-----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, M7ahUItsXUqX5iRerGmdA11zvJFBLXOJsYtUJ1sYUghPXJFjelnle0cQFtaCwVG1 aOff04wFkWWz0BGoOk0j2w== 0000950129-02-000665.txt : 20020414 0000950129-02-000665.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950129-02-000665 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020213 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10059 FILM NUMBER: 02540452 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 INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS INC /TX/ DATE OF NAME CHANGE: 19961218 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS HOLDINGS INC DATE OF NAME CHANGE: 19960828 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-04343-01 FILM NUMBER: 02540453 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-Q 1 h94159e10-q.txt STERLING CHEMICALS HOLDINGS INC - 12/31/2001 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q --------------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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, (Address of principal executive offices) including area 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 (IRS Employer incorporation or organization) Identification No.)
1200 SMITH STREET, SUITE 1900 (713) 650-3700 HOUSTON, TEXAS 77002-4312 (Registrant's telephone number, (Address of principal executive offices) including area code)
--------------------- 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 [ ] As of January 31, 2002, Sterling Chemicals Holdings, Inc. had 12,776,678 shares of common stock outstanding. As of January 31, 2002, all outstanding equity securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals Holdings, Inc. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- IMPORTANT INFORMATION REGARDING THIS FORM 10-Q Readers should consider the following information as they review this Form 10-Q. PRESENTATION OF FINANCIAL STATEMENTS This Form 10-Q includes two separate sets of financial statements and related notes: - The first set of financial statements and related notes present both the consolidated financial position of Sterling Chemicals Holdings, Inc. (Debtor-in-Possession) ("Holdings") and its subsidiaries and the consolidated financial position of Sterling Chemicals, Inc. (Debtor-in-Possession) ("Chemicals") and its subsidiaries. Holdings directly or indirectly owns all of the companies whose financial results are included in this Form 10-Q and Chemicals is the primary operating subsidiary of Holdings. - The second set of financial statements and related notes present the combined financial position of the Guarantors (Debtors-in-Possession) and their subsidiaries (discussed below). Under SEC rules, specified financial information is required to be provided with respect to subsidiaries of an issuer of debt securities that guarantee the repayment of those debt securities. In July 1999, Chemicals issued $295 million of its 12 3/8% Senior Secured Notes due 2006. The obligations of Chemicals related to the 12 3/8% Notes were guaranteed by most of its subsidiaries incorporated in the United States (the "Guarantors"). Each of the Guarantors is a wholly-owned direct or indirect subsidiary of Chemicals and the Guarantors have fully and unconditionally guaranteed the 12 3/8% Notes on a joint and several basis. In order to comply with these SEC rules, the combined financial statements and related notes of the Guarantors and their subsidiaries are included with this Form 10-Q. Separate financial statements of, and other disclosures concerning, each Guarantor are not presented in this Form 10-Q because management has determined that such separate financial statements and disclosures are not material to investors. FORWARD-LOOKING STATEMENTS This Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Form 10-Q are forward-looking statements, including without limitation the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the cyclicality of our industry, current and future industry conditions, the potential effects of such matters on our business strategy, results of operations or financial position, the adequacy of our liquidity and our market sensitive financial instruments. The forward-looking statements are based upon current information and expectations. Estimates, forecasts and other statements contained in or implied by the forward-looking statements speak only as of the date on which they are made, are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to evaluate and predict. Although we believe that the expectations reflected in the forward-looking statements are reasonable, no assurances can be given that such expectations will prove to have been correct. Certain important factors that could cause actual results to differ materially from our expectations or what is expressed, implied or forecasted by or in the forward-looking statements include developments in our Chapter 11 proceedings, the timing and extent of changes in commodity prices and global economic conditions, industry production capacity and operating rates, the supply-demand balance for our products, competitive products and pricing pressures, increases in raw material costs, our ability to obtain raw materials and energy at acceptable prices, in a timely manner and on acceptable terms, federal and state regulatory developments, our high financial leverage, petitions filed or actions taken in connection with the bankruptcy proceedings, the availability of skilled personnel, our ability to attract or retain high quality employees and operating hazards attendant to the industry. Additional factors that could cause actual results to differ materially from our expectations or what is expressed, implied or forecasted by or in the forward-looking statements are stated herein in cautionary statements made in conjunction with the forward-looking statements or are included elsewhere in this Form 10-Q or Holdings' and Chemicals' combined Annual Report on Form 10-K for the fiscal year ended September 30, 2001 (the "Annual Report"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Known Events, Trends, Uncertainties and Risk Factors" 2 contained in the Annual Report. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. SUBSEQUENT EVENTS All statements contained in this Form 10-Q, including the forward-looking statements discussed above, are made as of February 13, 2002, unless those statements are expressly made as of another date. We disclaim any responsibility for the correctness of any information contained in this Form 10-Q to the extent such information is affected or impacted by events, circumstances or developments occurring after February 13, 2002 or by the passage of time after such date and, except as required by applicable securities laws, we do not intend to update such information. DOCUMENT SUMMARIES Statements contained in this Form 10-Q describing documents and agreements are provided in summary form only and such summaries are qualified in their entirety by reference to the actual documents and agreements filed as exhibits to the Annual Report or this 10-Q. 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-Q to a particular fiscal year refer to the twelve-calendar-month period ending on September 30 of that year. This combined Form 10-Q 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 "we," "our," "ours" and "us." 3 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) (a) Sterling Chemicals Holdings, Inc. ............. 5 (b) Sterling Chemicals, Inc. ...................... 8 (c) Report of Independent Accountants (Sterling Chemicals Holdings, Inc.)........................... 27 (d) Report of Independent Accountants (Sterling Chemicals, Inc.)............................... 28 (e) Sterling Chemicals Guarantors.................. 39 (f) Report of Independent Accountants (Sterling Chemicals Guarantors).......................... 42 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 43 Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 51 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................... 52 Item 4. Submission of Matters to a Vote of Security Holders............................................. 52 Item 6. Exhibits and Reports of Form 8-K.................... 52
4 STERLING CHEMICALS HOLDINGS, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, ------------------- 2001 2000 -------- -------- Revenues.................................................... $124,974 $253,854 Cost of goods sold.......................................... 114,877 244,840 -------- -------- Gross profit................................................ 10,097 9,014 Selling, general and administrative expenses................ 6,099 7,216 Reorganization items........................................ 3,633 -- Interest and debt related expenses, net of interest income(1)................................................. 12,174 29,887 -------- -------- Loss before income taxes.................................... (11,809) (28,089) Provision for income taxes.................................. 3,064 2,353 -------- -------- Net loss.................................................... (14,873) (30,442) Preferred stock dividends................................... -- 802 -------- -------- Net loss attributable to common stockholders................ $(14,873) $(31,244) ======== ======== Net loss per common share................................... $ (1.16) $ (2.45) ======== ======== Weighted average shares outstanding......................... 12,777 12,776 ======== ========
