreement (other than the Priming Lien), and (c) the second anniversary of the Effective Date of this Agreement (unless the Maturity Date has been extended pursuant to Section 10.1(e)(i) below). (b) AMENDMENT TO SECTION 5.2.3. The date "August 30, 2001" is hereby deleted from clause (a)(ii) of Section 5.2.3. and the date "September 14" is inserted in lieu thereof. SECTION 2. LIMITED WAIVERS. Subject to the covenants, terms and conditions set forth herein and in reliance upon the representations and warranties herein contained, the Borrowers and the several Lenders parties to this Amendment (which Lenders constitute the 2 Lenders required to effect the following waivers) hereby re-affirm the waiver given in the Second Amendment of the following Events of Default effective as of the Amendment Effective Date: (a) the Event of Default under Section 8.1.5 of the Credit Agreement arising as a result of the Bankruptcy Court not having entered the Final Order prior to the thirtieth (30th) day after the date of the entry of the Interim Order as required by Section 10(1)(p) of the Canadian Facility; and (b) the Event of Default under Section 8.1.5 of the Credit Agreement arising as a result of the Bankruptcy Court not having entered an order approving the assumption of the "Inter-Sterling" Material Agreements listed in Schedule 9 thereof within 45 days of the Filing Date as required by Section 10(1)(q) of the Canadian Facility; provided in each case that the foregoing Events of Default are waived only if and only for so long as the Canadian Facility Defaults are waived by the lenders under the Canadian Facility pursuant to documentation in form and substance acceptable to the Administrative Agent. SECTION 3. CONDITIONS PRECEDENT. The parties hereto agree that this Amendment and the amendments to the Credit Agreement and re-affirmation of waivers contained herein shall not be effective until the satisfaction of each of the following conditions precedent: (a) EXECUTION AND DELIVERY OF THIS AMENDMENT. The Administrative Agent shall have received a copy of this Amendment executed and delivered by each of the applicable Obligors and by each of the Lenders. (b) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties made in this Amendment shall be true and correct on and as of the Amendment Effective Date as if made on and as of such date, both before and after giving effect to this Amendment (except to the extent such representations and warranties relate expressly to an earlier date, which representations and warranties are true and correct as of such earlier date). (c) PAYMENT OF FEES AND EXPENSES. The Borrowers shall have paid and the Administrative Agent shall have received all costs and expenses of the Administrative Agent in connection with the preparation, reproduction, execution, and delivery of this Amendment and any other documents prepared in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent. (d) APPROVAL BY BANKRUPTCY COURT. The Administrative Agent shall have received a copy (or such other evidence satisfactory to Administrative Agent) of an order of the Bankruptcy Court, which order (i) as entered, shall be acceptable in form and substance to the Administrative Agent, (ii) shall be entered on or before September 7, 2001, authorizing the Borrowers to execute, deliver and to perform their respective obligations under this Amendment, (iii) shall be in full force and effect, and (iv) shall not have been stayed, reversed, modified or amended in any respect. 3 SECTION 4. REPRESENTATIONS AND WARRANTIES. To induce the Administrative Agent and the several Lenders parties hereto to enter into this Amendment and to agree to the amendments and to re-affirm the waivers contained herein, each of the Borrowers represents and warrants to the Administrative Agent and the Lenders as follows: (a) AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by the applicable Obligors of this Amendment have been duly authorized by all necessary partnership, corporate or limited liability company action, as applicable, and do not and will not (i) contravene the terms of any Organic Documents of any Obligor, (ii) conflict with or result in any breach or contravention of, or (except as contemplated by the Loan Documents or as otherwise permitted by the Credit Agreement) the creation of any Lien under, any document evidencing any contractual obligation to which any Obligor is a party or, upon entry of the approval of the Bankruptcy Court described in Section 3(d) above, any order, injunction, writ or decree of any Governmental Authority to which any Obligor is a party or its property is subject, or (iii) violate any applicable law binding on or affecting any Obligor. (b) GOVERNMENTAL AUTHORIZATION. Upon entry of the approval of the Bankruptcy Court described in Section 3(d) above, no approval, consent, exemption, authorization or other action by, or notice to, or filing with or approvals required under state blue sky securities laws or by any Governmental Authority is necessary or required in connection with the execution, delivery, performance or enforcement of this Amendment. (c) NO DEFAULT. No Default or Event of Default exists under any of the Loan Documents other than the Cross Defaults. No Obligor is in default under or with respect to (i) its Organic Documents or (ii) any material contractual obligation of such Person other than the Canadian Facility Defaults. The execution, delivery and performance of this Amendment shall not result in any default under any contractual obligation of any Obligor in any respect. (d) BINDING EFFECT. Upon entry of the approval of the Bankruptcy Court described in Section 3(d) above, this Amendment and the Credit Agreement as amended hereby constitute the legal, valid and binding obligations of the Obligors that are parties thereto, enforceable against such Obligors in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles of general applicability. (e) REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in the Credit Agreement and the other Loan Documents are true and correct in all material respects on and as of the Amendment Effective Date, both before and after giving effect to the amendments contemplated in this Amendment, as if such representations and warranties were being made on and as of the Amendment Effective Date (except to the extent such representations and warranties relate expressly to an earlier date, which representations and warranties are true and correct as of such earlier date, and except to the extent that such representations and warranties would not be true and correct solely as a result of the Canadian Facility Defaults and the Cross Defaults). 4 SECTION 5. MISCELLANEOUS (a) RATIFICATION AND CONFIRMATION OF LOAN DOCUMENTS. Except for the specific amendments and waivers expressly set forth in and re-affirmed by this Amendment, the terms, provisions, conditions and covenants of the Credit Agreement and the other Loan Documents remain in full force and effect and are hereby ratified and confirmed, and the execution, delivery and performance of this Amendment shall not in any manner operate as a waiver of, consent to or amendment of any other term, provision, condition or covenant of the Credit Agreement or any other Loan Document. Without limiting the generality of the foregoing, the waivers described in Section 2 of this Amendment shall be limited precisely as set forth above, and nothing in this Amendment shall be deemed (i) to constitute a waiver of compliance or consent to noncompliance by any of the Obligors with respect to any other term, provision, covenant or condition of the Credit Agreement or other Loan Documents; (ii) to prejudice any right or remedy that the Administrative Agent or the Lenders may now have or may have in the future under or in connection with the Credit Agreement or any other Loan Document; or (iii) to constitute a waiver of compliance or consent to noncompliance by any Obligor with respect to the terms, provisions, covenants and conditions of the Credit Agreement made subject hereof, other than as specifically set forth herein and for the time periods specifically set forth herein. (b) FEES AND EXPENSES. The Borrowers jointly and severally agree to pay on demand all reasonable costs and expenses of the Administrative Agent in connection with the preparation, reproduction, execution, and delivery of this Amendment and any other documents prepared in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent. (c) HEADINGS. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. (d) APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. (e) COUNTERPARTS AND AMENDMENT EFFECTIVE DATE. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Amendment shall become effective when (i) each of the conditions precedent set forth in Section 3 of this Amendment have been satisfied and (ii) the Administrative Agent has received counterparts of this Amendment executed by the Borrowers, each of the Obligors that are parties hereto and each of the Lenders (the "Amendment Effective Date"). 5 (f) AFFIRMATION OF OBLIGATIONS. Notwithstanding that such consent is not required thereunder, the undersigned Obligors hereby consent to the execution and delivery of this Amendment by the parties hereto and reaffirm their respective obligations under each of the Loan Documents to which such Obligors are parties. (g) CONFIRMATION OF LOAN DOCUMENTS AND LIENS. As a material inducement to the Lenders to amend the Credit Agreement and waive the Cross Defaults, the Obligors that are parties hereto hereby (i) acknowledge and confirm the continuing existence, validity and effectiveness of the Loan Documents to which they are parties, including, without limitation the Security Documents, and the Liens granted under the Security Documents, (ii) agrees that the execution, delivery and performance of this Amendment shall not in any way release, diminish, impair, reduce or otherwise affect such Loan Documents and Liens and (iii) acknowledges and agrees that the Liens granted under the Security Documents secure payment of the Obligations under the Loan Documents in the same priority as on the date such Liens were created and perfected, and the performance and observance by the Borrowers and the other Obligors of the covenants, agreements and conditions to be performed and observed by each under the Credit Agreement, as amended hereby. (h) FINAL AGREEMENT. THIS AMENDMENT, TOGETHER WITH THE CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES FOLLOW] 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers effective as of the Amendment Effective Date. OBLIGORS: STERLING CHEMICALS, INC. By: ---------------------------------------- Title: STERLING CANADA, INC. By: ---------------------------------------- Title: STERLING PULP CHEMICALS US, INC. By: ---------------------------------------- Title: STERLING PULP CHEMICALS, INC. By: ---------------------------------------- Title: STERLING FIBERS, INC. By: ---------------------------------------- Title: STERLING CHEMICALS ENERGY, INC. By: ---------------------------------------- Title: STERLING CHEMICALS INTERNATIONAL, INC. By: ---------------------------------------- Title: STERLING CHEMICALS HOLDINGS, INC. By: ---------------------------------------- Title: ADMINISTRATIVE AGENT: THE CIT GROUP/BUSINESS CREDIT, INC., as Administrative Agent By: ---------------------------------------- Title: LENDERS: THE CIT GROUP/BUSINESS CREDIT, INC. By: ---------------------------------------- Title: IBJ WHITEHALL BUSINESS CREDIT CORPORATION By: ---------------------------------------- Title: FLEET CAPITAL CORPORATION By: ---------------------------------------- Title: TEXTRON FINANCIAL CORP. By: ---------------------------------------- Title: TRANSAMERICA BUSINESS CAPITAL CORPORATION By: ---------------------------------------- Title: GMAC BUSINESS CREDIT, LLC By: ---------------------------------------- Title: THE PROVIDENT BANK By: ---------------------------------------- Title: GPSF SECURITIES, INC. By: ---------------------------------------- Title: FOOTHILL INCOME TRUST II, L.P. By: ---------------------------------------- Title: CONGRESS FINANCIAL CORPORATION By: ---------------------------------------- Title: COMERICA BANK By: ---------------------------------------- Title: EX-4.18.D 8 h92951ex4-18_d.txt 4TH AMEND. TO REVOLVING CREDIT AGREEMENT EXHIBIT 4.18(d) FOURTH AMENDMENT TO REVOLVING CREDIT AGREEMENT AND SECOND AMENDMENT TO REVOLVER INTERCREDITOR AGREEMENT THIS FOURTH AMENDMENT TO REVOLVING CREDIT AGREEMENT AND SECOND AMENDMENT TO REVOLVER INTERCREDITOR AGREEMENT (this "Amendment"), dated as of October 10, 2001, is among STERLING CHEMICALS, INC., a Delaware corporation (the "Company"), STERLING CANADA, INC., a Delaware corporation ("Canada"), STERLING PULP CHEMICALS US, INC., a Delaware corporation ("Pulp US"), STERLING PULP CHEMICALS, INC., a Georgia corporation ("Pulp"), STERLING FIBERS, INC., a Delaware corporation ("Fibers"), STERLING CHEMICALS ENERGY, INC., a Delaware corporation ("Energy"), and STERLING CHEMICALS INTERNATIONAL, INC., a Delaware corporation (together with the Company, Canada, Pulp US, Pulp, Fibers and Energy, collectively, the "Borrowers"), the several Lenders (as such term is defined in the hereinafter described Credit Agreement) parties to this Amendment, and THE CIT GROUP/BUSINESS CREDIT, INC., as Administrative Agent for the Lenders (in such capacity, the "Administrative Agent"). RECITALS: A. The Borrowers are parties to a Revolving Credit Agreement dated as of July 19, 2001 (as amended by the First Amendment to Revolving Credit Agreement and Revolver Intercreditor Agreement dated as of August 17, 2001, the Second Amendment to Revolving Credit Agreement and Limited Waiver dated as of August 29, 2001, the Third Amendment to Revolving Credit Agreement and Limited Waiver dated as of September 7, 2001, and as the same may be further amended, modified, restated, supplemented, renewed, extended, increased, rearranged and/or substituted from time to time, the "Credit Agreement") among the Borrowers, the Administrative Agent, and the several Lenders from time to time parties thereto. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement. B. The Borrowers have requested that the Lenders amend the Credit Agreement as hereinafter set forth. C. The Lenders parties to this Amendment (which Lenders constitute the Lenders required to effect the amendments intended hereby) are willing to so amend the Credit Agreement, subject to the performance and observance in full of each of the covenants, terms and conditions, and in reliance upon all of the representations and warranties of the Borrowers, set forth herein. NOW, THEREFORE, in consideration of the premises and the covenants, terms, conditions, representations and warranties herein contained, the parties hereto agree hereby as follows: SECTION 1. AMENDMENTS. Subject to the covenants, terms and conditions set forth herein and in reliance upon the representations and warranties herein contained, the Borrowers and the several Lenders parties to this Amendment (which Lenders constitute the Lenders required to effect the following amendments) hereby agree to amend the Credit Agreement and the Revolver Intercreditor Agreement as set forth below in this Section 1, in each case effective as of the Amendment Effective Date (as hereinafter defined). (a) ADDITION OF DEFINITIONS TO THE CREDIT AGREEMENT. Section 1.1 of the Credit Agreement is amended by inserting the following definitions in the appropriate alphabetical position therein: "Appraiser" is defined in Section 5.2.3. "Excess EBITDA" is defined in Section 7.2.7. "Qualified Financial Forecast" is defined in Section 5.2.3. (b) AMENDMENTS TO CERTAIN CREDIT AGREEMENT DEFINITIONS. Section 1.1 of the Credit Agreement is amended by deleting the existing definitions of the terms described in this Section 1(a) below in their entirety and inserting the following definitions in lieu thereof: "Borrowing Base Amount" means, at any time, an amount equal to the sum of (without duplication) (a) 85% of Eligible Accounts; plus (b) on and after the date which is the later to occur of (i) the date of entry of the Priming Order and (ii) the date the Borrowers have fully complied with the proviso to clause (b) of Section 5.2.3, the product of (A) the lesser of (x) $10,000,000 and (y) 33% of Generator Receivables multiplied by (B) a fraction the numerator of which is the excess, if any, of $40,000,000 over the aggregate amount of any reductions in the Current Assets Loan Commitment Amount pursuant to clause (b) of Section 3.1.2 as a result of Dispositions of Fixed Assets Collateral and the denominator of which is $40,000,000; plus (c) 65% of Eligible Inventory; provided, however, that the amount available pursuant to clause (c) of this definition shall not at any time exceed 50% of the Current Assets Loan Commitment Amount at such time. The Administrative Agent shall have the right to review computations of the Borrowing Base Amount and if, in its reasonable judgment, such computations have not been computed in accordance with the terms of this Agreement, the Administrative Agent shall have the right to correct such errors. "Current Assets" means all of the assets of the Borrowers other than the Fixed Assets Collateral; provided, however, except to the extent set forth in paragraph H of the Final Order, Current Assets shall not include, and, except to the extent set forth in paragraph H of the Final Order, the Liens granted to the Administrative Agent for the benefit of the Lenders shall not extend to, any causes of action arising under Chapter 5 of the Bankruptcy Code or any proceeds thereof. "Current Assets Obligations" means all obligations of every kind and nature, including without limitation, principal, fees, interest (including interest which accrues after or would accrue but for the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Borrowers), expenses, indemnities and all other sums, monetary or otherwise, whether absolute or contingent, matured or 2 unmatured, of the Borrowers and each other Obligor arising under, in connection with or relating to the Current Assets Loans, the Current Assets Loan Commitment, any Current Assets Security Document or any other Loan Document which secures or guarantees such obligations (including obligations under a Rate Protection Agreement where the counterparty is a Current Assets Lender or its Affiliate), in each case, to the extent such obligations are owed to any Current Assets Secured Party. "Final Order" means an order or judgment of the Bankruptcy Court after a final hearing pursuant to Section 364 of the Bankruptcy Code and Fed. R. Bankr. P. 4001, approving the transactions contemplated by the Loan Documents in form and substance acceptable to Lenders and the Administrative Agent, in their sole discretion, including (i) a finding in favor of the Administrative Agent and the Lenders pursuant to 11 U.S.C. Section 364(e), (ii) the grant of a Superpriority Claim in favor of the Administrative Agent and the Lenders with respect to all of the Obligations, and (iii) granting Liens in the Current Assets Collateral and the Fixed Assets Collateral securing the Obligations as set forth in Section 7.1.8 and the other Loan Documents; and which order or judgment of the Bankruptcy Court has not been reversed, stayed or otherwise rendered ineffective or modified in any manner (except as may be provided in the Priming Order), and if such order is the subject of a pending appeal in any respect, neither the making of any Credit Extensions, nor the granting of Superpriority Claim status with respect to the Obligations, nor the granting of the Liens described hereinabove, nor the performance by any of the Borrowers of any of their obligations under this Agreement or any other Loan Document or under any other instrument or agreement referred to in this Agreement shall be the subject of a presently effective stay pending appeal. "Fixed Assets Obligations" means all obligations of every kind and nature, including without limitation, principal, fees, interest (including interest which accrues after or would accrue but for the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Borrowers), expenses, indemnities and all other sums, monetary or otherwise, whether absolute or contingent, matured or unmatured, of the Borrowers and each other Obligor arising under, in connection with or relating to the Fixed Assets Loans, the Fixed Assets Loan Commitment, the Fixed Assets Security Documents or any other Loan Document which secures or guarantees such obligations (including obligations under a Rate Protection Agreement where the counterparty is a Fixed Assets Lender or its Affiliate), in each case, to the extent such obligations are owed to any Fixed Assets Secured Party. "Minimum Excess Availability" means, at any time (a) prior to the date which is the date of entry of the Priming Order, $12,000,000, plus the amount of any Availability Reserve (as adjusted from time to time pursuant to the terms of the definition thereof and/or clause (e) of Section 2.7) and (b) on and after the date of entry of the Priming Order, the amount of any Availability Reserve (as adjusted from time to time pursuant to the terms of the definition thereof and/or clause (e) of Section 2.7), plus, for all purposes of this Agreement other than Section 7.2.21, the sum of (x) $6,000,000 plus (y) 15% of the aggregate amount of any reductions in the Current Assets Loan Commitment Amount pursuant to clause (b) of Section 3.1.2 as a result of Dispositions of Fixed Assets Collateral. 3 "Priming Lien" means a security interest in and Lien on the Fixed Assets Collateral (other than the Capital Securities of the Company) granted, or to be granted, to the Current Assets Secured Parties pursuant to the Priming Order to secure up to $40,000,000 in Current Assets Obligations, which Lien and security interest is (or will be upon entry of the Priming Order) a first-priority security interest in and Lien on the Fixed Assets Collateral (other than the Capital Securities of the Company), subject to no other prior security interests or Liens other than Existing Leases and the Priority Liens described in clause (b)(ii)(B)(y) and clause (c) of the definition thereof; provided that the Current Assets Obligations secured by the Priming Lien shall not exceed $40,000,000 in the aggregate, less the aggregate amount of all permanent reductions made from time to time to the Current Assets Loan Commitment Amount pursuant to Section 3.1.2(b). "Priming Order" means an order or judgment of the Bankruptcy Court after a final hearing pursuant to Section 364 of the Bankruptcy Code and Fed. R. Bankr. P. 4001, in form and substance acceptable to Lenders and the Administrative Agent, in their sole discretion, which grants the Priming Lien and which order or judgment of the Bankruptcy Court has not been reversed, stayed or otherwise rendered ineffective or modified in any manner, and if such order is the subject of a pending appeal in any respect, neither the making of any Credit Extensions, nor the granting of Superpriority Claim status with respect to the Obligations, nor the granting of the Priming Lien described hereinabove, nor the performance by any of the Borrowers of any of their obligations under this Agreement or any other Loan Document or under any other instrument or agreement referred to in this Agreement shall be the subject of a presently effective stay pending appeal. "Priority Liens" means (a) with respect to Fixed Assets Obligations, (i) the Liens on the Current Assets Collateral securing the Current Assets Obligations and, after the date of entry of the Priming Order, the Priming Lien on the Fixed Assets Collateral (other than the Capital Securities of the Company) and (ii) the Lien on 65% of the Capital Securities of the Foreign Restricted Subsidiaries securing the Senior Secured Notes; (b) with respect to Current Assets Obligations, (i) for the period prior to (but not on or after) the date of entry of the Priming Order, the Liens on (A) the Fixed Assets of the Borrowers and the Capital Securities of the Borrowers (other than the Company) and the Subsidiaries (other than Unrestricted Subsidiaries) securing the Fixed Assets Obligations and the Senior Secured Notes, and (B) the Capital Securities of the Company securing the Fixed Assets Obligations and the Senior Secured Discount Notes, and (ii) on and after the date of entry of the Priming Order, (A) with respect to any Current Assets Obligations in excess of the amount of Current Assets Obligations secured by the Priming Lien (but in all cases excluding the amount of Current Assets Obligations secured by the Priming Lien), the Liens on (x) the Fixed Assets of the Borrowers and the Capital Securities of the Borrowers (other than the Company) and the Subsidiaries (other than Unrestricted Subsidiaries) securing the Fixed Assets Obligations and the Senior Secured Notes and (y) the Capital Securities of the Company securing the Fixed Assets Obligations and the Senior Secured Discount Notes and (B) with respect to any Current Assets Obligations secured by the Priming Lien, the Liens on (x) the Capital Securities of the Company securing the Fixed Assets Obligations and the Senior Secured Discount Notes and (y) 65% of the Capital Securities of the Foreign Restricted Subsidiaries securing the Senior Secured Notes; and (c) with respect to the 4 Obligations, the Lien granted under the agreement with BP Chemicals, Inc. described in clause (b), Part 2, Item 7.2.3(c) of the Disclosure Schedule. "Superpriority Claim" means, in relation to any Borrower, a claim against such Borrower in such Borrower's Case which is a superpriority administrative expense claim authorized and established by the Bankruptcy Court pursuant to, and having the status prescribed by, Sections 364(c) and 507(b) of the Bankruptcy Code and any and all statutory provisions cited therein and having priority over any or all administrative expenses of the kind specified in Sections 503(b), 507(b) and 546(c) of the Bankruptcy Code; provided, however, that, except to the extent set forth in paragraph H of the Final Order, the Superpriority Claim of the Administrative Agent and the Lenders shall not extend to any causes of action arising under Chapter 5 of the Bankruptcy Code or any proceeds thereof. "Trustee" means The Bank of New York (assignee of Harris Trust Company of New York), as trustee under the Senior Secured Note Indenture. (c) AMENDMENT TO SECTION 3.1.1 OF THE CREDIT AGREEMENT. Clause (f) of Section 3.1.1 of the Credit Agreement is amended by deleting the reference to "clause (b)(iii) of Section 3.1.2" in clause (ii) and inserting a reference to "clause (b)(iv) of Section 3.1.2" in lieu thereof. (d) AMENDMENT TO SECTION 3.1.2 OF THE CREDIT AGREEMENT. Clause (b) is deleted from Section 3.1.2. of the Credit Agreement and the following is inserted in lieu thereof: "(b) Subject to any applicable terms of the Senior Debt Intercreditor Agreement dated as of July 23, 1999 between the Indenture Trustee, on behalf of itself and the holders of the Senior Secured Notes, and the CIT Group/Business Credit, Inc., as administrative agent on behalf of the parties described therein, each prepayment of Obligations pursuant to clause (d) and clause (f)(ii) of Section 3.1.1 shall be applied (i) in the case of a Disposition of Fixed Assets Collateral other than the Capital Securities of the Company (A) prior to the date of entry of the Priming Order, first, to a mandatory prepayment of the outstanding Fixed Assets Obligations until all outstanding Fixed Assets Obligations have been repaid in full, and, second, to a mandatory prepayment of the outstanding Current Assets Obligations until all outstanding Current Assets Obligations have been repaid in full, and (B) on and after the date of entry of the Priming Order, first, to a mandatory prepayment of outstanding Current Assets Obligations until an aggregate amount of $40,000,000 of Current Assets Obligations have been repaid, second, to a mandatory prepayment of the outstanding Fixed Assets Obligations until all outstanding Fixed Assets Obligations have been repaid in full, and, third, to a mandatory prepayment of the outstanding Current Assets Obligations until all outstanding Current Assets Obligations have been repaid in full; (ii) in the case of a Disposition of Capital Securities of the Company, first, to a mandatory prepayment of the outstanding Fixed Assets Obligations until all outstanding Fixed Assets Obligations have been repaid in full, and, second, to a mandatory prepayment of the outstanding Current Assets Obligations until all outstanding Current Assets Obligations have been 5 repaid in full; (iii) in the case of a Disposition of Current Assets (other than Dispositions of Capital Securities of Unrestricted Subsidiaries), first, to a mandatory prepayment of the outstanding Current Assets Obligations until all outstanding Current Assets Obligations have been repaid in full (or, with respect to Letters of Credit, Cash Collateralized) and, second, to a mandatory prepayment of the outstanding Fixed Assets Obligations until all outstanding Fixed Assets Obligations have been repaid in full; and (iv) in the case of a Disposition of Capital Securities of Unrestricted Subsidiaries or the receipt of Net Equity Proceeds of the type described in clause (b) of the definition thereof, to the Fixed Assets Obligations and the Current Assets Obligations in the order designated by the Company upon receipt of same by any Obligor, or if no such designation is received by the Administrative Agent prior to or upon receipt of such proceeds, then to the Obligations as determined by the Administrative Agent. In the case of any Disposition of Fixed Assets Collateral prior to the date of the entry of the Priming Order or at any time with respect to a Disposition of Capital Securities of the Company, the Fixed Assets Loan Commitment Amount shall be automatically and permanently reduced by the aggregate amount of the Net Disposition Proceeds; provided that so long as no Default or Event of Default then exists, no such reduction shall occur with respect to Net Disposition Proceeds from a casualty or condemnation of Fixed Assets which are permitted to be used by the Borrowers in connection with the restoration or replacement of the affected assets in accordance with Section 2.3 of the Mortgages. In the case of any Disposition of Fixed Assets Collateral other than the Capital Securities of the Company on or after the date of the entry of the Priming Order, (1) the Current Assets Loan Commitment Amount shall be automatically and permanently reduced by an amount equal to the lesser of (x) the aggregate amount of such Net Disposition Proceeds and (y) an amount that, when added to all other prior reductions of the Current Assets Loan Commitment Amount pursuant to this clause (1), equals $40,000,000, and (2) the Fixed Assets Loan Commitment Amount shall be automatically and permanently reduced by an amount equal to the excess, if any, of the aggregate amount of such Net Disposition Proceeds over the aggregate amount of any reduction in the Current Assets Loan Commitment Amount pursuant to the foregoing clause (1); provided in each case that so long as no Default or Event of Default then exists, no such reduction shall occur with respect to Net Disposition Proceeds from a casualty or condemnation of Fixed Assets which are permitted to be used by the Borrowers in connection with the restoration or replacement of the affected assets in accordance with Section 2.3 of the Mortgages. Upon the indefeasible payment in cash of $40,000,000 in the aggregate of Current Assets Obligations and a permanent reduction of the Current Assets Loan Commitment Amount by $40,000,000 in the aggregate pursuant to the immediately preceding sentence, the Priming Lien shall automatically terminate and be released without the necessity of further action by the parties and the Administrative Agent shall execute and deliver such documentation as is reasonably requested by the Borrowers in order to confirm that such termination and release of the Priming Lien has occurred." (e) AMENDMENT TO SECTION 5.2.3 OF THE CREDIT AGREEMENT. Section 5.2.3. of the Credit Agreement is deleted in its entirety and the following is inserted in lieu thereof: "5.2.3. Financing Order. The Interim Order shall be in full force and effect and shall not have been stayed, reversed, modified or amended in any respect (other than by the Final Order and Priming Order as provided therein and hereinbelow); provided that no Lender shall have any obligation to make any Credit Extension if the making of such Credit Extension would cause the aggregate amount of all Credit Extensions then outstanding, 6 either separately or together, to exceed the lesser of (x) $155,000,000 and (y) the amount thereof which was authorized by the Bankruptcy Court in the Interim Order unless: (a) the Administrative Agent and each of the Lenders shall have received a certified copy (or other evidence satisfactory to the Administrative Agent) of the Final Order which (i) as entered, shall be acceptable in form and substance to the Administrative Agent, (ii) shall have been entered into no later than September 14, 2001, and (iii) shall then be in full force and effect, and shall not have been stayed, reversed, modified or amended in any respect; provided in such case that no Lender shall have any obligation to make any Credit Extension if the making of any such Credit Extension would cause the aggregate amount of all Credit Extensions then outstanding, either separately or together, to exceed $155,000,000; or (b) the Administrative Agent and each of the Lenders shall have received a certified copy (or other evidence satisfactory to the Administrative Agent) of the Priming Order which (i) as entered, shall be acceptable in form and substance to the Administrative Agent, and (ii) shall then be in full force and effect, and shall not have been stayed, reversed, modified or amended in any respect; provided that, notwithstanding the foregoing, if the making of any Credit Extension would cause the aggregate amount of all Credit Extensions then outstanding to exceed $170,000,000, no Lender shall have any obligation to make such Credit Extension until the Borrowers shall have (A) previously submitted to the Administrative Agent (i) a Qualified Financial Forecast, together with a written report from the Appraiser addressed to the Administrative Agent and the Lenders stating that it has reviewed such Qualified Financial Forecast and performed the scope of work set forth in its engagement letter with the Administrative Agent and that, in the Appraiser's opinion, the Borrowers' Qualified Financial Forecast, including the Borrowers' outlook for acrylonitrile and styrene, the assumptions and key factors contained in such Qualified Financial Forecast (including the reliability of the sources referred to in such Qualified Financial Forecast for such outlook, assumptions and key factors) and the working capital levels, margins, operating cash flow, and EBITDA reflected therein are all reasonable, and (ii) the most recent set of Projections to be delivered to the Lenders pursuant to Section 7.1.1.(o), demonstrating pro forma compliance with Section 7.2.7 (at the levels that would be in effect assuming this proviso were satisfied) and Section 7.2.4 throughout the next 12 month period, and (B) the Borrowers have otherwise complied with the other provisions of this Section 5.2. To the extent that the Borrowers are unable to satisfy the requirements in clause (A) (i) of the proviso to the immediately preceding sentence with respect to the Qualified Financial Forecast most recently submitted to the Administrative Agent, the Borrowers may from time to time revise and/or replace such Qualified Financial Forecast and re-submit the same to the Administrative Agent for review by the Appraiser in order to attempt to satisfy such proviso; provided that (x) any material revisions to any such Qualified Financial Forecast and all replacement Qualified Financial Forecasts must be in form and substance acceptable to the Approving Lenders, and (y) all such revisions, whether or not material, and any replacement Qualified Financial Forecasts must be acceptable in form and substance to the 7 Administrative Agent. All costs and expenses of the Appraiser shall be paid by the Borrowers as provided in the engagement letter among the Appraiser, the Administrative Agent and the Company dated as of September 14, 2002, (and any subsequent engagement letters). As used in the foregoing paragraph, (a) "Appraiser" means Nexant, Inc. or such other independent appraiser of national standing as may be retained by the Administrative Agent for the benefit of the Lenders (and consented to by the Company, which consent shall not be unreasonably withheld or delayed) and (b) "Qualified Financial Forecast" means the consolidated operating and financial plan of the Company, including a restart of the acrylonitrile production and a turnaround of the styrene facility at the Texas City, Texas plant attached hereto as Exhibit Q, as the same may be revised and/or replaced from time to time pursuant to the penultimate sentence of the foregoing paragraph." (f) AMENDMENT TO SECTION 7.2.7 OF THE CREDIT AGREEMENT. Section 7.2.7. of the Credit Agreement is deleted in its entirety and the following is inserted in lieu thereof: "7.2.7 Monthly Minimum EBITDA. The Borrowers will not permit EBITDA for the Borrowers to be less than (i.e., be a greater negative number than those set forth below) the following amounts at the end of each of the calendar months set forth below opposite such amounts: Prior to the date that the Borrowers have fully satisfied the proviso to clause (b) of Section 5.2.3
Calendar Month Minimum EBITDA -------------- -------------- Filing Date through and including August 31, 2001 (7,600,000) September 2001 (3,300,000) October 2001 (3,900,000) November 2001 (3,000,000) December 2001 (3,400,000) January 2002 (2,500,000) February 2002 (4,200,000) March 2002 (8,300,000) April 2002 (1,000,000) May 2002 1,600,000 June 2002 2,800,000 Each calendar month thereafter 5,000,000
8 Effective on and after the date that the Borrowers have fully satisfied the proviso to clause (b) of Section 5.2.3
Calendar Month Minimum EBITDA -------------- -------------- Filing Date through and including August 31, 2001 (7,600,000) September 2001 (3,300,000) October 2001 (5,300,000) November 2001 (5,100,000) December 2001 (6,300,000) January 2002 (1,900,000) February 2002 (1,650,000) March 2002 (2,200,000) April 2002 800,000 May 2002 1,600,000 June 2002 1,000,000 July 2002 4,700,000 August 2002 5,000,000 September 2002 5,000,000 October 2002 and each month thereafter 6,000,000
provided, however, that for each calendar month set forth above that the Borrowers' EBITDA exceeds the minimum EBITDA amount set forth above opposite such calendar month (i.e., reflects a lower negative number or exceeds a positive number), such excess (the "Excess EBITDA") shall be carried forward on a cumulative basis to the next calendar month's calculation of minimum EBITDA of the Borrowers, provided, further, that Excess EBITDA from any calendar month in a given Fiscal Year may only be carried forward to a calendar month in the same Fiscal Year." (g) AMENDMENT TO SECTION 8.2 OF CREDIT AGREEMENT. Section 8.2 of the Credit Agreement is amended by deleting the phrase "five (5) Business Days' notice" and inserting the phrase "seven (7) Business Days' notice" in lieu thereof. (h) ADDITION OF EXHIBIT Q TO THE CREDIT AGREEMENT. A new Exhibit Q is added to the Credit Agreement in the form attached as Exhibit Q hereto. (i) AMENDMENTS TO SECTION 3.3 OF THE REVOLVER INTERCREDITOR AGREEMENT. (i) Paragraph (a) of Section 3.3 of the Revolver Intercreditor Agreement is deleted in its entirety and the following is inserted in lieu thereof: "(a) The Administrative Agent (in its capacity as secured party for and on behalf of the Current Assets Lenders) shall have the sole and exclusive right to sell, transfer or otherwise dispose of (i) the Current Assets Collateral and (ii) after the date that the Priming Order has been entered, the Fixed Assets Collateral (other than the Capital Securities of the Company) up to the amount of the Current Assets Obligations which are secured by the Priming Lien, in each case in any manner deemed necessary or appropriate by it without regard to the security interest or Liens of the Fixed Assets Secured Parties and without the Fixed Assets Secured Parties' consent. Simultaneously with the sale, transfer or other disposition of all or any part of the Collateral described in clauses (i) and (ii) above by the Administrative Agent (in its capacity as secured party for and on behalf of the Current Assets Lenders), the Administrative Agent shall release or otherwise terminate the security 9 interests in and Liens on all of such Current Assets Collateral and such Fixed Assets Collateral which is held by the Fixed Assets Secured Parties." (ii) Paragraph (b) of Section 3.3 of the Revolver Intercreditor Agreement is amended by deleting the reference to "Section 3.3" in the first line of such paragraph and inserting the reference "Section 3.3(a)" in lieu thereof. (iii) Paragraph (d) of Section 3.3 of the Revolver Intercreditor Agreement is amended by deleting the reference to "Section 3.3(a)(ii)" in the clause (iii) of such paragraph and inserting the reference "Section 3.3(a)" in lieu thereof. (iv) Paragraph (h) of Section 3.3 of the Revolver Intercreditor Agreement is deleted in its entirety and the following is inserted in lieu thereof: "(h) The Current Assets Secured Parties understand and agree that, so long as any Fixed Assets Obligations shall not have been paid in cash in full and until all Fixed Assets Commitments shall have been fully and permanently terminated, the Administrative Agent shall, with respect to the Fixed Assets Collateral, accept directions only from the Fixed Assets Secured Parties; provided that after the date that the Priming Order has been entered, the Administrative agent shall, with respect to the Fixed Assets Collateral (other than Capital Securities of the Company) accept directions only from the Current Assets Secured Parties until either (i) the Priming Lien is no longer in effect and outstanding, or (ii) the Current Assets Loan Commitment Amount has been reduced pursuant to Section 3.1.2(b) of the Credit Agreement by $40,000,000 in the aggregate." (j) AMENDMENTS TO SECTION 3.4 OF THE REVOLVER INTERCREDITOR AGREEMENT. (i) Paragraph (c) of Section 3.4 of the Revolver Intercreditor Agreement is deleted in its entirety and the following is inserted in lieu thereof: "(c) Each Fixed Assets Lender agrees that if it receives (i) Current Assets Liquidation Proceeds or (ii) after the date of entry of the Priming Order, Fixed Assets Liquidation Proceeds to which it is not entitled pursuant to the terms of this Agreement, then such Fixed Assets Lender shall promptly remit such proceeds to the Administrative Agent for application in accordance with clause (a) of this Section 3.4." (ii) Paragraph (d) of Section 3.4 of the Revolver Intercreditor Agreement is deleted in its entirety and the following is inserted in lieu thereof: "(d) Each Current Assets Lender agrees that if it receives Fixed Assets Liquidation Proceeds to which it is not entitled pursuant to the terms of this Agreement, then such Current Assets Lender shall promptly remit such proceeds to the Administrative Agent for application in accordance with clause (b) of this Section 3.4." (iii) A new Paragraph (e) is added to Section 3.4 of the Revolver Intercreditor Agreement that reads as follows: 10 "(e) For purposes of this Section, the terms "Fixed Assets Liquidation Proceeds" and "Current Assets Proceeds" shall include proceeds of Fixed Assets Collateral or Current Assets Collateral, as applicable, received by any party hereto from any source whatsoever, including by means of setoff." (k) AMENDMENT TO SECTION 4.2 OF THE REVOLVER INTERCREDITOR AGREEMENT. Paragraph (a) of Section 4.2 of the Revolver Intercreditor Agreement is deleted in its entirety and the following is inserted in lieu thereof: "(a) Notwithstanding anything to the contrary herein, with respect to policies which insure (i) the Current Assets Collateral or, (ii) after the date of entry of the Priming Order, the Fixed Assets Collateral subject to the Priming Lien, if, pursuant to the Applicable Agreements, the Company is required to obtain satisfactory loss payable endorsements naming the Current Assets Secured Parties and the Fixed Assets Secured Parties, as their interests may appear, as loss payees, or with such other designation as the parties hereto may agree, the Administrative Agent (in its capacity as secured party for and on behalf of the Current Assets Lenders and the Fixed Assets Lenders) shall, subject to the Administrative Agent's rights under the Applicable Agreements, have the sole exclusive right, as against the Fixed Assets Secured Parties, to effect settlement of such insurance policy in the event of any loss to any Current Assets Collateral). All proceeds of such policy shall be paid to the Administrative Agent and apply the proceeds of such policy in accordance with clause (a) of Section 3.4." SECTION 2. CONDITIONS PRECEDENT. The parties hereto agree that this Amendment and the amendments to the Credit Agreement and the Revolver Intercreditor Agreement contained herein shall not be effective until the satisfaction of each of the following conditions precedent: (a) EXECUTION AND DELIVERY OF THIS AMENDMENT. The Administrative Agent shall have received a copy of this Amendment executed and delivered by each of the applicable Obligors and by the Approving Lenders. (b) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties made in this Amendment shall be true and correct on and as of the Amendment Effective Date as if made on and as of such date, both before and after giving effect to this Amendment (except to the extent such representations and warranties relate expressly to an earlier date, which representations and warranties shall have been true and correct as of such earlier date). (c) PAYMENT OF EXPENSES. The Borrowers shall have paid and the Administrative Agent shall have received all costs and expenses of the Administrative Agent in connection with the preparation, reproduction, execution, and delivery of this Amendment and any other documents prepared in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent. 11 (d) DELIVERY OF DOCUMENTS. The Administrative Agent shall have received certified copies any documents or instruments reasonably requested by the Administrative Agent, each in form and substance reasonably satisfactory to the Administrative Agent. (e) APPROVAL BY BANKRUPTCY COURT. The Administrative Agent shall have received a copy (or such other evidence satisfactory to Administrative Agent) of the Priming Order which (i) as entered, shall be acceptable in form and substance to the Administrative Agent and the Lenders, (ii) authorizes the Borrowers to execute, deliver and to perform their respective obligations under this Amendment and grants the Priming Lien, (iii) shall have been entered upon a motion of the Borrowers satisfactory in form and substance to the Administrative Agent, (iv) shall be in full force and effect, and (v) shall not have been stayed, reversed, modified or amended in any respect. SECTION 3. REPRESENTATIONS AND WARRANTIES. To induce the Administrative Agent and the several Lenders parties hereto to enter into this Amendment, each of the Borrowers represents and warrants to the Administrative Agent and the Lenders as follows: (a) AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by the applicable Obligors of this Amendment have been duly authorized by all necessary partnership, corporate or limited liability company action, as applicable, and do not and will not (i) contravene the terms of any Organic Documents of any Obligor, (ii) conflict with or result in any breach or contravention of, or (except as contemplated by the Loan Documents or as otherwise permitted by the Credit Agreement) the creation of any Lien under, any material contract or indenture entered into or assumed after the Filing Date that is binding on or affects any Obligor or, upon entry of the Priming Order, any order, injunction, writ or decree of any Governmental Authority to which any Obligor is a party or its property is subject, or (iii) upon entry of the Priming Order, violate any applicable law binding on or affecting any Obligor. (b) GOVERNMENTAL AUTHORIZATION. Upon entry of the Priming Order, no approval, consent, exemption, authorization or other action by, or notice to, or filing with or approvals required under state blue sky securities laws or by any Governmental Authority will be necessary or required in connection with the execution, delivery, performance or enforcement of this Amendment. (c) NO DEFAULT. No Default or Event of Default exists under any of the Loan Documents. No Obligor is in default under or with respect to its Organic Documents. The execution, delivery and performance of this Amendment shall not result in any default under any material contract or indenture entered into or assumed on or after the Filing Date that is binding or affects any Obligor. (d) BINDING EFFECT. Upon entry of the Priming Order, this Amendment and the Credit Agreement as amended hereby constitute the legal, valid and binding obligations of the Obligors that are parties thereto, enforceable against such Obligors in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles of general applicability. 12 (e) REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in the Credit Agreement and the other Loan Documents are true and correct in all material respects on and as of the Amendment Effective Date, both before and after giving effect to the amendments contemplated in this Amendment, as if such representations and warranties were being made on and as of the Amendment Effective Date (except to the extent such representations and warranties relate expressly to an earlier date, which representations and warranties are true and correct as of such earlier date). SECTION 4. MISCELLANEOUS (a) RATIFICATION AND CONFIRMATION OF LOAN DOCUMENTS. Except for the specific amendments expressly set forth in this Amendment, the terms, provisions, conditions and covenants of the Credit Agreement and the other Loan Documents remain in full force and effect and are hereby ratified and confirmed, and the execution, delivery and performance of this Amendment shall not in any manner operate as a waiver of, consent to or amendment of any other term, provision, condition or covenant of the Credit Agreement or any other Loan Document. (b) FEES AND EXPENSES. The Borrowers jointly and severally agree to pay on demand all reasonable costs and expenses of the Administrative Agent in connection with the preparation, reproduction, execution, and delivery of this Amendment and any other documents prepared in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent. (c) HEADINGS. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. (d) APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. (e) COUNTERPARTS AND AMENDMENT EFFECTIVE DATE. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Amendment shall become effective when each of the conditions precedent set forth in Section 2 of this Amendment have been satisfied (the "Amendment Effective Date"). (f) AFFIRMATION OF OBLIGATIONS. Notwithstanding that such consent is not required thereunder, the undersigned Obligors hereby consent to the execution and delivery of this Amendment by the parties hereto and reaffirm their respective obligations under each of the Loan Documents to which such Obligors are parties. 13 (g) CONFIRMATION OF LOAN DOCUMENTS AND LIENS. As a material inducement to the Lenders to amend the Credit Agreement, the Obligors that are parties hereto hereby (i) acknowledge and confirm the continuing existence, validity and effectiveness of the Loan Documents to which they are parties, including, without limitation the Security Documents, and the Liens granted under the Security Documents, (ii) agrees that, except as otherwise expressly provided in this Amendment, the execution, delivery and performance of this Amendment shall not in any way release, diminish, impair, reduce or otherwise affect such Loan Documents and Liens and (iii) acknowledges and agrees that, except as otherwise expressly provided for in this Amendment with respect to the Priming Order, the Liens granted under the Security Documents secure payment of the Obligations under the Loan Documents in the same priority as on the date such Liens were created and perfected, and the performance and observance by the Borrowers and the other Obligors of the covenants, agreements and conditions to be performed and observed by each under the Credit Agreement, as amended hereby. (h) FINAL AGREEMENT. THIS AMENDMENT, TOGETHER WITH THE CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES FOLLOW] 14 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers effective as of the Amendment Effective Date. OBLIGORS: STERLING CHEMICALS, INC. By: -------------------------------------- Title: STERLING CANADA, INC. By: -------------------------------------- Title: STERLING PULP CHEMICALS US, INC. By: -------------------------------------- Title: STERLING PULP CHEMICALS, INC. By: -------------------------------------- Title: STERLING FIBERS, INC. By: -------------------------------------- Title: STERLING CHEMICALS ENERGY, INC. By: -------------------------------------- Title: STERLING CHEMICALS INTERNATIONAL, INC. By: -------------------------------------- Title: STERLING CHEMICALS HOLDINGS, INC. By: -------------------------------------- Title: ADMINISTRATIVE AGENT: THE CIT GROUP/BUSINESS CREDIT, INC., as Administrative Agent By: -------------------------------------- Title: LENDERS: THE CIT GROUP/BUSINESS CREDIT, INC. By: -------------------------------------- Title: IBJ WHITEHALL BUSINESS CREDIT CORPORATION By: -------------------------------------- Title: FLEET CAPITAL CORPORATION By: -------------------------------------- Title: TEXTRON FINANCIAL CORP. By: -------------------------------------- Title: TRANSAMERICA BUSINESS CAPITAL CORPORATION By: -------------------------------------- Title: GMAC BUSINESS CREDIT, LLC By: -------------------------------------- Title: THE PROVIDENT BANK By: -------------------------------------- Title: GPSF SECURITIES, INC. By: -------------------------------------- Title: FOOTHILL INCOME TRUST II, L.P. By: -------------------------------------- Title: CONGRESS FINANCIAL CORPORATION By: -------------------------------------- Title: COMERICA BANK By: -------------------------------------- Title: EXHIBIT Q Qualified Financial Forecast EX-4.41.A 9 h92951ex4-41_a.txt LETTER AGREEMENT DATED JULY 26, 2001 EXHIBIT 4.41(a) July 26, 2001 Sterling Pulp Chemicals, Ltd. 302 The East Mall, Suite 200 Toronto, Ontario M9B 6C7 RE: FINANCING AGREEMENT Reference is made to the financing agreement dated as of July 11, 2001 (the "FINANCING AGREEMENT") between Sterling Pulp Chemicals, Ltd. (the "BORROWER"), CIT Business Credit Canada Inc. (the "AGENT") as agent and lender and the other Lenders party thereto. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Financing Agreement. Reference is also made to (i) Lockbox Account Number 905219 (the "LOCKBOX") and Standing Order Instructions for Balance Reporting or Funds Transfer Questionnaire (the "INSTRUCTIONS") number 556-1868 dated August 23, 1999 between the Borrower and The First National Bank of Chicago (now known as Bank One National Association) ("BANK ONE"), a copy of which is attached hereto as Schedule "A", (ii) the blocked account agreement dated July 16, 2001 (the "BLOCKED ACCOUNT AGREEMENT") among the Borrower, the Agent and Canadian Imperial Bank of Commerce ("CIBC"), and (iii) CIBC lockbox number 3536 to which Canadian Dollar and U.S. Dollar proceeds payable to the Borrower can be directed pursuant to the Blocked Account Agreement (the "BLOCKED ACCOUNTS"). The Borrower represents and warrants to the Agent and the Lenders that it has used its best commercial efforts to obtain the signature of Bank One to a direction and acknowledgement, a copy of which is attached hereto as Schedule "B" (the "DIRECTION AND ACKNOWLEDGEMENT") in respect of amending the account to which funds are transferred pursuant to Section 4 of the Instructions, and that Bank One has stated that it would not sign such Direction and Acknowledgement without the Agent and the Borrower entering into a further blocked account agreement or lockbox agreement with Bank One in Bank One's standard form, even though Section 4 of the Instructions does not require the written acknowledgement of Bank One to such direction or any further such agreement. The Agent and the Lenders hereby wish to confirm our understanding that Section 10(1) of the Financing Agreement is hereby amended as follows by inserting the following Events of Default: (r) The Borrower provides Bank One with any further notices or instructions in respect of the Lockbox, the Instructions and U.S. dollar account number 556-1868 (the "BANK ONE ACCOUNT"), (except for purposes of terminating or closing the same or redirecting the proceeds which would have otherwise been payable into the Lockbox or the Bank One Account to the Blocked Accounts as contemplated by subsection (s) below), or the Borrower fails to terminate such Lockbox and Instructions and close such 2 Bank One Account to the satisfaction of the Agent, acting reasonably, within 90 days from July 11, 2001; and (s) the Borrower fails to make all necessary arrangements with its applicable customers within ninety days from July 11, 2001 (and to provide evidence of the same to the Agent) such that any proceeds payable by such customers to the Borrower that would have otherwise been directed to the Lockbox or the Bank One Account are directed to the Blocked Accounts pursuant to lockbox arrangements to be established with CIBC within such 90 day period on terms and conditions satisfactory to the Agent. On and after the date hereof, each reference in the Financing Agreement to "this Financing Agreement" and each reference to the Financing Agreement in the Loan Documents and any and all other agreements, documents and instruments delivered by any of the Agent, the Lenders, the Borrower or any other Person shall mean and be a reference to the Financing Agreement as amended by this letter agreement. Except as specifically amended by this letter agreement, the Financing Agreement shall remain in full force and effect and is hereby ratified and confirmed. This letter agreement may be executed in any number of counterparts (including counterparts by facsimile) and all such counterparts taken together shall be deemed to constitute one and the same instrument. This letter agreement shall constitute a Loan Document and shall be governed by and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein. If the foregoing is in accordance with your understanding and agreement, please sign this letter agreement where indicated below. Yours truly, CIT BUSINESS CREDIT CANADA INC. Per: ----------------------------------- 3 ACKNOWLEDGED AND AGREED THIS ________ DAY OF JULY 2001. STERLING PULP CHEMICALS, LTD. Per: ---------------------------------- Per: ---------------------------------- EX-4.41.B 10 h92951ex4-41_b.txt LETTER AGREEMENT DATED SEPTEMBER 14, 2001 EXHIBIT 4.41(b) September 14, 2001 Sterling Pulp Chemicals, Ltd. 302 The East Mall, Suite 200 Toronto, Ontario M9B 6C7 RE: FINANCING AGREEMENT Reference is made to the financing agreement dated as of July 11, 2001, as amended by a letter agreement dated July 26, 2001 (collectively, the "FINANCING AGREEMENT") between Sterling Pulp Chemicals, Ltd. (the "BORROWER"), CIT Business Credit Canada Inc. (the "AGENT") as agent and lender and the other Lenders party thereto. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Financing Agreement. The Agent and the Lenders hereby wish to confirm our understanding that Section 10(1) of the Financing Agreement is hereby amended as follows by deleting subsections (p) and (q) thereof in their entirety and by replacing them with the following Events of Default: "(p) The Final Order in a form and content satisfactory to the Agent and its counsel is not issued by September 14, 2001; or (q) If at any time, unless otherwise agreed in advance by the Agent, (i) any of the "Inter-Sterling" Material Agreements listed or described in Schedule 9 hereto are rejected (as such term is used in 11 U.S.C., Section 365) at the request of any of the Debtors (as defined in the Interim Order) or any other Person party thereto, by any trustee appointed by any of the Debtors (as defined in the Interim Order) or any other Person party to such agreements or by operation of law, or (ii) any of the Debtors (as defined in the Interim Order) fail to comply with the terms of the "Order Authorizing and Directing Debtors to Perform Obligations Under Intercompany Agreements with Pulp Canada" of the Bankruptcy Court dated September 7, 2001." On and after the date hereof, each reference in the Financing Agreement to "this Financing Agreement" and each reference to the Financing Agreement in the Loan Documents and any and all other agreements, documents and instruments delivered by any of the Agent, the Lenders, the Borrower or any other Person shall mean and be a reference to the Financing Agreement as amended by this letter agreement. Except as specifically amended by this letter 2 agreement, the Financing Agreement shall remain in full force and effect and is hereby ratified and confirmed. This letter agreement may be executed in any number of counterparts (including counterparts by facsimile) and all such counterparts taken together shall be deemed to constitute one and the same instrument. This letter agreement shall constitute a Loan Document and shall be governed by and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein. If the foregoing is in accordance with your understanding and agreement, please sign this letter agreement where indicated below. Yours truly, CIT BUSINESS CREDIT CANADA INC. Per: ------------------------------------------ Per: ------------------------------------------ ACKNOWLEDGED AND AGREED THIS ________ DAY OF SEPTEMBER 2001. STERLING PULP CHEMICALS, LTD. Per: ------------------------------------------ Per: ------------------------------------------ EX-10.2 11 h92951ex10-2.txt 3RD AMENDED KEY EMPLOYEE PROTECTION PLAN EXHIBIT 10.2 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. THIRD AMENDED AND RESTATED KEY EMPLOYEE PROTECTION PLAN PRELIMINARY STATEMENTS A. Sterling Chemicals Holdings, Inc. and Sterling Chemicals, Inc. are Delaware corporations. B. The Holdings Board and the Chemicals Board (as such terms are defined below) have previously duly adopted that certain Second Amended and Restated Key Employee Protection Plan (the "Existing Plan"). C. On October 31, 2001, the United States Bankruptcy Court for the Southern District of Texas entered an order (the "Court Order") approving the Existing Plan, subject to certain modifications negotiated and agreed to by the Company (as defined below), the Official Committee of Unsecured Creditors, The Bank of New York, as Indenture Trustee, and the Ad Hoc Committee of holders of Chemicals' 12-3/8% Senior Secured Notes due 2006. D. The Holdings Board and the Chemicals Board desire to formally amend the Existing Plan to incorporate the modifications required by the Court Order and to restate the Existing Plan as so amended in its entirety. NOW, THEREFORE, the Existing Plan is hereby amended and restated, effective as of the Effective Date (as defined below), to read in its entirety as follows: ARTICLE I Definitions and Interpretations Section 1.01.Definitions. Capitalized terms used in this Plan shall have the following respective meanings, except as otherwise provided or as the context shall otherwise require: "Annual Compensation" shall mean, when used as of any date with reference to any Participant, the sum of (i) the highest annual base salary of such Participant in effect at any time during the three-year period ending immediately prior to the date on which the applicable Change of Control occurs or is deemed to have occurred plus (ii) the Targeted Bonus, if any, of such Participant in effect immediately prior to the earlier of (A) the date on which an event occurs that results in such Participant terminating his or her employment for Good Reason and (B) the actual date of such Participant's termination by the Company for any reason other than Misconduct or Disability. "Applicable Multiplier" shall mean (i) when used with reference to any Existing Participant, the number set forth opposite such Existing Participant's name on Exhibit B attached hereto under the heading "Applicable Multiplier" and (ii) when used with reference to any other Participant, the multiplier specified in the Instrument of Designation executed and delivered by Holdings and such Participant in accordance with Section 2.01(b); provided, however, that in no event shall the Applicable Multiplier of any Participant be less than 0.50 (except as provided in Section 2.03) or greater than 2.75. "Benefit Plan" shall mean any employee benefit plan (including any employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974), program, arrangement or practice maintained, sponsored or provided by Holdings or any Subsidiary, including those relating to bonuses, incentive compensation, retirement benefits, stock options, stock ownership or stock awards, healthcare and medical benefits, disability benefits, death benefits, disability, life, accident and travel insurance, sick leave, vacation pay or termination pay. "CEO" shall mean the Chief Executive Officer of Holdings. "Chairman" shall mean the Chairman of the Board of Holdings. "Change of Control" shall mean the occurrence of any of the following events: (i) Holdings shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned Subsidiary), (ii) Holdings sells, leases or exchanges all or a substantial part of its assets (other than in the ordinary course of business) to any other person or entity (other than a wholly-owned Subsidiary), (iii) Holdings is to be dissolved and liquidated, (iv) Chemicals sells, leases or exchanges all or a substantial part of its assets (other than in the ordinary course of business) to any other person or entity (other than Holdings or another wholly-owned Subsidiary), (v) Chemicals ceases to be a wholly-owned Subsidiary for any reason other than a merger, consolidation or other reorganization in which Holdings or a wholly-owned Subsidiary is the surviving entity, (vi) Chemicals sells, leases or exchanges all or substantially all of its assets to any other person or entity (other than Holdings or another wholly-owned Subsidiary), (vii) any person or entity, including a "group" as contemplated by section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including the power to vote) of more than 50% of the outstanding shares of Holdings' voting stock (based upon voting power), (viii) as a result of or in connection with any tender or exchange offer, merger or other business combination, sale of assets or contested election of directors (by proxy or otherwise), the persons who were directors of Holdings immediately prior to such offer, merger or other business combination, sale of assets or election shall cease to constitute a majority of the Holdings Board (or a majority of the board of directors of any successor to Holdings) or a majority of the elected officers of Holdings immediately prior to such offer, merger or other -2- business combination, sale of assets or election shall cease to serve as elected officers of Holdings (or any successor to Holdings), or (ix) the Company sells, leases or exchanges all or substantially all of the assets or capital securities of any of its SBUs to any other person or entity (other than Holdings or another wholly-owned Subsidiary); provided, however, that any such sale, lease or exchange shall not constitute a "Change of Control" for purposes of this clause (ix) with respect to any Participant who was not assigned to work on a full-time basis in the relevant SBU at the time of such sale, lease or exchange and, provided further, that the sale, lease or exchange of all or substantially all of the assets or capital securities of Sterling Fibers, Inc. or Sterling Chemicals Acquisitions, Inc. (or any of its direct or indirect subsidiaries) shall not constitute a "Change of Control" with respect to any Participant. "Chemicals" means Sterling Chemicals, Inc. and any Successor. "Chemicals Board" means the Board of Directors of Chemicals. "Code" shall mean the Internal Revenue Code of 1986, as amended. Reference in this Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section. "Company" shall mean Holdings and the Subsidiaries, including Chemicals. "Compensation Committee" shall mean the Compensation Committee of the Holdings Board. "Confirmation Date" means the date on which the United States Bankruptcy Court for the Southern District of Texas issues an order confirming a plan of reorganization for the Company. "Disability" shall mean, when used with reference to any Participant, a physical or mental condition of such Participant that, in the opinion of a licensed physician reasonably acceptable to Holdings and such Participant or his or her legal representative, (a) prevents such Participant from being able to perform the services required of him or her as an employee of the Company, (b) has continued for at least 180 days during any period of twelve consecutive months and (c) is reasonably expected to continue. "Effective Date" shall mean October 31, 2001. "Existing Participants" shall mean the Participants in this Plan as of the Effective Date, each of whom is listed on Exhibit B attached hereto. "Existing Plan" has the meaning specified in the Preliminary Statements. "Good Reason" shall mean, when used with reference to any Participant, any of the following actions or failures to act, but in each case only if it occurs (a) on or after the date -3- that is 180 days prior to the date on which a Change of Control occurs and (b) while such Participant is employed by Holdings or any Subsidiary and then only if it is not consented to by such Participant in writing: (i) if (but only if) such Participant is Grade S23 or higher, a material change in such Participant's reporting responsibilities, titles or elected or appointed offices as in effect immediately prior to the effective date of such change, including any change caused by the removal of such Participant from, or the failure to re-elect such Participant to, any material corporate office of the Company held by such Participant immediately prior to such effective date but excluding any such change that occurs in connection with such Participant's death, disability or retirement; (ii) if (but only if) such Participant is Grade S23 or higher, the assignment to such Participant of duties and/or responsibilities that are materially inconsistent with such Participant's status, positions, duties, responsibilities and functions with the Company immediately prior to the effective date of such assignment; (iii) a material reduction by the Company in such Participant's total compensation in effect immediately prior to the effective date of such reduction; (iv) the failure of the Company to continue such Participant's eligibility for participation in employee benefit plans, programs, arrangements and practices providing benefits that, in the aggregate, are at least as favorable to such Participant as those provided under the Benefit Plans in which he or she was a participant immediately prior to the effective date of such failure; (v) the failure of the Company to maintain employee benefit plans, programs, arrangements and practices entitling such Participant to benefits that, in the aggregate, are at least as favorable to such Participant as those available to such Participant under the Benefit Plans in which he or she was a participant immediately prior to the effective date of such failure; (vi) any change of more than 75 miles (or, in the case of any Participant for whom the Compensation Committee has approved a shorter distance, such shorter distance) in the location of the principal place of employment of such Participant immediately prior to the effective date of such change; (vii) any purported termination of such Participant's employment for Misconduct or Disability not in accordance with the provisions of Section 3.02; or (viii) any purported termination of such Participant's participation in this Plan not in accordance with the provisions of Section 2.01(c). -4- For purposes of this definition, none of the actions described in clauses (i) through (iii) above shall constitute a Good Reason with respect to any Participant if it was an isolated and inadvertent action not taken in bad faith by the Company and if it is remedied by the Company promptly after receipt of notice thereof given by such Participant. For purposes of this definition, any action or failure to act described in clauses (i) through (viii) above shall cease to be a Good Reason with respect to any Participant on the date which is 60 days after such Participant acquires actual knowledge of such action or failure to act unless, prior to such date, such Participant gives a Termination Notice pursuant to Section 3.01. In the event of any dispute between the Company, on the one hand, and any Participant, on the other hand, with respect to the amount of total compensation of such Participant for purposes of clause (c) above or the aggregate value or level of any of such Participant's benefits for purposes of clause (d) or (e) above, the Company and such Participant shall use their best efforts to resolve such dispute themselves. If they are unable to resolve the dispute within 15 business days, Deloitte & Touche L.L.P., or such other nationally recognized accounting firm or employee benefits firm acceptable to the Company and such Participant, shall be engaged by the Company to make its own determination with respect to the dispute and the determination by such firm shall be final and binding on the Company (including the Compensation Committee) and such Participant. If any firm is engaged with respect to any dispute as aforesaid, (i) such firm shall be instructed to make its determination as soon as practicable and to use such materiality standard as such firm may determine to be reasonable under the circumstances and (ii) the disputants shall provide such firm with all books, records and other information relevant to such dispute as such firm may reasonably request. No firm engaged as aforesaid shall be liable or responsible to the Company (including the Compensation Committee) or any Participant for any determination made by such firm in good faith. "Grade" shall mean when used with reference to any Participant for purposes of any action described in clauses (i) and (ii) of the definition of Good Reason, his or her salary classification by the Company immediately prior to such action. "Holdings" means Sterling Chemicals Holdings, Inc. and any Successor. "Holdings Board" means the Board of Directors of Holdings. "Misconduct" shall mean, when used with reference to any Participant: (a) the commission by such Participant of acts that are both dishonest and demonstrably injurious to the Company (monetarily or otherwise) in any material respect; (b) the failure of such Participant to observe and comply with the Company's published policies relating to alcohol and drugs, harassment or antitrust; (c) the failure of such Participant to observe and comply with any other lawful published policy of the Company, but, in the case of any such failure that is -5- capable of being remedied, only if such failure shall have continued unremedied for more than 30 days after written notice thereof is given to such Participant by Holdings and/or Chemicals; (d) the willful failure of such Participant to observe and comply with all lawful and ethical directions and instructions of the Holdings Board, the Chairman and/or the CEO; (e) the failure of such Participant to perform, in any material respect, his or her duties with the Company, but only if such failure was not caused by disability or incapacity and shall have continued unremedied for more than 30 days after written notice thereof is given to such Participant by Holdings and/or Chemicals; (f) the conviction of such Participant for a felony offense; or (g) any willful conduct on the part of such Participant that prejudices, in any material respect, the reputation of the Company in the fields of business in which it is engaged or with the investment community or the public at large, but only if such Participant knew, or should have known, that such conduct could have such result. For purposes of clauses (d) and (g) above, no act or failure to act on the part of any Participant shall be considered "willful" if such act or failure to act was done or omitted to be done by such Participant in good faith and with the reasonable belief that such Participant's action or omission was in the best interest of the Company. If any Participant is a party to a written employment agreement with the Company, then clause (d) above shall not apply to any directions or instructions that are contrary to or inconsistent with any of the positions, functions, duties or reporting responsibilities of such Participant as set forth in such written employment agreement or that violate any of such Participant's rights, privileges or immunities under such employment agreement. In case of any dispute regarding whether or not any conduct by a Participant meets any of the standards set forth in clauses (a) through (g) above, the burden of proof shall rest with the Company. "Participants" shall mean, except as otherwise provided in Section 2.01(c), the Existing Participants and those employees of Holdings or any Subsidiary who are from time to time designated by the Compensation Committee as Participants in accordance with Section 2.01(b). "Pension Plan" shall mean the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (effective as of May 1, 1996) or any successor plan. "Plan" shall mean this Third Amended and Restated Key Employee Protection Plan, as amended, supplemented or modified from time to time in accordance with its terms. -6- "Protection Period" shall mean (i) with respect to any Participant having an Applicable Multiplier that is greater than or equal to 1.5, the period commencing 180 days prior to the date on which the relevant Change of Control occurs and ending two years after the date on which such Change of Control occurs and (ii) with respect to any Participant having an Applicable Multiplier that is less than 1.5, the period commencing 180 days prior to the date on which the relevant Change of Control occurs and ending 18 months after the date on which such Change of Control occurs. "Qualified Plan" shall mean a "qualified plan" within the meaning of section 401(a) of the Code. "SBU" means a strategic business unit of the Company. "Severance Amount" has the meaning specified in Section 2.02(a)(i). "Subsidiary" shall mean any corporation, limited partnership, general partnership, limited liability company or other form of entity a majority of any class of voting stock or other voting rights of which is owned, directly or indirectly, by Holdings. "Substantial Part of its Assets" means (i) all or substantially all of the assets of the Company comprising its Texas City, Texas facility or (ii) all or substantially all of the assets of the Company comprising its pulp chemicals business. "Successor" shall mean (i) with respect to all Participants, a successor to all or substantially all of the business, operations or assets of the Company or any Substantial Part of its Assets (whether direct or indirect, by purchase, merger, consolidation or otherwise), and (ii) with respect to any Participant as to whom a Change of Control is deemed to have occurred pursuant to clause (vii) of the definition of Change of Control, the person or entity to or with whom the Company sold, leased or exchanged all or substantially all of the assets or capital securities of the relevant SBU. "Targeted Bonus" shall mean (i) when used with reference to any Existing Participant at any time, the amount set forth opposite such Existing Participant's name on Exhibit B attached hereto under the heading "Targeted Bonus" and (ii) when used with reference to any other Participant at any time, the amount determined by multiplying (A) the annual base salary of such Participant in effect immediately prior to the earlier of (x) the date on which an event occurs that results in such Participant terminating his or her employment for Good Reason and (y) the actual date of such Participant's termination by the Company for any reason other than Misconduct or Disability times (B) such Participant's Target Bonus Percentage, if any, in effect on such earlier date under the Company's bonus plan for salaried employees. "Termination Date" shall mean, with respect to any Participant, the termination date specified in the Termination Notice delivered by such Participant to the Company in accordance with Section 3.01 or the actual date of termination of such Participant's -7- employment by the Company for any reason other than Misconduct or Disability, as applicable. "Termination Notice" shall mean, as appropriate, (a) a notice from a Participant to Holdings purporting to terminate such Participant's employment for Good Reason in accordance with Section 3.01 or (b) a notice from Holdings and/or Chemicals to any Participant purporting to terminate such Participant's employment for Misconduct or Disability in accordance with Section 3.02. Section 1.02.Interpretation. In this Plan, unless a clear contrary intention appears, (a) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Plan as a whole and not to any particular Article, Section or other subdivision, (b) reference to any Article or Section, means such Article or Section hereof and (c) the words "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. ARTICLE II Eligibility and Benefits Section 2.01.Eligible Employees. (a) This Plan is only for the benefit of Participants, and no other employees or personnel shall be eligible to participate in this Plan or to receive any rights or benefits hereunder. (b) In addition to the Existing Participants, the Compensation Committee shall be authorized from time to time after the Effective Date to designate one or more members of a select group of management or highly compensated employees of the Company as Participants. Each such designation shall be evidenced by an Instrument of Designation signed by Holdings and the Participant substantially in the form of Exhibit A hereto. Each such Instrument of Designation, and the designation evidenced thereby, shall be binding on the Company. (c) In the event that the Holdings Board determines in good faith that any Participant is no longer a key employee of the Company and thus should not continue to participate in this Plan, the Holdings Board shall be permitted, subject to the limitations set forth below, to terminate such Participant's participation in this Plan on such date as shall be specified by written notice delivered to such Participant not less than 60 days prior to the date so specified, which notice shall state that it is a termination notice given pursuant to this Section 2.01(c). Upon the effective date of such termination, such Participant shall cease to be a Participant and, accordingly, such Participant shall no longer be entitled to receive any rights or benefits hereunder; provided, however, that such termination shall not affect the rights or benefits of such Participant or the obligations of the Company accrued under this Plan as of the effective date of such termination or the rights or benefits of such Participant or the obligations of the Company accruing under this Plan after the effective date of such termination on account of any Change of Control that occurred on or before such effective date or that occurs within 180 days after such -8- effective date. Notwithstanding the foregoing, the Compensation Committee shall not be permitted to terminate any Participant's participation in this Plan unless the sole reason therefor is that, in the good faith opinion of the Compensation Committee, such Participant has ceased to be a key employee of the Company and thus should not continue to participate in this Plan. Without limitation of the foregoing, the Compensation Committee may not terminate any Participant's participation in this Plan if such termination is directly or indirectly related to, connected with, in anticipation of, in furtherance of, pursuant to the terms of or during the pendency of any Change of Control or is for the purpose of directly or indirectly encouraging or facilitating a Change of Control. In case of any dispute regarding whether or not any purported termination of any Participant's participation in this Plan is permitted by, or satisfies any of the requirements of, this paragraph (c), the burden of proof shall rest with the Company. Section 2.02. Description of Benefits Triggered by Termination following a Change of Control. (a) Each Participant shall be entitled to receive the benefits described below if a Change of Control occurs after the Effective Date and if, during the Protection Period for such Participant, either such Participant terminates or has terminated his or her employment for Good Reason in accordance with Section 3.01 or the Company terminates or has terminated such Participant's employment for any reason other than a termination for Misconduct or Disability in accordance with Section 3.02: (i) the Company shall pay to such Participant, within 30 days after such Participant's Termination Date or, in the event that such Participant's Termination Date occurred within the 180-day period immediately preceding the occurrence of a Change of Control, within 30 days after such Change of Control, a lump sum cash payment equal to the sum of (A) an amount (the "Severance Amount") equal to (subject to Section 2.04(b)) (x) such Participant's Annual Compensation times such Participant's Applicable Multiplier minus (y) an amount equal to 50% of the aggregate cash compensation paid to such Participant by the Company or a Successor after the Confirmation Date, plus (B) all unused vacation time accrued by such Participant as of the Termination Date under the Company's vacation policy, plus (C) all accrued but unpaid compensation earned by such Participant as of the Termination Date, plus (D) all unpaid vested benefits earned or accrued by such Participant as of the Termination Date under any Benefit Plan (other than a Qualified Plan) in effect immediately prior to the date on which the Change of Control occurs; provided, however, that (x) any amounts payable to any Participant pursuant to this clause (i) shall be reduced by an amount equal to the aggregate amount previously paid to such Participant by the Company pursuant to Section 2.03 by reference to this clause (i), and (y) in the event that a Participant becomes entitled to benefits under this Plan in connection with the liquidation of all or substantially all of the Company's assets for salvage or equivalent value, the Severance Amount payable to such Participant shall be reduced by 25%; and (ii) for a period of 24 months (including 18 months of COBRA coverage) following the Termination Date (including any period during which such Participant was covered by such plans and programs pursuant to Section 2.03), such Participant shall continue to be covered by all life, health care, medical and dental insurance plans and programs (excluding disability) of the Company by which he or she was covered on the Termination Date -9- notwithstanding any subsequent termination or amendment of any such plan or programs and notwithstanding any eligibility provisions thereof to the contrary, provided that (A) such Participant makes a timely COBRA election following the Termination Date and (B) such Participant pays the regular employee premium required by such plans and programs or by COBRA, as the case may be. (b) No Participant shall be entitled to receive any of the benefits described in this Section 2.02 on account of any Change of Control unless (i) such Change of Control occurred (A) while such Participant was employed by the Company or (B) within 180 days after such Participant's Termination Date and (ii) either such Participant terminates or has terminated his or her employment for Good Reason in accordance with Section 3.01 or the Company terminates or has terminated such Participant's employment for any reason other than a termination for Misconduct or Disability in accordance with Section 3.02, in each case, during the Protection Period for such Participant. (c) Notwithstanding anything to the contrary contained in this Plan, no Participant whose employment is terminated by the Company or a Successor after the Confirmation Date shall be entitled to receive his or her Severance Amount unless and until such Participant agrees in writing that he or she will repay to the Company or its Successor, as the case may be, a Pro Rata Portion of any Severance Amount received by such Participant if such Participant is offered and accepts reemployment by the Company or its Successor within one year after such Participant's Termination Date. For purposes of this Plan, "Pro Rata Portion" means, with respect to any Participant, (i) the Severance Amount received by such Participant times a fraction, (A) the numerator of which is the number of days from such Participant's reemployment date to the date which is the first anniversary of such Participant's Termination Date, and (B) the denominator of which is 365, minus (ii) such amount as may be required to ensure that the net after tax amount retained by such Participant after any repayment to the Company pursuant to this paragraph (c) is equivalent to the net after tax amount that would have been retained by such Participant had such Participant originally received and paid taxes on an amount equal to the Severance Amount received by such Participant minus the amount determined under clause (i) of this definition. Section 2.03.Description of Benefits Triggered by Termination Without a Change of Control. If, under circumstances where Section 2.02 is inapplicable, any Participant terminates his or her employment for Good Reason in accordance with Section 3.01 or the Company terminates such Participant's employment for any reason other than a termination for Misconduct or Disability in accordance with Section 3.02, then such Participant shall be entitled to receive, and the Company shall be obligated to pay and provide, all the benefits described in Section 2.02 the same as if a Change of Control had occurred on the date which is 60 days prior to the relevant Termination Date; provided, however, that, for purposes of calculating the Severance Amount payable to such Participant under this Section 2.03, the Applicable Multiplier of such Participant shall be reduced by 50%. In the case of each termination of employment covered by this Section 2.03, a Change of Control shall be deemed to have occurred on the date which is 60 days prior to the relevant Termination Date and, accordingly, all other provisions of this Plan shall be construed as if a Change of Control had actually occurred on such date. -10- Section 2.04.Additional Provisions Relating to Benefits under Sections 2.02 and 2.03. (a) Anything in this Plan to the contrary notwithstanding, (i) the Company shall not be obligated to pay a Severance Amount to any Participant below Grade S23 or continue the non-COBRA benefits described in Section 2.02(a)(ii) for such Participant if the Termination Date is after such Participant's normal Retirement Date (as defined in the Pension Plan) and (ii) the Company's obligation to continue the benefits described in Section 2.02(a)(ii) for any Participant shall cease if and when such Participant becomes employed, on a full-time basis, by a third party which provides such Participant with substantially similar benefits. (b) Anything in this Plan to the contrary notwithstanding, the amount of the Severance Amount payable to any Participant under this Plan shall be reduced by the aggregate amount of all separation, severance or termination payments due to such Participant under (i) any Benefit Plan (other than this Plan), (ii) any agreement between such Participant and the Company or (ii) any applicable law, statute, rule, regulation, order or decree (or other pronouncement having the effect of law) of any nation or governmental authority. Section 2.05.Certain Additional Payments by the Company. Anything in this Plan to the contrary notwithstanding, in the event it shall be determined that any payment or distribution to or for the benefit of any Participant under this Plan (the "Triggering Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, being collectively referred to below as the "Excise Tax"), then such Participant shall be entitled to receive from the Company an additional payment (the "Gross-Up Payment") in an amount such that after payment by such Participant of all taxes (including any interest or penalties imposed with respect to such taxes) including any Excise Tax imposed on the Gross-Up Payment, such Participant retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Triggering Payment. Notwithstanding the foregoing, in no event shall any Participant be entitled to receive a Gross-Up Payment greater than 25% of such Participant's Annual Compensation. All determinations required to be made under this Section 2.05 with respect to a particular Participant shall be made by the independent accounting firm then retained by Holdings in the ordinary course of business (which firm shall provide detailed supporting calculations to the Company and such Participant) and such determinations shall be final and binding on the Company (including the Compensation Committee) and all Participants. Section 2.06.Cost of Plan; Plan Unfunded; Participant's Rights Unsecured. The entire cost of this Plan shall be borne by the Company, and no contributions shall be required of the Participants. The Company shall not be required to establish any special or separate fund or make any other segregation of funds or assets to assure the payment of any benefit hereunder. The right of any Participant to receive the benefits provided for herein shall be an unsecured claim against the general assets of the Company. -11- ARTICLE III Termination Notices Section 3.01.Termination Notices from Participants. For purposes of this Plan, in order for any Participant to terminate his or her employment for Good Reason, such Participant must give a written notice of termination to Holdings and/or Chemicals, which notice shall be in writing and signed by such Participant, shall be dated the date it is given to Holdings and/or Chemicals, shall specify the termination date and shall state that the termination is for a Good Reason and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for such Good Reason. Any Termination Notice given by a Participant that is not in compliance, in all material respects, with the foregoing requirements shall be invalid and ineffective for purposes of this Plan. If Holdings or Chemicals receives from any Participant a Termination Notice that it believes is invalid and ineffective as aforesaid, it shall promptly notify such Participant of such belief and the reasons therefor. Section 3.02.Termination Notices from Company. For purposes of this Plan, in order for the Company to terminate any Participant's employment for Misconduct, Holdings and/or Chemicals must give a written notice of termination to such Participant, which notice shall be dated the date it is given to such Participant, shall specify the termination date and shall state that the termination is for Misconduct and shall set forth in reasonable detail the particulars thereof. For purposes of this Plan, in order for the Company to terminate any Participant's employment for Disability, Holdings and/or Chemicals must give a written notice of termination to such Participant, which notice shall be dated the date it is given to such Participant, shall specify the termination date and shall state that the termination is for Disability and shall set forth in reasonable detail the particulars thereof. Any Termination Notice given by Holdings and/or Chemicals that is not in compliance, in all material respects, with the foregoing requirements shall be invalid and ineffective for purposes of this Plan. Any Termination Notice purported to be given by Holdings and/or Chemicals to any Participant after the death or retirement of such Participant shall be invalid and ineffective. ARTICLE IV Dispute Resolution Section 4.01.Negotiation. Subject to Section 4.03, in case a dispute or controversy shall arise between any Participant (or any person claiming by, through or under any Participant) and the Company (including the Compensation Committee) relating to or arising out of this Plan, either disputant may give written notice to the other disputant ("Dispute Notice") that it wishes to resolve such dispute or controversy by negotiations, in which event the disputants shall attempt in good faith to negotiate a resolution of such dispute or controversy. If the dispute or controversy is not so resolved within 30 days after the effective date of the Dispute Notice, subject to Section 4.03, either disputant may initiate arbitration of the matter as provided in Section 4.02. All negotiations pursuant to this Section 4.01 shall be held at the Company's principal offices in Houston, Texas (or such other place as the disputants shall mutually agree) and shall be treated as -12- compromise and settlement negotiations for the purposes of the federal and state rules of evidence and procedure. Section 4.02.Arbitration. Subject to Section 4.03, any dispute or controversy arising out of or relating to this Plan which has not been resolved by negotiations in accordance with Section 4.01 within 30 days of the effective date of the Dispute Notice shall, upon the written request of either disputant, be finally settled by arbitration conducted expeditiously in accordance with the labor arbitration rules of the American Arbitration Association. The arbitrator shall be not empowered to award damages in excess of compensatory damages and each disputant shall be deemed to have irrevocably waived any damages in excess of compensatory damages. The arbitrator's decision shall be final and legally binding on the disputants and their successors and assigns. The fees and expenses of the arbitrator shall be borne solely by the prevailing disputant or, in the event there is no clear prevailing disputant, as the arbitrator deems appropriate. All arbitration conferences and hearings shall be held in Houston, Texas. Section 4.03.Exclusivity, etc. The dispute resolution procedures set forth in Sections 4.01 and 4.02 shall not apply to any matter which, by the express provisions of this Plan, is to be finally determined by the Compensation Committee or by an accounting firm or employee benefits firm. No legal action may be brought with respect to this Plan except for the purpose of specifically enforcing the provisions of this Article IV or for the purpose of enforcing any arbitration award made pursuant to Section 4.02. ARTICLE V Miscellaneous Provisions Section 5.01.Cumulative Benefits. Except as provided in Section 2.04(b), the rights and benefits provided to any Participant under this Plan are cumulative of, and are in addition to, all of the other rights and benefits provided to such Participant under any Benefit Plan or any agreement between such Participant and the Company. Section 5.02.No Mitigation. No Participant shall be required to mitigate the amount of any payment provided for in this Plan by seeking or accepting other employment following a termination of his or her employment with the Company or otherwise. Except as otherwise provided in Section 2.02(c), the amount of any payment provided for in this Plan shall not be reduced by any compensation or benefit earned by a Participant as the result of employment by another employer or by retirement benefits. The Company's obligations to make payments to any Participant required under this Plan shall not be affected by any set off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against such Participant. Section 5.03.Amendment and Termination. (a) The Holdings Board and the Chemicals Board shall be entitled to terminate this Plan at any time and for any reason; provided, however, that in no event shall such termination become effective with respect to any Participant prior to 90 days after notice of such termination is given to such Participant. -13- (b) The Holdings Board and the Chemicals Board shall be entitled to amend this Plan at any time and for any reason; provided, however, that no amendment that would effectively reduce, alter, suspend or otherwise impair or prejudice the rights and benefits (whether accrued or unaccrued) of any Participant in any material respect (a "Material Amendment") shall become effective with respect to any Participant prior to 90 days after notice of such amendment is given to such Participant. For purposes of this paragraph (b), the termination of a Participant's participation in this Plan in accordance with Section 2.01(c) shall not be deemed to be an amendment of this Plan. (c) Notwithstanding the foregoing, no termination of this Plan and no Material Amendment shall be effective with respect to, binding upon or reduce any benefits payable hereunder to, any person who at the time is a Participant if such termination or Material Amendment is (i) directly or indirectly related to, connected with, in anticipation of, in furtherance of, pursuant to the terms of or during the pendency of any Change of Control or is for the purpose of directly or indirectly encouraging or facilitating a Change of Control or (ii) made within 180 days prior to the date of any Change of Control. (d) No termination or amendment of this Plan shall affect the rights or benefits of any Participant or the obligations of the Company accrued under this Plan as of the effective date of such termination or amendment or any of the rights or benefits of such Participant or the obligations of the Company accruing under this Plan after the effective date of such termination or amendment on account of any Change of Control that occurred prior to such effective date or within 180 days after such effective date. If any Participant shall become entitled to benefits under this Plan during the term of this Plan, then, notwithstanding the termination or amendment of this Plan, the benefits payable hereunder to such Participant shall be paid in full. (e) In case of any dispute regarding whether or not any purported termination or amendment of this Plan is permitted by, or satisfies any of the requirements of, this Section 5.03, the burden of proof shall rest with the Company. Section 5.04.Enforceability. The provisions of this Plan (i) are for the benefit of, and may be enforced directly by, each Participant the same as if the provisions of this Plan were set forth in their entirety in a written instrument executed and delivered by the Company and such Participant and (ii) constitute a continuing offer to all present and future Participants. Holdings and Chemicals, by their adoption of this Plan, (a) acknowledge and agree that each present and future Participant has relied upon and will continue to rely upon the provisions of this Plan in becoming, and serving as, an employee of the Company, (b) waive reliance upon, and all notices of acceptance of, this Plan by the Participants and (c) acknowledge and agree that no present or future Participant shall be prejudiced in his or her right to enforce directly the provisions of this Plan in accordance with the terms by any act or failure to act on the part of the Company. Section 5.05.Administration. (a) The Compensation Committee shall have full and final authority to make determinations with respect to the administration of this Plan, to construe -14- and interpret its provisions and to take all other actions deemed necessary or advisable for the proper administration of this Plan, but such authority shall be subject to the provisions of this Plan. Subject to Section 2.02(c), the Compensation Committee shall have no authority to change or modify the level of benefits provided for Participants under this Plan. No discretionary action by the Compensation Committee shall amend or supersede the express provisions of this Plan. In making determinations and taking other actions with respect to this Plan, the members of the Compensation Committee will be deemed to be fiduciaries with the same duties imposed upon plan fiduciaries by the Employee Retirement Income Security Act of 1974. (b) The members of the Compensation Committee shall receive no additional compensation for their services relating to this Plan. Any expenses properly incurred by the Compensation Committee incident to this Plan, including the cost of any bond required by applicable law, shall be paid by the Company. (c) The Company shall indemnify and hold harmless each member of the Compensation Committee against and all expenses and liabilities arising out of his or her administrative functions or fiduciary responsibilities, including any expenses and liabilities that are caused by or result from an act or omission constituting the negligence of such member in the performance of such functions or responsibilities, but excluding expenses and liabilities that are caused by or result from such member's own gross negligence or willful misconduct. Expenses against which such member shall be indemnified hereunder shall include, without limitation, the amounts of any settlement or judgment, costs, counsel fees, and related charges reasonably incurred in connection with a claim asserted or a proceeding brought or settlement thereof. Section 5.06.Release of Claims. As a condition to receipt of the benefits under this Plan, a Participant will be required to sign an agreement, to be prepared by Holdings, in which he or she releases the Company and its successors, assigns, divisions, subsidiaries, representatives, agents, officers, directors, stockholders, and employees from any claims, demands and/or causes of action relating to or arising out of the termination of his or her employment with the Company, including, but not limited to any statutory claims under the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, the Civil Rights Acts of 1964 and 1991, and/or the Texas Commission on Human Rights Act. Section 5.07.Assignability. The Company shall have the right to assign this Plan and to delegate its duties and obligations hereunder, but not otherwise; provided, however, that no such assignment shall relieve or discharge the Company of or from any of its obligations under this Plan. Unless otherwise approved by the Compensation Committee, no Participant shall transfer or assign any of his or her rights under this Plan except by will or the laws of descent and distribution. Section 5.08.Consolidations, Mergers, Etc. Each of Holdings and Chemicals will require any person, firm or entity which becomes its Successor to expressly assume and agree to perform this Plan in writing, in the same manner and to the same extent that Holdings or Chemicals, as the case may be, would be required to perform hereunder if no such succession had taken place. -15- Section 5.09.Successors and Assigns. This Plan shall be binding upon and inure to the benefit of the Company and its successors and assigns. This Plan and all rights of each Participant shall inure to the benefit of and be enforceable by such Participant and his or her personal or legal representatives, executors, administrators, heirs and permitted assigns. If any Participant should die while any amounts are due and payable to such Participant hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Plan to such Participant's devisees, legatees or other designees or, if there be no such devisees, legatees or other designees, to such Participant's estate. Section 5.10.Notices. All notices and other communications provided for in this Plan shall be in writing and shall be sent, delivered or mailed, addressed as follows: (i) if to Holdings, Chemicals or any other Subsidiary, at Holdings' principal office address or such other address as Holdings may have designated by written notice to all Participants for purposes hereof, directed to the attention of the Treasurer, and (ii) if to any Participant, at his or her residence address on the records of Holdings or to such other address as he or she may have designated to Holdings in writing for purposes hereof. Each such notice or other communication shall be deemed to have been duly given or mailed by United States registered mail, return receipt requested, postage prepaid, except that any change of notice address shall be effective only upon receipt. Section 5.11.Tax Withholdings. The Company shall have the right to deduct from any payment hereunder all taxes (federal, state or other) which it is required to be withhold therefrom. Section 5.12.No Employment Rights Conferred. Nothing contained in this Plan shall (i) confer upon any Participant any right with respect to continuation of employment with the Company or (ii) subject to the rights and benefits of any Participant hereunder, interfere in any way with the right of the Company to terminate such Participant's employment at any time. Section 5.13.Governing Law. This Plan shall be governed in accordance with the laws of the State of Texas and applicable federal law. IN WITNESS WHEREOF, and as conclusive evidence of the adoption of this Plan by the Holdings Board and the Chemicals Board, Holdings and Chemicals have each caused this Plan to be duly executed in its name and behalf by its proper officer thereunto duly authorized as of the Effective Date. STERLING CHEMICALS HOLDINGS, INC. By: ------------------------------------- Printed Name: -------------------------- Title: --------------------------------- -16- STERLING CHEMICALS, INC. By: ------------------------------------- Printed Name: -------------------------- Title: --------------------------------- -17- EXHIBIT A STERLING CHEMICALS HOLDINGS, INC. Instrument of Designation THIS INSTRUMENT OF DESIGNATION (this "Instrument") is intended to evidence the designation by the Compensation Committee of the Board of Directors of Sterling Chemicals Holdings, Inc., a Delaware corporation (the "Corporation"), of the undersigned employee as a "Participant," within the meaning of that certain Third Amended and Restated Key Employee Protection Plan of the Corporation and Sterling Chemicals Holdings, Inc., a Delaware corporation, with an Applicable Multiplier (as defined therein) of _____________. IN WITNESS WHEREOF, the Corporation has caused its duly authorized officer to execute this Instrument effective as of the date set forth below. Dated: ___________________ STERLING CHEMICALS HOLDINGS, INC. By: ----------------------------------- Printed Name: -------------------------- Title: --------------------------------- EMPLOYEE: Printed Name: --------------------------------------- A-i EXHIBIT B Participants as of the Effective Date
Name Applicable Multiplier Targeted Bonus Frank P. Diassi 1.50 $225,000 David G. Elkins 2.75 $210,000 Richard K. Crump 2.00 $150,000 Paul G. Vanderhoven 2.00 $66,667 Kenneth M. Hale 2.00 $46,667 Paul Timmons 2.00 $40,200 Paul K. Saunders 2.00 $45,600 John Beaver 1.00 $25,000 Eugene Kenyon 1.00 $44,800 Wayne R. Parker 1.00 $44,800 John S. Land 1.00 $52,267 Paul C. Rostek 1.00 $44,800 Robert W. Fransham 1.00 $35,233 Daniel R. Withers 1.00 $27,980 Donald Denby 1.00 $26,968 Walter B. Treybig 1.00 $34,767
B-i EX-10.4 12 h92951ex10-4.txt AMENDED RETENTION BONUS PLAN EXHIBIT 10.4 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. AMENDED AND RESTATED RETENTION BONUS PLAN PRELIMINARY STATEMENTS A. Sterling Chemicals Holdings, Inc. and Sterling Chemicals, Inc. are Delaware corporations. B. On July 13, 2001, the Holdings Board and the Chemicals Board (as such terms are defined below) approved that certain Retention Bonus Plan (the "Original Plan") for the benefit of certain employees of the Company (as defined below), to become effective on the date on which the United States Bankruptcy Court for the Southern District of Texas issued an order approving such plan. C. On October 31, 2001, the United States Bankruptcy Court for the Southern District of Texas entered an order (the "Court Order") approving the Original Plan, subject to certain modifications negotiated and agreed to by the Company (as defined below), the Official Committee of Unsecured Creditors, The Bank of New York, as Indenture Trustee, and the Ad Hoc Committee of holders of Chemicals' 12-3/8% Senior Secured Notes due 2006. D. The Holdings Board and the Chemicals Board desire to formally amend the Original Plan to incorporate the modifications required by the Court Order and to restate the Original Plan as so amended in its entirety. NOW, THEREFORE, the Original Plan is hereby amended and restated, effective as of the Effective Date (as defined below), to read in its entirety as follows: Section 1. Definitions and Interpretation. (a) Capitalized terms used in this Plan shall have the following respective meanings, except as otherwise provided or as the context shall otherwise require: "Annual Compensation" means, with respect to any Participant, the sum of (i) the highest Base Salary of such Participant in effect at any time on or after the Effective Date plus (ii) in the event that such Participant is also a "Participant" in the Company's Supplemental Pay Plan, the total annual compensation payable to such Participant under such Supplemental Pay Plan using such Participant's highest Base Salary and highest Applicable Multiplier (as defined in such Supplemental Pay Plan) at any time on or after the Effective Date. "Base Salary" means, with respect to any Participant, such Participant's annual base salary as of the time of determination. "Benefit Plan" means any employee benefit plan (including any employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974), program, arrangement or practice maintained, sponsored or provided by Holdings or any Subsidiary, including those relating to bonuses, incentive compensation, retirement benefits, stock options, stock ownership or stock awards, healthcare and medical benefits, disability benefits, death benefits, disability, life, accident and travel insurance, sick leave, vacation pay or termination pay. "Chemicals" means Sterling Chemicals, Inc. and any successor to all or substantially all of its business, operations or assets. "Chemicals Board" means the Board of Directors of Chemicals. "Code" means the Internal Revenue Code of 1986, as amended. References in this Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section. "Company" means Holdings and the Subsidiaries, including Chemicals. "Confirmation Date" means the date on which the United States Bankruptcy Court for the Southern District of Texas issues an order confirming a plan of reorganization for the Company. "Disability" means, with respect to any Participant, a physical or mental condition of such Participant that, in the opinion of a licensed physician reasonably acceptable to Holdings and such Participant or his or her legal representative, (i) prevents such Participant from being able to perform the services required of him or her as an employee of the Company, (ii) has continued for at least 180 days during any period of 12 consecutive months and (c) is reasonably expected to continue. "Effective Date" means October 31, 2001. "Good Reason" means, with respect to any Participant, any of the following actions or failures to act, but in each case only if it occurs on or after the Effective Date and while such Participant is employed by Holdings or any Subsidiary, and then only if it is not consented to by such Participant in writing: (i) a material change in such Participant's reporting responsibilities, titles or elected or appointed offices, including any change caused by the removal of such Participant from, or the failure to re-elect such Participant to, any material corporate office of the Company held by such Participant, but excluding any such change that occurs in connection with such Participant's death, Disability or retirement; -2- (ii) the assignment to such Participant of duties or responsibilities that are materially inconsistent with such Participant's status, positions, duties, responsibilities and functions with the Company; (iii) a reduction by the Company in such Participant's total compensation in effect immediately prior to the effective date of such reduction; (iv) the failure of the Company to continue such Participant's eligibility for participation in Benefit Plans providing benefits that, in the aggregate, are at least as favorable to such Participant as those provided under the Benefit Plans in which he or she was a participant on the Effective Date; (v) the failure of the Company to maintain Benefit Plans entitling such Participant to benefits that, in the aggregate, are at least as favorable to such Participant as those available to such Participant on the Effective Date; or (vi) any change of more than 75 miles (or, in the case of any Participant for whom the Holdings Board has approved a shorter distance, such shorter distance) in the location of the principal place of employment of such Participant on the Effective Date; provided, however, that (A) none of the actions described in clauses (i) through (iii) above shall constitute a Good Reason with respect to any Participant if it was an isolated and inadvertent action not taken in bad faith by the Company and if it is remedied by the Company promptly after receipt of notice thereof given by such Participant, and (B) any action or failure to act described in clauses (i) through (vi) above shall cease to be a Good Reason with respect to any Participant on the date which is 60 days after such Participant acquires actual knowledge of such action or failure to act unless, prior to such date, such Participant gives a Termination Notice. In the event of any dispute between the Company, on the one hand, and any Participant, on the other hand, with respect to the amount of total compensation of such Participant for purposes of clause (iii) above or the aggregate value or level of any of such Participant's benefits for purposes of clause (iv) or (v) above, the Company and such Participant shall use their best efforts to resolve such dispute themselves. If they are unable to resolve the dispute within 15 business days, Deloitte & Touche L.L.P., or such other nationally recognized accounting firm or employee benefits firm acceptable to the Company and such Participant, shall be engaged by the Company to make its own determination with respect to the dispute and the determination by such firm shall be final and binding on the Company and such Participant. If any firm is engaged with respect to any dispute as aforesaid, (x) such firm shall be instructed to make its determination as soon as practicable and to use such materiality standard as such firm may determine to be reasonable under the circumstances and (y) the disputants shall provide such firm with all books, records and other information relevant to such dispute as such firm may reasonably request. No firm engaged as aforesaid shall be liable or responsible to the Company or any Participant for any determination made by such firm in good faith. -3- "Holdings" means Sterling Chemicals Holdings, Inc. and any successor to all or substantially all of its business, operations or assets. "Holdings Board" means the Board of Directors of Holdings. "Liquidation Date" means the date on which all or substantially all of the assets owned by Holdings or Chemicals as of the Effective Date are sold or otherwise transferred in a transaction or series of transaction (excluding any such transactions that are consummated pursuant to a confirmed plan of reorganization), irrespective of whether any of such transactions are accomplished pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code or otherwise. "Misconduct" means, with respect to any Participant: (i) the commission by such Participant of acts that are both dishonest and demonstrably injurious to the Company (monetarily or otherwise) in any material respect; (ii) the failure of such Participant to observe and comply with the Company's published policies relating to alcohol and drugs, harassment or antitrust; (iii) the failure of such Participant to observe and comply with any other lawful published policy of the Company, but, in the case of any such failure that is capable of being remedied, only if such failure shall have continued unremedied for more than 30 days after written notice thereof is given to such Participant by Holdings or Chemicals; (iv) the willful failure of such Participant to observe and comply with all lawful and ethical directions and instructions of the Holdings Board, the Chairman of the Board or the President of Holdings or Chemicals; (v) the failure of such Participant to perform, in any material respect, his or her duties with the Company, but only if such failure was not caused by disability or incapacity and shall have continued unremedied for more than 30 days after written notice thereof is given to such Participant by Holdings or Chemicals; (vi) the conviction of such Participant for a felony offense; or (vii) any willful conduct on the part of such Participant that prejudices, in any material respect, the reputation of the Company in the fields of business in which it is engaged or with the investment community or the public at large, but only if such Participant knew, or should have known, that such conduct could have such result. For purposes of clauses (iv) and (vii) above, no act or failure to act on the part of any Participant shall be considered "willful" if such act or failure to act was done or omitted to -4- be done by such Participant in good faith and with the reasonable belief that such Participant's action or omission was in the best interest of the Company. If any Participant is a party to a written employment agreement with the Company, then clause (iv) above shall not apply to any directions or instructions that are contrary to or inconsistent with any of the positions, functions, duties or reporting responsibilities of such Participant as set forth in such written employment agreement or that violate any of such Participant's rights, privileges or immunities under such employment agreement. In case of any dispute regarding whether or not any conduct by a Participant meets any of the standards set forth in clauses (i) through (vii) above, the burden of proof shall rest with the Company. "Named Participants" means those employees of the Company who are listed on Exhibit A attached hereto and incorporated herein for all purposes. "Original Plan" has the meaning specified in the Preliminary Statements of this Plan. "Participants" means the Named Participants and each Successor deemed to be a Participant pursuant to Section 2(d). "Plan" means this Amended and Restated Retention Bonus Plan, as amended, supplemented or modified from time to time in accordance with its terms. "Subsidiary" means any corporation, limited partnership, general partnership, limited liability company or other form of entity a majority of any class of voting stock or other voting rights of which is owned, directly or indirectly, by Holdings. "Successor" has the meaning provided in Section 2(d). "Termination Date" means, with respect to any Participant, the termination date specified in the Termination Notice delivered by such Participant to the Company or, in the case of any termination by the Company of such Participant's employment for any reason other than Misconduct or Disability, the actual date of termination of such Participant's employment by the Company. "Termination Notice" shall mean, as appropriate, (i) a written notice from a Participant to Holdings or Chemicals purporting to terminate such Participant's employment for Good Reason, which notice shall be signed by such Participant, shall be dated the date it is given to Holdings or Chemicals, shall specify the termination date and shall state that the termination is for a Good Reason and set forth in reasonable detail the facts and circumstances claimed to provide a basis for such Good Reason, or (ii) a written notice from Holdings or Chemicals to a Participant purporting to terminate such Participant's employment for Misconduct or Disability, which notice shall be signed by Holdings or Chemicals, shall be dated the date it is given to such Participant, shall specify the termination date and shall state that the termination is for Misconduct and set forth in reasonable detail the facts and circumstances claimed to provide a basis for such Misconduct; provided, however, that any Termination Notice purported to be given by Holdings or Chemicals to any Participant after the death or retirement of such Participant -5- shall be invalid and ineffective. Any Termination Notice that is not in compliance, in all material respects, with the foregoing requirements shall be invalid and ineffective for purposes of this Plan. If Holdings or Chemicals receives from any Participant a Termination Notice that it believes is invalid and ineffective for purposes of this Plan, it shall promptly notify such Participant of such belief and the reasons therefor. (b) In this Plan, unless a clear contrary intention appears, (a) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Plan as a whole and not to any particular Section or other subdivision, (b) reference to any Section, means such Section hereof and (c) the words "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term. The Section headings herein are for convenience only and shall not affect the construction hereof. Section 2. Eligible Employees; Plan Payments. (a) This Plan is only for the benefit of Participants, and no other employees or personnel shall be eligible to participate in this Plan or to receive any rights or benefits hereunder. (b) Each Named Participant shall be entitled to a retention bonus in an amount equal to the percentage of such Participant's Annual Compensation set forth opposite such Participant's name on Exhibit A. Except as otherwise provided in paragraph (c) below, the retention bonus payable to each Participant pursuant to this paragraph (b) shall be due and payable (i) 25% on the earlier to occur of April 15, 2002 and the Confirmation Date, (ii) an additional 25% on the earliest to occur of October 15, 2002, the Confirmation Date and the Liquidation Date and (iii) the remaining 50% on the earlier to occur of the Confirmation Date and the Liquidation Date; provided, however, that no amounts shall be payable under clause (ii) or clause (iii) above solely as a result of the occurrence of the Liquidation Date unless such Liquidation Date occurs after April 15, 2002 and, provided further, that in the event that the payment contemplated by clause (iii) above becomes payable solely as a result of the occurrence of the Liquidation Date, the amount payable to each Participant under clause (iii) above shall be reduced by 50%. The designation of each Participant as a Participant in this Plan shall, from and after the Effective Date, be binding on the Company and be irrevocable. (c) Notwithstanding anything to the contrary contained in this Plan, no Participant shall be or become entitled to receive any payment under this Plan if such Participant's employment with the Company terminates prior to the relevant payment date for any reason other than (i) a termination by such Participant for Good Reason or (ii) a termination by the Company for any reason other than Misconduct or Disability; provided, however, that nothing contained in this paragraph (c) is intended to impose any obligation on any Participant to return any amounts paid such Participant under this Plan while such Participant was an employee of the Company. (d) In the event that (i) any Participant's employment with the Company terminates, (ii) such Participant is not entitled under paragraph (c) above to receive any further payments under this Plan and (iii) any other person is appointed by the Holdings Board or the Chemicals Board as successor to the position previously held by such former Participant (a "Successor"), such Successor shall be deemed to be a Participant hereunder and shall thereafter be entitled to -6- receive, on the same terms and conditions as such former Participant, any payments under this Plan that would have thereafter been made to such former Participant had such former Participant continued to be eligible to receive further payments under this Plan; provided, however, that (A) in no event shall the aggregate amount paid to such former Participant and such Successor (or Successors) exceed the aggregate amount that would have been paid to such former Participant had such former Participant continued to be eligible to receive further payments under this Plan throughout the entire term of this Plan and (B) nothing contained in this paragraph (d) is intended to impose any obligation on any former Participant to return any amounts paid such former Participant under this Plan. Section 3. Dispute Resolution. Except as otherwise provided in paragraph (c) below, in the event that any dispute or controversy shall arise between any Participant (or any person claiming by, through or under any Participant) and the Company relating to or arising out of this Plan, either disputant may give written notice to the other disputant ("Dispute Notice") that it wishes to resolve such dispute or controversy by negotiations, in which event the disputants shall attempt in good faith to negotiate a resolution of such dispute or controversy. If such dispute or controversy is not resolved within 30 days after receipt of such Dispute Notice by the other disputant, either disputant may (except as otherwise provided in paragraph (c) below) initiate arbitration of the matter as provided in paragraph (b) below. All negotiations pursuant to this paragraph (a) shall be held at the Company's principal offices in Houston, Texas (or such other place as the disputants shall mutually agree) and shall be treated as compromise and settlement negotiations for the purposes of the federal and state rules of evidence and procedure. (b) Except as otherwise provided in paragraph (c) below, any dispute or controversy arising out of or relating to this Plan which has not been resolved by negotiations in accordance with paragraph (a) above within 30 days of receipt of the relevant Dispute Notice by the other disputant, shall, upon the written request of either disputant, be finally settled by arbitration conducted expeditiously in accordance with the labor arbitration rules of the American Arbitration Association. The arbitrator shall be not empowered to award damages in excess of compensatory damages and each disputant shall be deemed to have irrevocably waived any damages in excess of compensatory damages. The arbitrator's decision shall be final and legally binding on the disputants and their successors and assigns. The fees and expenses of the arbitrator shall be borne solely by the prevailing disputant or, in the event there is no clear prevailing disputant, as the arbitrator deems appropriate. All arbitration conferences and hearings shall be held in Houston, Texas. (c) The dispute resolution procedures set forth in paragraphs (a) and (b) above shall not apply to any matter which, by the express provisions of this Plan, is to be finally determined by the Holdings Board or by an accounting firm or employee benefits firm. No legal action may be brought with respect to this Plan except for the purpose of specifically enforcing the provisions of this Section 3 or for the purpose of enforcing any arbitration award made pursuant to paragraph (b) above. Section 4. Cumulative Benefits. The rights and benefits provided to any Participant under this Plan are cumulative of, and are in addition to, all of the other rights and benefits -7- provided to such Participant under any Benefit Plan or any agreement between such Participant and the Company. Section 5. Amendment and Termination. The Holdings Board and the Chemicals Board may amend this Plan at any time and for any reason; provided, however, that no such amendment shall be or become effective with respect to, or binding upon, any person who at the time of such amendment is a Participant hereunder if such amendment adversely affects the rights or benefits of, or the obligations of the Company hereunder to, such Participant unless such Participant consents otherwise in writing. Notwithstanding any termination or amendment of this Plan, the benefits payable hereunder to each Participant shall be paid in full. In case of any dispute regarding whether or not any purported amendment or termination of this Plan is permitted by, or satisfies any of the requirements of, this Section 5, the burden of proof shall rest with the Company. Section 6. Enforceability. The provisions of this Plan (a) are for the benefit of, and may be enforced directly by, each Participant the same as if the provisions of this Plan were set forth in their entirety in a written instrument executed and delivered by the Company and such Participant and (b) constitute a continuing offer to all present and future Participants. Holdings and Chemicals, by their adoption of this Plan, (i) acknowledge and agree that each present and future Participant has relied upon and will continue to rely upon the provisions of this Plan in becoming, and serving as, an employee of the Company, (ii) waive reliance upon, and all notices of acceptance of, this Plan by the Participants and (iii) acknowledge and agree that no present or future Participant shall be prejudiced in his or her right to enforce directly the provisions of this Plan in accordance with the terms by any act or failure to act on the part of the Company. Section 7. Administration. (a) The Holdings Board shall have full and final authority to make determinations with respect to the administration of this Plan, to construe and interpret its provisions and to take all other actions deemed necessary or advisable for the proper administration of this Plan, but such authority shall be subject to the provisions of this Plan; provided, however, that (i) the Holdings Board shall have no authority to change or modify the level of benefits provided for Participants under this Plan and (ii) no discretionary action by the Holdings Board shall amend or supersede the express provisions of this Plan. (b) The members of the Holdings Board shall receive no additional compensation for their services relating to this Plan. Any expenses properly incurred by the Holdings Board incident to this Plan, including the cost of any bond required by applicable law, shall be paid by the Company. (c) The Company shall indemnify and hold harmless each member of the Holdings Board against any and all expenses and liabilities arising out of his or her administrative functions and other responsibilities, including any expenses and liabilities that are caused by or result from an act or omission constituting the negligence of such member in the performance of such functions or responsibilities, but excluding expenses and liabilities that are caused by or result from such member's own gross negligence or willful misconduct. Expenses against which such member shall be indemnified hereunder shall include the amounts of any settlement or -8- judgment, costs, counsel fees and related charges reasonably incurred in connection with a claim asserted or a proceeding brought or settlement thereof. Section 8. Assignability. The Company shall have the right to assign this Plan and to delegate its duties and obligations hereunder, but not otherwise; provided, however, that no such assignment shall relieve or discharge the Company of or from any of its obligations under this Plan. Unless otherwise approved by the Holdings Board, no Participant shall transfer or assign any of his or her rights under this Plan except by will or the laws of descent and distribution. Section 9. Consolidations, Mergers, etc. Each of Holdings and Chemicals will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of its business, operations or assets to expressly assume and agree to perform this Plan in writing, in the same manner and to the same extent that Holdings or Chemicals, as the case may be, would be required to perform hereunder if no such succession had taken place. Section 10. Successors and Assigns. This Plan shall be binding upon and inure to the benefit of the Company and its successors and assigns. This Plan and all rights of each Participant shall inure to the benefit of and be enforceable by such Participant and his or her personal or legal representatives, executors, administrators, heirs and permitted assigns. If any Participant should die while any amounts are due and payable to such Participant hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Plan to such Participant's devisees, legatees or other designees or, if there be no such devisees, legatees or other designees, to such Participant's estate. Section 11. Notices. All notices and other communications provided for in this Plan shall be in writing and shall be sent, delivered or mailed, addressed as follows: (a) if to Holdings, Chemicals or any other Subsidiary, at Holdings' principal office address or such other address as Holdings may have designated by written notice to all Participants for purposes hereof, directed to the attention of the Treasurer, and (b) if to any Participant, at his or her residence address on the records of Holdings or to such other address as he or she may have designated to Holdings in writing for purposes hereof. Each such notice or other communication shall be deemed to have been duly given on the date it is mailed by United States registered mail, return receipt requested, postage prepaid (or any substantial equivalent mail delivery of any foreign country, if applicable), except that any change of notice address shall be effective only upon receipt. Section 12. Tax Withholdings. The Company shall have the right to deduct from any payment hereunder all taxes (federal, state or other) which it is required to be withhold therefrom. Section 13. No Employment Rights Conferred. Nothing contained in this Plan shall (a) confer upon any Participant any right with respect to continuation of employment with the Company or (b) subject to the rights and benefits of any Participant hereunder, interfere in any way with the right of the Company to terminate such Participant's employment at any time. -9- Section 14. Governing Law. This Plan shall be governed in accordance with the laws of the State of Texas and any other applicable law. Section 15. Bonus Arrangement. The Plan is intended to be a bonus program that is designed to provide a pecuniary incentive for eligible employees (a) to remain in employment by the Company and (b) to produce their best efforts during the continuance of the Company's bankruptcy proceedings. The Plan is not intended to provide retirement income or to defer the receipt of payments hereunder to the termination of a Participant's covered employment or beyond. The Plan is strictly an incentive bonus program (as described in U.S. Department of Labor Regulation Section 2510.3-2(c) or any successor thereto), and not a pension or welfare benefit plan that is subject to the Employee Retirement Income Security Act of 1974, as amended. All interpretations and determinations hereunder shall be made on a basis consistent with the Plan's status as a bonus program. IN WITNESS WHEREOF, and as conclusive evidence of the adoption of this Plan by the Holdings Board and the Chemicals Board, Holdings and Chemicals have each caused this Plan to be duly executed in its name and behalf by its proper officer thereunto duly authorized, effective as of the Effective Date. STERLING CHEMICALS HOLDINGS, INC. By: ------------------------------------- Printed Name: --------------------------- Title: ---------------------------------- STERLING CHEMICALS, INC. By: ------------------------------------- Printed Name: --------------------------- Title: ---------------------------------- -10- EXHIBIT A Named Participants; Bonus Percentages
Name Position % of Annual Compensation David Elkins President and Co-CEO 120% Richard Crump Co-CEO 120% Paul Vanderhoven VP - Finance 120% Kenneth Hale General Counsel 120% Paul Timmons President - Pulp Chemicals 100% John Beaver Corporate Controller 100% Paul Saunders President - Fibers 75% Eugene Kenyon VP - Supply Chain 75% Wayne Parker VP - Human Resources 75% John Land VP - Styrene 75% Paul Rostek VP - AN/NaCN/TBA 75% Robert Fransham VP - Acetyls 75% John Kamler VP - Pulp Business Development 75% Donald Denby VP - Water Treatment 50% Walter Treybig Plant Manager (TC) 50%
A-i EX-10.5 13 h92951ex10-5.txt AMENDED SUPPLEMENTAL BONUS PLAN EXHIBIT 10.5 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. AMENDED AND RESTATED SUPPLEMENTAL BONUS PLAN PRELIMINARY STATEMENTS A. Sterling Chemicals Holdings, Inc. and Sterling Chemicals, Inc. are Delaware corporations. B. On July 13, 2001, the Holdings Board and the Chemicals Board (as such terms are defined below) approved that certain Success Bonus Plan (the "Original Plan") for the benefit of certain employees of the Company (as defined below), to become effective on the date on which the United States Bankruptcy Court for the Southern District of Texas issued an order approving such plan. C. On October 31, 2001, the United States Bankruptcy Court for the Southern District of Texas entered an order (the "Court Order") approving the Original Plan, subject to certain modifications negotiated and agreed to by the Company (as defined below), the Official Committee of Unsecured Creditors, The Bank of New York, as Indenture Trustee, and the Ad Hoc Committee of holders of Chemicals' 12-3/8% Senior Secured Notes due 2006. D. The Holdings Board and the Chemicals Board desire to formally amend the Original Plan to incorporate the modifications required by the Court Order and to restate the Original Plan as so amended in its entirety. NOW, THEREFORE, the Original Plan is hereby amended and restated, effective as of the Effective Date (as defined below), to read in its entirety as follows: Section 1. Definitions and Interpretation. (a) Capitalized terms used in this Plan shall have the following respective meanings, except as otherwise provided or as the context shall otherwise require: "Benefit Plan" means any employee benefit plan (including any employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974), program, arrangement or practice maintained, sponsored or provided by Holdings or any Subsidiary, including those relating to bonuses, incentive compensation, retirement benefits, stock options, stock ownership or stock awards, healthcare and medical benefits, disability benefits, death benefits, disability, life, accident and travel insurance, sick leave, vacation pay or termination pay. "Chemicals" means Sterling Chemicals, Inc. and any successor to all or substantially all of its business, operations or assets. "Chemicals Board" means the Board of Directors of Chemicals. "Code" means the Internal Revenue Code of 1986, as amended. Reference in this Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section. "Company" means Holdings and the Subsidiaries, including Chemicals. "Confirmation Date" means the date on which the United States Bankruptcy Court for the Southern District of Texas issues an order confirming a plan of reorganization for the Company. "Disability" means, with respect to any Participant, a physical or mental condition of such Participant that, in the opinion of a licensed physician reasonably acceptable to Holdings and such Participant or his or her legal representative, (i) prevents such Participant from being able to perform the services required of him or her as an employee of the Company, (ii) has continued for at least 180 days during any period of 12 consecutive months and (c) is reasonably expected to continue. "Discretionary Bonus Pool" means an aggregate amount equal to $1,400,000 that shall be available for awards under this Plan pursuant to Section 2(b). "Effective Date" means October 31, 2001. "Good Reason" means, with respect to any Participant, any of the following actions or failures to act, but in each case only if it occurs on or after the Effective Date and while such Participant is employed by Holdings or any Subsidiary, and then only if it is not consented to by such Participant in writing: (i) a material change in such Participant's reporting responsibilities, titles or elected or appointed offices, including any change caused by the removal of such Participant from, or the failure to re-elect such Participant to, any material corporate office of the Company held by such Participant, but excluding any such change that occurs in connection with such Participant's death, Disability or retirement; (ii) the assignment to such Participant of duties or responsibilities that are materially inconsistent with such Participant's status, positions, duties, responsibilities and functions with the Company; (iii) a reduction by the Company in such Participant's annual base salary or target bonus percentage; (iv) the failure of the Company to continue such Participant's eligibility for participation in Benefit Plans providing benefits that, in the aggregate, are at -2- least as favorable to such Participant as those provided under the Benefit Plans in which he or she was a participant on the Effective Date; (v) the failure of the Company to maintain Benefit Plans entitling such Participant to benefits that, in the aggregate, are at least as favorable to such Participant as those available to such Participant on the Effective Date; or (vi) any change of more than 75 miles (or, in the case of any Participant for whom the Holdings Board has approved a shorter distance, such shorter distance) in the location of the principal place of employment of such Participant on the Effective Date; provided, however, that (A) none of the actions described in clauses (i) through (iii) above shall constitute a Good Reason with respect to any Participant if it was an isolated and inadvertent action not taken in bad faith by the Company and if it is remedied by the Company promptly after receipt of notice thereof given by such Participant, and (B) any action or failure to act described in clauses (i) through (vi) above shall cease to be a Good Reason with respect to any Participant on the date which is 60 days after such Participant acquires actual knowledge of such action or failure to act unless, prior to such date, such Participant gives a Termination Notice. In the event of any dispute between the Company, on the one hand, and any Participant, on the other hand, with respect to the amount of total compensation of such Participant for purposes of clause (iii) above or the aggregate value or level of any of such Participant's benefits for purposes of clause (iv) or (v) above, the Company and such Participant shall use their best efforts to resolve such dispute themselves. If they are unable to resolve the dispute within 15 business days, Deloitte & Touche L.L.P., or such other nationally recognized accounting firm or employee benefits firm acceptable to the Company and such Participant, shall be engaged by the Company to make its own determination with respect to the dispute and the determination by such firm shall be final and binding on the Company and such Participant. If any firm is engaged with respect to any dispute as aforesaid, (x) such firm shall be instructed to make its determination as soon as practicable and to use such materiality standard as such firm may determine to be reasonable under the circumstances and (y) the disputants shall provide such firm with all books, records and other information relevant to such dispute as such firm may reasonably request. No firm engaged as aforesaid shall be liable or responsible to the Company or any Participant for any determination made by such firm in good faith. "Holdings" means Sterling Chemicals Holdings, Inc. and any successor to all or substantially all of its business, operations or assets. "Holdings Board" means the Board of Directors of Holdings. ` "Liquidation Date" means the date on which all or substantially all of the assets owned by Holdings or Chemicals as of the Effective Date are sold or otherwise transferred in a transaction or series of transaction (excluding any such transactions that are consummated pursuant to a confirmed plan of reorganization), irrespective of whether any -3- of such transactions are accomplished pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code or otherwise. "Misconduct" means, with respect to any Participant: (i) the commission by such Participant of acts that are both dishonest and demonstrably injurious to the Company (monetarily or otherwise) in any material respect; (ii) the failure of such Participant to observe and comply with the Company's published policies relating to alcohol and drugs, harassment or antitrust; (iii) the failure of such Participant to observe and comply with any other lawful published policy of the Company, but, in the case of any such failure that is capable of being remedied, only if such failure shall have continued unremedied for more than 30 days after written notice thereof is given to such Participant by Holdings or Chemicals; (iv) the willful failure of such Participant to observe and comply with all lawful and ethical directions and instructions of the Holdings Board, the Chairman of the Board or the President of Holdings or Chemicals; (v) the failure of such Participant to perform, in any material respect, his or her duties with the Company, but only if such failure was not caused by disability or incapacity and shall have continued unremedied for more than 30 days after written notice thereof is given to such Participant by Holdings or Chemicals; (vi) the conviction of such Participant for a felony offense; or (vii) any willful conduct on the part of such Participant that prejudices, in any material respect, the reputation of the Company in the fields of business in which it is engaged or with the investment community or the public at large, but only if such Participant knew, or should have known, that such conduct could have such result. For purposes of clauses (iv) and (vii) above, no act or failure to act on the part of any Participant shall be considered "willful" if such act or failure to act was done or omitted to be done by such Participant in good faith and with the reasonable belief that such Participant's action or omission was in the best interest of the Company. If any Participant is a party to a written employment agreement with the Company, then clause (iv) above shall not apply to any directions or instructions that are contrary to or inconsistent with any of the positions, functions, duties or reporting responsibilities of such Participant as set forth in such written employment agreement or that violate any of such Participant's rights, privileges or immunities under such employment agreement. In case of any dispute regarding whether or not any conduct by a Participant meets any of the standards set forth in clauses (i) through (vii) above, the burden of proof shall rest with the Company. -4- "Original Plan" has the meaning specified in the Preliminary Statements of this Plan. "Participants" means such employees of the Company who are from time to time designated by the Holdings Board as Participants pursuant to Section 2(b). "Plan" means this Amended and Restated Supplemental Bonus Plan, as amended, supplemented or modified from time to time in accordance with its terms. "Retention Bonus Plan" means the Company's Amended and Restated Retention Bonus Plan, as amended, supplemented or modified from time to time in accordance with its terms. "Subsidiary" mean any corporation, limited partnership, general partnership, limited liability company or other form of entity a majority of any class of voting stock or other voting rights of which is owned, directly or indirectly, by Holdings. (b) Interpretation. In this Plan, unless a clear contrary intention appears, (i) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Plan as a whole and not to any particular Section or other subdivision, (ii) reference to any Section, means such Section hereof and (iii) the words "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term. The Section headings herein are for convenience only and shall not affect the construction hereof. Section 2. Eligible Employees. (a) This Plan is only for the benefit of Participants, and no other employees or personnel shall be eligible to participate in this Plan or to receive any rights or benefits hereunder. (b) The Holdings Board may at any time and from time to time after the Effective Date designate one or more employees of the Company as Participants in this Plan for purposes of receiving awards from the Discretionary Bonus Pool; provided, however, that no "Participant" under the Retention Bonus Plan (excluding any "Successor," as defined in the Retention Bonus Plan, who is not entitled to receive any payments thereunder) shall (i) be designated as a Participant in this Plan or (ii) receive any award from the Discretionary Bonus Pool. Upon designating any individual as a Participant pursuant to this paragraph (b), the Holdings Board shall provide such Participant with written notice of such designation, which notice shall indicate the amount of such award or the basis on which the amount of such award will be determined. Upon receipt of such notice by such Participant, the designation of such employee as a Participant in this Plan and the amount of such award (or basis on which the amount of such award shall be determined) shall be binding on the Company and be irrevocable. Except as otherwise provided below in this paragraph (b), any and all awards payable from the Discretionary Bonus Pool shall be payable on the earlier of the Confirmation Date or the Liquidation Date or, in the case of any Participant who is designated after such time, as soon as practicable after the date of such designation. Notwithstanding anything to the contrary contained in this Plan, no person designated as a Participant under this Plan shall be or become -5- entitled to receive any payment under this Plan if such Participant's employment with the Company terminates prior to the relevant payment date for any reason other than (i) a termination by such Participant for Good Reason or (ii) a termination by the Company for any reason other than Misconduct or Disability. Nothing contained in this Plan shall obligate the Holdings Board to designate any employee of the Company as a Participant hereunder or to award any Participant any particular amount, irrespective of the status, title or duties of any other Participant or the amount of award given to any other Participant. In no event may the awards under this Plan exceed, in the aggregate, the amount of the Discretionary Bonus Pool. Section 3. Dispute Resolution. (a) Except as otherwise provided in paragraph (c) below, in the event that any dispute or controversy shall arise between any Participant (or any person claiming by, through or under any Participant) and the Company relating to or arising out of this Plan, either disputant may give written notice to the other disputant ("Dispute Notice") that it wishes to resolve such dispute or controversy by negotiations, in which event the disputants shall attempt in good faith to negotiate a resolution of such dispute or controversy. If such dispute or controversy is not resolved within 30 days after receipt of such Dispute Notice by the other disputant, either disputant may (except as otherwise provided in paragraph (c) below) initiate arbitration of the matter as provided in paragraph (b) below. All negotiations pursuant to this paragraph (a) shall be held at the Company's principal offices in Houston, Texas (or such other place as the disputants shall mutually agree) and shall be treated as compromise and settlement negotiations for the purposes of the federal and state rules of evidence and procedure. (b) Except as otherwise provided in paragraph (c) below, any dispute or controversy arising out of or relating to this Plan which has not been resolved by negotiations in accordance with paragraph (a) above within 30 days of receipt of the relevant Dispute Notice by the other disputant, shall, upon the written request of either disputant, be finally settled by arbitration conducted expeditiously in accordance with the labor arbitration rules of the American Arbitration Association. The arbitrator shall be not empowered to award damages in excess of compensatory damages and each disputant shall be deemed to have irrevocably waived any damages in excess of compensatory damages. The arbitrator's decision shall be final and legally binding on the disputants and their successors and assigns. The fees and expenses of the arbitrator shall be borne solely by the prevailing disputant or, in the event there is no clear prevailing disputant, as the arbitrator deems appropriate. All arbitration conferences and hearings shall be held in Houston, Texas. (c) The dispute resolution procedures set forth in paragraphs (a) and (b) above shall not apply to any matter which, by the express provisions of this Plan, is to be finally determined by the Holdings Board. No legal action may be brought with respect to this Plan except for the purpose of specifically enforcing the provisions of this Section 3 or for the purpose of enforcing any arbitration award made pursuant to paragraph (b) above. Section 4. Cumulative Benefits. The rights and benefits provided to any Participant under this Plan are cumulative of, and are in addition to, all of the other rights and benefits provided to such Participant under any Benefit Plan or any agreement between such Participant and the Company. -6- Section 5. Amendment and Termination. The Holdings Board and the Chemicals Board may amend this Plan at any time and for any reason; provided, however, that no such amendment shall be or become effective with respect to, or binding upon, any person who at the time of such amendment is a Participant hereunder if such amendment adversely affects the rights or benefits of, or the obligations of the Company hereunder to, such Participant unless such Participant consents otherwise in writing. Notwithstanding any termination or amendment of this Plan, the benefits payable hereunder to each Participant shall be paid in full. In case of any dispute regarding whether or not any purported amendment or termination of this Plan is permitted by, or satisfies any of the requirements of, this Section 5, the burden of proof shall rest with the Company. Section 6. Enforceability. The provisions of this Plan (a) are for the benefit of, and may be enforced directly by, each Participant the same as if the provisions of this Plan were set forth in their entirety in a written instrument executed and delivered by the Company and such Participant and (b) constitute a continuing offer to all present and future Participants. Holdings and Chemicals, by their adoption of this Plan, (i) acknowledge and agree that each present and future Participant has relied upon and will continue to rely upon the provisions of this Plan in becoming, and serving as, an employee of the Company, (ii) waive reliance upon, and all notices of acceptance of, this Plan by the Participants and (iii) acknowledge and agree that no present or future Participant shall be prejudiced in his or her right to enforce directly the provisions of this Plan in accordance with the terms by any act or failure to act on the part of the Company. Section 7. Administration. (a) The Holdings Board shall have full and final authority to make determinations with respect to the administration of this Plan, to construe and interpret its provisions and to take all other actions deemed necessary or advisable for the proper administration of this Plan, but such authority shall be subject to the provisions of this Plan; provided, however, that (i) the Holdings Board shall have no authority to change or modify the level of benefits provided for Participants under this Plan and (ii) no discretionary action by the Holdings Board shall amend or supersede the express provisions of this Plan. (b) The members of the Holdings Board shall receive no additional compensation for their services relating to this Plan. Any expenses properly incurred by the Holdings Board incident to this Plan, including the cost of any bond required by applicable law, shall be paid by the Company. (c) The Company shall indemnify and hold harmless each member of the Holdings Board against any and all expenses and liabilities arising out of his or her administrative functions and other responsibilities, including any expenses and liabilities that are caused by or result from an act or omission constituting the negligence of such member in the performance of such functions or responsibilities, but excluding expenses and liabilities that are caused by or result from such member's own gross negligence or willful misconduct. Expenses against which such member shall be indemnified hereunder shall include the amounts of any settlement or judgment, costs, counsel fees and related charges reasonably incurred in connection with a claim asserted or a proceeding brought or settlement thereof. -7- Section 8. Assignability. The Company shall have the right to assign this Plan and to delegate its duties and obligations hereunder, but not otherwise; provided, however, that no such assignment shall relieve or discharge the Company of or from any of its obligations under this Plan. Unless otherwise approved by the Holdings Board, no Participant shall transfer or assign any of his or her rights under this Plan except by will or the laws of descent and distribution. Section 9. Consolidations, Mergers, etc. Each of Holdings and Chemicals will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of its business, operations or assets to expressly assume and agree to perform this Plan in writing, in the same manner and to the same extent that Holdings or Chemicals, as the case may be, would be required to perform hereunder if no such succession had taken place. Section 10. Successors and Assigns. This Plan shall be binding upon and inure to the benefit of the Company and its successors and assigns. This Plan and all rights of each Participant shall inure to the benefit of and be enforceable by such Participant and his or her personal or legal representatives, executors, administrators, heirs and permitted assigns. If any Participant should die while any amounts are due and payable to such Participant hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Plan to such Participant's devisees, legatees or other designees or, if there be no such devisees, legatees or other designees, to such Participant's estate. Section 11. Notices. All notices and other communications provided for in this Plan shall be in writing and shall be sent, delivered or mailed, addressed as follows: (a) if to Holdings, Chemicals or any other Subsidiary, at Holdings' principal office address or such other address as Holdings may have designated by written notice to all Participants for purposes hereof, directed to the attention of the Treasurer, and (b) if to any Participant, at his or her residence address on the records of Holdings or to such other address as he or she may have designated to Holdings in writing for purposes hereof. Each such notice or other communication shall be deemed to have been duly given on the date it is mailed by United States registered mail, return receipt requested, postage prepaid (or any substantial equivalent mail delivery of any foreign country, if applicable), except that any change of notice address shall be effective only upon receipt. Section 12. Tax Withholdings. The Company shall have the right to deduct from any payment hereunder all taxes (federal, state or other) which it is required to be withhold therefrom. Section 13. No Employment Rights Conferred. Nothing contained in this Plan shall (a) confer upon any Participant any right with respect to continuation of employment with the Company or (b) subject to the rights and benefits of any Participant hereunder, interfere in any way with the right of the Company to terminate such Participant's employment at any time. Section 14. Governing Law. This Plan shall be governed in accordance with the laws of the State of Texas and any other applicable law. -8- Section 15. Bonus Arrangement. The Plan is intended to be a bonus program that is designed to provide a pecuniary incentive for eligible employees (a) to remain in employment by the Company and (b) to produce their best efforts during the continuance of the Company's bankruptcy proceedings. The Plan is not intended to provide retirement income or to defer the receipt of payments hereunder to the termination of a Participant's covered employment or beyond. The Plan is strictly an incentive bonus program (as described in U.S. Department of Labor Regulation Section 2510.3-2(c) or any successor thereto), and not a pension or welfare benefit plan that is subject to the Employee Retirement Income Security Act of 1974, as amended. All interpretations and determinations hereunder shall be made on a basis consistent with the Plan's status as a bonus program. IN WITNESS WHEREOF, and as conclusive evidence of the adoption of this Plan by the Holdings Board and the Chemicals Board, Holdings and Chemicals have each caused this Plan to be duly executed in its name and behalf by its proper officer thereunto duly authorized, effective as of the Effective Date. STERLING CHEMICALS HOLDINGS, INC. By: ------------------------------------- Printed Name: --------------------------- Title: ---------------------------------- STERLING CHEMICALS, INC. By: ------------------------------------- Printed Name: --------------------------- Title: ---------------------------------- -9- EX-10.6 14 h92951ex10-6.txt 2ND AMENDED SEVERANCE PAY PLAN EXHIBIT 10.6 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. SECOND AMENDED AND RESTATED SEVERANCE PAY PLAN PRELIMINARY STATEMENTS A. Sterling Chemicals Holdings, Inc. and Sterling Chemicals, Inc. are Delaware corporations. B. On March 8, 2001, the Holdings Board and the Chemicals Board (as such terms are defined below) approved a severance pay plan (as amended and restated as of July 13, 2001, the "Existing Plan"). C. On October 31, 2001, the United States Bankruptcy Court for the Southern District of Texas entered an order (the "Court Order") approving the Existing Plan, subject to certain modifications negotiated and agreed to by the Company (as defined below), the Official Committee of Unsecured Creditors, The Bank of New York, as Indenture Trustee, and the Ad Hoc Committee of holders of Chemicals' 12-3/8% Senior Secured Notes due 2006. D. The Holdings Board and the Chemicals Board desire to formally amend the Existing Plan to incorporate the modifications required by the Court Order and to restate the Existing Plan as so amended in its entirety. NOW, THEREFORE, the Existing Plan is hereby amended and restated, effective as of the Effective Date (as defined below), to read in its entirety as follows: ARTICLE I Definitions and Interpretations Section 1.01.Definitions. Capitalized terms used in this Plan shall have the following respective meanings, except as otherwise provided or as the context shall otherwise require: "Applicable Multiplier" has the meaning specified in Section 2.02(a). "Base Salary" has the meaning specified in Section 2.02(a). "Benefit Plan" means any employee benefit plan (including any employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974), program, arrangement or practice maintained, sponsored or provided by Holdings or any Subsidiary, including those relating to bonuses, incentive compensation, retirement benefits, stock options, stock ownership or stock awards, healthcare and medical benefits, disability benefits, death benefits, disability, life, accident and travel insurance, sick leave, vacation pay or termination pay, as amended, or any successor to any of such plans. "Change of Control" means the occurrence of any of the following events: (i) Holdings shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned Subsidiary); (ii) Holdings or Chemicals is dissolved and liquidated; (iii) Chemicals sells, leases or exchanges all of its assets or a Substantial Part of its Assets (other than in the ordinary course of business) to any other person or entity (other than Holdings or another wholly-owned Subsidiary); (iv) Chemicals ceases to be a wholly-owned Subsidiary of Holdings for any reason other than a merger, consolidation or other reorganization in which Holdings or a wholly-owned Subsidiary is the surviving entity; (v) any "person" (as that term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) other than one or more of the Excluded Holders, is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as amended, except that a person will be deemed to have "beneficial ownership" of all shares that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the then outstanding shares of Holdings' that are normally entitled to vote in the election of directors (based upon voting power); (vi) individuals who as of March 8, 2001 constituted the Holdings Board (together with any new directors whose election by the Holdings Board or whose nomination for election by the stockholders of Holdings was approved by a majority of the directors of Holdings then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Holdings Board then in office; or (vii) the Company sells, leases or exchanges all or substantially all of the assets or capital securities of any of its SBUs to any other person or entity (other than Holdings or another wholly-owned Subsidiary); provided, however, that any such sale, lease or exchange shall not constitute a "Change of Control" for purposes of this clause (vii) with respect to any Participant who was not assigned to work on a full-time basis in the relevant SBU at the time of such sale, lease or exchange and, provided further, that the sale, lease or exchange of all or substantially all of the assets or capital securities of Sterling Fibers, Inc. or Sterling Chemicals Acquisitions, Inc. (or any of its direct or indirect subsidiaries) shall not constitute a "Change of Control" with respect to any Participant. "Chemicals" means Sterling Chemicals, Inc. and any Successor. "Chemicals Board" means the Board of Directors of Chemicals. "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. Reference in this Plan to COBRA shall be deemed to include any amendments or successor provisions to COBRA and any regulations thereunder. -2- "Code" means the Internal Revenue Code of 1986, as amended. Reference in this Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section. "Company" means Holdings and the Subsidiaries, including Chemicals. "Compensation Committee" means the Compensation Committee of Holdings. "Disability" means, with respect to any Participant, a physical or mental condition of such Participant that results in such Participant becoming eligible for long term disability benefits under the Company's long term disability Benefit Plan. "Effective Date" means October 31, 2001. "Excluded Holders" means the parties, as of March 8, 2001, to that certain Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, as amended. "Existing Plan" has the meaning specified in the Preliminary Statements of this Plan. "Good Reason" means, with respect to any Participant, any of the following actions or failures to act, but in each case only if it occurs (a) on or after the date that is 180 days prior to the date on which a Change of Control occurs and (b) while such Participant is employed by Holdings or any Subsidiary, and then only if it is not consented to by such Participant in writing: (i) a material reduction by the Company in such Participant's total compensation in effect immediately prior to the effective date of such reduction; (ii) the failure of the Company to continue such Participant's eligibility for participation in employee benefit plans, programs, arrangements and practices providing benefits that, in the aggregate, are at least as favorable to such Participant as those provided under the Benefit Plans in which he or she was a participant immediately prior to the effective date of such failure; (iii) the failure of the Company to maintain employee benefit plans, programs, arrangements and practices entitling such Participant to benefits that, in the aggregate, are at least as favorable to such Participant as those available to such Participant under the Benefit Plans in which he or she was a participant immediately prior to the effective date of such failure; or (iv) any change of more than 75 miles (or, in the case of any Participant for whom the Compensation Committee has approved a shorter distance, such shorter distance) in the location of the principal place of employment of such Participant immediately prior to the effective date of such change. -3- For purposes of this definition, any action or failure to act described in clauses (i) through (iv) above shall cease to be a Good Reason with respect to any Participant on the date which is 30 days after such Participant acquires actual knowledge of such action or failure to act unless, prior to such date, such Participant gives a Termination Notice pursuant to Section 2.05. In the event of any dispute between the Company, on the one hand, and any Participant, on the other hand, with respect to the amount of total compensation of such Participant for purposes of clause (i) above or the aggregate value or level of any of such Participant's benefits for purposes of clause (ii) or (iii) above, the Company and such Participant shall use their best efforts to resolve such dispute themselves. If they are unable to resolve the dispute within 15 business days, Deloitte & Touche L.L.P., or such other nationally recognized accounting firm or employee benefits firm acceptable to the Company and such Participant, shall be engaged by the Company to make its own determination with respect to the dispute and the determination by such firm shall be final and binding on the Company (including the Compensation Committee) and such Participant. In case of any dispute regarding the amount of total compensation of a Participant or the value or level of a Participant's benefits, the burden of proof shall rest with the Participant. If any firm is engaged with respect to any dispute as aforesaid, (A) such firm shall be instructed to make its determination as soon as practicable and to use such materiality standard as such firm may determine to be reasonable under the circumstances and (B) the disputants shall provide such firm with all books, records and other information relevant to such dispute as such firm may reasonably request. No firm engaged as aforesaid shall be liable or responsible to the Company (including the Compensation Committee) or any Participant for any determination made by such firm in good faith. In case of any claim that such firm did not act in good faith, the burden of proof shall rest with the person or entity claiming the absence of good faith. "Holdings" means Sterling Chemicals Holdings, Inc. and any Successor. "Holdings Board" means the Board of Directors of Holdings. "Misconduct" means, with respect to any Participant: (i) the commission by such Participant of acts that are both dishonest and demonstrably injurious to the Company (monetarily or otherwise) in any material respect; (ii) the failure of such Participant to observe and comply with the Company's published policies relating to alcohol and drugs, harassment or compliance with applicable laws; (iii) the failure of such Participant to observe and comply with any other lawful published policy of the Company, but, in the case of any such failure that is capable of being remedied, only if such failure shall have continued unremedied -4- for more than 30 days after written notice thereof is given to such Participant by Holdings or Chemicals; (iv) the willful failure of such Participant to observe and comply with all lawful and ethical directions and instructions of the Holdings Board, any person to whom such Participant reports or any person who has greater authority than such Participant with respect to the relevant directions or instructions; (v) the failure of such Participant to perform, in any material respect, his or her duties with the Company, but only if such failure was not caused by disability or incapacity and shall have continued unremedied for more than 30 days; (vi) the conviction of such Participant for a felony offense; or (vii) any willful conduct on the part of such Participant that prejudices, in any material respect, the reputation of the Company in the fields of business in which it is engaged or with the investment community or the public at large, but only if such Participant knew, or should have known, that such conduct could have such result. If any Participant is a party to a written employment agreement with the Company, then clause (iv) above shall not apply to any directions or instructions that are contrary to or inconsistent with any of the positions, functions, duties or reporting responsibilities of such Participant as set forth in such written employment agreement or that violate any of such Participant's rights, privileges or immunities under such employment agreement. In case of any dispute regarding whether or not any conduct by a Participant meets any of the standards set forth in clauses (i) through (vii) above, the burden of proof shall rest with the Company. "Participants" means all non-union employees of the Company (salaried and hourly) who are based in the United States; provided, however, that no employee of the Company that was given notice of his or her termination or layoff, or proposed termination or layoff, prior to April 1, 2001 shall be a Participant hereunder and, provided further, that, except as the Compensation Committee may otherwise provide in writing, any individual who is not paid through the Company's payroll system, or who is classified by the Company for purposes of this Plan as an independent contractor (or some other non-common law employee category), shall not be a "Participant" under this Plan, notwithstanding such individual's subsequent or retroactive (i) payment through the Company's payroll system or (ii) classification or reclassification for tax or other purposes. "Pension Plans" means the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (effective as of May 1, 1996), as amended, and the Sterling Chemicals, Inc. Hourly Paid Employees' Pension Plan (effective as of May 1, 1996), as amended, or any successor to either of such plans. -5- "Plan" means this Second Amended and Restated Severance Pay Plan, as amended, supplemented or modified from time to time in accordance with its terms. "SBU" means a strategic business unit of the Company. "Severance Amount" has the meaning specified in Section 2.02(a)(i). "Subsidiary" means any corporation, limited partnership, general partnership, limited liability company or other form of entity a majority of any class of voting stock or other voting rights of which is owned, directly or indirectly, by Holdings. "Substantial Part of its Assets" means (i) all or substantially all of the assets of the Company comprising its Texas City, Texas facility or (ii) all or substantially all of the assets of the Company comprising its pulp chemicals business. "Successor" means (i) with respect to all Participants, a successor to all or substantially all of the business, operations or assets of the Company or any Substantial Part of its Assets (whether direct or indirect, by purchase, merger, consolidation or otherwise), and (ii) with respect to any Participant as to whom a Change of Control is deemed to have occurred pursuant to clause (vii) of the definition of Change of Control, the person or entity to or with whom the Company sold, leased or exchanged all or substantially all of the assets or capital securities of the relevant SBU. "Termination Date" means, with respect to any Participant, the termination date specified in the Termination Notice delivered by such Participant to the Company in accordance with Section 2.05 or the actual date of termination of such Participant's employment by the Company for any reason other than Misconduct or Disability. "Termination Notice" means, with respect to any Participant, a notice from such Participant to Holdings purporting to terminate such Participant's employment for Good Reason in accordance with Section 2.05. "Years of Service" means, with respect to any Participant, the number of years of service as of such Participant's Termination Date which is recognized by the Company for such Participant for vesting purposes under the Pension Plan in which such Participant participates as of such Participant's Termination Date; provided, however, that any fractional Year of Service shall be rounded up to the next full Year of Service. Section 1.02.Interpretation. In this Plan, unless a clear contrary intention appears, (a) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Plan as a whole and not to any particular Article, Section or other subdivision, (b) reference to any Article or Section, means such Article or Section hereof and (c) the words "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. -6- ARTICLE II Eligibility and Benefits Section 2.01.Eligible Employees. This Plan is only for the benefit of Participants, and no other employees or personnel shall be eligible to participate in this Plan or to receive any rights or benefits hereunder. Section 2.02.Description of Benefits. (a) Subject to Section 2.03, each Participant shall be entitled to receive the benefits described below if (i) a Change of Control occurs after April 1, 2001 and (ii) during the period commencing 180 days prior to the date on which such Change of Control occurs and ending 180 days after the date on which such Change of Control occurs, either such Participant terminates or has terminated his or her employment for Good Reason in accordance with Section 2.05 or the Company terminates or has terminated such Participant's employment for any reason other than a termination for Misconduct or Disability: (i) the Company shall pay to such Participant, within 30 days after such Participant's Termination Date or, in the event that such Participant's Termination Date occurred within the 180-day period immediately preceding the occurrence of a Change of Control, within 30 days after such Change of Control, a lump sum cash payment equal to such Participant's Base Salary times such Participant's Applicable Multiplier (the "Severance Amount"); and (ii) for a period of six months following such Participant's Termination Date, the COBRA premium required to be paid by such Participant for coverage under the Company's medical and dental insurance plans shall not exceed the regular premiums required to be paid by active employees for similar coverage under such plans; provided, however, that the benefits provided under this clause (ii) shall only be available to such Participant if such Participant (or his or her qualified beneficiaries) makes a timely COBRA election on or after such Participant's Termination Date to continue coverage under such medical and dental insurance plans and pays the regular employee premium required by such plans and, provided further, that during such six-month period, the Company shall not amend any such medical or dental insurance plan to decrease or restrict eligibility for the benefits available thereunder or terminate any such medical or dental insurance plan without establishing a successor plan providing benefits that are at least equal to the benefits provided under the terminated plan. For purposes of this Plan, "Base Salary" means, with respect to any Participant, such Participant's annual base salary immediately prior to the earlier of (A) the date on which an event occurs that results in such Participant terminating his or her employment for Good Reason and (B) the actual date of such Participant's termination by the Company for any reason other than Misconduct or Disability, and "Applicable Multiplier" means, with respect to any Participant, the greater of (x) 0.5 and (y) such Participant's Years of Service as of the earlier of (1) the date on which an event occurs that results in such Participant terminating his or her employment for -7- Good Reason and (2) the actual date of such Participant's termination by the Company for any reason other than Misconduct or Disability times a fraction having a numerator of two and a denominator of 52; provided, however, that no Participant's Applicable Multiplier shall exceed 1.0. (b) No Participant shall be entitled to receive any of the benefits described in this Section 2.02 on account of any Change of Control unless such Change of Control occurred (i) while such Participant was employed by the Company or (ii) within 180 days after such Participant's Termination Date unless the Company terminates such Participant's employment prior to such Change of Control and such termination was directly or indirectly related to, connected with, in anticipation of, in furtherance of, pursuant to the terms of or during the pendency of such Change of Control or is for the purpose of directly or indirectly encouraging or facilitating such Change of Control. (c) Notwithstanding anything to the contrary contained in this Plan, the benefits made available under this Plan to Participants expressly exclude outplacement services and financial counseling. (d) Participation in this Plan is voluntary. The Company may require that each eligible employee execute a participation agreement as a condition to becoming a Participant hereunder. By agreeing to participate in this Plan, or by accepting any benefits under this Plan, a Participant unconditionally agrees for all purposes under this Plan to be bound by all of the terms and conditions of this Plan, including the provisions of Article III hereof. Section 2.03.Additional Provisions Relating to Benefits under Sections 2.02. (a) Notwithstanding anything to the contrary contained in this Plan, the Company's obligation to continue the benefits described in Section 2.02(a)(ii) for any Participant shall cease if and when such Participant ceases to be eligible to continue group health plan coverage under COBRA. (b) Notwithstanding anything to the contrary contained in this Plan, no Participant shall be entitled to receive any benefits under this Plan in connection with any Change of Control and termination of the employment of such Participant by the Company or a Successor if (i) the Company emerges from bankruptcy as a reorganized entity and, in connection with such emergence, either the Company or its Successor assumes this Plan as it pertains to such Participant, as applicable, and (ii) prior to or immediately following such termination, the Company or such Successor, as the case may be, offers such Participant employment at the same job position with substantially equivalent compensation and benefits; provided, however, that the failure or refusal of the Company or such Successor, as applicable, to assume this Plan shall not impair the right of any Participant to receive any benefits, or otherwise reduce or diminish the benefits received by such Participant, pursuant to this Plan. (c) Notwithstanding anything to the contrary contained in this Plan, the amount of the Severance Amount payable to any Participant under this Plan shall be reduced, dollar for dollar, by the aggregate amount of all separation, severance or termination payments paid or payable to such Participant under (i) any Benefit Plan (other than this Plan and the Pension -8- Plans), including the Company's Amended and Restated Key Employee Protection Plan, (ii) any agreement between such Participant and the Company or (iii) any applicable law, statute, rule, regulation, order or decree (or other pronouncement having the effect of law) of any nation or governmental authority, including the Worker Adjustment and Retraining Notification Act. (d) Notwithstanding anything to the contrary contained in this Plan, no Participant whose employment is terminated by the Company or a Successor shall be entitled to receive his or her Severance Amount unless and until such Participant agrees in writing that such Participant will repay to the Company or its Successor, as the case may be, a Pro Rata Portion of any Severance Amount received by such Participant if such Participant is offered and accepts reemployment by the Company or its Successor within 90 days after such Participant's Termination Date. For purposes of this Plan, "Pro Rata Portion" means, with respect to any Participant, (i) the Severance Amount received by such Participant times a fraction, (A) the numerator of which is the number of days from such Participant's reemployment date to the date which is 90 days after such Participant's Termination Date, and (B) the denominator of which is 90, minus (ii) such amount as may be required to ensure that the net after tax amount retained by such Participant after any repayment to the Company pursuant to this paragraph (d) is equivalent to the net after tax amount that would have been retained by such Participant had such Participant originally received and paid taxes on an amount equal to the Severance Amount received by such Participant minus the amount determined under clause (i) of this definition. Section 2.04.Cost of Plan; Plan Unfunded; Participant's Rights Unsecured. The entire cost of this Plan shall be borne by the Company, and no contributions shall be required of the Participants. The Company shall not be required to establish any special or separate fund or make any other segregation of funds or assets to assure the payment of any benefit hereunder. The right of any Participant to receive the benefits provided for herein shall be an unsecured claim against the general assets of the Company. Section 2.05.Termination Notices from Participants. For purposes of this Plan, in order for any Participant to terminate his or her employment for Good Reason, such Participant must give a written notice of termination to Holdings or Chemicals, which notice shall be in writing and signed by such Participant, shall be dated the date it is given to Holdings or Chemicals, shall specify the termination date, shall state that the termination is for a Good Reason and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for such Good Reason. ARTICLE III Claims Procedure and Dispute Resolution Section 3.01.Claims for Benefits. Any claim relating to benefits under this Plan shall be submitted in writing to the Compensation Committee in such manner as it may direct. If the Compensation Committee determines that any claimant is not entitled to receive all or part of the benefits claimed, it will mail or deliver written notice to such claimant of (a) its determination and the reasons therefor, with appropriate references to pertinent Plan provisions, -9- and (b) the procedure for review of its determination. Such notice shall, if appropriate, also explain how a claimant may perfect the claim and why submission of additional information is necessary to do so. Such notice shall be provided within 90 days after submission of the claim. If the claimant does not receive notice of a decision within such 90-day period, the claimant's claim shall be deemed denied. Section 3.02.Administrative Appeal. An applicant for benefits whose claim has been denied in whole or in part, or the duly authorized representative of such claimant, may, within 60 days after receipt of written notice of such denial (or after the claim is deemed denied), request a review thereof and submit to the Compensation Committee in writing such additional information as the claimant desires. A claimant who submits a claim for review shall have a reasonable opportunity to submit issues and comments in writing and to review pertinent documents. The Compensation Committee will then render its final decision with the specific reasons therefore (including references to pertinent Plan provisions) and notify the claimant in writing of such decision within 60 days after the submission of such request for review. If the claimant does not receive notice of such decision within such 60-day period, the claim for review shall be deemed denied. Section 3.03.Negotiation. Subject to Section 3.05, in case a dispute or controversy shall arise between any Participant (or any person claiming by, through or under any Participant) and the Company (including the Compensation Committee) relating to or arising out of this Plan or a benefit claim for which a final administrative appeal has been denied (or deemed denied) pursuant to Section 3.02, either disputant may give written notice to the other disputant ("Dispute Notice") that it wishes to resolve such dispute or controversy by negotiations, in which event the disputants shall attempt in good faith to negotiate a resolution of such dispute or controversy. If the dispute or controversy is not so resolved within 30 days after the effective date of the Dispute Notice, subject to Section 3.05, either disputant may initiate arbitration of the matter as provided in Section 3.04. All negotiations pursuant to this Section 3.03 shall be held at the Company's principal offices in Houston, Texas (or such other place as the disputants shall mutually agree) and shall be treated as compromise and settlement negotiations for the purposes of the federal and state rules of evidence and procedure. Section 3.04.Arbitration. Subject to Section 3.05, any dispute or controversy (a) which arises out of or relates to this Plan or a benefit claim for which a final administrative appeal has been denied (or deemed denied) pursuant to Section 3.02 and (b) which has not been resolved by negotiations in accordance with Section 3.03 within 30 days of the effective date of the Dispute Notice shall, upon the request of either disputant, be finally settled by arbitration conducted expeditiously in accordance with the labor arbitration rules of the American Arbitration Association. The arbitrator shall be not empowered to award damages in excess of compensatory damages and each disputant shall be deemed to have irrevocably waived any damages in excess of compensatory damages. The arbitrator's decision shall be final and legally binding on the disputants and their successors and assigns. The fees and expenses of the arbitrator shall be borne solely by the prevailing disputant or, in the event there is no clear prevailing disputant, as the arbitrator deems appropriate. All arbitration conferences and hearings shall be held in Houston, Texas. -10- Section 3.05.Exclusivity, etc. The dispute resolution procedures set forth in Sections 3.03 and 3.04 shall not apply to any matter which, by the express provisions of this Plan, is to be finally determined by the Compensation Committee or by an accounting firm or employee benefits firm unless and until the Compensation Committee, accounting firm or employee benefits firm issues its decision (in the case of the Compensation Committee, in accordance with Sections 3.01 and 3.02). Any such determination by the Compensation Committee or an accounting firm or employee benefits firm shall be final and may not be overturned unless such determination is found to be arbitrary and capricious or an abuse of discretion. No legal action may be brought with respect to this Plan except for the purpose of specifically enforcing the provisions of this Article III or for the purpose of enforcing any arbitration award made pursuant to Section 3.04. ARTICLE IV Miscellaneous Provisions Section 4.01.Cumulative Benefits. Except as provided in Section 2.03(b), the rights and benefits provided to any Participant under this Plan are cumulative of, and are in addition to, all of the other rights and benefits provided to such Participant under any Benefit Plan or any agreement between such Participant and the Company. Section 4.02.No Mitigation or Offset. No Participant shall be required to mitigate the amount of any payment provided for in this Plan by seeking or accepting other employment following a termination of his or her employment with the Company or otherwise. Except as otherwise provided in Section 2.03(a), the amount of any payment provided for in this Plan shall not be reduced by any compensation or benefit earned by a Participant as the result of employment by another employer or by retirement benefits. Section 4.03.Amendment and Termination. (a) The Holdings Board and the Chemicals Board shall be entitled to amend or terminate this Plan at any time and for any reason; provided, however, that no amendment or termination of this Plan shall affect the rights or benefits of any Participant or the obligations of the Company accrued under this Plan as of the effective date of such termination or amendment or any of the rights or benefits of such Participant or the obligations of the Company accruing under this Plan after the effective date of such termination or amendment on account of any Change of Control that occurred prior to such effective date. (b) Notwithstanding the foregoing, no termination of this Plan, and no amendment to this Plan that decreases or restricts benefits or eligibility hereunder, shall be effective with respect to, binding upon or reduce any benefits payable hereunder to, any person who at the time is a Participant if such termination or amendment is (i) directly or indirectly related to, connected with, in anticipation of, in furtherance of, pursuant to the terms of or during the pendency of any Change of Control or is for the purpose of directly or indirectly encouraging or facilitating a Change of Control, or (ii) made during the period commencing 180 days prior the date on which -11- any Change of Control occurs and ending 180 days after the date on which such Change of Control occurs. Section 4.04.Administration. (a) The Compensation Committee is, as respects the rights and obligations of all parties with an interest in this Plan, given the powers, rights and duties specifically stated elsewhere in this Plan and, in addition, is given full power and final discretionary authority to: (i) make determinations with respect to the administration of this Plan, construe and interpret its provisions, take all other actions deemed necessary or advisable for the proper administration of this Plan and determine all questions arising under this Plan, including the power to determine the rights or eligibility of Participants and any other persons, and the amounts of their benefits under this Plan, and to remedy ambiguities, inconsistencies or omissions; (ii) adopt such rules of procedure and regulations as in its opinion may be necessary for the proper and efficient administration of this Plan; (iii) enforce this Plan in accordance with its terms and in accordance with any rules of procedure and regulations adopted by the Compensation Committee pursuant to clause (ii) above; and (iv) employ agents, attorneys, accountants or other persons (who also may be employed by the Company), and allocate, delegate or reallocate to them such powers, rights and duties as the Compensation Committee may consider necessary or advisable to properly carry out the administration of this Plan; provided, however, that such allocation or delegation and the acceptance thereof by such agents, attorneys, accountants or other persons are in writing. (b) Subject to applicable law, any determination, construction or interpretation of the provisions of this Plan, and any decision on any matter within the discretion of the Compensation Committee, that is made by the Compensation Committee in good faith shall be binding on all persons. In case of any claim that the Compensation Committee (or any member thereof) did not act in good faith, the burden of proof shall rest with the person or entity claiming the absence of good faith. (c) The members of the Compensation Committee shall receive no additional compensation for their services relating to this Plan. Any expenses properly incurred by the Compensation Committee incident to this Plan, including the cost of any bond required by applicable law, shall be paid by the Company. (d) The Company shall indemnify and hold harmless each member of the Compensation Committee against and all expenses and liabilities arising out of his or her administrative functions or fiduciary responsibilities, including any expenses and liabilities that are caused by or result from an act or omission constituting the negligence of such member in the -12- performance of such functions or responsibilities, but excluding expenses and liabilities that are caused by or result from such member's own gross negligence or willful misconduct. Expenses against which such member shall be indemnified hereunder shall include, without limitation, the amounts of any settlement or judgment, costs, counsel fees and related charges reasonably incurred in connection with a claim asserted or a proceeding brought or settlement thereof. Section 4.05.Release of Claims. As a condition to receipt of the benefits under this Plan, a Participant will be required to sign an agreement, to be prepared by Holdings, in which he or she unconditionally and irrevocably releases the Company and its successors, assigns, divisions, subsidiaries, representatives, agents, officers, directors, stockholders and employees from any claims, demands and causes of action relating to or arising out of the termination of his or her employment with the Company, including any statutory claims under the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, the Civil Rights Acts of 1964 and 1991 and the Texas Commission on Human Rights Act, but excluding, however, any claims, demands and causes of action pertaining to (a) any benefits that are to be provided after the date of such agreement pursuant to the terms of this Plan, (b) such Participant's rights, if any, under the Company's Amended and Restated Key Employee Protection Plan (as the same may hereafter be amended or modified in accordance with its terms) or (c) such Participant's rights, if any, under any employment agreement between such Participant and the Company. Section 4.06.Assignability. The Company shall have the right to assign this Plan and to delegate its duties and obligations hereunder, but not otherwise; provided, however, that no such assignment shall relieve or discharge the Company of or from any of its obligations under this Plan. Unless otherwise approved by the Compensation Committee, no Participant shall transfer or assign any of his or her rights under this Plan except by will or the laws of descent and distribution. Except as otherwise provided by law, no benefit, right or interest of any Participant under this Plan shall be subject to pledge, encumbrance or charge, seizure, attachment or legal, equitable or other process, or be liable for, or subject to, debts, liabilities or other obligations. Section 4.07.Consolidations, Mergers, Etc. Each of Holdings and Chemicals will require any person, firm or entity which becomes its Successor to expressly assume and agree to perform this Plan in writing, in the same manner and to the same extent that Holdings or Chemicals, as the case may be, would be required to perform hereunder if no such succession had taken place. Section 4.08.Benefit and Burden. This Plan shall be binding upon and inure to the benefit of the Company and its successors and assigns. This Plan and all rights of each Participant shall inure to the benefit of and be enforceable by such Participant and his or her personal or legal representatives, executors, administrators, heirs and permitted assigns. If any Participant should die while any amounts are due and payable to such Participant hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Plan to such Participant's devisees, legatees or other designees or, if there be no such devisees, legatees or other designees, to such Participant's estate. -13- Section 4.09.Notices. All notices and other communications provided for in this Plan shall be in writing and shall be sent, delivered or mailed, addressed (a) if to Holdings, Chemicals or any other Subsidiary, at Holdings' principal office address or such other address as Holdings may have designated by written notice to all Participants for purposes hereof, directed to the attention of the Treasurer, and (b) if to any Participant, at his or her residence address on the records of Holdings or to such other address as he or she may have designated to Holdings in writing for purposes hereof. Each such notice or other communication shall be deemed to have been duly given or mailed by United States registered mail, return receipt requested, postage prepaid, except that any change of notice address shall be effective only upon receipt. Section 4.10.Withholdings. The Company shall have the right to deduct from any payment hereunder all taxes (federal, state or other) and other payments which it is required to withhold therefrom. Section 4.11.No Employment Rights Conferred. Nothing contained in this Plan shall (i) confer upon any Participant any right with respect to continuation of employment with the Company or (ii) subject to the rights and benefits of any Participant hereunder, interfere in any way with the right of the Company to terminate such Participant's employment at any time. Section 4.12.Governing Law. This Plan shall be governed in accordance with the laws of the State of Texas (without giving effect to conflicts of laws principles thereof) and applicable federal law. IN WITNESS WHEREOF, and as conclusive evidence of the adoption of this Plan by the Holdings Board and the Chemicals Board, Holdings and Chemicals have each caused this Plan to be duly executed in its name and behalf by its proper officer thereunto duly authorized as of March 8, 2001. STERLING CHEMICALS HOLDINGS, INC. By: ------------------------------------ Printed Name: -------------------------- Title: --------------------------------- STERLING CHEMICALS, INC. By: ------------------------------------ Printed Name: -------------------------- Title: --------------------------------- -14- EX-10.15 15 h92951ex10-15.txt AGREEMENT - PULP, PAPER & WOODWORKERS OF CANADA #5 EXHIBIT 10.15 AGREEMENT BETWEEN STERLING PULP CHEMICALS, LTD. NORTH VANCOUVER BRITISH COLUMBIA AND PULP, PAPER AND WOODWORKERS OF CANADA LOCAL 5 BRITISH COLUMBIA EFFECTIVE DECEMBER 1, 2000 to NOVEMBER 30, 2003 TABLE OF CONTENTS ARTICLE 1 PURPOSE 1 2 RECOGNITION 1 3 MANAGEMENT FUNCTIONS 1 4 UNION SECURITY 2 5 TERMS OF AGREEMENT AND CHANGES IN AGREEMENT 2 6 STRIKES AND LOCKOUTS 3 7 HOLIDAYS 3 8 CALL TIME 5 9 HOURS OF WORK 5 10 DEFINITIONS 7 11 ALLOWANCE FOR FAILURE TO PROVIDE WORK 8 12 UNION NOTICES 8 13 SAFETY 8 14 SENIORITY 9 15 GRIEVANCE PROCEDURE 15 16 ARBITRATION 16 17 DAYS OFF AND SCHEDULE OF SHIFTS 17 18 VACATIONS 17 19 TEMPORARY EMPLOYEES 20 20 JOB CLASSIFICATIONS AND JOB RATES 21 21 WAGE RATE ADJUSTMENTS 21