- --------------- (1) Contractual interest for the three months ended December 31, 2001 totaled $30,942. The accompanying notes are an integral part of the consolidated financial statements. 5 STERLING CHEMICALS HOLDINGS, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
DECEMBER 31, SEPTEMBER 30, 2001 2001 ------------ ------------- ASSETS Current assets: Cash and cash equivalents................................. $ 11,389 $ 15,830 Accounts receivable, net.................................. 93,247 100,690 Inventories............................................... 54,164 48,318 Prepaid expenses.......................................... 4,205 3,358 --------- --------- Total current assets.............................. 163,005 168,196 Property, plant and equipment, net.......................... 277,074 284,944 Other assets................................................ 56,284 57,003 --------- --------- Total assets...................................... $ 496,363 $ 510,143 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable.......................................... $ 20,345 $ 27,436 Accrued liabilities....................................... 45,736 35,725 Current portion of long-term debt......................... 7,669 33,260 --------- --------- Total current liabilities......................... 73,750 96,421 Pre-petition liabilities -- subject to compromise........... 739,916 744,857 Pre-petition liabilities -- not subject to compromise....... 330,520 325,655 Long-term debt.............................................. 85,406 61,084 Deferred income tax liability............................... 14,514 14,504 Deferred credits and other liabilities...................... 15,910 15,786 Common stock held by ESOP................................... 289 289 Redeemable preferred stock.................................. 27,272 27,272 Commitments and contingencies (Note 5) Stockholders' deficit: Common stock, $.01 par value, 20,000,000 shares authorized, 12,422,000 shares issued and 12,199,000 outstanding at December 31, 2001 and at September 30, 2001................................................... 123 123 Additional paid-in capital................................ (546,056) (546,056) Accumulated deficit....................................... (204,073) (189,199) Accumulated other comprehensive income.................... (38,669) (38,053) Deferred compensation..................................... (2) (3) --------- --------- (788,677) (773,188) Treasury stock, at cost, 223,000 shares at December 31, 2001 and at September 30, 2001......................... (2,537) (2,537) --------- --------- Total stockholders' deficit....................... (791,214) (775,725) --------- --------- Total liabilities and stockholders' deficit....... $ 496,363 $ 510,143 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 6 STERLING CHEMICALS HOLDINGS, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, --------------------- 2001 2000 --------- --------- Cash flows from operating activities: Net loss.................................................. $ (14,873) $ (30,442) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 10,510 13,420 Interest amortization.................................. 1,272 794 Deferred tax expense................................... 10 540 Discount notes amortization............................ -- 5,869 Other.................................................. (535) 322 Change in assets/liabilities: Accounts receivable.................................... 7,443 2,599 Inventories............................................ (5,846) 10,269 Prepaid expenses....................................... (847) 207 Other assets........................................... (553) 1,070 Accounts payable....................................... (7,091) (14,388) Accrued liabilities.................................... 10,011 (1,358) Other liabilities...................................... 48 3,344 --------- --------- Net cash provided by (used in) operating activities...................................... (451) (7,754) --------- --------- Cash flows from investing activities: Capital expenditures...................................... (2,643) (3,247) --------- --------- Cash flows from financing activities: Payment on Saskatoon term loans........................... (7,161) (678) Net changes in Prior Credit Agreement..................... -- 12,942 Net borrowings under DIP Facility......................... 9,154 -- Net change in Canadian Financing Agreement................ (3,111) -- Other..................................................... (151) (18) --------- --------- Net cash provided by (used in) financing activities...................................... (1,269) 12,246 --------- --------- Effect of exchange rate on cash............................. (78) (10) --------- --------- Net increase (decrease) in cash and cash equivalents........ (4,441) 1,235 Cash and cash equivalents -- beginning of year.............. 15,830 7,667 --------- --------- Cash and cash equivalents -- end of period.................. $ 11,389 $ 8,902 ========= ========= Supplement disclosures of cash flow information: Interest paid, net of interest income received............ $ (1,459) $ (10,765) Income taxes paid......................................... (1,847) (544) Cash paid for reorganization items........................ (2,895) --
The accompanying notes are an integral part of the consolidated financial statements. 7 STERLING CHEMICALS, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, ------------------- 2001 2000 -------- -------- Revenues.................................................... $124,974 $253,854 Cost of goods sold.......................................... 114,877 244,840 -------- -------- Gross profit................................................ 10,097 9,014 Selling, general and administrative expenses................ 6,036 6,780 Reorganization items........................................ 3,633 -- Interest and debt related expenses, net of interest income.................................................... 12,051 23,758 -------- -------- Loss before income taxes.................................... (11,623) (21,524) Provision for income taxes.................................. 3,064 2,353 -------- -------- Net loss.................................................... $(14,687) $(23,877) ======== ========
- --------------- (1) Contractual interest for the three months ended December 31, 2001 totaled $24,348. The accompanying notes are an integral part of the consolidated financial statements. 8 STERLING CHEMICALS, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) (UNAUDITED)
DECEMBER 31, SEPTEMBER 30, 2001 2001 ------------ ------------- ASSETS Current assets: Cash and cash equivalents................................. $ 11,218 $ 14,459 Accounts receivable, net.................................. 95,358 103,933 Inventories............................................... 54,164 48,318 Prepaid expenses.......................................... 4,173 3,349 --------- --------- Total current assets.............................. 164,913 170,059 Property, plant and equipment, net.......................... 277,074 284,944 Other assets................................................ 56,153 56,847 --------- --------- Total assets...................................... $ 498,140 $ 511,850 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable.......................................... $ 20,345 $ 27,436 Accrued liabilities....................................... 45,736 35,725 Current portion of long-term debt......................... 7,669 33,260 --------- --------- Total current liabilities......................... 73,750 96,421 Pre-petition liabilities -- subject to compromise........... 556,630 561,692 Pre-petition liabilities -- not subject to compromise....... 330,520 325,655 Long-term debt.............................................. 85,406 61,084 Deferred income tax liability............................... 14,514 14,504 Deferred credits and other liabilities...................... 15,910 15,787 Common stock held by ESOP................................... 289 289 Commitments and contingencies (Note 5) Stockholders' deficit: Common stock, $.01 par value.............................. -- -- Additional paid-in capital................................ (141,786) (141,786) Accumulated deficit....................................... (398,422) (383,740) Accumulated other comprehensive income.................... (38,669) (38,053) Deferred compensation..................................... (2) (3) --------- --------- Total stockholders' deficit....................... (578,879) (563,582) --------- --------- Total liabilities and stockholders' deficit....... $ 498,140 $ 511,850 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 9 STERLING CHEMICALS, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, --------------------- 2001 2000 --------- --------- Cash flows from operating activities: Net loss.................................................. $ (14,687) $ (23,877) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 10,510 13,286 Interest amortization.................................. 1,272 794 Deferred tax expense................................... 10 450 Other.................................................. (529) 257 Change in assets/liabilities: Accounts receivable.................................... 8,575 (1,161) Inventories............................................ (5,846) 10,269 Prepaid expenses....................................... (824) 407 Other assets........................................... (578) 870 Accounts payable....................................... (7,091) (12,152) Accrued liabilities.................................... 10,011 (52) Other liabilities...................................... (74) 3,344 --------- --------- Net cash provided by (used in) operating activities...................................... 749 (7,565) --------- --------- Cash flows from investing activities: Capital expenditures...................................... (2,643) (3,247) --------- --------- Cash flows from financing activities: Payment on Saskatoon term loans........................... (7,161) (678) Net changes in Prior Credit Agreement..................... -- 12,942 Net borrowings under DIP Facility......................... 9,154 -- Borrowings under Canadian Financing Agreement............. (3,111) -- Other..................................................... (151) (18) --------- --------- Net cash provided by (used in) financing activities......... (1,269) 12,246 Effect of United States/Canadian exchange rate on cash...... (78) (10) --------- --------- Net increase (decrease) in cash and cash equivalents........ (3,241) 1,424 Cash and cash equivalents -- beginning of period............ 14,459 5,740 --------- --------- Cash and cash equivalents -- end of year.................... $ 11,218 $ 7,164 ========= ========= Supplement disclosures of cash flow information: Interest paid, net of interest income received............ (1,464) $ (10,794) Income taxes (paid) received.............................. (1,847) (544) Cash paid for reorganization items........................ (2,895) --
The accompanying notes are an integral part of the consolidated financial statements. 10 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION Interim Financial Information In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments necessary to present fairly: - the consolidated financial position of Sterling Chemicals Holdings, Inc. (Debtor-in-Possession) ("Holdings") and its subsidiaries and the consolidated financial position of Sterling Chemicals, Inc. (Debtor-in-Possession) ("Chemicals") and its subsidiaries as of December 31, 2001, and - the respective consolidated results of operations and cash flows of Holdings and its subsidiaries and Chemicals and its subsidiaries for the applicable three-month periods ended December 31, 2001 and December 31, 2000, respectively. All such adjustments are of a normal and recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be, and are assumed to have been, read in conjunction with the consolidated financial statements and notes included in Holdings' and Chemicals' combined Annual Report on Form 10-K for the fiscal year ended September 30, 2001 (the "Annual Report"). The accompanying consolidated balance sheets as of September 30, 2001 have been derived from the audited consolidated balance sheets as of September 30, 2001 included in the Annual Report. The accompanying consolidated financial statements as of and for the three-month period ended December 31, 2001, have been reviewed by Deloitte & Touche LLP, our independent public accountants, whose reports are included herein. Unless otherwise indicated, Holdings and its subsidiaries, including Chemicals, are collectively referred to as "we," "our," "ours" and "us." 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' deficit. Industry Conditions and Liquidity The accompanying consolidated financial statements have been prepared on the going concern basis of accounting, which contemplates the continuation 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 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 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 as of the Petition Date and identification of all transactions and events that are directly associated with the reorganization of the Debtors. The filing of the Chapter 11 petitions was driven by the Debtors' inability to meet their funded debt obligations over the long-term, largely brought about by weak demand for petrochemicals products caused by declines in general worldwide economic conditions, the relative strength of the U.S. dollar (which caused 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 11 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 timely filed plan proposed by them until May 12, 2002. The Debtors may determine to seek a further extension of these deadlines. The Debtors aspire to propose a plan of reorganization on or before March 13, 2002, unless a further extension is sought and is granted by the Bankruptcy Court. 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 is likely to result in significant dilution or elimination of some or all of the Debtors' classes of existing public debt and equity interests. The Debtors are in the process of formulating a plan of reorganization and have engaged in preliminary discussions with some of their creditor groups. 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 proceedings, in general, or the effect on the business of the Debtors or the claims of creditors of the Debtors or the stockholders of Holdings. As a result of the bankruptcy filing, 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 the quarter ended December 31, 2001 are composed primarily of professional fees directly related to the bankruptcy cases. 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"). 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. 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." Commitments under the current assets revolver were increased to $125 million upon entry of the priming order discussed below. The initial draw under the DIP Financing was used to repay all amounts outstanding under the Debtors' pre-petition 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 was appealed to the U.S. District Court by the indenture trustee for the 12 3/8% Notes, but no stay of the final order was sought or imposed, and the order remains fully effective. By order dated February 7, 2002, the U.S. District Court denied the appeal. The indenture trustee may seek further review by the 5th Circuit Court of Appeals. While no assurances can be given, we do not believe the final order will be overturned by the 5th Circuit. 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, and has been granted super-priority administrative expense claim status 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. 12 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 current 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 orders dated December 19, 2001 and January 10, 2002 reinstating the priming order, subject to a compensatory adjustment in favor of the 12 3/8% Notes of the accrual during the bankruptcy proceedings of four percentage points of additional interest on up to $40 million. The priming order was further appealed by the indenture trustee to the U.S. District Court. The priming order will remain effective pending the outcome of any appeal unless stayed by an appellate court. By order dated February 8, 2002, the U.S. District Court denied the appeal of the December 17, 2001 order. The U.S. District Court has yet to rule on the January 10, 2002 order. The indenture trustee may seek further review by the 5th Circuit Court of Appeals. While no assurances can be given, we do not believe the priming order will be overturned by the 5th Circuit. 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. At December 31, 2001, the total credit available under the DIP Financing was limited to $124.0 million due to borrowing base restrictions under the current assets revolver. At December 31, 2001, $51.4 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 December 31, 2001, unused borrowing capacity under the DIP Financing of approximately $68.2 million. 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 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 December 31, 2001, $15.4 million was drawn under the Canadian Financing Agreement. Certain Bankruptcy Implications 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 13 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 can be 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 can be 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: - 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, - the ability of the Debtors to access the incremental $40 million in DIP Financing that is dependent on an effective priming order, - the ability of the Debtors to maintain adequate cash on hand, - the ability of the Debtors to generate sufficient cash from operations, - the ability of the Debtors' subsidiaries that are not included in the Chapter 11 cases to obtain necessary financing, - confirmation of a plan or plans of reorganization under the Bankruptcy Code and - 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 an EBITDA covenant. 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 14 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 accompanying financial statements do not include any adjustments that may result from the resolution of these uncertainties. Segment Information Our operations are divided into two reportable segments: petrochemicals and pulp chemicals. Our petrochemicals segment manufactures commodity petrochemicals and acrylic fibers. Our pulp chemicals segment manufactures chemicals for use primarily in the pulp and paper industry and licenses large scale chlorine dioxide generators to the pulp and paper industry. Operating segment information is presented below (in thousands).