TABLE OF CONTENTS (CONT'D) 22 OVERTIME AND PREMIUM TIME 22 23 JURY DUTY PAY 23 24 BEREAVEMENT LEAVE 24 25 MAINTENANCE DEPARTMENT APPRENTICES 24 26 SUSPENSION AND/OR DISCHARGE 24 27 LEAVE OF ABSENCE 24 28 COMMITTEES 25 29 TRAINING 26 30 TECHNOLOGICAL CHANGE AND TERMINATION PAY 26 31 CONTINUOUS 12-HOUR SHIFTS 27 32 HEALTH AND WELFARE 27 33 PENSION PLAN 28 EARLY RETIREMENT PROVISION 29 34 BANKING OF OVERTIME 30 APPENDIX "A" - JOB CLASSIFICATIONS & RATES 31 - MULTI SKILL/DUAL TRADES 31 APPENDIX "B" - MAINTENANCE APPRENTICESHIP 32 APPENDIX "C" - BENEFITS OF HOURLY-PAID EMPLOYEES 34 NORTH VANCOUVER PLANT APPENDIX "D" - PRODUCTION SCHEDULE 35 LETTERS OF UNDERSTANDING - TEMPORARY MAINTENANCE CO-ORDINATOR 36 - RAIL CAR INSPECTION 37
Changes from previous contract (expired November 30th, 2000) are indicated by shading & bolding. ii AGREEMENT BETWEEN STERLING PULP CHEMICALS, LTD. NORTH VANCOUVER, B.C. (HEREINAFTER REFERRED TO AS "THE COMPANY") AND LOCAL 5 PULP, PAPER AND WOODWORKERS OF CANADA (HEREINAFTER REFERRED TO AS THE "UNION") ARTICLE 1 PURPOSE 1.01 The purpose of the Agreement is to provide for orderly collective bargaining, prompt disposition of grievances, wages, hours of work and other terms and working conditions to the extent and in the manner provided herein. ARTICLE 2 RECOGNITION 2.01 The Company recognizes the Union as the sole and exclusive bargaining agent for its employees employed in production and maintenance except those excluded by the Labour Relations Code of British Columbia (1993), foreman, those above the rank of foreman, sales staff, office and clerical staff test and quality control staff, laboratory technicians, draftsmen, security guards and those engaged in office janitor work. 2.02 The terms "employee" and "employees" when used in this agreement shall mean persons in the employ of the Company within the bargaining unit described herein above and covered by this Agreement. Gender: The use of "he", "his" and "him" refer to both the masculine and feminine genders. 2.03 The Company recognizes the Union's right to communicate with its members on the Company's property so that the Union, through its elected officials, may fairly represent the employees. ARTICLE 3 MANAGEMENT FUNCTIONS 3.01 All functions, powers, or authority which the Company has not specifically abridged, delegated or modified by this Agreement will be recognized by the Union as being retained by the Company. 1 ARTICLE 4 UNION SECURITY 4.01 Any employee who is now a member in good standing or who becomes or is reinstated as a member of the Union shall, as a condition of employment, maintain such membership in good standing throughout the term of this Agreement. Any new employee hired shall become a member of the Union thirty (30) days after his or her employment. In the event of a Local Union intending to suspend a member for non-maintenance of membership, the Company shall be notified by the local, in writing at least seven (7) days before suspension. 4.02 No employee shall be subject to any penalties against his application for membership or reinstatement, except as may be provided for in the Constitution of the Pulp, Paper and Woodworkers of Canada. 4.03 There shall be no discrimination against any employee or employees in any manner whatsoever because of race, colour, creed, nationality, Union membership, and non-Union membership. 4.04 In case a dispute arises as to whether or not an employee has failed to maintain his Union membership in good standing, the Union agrees to save harmless from and indemnify the Company for any liability that may arise from any acts of the Company taken under provisions of ARTICLE 4, as a result of its reliance on a representation of facts by the Union. 4.05 The Company will deduct a Union initiation fee and monthly Union dues in amounts authorized by individual employees and presented in writing to the Company. Any Union dues passed in compliance with Local 5 of the Pulp, Paper and Woodworkers of Canada by-laws shall be applied and deducted upon notification from the Secretary of Local 5 sent to the Company. Such deductions shall be remitted to the Local Secretary - Treasurer as soon as possible after the first pay period of each month and any adjustments will be made the following month. The Union shall advise the Company of the address of the Local Treasurer and of any changes in this address. Deductions of Union dues from an employee's pay shall be discontinued when written authorization furnished the Company by the employee is revoked, in writing by the employee. 4.06 There shall be no solicitation for membership, meetings, etc., during working hours and/or on Company premises except with the permission of the Company. 4.07 For the purpose of this Agreement, a member of the Union in good standing shall mean an employee who has paid or tendered an amount equivalent to the regular monthly Union dues and assessments. ARTICLE 5 TERMS OF AGREEMENT AND CHANGES IN AGREEMENT 5.01 This Agreement shall be in effect until the 30th of November, 2003 and shall continue thereafter from year to year unless during the four months immediately preceding the expiry date either party has given written notice to the other party that desires revision of this Agreement and its expiry date. 5.02 If notice of desire for changes has been given the parties shall, as soon as agreeable, meet for collective bargaining. If such negotiations cannot be completed prior to December 1st following the October 1st on which such notice was given, any changes in compensation to employees shall be retroactive to December 1st. 2 ARTICLE 6 STRIKES AND LOCKOUTS 6.01 The Union and its members agree that it will not cause, authorize or sanction any strike or stoppage of any of the Company's operations or any Curtailment of work or restriction of or interference with production during the terms of this Agreement. 6.02 The Company agrees that it will not cause or sanction a lockout during the terms of this Agreement. ARTICLE 7 HOLIDAYS 7.01 Recognized Holidays (a) New Year's Day Canada Day Remembrance Day Good Friday 1st Monday In August Christmas Day Easter Monday Labour Day Boxing Day Victoria Day Thanksgiving Day (b) In the event that Heritage Day is declared as a Statutory Holiday by the Federal Government it will be included in the above list of holidays. 7.02 The period of time recognized as a holiday is the twenty- four (24) hour period from 0001 hrs to 2400 hrs on the date recognized as the holiday. However for those employees working the 12 hour shift schedule, the holiday will commence at 1830 hours immediately preceding such 12:01am and will end twenty-four (24) hours later. (i.e. 1830 hours on the day of the holiday) . 7.03 The hours of commencing and ending specified above may be varied by mutual agreement of the Management and the Union Standing committee. The specified hours of commencing or ending will be adjusted to coincide with regular hours for changing shifts. 7.04 a) It is understood that day workers will not be required to work on a holiday except to meet the needs of the continued uninterrupted operation of the plant. b) Further, and with special reference to the Christmas holiday the parties recognized that shift workers will be held to absolute reasonable minimum and that only those activities required to maintain the necessary efficient operation of the plant shall be performed. 7.05 a) When any of the holidays listed in the Agreement falls on a Saturday or Sunday, shift workers should observe the holiday on the day which it falls. Day workers, scheduled Monday to Friday, will observe the holiday on such a day as will provide them with a long weekend. The determination of such day or days shall be determined by the Company consistent with operational requirements. b) In the event a holiday falls on a day when a day worker would otherwise be scheduled off, then said employee will take the holiday on the Thursday before or the Tuesday following the holiday whichever is applicable and is mutually agreed. c) In the event the holiday falls on the day when a shift worker would otherwise be scheduled off, he has the option of banking the time and/or the money. 3 d) For shift workers, holiday pay is calculated as 9 1/3 hours pay at straight time, and in the case of banking, 9 1/3 hours will be banked for each holiday that falls on a scheduled day off, and 12 hours for each holiday worked. 7.06 Overtime shall be paid for all work performed during holidays at the rates hereinafter specified. 7.07 In addition to any other compensation earned, all employees who are on the payroll of the Company on any of the forgoing recognized holidays will be granted nine and one-third (9 1/3) hours pay on the straight time rate of the employee's regular job, provided however, that: (a) Any new employee must have been on the payroll for not less than thirty (30) days just preceding the holiday and must have worked a minimum of eighty five (85) hours during that thirty (30) day qualifying period. b) The employees must have worked his scheduled work day before and his scheduled work day after the holiday unless failure to work was due to any of the following events. (1) When the employee is on his regular authorized vacation. (2) When the employee's absence is due to bonafide sickness or occupational or non- occupational accident provided however, that payment for such holiday is not being covered by W.C.B. or sick benefit insurance. Payment for such holiday will not be extended beyond the time limit of W.C.B. or sick benefit insurance. (3) When a trade in shifts agreed upon between employees, and approved in advance by Management, results in temporary change of the scheduled work day after the holiday, provided the employee works the shift agreed upon. (4) When the employee's absence is due to an approved leave of absence granted by the Company; provided however that such leave of absence does not exceed ten (10) days prior to or ten (10) days following such holiday. (5) When the employee's absence is due to Jury Duty, subpoenaed witness or bereavement leave as provided by this Agreement. (6) When the operation in which the employee is engaged is curtailed or discontinued by the decision of management and which curtailment of discontinuance changes or eliminates the employee's scheduled work day before, or his scheduled work day after, such holiday. 7.08 An employee whose work schedule conflicts with the normal observance of a specified holiday may elect to bank the holiday, and take the time off and pay thereof, provided the following conditions are met: (a) The holiday(s) and holiday(s) pay shall be taken at a time convenient to the employee and management consistent with the continued, economic and efficient operation of the plant. It is understood that requests for time off received and granted thirty (30) days in advance will be honoured. (b) Employees must notify their supervisor in writing at least one week in advance of the holiday of his intent to bank that holiday. 4 (c) It is also agreed and understood that the employee will take such banked holidays within one year of banking. If the employee does not arrange to take the holiday within the given delay, the Company will schedule time off at its own discretion in lieu thereof or alternatively, if mutually agreed, reimburse any banked holiday pay and forfeit the banked time. 7.09 Employees working temporarily at a higher job rate will be paid at the higher job rate for a statutory holiday providing they work at that higher job rate on either side of said statutory holiday, otherwise they will be paid for the statutory holiday based on their regular job rate. If the employee is scheduled off on either side of the statutory holiday, then his last scheduled day on before, or his first scheduled day on after the statutory holiday, will satisfy this section. 7.10 In the event that an employee is called in, or is scheduled to work, on a recognized statutory holiday on a job paying a higher rate than his regular job, he will be paid for the statutory holiday at the higher rate of pay. ARTICLE 8 CALL TIME 8.01 Call time is an occasion when an employee, after leaving the premises, is called in to work before his next regularly scheduled reporting time. In such cases, the Company will pay an additional amount over and above pay for hours worked, equal to three (3) hours pay at the employee's straight time hourly rate, which shall be known as call time. Such call time shall not be payable when the employee, before leaving the premises, is notified to report for work before his next regularly scheduled reporting time. 8.02 When the hours worked on call time are extended to the employee's regularly scheduled starting time, overtime rates as called for by this section, shall cease at the employee's regularly scheduled starting time unless such call-in was of such duration as to give the employee a full shift prior to his regular starting time consistent with article 22.10. ARTICLE 9 HOURS OF WORK 9.01 Hours of work shall be scheduled by the Company in accordance with the requirements of the plant. 9.02 Employees shall be at their work place and ready to assume their duties at the commencement of their work day. 9.03 Shift workers will not leave their work place until 0630 HRS (or 1830 HRS) unless relieved by the employee assigned to the same position on the following shift. 9.04 Employees are expected to co-operate in the execution of necessary overtime work. The Company will make every effort to keep overtime to a minimum consistent with the continued efficient operation of the plant. 9.05 The normal hours of work shall be: a) For Day Workers - from 0700 Hrs. to 1200 Hrs. and from 1230 Hrs. to 1650 Hrs. A ten minute wash up period will be provided prior to lunch and at the completion of the work day. Labourers and Relief Brine Operators assigned to the Maintenance Department (for a period of a week or more), will be classified as Day Workers. 5 b) For Shift Workers - from 0630 Hrs. to 1830 Hrs., and 1830 Hrs. to 0630 Hrs. - as per Article 31. c) For Labourers and Relief Brine Operators assigned to the Production Department - Two different workday formats are available: i) From 0630 Hrs. (or 0730 Hrs.) to 1600 Hrs. (or 1700 Hrs.), and 1600 Hrs. (or 1700 Hrs.) to 0130 Hrs. (or 0230 Hrs.). A one-half hour lunch break is included, with a ten minute wash up period prior to lunch and at the completion of the work day. ii) From 0630 Hrs. to 1830 Hrs., and 1830 Hrs. to 0630 Hrs. - similar to a shift worker. 9.06 The regular schedule of hours of work shall be: a) For Day Workers - 9 1/3 hours per day and 37 1/3 hours per week. The normal work week will be either Monday to Thursday, or Tuesday to Friday. b) For Shift Workers - 12 hours per day and 36 or 48 hours per week with compensating scheduled time off to average 37 1/3 hours/week - as per Article 31. Compensating time off for Shift Workers shall be covered by the Senior Relief Operators and taken in blocks of three (3) day shifts as outlined in the shift schedule in Appendix D. When ever the Senior Relief Operator is scheduled as a spare operator, he may be rescheduled to provide relief on dayshift or nightshift as required. c) For Labourers & Relief Brine Operators assigned to the Production Department - either: i) Four workdays of 9 hours per day, with compensation to allow averaging of 37 1/3 hours/week over a 9 week period, or ii) Three workdays of 12 hours per day, with compensation to allow averaging of 37 1/3 hours/week over a 9 week period. d) This article is for the purpose of providing a basis for calculating overtime and shall not be construed as a guarantee of hours of work. 9.07 a) Labourers and Relief Brine Operators assigned to the Production Department will receive shift premiums (when working the evening shift(s) outlined in Article 9.05(c) as per Article 22.09, & statutory holiday compensation as per Article 7.05(c) & (d). b) Every effort shall be made to schedule consecutive days off in each work week when ever possible. c) For Labourers & Relief Brine Operators, Management will provide access to documentation on: scheduling of hours, & mutual agreements between workers & Management regarding shifts. It is the intention of the company to assign shifts for Labourers and Relief Brine Operators equitably & fairly. 6 ARTICLE 10 DEFINITIONS 10.01 The words "shift workers" means employees assigned to a job on a regularly rotating shift schedule. All other employees are considered day workers. 10.02 The word "day" shall mean a calendar day and shall be a period of twenty-four (24) hours beginning at 0001 hours. However, in the case of the work schedule a shift worker working the 12 hour schedule, and only in such cases, the day shall deem to have commenced at 0630 HRS. 10.03 The word "week" means a period of seven (7) days beginning at 0001 hours Monday. However, in the case of the work schedule of a shift worker working the 12 hour schedule, and only in such cases, the week shall deem to have commenced at 0630 HRS Monday. 10.04 Further to Article 18: (a) The word "week", when used to define a length of vacation, and for the purposes of calculating vacation pay, shall mean 37 1/3 average working hours. (b) The word "day", when used to define a length of a vacation, shall mean 9 1/3 working hours. 10.05 Bargaining Unit Work (a) It is the policy of the Company not to use non-bargaining unit personnel to do work normally performed by hourly paid employees. It is recognized by the parties that there may be exceptions to the above, such as: (i) In emergency situations (ii) When no qualified hourly employee is available It is recognized by both parties, however, that for the practical and efficient operation of the plant, there are occasions when a supervisor must help. These occasions will be temporary in nature and will not result in the displacement or exclusion of hourly rated employees. (b) It is the intention of the company not to contract out work normally performed by bargaining unit personnel. It is recognized that there are occasions when contractors may be required: (i) In emergency situations (ii) When no qualified bargaining unit employee is available (iii) When the bargaining unit crew size is not capable of handling such work in a timely fashion. On the occasion when the bargaining unit crew size is not capable of handling such work in a timely fashion, the company shall consult the union standing committee before the work is undertaken by non-Sterling personnel. Sterling Pulp Chemicals, Ltd. will review at quarterly Union Standing Committee meetings the utilization of contractors performing normal bargaining unit work to the exclusion of projects. 7 ARTICLE 11 ALLOWANCE FOR FAILURE TO PROVIDE WORK 11.01 An employee who reports for work at his regularly scheduled time and who has not been notified by the Company not to report, shall receive not less than one half his regular shifts work at his regular straight time hourly rate, or pay in lieu thereof at the discretion of the Company. 11.02 A telephone call to the number on record in the employee's name in the plant personnel files will be considered as proof of notification. An employee who leaves no telephone number by which he can be contacted forfeits the right to the one half shift or pay in lieu there of as mentioned in 11.01 above. ARTICLE 12 UNION NOTICES 12.01 The Company will provide the Union with a secured bulletin board in the plant for the purpose of posting official Union notices and papers. Notices will be posted and initialed by a member of the Union Standing Committee, or the authorized representative of the Bargaining Agent. ARTICLE 13 SAFETY 13.01 Employees and the Company are to comply with established Safety Rules as amended by the Joint Occupational Health and Safety Committee from time to time. Employees will not be expected to operate with unsafe equipment or under unsafe working conditions. Employees are expected to report immediately any unsafe equipment or condition to the Production or Maintenance Manager using where appropriate the Safety Work Order System. 13.02 The Union will elect three of its members to serve on the Joint Occupational Health and Safety Committee preferably with representation from each Department. The Plant Manager will appoint three Company representatives. The Occupational Health and Safety Committee will meet monthly to develop and promote the safety program. It is agreed that the Committee will appoint a Chairman with the responsibility alternating between the Company and the Union. Where the Chairman is a Union employee, the Secretary shall be a Company representative and vice versa. 13.03 The Union undertakes to encourage its members to cooperate in the execution of the Plant Safety Program and Safety Education. 13.04 First Aid Attendants As of September 1st, 1994, the Occupational First Aid Regulations require that the First Aid Attendants only require a Level II certificate. First Aid Attendants currently holding a Level III equivalent certificate, (i.e.: an Industrial First Aid 'A' or 'B' certificate) and who desires to renew at that level may do so. All new candidates will only be given necessary training to acquire a Level II certificate. 8 If a person lapses in renewing his First Aid certificate and then wants to renew, he will be treated as a new candidate. Wages during training and exams will be paid as for scheduled hours of work: - During the training period. - On the day before the exam. - On the exam or re-exam day. The company will pay for associated costs of certification with prior authorization of the supervisor. An employee holding a Level II or III W.C.B. Occupational First Aid certificate will be paid $1.00 per hour over and above the employee's regular rate. ARTICLE 14 SENIORITY 14.01 General Principles (a) The company recognizes the principles of seniority in the administration of promotions, demotions, transfers, layoffs and recalls. In the application of seniority, provided an employee has the necessary qualifications and ability to perform the work in accordance with job requirements, seniority shall prevail. Definitions (b) Plant seniority shall mean the length of continuous service in the employ of the signatory Company in the North Vancouver Bargaining Unit. (c) Departmental seniority shall mean the length of continuous service in a permanent position within the recognized departments. 14.02 Establishing Seniority (a) Plant seniority shall be established from the original date of hire, after completion of a probationary period. A probationary period consists of 40 working days and may be extended by mutual agreement between the company and the union. (b) During the probationary period defined in 14.02(a), a new employee will not have any seniority rights and shall be subject to transfer, demotion, promotion, layoff or discharge at the sole discretion of the Company without recourse to the grievance procedure of this Agreement. (c) The Company will appraise each probationary employee at the end of his first thirty (30) working days in his presence. A Shop Steward or Union Standing Committee Member shall be present if requested by the employee. Copy of the appraisal to be sent to the employee and the Union Standing Committee. (d) An employee who exercises his seniority to promote or bump into another job within the Bargaining Unit, shall be probationary in the new job for a period of two (2) weeks after training is completed. In such instance, the employee shall be formally appraised in his presence and within the stipulated probationary period. A Shop Steward or Union Standing Committee Member shall be present if requested by the employee. 9 14.03 Loss of Seniority (a) Plant or Departmental An employee shall cease to have Plant seniority or Departmental seniority if the employee: 1) quits or resigns, or 2) is discharged 3) Is laid off for a period exceeding recall provisions. 4) Is absent from work for three (3) consecutive days on which he is scheduled to work without notifying his immediate supervisor, giving satisfactory reasons. 5) When recalled to work, once notice by registered mail to the address on record with the company has been made, fails to indicate his intent to return to company service within three (3) days or fails to report to work within seven (7) days. 6) Is absent without cause, to the satisfaction of Management, beyond the time limit of a sick leave or an authorized leave of absence granted by the Company. However, Plant and Departmental seniority shall continue to accrue: i) If absent due to illness or injury provided the absence does not exceed the period provided for in the L.T.D. program, unless seniority would have otherwise been lost. ii) If absent due to industrial illness or accident at work (recognized by the Worker's Compensation Board) which occurs while working for the Company, unless seniority would have otherwise been lost. (b) Departmental Seniority An employee shall cease to have Departmental seniority in the Department from which he was displaced, if the employee is: 1) Laid off or demoted out of the Department, because of cutbacks, for a period exceeding the recall rights as set out in 14.05(a). 2) Permanently transferred to another Department for a period exceeding six (6) months. 3) Is demoted outside the recognized Departments either voluntarily or for inability to perform the work. If the cause for the demotion has been corrected the employees' previous Departmental seniority will be reinstated. 14.04 Layoffs In the event of departmental layoff resulting from cutbacks, employees affected will be re-classified to Relief Brine Operator or Labourer positions. Layoff from these positions will be on the basis of Plant seniority. (Refer to diagram in 14.06) 10 14.05 Recall Provisions (a) In the event of a layoff, recall rights shall be established according to: 1) An employee who is laid off with more than the probationary period, but less than one (1) year of continuous service, shall be entitled to recall rights according to his accumulated Plant seniority for six (6) months from the date of layoff. 2) An employee with one or more years of continuous service shall be entitled to recall rights according to his accumulated Plant seniority for twelve (12) months from the date of layoff, plus one (1) additional month for each year's service up to an additional six (6) months. (b) Departmental Recall Rights An employee shall have recall rights to the Department from which he was displaced as follows: 1) Less than one (1) year of Departmental seniority: - six (6) months recall rights from date of displacement. 2) One (1) or more years of Departmental seniority: - twelve (12) months recall rights plus one (1) month for each year of service up to a maximum of six (6) additional months. However, departmental recall rights shall decrease from the time of displacement and ultimately expire, unless the affected employee is permanently recalled to or promoted to his former position. In such instance the employee affected will be reinstated with his previous accumulated Departmental seniority. (c) Employees shall be recalled to the plant on the basis of Departmental or Plant seniority, subject to Article 14.01(a) depending on where the vacancy occurs. (d) Benefits All benefit plans shall immediately be reinstated upon the recall of an employee. (e) It shall be the duty of all employees to notify the Company promptly of any change in their address or phone number. If an employee fails to do this, the Company will not be responsible for failure to contact the employee. 11 14.06 Departmental Organization The parties recognize the following two departments for seniority purposes in matters of permanent promotions, demotions, layoffs, recalls and transfers: 1) Production Department 2) Maintenance Department The lines of progression shall be as follows:
PRODUCTION DEPARTMENT MAINTENANCE DEPARTMENT --------------------- ---------------------- Senior Relief Operator Tradesperson Crystal Operator Storesperson Cell Operator Maintenance Helper Brine Operator Relief Brine Operator Labourer
14.07 Promotions (a) Permanent promotions in established lines of progression will take place with Departmental seniority governing subject to Article 14.01(a). The positions outlined in Article 14.06 that are excluded from lines of progression shall be subject to posting provisions. (See Article 14.08) (b) It is understood that promotion to the position of Tradesman can only be done through the apprenticeship program as outlined in Article 25, or through the promotion of a qualified person. (c) In the event that an employee declines to exercise his Departmental seniority to step up to the next position in his Department, whether permanently or temporarily, to which he would otherwise have been entitled by virtue of Departmental seniority, ability and qualifications, he will no longer be able to exercise his Departmental seniority to obtain a job senior to the employee who bypassed him. A refusal to step up to the next position in the line of progression shall be recorded and a copy sent to the Union. 12 (d) 4th Class Stationary Engineer's Certificate (Permanent 4th Class Certificate) 1) Upon permanent shutdown of the current boiler and temporary low pressure boiler, a permanent certificate is not a requirement for the purpose of promotion in the production department. It is understood and agreed that production department seniority as of the boiler(s) shutdown date prevails, in accordance with Article 14.07(c). 2) Present Brine Operators and Relief Brine Operators have the option to obtain their permanent 4th Class certificate as per Article 14.07(d)3 iv). Upon successful completion of a permanent 4th Class certificate the Brine Operator / Relief Brine Operator will receive the steam ticket rate when working as a Brine Operator. 3) Should the need arise in the future for a permanent 4th Class certificate because of physical plant changes, the following will apply: i) A permanent 4th Class certificate is required for the permanent positions of Cell Operator & Crystal Operator. The Relief & Temporary Crystal Operators will also require a permanent 4th Class certificate. ii) In order to assist an employee who is promoted to the position of temporary or permanent Cell Operator, he will be supported in his application for a temporary 4th Class certificate. He will be required to obtain a permanent 4th Class certificate within 12 months. This may be extended to 15 months if he has attempted and failed his exam in the first 12 months. This also applies to Relief, Temporary, or Permanent Crystal Operators. iii) If after the 15 months, or after 12 months if no attempt is made to write the exam, he shall be demoted to a position not requiring a permanent 4th Class certificate. iv) In order to assist a production employee to obtain a permanent 4th Class certificate (to study and write the necessary material and exam) he will be allowed paid time off to a maximum of 84 hours. This will also include employees who, prior to 1994, have previously been given the opportunity to write the exam for a permanent 4th Class certificate. 14.08 Postings Permanent vacancies in the following job classifications will be posted and shall be filled on the basis of Plant seniority subject to 14.01(a) and Article 14.07. (1) Brine Operator (2) Maintenance Helper (3) Storesperson (4) Tradesperson Notice of permanent vacancies within the scope of the agreement will be posted for twelve (12) days, on the bulletin boards. During this time, applications may be made to the Administration Manager. 13 14.09 Temporary Openings Temporary openings in the Production Department will be divided into two (2) categories, namely: Type "A" having a duration in excess of three (3) months, and will be applicable only in cases of extended leave of absence and long term sickness or disability. Type "B" having a duration of up to three (3) months to cover vacation relief, short term illness and short term absence. Type "A" openings will be filled in the same manner as that outlined in Article 14.06 for permanent openings. However, in the event that the circumstances which caused the opening, return to normal, then the temporary position will cease to exist. The accrual of Departmental seniority in such cases will be governed by Article 14.01. Type "B" openings may be filled by employees in the lowest classification within the respective Department, out of line of Departmental seniority and subject to Article 14.01(a), to meet the continued and efficient operation of the Plant. The Company, in administering Type "A" openings, will estimate the expected duration of an opening without prejudice, from the information available. 14.10 Transfers (a) In the case of permanent transfer from one Department to another, Plant seniority shall govern subject to the provision of Article 14.01(a). 14.11 Demotions (a) Demotions resulting in bumping in the recognized Departments for whatever reason inclusive of layoffs, shall take place in reverse progression to that outlined in Article 14.06 with accumulated Departmental seniority governing subject to Article 14.01(a). It is understood that Maintenance employees in such instance shall exercise Departmental seniority to displace only those employees in the Maintenance Helper and Storesperson positions. (b) An employee who is demoted, within his Department, either voluntarily or for inability to perform the work shall not be entitled to exercise Departmental seniority to move up to a higher job classification. If the cause for the demotion has been corrected the employees' previous Departmental seniority will be reinstated. 14.12 Seniority Lists The company shall, within thirty (30) days of the date on which this Agreement is signed, furnish the Union with two (2) copies of a list showing the Plant and Departmental seniority of each employee then on the payroll and will thereafter revise such list each six (6) months. 14.13 Any employee promoted to a supervisory or staff position which removes him from the Bargaining Unit shall retain and accumulate his Plant and Departmental seniority within the Bargaining Unit for a period of up to twelve (12) months following this promotion. The employee will continue to pay the prescribed union dues while he maintains his seniority within the Bargaining Unit. If during this twelve (12) month period such employee is transferred back to the Bargaining Unit, he shall exercise his accumulated Plant and Departmental seniority in returning his to his former job. Any extension of the above shall be by mutual agreement and limited to two (2) month intervals. 14 ARTICLE 15 GRIEVANCE PROCEDURE 15.01 A grievance is any difference of opinion or dispute with respect to the interpretation, application or alleged violation of this Agreement. A grievance must be presented in the following manner. 15.02 Step No. One (1) If an employee has a complaint, that employee alone or accompanied by a shop steward shall submit the complaint to his Department Manager. The Department Manager shall render his decision to the employee within the following ten (10) calendar days. If the decision is not satisfactory the complaint shall be reduced to writing as a grievance. 15.03 Step No. Two (2) If a settlement is not reached as outlined above, the grievance, reduced to writing, shall be submitted to the employee's Department Manager within fourteen (14) calendar days following receipt of the Department Manager's step one (1) decision. A meeting between the Union Standing Committee, the grievor and the Department Manager shall take place within fourteen (14) calendar days following the submission of the written grievance. The Department Manager shall render his written decision within fourteen (14) calendar days following the step two (2) meeting. 15.04 Step No. Three (3) If the written decision of the Department Manager is not accepted, the Union Standing Committee may within fourteen (14) calendar days submit the grievance to the Plant Manager. A further meeting shall be held between the Union Counsellor and/ or an officer of the National Union, the Union Standing Committee and the Plant Manager or his designate. The Plant Manager shall render his written decision within fourteen (14) days following the step three (3) meeting. 15.05 If the decision of the Plant Manager is not accepted the Union may refer the grievance to arbitration. 15.06 Notice of reference to arbitration specifying the matter or matters to be arbitrated shall be given in writing to the other party within forty-five (45) calendar days after the rendering of the decision by the Plant Manager. 15.07 The Company or Union may submit a Policy Grievance which directly affects the interests of the party to the Collective Agreement and shall not be administered as an employee grievance. The Policy Grievance may be submitted within thirty (30) working days from the date of occurrence of the incident giving rise to the grievance. The recipient of the grievance shall render a decision in writing within thirty (30) working days of receipt of the grievance. The Policy Grievance shall be submitted at Step No. Three (3) of the Grievance Procedure. 15.08 In the event that either of the parties does not take a grievance to the next higher step within the time limits set out above the grievance shall be deemed to have been withdrawn. If the recipient of the grievance fails to respond within the time limits set out above, the grievance shall be deemed resolved in favor of the grieving party. 15 15.09 A grievance shall be presented as soon as practicable after the occurrence causing the grievance. However, the time limit for filing a grievance is 21 working days after the occurrence causing the grievance. 15.10 When an agreement has been reached between the Company and the Union at any stage of the grievance procedure it shall be put in writing and it shall be final and binding on both parties. 15.11 Nothing in this agreement shall be construed to prevent any employee from presenting any complaints on his own behalf directly to the Company or to prevent the Company from making adjustments in respect of such individual complaints not inconsistent with the terms and provisions of this agreement. 15.12 The time limit between steps may be extended by mutual consent. All time extensions must be confirmed in writing. ARTICLE 16 ARBITRATION 16.01 A grievance which has not been settled after being carried through the steps of the Grievance Procedure may be referred to Arbitration in accordance with the following procedure. 16.02 When notice is given in accordance with Article 15.06 the party giving the notice shall, at the same time, in writing, nominate an arbitrator. 16.03 Within seven (7) days thereafter the other party shall nominate an arbitrator and so advise the other party in writing within the said delay. 16.04 The two nominees shall endeavour to select a third person who shall act as chairman. 16.05 In all matters of procedure not covered by the provisions of this section, including alternating procedures for the selection of a third arbitrator the provisions of the Labour Relations Code of British Columbia (1993) shall apply. 16.06 The Arbitration Board shall have jurisdiction to interpret the provision of this Agreement in so far as shall be necessary to the determination of the grievance, but shall not have jurisdiction or authority to alter in any way, add to, subtract from or modify any of the terms hereof, nor make any decision inconsistent with the provisions of this agreement. 16.07 The decision of the Arbitration Board shall be final and binding upon the parties hereto and the employee or employees concerned. 16.08 Each of the parties shall bear equally the expense of the Chairman of the Arbitration Board. 16.09 The parties hereby request the Arbitration Board to render its decision as expeditiously as possible. 16.10 The award of the Arbitration Board shall not be made retroactive to a date prior to the date on which the grievance was submitted in writing as provided for in the Grievance Procedure. 16.11 The Company and the Union may by mutual agreement, elect a single arbitrator instead of a three-man arbitration board, and the powers of the single arbitrator shall be the same as those of the board of arbitration pursuant to this article. 16 ARTICLE 17 DAYS OFF AND SCHEDULE OF SHIFTS 17.01 The employer will normally designate consecutive regular days off for each regular employee. 17.02 When extensive changes to the schedule are necessary the Company will so notify the Union in advance whenever practical, and will welcome discussion with the Union Standing Committee. 17.03 (a) Employees may change their day or days off by mutual agreement with their Department Manager, provided such change shall not involve additional cost to the company. (b) Department Managers may change an employee's day(s) off by mutual agreement with the employee concerned. 17.04 Employees will normally not be scheduled to work six (6) consecutive days in a two-week period. The exception being that if the shift schedule is altered significantly as a result of layoff, plant shutdown, etc., this may not always be possible. (a) Relief Brine Operators/ Labourers (assigned to the Production Department) shifts may be changed at anytime provided the employee is given 24 hour notice prior to shift change. Every effort will be made to give the employee as much notice as possible. ARTICLE 18 VACATIONS 18.01 It is hereby understood and agreed that in the application of the following provisions governing vacations and vacation pay, no employee shall be treated less favourably than is provided for under the "Annual Holidays Act". (R.S.B.C. 1980) SBC Chap.10 - #36. 18.02 The Vacation year shall be the twelve (12) months commencing on May 1st and ending the following April 30th. However, for the purposes of calculating vacation pay only May 1st shall be interpreted as being the end of the last pay period in April. 18.3 Management will co-operate in arranging vacation time to suit each employee. However, the scheduling of vacation time is to be decided by Management. Management will give consideration to requests for vacation dates on the basis of plant seniority, provided such requests are made before March 1st for the current year. However, it is understood that no employee can exercise seniority rights over less senior employees in the scheduling of more than two (2) weeks vacation during the period June 15th to September 15th. 18.04 Vacations are not cumulative and must be taken annually within the vacation year as defined in 18.02. However, the Company may extend the vacation year due to extenuating circumstances and as mutually agreed at the request of an employee. 18.05 No employee may continue to work and draw vacation pay in lieu of taking his vacation. 18.06 Vacation pay will be paid by direct deposit to an employee's account on a bi-weekly basis as vacation is taken. The company may grant vacation pay in advance due to extenuating circumstances and as mutually agreed at the request of the employee. 17 18.07 Employees of the Company shall receive their vacation with pay entitlement exclusive of recognized holidays to which they are entitled under Article 7 of this Agreement. 18.08 When services of an employee are terminated for any reason, he shall receive vacation pay for the vacation earned but not taken, computed as 4% of his total earnings for the period during which vacation was earned. An employee who qualifies for vacation under 18.12 will be paid 6% of his total earnings on termination, those who qualify for vacations under 18.13 will be paid 8% of their total earnings on termination, and those who qualify for vacation under 18.14 will be paid 10% of their total earnings on termination, those who qualify for vacation under 18.15 will be paid 12% of total earnings on termination, and those who qualify under 18.16 will be paid 14% of total earnings on termination. 18.09 The following shall be considered as time worked (maximum 9 1/3 hours per day and 37 1/3 hours per week) for the purpose of qualifying for a vacation. (a) Time lost as a result of an accident as recognized by the Worker's Compensation Board. (b) Time, not exceeding one year, lost as a result of a non-occupational accident or illness, provided that the employee has completed the probationary period as outlined in Article 14.02, and that he returns to his employment. (c) Time spent on earned vacations. (d) Time spend on holidays as defined in Article 7 of this Agreement. (e) Time absent from work because of Jury Duty or as a subpoenaed witness. (f) Time absent from work because of a death in family. (g) Time absent from work on approved leaves of absence. 18.10 Employees employed by the Company on May 1st of any year and who have: (a) Less than twelve (12) months continuous service and do not qualify under 18.11 below will be granted one quarter (1/4) of a day's vacation with pay for each full week of work performed in the immediately preceding vacation period. No vacation of less than one (1) day, nor more than eight (8) days will be granted under this provision. Fractional entitlements will be rounded off to the nearest full day; eg: an employee with three and one-quarter (3 1/4) days vacation credit will be granted three (3) days vacation; whereas, an employee with three and one-half (3 1/2) or three and three quarters (3 3/4) days vacation credit will be granted four (4) days vacation. Pay for such vacations will be computed at four per cent (4%) of the employee's actual earnings during the vacation period in which the vacation was earned. 18 18.11 Employees on the payroll of the Company on May 1st who have 1400 hours continuous service have qualified for a first vacation and shall be granted two (2) weeks vacation with pay. Pay for such two-week vacation shall be four per cent (4%) of the employee's actual earnings during the vacation period in which the vacation was earned, or two weeks base pay computed on the basis of the employee's regular job rate at the time he goes on vacation, whichever is greater. 18.12 Employees on the payroll of the Company on May 1st who qualify for a second vacation shall be granted three (3) weeks vacation with pay. Pay for such three-week vacation shall be six per cent (6%) of the employee's actual earnings during the immediately preceding vacation period, or three weeks base pay computed on the basis of the employee's regular job rate at the time he goes on vacation, whichever is greater. 18.13 Employees on the payroll of the Company on May 1st who qualify for a 7th vacation shall be granted four (4) weeks vacation with pay. Pay for such four-week vacation shall be eight per cent (8%) of the employee's actual earnings during the immediately preceding vacation period, or four weeks base pay computed on the basis of the employee's regular job rate at the time he goes on vacation, whichever is greater. 18.14 Employees on the payroll of the Company on May 1st who qualify for a 15th vacation shall be granted five (5) weeks vacation with pay. Pay for such five-week vacation shall be ten per cent (10%) of the employee's actual earnings during the immediately preceding vacation period, or five weeks base pay computed on the basis of the employee's regular job rate at the time he goes on vacation, whichever is greater. 18.15 Employees on the payroll of the Company on May 1st who qualify for a 24th vacation shall be granted six (6) weeks vacation with pay. Pay for such six week vacation shall be twelve per cent (12%) of the employee's actual earnings during the immediately preceding vacation period, or six weeks base pay computed on the basis of the employee's regular job rate at the time he goes on vacation, whichever is greater. 18.16 Employees on the payroll of the Company on May 1st who qualify for a 30th vacation shall be granted seven (7) weeks vacation with pay. Pay for such seven week vacation shall be fourteen per cent (14%) of the employee's actual earnings during the immediately preceding vacation period, or seven weeks base pay computed on the basis of the employee's regular job rate at the time he goes on vacation, whichever is greater. 18.17 For the purpose of calculating vacation pay, actual earnings shall not include profit sharing earnings. 18.18 After completing the necessary period of continuous service with the Company, an employee shall, in addition to the regular vacation to which he is entitled, become eligible to receive a Supplementary Vacation with pay as set forth below:
Year of Completed Continuous Service Supplementary Vacation ------------------------------------ ---------------------- After 5 years 1 week After 10 years 2 weeks After 15 years 2 weeks After 20 years 2 weeks After 25 years 2 weeks After 30 years 2 weeks
(a) The Supplementary Vacation must be taken within five (5) years of the employee's becoming eligible or before his becoming eligible for his next earning period of Supplementary Vacation as above, whichever comes first. 19 (b) For the purpose of determining eligibility for Supplementary Vacation, an employee's service shall be calculated from the date of his joining the Company. (c) The Supplementary Vacation may be taken in conjunction with the regular vacation to which the employee is entitled, subject to Article 18.03. (d) One week's Supplementary Vacation pay shall be equal to 37 1/3 hours at the straight time hourly rate of the employee's regular job. (e) At retirement or termination from the Company an employee who has qualified for Supplementary Vacation shall be entitled to that portion of Supplementary Vacation Pay proportionate to the number of years of service completed subsequent to his last five-year entitlement period. 18.19 In the event an employee is called in to work, during his/her vacation, the employee shall be granted another day off with pay to be taken during the current vacation period. The employee being called in must receive prior approval from his/her supervisor. ARTICLE 19 TEMPORARY EMPLOYEES 19.01 A temporary FULL-TIME employee shall be an employee who is hired to fill a temporary labour need for 37 1/3 hours per week, be it skilled or unskilled. 19.02 A temporary PART-TIME employee shall be an employee who is hired for less than 37 1/3 hours per week to fill a temporary need as Labourer. There will be no displacement of permanent or temporary full-time workers by part-time employees. Temporary part-time employees may be only utilized after the company has consulted with the Union regarding the need for hiring. 19.03 He/she shall be considered a temporary employee for up to one year. 19.04 The company will notify the Union when a temporary employee is being hired. 19.05 All articles, with the exception of Article 14 will apply to temporary full-time employees. However, the eligibility period for WI, LTD, Life, AD&D, and Dental Plans shall be 4 months. 19.06 All articles, with the exception of Articles 14, 32, and 33 will apply to temporary part-time employees. 20 ARTICLE 20 JOB CLASSIFICATIONS AND JOB RATES 20.01 Job classification during the term of this Agreement shall be in accordance with Appendix "A" appended hereto. 20.02 Job rates as detailed in Appendix "A" will be made effective December 1, 2000 and will remain in effect until November 30, 2003. ARTICLE 21 WAGE RATE ADJUSTMENTS 21.01 Job rate shall be defined as the wage rate for any job classification as listed in Appendix "A", "Job Classifications and Job Rates" and excludes all premium pay, bonuses, shift differentials and allowances of any type or kind. 21.02 Should the Company introduce a change(s) that will affect job content during the term of the Agreement, the following procedure shall apply: (a) The Company shall notify the Union as far in advance of the change(s) as is practicable. (b) The Company shall describe the change(s) and provide an estimate of the effect on Union members' jobs. (c) After an appropriate period from commissioning the change(s), up to SIXTY (60) DAYS, a new rate will be settled by discussion between the Company and Union Standing Committee. (d) The Company agrees that failure to resolve any differences there may be after discussions, may result in the Union filing a grievance, as herein provided, alleging that the new rate is incompatible with relevant internal and external comparisons. The company agrees that any change in the new rate that may result from grievance procedure, discussions, or from an arbitration decision will be made retroactive to the date on which the new rate was first applied or the date on which the job changed, whichever first occurs. 21.03 If an employee is temporarily transferred to a job paying a higher rate he shall be paid the higher rate. 21.04 It is understood that when an employee is being trained for a higher paying job he shall receive this regular job rate. 21 ARTICLE 22 OVERTIME AND PREMIUM TIME 22.01 Overtime Overtime shall be either all authorized time worked in excess of nine and one third (9-1/3) hours in a twenty-four (24) consecutive hour period, starting when an employee reports for work; or, all hours worked in excess of thirty seven and one third (37-1/3) hours in any one week except in the case of those employees assigned to the 12-hour shifts when overtime shall be all hours worked in excess of 12 hours in a 24 consecutive hour period, starting when an employee reports for work, or all hours worked in excess of 36 or 48 hours per week depending on whether such 36 or 48 hours per week fall into the regular schedule of 3 days on and 3 days off. (a) In the event that an employee is required to work overtime hours that run continuously from the end of his shift, he must be given a minimum of eight (8) hours off, before starting his next shift. Any straight time earnings lost as a result will be paid to the employee affected. (b) In the event an employee is called in to work overtime hours that occur in, or extend into, the period between 2330 Hrs. and 0330 Hrs. when such an employee is scheduled to report for work at 0700 Hrs. (or 0630 Hrs), if the time worked in this period is one or more hours the employee will not be required to report for work for a minimum of eight (8) consecutive hours from the end of the time worked. Straight time earnings lost as a result will be paid the employee affected. (c) In the event an employee is called in to work overtime hours that occur in the period between 0330 Hrs. and 0700 Hrs. (or 0630 Hrs.), if the time worked in this period is one or more hours the employee will not be required to report for work for a period past 0700 Hrs. (or 0630 Hrs.) equivalent to the hours worked during the 0330 to 0700 Hrs. (or 0630 Hrs.) period, or take the equivalent time off at the end of his/ her shift. Straight time earnings lost as a result will be paid to the employee affected. 22.02 In those weeks when a day worker works a scheduled 37 1/3 hour week, hours in excess of 37 1/3 hours shall be paid at overtime rates. 22.03 All authorized overtime shall be paid at double time. 22.04 For the purpose of avoiding pyramiding of overtime, hours compensated for at overtime or premium time rates shall not be counted further for any purpose in determining overtime liability under the same or any other provision. 22.05 Shift Premiums shall not be included when computing pay for overtime. Sunday Premiums shall not be included when computing pay for overtime. 22.06 Time exchanged between employees, hours worked as a result of shift change, shall be paid for at the regular straight time hourly rate of the employee scheduled to work at that time plus shift differential applicable to the time worked. Such changes must have the approval of the supervisor concerned. 22.07 Where an employee's shift schedule is changed with less than 48 hours notice then the employee will be paid overtime for the first shift worked (except as noted in 17.04(a)). 22 22.08 Sunday Premium A premium of $1.75 per hour shall be paid to all workers for work performed on Sunday which shall be known as "Sunday Premium". 22.09 Shift Differentials (a) A differential of $1.60 per hour for all hours worked on scheduled evening night shifts between the hours of 1830 hrs. and 0630 hrs.. (b) An employee working on a regularly scheduled night shift shall continue to receive the shift differential for overtime worked beyond 0630 hrs. 22.10 In the event that an employee is called in and reports to work at least one full shift before his regular starting time he shall continue to receive overtime rates if he is asked to continue on into this regular shift. 22.11 A hot meal, value of $12.50 shall be provided for any employee called in to work four (4) hours or more on a scheduled day off or if less than 24 hours notice is given, or for two (2) hours or more if these overtime hours are continuous with his regular scheduled hours, and every four hours thereafter. In the latter case, depending on the urgency of the work involved, the meal may be taken prior to or during the overtime period provided the actual time worked is two (2) hours or more. When a maintenance employee is called in to work, he will receive the hot meal allowance after four (4) hours of work and every (4) hour hours thereafter, until the completion of the work. Meal vouchers will be included on the pay cheque and be a taxable benefit. ARTICLE 23 JURY DUTY PAY 23.01 a) The Company will pay an employee called for Jury Duty or as a subpoenaed witness, the difference between the jury duty or witness pay and his straight time pay, provided he works his regular shift when not performing such jury or witness service. The employee will be required to furnish proof of performing such service and such duty pay received. b) Shift workers will not be required to work a scheduled evening shift if : - jury duty starts the following day, or - jury duty is completed on the day of the scheduled evening shift. 23 ARTICLE 24 BEREAVEMENT LEAVE 24.01 In the event of a death of a member of an employee's immediate family, the employee will be allowed a reasonable time off. The Company will pay such employee his straight time pay for any of his scheduled working days lost immediately following the death, up to a maximum of three (3) days to attend the funeral. If the employee is unable to attend such funeral, he will be allowed one (1) day off for personal reasons for which he will be reimbursed, at this straight time rate for any wages lost during such absence. "Immediate Family" means Father, Mother, Child, Spouse, Brother, Sister, Spouse's Father, Spouse's Mother, Step-Father, Step-Mother, Step-Children, Grand Parents and Grand Children, Son's Spouse and Daughter's Spouse. ARTICLE 25 MAINTENANCE DEPARTMENT APPRENTICES 25.01 Appendix "B" attached hereto and entitled "Maintenance Apprenticeship" shall be part of this agreement. ARTICLE 26 SUSPENSION AND/OR DISCHARGE 26.01 When in the opinion of the Company disciplinary action involving suspension or discharge become necessary the Union shall be notified of that intent and the reasons therefore, prior to the action, if such prior notification is practicable. Further the Company welcomes pertinent discussion with the Union about the suspension or the discharge prior to that action when practicable. 26.02 In the event that an employee has been discharged and it is alleged that he has been unjustly dealt with the grievance procedure may be used. The grievance must be submitted to the Company in writing within seven (7) days of the discharge and in such cases steps one and two of the grievance procedure shall be omitted. ARTICLE 27 LEAVE OF ABSENCE 27.01 The Company will consider granting a leave of absence to employees for personal reasons consistent with the continued and efficient operation of the plant, and provided there is a minimum of disruption to fellow employees. 27.02 The length of such leave of absence in any one year shall be: (a) Those employees with more than one year's service but less than five year's service - up to one week. (b) Those employee with more than five year's service - up to one month. However under extenuating circumstances, the Plant Manager may alter the above conditions at his sole discretion. 24 27.03 Such leave of absence shall be without remuneration. 27.04 A leave of absence must be applied for in writing. 27.05 It will be the responsibility of the employee to arrange with the Company for the payment, suspension, or other disposition, of the Company sponsored welfare plans at the time of applying for such leave of absence. 27.06 No employee will be granted a leave of absence to accept other employment. It is understood, however, that other employment does not include duties as elected union officers, elected political representative, (i.e.: MLA, MP, Councillor, Mayor, etc.), or other such assignments, for which remuneration may be paid. 27.07 The following specific exceptions will be made to the above were a leave of absence is granted by the Company to an employee in order that he may accept an elected Union or political office (as in 27.06 above). (a) It is agreed that an employee who is elected or appointed to Union office shall be granted sufficient leave in order to perform the duties of the position. The length of such leave of absence may be up to one year or for the elected term. (b) The employee will continue to accumulate seniority. 27.08 Parental leave as outlined in the Employment Standards Act. ARTICLE 28 COMMITTEES 28.01 The Company shall appoint a Company Standing Committee of three (3) individuals which shall represent the Company. 28.02 The Union shall elect from its membership of employees at Sterling Pulp Chemical's North Vancouver plant a Union Standing Committee of three (3) which shall represent the Union for the purpose stated in this Agreement. 28.03 (a) The Company and Union Standing Committee shall meet quarterly to discuss items of mutual interest. The agenda for each meeting shall consist of the following items. i) Safety ii) Changes to the plant that will affect Union members. Where the change(s) is significant. Workers for the affected areas will be included to provide their input in subsequent discussions. iii) Other items. (b) Minutes of these meetings shall be distributed for signatures within one (1) week after the meeting. 25 ARTICLE 29 TRAINING 29.01 The Company recognizes its responsibility to ensure that its employees are adequately trained to perform their jobs in a satisfactory manner. The Company will institute a training program for all Production employees under the direction of the Production Manager or his appointee so that the opportunity will be given to each employee to perform his job satisfactorily and to satisfactorily perform the duties of the next higher job classification. The Union recognizes that it is to the mutual benefit of both parties to have an adequately trained workforce. ARTICLE 30 TECHNOLOGICAL CHANGE AND TERMINATION PAY 30.01 The Company will endeavour to give as much prior notice of technological change however, not less than 90 days before the date on which the technological change is to be effected. The notice of technological change shall be in writing and shall state: (a) Nature of the technological change. (b) Date of which technological change will be effected. (c) Approximate number and type of employees likely to be affected by the technological change. If the Company and Union are unable to resolve their differences regarding technological change, final and conclusive settlement, without work stoppage, shall be by arbitration or another method agreed to by the parties. 30.02 The Company agrees to pay termination pay to employees permanently laid off because of plant closure, automation, technological change, modernization or for economic reasons at the rate of pay of two (2) weeks pay per year of service. In the event of plant closure the Company agrees to negotiate with the Union the termination payout. The Company also agrees to cooperate with the Government to minimize the impact of plant closure. The terms of payout shall be defined as: (a) Initial payment conforming to provisions of the Employment Standards Act. (b) Remainder, if applicable, on expiry of recall rights. (c) A laid off employee may request in writing payment of his termination pay after three (3) months on layoff providing the employee agrees in writing to waive his remaining recall rights. 30.03 When an employee is terminated as a direct result of plant closure, automation, and/or technological change, Management will assist the Union in communicating with Canada Manpower to advise them of the suitability of the employee for re-training and re-location in another job, and request that they use their facilities for this purpose. In the event of plant closure, the company will endeavor to give as much prior notice as possible, however, not less than 90 days. 30.04 The Company agrees to retrain those employees whose jobs cease to exist due to Modernization or Expansion, for other jobs within the plant. This excludes employees who are laid off or terminated and does not obligate the Company under the Maintenance Apprenticeship program. 26 ARTICLE 31 CONTINUOUS 12-HOUR SHIFTS The parties hereto agree to the following terms and conditions relating to the continuous rotating shift schedule, as hereafter defined. 31.01 The work schedule considered herein will be applicable to The Job Classifications, currently on the existing continuous rotating shift schedule, in the Production Department. 31.02 The shift schedule is as per Appendix D. 31.03 Upon converting to a revised schedule and during the first week under it, no premiums will be paid to an employee for the sole reason of transferring from one standard work week to another standard work week. 31.04 Each employee's pay will be calculated on a weekly basis. However, if an employee wishes, the Company will hold back a fixed amount each week the employee works in excess of 36 hours, to be paid to the employee at the time he gets his "9 days off". It is clearly understood that this holdback of pay will not be flexible, and will only be paid to the employee when he takes his scheduled 9 days off. 31.05 Vacations will be allotted on a weekly basis and will be paid on a 37 1/3 hr. basis. ARTICLE 32 HEALTH AND WELFARE 32.01 Benefits of hourly-paid employees during the term of this Agreement shall be in accordance with appendix "C" appended hereto. For full details refer to the current Sterling Pulp Chemicals Plan Texts and associated policies. For ease of reference, see the current Employees Benefits Program booklet. 32.02 E.I. Premium reduction will be applied to funding the benefits package. 32.03 For the purposes of Weekly Indemnity claims the waiting period will be "0" days for both illness and accidents and subsequently the claim will be paid on the first calendar day. 32.04 The Company will pay all Health and Welfare premiums for the first two years during an employee's recovery while on L.T.D. 32.05 Supplementary Benefit Fund The company (Sterling Pulp Chemicals) agrees to allocate the following amounts of money to a trust fund to be set up by PPWC #5 for use as a supplementary benefit fund for current and past members of the local. Effective December 1, 1997 the Company will contribute *$0.40/hour for regular hours worked to the Fund; effective December 1, 1999 the Company will contribute $0.42/hour for regular hours worked to the Fund. Utilization/application of this supplementary benefit shall be at the discretion of members of the local. The company will be kept informed as to application of the fund. This fund will not prejudice the Company reviewing the ad hoc increases to retirees. * Based on 37 1/3 Hrs/week. (For all employees.) 27 32.06 Agreed to eliminate for the term of the agreement requirement for physician's statement for absences due to non-occupational sickness or accident up to one week. Physician's statement may be required at the discretion of the supervisor. ARTICLE 33 PENSION PLAN 33.01 a) There shall be a Pension Plan for all employees with contributions made by the Company, to provide for the needs of the employees upon retirement. b) Pension benefits are increased from $45.00/month/year (December 1, 1999) to $51.00/month/year on November 30, 2003. c) Spousal Pension - Effective December 1st, 1994 the spousal benefit is 60% for all years of service. d) Credited service for future retirees is calculated from day one, provided the employee has satisfied the probation period (40 working days). All other terms as per Plan Text. 28 EARLY RETIREMENT PROVISION I Effective September 8, 1992, retirement at 60 years of age with 20 years of service with no reduction. Effective December 1st, 1994 the following reduction from age 60 to 55 with 20 years service apply (.41667%/month reduction to age 55)
Age Years of Service Reduction --- ---------------- --------- 65 20 0 % 64 20 0 % 63 20 0 % 62 20 0 % 61 20 0 % 60 20 0 % 59 20 5 % 58 20 10% 57 20 15% 56 20 20% 55 20 25%
II Age 55-64 minimum of 10 years service - 1/4 of 1% per month for each month of early retirement -/from 60 to 64 plus 1/2 of 1% per month prior to age of 60 (55-60) Current age of 60 (55 to 60) Schedule 65 0% 64 3% 63 6% 62 9% 61 12% 60 15% 59 21% 58 27% 57 33% 56 39% 55 45%
III Age 55 to 64 - less than 10 years service - 1/2 of 1% per month for each month of early retirement prior to age 65. Schedule 65 0% 64 6% 63 12% 62 18% 61 24% 60 30% 59 36% 58 42% 57 48% 56 54% 55 60%
Bridging: Effective December 1, 1988 a bridging formula of $15.00 per month per year service will be available to those retiring between age 63 and 65. A minimum of 10 years service is required for bridging. 29 ARTICLE 34 BANKING OF OVERTIME 34.01 It is understood and agreed that the voluntary banking of overtime hours will involve no extra time or cost to the company, nor will it affect the smooth and efficient operation of the plant. 34.02 Time off in lieu of overtime will receive low priority and requires mutual agreement between supervisor and employee. 34.03 Overtime pay and/or hours may be banked. 34.04 Overtime hours may be banked to a maximum of thirty-six (36) hours at any one time. 34.05 Overtime pay may be banked with no maximum. Pay may be drawn out on any regular pay period. Balances in excess of 36 hours not withdrawn by September 30th of each year will be paid out in the following pay period. 34.06 Overtime pay may be taken when earned and hours banked. 30 APPENDIX "A" - JOB CLASSIFICATIONS AND RATES
CLASSIFICATION DEC. 1/99 DEC. 1/00 DEC. 1/01 DEC. 1/02 - -------------- --------- --------- --------- --------- Temporary Maintenance Coordinator (TMC) $31.03 $31.74 $32.69 $33.67 Tradesperson 29.02 29.69 30.58 31.50 Storesperson 25.33 25.91 26.69 27.49 Maintenance Helper 23.93 24.48 25.21 25.97 Senior Relief Operator 29.02 29.69 30.58 31.50 Crystal Operator 29.02 29.69 30.58 31.50 Cell Operator 28.90 29.56 30.45 31.36 Brine Operator (4th Class Steam Ticket) 27.26 27.89 28.73 29.59 Brine Operator 26.79 27.41 28.23 29.08 Relief Brine Operator 23.93 24.48 25.21 25.97 Labourer 22.77 23.29 23.99 24.71
Hourly Wage increases: December 1/00: 2.3% December 1/01: 3.0% December 1/02: 3.0%
MULTI SKILLS / DUAL TRADES 1. Multi Skills is defined as a plant recognized provincial TQ Ticket (as defined below) plus in house training for instrumentation, Level "C" Provincial Welding certificate or a BCIT Pipefitting Certificate Program (or equivalent) or other skills recognized by the Union and the Company and supported by TQ ticket, or certificate of training, or in-house training. 2. Dual Trades is defined as two plant recognized TQ qualifications (as defined below), a single plant recognized TQ ticket plus a Level "B" welding certificate or successful completion of a SAIT (or equivalent) correspondence course for instrumentation. 3. Based on the needs of the plant, multi skills training will be provided to personnel meeting the necessary qualifications. 4. Minimum qualifications is a provincial TQ ticket in at least one of the required trades: Electrician Instrument Mechanic Millwright Pipefitter Welder 5. Employee must be presently active in one of the above trades. 6. A selection board similar to Appendix "B" with a plant committee member representing the bargaining unit will determine who will receive the multi skills training. 7. Such training does not preclude the possibility of hiring from outside the present bargaining unit for a dual trades person if such a tradesperson were required or needed at the plant. 8. An $0.80/hr premium will be paid after successful completion of the training for the multi skilled position. 9. An additional $0.80/hr premium will be paid for the dual trades position as defined in Section 2. 31 APPENDIX "B" MAINTENANCE APPRENTICESHIP 1. PURPOSE To train Tradespersons of the highest calibre consistent with plant requirements. 2. SCOPE The program will embrace the Electrical, Instrument Mechanic, Millwright, Pipefitter and Welder trades and will be run in conjunction with the B.C. Department of Labour Apprenticeship Training Branch. Other trades may be added in the future as required. It is intended that there will be no more than one apprentice in each trade at any one time. 3. STERLING PULP CHEMICALS APPRENTICESHIP BOARD (Otherwise known as "The Board") The Board will be established consisting of the Plant Manager, (Chairman), the Maintenance Manager, a member of the personnel function, and a Tradesperson employee of the designated trade involved to made the final selection of apprentices. Said Board will also review the progress of the apprentice from time to time and will be empowered to take appropriate action. The tradesperson employee member of the board will be appointed by the Plant Manager after due consultation with the Union. 4. SELECTION OF CANDIDATES Candidates will be selected from interested employees, recent high school/technical school graduates, and graduates from accredited pre-apprenticeship training course. Psychological, I.Q. aptitude tests and other such aids may be used in assessing prospective candidates. Apprentices will be selected on the basis of ability, personality, and attitude. 5. JOB SECURITY Apprenticeship training under this program does not constitute guaranteed employment to a graduate. He retains and accumulates seniority while employed as an apprentice, as spelled out in the Union Contract, and as such is treated as any other employee on graduation. Over and above any provisions in the B.C. Department of Labour Apprenticeship program for the termination of unsuitable candidates, and apprentice will be on probation for the first year and the Company retains the right to terminate the apprentice if, in the opinion of the "Board", the candidate is in any way unsuitable. 32 6. PAY SCHEDULE The pay schedule for apprentices will be as follows: 1st 6 months - Labourer rate 2nd 6 months - Mech. "A" Rate less 7/8 spread (Labourer rate to Tradesperson rate) 3rd 6 months - Tradesperson Rate less 6/8 spread 4th 6 months - Tradesperson Rate less 5/8 spread 5th 6 months - Tradesperson Rate less 4/8 spread 6th 6 months - Tradesperson Rate less 3/8 spread 7th 6 months - Tradesperson Rate less 2/8 spread 8th 6 months - Tradesperson Rate less 1/8 spread On graduation - Tradesperson Rate While an apprentice is in school the Company will make up his pay to his regular weekly pay less all government sponsored allowances available. Additional traveling and living expenses will not be paid. For the purpose of calculating the regular weekly pay for classroom training, the average weekly hours will be used, i.e.: 37 1/3 hours. 7. PROGRAM On the job training will be done under the direction of the Maintenance Manager through skilled Tradesperson. The apprentice will be expected to perform useful tasks relating to maintenance in general and to a large degree his selected trade in particulate. In no circumstances is an apprentice to be considered a helper. 8. TOOLS Apprentices will be expected to provide their own hand tools within a reasonable period of time. 9. Apprentices will be considered as part of the bargaining unit and will become Union members as provided for in the Sterling Pulp Chemicals Union Contract. They shall be subject to the rights, privileges and responsibilities of full Union membership except as herein specified. 33 APPENDIX "C" BENEFITS OF HOURLY-PAID EMPLOYEES NORTH VANCOUVER PLANT
Weekly Long Term Medical Indemnity Disability Life A D & D Service Plan - --------------------- -------------- ------------------- ---------------- --------------- ---------------- Eligibility * Full Time 3 Months 3 Months 3 Months 3 Months 1 Month Temp Full Time 4 Months 4 Months 4 Months 4 Months 1 Month - --------------------- -------------- ------------------- ---------------- --------------- ---------------- Benefits 75% 60% $85,000 $ 85,000 All medical, Hours lost Basic monthly wage Surgical and Dec. 1/97 max. obstetrical $5000 - --------------------- -------------- ------------------- ---------------- --------------- ---------------- Deductible -- -- -- -- -- - --------------------- -------------- ------------------- ---------------- --------------- ---------------- Elimination Period 0-days acc. 26 weeks -- -- -- 0 day ill - --------------------- -------------- ------------------- ---------------- --------------- ---------------- Duration Period 26 weeks to -- -- -- Age 65 - --------------------- -------------- ------------------- ---------------- --------------- ---------------- Amount of Retirement -- -- 50% of benefit -- -- $85000 Decr. 5%/Yr. min 25% - --------------------- -------------- ------------------- ---------------- --------------- ---------------- Retirement -- -- -- -- -- - --------------------- -------------- ------------------- ---------------- --------------- ---------------- Carrier SPC Clarica Clarica Clarica M.S.P. - --------------------- -------------- ------------------- ---------------- --------------- ---------------- SPC Pays 90% 90% 96% 96% 100% - --------------------- -------------- ------------------- ---------------- --------------- ---------------- Employee Pays 10% 10% First $1000 of First $1000 -- coverage of coverage - --------------------- -------------- ------------------- ---------------- --------------- ---------------- Termination Date active As W.I. other Death or date Death or date Last day of employment than sick, injury employment employment month which ceases or vacation pay terminates terminates employment terminates - --------------------- -------------- ------------------- ---------------- --------------- ---------------- Vesting -- -- -- -- -- ===================== ============== =================== ================ =============== ================ Extended Health Benefits Dental Pension - --------------------- ---------------------- ------------------------- ---------------------- Eligibility * Full Time Probation Temp Full Time 1 Month 3 Months Period/40 Days then 1 Month 4 Months day one. - --------------------- ---------------------- ------------------------- ---------------------- Benefits 80% of 1st $1000/yr. 100% Diagnostic Dec. 1 /1999 100% above $1000/yr. Preventive/Restorative $45.00/ Mo./yr. Max. $100,000/ yr. 75% Prosthetics Renewable each year 50% Crowns, Bridges Nov. 30/ 2003 Dec. 1/ 2000 50% Orthodontics $51.00 / Mo./ yr. Direct Payment to - $2,500.00 Pharmacy Lifetime limit Dec 1/ 2001 Birth Control Pills - --------------------- ---------------------- ------------------------- ----------------------- Deductible $25/person or Amounts in excess of -- family per year B.C. fee guide - --------------------- ---------------------- ------------------------- ----------------------- Elimination Period -- -- -- - --------------------- ---------------------- ------------------------- ----------------------- Duration Period -- -- -- - --------------------- ---------------------- ------------------------- ----------------------- Amount of Retirement -- -- Benefit in effect at retirement x years of service - --------------------- ---------------------- ------------------------- ----------------------- Retirement -- -- Age 65; 60/20 years - --------------------- ---------------------- ------------------------- ----------------------- Carrier Pacific Blue Cross Great West Life Standard Life / Montreal Trust - --------------------- ---------------------- ------------------------- ----------------------- SPC Pays 100% 90% -- - --------------------- ---------------------- ------------------------- ----------------------- Employee Pays -- 10% -- - --------------------- ---------------------- ------------------------- ----------------------- Termination Last day of month Last day of the month Death or termination which employment which employment of employment terminates terminates - --------------------- ---------------------- ------------------------- ----------------------- Vesting -- -- After 2 years service in plan ===================== ====================== ========================= =======================
* See Article 19.05 for the benefits of temporary full-time employees. 34 APPENDIX "D" PRODUCTION SCHEDULE [ILLEGIBLE] 35 [STERLING PULP CHEMICALS LETTERHEAD] LETTER OF UNDERSTANDING FOR TEMPORARY MAINTENANCE CO-ORDINATOR The Company may as required need an employee to act as a Temporary Maintenance Co-Ordinator (TMC). (The Maintenance Manager may or may not choose to utilize the TMC.) The selection of the TMC will be offered to the maintenance employee meeting qualifications of departmental seniority, plant recognized Provincial TQ Ticket and ability to perform the work. Ability to perform the work will be determined by having the employee perform duties and evaluating his performance. Evaluation will be by the Maintenance Manager, Production Manager and the Plant Manager with input from the Shop Floor. This position is not a full time position and may be implemented when the Maintenance Manager is away from the site or as short term work load dictates. The TMC will work on the tools only in an emergency situation. The number of days will vary from one to five days per week with overtime paid as per the collective agreement. The role of the TMC is to perform work load co-ordinations and administration of the department, so that all work is performed safely. At no time can the TMC discipline or recommend disciplinary measures. The regular rate of pay for the TMC will be $27.18/ hr. effective December 1st, 1994. See Appendix "A". /s/ BOB MACLEOD /s/ DENNIS KIBSEY - ---------------------- ------------------------- Bob MacLeod Dennis Kibsey Plant Manager Plant Chairman December 9, 1997 36 [STERLING PULP CHEMICALS LETTERHEAD] LETTER OF UNDERSTANDING RAIL CAR INSPECTION The company, Sterling Pulp Chemicals Ltd., North Vancouver Plant and PPWC (Pulp, Paper and Woodworkers of Canada) Local #5 have agreed to transfer the responsibilities of railcar inspections from the Maintenance Department to the Production Department, effective January 18, 1999. The responsibility for the repair of railcars will remain with the Maintenance Department. /s/ ROBERT W. MACLEOD /s/ GREG HALL - -------------------------------- ----------------------------- Robert W. MacLeod, P. Eng. Greg Hall Plant Manager Plant Chairman January 12, 1999 37 IN WITNESS WHEREOF we, the undersigned, have as the accredited representatives of the respective parties to this Agreement hereunto set our signatures this 1 day of December 2000. For: STERLING PULP CHEMICALS, LTD. For: PULP, PAPER & WOODWORKERS OF CANADA, LOCAL 5 /s/ R.K THOMEY /s/ G.A. HALL - --------------------------------- ---------------------------------- R.K Thomey G.A. Hall /s/ J.D KIRICHENKO /s/ H.W. WEIR - --------------------------------- ---------------------------------- J.D Kirichenko H.W. Weir /s/ T.N. MILLER /s/ J.J. THOMPSON - --------------------------------- ---------------------------------- T.N. Miller J.J. Thompson /s/ D.R. KIBSEY ---------------------------------- D.R. Kibsey 38 EX-21.1 16 h92951ex21-1.txt SUBSIDIARIES OF STERLING CHEMICALS HOLDINGS, INC. EXHIBIT 21.1 Subsidiaries of STERLING CHEMICALS HOLDINGS, INC. As of September 30, 2001 Owns 100% of: Sterling Chemicals, Inc., a Delaware corporation Owns 100% of: Sterling Fibers, Inc., a Delaware corporation Sterling Chemicals Acquisitions, Inc., a Delaware corporation Owns 100% of: Sterling Pulp Chemicals Fuzhou, Ltd., an Ontario corporation Sterling Australian Holdings, Inc., a Delaware corporation Sterling (Sask) Holdings Ltd., an Ontario corporation Owns 100% of: Sterling Pulp Chemicals (Sask) Ltd., an Ontario corporation Owns 100% of 619220 Saskatchewan Ltd., a Saskatchewan corporation Sterling Chemicals International, Inc., a Delaware corporation Sterling Chemicals Energy, Inc., a Delaware corporation Sterling Chemicals Marketing, Inc., a Barbados corporation Sterling Canada, Inc., a Delaware corporation Owns 100% of: Sterling Pulp Chemicals US, Inc., a Delaware corporation Owns 100% of: Sterling Pulp Chemicals, Inc., a Georgia corporation Sterling NRO, Ltd., an Ontario corporation Sterling Pulp Chemicals, Ltd., an Ontario corporation EX-23.1 17 h92951ex23-1.txt CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-30917 of Sterling Chemicals Holdings, Inc. on Form S-3 and Registration Statement No. 333-52795 of Sterling Chemicals Holdings, Inc. on Form S-8 of our report dated December 20, 2001 appearing on page 102 in this Annual Report on Form 10-K of Sterling Chemicals Holdings, Inc. for the year ended September 30, 2001. DELOITTE & TOUCHE LLP Houston, Texas December 20, 2001 EX-99.1 18 h92951ex99-1.txt STERLING CANADA, INC. - CONSOLIDATED FIN. STMTS. EXHIBIT 99.1 Consolidated Financial Statements of STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) (in United States dollars) Years ended September 30, 2001, 2000 and 1999 STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ================================================================================
September 30, ------------------------ 2001 2000 ---- ---- ASSETS CURRENT Cash and cash equivalents $ 1,100 $ 86 Accounts receivable, net 34,668 49,930 Inventories (Note 3) 9,190 7,459 Prepaid expenses 887 568 - --------------------------------------------------------------------------------------- 45,845 58,043 Property, plant and equipment, net (Note 3) 107,093 117,785 Due from affiliates (Note 10) 203,793 168,008 Other assets (Note 3) 9,869 21,450 - --------------------------------------------------------------------------------------- $ 366,600 $ 365,286 ======================================================================================= LIABILITIES CURRENT Accounts payable $ 12,664 $ 15,478 Accrued liabilities (Note 3) 4,506 16,511 Current portion of long-term debt (Note 4) 1,206 -- - --------------------------------------------------------------------------------------- 18,376 31,989 Pre-petition liabilities - subject to compromise (Note 4) 181,965 -- Pre-petition liabilities - not subject to compromise (Note 4) 73,084 -- Long-term debt (Note 5) 18,798 244,001 Deferred income taxes (Note 7) 9,171 8,338 Deferred credits and other liabilities 9,909 8,832 - --------------------------------------------------------------------------------------- 311,303 293,160 - --------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Note 9) STOCKHOLDER'S EQUITY Common stock -- -- Additional paid-in capital 83,396 83,396 Retained earnings 3,921 17,763 Accumulated other comprehensive income (32,020) (29,033) - --------------------------------------------------------------------------------------- 55,297 72,126 - --------------------------------------------------------------------------------------- $ 366,600 $ 365,286 =======================================================================================
The accompanying notes are an integral part of these consolidated financial statements. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) ================================================================================
Year ended September 30, ------------------------------------ 2001 2000 1999 ---- ---- ---- REVENUES $ 187,625 $ 185,763 $ 169,489 COST OF GOODS SOLD 148,781 147,608 139,628 - --------------------------------------------------------------------------------- GROSS PROFIT 38,844 38,155 29,861 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 8,368 12,746 9,839 OTHER EXPENSE 732 -- -- REORGANIZATION ITEMS 1,340 -- -- INTEREST AND DEBT RELATED EXPENSES (1) 26,077 29,768 29,463 - --------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES 2,327 (4,359) (9,441) PROVISION FOR INCOME TAXES (Note 5) 16,169 2,946 487 - --------------------------------------------------------------------------------- NET LOSS $ (13,842) $ (7,305) $ (9,928) =================================================================================
The accompanying notes are an integral part of these consolidated financial statements. (1) Contractual interest on allocated debt for the year ended September 30, 2001 totaled $30,351 STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DOLLARS IN THOUSANDS) ================================================================================
Accumulated Additional Other Common Paid-In Retained Comprehensive Stock Capital Earnings Income Total ----- ------- -------- ------ ----- Balance, September 30, 1998 -- $ 83,396 $ 34,996 $(30,813) $ 87,579 Comprehensive income: Net loss -- -- (9,928) -- Translation adjustment -- -- -- 3,313 Comprehensive loss (6,615) - --------------------------------------------------------------------------------------------------------------- Balance, September 30, 1999 -- 83,396 25,068 (27,500) 80,964 Comprehensive income: Net loss -- -- (7,305) -- Translation adjustment -- -- -- (1,533) Comprehensive loss (8,838) - --------------------------------------------------------------------------------------------------------------- Balance, September 30, 2000 -- 83,396 17,763 (29,033) 72,126 Comprehensive income: Net loss -- -- (13,842) -- Pension Adjustment -- -- -- (52) Translation adjustment -- -- -- (2,935) Comprehensive loss (16,829) - --------------------------------------------------------------------------------------------------------------- Balance, September 30, 2001 -- $ 83,396 $ 3,921 $(32,020) $ 55,297 ===============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) ================================================================================
Year ended September 30, ------------------------------------- 2001 2000 1999 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(13,842) $ (7,305) $ (9,928) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 18,986 19,476 18,328 Deferred tax expense 13,131 1,066 763 Other 2,680 60 (234) Changes in assets/liabilities: Accounts receivable 14,125 (16,588) (6,943) Inventories (2,097) (1,171) 1,578 Prepaid expenses (363) 1,301 4,721 Due from affiliates (46,401) (18,595) 2,017 Other assets (1,293) 8,802 2,298 Accounts payable 449 798 1,142 Accrued liabilities 1,099 5,273 (1,629) Other liabilities 1,273 3,907 (4,792) - ------------------------------------------------------------------------------------------------ Net cash (used in) provided by operating activities (12,253) (2,976) 7,321 - ------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (5,754) (5,466) (4,357) Proceeds on disposal of fixed assets -- -- 3,583 - ------------------------------------------------------------------------------------------------ Net cash used in investing activities (5,754) (5,466) (774) - ------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issance of long-term debt 20,025 -- (1,765) Debt issuance costs (1,007) -- -- - ------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 19,018 -- (1,765) - ------------------------------------------------------------------------------------------------ Effect of United States/Canadian exchange rate on cash 3 (60) 234 - ------------------------------------------------------------------------------------------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 1,014 (8,502) 5,016 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 86 8,588 3,572 - ------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,100 $ 86 $ 8,588 ================================================================================================ Supplemental disclosures of cash flow information: Income taxes paid $ (1,961) $ (696) $ (749) Interest paid, net of interest income received (1,130) -- --
The accompanying notes are an integral part of these consolidated financial statements. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS Sterling Canada, Inc., through its subsidiaries (Sterling Canada, Inc. and its subsidiaries collectively, the "Company"), manufactures chemicals for use primarily in the pulp and paper industry at four plants in Canada and one plant in Valdosta, Georgia. These plants primarily produce sodium chlorate, a chemical used primarily to make chlorine dioxide, which in turn is used by pulp mills in the pulp bleaching process. The Company also produces sodium chlorite at one of its Canadian locations and oversees construction of large-scale chlorine dioxide generators for the pulp and paper industry. Sterling Canada, Inc. is a wholly-owned subsidiary of Sterling Chemicals, Inc. ("Chemicals"), which is a wholly-owned subsidiary of Sterling Chemicals Holdings, Inc. ("Holdings" and, together with its subsidiaries, unless otherwise indicated are collectively referred to as "we","our","ours", and "us"). The accompanying consolidated financial statements have been prepared on the going concern basis of accounting, which contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities in the ordinary course of business. On July 16, 2001 (the "Petition Date"), Holdings, Chemicals and most of their U.S. subsidiaries (collectively, the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code ("Bankruptcy Code") in the U.S. Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") and began operating their business as debtors-in-possession pursuant to the Bankruptcy Code. None of the Company's foreign subsidiaries were included in the Chapter 11 filings. The accompanying consolidated financial statements have been presented in conformity with the AICPA's Statement of Position 90-7, "Financial Reporting By Entities in Reorganization Under the Bankruptcy Code," ("SOP 90-7"). The statement requires a segregation of liabilities subject to compromise by the Bankruptcy Court as of the bankruptcy filing date, and identification of all transactions and events that are directly associated with the reorganization of the Debtors. The Chapter 11 petitions were driven by the Debtors' inability to meet their funded debt obligations over the long-term, largely brought about by weak demand for petrochemical products caused by declines in general worldwide economic conditions, the relative strength of the U.S. dollar which has caused their export sales to be at a competitive disadvantage and higher raw material and energy costs. As a result of these conditions, the Debtors have incurred significant operating losses. The reorganization contemplated by the Chapter 11 filings is designed to permit the Debtors to preserve cash and to give the Debtors the opportunity to restructure their debt. During the pendency of the Chapter 11 cases, with approval of the Bankruptcy Court, the Debtors may assume favorable pre-petition contracts and leases, reject unfavorable pre-petition contracts and leases and sell or otherwise dispose of assets. The confirmation of a plan of reorganization is the primary objective of the Debtors. Unless otherwise ordered by the Bankruptcy Court, the Debtors have the exclusive right to propose a plan of reorganization until March 13, 2002, and the exclusive right to seek acceptances of any plan proposed by them until May 12, 2002. A plan of reorganization, when filed, will set forth the means for treating claims, including liabilities subject to compromise and interests in the Debtors. Such means may take a number of different forms. A plan of reorganization may result in, among other things, significant dilution or elimination of certain classes of existing equity interests as a result of the issuance of securities to creditors or new investors. The Debtors are in the early stages of formulating a plan of reorganization. The confirmation of any plan of reorganization will require creditor acceptance as required under the Bankruptcy Code and approval of the Bankruptcy Court. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS (CONTINUED) At this time, it is not possible to predict the outcome of the bankruptcy cases, in general, or the effect on the business of the Debtors, the claims of creditors of the Debtors or the interests of the stockholders of Holdings. As a result of the bankruptcy filings, most of the Debtors' liabilities incurred prior to the Petition Date, including certain secured debt, could be subject to compromise. However, the ultimate resolutions of these liabilities is not presently determinable. As a result of the bankruptcy filings and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, confirmation of a plan of reorganization, or disapproval thereof, could change the amounts reported in the financial statements. The ability of the Debtors to continue as a going concern is dependent upon, among other things, (i) the Debtors' ability to comply with the terms of the DIP Financing described below and any related orders entered by the Bankruptcy Court in connection with the Chapter 11 cases, (ii) the ability of the Debtors to access the incremental $40 million in Debtor-in-Possession financing that is dependent on an effective primary order, (iii) the ability of the Debtors to maintain adequate cash on hand, (iv) the ability of the Debtors to generate sufficient cash from operations, (v) the ability of the Debtors' subsidiaries that are not included in the Chapter 11 cases to obtain necessary financing, (vi) confirmation of a plan or plans of reorganization under the Bankruptcy Code and (vii) the Debtors' ability to achieve profitability following such confirmation. As the Debtors can give no assurances that they will accomplish any of the foregoing, there is substantial doubt about the Debtors', and therefore the Company's ability to continue as a going concern. The Debtors have limited liquidity, which may prove inadequate during their reorganization process. The Debtors are currently funding their liquidity needs out of operating cash flow and from borrowings under the DIP Financing. The DIP Financing is limited in amount and is also subject to numerous funding conditions which are largely beyond the control of the Debtors, including borrowing base requirements and compliance with the EBITDA covenant contained in the DIP Financing. The ability of the Debtors to obtain additional financing during the reorganization process is severely limited by a variety of factors, including the debt incurrence restrictions imposed by the DIP Financing, numerous procedural requirements and uncertainties relating to the bankruptcy proceedings, including any continuing challenge to the priming order, and the Debtors' current financial condition and prospects. Accordingly, no assurances can be given that the Debtors' existing sources of liquidity will be adequate to fund their liquidity needs throughout the reorganization process or, if additional sources of liquidity become necessary during the reorganization process, that they would be available to the Debtors or adequate. Any liquidity shortages during the reorganization process would likely have a material adverse effect on the Debtors' business and financial condition as well as their ability to successfully restructure and emerge from bankruptcy. See Note 5 for additional information regarding the status of the challenge to the priming order and the impact on the Debtors' business. The accompanying financial statements do not include any adjustments that may result from the resolution of these uncertainties. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies of the Company are described below. The financial statements of the Company are presented in accordance with accounting principles generally accepted in the United States of America ("U.S.") and certain subsidiaries have been translated from Canadian dollars, their functional currency, to U.S. dollars, the reporting currency of the Company following the guidelines of Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation". Principles of consolidation The consolidated financial statements include the accounts of Sterling Canada, Inc. and all of its direct and indirect wholly-owned subsidiaries, which include Sterling Pulp Chemicals Ltd. ("Sterling Pulp"), Sterling Pulp Chemicals, Inc., Sterling Pulp Chemicals US, Inc., and Sterling NRO, Ltd. All significant intercompany accounts and transactions have been eliminated. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash equivalents The Company considers all investments with a remaining maturity of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of cost and market. Cost is determined on the first-in, first-out basis, except for stores and supplies that are valued at average cost. The Company enters into agreements with other companies to exchange chemical inventories in order to minimize working capital requirements and to facilitate distribution logistics. Balances related to quantities due to or payable by the Company are included in inventory. Property, plant, and equipment Property, plant, and equipment are recorded at cost. Major renewals and improvements which extend the useful lives of equipment are capitalized, while repair and maintenance expenses are charged to operations as incurred. Disposals are removed at carrying costs less accumulated depreciation with any resulting gain or loss reflected in operations. Depreciation is provided using the straight-line method over estimated useful lives ranging from five to 25 years, with the predominant life of plant and equipment being 15 years. Impairment of long-lived assets Impairment tests of long-lived assets are made when conditions indicate their carrying costs may not be recoverable. Such impairment tests are based on a comparison of undiscounted future cash flows to the carrying cost of the asset. If an impairment is indicated, the asset value is written down to its estimated fair value. Patents and royalties The costs of patents are amortized on a straight-line basis over their estimated useful lives, which approximate ten years. The Company capitalized the value of its chlorine dioxide generator technology acquired in fiscal 1992 based on the net present value of all estimated remaining royalty payments associated with this technology. The resulting intangible amount is included in other assets and is amortized over the average life for these royalty payments of ten years. Income taxes The Company is included in the consolidated United States federal income tax returns filed by Holdings. The Company's provision (benefit) for United States income taxes has been allocated by Holdings as if the Company filed its annual tax returns on a separate return basis. The Company's Canadian subsidiaries file separate federal Canadian tax returns, as well as returns in the provinces in which they operate. For these Canadian subsidiaries, deferred income taxes are recorded to reflect the tax effect of the temporary differences between the financial reporting basis and the tax basis of the subsidiary's assets and liabilities. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue recognition The Company generates revenues through sales in the open market pursuant to short-term and long-term contracts with its customers. The Company recognizes revenue from sales as the products are shipped and collection is reasonably assured. Revenues associated with the constructing of chlorine dioxide generators are recognized using the percentage of completion method based on cost incurred compared to total estimated cost. The Company also receives prepaid royalties for use of its chlorine dioxide generator technology, which are typically recognized as revenues over a period of ten years. The Company classifies amounts billed to customers for shipping and handling as revenues, with the related shipping and handling costs included in cost of goods sold. Foreign currency translation Assets and liabilities denominated in Canadian dollars are translated into United States dollars at year-end exchange rates and revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are included in accumulated other comprehensive income, while transaction gains and losses are included in operations when incurred. Earnings per share All issued and outstanding shares of the Company are held directly or indirectly by Chemicals and, accordingly, earnings per share information is not presented. Environmental costs Environmental costs are expensed as incurred unless the expenditures extend the economic useful life of the relevant assets. Costs that extend the economic life of assets are capitalized and depreciated over the remaining life of those assets. Liabilities are recorded when environmental assessments or remedial efforts are probable and the cost can be reasonably estimated. Disclosures about fair value of financial instruments In preparing disclosures about the fair value of financial instruments, the Company has assumed that the carrying amount approximates fair value for cash and cash equivalents, receivables, accounts payable and certain accrued expenses due to the short maturities of those instruments. The fair values of long-term debt instruments allocated to the Company by Chemicals are estimated based upon quoted market values (if applicable) or on the current interest rates available for debt with similar terms and remaining maturities. The fair value of pre-petition liabilities subject to compromise and pre-petition liabilities not subject to compromise is not possible to determine given the uncertainty of the impact of the bankruptcy proceedings. Considerable judgment is required in developing these estimates and, accordingly, no assurance can be given that the estimated values presented herein are indicative of the amounts that would be realized in a free market exchange. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Accounting estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Allocations Sterling Canada, Inc. and each of its subsidiaries is directly or indirectly wholly owned by Chemicals, which incurs certain direct and indirect expenses for the benefit and support of the Company. These services include, among others, tax planning, treasury, legal, risk management, and the maintenance of insurance coverage for the Company. Chemicals allocated $2.3 million, $3.5 million, and $2.5 million of such expenses to the Company in fiscal years 2001, 2000, and 1999, respectively, which are included in selling, general, and administrative expenses. Additionally, Chemicals allocated $0.7 million of other expense and $1.3 million of reorganization items during fiscal 2001. Allocations are based on the Companys' proportionate share of the respective amounts and are determined using various criteria including headcount, payroll, number of vehicles, amount of pre-petition liabilities and revenue. New accounting standards Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities," establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. As of October 1, 2000 the transition adjustment relating to the adoption of these statements was not material. Our Canadian facilities periodically enter into fixed price agreements for a portion of their electrical energy requirements. Sterling Pulp has an agreement relating to the supply of a portion of the electrical energy at one of its Canadian sodium chlorate production facilities. This agreement, which was previously designated as a normal purchase under SFAS No. 133, does not meet the criteria of a normal purchase based on guidance issued by the Derivative Implementation Group (the "DIG") in June 2001, All purchases under this agreement, which expires on December 31, 2001, are used in the ordinary course of business; however, effective July 1, 2001, this agreement is required to be marked-to-market. At September 30, 2001, the value of this agreement was a loss of approximately $1.2 million based upon current market prices and quantities to be delivered. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method and further requires separate identification and recognition of intangible assets, other than goodwill. The statement applies to all business combinations initiated after June 30, 2001. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New accounting standards (continued) SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001. The Company does not believe that the adoption of SFAS No. 141 or 142 will have a significant impact on its financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which must be applied to fiscal years beginning after June 15, 2002, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is in the process of evaluating the impact of SFAS No. 143 on its financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company is currently evaluating the impact of SFAS No. 144 on its financial statements. Reclassification Certain amounts reported in the financial statements for the prior periods have been reclassified to conform with the current financial statement presentation with no effect on net income (loss) or stockholder's equity. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
September 30, ------------------------ 2001 2000 ---- ---- (Dollars in Thousands) Inventories: Finished products $ 5,821 $ 3,823 Raw materials 259 250 ---------------------------------------------------------------------------------- Inventories, at cost 6,080 4,073 Inventories under exchange agreements 80 278 Stores and supplies 3,030 3,108 ---------------------------------------------------------------------------------- $ 9,190 $ 7,459 ================================================================================== Property, plant and equipment: Land $ 1,362 $ 1,430 Buildings 26,671 27,109 Plant and equipment 163,602 163,619 ---------------------------------------------------------------------------------- Property, plant and equipment, at cost 191,635 192,158 Less accumulated depreciation (84,542) (74,373) ---------------------------------------------------------------------------------- $ 107,093 $ 117,785 ================================================================================== Other assets: Debt placement fees, net $ 1,007 $ 8,362 Capitalized project costs 1,358 115 Intangible assets, net 5,924 11,762 Other 1,580 1,211 ---------------------------------------------------------------------------------- $ 9,869 $ 21,450 ================================================================================== Accrued liabilities: Accrued compensation $ 565 $ 3,008 Accrued interest 136 6,559 Other 3,805 6,944 ---------------------------------------------------------------------------------- $ 4,506 $ 16,511 ==================================================================================
4. PRE-PETITION LIABILITIES Liabilities Subject to Compromise The principal categories of claims classified as liabilities subject to compromise under reorganization proceedings are identified below. All amounts below may be subject to future adjustment depending on Bankruptcy Court action, further developments with respect to disputed claims or other events, including the reconciliation of claims filed with the Bankruptcy Court to amounts recorded in the accompanying consolidated financial statements. Additional pre-petition claims may arise from rejection of additional executory contracts or unexpired leases by the Debtors. Under a confirmed plan of reorganization, all pre-petition claims subject to compromise may be paid and discharged at amounts substantially less than their allowed amounts. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 4. PRE-PETITION LIABILITIES (CONTINUED) In August of 1996, in connection with a recapitalization transaction, Chemicals allocated $276.8 million of debt to the Company. Principal payments were allocated to the Company by Chemicals as scheduled principal payments were made on a basis consistent with the original allocation. In addition, the Company has made payments to Chemicals, from time to time, out of available cash which were applied by Chemicals as a reduction of the principal of the previously allocated debt. Interest expense is allocated to the Company based on the terms of Chemicals' debt agreements. The Company recorded liabilities subject to compromise under Chapter 11 proceedings as of September 30, 2001, consisted of the following:
(Dollars in Thousands) Accrued liabilities $ 130 Trade accounts payable 2,767 Accrued interest 5,846 Allocated debt(1) ----------------- 11 1/4% Notes 52,224 11 3/4% Notes 120,998 ----------- Total liabilities subject to compromise $ 181,965 ===========
(1) Debt liabilities are presented net of allocated unamortized debt issue costs of $3.6 million. As a result of the bankruptcy filing, principal and interest payments may not be made on pre-petition debt without Bankruptcy Court approval or until a plan of reorganization defining the repayment terms has been confirmed. The total allocated interest on pre-petition debt that was not paid or charged to earnings for the period from July 16, 2001 to September 30, 2001, was $4.2 million. Such interest is not being accrued since management believes it is not probable that it will be treated as an allowed claim. The Bankruptcy Code generally disallows the payment of post-petition interest that accrues with respect to unsecured or undersecured claims. Liabilities Not Subject to Compromise The principal categories of claims classified as liabilities not subject to compromise under reorganization proceedings are identified below. Management believes all amounts below are fully secured liabilities that are not expected to be compromised. The Company recorded liabilities not subject to compromise under Chapter 11 proceedings as of September 30, 2001, consisted of the following:
(Dollars in Thousands) Debt allocated from Parent -------------------------- 12 3/8% Senior secured notes $ 67,152 Accrued interest on 12 3/8% Senior secrued notes 5,932 ---------- Total liabilities not subject to compromise $ 73,084 ==========
STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 5. LONG-TERM DEBT This note contains information regarding debt as of September 30, 2001. As a result of the filing of the Chapter 11 cases previously described, no payments will be made by the Debtors on pre-petition debt except as approved by the Bankruptcy Court. Upon the filing of the Chapter 11 cases by the Debtors, an Event of Default occurred under the Prior Credit Agreement (as defined below) and each of the indentures governing outstanding notes of Chemicals and Holdings and all of this indebtedness was accelerated and became immediately due and payable. The Prior Revolvers (as defined below) were completely paid off with the proceeds of the initial draw under the DIP Financing. However, the Debtors may pay the indebtedness under the indentures only pursuant to a confirmed plan of reorganization or order of the Bankruptcy Court. During the pendency of the Chapter 11 cases, the Debtors will not, for the most part, be subject to the restrictions contained in the Prior Credit Agreement (as defined below) or any of the indentures. However, the Debtors and the Company will be subject to the restrictions contained in the DIP Financing, and Sterling Pulp Chemicals, Ltd. ("Sterling Pulp") will be subject to restrictions contained in both the DIP Financing and the Canadian Financing Agreement (as defined below). Effective July 19, 2001, the Debtors (excluding Holdings) entered into a Revolving Credit Agreement with a group of lenders led by Tyco Capital (formerly The CIT Group/Business Credit, Inc.) to provide up to $195 million in Debtor-In-Possession financing (the "DIP Financing"). By interim order dated July 18, 2001 and final order dated September 14, 2001, the Bankruptcy Court approved up to $155 million in lending commitments under the DIP Financing (the "Base Facility"), consisting of an $85 million "current assets revolver" and a $70 million "fixed assets revolver." The initial draw under the DIP Financing was used to repay all amounts outstanding under the Debtors' previous revolving credit facilities. Additional borrowings under the DIP Financing may be used to fund the Debtors' post-petition operating expenses and supplier and employee obligations throughout the reorganization process. The final order dated September 14, 2001 is on appeal to the U.S. District Court, but no stay of the final order has been sought or imposed, and the order remains fully effective. While no assurances can be given, we do not believe the final order will be overturned on appeal. Borrowings under the DIP Financing are subject to customary funding conditions, including borrowing base restrictions under the current assets revolver. The Base Facility is secured by substantially all of the assets of the Debtors, but some of the liens have been granted super-priority administrative expense claims for the amount of the DIP Financing which, subject to certain carve outs, will entitle the DIP lenders to be paid before any other claims against the Debtors are paid. The DIP Financing is designed to give the Debtors the opportunity, during the reorganization process, to develop a new capital structure that will support them over the long-term, including during recurring cyclical downturns in the markets for the Debtors' petrochemicals products. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 5. LONG-TERM DEBT (CONTINUED) At September 30, 2001, the total credit available under the DIP Financing was $112.8 million due to borrowing base restrictions under the current assets revolver. At September 30, 2001, $42.3 million was drawn under the fixed assets revolver and there were no borrowings outstanding under the current assets revolver. In addition, approximately $4.4 million of letters of credit were outstanding under the current assets revolver, leaving at September 30, 2001, unused borrowing capacity under the secured revolving credit facilities of approximately $66.1 million. As a result of a priming order entered by the Bankruptcy Court on November 2, 2001 and reinstated on December 19, 2001, the lending commitments under the current assets revolver were increased from $85 million to $125 million. The priming order grants the lenders under the currents assets revolver a priming lien on Chemicals' fixed assets located in the United States and the capital stock of most of Chemicals' domestic subsidiaries, prior in right to the existing liens in favor of the 12 3/8% Notes. Although the priming order was entered by the Bankruptcy Court on November 2, 2001, it was appealed to the U.S. District Court by the indenture trustee for the 12 3/8% Notes. By order dated December 17, 2001, the U.S. District Court reversed the priming order and remanded the matter to the Bankruptcy Court for a determination of a compensatory adjustment in favor of the 12 3/8% Notes, which the U.S. District Court suggested would be satisfied by a 4% increase of the interest rate payable on up to $40 million. On remand, the Bankruptcy Court entered an order dated December 19, 2001, reinstating the priming order subject to an appropriate compensatory adjustment in favor of the 12 3/8% Notes of four percentage points of additional interest on up to $40 million. In addition, the Bankruptcy Court scheduled a hearing for January 2, 2002 to consider the characteristics and implementation of this 4% increase. The Debtors anticipate that the priming order will be further appealed by the indenture trustee. The priming order will remain effective pending the outcome of any appeal unless stayed by an appellate court. The Debtors will take all reasonable actions necessary, either before the Bankruptcy Court or on appeal, to maintain the effectiveness of the priming order. If the priming order is stayed or is not ultimately upheld on appeal, we will need to seek additional sources of financing or revise our business plan and operations consistent with the level of available financing. However, we can give no assurances that the priming order will not be stayed or will be upheld on appeal or, if stayed or not upheld on appeal, that additional sources of financing will be available or adequate or that our available financing will be adequate after implementing revisions to our business plan and operations. As of July 11, 2001, Sterling Pulp entered into a financing agreement with Tyco Capital Business Credit (Canada) Inc. ("Tyco Canada") to provide up to the Canadian dollar equivalent of U.S. $30 million (the "Canadian Financing Agreement"). The initial advance under this facility, approximately U.S. $20 million, was used by Sterling Pulp to discharge a portion of an intercompany debt and was ultimately transferred to the Debtors through an intercompany loan. The intercompany loan was approved by the Bankruptcy Court's interim order entered on July 18, 2001 and final order entered on September 14, 2001, which is a subject of the appeal of the final order discussed above. The initial term of the Canadian Financing Agreement extends to July 2004. The Canadian Financing Agreement maybe terminated by either Sterling STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 5. LONG-TERM DEBT (CONTINUED) Pulp or Tyco Canada thereafter only by giving 60 days written termination notice prior to each subsequent anniversary date. At September 30, 2001, $20 million was drawn under the Canadian Financing Agreement. Under the DIP Financing, the Debtors (excluding Holdings) are co-borrowers and are jointly and severally liable for any indebtedness thereunder. The Base Facility consists of: o a $70 million fixed assets revolving credit facility secured by: - first priority liens on all of the capital stock of Chemicals and the other co-borrowers, all of Chemicals' United States production facilities and related assets and 35% of the capital stock of certain of Chemicals' subsidiaries incorporated outside the United States; and - second priority liens on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers and 65% of the capital stock of certain of Chemicals' subsidiaries incorporated outside the United States; and o an $85 million current assets revolving credit facility secured by: - a first priority lien on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers; - a second priority lien on 35% of the capital stock of certain of Chemicals' subsidiaries incorporated outside the United States; and - third priority liens on the remaining 65% of that stock, all of the capital stock of Chemicals and the other co-borrowers and all of Chemicals' United States production facilities and related assets. Available credit under the fixed assets revolving credit facility is not subject to a borrowing base. At September 30, 2001, available credit under the current assets revolving credit facility was subject to a monthly borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory, with an inventory cap of $42.5 million. In addition, the borrowing base for the current assets revolver was required to exceed outstanding borrowings thereunder by $12 million at all times with a maximum of $85 million available under the current asset revolving credit facility. Assuming the priming order is not overturned on appeal, (i) maximum availability under the current assets revolving credit facility is $125 million, (ii) the monthly borrowing base consists of 85% of eligible accounts receivable, the lesser of $10 million or 33% of specified estimated future royalty payments related to the Debtors' chlorine dioxide generator technology and 65% of eligible inventory, with an inventory cap of $62.5 million and (iii) the borrowing base for the current assets revolver is required to exceed outstanding borrowings by only $6 million at all times. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 5. LONG-TERM DEBT (CONTINUED) If the priming order remains effective and the total commitments under the current assets revolver are increased to $125 million, the incremental $40 million is secured by first priority liens on all of our United States production facilities and related assets and all of the capital stock of the co-borrowers (excluding Chemicals) to secure up to $40 million under the current assets revolver, as well as all of the same collateral securing the initial $85 million current assets revolver. Consequently, after giving effect to the priming order, the DIP Financing consists of: o a $70 million fixed assets revolving credit facility secured by: - a first priority lien on all of the capital stock of Chemicals; - second priority liens on all of Chemicals' United States production facilities and related assets, all of the capital stock of the co-borrowers (excluding Chemicals), all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers and 35% of the capital stock of certain of Chemicals' subsidiaries incorporated outside the United States; and - a third priority lien on the remaining 65% of that stock; and o a $125 million current assets revolving credit facility: - $40 million of which is secured by first priority liens on all of Chemicals' United States production facilities and related assets, all of the capital stock of the co-borrowers (excluding Chemicals) and 35% of the capital stock of certain of Chemicals' subsidiaries incorporated outside the United States and a second priority lien on the remaining 65% of that stock; and - all of which is secured by a first priority lien on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers, third priority liens on all of the capital stock of Chemicals and 35% of the capital stock of certain of Chemicals' subsidiaries incorporated outside the United States and fourth priority liens on the remaining 65% of that stock, all of the capital stock of the co-borrowers (excluding Chemicals) and all of Chemicals' United States production facilities and related assets. Borrowings under the fixed assets revolving credit facility bear interest, at Chemicals' option, at an annual rate of either the "LIBOR Rate" (as defined in the DIP Financing) plus 3.75% or the "Alternate Base Rate" (as defined in the DIP Financing) plus 2.25%. Borrowings under the current assets revolving credit facility bear interest, at Chemicals' option, at an annual rate of either the LIBOR Rate plus 3.50% or the Alternate Base Rate plus 2.00%. At September 30, 2001, the weighted average interest rate in effect was 7.2%. The DIP Financing also requires Chemicals and the co-borrowers to pay an aggregate commitment fee ranging from 0.75% to 1.25% on the unused portion of the commitment for the fixed assets revolving credit facility, depending on the amount drawn, and an aggregate commitment fee of 0.5% on the unused portion of the commitment for the current assets revolving credit facility. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 5. LONG-TERM DEBT (CONTINUED) At September 30, 2001, the total credit available under the DIP Financing was $112.8 million due to the current assets revolver borrowing base limitations discussed above. At September 30, 2001, $42.3 million was drawn under the fixed assets revolver and there were no borrowings outstanding under the current assets revolver. In addition, approximately $4.4 million of letters of credit were outstanding under the current assets revolver, leaving at September 30, 2001, unused borrowing capacity under the secured revolving credit facilities of approximately $66.1 million. None of these borrowings were allocated to the Company. At September 30, 2001, $20 million was drawn under the Canadian Financing Agreement. Borrowings under the Canadian Financing Agreement bear interest at the CIBC Bank Rate (as defined in the Canadian Financing Agreement) plus between 2.0% and 2.5%, or at the LIBOR Rate plus 3.5%. The DIP Financing and the Canadian Financing Agreement contain numerous covenants, including, but not limited to, restrictions on the ability to incur indebtedness, create liens and sell assets, as well as maintenance of certain financial covenants. In August of 1996, in connection with a recapitalization transaction, Chemicals allocated $276.8 million of debt to the Company. Principal payments were allocated to the Company by Chemicals as scheduled principal payments were made on a basis consistent with the original allocation. In addition, the Company has made payments to Chemicals, from time to time, out of available cash which were applied by Chemicals as a reduction of the principal of the previously allocated debt. Interest expense is allocated to the Company based on the terms of Chemicals' debt agreements. At September 30, 2001, interest rates on allocated debt ranged from 11.25% to 12.375%. Debt issue costs relating to allocated long-term debt have been allocated to the Company by Chemicals on a basis consistent with long-term debt and are included as a valuation against pre-petition liabilities subject to compromise. On July 23, 1999, Chemicals completed a private offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006, which were subsequently exchanged for publicly registered 12 3/8% Notes with substantially similar terms (the "12 3/8% Notes"). The 12 3/8% Notes are senior secured obligations of Chemicals and rank equally in right of payment with all other existing and future senior indebtedness of Chemicals and senior in right of payment to all existing and future subordinated indebtedness of Chemicals. The 12 3/8% Notes are guaranteed by all of Chemicals' existing direct and indirect United States subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) on a joint and several basis. Each subsidiary's guarantee ranks equally in right of payment with all of that subsidiary's existing and future senior indebtedness and senior in right of payment to all existing and future subordinated indebtedness of that subsidiary. The 12 3/8% Notes and the subsidiary guarantees are secured by: o a second priority lien on all of Chemicals' United States production facilities and related assets; o a second priority pledge of all of the capital stock of each subsidiary guarantor; and o a first priority pledge of 65% of the stock of certain of Chemicals' subsidiaries incorporated outside of the United States. As a result of the priming order, the second priority liens held by the 12 3/8% Notes on all of Chemicals' United States production facilities and related assets and the capital stock of each subsidiary guarantor became third priority liens. The priming order does not affect the priority of the pledge held by the 12 3/8% Notes of 65% of the stock of certain of Chemicals' subsidiaries incorporated outside of the United States. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 5. LONG-TERM DEBT (CONTINUED) On July 23, 1999, Chemicals also established two secured revolving credit facilities providing up to $155,000,000 in revolving credit loans (the "Prior Revolvers") under a single Revolving Credit Agreement (the "Prior Credit Agreement"). Under the Prior Credit Agreement, Chemicals and each of its direct and indirect United States subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) were co-borrowers and were jointly and severally liable for any indebtedness thereunder. The Prior Revolvers consisted of (i) an $85,000,000 revolving credit facility secured by a first priority lien on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers and (ii) a $70,000,000 revolving credit facility secured by a first priority lien on all of our United States production facilities and related assets, all of the capital stock of Chemicals and all of the capital stock of each co-borrower and a second priority lien on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers. As mentioned above, the initial draw under the DIP Financing was used to repay all amounts under the Prior Revolvers. At September 30,2000, approximately $37.2 million was drawn by Chemicals under the prior revolvers, none of which was allocated to the Company. DEBT MATURITIES The estimated remaining principal payments on the outstanding debt of Sterling Pulp are as follows:
YEAR ENDING PRINCIPAL SEPTEMBER 30, PAYMENTS ------------- -------- (Dollars in Thousands) 2002................................................. $ 1,206 2003................................................. 1,810 2004................................................. 16,988 2005................................................. -- 2006................................................. -- Thereafter .......................................... -- --------- Total debt of Sterling Pulp.................. $ 20,004 =========
STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 6. CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY The following condensed financial statements are presented in accordance with SOP 90-7: STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) CONDENSED COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) ================================================================================
Year ended September 30, 2001 -------------------------------------------------------------------- Entities in Entities Not in Reorganization Reorganization Combined Proceedings Proceedings Eliminations Totals ---------------- ----------------- -------------- ---------- Revenues $ 56,230 $ 134,989 $ (3,594) $ 187,625 Cost of goods sold 39,773 112,602 (3,594) 148,781 - ------------------------------------------------------------------------------------------------------------------- Gross profit 16,457 22,387 -- 38,844 Selling, general and administrative expenses 2,406 5,962 -- 8,368 Other expense 732 -- -- 732 Reorganization expense 1,340 -- -- 1,340 Interest and debt related expenses, net 25,716 361 -- 26,077 - ------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (13,737) 16,064 -- 2,327 Provision for income taxes 11,194 4,975 -- 16,169 - ------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (24,931) $ 11,089 $ -- $ (13,842) ===================================================================================================================
STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 6. CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY (CONTINUED) STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) CONDENSED COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS) ================================================================================
September 30, 2001 -------------------------------------------------------------------- Entities in Entities Not in Reorganization Reorganization Combined Proceedings Proceedings Eliminations Totals ----------------- ----------------- -------------- ------------ ASSETS Cash and cash equivalents $ 1,086 $ 14 $ -- $ 1,100 Accounts receivable, net 15,388 22,359 (3,079) 34,668 Inventories 1,756 7,434 -- 9,190 Prepaid expenses 16 871 -- 887 Property, plant and equipment, net 44,332 62,761 -- 107,093 Due from affiliates 203,793 -- -- 203,793 Other assets 7,334 21,944 (19,409) 9,869 - -------------------------------------------------------------------------------------------------------------------- Total Assets $ 273,705 $ 115,383 $ (22,488) $ 366,600 ==================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) Accounts payable $ 3,219 $ 12,524 $ (3,079) $ 12,664 Accrued liabilities 594 3,912 -- 4,506 Current portion of long-term debt -- 1,206 -- 1,206 Liabilities subject to compromise 181,965 -- -- 181,965 Liabilities not subject to compromise 73,084 -- -- 73,084 Long-term debt 19,409 18,798 (19,409) 18,798 Deferred income taxes -- 9,171 -- 9,171 Deferred credits and other liabilities 5,727 4,182 -- 9,909 Stockholder's equity (deficiency in assets) (10,293) 65,590 -- 55,297 - -------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity (Deficiency in Assets) $ 273,705 $ 115,383 $ (22,488) $ 366,600 ====================================================================================================================
STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 6. CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY (CONTINUED) STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) CONDENSED COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) ================================================================================
Year ended September 30, 2001 --------------------------------------------------- Entities in Entities Not in Reorganization Reorganization Combined Proceedings Proceedings Totals --------------------------------------------------- Net cash provided by (used in) operating activities $ (24,565) $ 12,312 $ (12,253) Cash flows from investing activities: Capital expenditures (627) (5,127) (5,754) Investments 6,764 (6,764) -- --------------------------------------------------- Net cash provided by (used in) investing activities 6,137 (11,891) (5,754) Cash flows from financing activities: Proceeds from long-term debt -- 20,004 20,004 Repayments of long-term debt 19,409 (19,409) -- Debt issuance costs 105 (1,112) (1,007) Other -- 21 21 --------------------------------------------------- Net cash provided by (used in) financing activities 19,514 (496) 19,018 Effect of exchange rate changes on cash -- 3 3 --------------------------------------------------- Net increase (decrease) in cash and cash equivalents 1,086 (72) 1,014 Cash and cash equivalents at: Beginning of year -- 86 86 --------------------------------------------------- End of year $ 1,086 $ 14 $ 1,100 ===================================================
STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 7. INCOME TAXES The Company is included in the consolidated federal United States tax returns filed by Holdings. The Company's provision (benefit) for United States income taxes has been allocated as if the Company filed its annual federal United States tax returns on a separate return basis. As of September 30, 2001, and 2000, zero and $13.1 million, respectively, of deferred income tax assets were included in Due from Affiliates. For the years ended September 30, 2001, 2000, and 1999, the Company recorded $13.1 million, zero and $0.2 million, respectively, of United States income tax provision (benefit) in its provision (benefit) for income taxes. Canadian deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and the financial reporting amounts at each year-end. A reconciliation of the Canadian income taxes to the Canadian effective tax provision follows:
Year ended September 30, --------------------------------------- 2001 2000 1999 -------- -------- -------- (Dollars in Thousands) Provision for federal income tax at the statutory rate $ 3,713 $ 2,308 $ 259 Provincial income taxes at the statutory rates 2,072 1,114 88 Federal and provincial manufacturing and processing tax credits (810) (477) (50) Other -- -- 16 -------------------------------------------------------------------------------------------------------------- $ 4,975 $ 2,945 $ 313 ==============================================================================================================
STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 7. INCOME TAXES (CONTINUED) The provision for Canadian income taxes is composed of the following:
Year ended September 30, ---------------------------------------------- 2001 2000 1999 (Dollars in Thousands) Current federal $ 2,898 $ 3,328 $ 2,098 Deferred federal 5 (1,380) (1,859) Current provincial 2,067 1,702 619 Deferred provincial 5 (705) (545) ---------------------------------------------------------------------------------------------------- $ 4,975 $ 2,945 $ 313 ====================================================================================================
The components of the Company's deferred income tax assets and liabilities are summarized below:
September 30, ----------------------------- 2001 2000 (Dollars in Thousands) Deferred tax assets: Accrued liabilities $ 452 $ 249 Accrued postretirement cost 1,522 1,339 Investment tax credits 115 1,408 --------------------------------------------------------------------------------------- 2,089 2,996 --------------------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment (11,260) (11,334) --------------------------------------------------------------------------------------- (11,260) (11,334) Net deferred tax liabilities $ (9,171) $ (8,338) =======================================================================================
STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 8. EMPLOYEE BENEFITS The Company's United States employees participate in various employee benefit plans of Chemicals. Costs, assets, and liabilities associated with United States employees participating in these various plans are allocated to the Company by Chemicals based on the number of employees. In addition, the Company sponsors various employee benefit plans in Canada. The Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of their pre-petition obligations, including payments for employee wages and salaries, benefits and other employee obligations. The Debtors' obligations, under its employee benefit plans are liabilities that are subject to compromise under the Chapter 11 reorganization proceedings. See Note 4 for further information on liabilities subject to compromise. Employee Savings Plan The Company introduced an employee savings plan for all eligible full-time Canadian employees with an effective date of October 1, 2000. Each participant has the option to contribute a percentage of his or her earnings to the Canadian savings plan, with no limit on the maximum percentage contributed. The Company will match 100% of a participant's contributions, to the extent such contributions do not exceed 3.5% of such participant's cash compensation (excluding bonuses, profit sharing, and similar types of compensation). The Company has recorded an expense of $0.2 million related to the Savings Plan for the fiscal year ended September 30, 2001. Profit Sharing and Bonus Plans In January of 1997, the Board of Directors of Holdings, upon recommendation of its Compensation Committee, approved the establishment of a Profit Sharing Plan that is designed to benefit all qualified employees, and a Bonus Plan that is designed to provide certain exempt salaried employees of the Company with the opportunity to earn bonuses, depending, among other things, on the annual financial performance of Holdings. The Company has recorded (income) and expense of ($0.1) million, $1.3 million and $0.2 million related to the Profit Sharing Plan and nil, $1.1 million and nil related to the Bonus Plan for each of the fiscal years ended September 30, 2001, 2000 and 1999, respectively. Phantom Stock Plan The Company has a phantom stock plan for all eligible full-time Canadian employees. The effective date of this Plan was August 21, 1996 and the expiration date was December 31, 2000. At the end of each plan year, the plan administrator establishes a "determined percentage" for the preceding plan year. This percentage is then multiplied by each participant's compensation for the plan year to determine the award amount. The award amount is then divided by the fair market value of one share of the common stock of Holdings, as of December 31 of that plan year, to determine the number of rights to be credited to the participant. Upon termination of employment, the benefit amount becomes payable to the participant. The benefit amount is the number of vested rights in the participant's account, multiplied by the fair market value of one share of common stock of Holdings as of the most recent valuation date. The Company has recorded (income) and expense of $(0.4) million, $0.2 million and nil related to the phantom stock plan for each of the fiscal years ended September 30, 2001, 2000 and 1999, respectively. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 8. EMPLOYEE BENEFITS (CONTINUED) Savings and Investment Plan Chemicals' Sixth Amended and Restated Savings and Investment Plan covers substantially all United States employees of the Company, including executive officers. This Plan is qualified under Section 401(k) of the Internal Revenue Code. Each participant has the option to defer taxation of a portion of his or her earnings by directing the Company to contribute a percentage of such earnings to this Plan. A participant may direct up to a maximum of 20% of eligible earnings to this Plan, subject to certain limitations set forth in the Internal Revenue Code for "highly compensated" participants. A participant's contributions become distributable upon the termination of his or her employment. The Company did not make any contribution to this Plan in fiscal 2000. Beginning October 1, 2000, the Company began matching 50% of a participant's contributions, to the extent such contributions do not exceed 7% of such participant's cash compensation (excluding bonuses, profit sharing, and similar types of compensation). The Company has recorded an expense of $0.1 million related to the Savings and Investment Plan for the fiscal year ended September 30, 2001. Retirement Benefit Plans Chemicals has non-contributory pension plans in the United States which cover all salaried and wage employees. The benefits under these plans are based primarily on years of service and employees' pay near retirement. Chemicals' funding policy is consistent with the funding requirements of federal law and regulations. Plan assets consist principally of government and corporate securities. The liability relating to United States employees allocated to the Company by Chemicals for the retirement benefit plans and included in Due from Affiliates was $0.8 million and $0.6 million at September 30, 2001 and 2000, respectively. The total pension expense relating to United States employees allocated to the Company was $0.2 million, $0.2 million, and $0.1 million for the years ended September 30, 2001, 2000, and 1999, respectively. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 8. EMPLOYEE BENEFITS (CONTINUED) The Company has employer and employee contributory plans in Canada which cover all salaried and wage employees. Information for Canadian benefit plans concerning the pension obligation, plan assets, amounts recognized in the Company's financial statements, and underlying actuarial assumptions is stated below.
September 30, ------------------------ 2001 2000 ---- ---- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 17,608 $ 16,283 Currency rate conversion (855) (293) Service cost 713 716 Interest cost 1,293 1,240 Plan amendments 196 Actuarial gain 985 (31) Benefits paid (470) (307) ------------------------------------------------------------------------------------------------ Benefit obligation at end of year $ 19,470 $ 17,608 ================================================================================================ Change in plan assets: Fair value at beginning of year $ 17,817 $ 15,330 Currency rate conversion (865) (276) Actual return on plan assets (2,348) 2,412 Employer contributions 722 658 Benefits paid (470) (307) ------------------------------------------------------------------------------------------------ Fair value at end of year $ 14,856 $ 17,817 ================================================================================================ Development of net amount recognized: Funded status $ (4,613) $ 209 Unrecognized cost: Actuarial gain (loss) 3,449 (1,318) Prior service cost 452 298 ------------------------------------------------------------------------------------------------ Net amount recognized $ (712) $ (811) ================================================================================================ Amounts recognized in the statement of financial position: Prepaid pension cost $ 353 $ 418 Accrued pension cost (1,246) (1,229) Intangible asset 129 -- Accumulated other comprehensive income 52 -- ------------------------------------------------------------------------------------------------ Net amount recognized $ (712) $ (811) ================================================================================================
STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 8. EMPLOYEE BENEFITS (CONTINUED) Net periodic pension costs for the Canadian pension plan consist of the following components:
September 30, ------------------------------------ 2001 2000 1999 ---- ---- ---- (Dollars in Thousands) Components of net pension costs: Service cost-benefits earned during the year $ 713 $ 716 $ 919 Interest on prior year's projected benefit obligation 1,293 1,240 1,112 Expected return on plan assets (1,281) (1,144) (963) Net amortization: Actuarial loss (gain) (89) 28 68 Prior service cost 27 (2) 29 ------------------------------------------------------------------------------------------------------------ Net pension costs $ 663 $ 838 $ 1,165 ============================================================================================================ Weighted average assumptions: Discount rate 7.3% 7.5% 7.5% Rates of increase in salary compensation level 4.5% 4.5% 4.5% Expected long-term rate of return on plan assets 7.5% 7.5% 7.5%
Postretirement Benefits Other than Pensions Chemicals and the Company provide certain health care benefits and life insurance benefits for retired employees. Substantially all employees become eligible for these benefits at normal retirement age. The cost of these benefits is accrued during the period in which the employee renders the necessary service. Health care benefits are provided to employees who retire with ten or more years of service, excluding Canadian employees covered by collective bargaining agreements. All employees are eligible for postretirement life insurance. Postretirement health care benefits for United States plans are non-contributory. Benefit provisions for most hourly and some salaried employees are subject to collective bargaining agreements. In general, the plans stipulate that retiree health care benefits are paid as covered expenses are incurred. The liability relating to United States employees allocated to the Company by Chemicals for the postretirement benefits other than pensions and included in Due from Affiliates was $0.5 million and $0.4 million at September 30, 2001 and 2000, respectively. The total postretirement benefits other than pensions expense for United States employees allocated to the Company was $ 0.1 million, $0.1 million, and $0.1 million for the years ended September 30, 2001, 2000, and 1999, respectively. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 8. EMPLOYEE BENEFITS (CONTINUED) Information for Canadian benefit plans with respect to the plan obligation, the funded status, amounts recognized in the Company's financial statements, and underlying actuarial assumptions is stated below.