THREE MONTHS ENDED DECEMBER 31, ------------------- 2001 2000 -------- -------- Revenues: Petrochemicals............................................ $ 68,282 $197,263 Pulp chemicals............................................ 56,692 56,591 -------- -------- Total............................................. $124,974 $253,854 ======== ======== Operating income (loss): Petrochemicals............................................ $(12,131) $ (9,557) Pulp chemicals............................................ 12,496 11,355 -------- -------- Total............................................. $ 365 $ 1,798 ======== ========
Comprehensive Loss Our total comprehensive net loss for the three-month periods ended December 31, 2001 and December 31, 2000 was $15,489,000 and $30,403,000, respectively. The total comprehensive net loss of Chemicals and its subsidiaries for the three-month periods ended December 31, 2001 and December 31, 2000 was $15,303,000 and $23,838,000, respectively. 2. INVENTORIES
DECEMBER 31, SEPTEMBER 30, 2001 2001 ------------ ------------- (DOLLARS IN THOUSANDS) Inventories consisted of the following: Finished products......................................... $26,468 $25,660 Raw materials............................................. 10,860 9,006 Inventories under exchange agreements..................... 3,655 749 Stores and supplies....................................... 13,181 12,903 ------- ------- $54,164 $48,318 ======= =======
15 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Pursuant to an order of the Bankruptcy Court, the Debtors mailed notices to all known creditors that the deadline for filing proofs of claim with the Bankruptcy Court was December 17, 2001. Differences between amounts recorded by the Debtors and claims filed by creditors are continuing to be investigated and resolved. Accordingly, the ultimate number and amount of allowed claims is not presently known and, because the settlement terms of each such allowed claim is subject to a confirmed plan of reorganization, the ultimate distribution with respect to allowed claims is not presently ascertainable. On a consolidated basis, recorded liabilities subject to compromise under Chapter 11 proceedings as of December 31, 2001 and September 30, 2001, consisted of the following:
DECEMBER 31, SEPTEMBER 30, 2001 2001 ------------ ------------- (DOLLARS IN THOUSANDS) Accrued litigation.......................................... $ 3,454 $ 3,454 Trade accounts payable...................................... 30,297 34,486 Accrued interest............................................ 19,201 19,201 Debt:(1) 11 1/4% Notes............................................... 149,500 149,500 11 3/4% Notes............................................... 268,885 268,885 13 1/2% Notes............................................... 185,436 185,436 Employee benefits........................................... 65,145 64,853 Accrued taxes............................................... 4,734 4,811 Other....................................................... 13,264 14,231 ------------ -------- Total liabilities subject to compromise........... $ 739,916 $744,857 ============ ========
- --------------- (1) Debt liabilities are presented net of unamortized debt issue costs of $12.9 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 the pre-petition debt described above that was not paid or charged to earnings for the period from July 16, 2001 to September 30, 2001 was $15.3 million and for the period from October 1, 2001 to December 31, 2001 was $18.7 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. 16 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Liabilities Not Subject to Compromise The principal categories of claims classified as liabilities not subject to compromise under reorganization proceedings are identified below. The Debtors believe 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 December 31, 2001 and September 30, 2001, consisted of the following:
DECEMBER 31, SEPTEMBER 30, 2001 2001 ------------ ------------- (DOLLARS IN THOUSANDS) 12 3/8% Senior Secured Notes................................ $295,000 $295,000 Accrued interest on 12 3/8% Senior Secured Notes............ 35,110 25,983 Employee benefits........................................... 410 4,672 -------- -------- Total liabilities not subject to compromise....... $330,520 $325,655 ======== ========
4. LONG-TERM DEBT This note contains information regarding our short-term borrowings and long-term debt as of December 31, 2001. As a result of the Debtors' bankruptcy filing, principal and interest payments may not be made 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 Debtors' pre-petition revolving credit facilities (the "Prior Credit Agreement") and each of the indentures governing our outstanding notes and all of this indebtedness was accelerated and became immediately due and payable. The indebtedness under the Prior Credit Agreement was completely paid off with the proceeds of the initial draw under the DIP Financing. The Debtors may not, however, pay the indebtedness under the indentures other than pursuant to a confirmed plan of reorganization or an order of the Bankruptcy Court. During the pendency of the Chapter 11 cases, the Debtors will not, for the most part, be subject to the restrictions contained in the Prior Credit Agreement or any of the indentures. However, the Debtors will be subject to the restrictions contained in the DIP Financing, Sterling Pulp will be subject to restrictions contained in both the DIP Financing and the Canadian Financing Agreement and our Saskatoon subsidiary will be subject to the restrictions contained in its credit facility. 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., a subsidiary of Weyerhaeuser Canada Ltd. In connection with this acquisition, Sterling Sask entered into a credit agreement (the "Saskatoon Credit Agreement") with JP Morgan of Canada, individually and as administrative agent. The Saskatoon Credit Agreement originally provided 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. 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. In 17 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) addition, the Saskatoon Credit Agreement contains provisions that 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 executed a forbearance agreement under which they agreed to not exercise their remedies prior to December 31, 2001 in exchange for the elimination of the exceptions to the provisions restricting the payment of advances, loans and dividends from Sterling Sask to us or Chemicals and the inclusion of a prohibition on draws under the revolving credit portion of the facility during the remainder of calendar year 2001. On January 2, 2002, Sterling Sask entered into a waiver and amending agreement (the "Waiver Agreement"), effective December 18, 2001, with its lenders. The Waiver Agreement waived the existing defaults, rescinded the acceleration of the amounts outstanding under the Saskatoon Credit Agreement and reinstated the commitments thereunder. The Waiver Agreement provides for a reduction of the revolving credit facility commitment to Cdn $4.0 million and changes the expiration date on the Tranche A term loan from June 30, 2003 to December 31, 2002 and on the Tranche B term loan from June 30, 2005 to June 30, 2003. During the first quarter of fiscal 2002, a payment of approximately $7.2 million was made pursuant to this obligation. Accordingly, $4.1 million of the remaining debt will mature during the remainder of fiscal 2002 and $20.8 million will mature during fiscal 2003. The Waiver Agreement also set a minimum discount rate and Eurodollar rate margin of 2.50% over the Base Rate or LIBOR, respectively, for the remaining term of the facility. Sterling Sask has not drawn on the revolving credit facility since its inception in 1997 and as of December 31, 2001, had approximately $8.7 million in cash and cash equivalents on hand. Borrowings consisted of the following:
DECEMBER 31, SEPTEMBER 30, 2001 2001 ------------ ------------- (DOLLARS IN THOUSANDS) DOMESTIC BORROWINGS DIP Financing............................................... $ 51,424 $ 42,270 Other Domestic Borrowings: 11 1/4% Notes............................................. 150,000 150,000 11 3/4% Notes............................................. 275,000 275,000 12 3/8% Notes............................................. 295,000 295,000 ---------- ---------- Chemicals' domestic borrowings.............................. 771,424 762,270 Holdings' 13 1/2% Notes..................................... 191,750 191,750 ---------- ---------- Total domestic borrowings......................... 963,174 954,020 ---------- ---------- CANADIAN BORROWINGS Canadian Financing Agreement................................ 15,422 20,003 Saskatoon term loans........................................ 24,856 32,054 ---------- ---------- Total Canadian borrowings......................... 40,278 52,057 ---------- ---------- Total borrowings.................................. 1,003,452 1,006,077 Less: Current portion not subject to compromise............. (7,669) (33,260) Less: Borrowings subject to compromise (see Note 3)......... (615,377) (616,733) Less: Borrowings not subject to compromise (see Note 3)..... (295,000) (295,000) ---------- ---------- Long-term debt.................................... $ 85,406 $ 61,084 ========== ==========
18 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. COMMITMENTS AND CONTINGENCIES Product Contracts We have certain long-term agreements that provide for the dedication of 100% of our production of acetic acid, plasticizers, sodium cyanide, DSIDA and methanol, each to one customer. We also have various sales and conversion agreements that dedicate significant portions of our production of styrene and acrylonitrile to certain customers. Some of these agreements provide for cost recovery plus an agreed profit margin based upon market prices. 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. Environmental Regulations Our operations involve the handling, production, transportation, treatment and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental, health and safety laws, regulations and permit requirements. Environmental permits required for our operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacturing, handling, processing, distribution and use of our products and the raw materials used to produce our products and, if so affected, our business, financial position, results of operations and cash flows may be materially and adversely affected. In addition, changes in environmental requirements can cause us to incur substantial costs in upgrading or redesigning our facilities and processes, including our emission producing practices and equipment and our waste treatment, storage, disposal and other waste handling practices and equipment. We conduct environmental management programs designed to maintain compliance with applicable environmental requirements 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. 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 we believe that our business operations and facilities generally are operated in compliance with all applicable environmental, health and safety requirements in all material respects, we cannot be sure that past practices or future operations will not result in material claims or regulatory action, require material environmental expenditures or result in exposure or injury claims by employees, contractors and their employees or the public. Some risk of environmental costs and liabilities 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 our facilities could result in the incurrence of liabilities substantially in excess of our insurance coverages. A significant ban on all chlorine containing compounds could have a materially 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 December 31, 2002. 19 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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. In light of our historical expenditures and expected future results of operations and sources of liquidity, we believe we will have adequate resources to conduct our operations in compliance with applicable environmental and health and safety requirements. Nevertheless, we may be required to make significant site and operational modifications that are not currently contemplated in order to comply with changing facility permitting requirements and regulatory standards. Additionally, we have incurred and may continue to incur liability for investigation and cleanup of waste or contamination at our own facilities or at facilities operated by third parties where we have disposed of waste. We continually review all estimates of potential environmental liabilities but can give no assurances that all potential liabilities arising out of our past or present operations have been identified or fully assessed or that the amount necessary to investigate and remediate such conditions will not be significant to us. It is our policy to make safety, environmental and replacement capital expenditures a priority in order to ensure adequate safety and compliance at all times. In the event we should not have available to us, at any time, liquidity sources sufficient to fund any of these expenditures, prudent business practice might require that we cease operations at the affected facility to avoid exposing our employees and contract workers, the surrounding community 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 required to comply with environmental requirements in the conduct of our business as a debtor-in-possession, including the potential obligation to conduct remedial actions at facilities we own or operate, regardless of when the contamination at those facilities occurred. On June 11, 2001, we received a notice from the U.S. Department of Justice, Environment and Natural Resources Division, in which the Department alleged that on April 1, 1998 an ethylbenzene release at our Texas City facility violated the general duty clause of the Clean Air Act and invited us to engage in settlement 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. We are presently investigating allegations by the Florida Department of Environmental Protection that past or present waste handling practices at the Fiber's facility in Santa Rosa, Florida have adversely affected the water quality of streams on the property. At this stage, we are not able to determine the validity of those allegations or the nature of remedial actions, if any, that may ultimately be required. 20 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. A description of this release is found under "Legal Proceedings" in Note 8 of the "Notes to Consolidated Financial Statements" of the Annual Report and is incorporated herein by reference. The seven lawsuits listed below and three interventions, involving a total of approximately 819 plaintiffs, have been filed based on this release alleging personal injury, property damage and nuisance claims: - Zabrina Alexander, et al. v. Sterling Chemicals Holdings, Inc., et al.; Case No. 00-CV0217; In the 10th Judicial District Court of Galveston County, Texas - Nettie Allen, et al. v. Sterling Chemicals, Inc., et al.; Case No. 00-CV0304; In the 10th Judicial District Court of Galveston County, Texas - Bobbie Adams, et al. v. Sterling Chemicals International, Inc., et al.; Case No. 00-CV0311; In the 212th Judicial District Court of Galveston County, Texas - James C. Allen, et al. v. Sterling Chemicals, Inc., et al.; Case No. 2000-15823; In the 152nd Judicial District Court of Harris County, Texas - Ida Goldman, et al. v. Sterling Chemicals, Inc., et al.; Case No. 00-CV0338; In the 56th Judicial District Court of Galveston County, Texas - Olivia Ellis v. Sterling Chemicals, Inc.; Case No. JC5000305; In Justice Court No. 5 of Galveston County, Texas - Joe L. Kimble, et al. v. Sterling Chemicals, Inc., et al.; Case No. 00-CV0333; In the 56th Judicial District Court of Galveston County, Texas We believe that all or substantially all of our future out-of-pocket costs and expenses relating to these lawsuits, including settlement payments and judgments, will be covered by our liability insurance policies or indemnification from third parties. We do not believe that the claims and litigation arising out of this incident will have a material adverse effect on our business, financial position, results of operations or cash flows, although we cannot give any assurances to that effect. All of these claims and litigation are subject to the automatic stay, and recoveries (if any) sought thereon from assets of the Debtors 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., allowing the plaintiffs to proceed against our liability insurance policies. As a condition to the lifting of the automatic stay, these plaintiffs waived their right to seek any recoveries against us directly and look solely to insurance proceeds to satisfy their claims. Small cash 21 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Other. We are subject to various other claims and legal actions that arise in the ordinary course of our business. Claims and legal actions existing as of the Chapter 11 filing date are subject to the automatic stay, and recoveries sought thereon from assets of the Company will be required to be dealt with in the Chapter 11 case. On December 19, 2001, we announced that Frank P. Diassi had elected to terminate his employment immediately. 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. On January 25, 2002, Mr. Diassi resigned from our Board of Directors. 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 December 31, 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 December 31, 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. 22 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY The following condensed combined financial statements are presented in accordance with SOP 90-7: STERLING CHEMICALS HOLDINGS, INC. (DEBTOR-IN-POSSESSION) CONDENSED COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2001 ----------------------------------------------------------------- ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION PROCEEDINGS PROCEEDINGS ELIMINATIONS COMBINED TOTALS -------------- --------------- ------------ --------------- Revenues............................... $ 81,099 $44,054 $(179) $124,974 Cost of goods sold..................... 82,109 32,831 (63) 114,877 -------- ------- ----- -------- Gross profit (loss).................... (1,010) 11,223 (116) 10,097 Selling, general and administrative expenses............................. 5,095 1,004 -- 6,099 Reorganization items................... 3,633 -- -- 3,633 Interest and debt related expenses, net.................................. 10,943 1,231 -- 12,174 -------- ------- ----- -------- Income (loss) before income taxes...... (20,681) 8,988 (116) (11,809) Income tax expense..................... 89 2,975 -- 3,064 -------- ------- ----- -------- Net income (loss)...................... $(20,770) $ 6,013 $(116) $(14,873) ======== ======= ===== ========
23 STERLING CHEMICALS HOLDINGS, INC. (DEBTOR-IN-POSSESSION) CONDENSED COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS) (UNAUDITED)