September 30, ---------------------------- 2001 2000 (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 4,751 $ 4,886 Service cost 238 314 Interest cost 355 329 Actuarial loss (gain) 407 (754) Benefits paid (200) (24) ----------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 5,551 $ 4,751 =============================================================================================== Development of net amount recognized: Funded status $ (5,551) $ (4,751) Unrecognized cost: Actuarial (gain) loss 267 (91) ----------------------------------------------------------------------------------------------- Net amount recognized $ (5,284) $ (4,842) ===============================================================================================
Net periodic plan costs for the Canadian postretirement benefit consist of the following components:
September 30, ----------------------------------- 2001 2000 1999 (Dollars in Thousands) Components of net plan costs: Service cost $ 238 $ 314 $ 307 Interest cost 355 329 299 Net amortizaton of actuarial loss 7 16 32 ----------------------------------------------------------------------------------------------- Net plan costs $ 600 $ 659 $ 638 =============================================================================================== Weighted-average assumptions: Discount rate 7.25% 7.50% 6.75%
STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 8. EMPLOYEE BENEFITS (CONTINUED) The weighted average annual assumed health care trend rate is 7.5% for 2001. The rate is assumed to decrease gradually to 5.8% in 2027 and remain level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one percentage point change in assumed health care trend rates would have the following effects:
1% Increase 1% Decrease ----------- ----------- (Dollars in Thousands) Effect on total of service and interest cost components $ 33 $ (31) Effect on postretirement benefit obligation 268 (233)
9. COMMITMENTS AND CONTINGENCIES Lease Commitments The Company has entered into various long-term noncancellable operating leases, some of which have been allocated to commonly controlled companies. Future minimum lease commitments at September 30, 2001 are as follows: fiscal 2002 - $5.6 million; fiscal 2003 - $4.9 million; fiscal 2004 - $4.6 million; fiscal 2005 - $3.8 million; fiscal 2006 - $2.6 million; and thereafter - $4.5 million. Environmental and Safety Matters The Company's operations involve the handling, production, transportation, treatment, and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental and health and safety laws, regulations, and permit requirements. Environmental permits required for the Company's operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacture, handling, processing, distribution, and use of the Company's chemical products and, if so affected, the Company's business and operations may be materially and adversely affected. In addition, changes in environmental requirements can cause the Company to incur substantial costs in upgrading or redesigning its facilities and processes, including our waste treatment, storage, disposal, and other waste handling practices and equipment. The Company conducts environmental management programs designed to maintain compliance with applicable environmental requirements at all of its facilities. The Company routinely conducts inspection and surveillance programs designed to detect and respond to leaks or spills of regulated hazardous substances and to correct identified regulatory deficiencies. The Company believes that its procedures for waste handling are consistent with industry standards and applicable requirements. In addition, the Company believes that its operations are consistent with good industry practice. However, a business risk inherent with chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees, and nearby landowners and occupants. While the Company believes its business operations and facilities generally are operated in compliance in all material respects with all applicable environmental and health and safety requirements, the Company cannot be sure that past practices or future operations will not result in STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 9. COMMITMENTS AND CONTINGENCIES (CONTINUED) material claims or regulatory action, require material environmental expenditures, or result in exposure or injury claims by employees, contractors and their employees, and the public. Some risk of environmental costs and liabilities is inherent in the Company's operations and products, as it is with other companies engaged in similar businesses. In addition, a catastrophic event at any of the Company's facilities could result in the incurrence of liabilities substantially in excess of its insurance coverages. The Company's operating expenditures for environmental matters, mostly waste management and compliance, were approximately $3.4 million for fiscal 2001 and $2.5 million for fiscal 2000. The Company also spent approximately $0.6 million for environmentally related capital projects in fiscal 2001 and $0.7 million for these types of capital projects in fiscal 2000. In fiscal 2002, the Company anticipates spending approximately $2.6 million for capital projects related to waste management and environmental compliance. There are no capital expenditures related to remediation of environmental conditions projected for fiscal 2002. Conversely, a significant ban on all chlorine containing compounds could have a materially adverse effect on us. British Columbia has a regulation in place - Pulp Mill and Pulp and Paper Mill Liquid Effluent Control Regulation - requiring elimination of the use of all chlorine products, including chlorine dioxide, in the bleaching process by the year 2002. The pulp and paper industry believes that a ban of chlorine dioxide in the bleaching process will yield no measurable environmental or public health benefit and is working to change this regulation. In the event such a regulation is implemented, Sterling Pulp would seek to sell the products it manufactures at its British Columbia facility to customers in other markets. Sterling Pulp is not aware of any other laws or regulations in place in North America which would restrict the use of such products for other purposes. Legal Proceedings As previously discussed, the Debtors filed petitions for reorganization under Chapter 11 of the Bankruptcy Code on July 16, 2001. As a result of the Debtors' commencement of the Chapter 11 cases, an automatic stay has been imposed against the commencement or continuation of legal proceedings against the Debtors outside of the Bankruptcy Court. The automatic stay will not apply, however, to governmental authorities exercising their police or regulatory powers, including the application of environmental laws. Claimants against the Debtors may assert their claims in the Chapter 11 cases by filing a timely proof of claim, to which the Debtors may object and seek a determination from the Bankruptcy Court as to the allowability of the claim. Claimants who desire to liquidate their claims in legal proceedings outside of the Bankruptcy Court will be required to obtain relief from the automatic stay by order of the Bankruptcy Court. If such relief is granted, the automatic stay will remain in effect with respect to the collection of liquidated claim amounts. As a general rule, all claims against the Debtors that seek a recovery from assets of the Debtors' estates will be addressed in the Chapter 11 cases and paid only pursuant to the terms of a confirmed plan of reorganization. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 9. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company is subject to claims and legal actions that arise in the ordinary course of its business. The Company believes that the ultimate liability, if any, with respect to these claims and legal actions will not have a material adverse effect on its financial position, results of operations, or cash flows, although the Company cannot give any assurances to that effect. Pledge of Common Stock The subsidiaries of Chemicals which guaranteed the 12 3/8% Notes consist of Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Chemicals Energy, Inc., Sterling Chemicals International, Inc. and Sterling Fibers, Inc. and, together with two Canadian subsidiaries of Sterling Canada, Inc., are collectively referred to as the "Guarantors." In order to secure the repayment of the DIP Financing, the following pledges of stock were made by the holders of that stock: In order to secure $40 million of the current assets revolving credit facility, a first priority pledge of 100% of the common stock of the Guarantors incorporated in the United States and 35% of the common stock of the Guarantors incorporated outside the United States, and a second priority pledge of the remaining 65% of that stock; In order to secure the fixed assets revolving credit facility, a second priority pledge of 100% of the common stock of the Guarantors incorporated in the United States and 35% of the common stock of the Guarantors incorporated outside the United states, and a third priority pledge of the remaining 65% of that stock, and In order to secure all of the current assets revolving credit facility, a fourth priority pledge of 100% of the common stock of the Guarantors incorporated in the United States and 65% of the common stock of the Guarantors incorporated outside the United States and a third priority pledge of the remaining 35% of that stock; As a result of the priming order, in order to secure the additional $40 million of the current assets revolving credit facility, there is a first priority pledge of 100% of the common stock of the Guarantors incorporated in the United States and 35% of the common stock of the Guarantors incorporated outside the United States, and a second priority pledge of the remaining 65% of that stock, which will result in the lowering by one level of priority of each of the pledges described above. In order to secure the repayment of the 12 3/8% Notes, the holders of the Guarantors' common stock initially made a second priority pledge of 100% of the common stock of each of the Guarantors incorporated in the United States and a first priority pledge of 65% of the common stock of each of the Guarantors incorporated outside of the United States. However, after the issuance of the priming order by the Bankruptcy Court, the priority of the pledge of the common stock of the Guarantors incorporated in the United States was lowered to a third priority pledge. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 10. RELATED PARTY TRANSACTIONS In the normal course of operations of the Company, the following represents significant transactions with related parties for the fiscal years ended September 30, 2001, 2000 and 1999:
Year ended September 30, ------------------------------------- 2001 2000 1999 ---- ---- ---- (Dollars in Thousands) Commonly-controlled companies: Sale of goods $ 2,866 $ 3,500 $ 6,661 Purchase of goods 8,364 6,087 6,401 Administration fee revenue 326 340 335
11. FINANCIAL INSTRUMENTS Foreign Exchange The Company has previously entered into forward foreign exchange contracts to reduce risk due to Canadian dollar exchange rate movements. The forward foreign exchange contracts had varying maturities with none exceeding 18 months. The Company made net settlements of United States dollars for Canadian dollars at rates agreed to at inception of the contracts. The Company does not engage in currency speculation. The last of the Company's existing forward exchange contracts expired in March of 2000, and it does not currently intend to enter into any additional forward exchange contracts. Electricity Contracts Sterling Pulp periodically enters into fixed price agreements for a portion of its electrical energy requirements. As of September 30, 2001, the Company had entered into a fixed price agreement relating to the supply of a portion of the electrical energy at one of its Canadian sodium chlorate production facilities. The difference between the forecasted price of energy and the fixed price resulted in the recognition of an operating expense of $1.2 million during fiscal 2001 based upon on current market prices and quantities to be delivered. The agreement expires December 31, 2001. Concentrations of Risk The Company sells its products primarily to companies involved in the pulp and paper manufacturing industries. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. The Company maintains cash deposits with major banks, which from time to time may exceed federally insured limits. The Company periodically assesses the financial condition of these institutions and believes that the possibility of any loss is minimal. Approximately 31% of the Company's employees are covered by union agreements. None of the agreements expire during fiscal 2002. STERLING CANADA, INC. (DEBTOR-IN-POSSESSION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 11. FINANCIAL INSTRUMENTS (CONTINUED) Investments It is the policy of the Company to invest its excess cash in investment instruments or securities whose value is not subject to market fluctuations, such as certificates of deposit, repurchase agreements, or Eurodollar deposits with domestic or foreign banks or other financial institutions. Other permitted investments include commercial paper of major United States corporations with ratings of A1 by Standard & Poor's Ratings Group or P1 by Moody's Investor Services, Inc., loan participations of major United States corporations with a short term credit rating of A1/P1, and direct obligations of the United States Government or its agencies. In addition, not more than $5 million may be invested by the Company with any single bank, financial institution, or United States corporation. Fair Value of Financial Instruments The carrying amounts reflected in the consolidated balance sheet for cash and cash equivalents, receivables, payables and certain accrued expenses approximate fair value due to the short maturities of these instruments. The following table presents the carrying value and fair value of long-term debt (including current maturities) at September 30, 2001:
CARRYING VALUE FAIR VALUE -------------- ---------- (Dollars in Thousands) Canadian Financing Agreement $20,004 $20,004
Due to the uncertainty resulting from the Bankruptcy filings discussed in Note 1, it is difficult to estimate the fair value of the Debtors' borrowings. The Canadian Financing Agreement having variable interest rates, the fair value approximates its carrying value, as the interest rate fluctuates with changes in market rates. At September 20, 2001, the Company's forward power contract had a fair market value of ($1.2) million, based on its estimate of what it would have to pay to terminate the contract at September 30, 2001. INDEPENDENT AUDITORS' REPORT To the Stockholder of Sterling Canada, Inc. We have audited the consolidated balance sheets of Sterling Canada, Inc. (the "Company") as at September 30, 2001 and 2000 and the consolidated statements of operations, changes in stockholder's equity, and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at September 30, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2001 in accordance with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Chartered Accountants Mississauga, Canada December 20, 2001 Comments by Auditors for U.S. Readers On Canada-U.S. Reporting Difference In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the company's ability to continue as a going concern, such as those described in Note 1 to the financial statements. Our report to the stockholder dated December 20, 2001 is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors' report when these are adequately disclosed in the financial statements. DELOITTE & TOUCHE LLP Chartered Accountants Mississauga, Canada December 20, 2001 EX-99.2 19 h92951ex99-2.txt STERLING PULP CHEMICALS, LTD. - FIN. STATEMENTS EXHIBIT 99.2 Financial Statements of STERLING PULP CHEMICALS, LTD. (in United States dollars) Years ended September 30, 2001, 2000 and 1999 STERLING PULP CHEMICALS, LTD. BALANCE SHEETS (U.S. DOLLARS IN THOUSANDS) ================================================================================
September 30, --------------------- 2001 2000 ------- -------- ASSETS CURRENT Accounts receivable, net $16,866 $17,165 Due from related parties (Note 8) 2,010 1,832 Other receivables 2,129 1,821 Inventories (Note 3) 7,434 6,035 Prepaid expenses 871 568 - -------------------------------------------------------------------------------------------- 29,310 27,421 PROPERTY, PLANT AND EQUIPMENT, NET (Note 3) 62,761 69,297 OTHER ASSETS (Note 3) 2,534 293 - -------------------------------------------------------------------------------------------- $94,605 $97,011 ============================================================================================ LIABILITIES CURRENT Accounts payable $ 9,551 $10,634 Other accrued liabilities 3,912 8,973 Due to related parties (Note 8) 4,144 1,407 Current portion of long-term debt 1,206 - - -------------------------------------------------------------------------------------------- 18,813 21,014 LONG-TERM DEBT - External (Note 4) 18,798 - LONG-TERM DEBT - Note Payable (Note 4) 13,813 34,546 DEFERRED INCOME TAXES (Note 5) 9,171 8,338 DEFERRED CREDITS AND OTHER LIABILITIES 4,182 4,335 - -------------------------------------------------------------------------------------------- 64,777 68,233 - -------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDER'S EQUITY Common stock 1 1 Additional paid-in capital 18,604 24,585 Retained earnings 21,897 13,366 Accumulated other comprehensive income (10,674) (9,174) - -------------------------------------------------------------------------------------------- 29,828 28,778 - -------------------------------------------------------------------------------------------- $94,605 $97,011 ============================================================================================
The accompanying notes are an integral part of these financial statements. Page 1 of 22 STERLING PULP CHEMICALS, LTD. STATEMENTS OF OPERATIONS (U.S. DOLLARS IN THOUSANDS) ================================================================================
Year ended September 30, ----------------------------------------------- 2001 2000 1999 -------- -------- -------- REVENUES $134,989 $132,730 $120,478 COST OF GOODS SOLD 112,859 111,165 101,624 - --------------------------------------------------------------------------------------------------- GROSS PROFIT 22,130 21,565 18,854 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,962 9,496 12,740 INTEREST AND DEBT RELATED EXPENSES, NET 2,662 4,550 5,548 - --------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 13,506 7,519 566 PROVISION FOR INCOME TAXES (Note 5) 4,975 2,945 313 - --------------------------------------------------------------------------------------------------- NET INCOME $ 8,531 $ 4,574 $ 253 ===================================================================================================
The accompanying notes are an integral part of these financial statements. Page 2 of 22 STERLING PULP CHEMICALS, LTD. STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (U.S. DOLLARS IN THOUSANDS) ================================================================================
Accumulated Common Stock Additional Other --------------- Paid-In Retained Comprehensive Shares Amount Capital Earnings Income Total ------ ------ ---------- -------- ------------- -------- Balance, September 30, 1998 1 $ 1 $ -- $ 25,296 $ (8,990) $ 16,307 Net capital contributions -- -- 16,871 -- -- 16,871 Dividends -- -- -- (11,079) -- (11,079) Comprehensive income: Net income -- -- -- 253 Translation adjustment -- -- -- -- 152 Comprehensive income 405 - --------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1999 1 1 16,871 14,470 (8,838) 22,504 Net capital contributions -- -- 7,714 -- -- 7,714 Dividends -- -- -- (5,678) -- (5,678) Comprehensive income: Net income -- -- -- 4,574 Translation adjustment -- -- -- -- (336) Comprehensive income 4,238 - --------------------------------------------------------------------------------------------------------------------- Balance, September 30, 2000 1 1 24,585 13,366 (9,174) 28,778 Net capital distributions -- -- (5,981) -- -- (5,981) Comprehensive income: Net income -- -- -- 8,531 -- Pension adjustment -- -- -- -- (52) Translation adjustment -- -- -- -- (1,448) Comprehensive income 7,031 - --------------------------------------------------------------------------------------------------------------------- Balance, September 30, 2001 1 $ 1 $18,604 $ 21,897 $(10,674) $ 29,828 =====================================================================================================================
The accompanying notes are an integral part of these financial statements. Page 3 of 22 STERLING PULP CHEMICALS, LTD. STATEMENTS OF CASH FLOWS (U.S. DOLLARS IN THOUSANDS) ================================================================================
Year ended September 30, ---------------------------------- 2001 2000 1999 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,531 $ 4,574 $ 253 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,450 8,532 7,757 Loss on disposal/write off of assets 26 333 50 Deferred tax expense (benefit) 1,304 1,247 (539) Other (31) (31) (31) Changes in assets/liabilities: Accounts receivable (504) (788) (2,156) Due from related parties (263) (475) (377) Other receivables (408) 382 (436) Inventories (1,765) (1,026) 1,791 Prepaid expenses (348) 51 (21) Other assets (1,283) 142 4,530 Accounts payable (633) 1,936 (607) Accrued generator construction costs (503) (2,448) 2,450 Other accrued liabilities (4,295) 1,581 (2,467) Due to related parties 2,896 204 (6,505) Other liabilities 89 503 299 - -------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 11,263 14,717 3,991 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds on disposal of capital assets -- -- 3,578 Capital expenditures (5,127) (4,325) (3,465) - -------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (5,127) (4,325) 113 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of note payable (19,534) (20,987) (4,527) Proceeds from issuance of long-term debt 20,496 -- -- Debt fees (1,112) -- -- Net capital contribution from parent -- 7,714 16,871 Net capital distribution to parent (5,981) -- -- Dividends -- (5,678) (11,079) - -------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (6,131) (18,951) 1,265 - -------------------------------------------------------------------------------------------------------------- Effect of exchange rate on cash (5) 78 (314) - -------------------------------------------------------------------------------------------------------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS -- (8,481) 5,055 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR -- 8,481 3,426 - -------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ -- $ -- $ 8,481 ============================================================================================================== Supplemental disclosures of cash flow information: Interest paid, net of interest income received $ (1,130) $ (4,663) $(11,608) Income taxes paid $ (1,953) $ (696) $ (749)
The accompanying notes are an integral part of these financial statements. Page 4 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS Organization and operations Sterling Pulp Chemicals, Ltd. ("Sterling Pulp") is a Canadian company, which operates four pulp chemical facilities in Canada. These plants primarily produce sodium chlorate, a chemical used primarily to make chlorine dioxide, which in turn is used by pulp mills in the pulp bleaching process. Sterling Pulp sells sodium chlorate primarily to customers in Canada and the United States. Sterling Pulp also produces sodium chlorite at one of its facilities and oversees construction of large-scale chlorine dioxide generators for the pulp and paper industry. Sterling Pulp is a wholly-owned subsidiary of Sterling Canada, Inc. ("Parent"), which is an indirect wholly-owned subsidiary of Sterling Chemicals, Inc. ("Chemicals") and Sterling Chemicals Holdings, Inc. ("Holdings"). On July 23, 1999, Chemicals completed a private offering of $295,000,000 of its 12-3/8% Senior Secured Notes due 2006. On November 5, 1999, Chemicals completed a registered exchange offer, pursuant to which all of these notes were exchanged for publicly registered 12-3/8% Notes with substantially similar terms (the "12-3/8% Notes"). The 12-3/8% Notes are guaranteed by all of Chemicals' existing direct and indirect subsidiaries incorporated in the United States (other than Sterling Chemicals Acquisitions, Inc.) (the "Guarantors") on a joint and several basis and are secured by, among other things, a second priority pledge of 100% of the stock of these subsidiaries. The 12-3/8% Notes are also secured by 65% of the stock of certain of Chemicals' subsidiaries incorporated outside of the United States, including Sterling Pulp. On July 16, 2001 (the "Petition Date"), Holdings, Chemicals and certain of their U.S. subsidiaries, including the Parent, (collectively, the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") and began operating their business as debtors-in-possession pursuant to the Bankruptcy Code. None of the foreign subsidiaries, including Sterling Pulp, were included in the Chapter 11 filings. At this time, it is not possible to predict the outcome of the bankruptcy cases, in general or the effect on the business of Sterling Pulp, the Debtors', the interests of creditors of the Debtors or the stockholders of Holdings. The Chapter 11 filings have had a minimal impact on Sterling Pulp's day-to-day business operations. The accompanying financial statements do not include any adjustments that may result from the resolution of the Chapter 11 filings. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies of Sterling Pulp are described below. The financial statements of Sterling Pulp are presented in accordance with accounting principles generally accepted in the United States of America ("U.S.") and have been translated from Canadian dollars, Sterling Pulp's functional currency, to U.S. dollars, the reporting currency of the Parent, following the guidelines of Statement of Financial Accounting Standards ("SFAS") No. 52 "Foreign Currency Translation". Page 5 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash equivalents Sterling Pulp considers all investments with a remaining maturity of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of cost and market. Cost is primarily determined on the first-in, first-out basis except for stores and supplies which are valued at average cost. Sterling Pulp enters into agreements with other companies to exchange chemical inventories in order to minimize working capital requirements and to facilitate distribution logistics. Balances related to quantities due to or payable by Sterling Pulp are included in inventory. Property, plant and equipment Property, plant and equipment are recorded at cost. Major renewals and improvements, which extend the useful lives of the equipment, are capitalized, while repair and maintenance expenses are charged to operations as incurred. Disposals are removed at carrying costs less accumulated depreciation with any resulting gain or loss reflected in operations. Depreciation is provided using the straight-line method over estimated useful lives ranging from 5 to 25 years with the predominant life of the plant and equipment being 15 years. Impairment of long-lived assets Impairment tests of long-lived assets are made when conditions indicate their carrying costs may not be recoverable. Such impairment tests are based on a comparison of undiscounted future cash flows to the carrying cost of the asset. If an impairment is indicated, the asset value is written down to its estimated fair value. Patents The costs of patents are amortized on a straight-line basis over their estimated useful lives, which approximate ten years. Income taxes Sterling Pulp files a federal Canadian tax return as well as returns in the provinces in which it operates. Deferred income taxes are recorded to reflect the tax effect of the temporary differences between the tax basis of Sterling Pulp's assets and liabilities and the financial reporting basis. Page 6 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue recognition Sterling Pulp generates revenues through sales in the open market pursuant to short-term and long-term contracts with its customers. Sterling Pulp recognizes revenue from sales as the products are shipped and collection is reasonably assured. Revenues associated with the constructing of chlorine dioxide generators are recognized using the percentage of completion method based on cost incurred compared to total estimated costs. Sterling Pulp classifies shipping and handling costs associated with product delivered to customers as a cost of sale. Foreign currency translation Sterling Pulp's functional currency is the Canadian dollar. The Parent's reporting currency is the United States dollar. For financial reporting purposes, assets and liabilities denominated in Canadian dollars are translated into United States dollars at year-end rates of exchange and revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are included in accumulated other comprehensive income while transaction gains and losses are included in operations when incurred. Earnings per share All issued and outstanding shares of Sterling Pulp are held by the Parent. Accordingly, earnings per share information is not presented. Environmental costs Environmental costs are expensed as incurred unless the expenditures extend the economic useful life of the relevant assets. Costs that extend the economic life of the assets are capitalized and depreciated over the remaining life of those assets. Liabilities are recorded when environmental assessments or remedial efforts are probable and the cost can be reasonably estimated. Page 7 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Disclosures about fair value of financial instruments In preparing disclosures about the fair value of financial instruments, Sterling Pulp has assumed that the carrying amount approximates fair value for cash and cash equivalents, receivables, accounts payable and certain accrued expenses due to the short maturities of these instruments. The fair values of long-term debt instruments are estimated based upon quoted market values (if applicable) or on the current interest rates available to Sterling Pulp for debt with similar terms and remaining maturities. Considerable judgement is required in developing these estimates and, accordingly, no assurances can be given that the estimated values presented herein are indicative of the amounts that would be realized in a free market exchange. Accounting estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. New accounting standards Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. As of October 1, 2000, the transition adjustment related to the adoption of these statements was not material. Sterling Pulp has an agreement relating to the supply of a portion of the electrical energy at one of its Canadian sodium chlorate production facilities. This agreement, which was previously designated as a normal purchase under SFAS No. 133, does not meet the criteria of a normal purchase based on guidance issued by the Derivative Implementation Group (the "DIG") in June 2001, All purchases under this agreement, which expires on December 31, 2001, are used in the ordinary course of business; however, effective July 1, 2001, this agreement is required to be marked-to-market. At September 30, 2001, the value of this agreement was a loss of approximately $1.2 million based upon current market prices and quantities to be delivered. In July of 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method and requires separate identification and recognition of intangible assets, other than goodwill. The statement applies to all business combinations initiated after June 30, 2001. Page 8 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New accounting standards (continued) SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001. Sterling Pulp does not believe that the adoption of SFAS No. 141 or 142 will have a significant impact on its financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which must be applied to fiscal years beginning after June 15, 2002, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Sterling Pulp is in the process of evaluating the impact of SFAS No. 143 on its financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Sterling Pulp is currently evaluating the impact of SFAS No. 144 on its financial statements. Reclassification Certain amounts reported in the financial statements for the prior periods have been reclassified to conform with the current financial statement presentation with no effect on net income or stockholder's equity. Page 9 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
September 30, ------------------------ 2001 2000 -------- -------- (Dollars in Thousands) Inventories: Finished products $ 4,647 $ 2,967 Raw materials 201 199 ------------------------------------------------------------------------------------------- Inventories at cost 4,848 3,166 Inventories under exchange agreements 80 278 Stores and supplies 2,506 2,591 ------------------------------------------------------------------------------------------- $ 7,434 $ 6,035 =========================================================================================== Property, plant and equipment: Land $ 1,345 $ 1,413 Buildings 13,083 13,635 Plant and equipment 111,058 111,650 ------------------------------------------------------------------------------------------- Property, plant and equipment at cost 125,486 126,698 Less accumulated depreciation (62,725) (57,401) ------------------------------------------------------------------------------------------- $ 62,761 $ 69,297 =========================================================================================== Other assets: Debt placement fees, net $ 1,007 $ -- Capitalized project costs 1,358 115 Other 169 178 ------------------------------------------------------------------------------------------- $ 2,534 $ 293 ===========================================================================================
4. LONG-TERM DEBT NOTE PAYABLE On August 20, 1992, Sterling Pulp entered into an agreement for a $109.1 million demand note facility with Sterling NRO, Ltd ("Sterling NRO"). Sterling NRO is also owned by the Parent and is therefore related by virtue of common control. The note has no scheduled terms of repayment and interest is calculated and payable monthly in arrears at 1.5% above the Bank of Nova Scotia prime rate. Interest expensed for the years ended September 30, 2001, 2000 and 1999 was $2.3 million, $4.5 million and $5.5 million, respectively. Principal repayments for the years ended September 30, 2001 and 2000 were $19.3 million and $21.0 million, respectively. Effective July 13, 2001, Sterling NRO waived any further earned interest on the note payable. EXTERNAL DEBT As of July 11, 2001, Sterling Pulp entered into a Financing Agreement with Tyco Capital Business Credit (Canada) Inc.(formerly CIT Business Credit (Canada) Inc.) ("Tyco Capital") to provide up to the Canadian dollar equivalent of U.S. $30 million (the "Canadian Financing Agreement"). The initial advance under this facility, approximately U.S. $20 million, was used by Sterling Pulp to discharge a portion of the NRO note and was ultimately transferred to the Debtors through an intercompany loan. Page 10 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 4. LONG-TERM DEBT (CONTINUED) Effective July 19, 2001, the Debtors entered into a Revolving Credit Agreement with a group of lenders led by Tyco Capital to provide up to $195 million in Debtor-In-Possession financing (the "DIP Financing"). The DIP Financing consists of: a $70 million fixed asset revolver credit facility which is secured by, amongst other things, a first priority lien of 35% of the stock of Sterling Pulp and a third priority lien on the remaining 65% of that stock; and a $125 million current assets revolving credit facility, $40 million of which is secured by, amongst other things, a first priority lien of 35% of the stock of Sterling Pulp and a second priority lien on the remaining 65% of that stock. A first priority pledge of 65% of the stock of Sterling Pulp has been provided to the 12 3/8% Senior Secured Notes of Chemicals. None of the assets of Sterling Pulp have been pledged to support the Debtors. Due to the Chapter 11 filings, the impact of certain provisions in the DIP Financing and a cash management order entered by the Bankruptcy Court, the Debtors are now subject to certain restrictions pertaining to their ability to transfer cash and other assets between debtors and non-debtors, including Sterling Pulp. The Canadian Financing Agreement consists of a fixed term portion and a revolving line of credit. The fixed term portion is evidenced by the term loan promissory note. The initial draw of approximately $12.7 million was used to repay a portion of the existing promissory note to Sterling NRO. The term loan shall be repaid in thirty (30) equal installments of $0.15 million followed by one (1) installment of $8.2 million on July 11, 2004. The first installment is payable February 1, 2002 and subsequent installments shall be due and payable on the first business day of each month thereafter until paid in full. In the event Sterling Pulp has surplus cash in any fiscal period beginning on or after October 1, 2001, Sterling Pulp must make a mandatory prepayment of the term loan by an amount equal to fifty percent (50%) of said surplus cash within 90 days of the fiscal year end. The initial term of the Canadian Financing Agreement extends to July 2004. The Canadian Financing Agreement may be terminated by either Sterling Pulp or Tyco Canada thereafter only by giving 60 days written notice of termination prior to each subsequent anniversary date. Borrowings under the Canadian dollar term loan of the Canadian facility bear interest at the "Bank Rate" plus 2.50% per annum. At September 30, 2001, the interest rate in effect was 7.75%. The maximum revolving line of credit available under the Canadian Financing Agreement is approximately $16 million. Available credit under the agreement is subject to a weekly borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory with an inventory cap of 50% of the revolving loan. At September 30, 2001 the total credit available under the revolving line of credit was $15.4 million. At September 30, 2001, $7.3 million was drawn under the revolving line of credit. Therefore, at September 30, 2001, $20 million in total was outstanding under the revolving line of credit and term loan portion. Borrowings under the revolving loan of the Canadian facility bear interest at the Canadian Imperial Bank of Commerce Rate (CIBC) "Bank Rate" plus 2.00% per annum on Canadian Dollar loans and CIBC "Base Rate" plus 2.00% per annum on American Dollar loans. At September 30, 2001, the interest rates in effect were 7.25% and 8.50% on the Canadian and American dollar loans. Page 11 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 4. LONG-TERM DEBT (CONTINUED) DEBT MATURITIES The estimated remaining principal payments on the outstanding debt of Sterling Pulp are as follows:
YEAR ENDING PRINCIPAL SEPTEMBER 30, PAYMENTS ------------- ------------- (Dollars in Thousands) 2002.......................................................... $ 1,206 2003.......................................................... 1,810 2004.......................................................... 16,988 2005.......................................................... -- 2006.......................................................... -- Thereafter ................................................... -- ------------- Total debt of Sterling Pulp........................... $ 20,004 =============
5. INCOME TAXES Deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and the financial reporting amounts. A reconciliation of federal statutory income taxes to Sterling Pulp's effective tax provision follows: [GRAPHIC OMITTED]The provision for income taxes is composed of the following:
Year ended September 30, ------------------------------- 2001 2000 1999 ------ ------ ----- (Dollars in Thousands) Provision for federal income tax at the statutory rate $3,713 $ 2,308 $ 259 Provincial income taxes at the statutory rates 2,072 1,114 88 Federal and provincial manufacturing and processing tax credits (810) (477) (50) Other -- -- 16 ------------------------------------------------------------------------------------------------------------- $4,975 $ 2,945 $ 313 =============================================================================================================
The provision for income taxes is composed of the following:
Year ended September 30, ------------------------------- 2001 2000 1999 ------ ------ ----- (Dollars in Thousands) Current federal $2,898 $ 3,328 $ 2,098 Deferred federal 5 (1,380) (1,859) Current provincial 2,067 1,702 619 Deferred provincial 5 (705) (545) ------------------------------------------------------------------------------------------------------------- $4,975 $ 2,945 $ 313 =============================================================================================================
Page 12 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 5. INCOME TAXES (CONTINUED) The components of Sterling Pulp's deferred income tax assets and liabilities are summarized below:
September 30, ----------------------- 2001 2000 -------- -------- (Dollars in Thousands) Deferred tax assets: Accrued liabilities $ 452 $ 249 Accrued postretirement cost 1,522 1,339 Investment tax credits 115 1,408 ------------------------------------------------------------------------------------------------------------ 2,089 2,996 ------------------------------------------------------------------------------------------------------------ Deferred tax liabilities: Property, plant and equipment (11,260) (11,334) ------------------------------------------------------------------------------------------------------------ (11,260) (11,334) ------------------------------------------------------------------------------------------------------------ Net deferred tax liabilities $ (9,171) $ (8,338) ============================================================================================================
6. EMPLOYEE BENEFITS Sterling Pulp has established the following benefit plans: Retirement Benefit Plans Sterling Pulp has employer and employee contributory plans which cover all salaried and wage employees. The benefits under these plans are based primarily on years of service and/or employee's pay near retirement. Sterling Pulp's funding policy is consistent with the funding requirements of Canadian federal and provincial laws and regulations. Plan assets consist principally of common stocks and government and corporate securities. Page 13 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 6. EMPLOYEE BENEFITS (CONTINUED) Information concerning the pension obligation, plan assets, amounts recognized in Sterling Pulp's financial statements, and underlying actuarial assumptions is stated below.
September 30, ----------------------- 2001 2000 -------- -------- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 17,608 $ 16,283 Currency rate conversion (855) (293) Service cost 713 716 Interest cost 1,293 1,240 Plan amendments 196 -- Actuarial loss (gain) 985 (31) Benefits paid (470) (307) ---------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 19,470 $ 17,608 ========================================================================================================== Change in plan assets: Fair value at beginning of year $ 17,817 $ 15,330 Currency rate conversion (865) (276) Actual return on plan assets (2,348) 2,412 Employer contributions 722 658 Benefits paid (470) (307) ---------------------------------------------------------------------------------------------------------- Fair value at end of year $ 14,856 $ 17,817 ========================================================================================================== Development of net amount recognized: Funded status $ (4,613) $ 209 Unrecognized cost: Actuarial loss (gain) 3,449 (1,318) Prior service cost 452 298 ---------------------------------------------------------------------------------------------------------- Net amount recognized $ (712) $ (811) ========================================================================================================== Amounts recognized in the statement of financial position: Prepaid pension cost $ 353 $ 418 Accrued pension cost (1,246) (1,229) Intangible asset 129 Accumulated other comprehensive income 52 -- ---------------------------------------------------------------------------------------------------------- Net amount recognized $ (712) $ (811) ==========================================================================================================
Page 14 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 6. EMPLOYEE BENEFITS (CONTINUED) Net periodic pension costs consist of the following components:
September 30, -------------------------------- 2001 2000 1999 ------- ------- ------- (Dollars in Thousands) Components of net pension costs: Service cost-benefits earned during the year $ 713 $ 716 $ 919 Interest on prior year's projected benefit obligation 1,293 1,240 1,112 Expected return on plan assets (1,281) (1,144) (963) Net amortization: Actuarial (gain) loss (89) 28 68 Prior service cost 27 (2) 29 ------------------------------------------------------------------------------------------------------------ Net pension costs $ 663 $ 838 $ 1,165 ============================================================================================================ Weighted average assumptions: Discount rate 7.3% 7.5% 7.5% Rates of increase in salary compensation level 4.5% 4.5% 4.5% Expected long-term rate of return on plan assets 7.5% 7.5% 7.5%
Postretirement Benefits Other than Pensions Sterling Pulp provides certain health care and life insurance benefits for retired employees. Employees become eligible for these benefits at normal or early retirement age. Retiree insurance plans provide health and life insurance benefits to employees who retire from Sterling Pulp. All of Sterling Pulp's employees are eligible for postretirement life insurance and, except for collectively bargained employees, are eligible for postretirement medical insurance. Postretirement medical insurance is a non-contributory plan. Benefit provisions for unionized employees are subject to collective bargaining. Page 15 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 6. EMPLOYEE BENEFITS (CONTINUED) Information concerning the plan obligation, the funded status, amounts recognized in Sterling Pulp's financial statements, and underlying actuarial assumptions is stated below.
September 30, ---------------------- 2001 2000 ------- ------- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 4,751 $ 4,886 Service cost 238 314 Interest cost 355 329 Actuarial loss (gain) 407 (754) Benefits paid (200) (24) ------------------------------------------------------------------------------------------------------------ Benefit obligation at end of year $ 5,551 $ 4,751 ============================================================================================================ Development of net amount recognized: Funded status $(5,551) $(4,751) Unrecognized cost: Actuarial (gain) loss 267 (91) ------------------------------------------------------------------------------------------------------------ Net amount recognized $(5,284) $(4,842) ============================================================================================================
Net periodic plan costs consist of the following components:
September 30, -------------------------------- 2001 2000 1999 ------ ------ ------ (Dollars in Thousands) Components of net plan costs: Service cost $ 238 $ 314 $ 307 Interest cost 355 329 299 Net amortization: Actuarial loss 7 16 32 ------------------------------------------------------------------------------------------------------------ Net plan costs $ 600 $ 659 $ 638 ============================================================================================================ Weighted-average assumptions: Discount rate 7.25% 7.50% 6.75%
Page 16 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 6. EMPLOYEE BENEFITS (CONTINUED) The weighted average annual assumed health care trend rate is 7.5% for 2001. The rate is assumed to decrease gradually to 5.8% in 2027 and remain level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one percentage point change in assumed health care trend rates would have the following effects:
1% Increase 1% Decrease ----------- ----------- (Dollars in Thousands) Effect on total of service and interest cost components $ 33 $ (29) Effect on postretirement benefit obligation 268 (233)
Profit Sharing and Bonus Plans Sterling Pulp established a Profit Sharing Plan for the benefit of salaried and hourly employees meeting certain eligibility requirements and a Bonus Plan that is designed to provide certain exempt salaried employees of Sterling Pulp with the opportunity to earn bonuses, depending, among other things, on the annual financial performance of Holdings. Sterling Pulp has recorded (income) and expense of ($0.1) million, $0.9 million and $0.2 million related to the Profit Sharing Plan and nil, $1.1 million and nil related to the Bonus Plan for each of the fiscal years ended September 30, 2001, 2000 and 1999, respectively. Employee Savings Plan Sterling Pulp introduced an employee savings plan for all eligible full-time Canadian employees with an effective date of October 1, 2000. Each participant has the option to contribute a percentage of his or her earnings to the Canadian savings plan, with no limit on the maximum percentage contributed. Sterling Pulp will match 100% of a participant's contributions to the extent such contributions do not exceed 3.5% of such participant's cash compensation (excluding bonuses, profit sharing, and similar types of compensation). Sterling Pulp has recorded an expense of $0.2 million related to the Savings Plan for the fiscal year ended September 30, 2001. Page 17 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 6. EMPLOYEE BENEFITS (CONTINUED) Phantom Stock Plan Sterling Pulp had a phantom stock plan for all eligible full-time Canadian employees. The effective date of this Plan was August 21, 1996 and the expiration date was December 31, 2000. At the end of each plan year, the plan administrator establishes a "determined percentage" for the preceding plan year. This percentage is then multiplied by each participant's compensation for the plan year to determine the award amount. The award amount is then divided by the fair market value of one share of the common stock of Holdings, as of December 31 of that plan year, to determine the number of rights to be credited to the participant. Upon termination of employment, the benefit amount becomes payable to the participant. The benefit amount is the number of vested rights in the participant's account, multiplied by the fair market value of one share of common stock of Holdings as of the most recent valuation date. Sterling Pulp has recorded (income) and expense of $(0.4) million, $0.2 million and $0.2 million related to the phantom stock plan for each of the fiscal years ended September 30, 2001, 2000 and 1999, respectively. 7. COMMITMENTS AND CONTINGENCIES Lease Commitments Sterling Pulp has entered into various long-term noncancellable rail car and other operating leases, some of which have been allocated to commonly controlled companies. Future minimum lease commitments are as follows: fiscal 2002 - $3.0 million, fiscal 2003 - $2.4 million, fiscal 2004 - $2.2 million, fiscal 2005 - $1.4 million, fiscal 2006 - $0.7 million and thereafter - $1.4 million. Environmental and Safety Matters Sterling Pulp's operations involve the handling, production, transportation, treatment, and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental and health and safety laws and regulations, and permit requirements. Environmental permits required for Sterling Pulp's operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacture, handling, processing, distribution, and use of Sterling Pulp's chemical products and, if so affected, Sterling Pulp's business and operations may be materially and adversely affected. In addition, changes in environmental requirements can cause Sterling Pulp to incur substantial costs in upgrading or redesigning its facilities and processes, including waste treatment, storage, disposal, and other waste handling practices and equipment. Page 18 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) Environmental and Safety Matters (continued) Sterling Pulp conducts environmental management programs designed to maintain compliance with applicable environmental requirements at all of its facilities. Sterling Pulp routinely conducts inspection and surveillance programs designed to detect and respond to leaks or spills of regulated hazardous substances and to correct identified regulatory deficiencies. Sterling Pulp believes that its procedures for waste handling are consistent with industry standards and applicable requirements. In addition, Sterling Pulp believes that its operations are consistent with good industry practice. However, a business risk inherent with chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees, and nearby landowners and occupants. While Sterling Pulp believes its business operations and facilities generally are operated in compliance in all material respects with all applicable environmental and health and safety requirements, Sterling Pulp cannot be sure that past practices or future operations will not result in material claims or regulatory action, require material environmental expenditures, or result in exposure or injury claims by employees, contractors and their employees, and the public. Some risk of environmental costs and liabilities is inherent in our operations and products, as it is with other companies engaged in similar businesses. In addition, a catastrophic event at any of the Sterling Pulp's facilities could result in the incurrence of liabilities substantially in excess of their insurance coverage. Sterling Pulp's operating expenditures for environmental matters, mostly waste management and compliance, were approximately $2.8 million for fiscal 2001 and $1.9 million for fiscal 2000. Sterling Pulp also spent approximately $0.4 million for environmentally related capital projects in fiscal 2001 and $0.4 million for these types of capital projects in fiscal 2000. In fiscal 2002, Sterling Pulp anticipates spending approximately $1.0 to $2.0 million for capital projects related to waste management and environmental compliance. There are no capital expenditures related to remediation of environmental conditions projected for fiscal 2002. A significant ban on all chlorine containing compounds could have a materially adverse effect on Sterling Pulp. British Columbia has a regulation in place - Pulp Mill and Pulp and Paper Mill Liquid Effluent Control Regulation - requiring elimination of the use of all chlorine products, including chlorine dioxide, in the bleaching process by the year 2002. The pulp and paper industry believes that a ban of chlorine dioxide in the bleaching process will yield no measurable environmental or public health benefit and is working to change this regulation. In the event such a regulation is implemented, Sterling Pulp would seek to sell the products it manufactures at its British Columbia facility to customers in other markets. Sterling Pulp is not aware of any other laws or regulations in place in North America which would restrict the use of such products for other purposes. Page 19 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) Legal Proceedings Sterling Pulp is subject to claims and legal actions that arise in the ordinary course of its business. Sterling Pulp believes that the ultimate liability, if any, with respect to these claims and legal actions will not have a material adverse effect on the financial position, results of operations or cash flows, although Sterling Pulp cannot give any assurances to that effect. Pledge of Common Stock The subsidiaries of Chemicals which guaranteed the 12 3/8% Notes consist of Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Chemicals Energy, Inc., Sterling Chemicals International, Inc. and Sterling Fibers, Inc. and, together with two Canadian subsidiaries of Sterling Canada, Inc. (including Sterling Pulp), are collectively referred to as the "Guarantors." In order to secure the repayment of the DIP Financing, the following pledges of stock were made by the holders of the stock: In order to secure $40 million of the current assets revolving credit facility, a first priority pledge of 100% of the common stock of the Guarantors incorporated in the United States and 35% of the common stock of Sterling Pulp, and a second priority pledge of the remaining 65% of the stock; In order to secure the fixed assets revolving credit facility, a second priority pledge of 100% of the common stock of the Guarantors incorporated in the United States and 35% of the common stock of Sterling Pulp, and a third priority pledge of the remaining 65% of the stock, and In order to secure all of the current assets revolving credit facility, a fourth priority pledge of 100% of the common stock of the Guarantors incorporated in the United States and 65% of the common stock of Sterling Pulp and a third priority pledge of the remaining 35% of that stock; In order to secure the repayment of the 12-3/8% Notes, the holders of the Guarantors' common stock initially made a second priority pledge of 100% of the common stock of each of the Guarantors incorporated in the United States and a first priority pledge of 65% of the common stock of Sterling Pulp. However, after the issuance of the priming order by the Bankruptcy Court, the priority of the pledge of the common stock of the Guarantors incorporated in the United States was lowered to a third priority pledge. Page 20 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 8. RELATED PARTY TRANSACTIONS In the normal course of operations of Sterling Pulp, the following represents significant transactions with related parties for the fiscal years ended September 30, 2001, 2000 and 1999:
Year ended September 30, ------------------------------ 2001 2000 1999 ------ ------ ------ (Dollars in Thousands) Chemicals: Management fees $ 676 $ 853 $ 869 Parent: Services, marketing and R&D revenue 803 878 921 Commonly controlled companies: Sale of goods 6,460 7,334 9,295 Purchase of goods 8,364 6,087 6,401 Administration fee revenue 326 340 335 Interest expense 2,299 4,663 5,630
The amounts due from and to related parties for the years ended September 30, 2001 and 2000 are as follows:
September 30, ---------------------- 2001 2000 ------ ------ (Dollars in Thousands) Due from related parties: Commonly controlled companies 2,010 1,832 -------------------------------------------------------------------------------------------------------------------- $2,010 $1,832 -------------------------------------------------------------------------------------------------------------------- Due to related parties: Parent $ 337 $ 125 Commonly controlled companies 3,807 1,282 -------------------------------------------------------------------------------------------------------------------- $4,144 $1,407 ====================================================================================================================
9. EXPORT SALES Sterling Pulp is engaged in the sale of products for export into the United States. These were primarily sodium chlorate sales and represented 51%, 50% and 47% of revenues for fiscal 2001, 2000 and 1999, respectively. Page 21 of 22 STERLING PULP CHEMICALS, LTD. NOTES TO THE FINANCIAL STATEMENTS (U.S. DOLLARS) ================================================================================ 10. FINANCIAL INSTRUMENTS Forward Exchange Contracts Sterling Pulp has entered into forward exchange contracts to reduce risk due to Canadian dollar exchange rate movements. The foreign exchange contracts had varying maturities with none exceeding 18 months. Sterling Pulp made net settlements of United States dollars for Canadian dollars at rates agreed to at inception of the contracts. Sterling Pulp does not engage in currency speculation. The last of Sterling Pulp's forward exchange contracts expired in March of 2000, and it does not currently intend to enter into any additional forward exchange contracts. Electricity Contracts Sterling Pulp periodically enters into fixed price agreements for a portion of its electrical energy requirements. Sterling Pulp has an agreement relating to the supply of a portion of the electrical energy at one of its Canadian sodium chlorate production facilities. This agreement, which was previously designated as a normal purchase under SFAS No. 133, does not meet the criteria of a normal purchase based on guidance issued by the Derivative Implementation Group (the "DIG") in June 2001, All purchases under this agreement, which expires on December 31, 2001, are used in the ordinary course of business; however, effective July 1, 2001, this agreement is required to be marked-to-market. At September 30, 2001, the value of this agreement was a loss of approximately $1.2 million based upon current market prices and quantities to be delivered and is included in accrued liabilities. Concentrations of Risk Sterling Pulp sells its products primarily to companies involved in the pulp and paper industry. Sterling Pulp performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. Sterling Pulp maintains cash deposits with major banks that from time to time may exceed federally insured limits. Management periodically assesses the financial condition of these institutions and believes that any possible credit loss is minimal. Approximately 35% of Sterling Pulp's employees are covered by union agreements. None of the agreements expire in fiscal 2002. Fair Value of Financial Instruments The fair value approximated the carrying value of financial instruments included in current assets and current liabilities on the balance sheet at September 30, 2001 due to the short maturities of these instruments. The fair value of the long-term debt on the balance sheet at September 30, 2001 approximated its carrying value, as the interest rate fluctuates with changes in market rates. Page 22 of 22 INDEPENDENT AUDITORS' REPORT To the Stockholder of Sterling Pulp Chemicals, Ltd. We have audited the balance sheet of Sterling Pulp Chemicals, Ltd. (the "Company") as at September 30, 2001 and 2000 and the statements of operations, changes in stockholder's equity, and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at September 30, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2001 in accordance with accounting principles generally accepted in the United States of America. Since the accompanying financial statements have not been prepared in accordance with Canadian generally accepted accounting principles, they will not satisfy the reporting requirements of Canadian statutes and regulations. Since the financial statements have been prepared in accordance with United States of America generally accepted accounting principles, the financial position, results of operations and cash flows might be significantly different than if the financial statements had been prepared in accordance with Canadian generally accepted accounting principles. DELOITTE & TOUCHE LLP Chartered Accountants Mississauga, Canada December 20, 2001 -----END PRIVACY-ENHANCED MESSAGE-----