DECEMBER 31, 2001 ------------------------------------------------------------ ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINED PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS -------------- --------------- ------------ --------- ASSETS Cash and cash equivalents.................... $ 1,371 $ 10,018 $ -- $ 11,389 Accounts receivable, net..................... 67,233 30,345 (4,331) 93,247 Inventories.................................. 43,183 11,158 (177) 54,164 Prepaid expenses............................. 3,569 636 -- 4,205 Property, plant and equipment, net........... 176,380 100,694 -- 277,074 Other assets................................. 84,774 22,691 (51,181) 56,284 --------- -------- -------- --------- Total Assets........................ $ 376,510 $175,542 $(55,689) $ 496,363 ========= ======== ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) Current liabilities.......................... $ 70,249 $ 27,232 $(23,731) $ 73,750 Liabilities subject to compromise............ 739,916 -- -- 739,916 Liabilities not subject to compromise........ 330,520 -- -- 330,520 Long-term debt............................... 51,301 34,105 -- 85,406 Non-current liabilities...................... 10,284 20,429 -- 30,713 Redeemable preferred stock................... 27,272 -- -- 27,272 Stockholders' equity (deficiency in assets).................................... (853,032) 93,776 (31,958) (791,214) --------- -------- -------- --------- Total Liabilities and Stockholders' Equity (Deficiency in Assets)..... $ 376,510 $175,542 $(55,689) $ 496,363 ========= ======== ======== =========
SEPTEMBER 30, 2001 ------------------------------------------------------------ ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINED PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS -------------- --------------- ------------ --------- 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 ========= ======== ======== =========
24 STERLING CHEMICALS HOLDINGS, INC. (DEBTOR-IN-POSSESSION) CONDENSED COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2001 ------------------------------------------- ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINED PROCEEDINGS PROCEEDINGS TOTALS -------------- --------------- -------- Net cash provided by (used in) operating activities..... $(10,297) $ 9,846 $ (451) Cash flows from investing activities: Capital expenditures.................................. (1,457) (1,186) (2,643) Cash flows from financing activities: Proceeds from financing............................... 9,154 (3,111) 6,043 Repayments of long-term debt.......................... -- (7,161) (7,161) Other................................................. (4) (147) (151) -------- -------- ------- Net cash provided by (used in) financing activities..... 9,150 (10,419) (1,269) Effect of exchange rate changes on cash................. -- (78) (78) -------- -------- ------- Net decrease in cash and cash equivalents............... (2,604) (1,837) (4,441) Cash and cash equivalents at: Beginning of year..................................... 3,975 11,855 15,830 -------- -------- ------- End of period......................................... $ 1,371 $ 10,018 $11,389 ======== ======== =======
25 STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (DEBTORS-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES As of September 30, 2001, we had approximately $318 million in United States net operating losses ("NOLs") which will expire during the period from fiscal 2018 to 2021. In assessing the value of our 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. Based on the uncertainty as to the effect of the Chapter 11 filings on the utilization of the NOLs and the future realization of other net deferred tax assets, we are not able to conclude that it is more likely than not that we will be able to realize the future benefit of our U.S. deferred tax assets and our valuation allowance reflects U.S. deferred tax assets as zero. Certain reductions to our NOLs may result from confirmation of a 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 remaining NOLs, if any, 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 NOLs will produce tax benefits in the future. Benefit was not provided for these loss carryforwards at December 31, 2001. 8. NEW ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method and requires separate identification and recognition of intangible assets, other than goodwill. The statement applies to all business combinations initiated after June 30, 2001. 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 SFAS No. 142 will have a significant impact on our financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which must be applied to fiscal years beginning after June 15, 2002, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We 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. 26 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Sterling Chemicals Holdings, Inc. We have reviewed the accompanying consolidated balance sheet of Sterling Chemicals Holdings, Inc. ("Holdings") and subsidiaries (Debtors-in-Possession) (the "Company") as of December 31, 2001, and the related consolidated statements of operations and cash flows for the three-month periods ended December 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be 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 not 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 to the condensed financial statements and Note 1 of the annual financial statements for the year ended September 30, 2001, 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 to the respective financial statements. The financial statements do not include adjustments that might result from the outcome of this uncertainty. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of September 30, 2001, and the related consolidated statements of operations, stockholders' equity (deficiency in assets), and cash flows for the year then ended (not presented herein); and in our report dated December 20, 2001, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph concerning matters that raise substantial doubt about the Company's ability to continue as a going concern. In our opinion, the information set forth in the accompanying consolidated balance sheet as of September 30, 2001 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Houston, Texas February 13, 2002 27 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of Sterling Chemicals, Inc. We have reviewed the accompanying consolidated balance sheet of Sterling Chemicals, Inc. and subsidiaries (Debtors-in-Possession) ("Chemicals") as of December 31, 2001, and the related consolidated statements of operations and cash flows for the three-month periods ended December 31, 2001 and 2000. These financial statements are the responsibility of Chemicals' management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be 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 not 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 to the condensed financial statements and Note 1 of the annual financial statements for the year ended September 30, 2001, 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 to the respective financial statements. The financial statements do not include adjustments that might result from the outcome of this uncertainty. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Chemicals as of September 30, 2001, and the related consolidated statements of operations, stockholder's equity (deficiency in assets), and cash flows for the year then ended (not presented herein); and in our report dated December 20, 2001, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph concerning matters that raise substantial doubt about Chemicals' ability to continue as a going concern. In our opinion, the information set forth in the accompanying consolidated balance sheet as of September 30, 2001 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Houston, Texas February 13, 2002 28 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, ------------------- 2001 2000 -------- -------- Revenues.................................................... $52,452 $59,681 Cost of goods sold.......................................... 41,588 50,264 ------- ------- Gross profit................................................ 10,864 9,417 Selling, general and administrative expenses................ 2,323 3,795 Reorganization items........................................ 1,264 -- Interest and debt related expenses.......................... 6,592 10,333 ------- ------- Net loss before income taxes................................ 685 (4,711) Equity in (earnings) losses of joint venture................ (1,745) 51 Provision for income taxes.................................. 2,124 1,620 ------- ------- Net income (loss)................................. $ 306 $(6,382) ======= =======
- --------------- (1) Contractual interest for the three months ended December 31, 2001 totaled $15,118. The accompanying notes are an integral part of the combined financial statements. 29 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS) (UNAUDITED)
DECEMBER 31, SEPTEMBER 31, 2001 2001 ------------ ------------- ASSETS Current assets: Cash and cash equivalents................................. $ 1,859 $ 1,396 Accounts receivable, net.................................. 34,059 36,372 Inventories............................................... 17,340 18,009 Prepaid expenses.......................................... 856 604 -------- -------- Total current assets.............................. 54,114 56,381 Property, plant and equipment, net.......................... 113,900 116,728 Due from affiliates......................................... 186,353 183,398 Other assets................................................ 18,498 19,121 -------- -------- Total assets...................................... $372,865 $375,628 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable.......................................... $ 13,331 $ 16,835 Accrued liabilities....................................... 6,512 5,944 Current portion of long-term debt......................... 1,497 1,206 -------- -------- Total current liabilities......................... 21,340 23,985 Pre-petition liabilities -- subject to compromise........... 233,228 233,572 Pre-petition liabilities -- not subject to compromise....... 143,296 139,572 Long-term debt.............................................. 15,422 18,797 Deferred income taxes....................................... 9,237 9,171 Deferred credits and other liabilities...................... 12,265 12,326 Commitments and contingencies (Note 5) Stockholders' deficit: Common stock.............................................. -- -- Additional paid-in capital................................ 92,735 92,735 Accumulated deficit....................................... (122,204) (122,510) Accumulated other comprehensive income.................... (32,454) (32,020) -------- -------- Total stockholders' deficit....................... (61,923) (61,795) -------- -------- Total liabilities and stockholders' deficit....... $372,865 $375,628 ======== ========
The accompanying notes are an integral part of the combined financial statements. 30 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, ------------------- 2001 2000 -------- -------- Cash flows from operating activities: Net income (loss)......................................... $ 306 $(6,382) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.......................... 4,967 4,983 Deferred tax expense................................... 66 1,272 Other.................................................. (8) (20) Change in assets/liabilities: Accounts receivable.................................... 2,313 4,181 Inventories............................................ 669 (767) Prepaid expenses....................................... (252) 286 Due from affiliates.................................... (3,389) 400 Other assets........................................... (318) 746 Accounts payable....................................... (3,504) (675) Accrued liabilities.................................... 568 (1,922) Other liabilities...................................... 3,320 (431) ------- ------- Net cash flows provided by operating activities... 4,738 1,671 ------- ------- Cash flows from investing activities: Capital expenditures...................................... (1,198) (1,310) ------- ------- Cash flows from financing activities: Payments on Canadian Financing Agreement.................. (3,084) -- ------- ------- Effect of United States/Canadian exchange rate on cash...... 7 20 ------- ------- Net increase in cash and cash equivalents................... 463 381 Cash and cash equivalents -- beginning of year.............. 1,396 499 ------- ------- Cash and cash equivalents -- end of year.................... $ 1,859 $ 880 ======= ======= Supplemental disclosures of cash flow information: Income taxes paid......................................... $(1,667) $ (110)
The accompanying notes are an integral part of the combined financial statements. 31 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION Interim Financial Information 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 12 3/8% Notes were exchanged for publicly registered 12 3/8% Notes with substantially similar terms. The 12 3/8% Notes are guaranteed by most of Chemicals' direct and indirect United States subsidiaries 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. As a result of the priming order discussed below, these second priority liens became third priority liens. 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., each of which is a wholly-owned direct or indirect subsidiary of Chemicals, and are collectively referred to as the "Guarantors." In addition, Sterling Canada, Inc. owns 100% of the stock of two Canadian subsidiaries that are collectively referred to as the "Canadian Subs." The consolidated financial statements of each of the Guarantors have been combined to produce the accompanying financial statements. The Guarantors and the Canadian Subs manufacture chemicals for use primarily in the pulp and paper industry at four plants in Canada and a plant in Valdosta, Georgia. Sodium chlorate is produced at the four plants in Canada and the Valdosta plant and 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 specialty textiles and technical fibers at their Santa Rosa plant, and license their acrylic fibers manufacturing technology to producers worldwide. In the opinion of management, the accompanying unaudited combined financial statements reflect all adjustments necessary to present fairly the combined financial position of the Guarantors as of December 31, 2001, and their combined results of operations and cash flows for the three month periods ended December 31, 2001 and December 31, 2000. All such adjustments are of a normal and recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited combined financial statements should be, and are assumed to have been, read in conjunction with the audited combined financial statements of the Guarantors included in Holdings' and Chemicals' combined Annual Report on Form 10-K for the fiscal year ended September 30, 2001 (the "Annual Report"). The accompanying combined balance sheet as of September 30, 2001 has been derived from the Guarantors' audited combined balance sheet as of September 30, 2001 included in the Annual Report. The accompanying combined financial statements as of and for the three-month period ended December 31, 2001 have been reviewed by Deloitte & Touche LLP, our independent accountants, whose report is included herein. Industry Conditions and Liquidity The accompanying combined financial statements have been prepared on the going concern basis of accounting, which contemplates the continuation 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 (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 accompanying combined financial statements have been presented in 32 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) conformity with the AICPA's Statement of Position 90-7 "Financial Reporting By Entities In Reorganization Under the Bankruptcy Code" ("SOP 90-7"). The statement requires a segregation of liabilities subject to compromise as of the Petition Date and identification of all transactions and events that are directly associated with the reorganization of the Debtors. The filing of the Chapter 11 petitions was driven by the Debtors' inability to meet their funded debt obligations over the long-term, largely brought about by weak demand for petrochemicals products caused by declines in general worldwide economic conditions, the relative strength of the U.S. dollar (which caused 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 timely filed plan proposed by them until May 12, 2002. The Debtors may determine to seek a further extension of these deadlines. The Debtors aspire to propose a plan of reorganization on or before March 13, 2002, unless a further extension is sought and is granted by the Bankruptcy Court. 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 is likely to result in significant dilution or elimination of some or all of the Debtors' classes of existing public debt and equity interests. The Debtors are in the process of formulating a plan of reorganization and have engaged in preliminary discussions with some of their creditor groups. 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 the quarter ended December 31, 2001 are composed primarily of professional fees directly related to the bankruptcy cases. As a result of the bankruptcy filings and related events, there can be 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: - the Debtors' ability to comply with the terms of their debtor-in-possession revolving credit agreement (the "DIP" Financing") and any related orders entered by the Bankruptcy Court in connection with the Chapter 11 cases, - the ability of the Debtors to access the incremental $40 million in availability under the DIP Financing that is dependent on an effective priming order, - the ability of the Debtors to maintain adequate cash on hand, - the ability of the Debtors to generate sufficient cash from operations, - the ability of the Debtors' subsidiaries that are not included in the Chapter 11 cases to obtain necessary financing, 33 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) - confirmation of a plan or plans of reorganization under the Bankruptcy Code and - 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 an EBITDA covenant. 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. 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 accompanying financial statements do not include any adjustments that may result from the resolution of these uncertainties. Comprehensive Loss The Guarantors' total comprehensive net loss for the three-month periods ended December 31, 2001 and December 31, 2000 was $131,000 and $6,357,000, respectively. 2. INVENTORIES
DECEMBER 31, SEPTEMBER 30, 2001 2001 ------------ ------------- (DOLLARS IN THOUSANDS) Inventories consisted of the following: Finished products......................................... $10,722 $11,308 Raw materials............................................. 1,468 1,634 Inventories under exchange agreements..................... (37) 80 Stores and supplies....................................... 5,187 4,987 ------- ------- $17,340 $18,009 ======= =======
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. 34 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Pursuant to an order of the Bankruptcy Court, the Debtors mailed notices to all known creditors that the deadline for filing proofs of claim with the Bankruptcy Court was December 17, 2001. Differences between amounts recorded by the Debtors and claims filed by creditors are continuing to be investigated and resolved. Accordingly, the ultimate number and amount of allowed claims is not presently known and, because the settlement terms of each such allowed claim is subject to a confirmed plan of reorganization, the ultimate distribution with respect to allowed claims is not presently ascertainable. On a combined basis, recorded liabilities subject to compromise under Chapter 11 proceedings as of December 31, 2001 and September 30, 2001, consisted of the following:
DECEMBER 31, SEPTEMBER 30, 2001 2001 ------------ ------------- (DOLLARS IN THOUSANDS) Trade accounts payable...................................... $ 4,174 $ 5,015 Accrued interest............................................ 8,538 8,538 Allocated Debt from Chemicals(1) 11 1/4% Notes............................................. 72,415 72,415 11 3/4% Notes............................................. 146,932 146,932 Accrued taxes............................................... 490 493 Other....................................................... 679 179 -------- -------- Total liabilities subject to compromise........... $233,228 $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 the pre-petition debt described above that was not paid or charged to earnings for the period from July 16, 2001 to September 30, 2001 was $7.0 million and for the period from October 1, 2001 to December 31, 2001 was $8.5 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. On a combined basis, recorded liabilities not subject to compromise under Chapter 11 proceedings as December 31, 2001 and September 30, 2001, consisted of the following:
DECEMBER 31, SEPTEMBER 30, 2001 2001 ------------ ------------- (DOLLARS IN THOUSANDS) Allocated 12 3/8% Senior Secured Notes from Chemicals....... $128,025 $128,025 Accrued interest on 12 3/8% Senior Secured Notes............ 15,271 11,310 Employee benefits........................................... -- 237 -------- -------- Total liabilities not subject to compromise....... $143,296 $139,572 ======== ========
35 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. LONG-TERM DEBT As of each of December 31, 2001 and September 30, 2001, debt allocated to the Guarantors by Chemicals was $351.3 million (see Note 1). At December 31, 2001, interest rates on this debt ranged from 11.25% to 12.375%. As a result of the filing of the Chapter 11 cases described in Note 1, no payments will be made by the Debtors on the pre-petition debt except as approved by the Bankruptcy Court. 5. COMMITMENTS AND CONTINGENCIES Environmental Regulations The operations of the Guarantors and the Canadian Subs 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 operations of the Guarantors and the Canadian Subs 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 chemical products made by the Guarantors and the Canadian Subs and the raw materials used to produce such products and, if so affected, the business of the Guarantors and the Canadian Subs may be materially and adversely affected. In addition, changes in environmental requirements can cause the Guarantors and the Canadian Subs to incur substantial costs in upgrading or redesigning their facilities and processes, including emission producing practices and equipment and waste treatment, storage, disposal and other waste handling practices and equipment. The Guarantors and the Canadian Subs conduct environmental management programs designed to maintain compliance with applicable environmental requirements at all of their facilities. The Guarantors and the Canadian Subs 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 the procedures of the Guarantors and the Canadian Subs for waste handling are consistent with industry standards and applicable requirements. In addition, the Guarantors believe that the operations of the Guarantors and the Canadian Subs 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 the business operations and facilities of the Guarantors and the Canadian Subs 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 and the Canadian Subs, as it is with other companies engaged in similar businesses. In addition, a catastrophic event at any of the facilities of the Guarantors or the Canadian Subs 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 financial condition and results of operations of the Guarantors and the Canadian Subs. British Columbia has a regulation in place requiring elimination of the use of all chlorine products, including chlorine dioxide, in the bleaching process by December 31, 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 Columbia. This new administration is aware of the issues surrounding this regulation and has agreed to negotiate amendments to the regulation. The Canadian Subs are working through the Alliance for Environmental Technology and the 36 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Canadian Chemical Producers' Association to provide information to the British Columbia Ministry of Environment to assist with these negotiations. In light of the historical expenditures and expected future results of operations and sources of liquidity of the Guarantors and the Canadian Subs, the Guarantors believe that the Guarantors and the Canadian Subs will have adequate resources to conduct their operations in compliance with applicable environmental and health and safety requirements. Nevertheless, the Guarantors and the Canadian Subs 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, the Guarantors and the Canadian Subs have incurred and may continue to incur liability for investigation and cleanup of waste or contamination at their own facilities or at facilities operated by third parties where they have disposed of waste. The Guarantors and the Canadian Subs continually review all estimates of potential environmental liabilities but can give no assurances that all potential liabilities arising out of their 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 them. It is the policy of the Guarantors and the Canadian Subs to make safety, environmental and replacement capital expenditures a priority in order to ensure adequate safety and compliance at all times. In the event that the Guarantors and the Canadian Subs should not have available to them, at any time, liquidity sources sufficient to fund any of these expenditures, prudent business practice might require that they cease operations at the affected facility to avoid exposing their employees and contract workers, the surrounding community and the environment to potential harm. The Guarantors believe that the Guarantors and the Canadian Subs would be able to recover certain losses that may arise out of claims related to environmental conditions at each of their facilities that existed prior to their acquisition through contractual indemnities and/or statutory law and common law principles, although there can be no assurance that the Guarantors or the Canadian Subs would prevail against any prior owner of any of their facilities with respect to any such claim. 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 required 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. We are presently investigating allegations by the Florida Department of Environmental Protection that past or present waste handling practices at the Fiber's facility in Santa Rosa, Florida have adversely affected the water quality of streams on the property. At this stage, we are not able to determine the validity of those allegations or the nature of remedial actions, if any, that may ultimately be required. 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 the Guarantors, 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 37 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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 and the Canadian Subs 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 the financial position, results of operations or cash flows of the Guarantors and the Canadian Subs, 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. 6. CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY The following condensed combined financial statements are presented in accordance with SOP 90-7: STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) CONDENSED COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2001 --------------------------------------------------------- ENTITIES NOT ENTITIES IN IN REORGANIZATION REORGANIZATION COMBINED PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS -------------- -------------- ------------ -------- Revenues.................................... $19,184 $34,300 $(1,032) $52,452 Cost of goods sold.......................... 16,099 26,521 (1,032) 41,588 ------- ------- ------- ------- Gross profit................................ 3,085 7,779 -- 10,864 Selling, general and administrative expenses.................................. 1,292 1,031 -- 2,323 Reorganization items........................ 1,264 -- -- 1,264 Interest and debt related expenses, net..... 6,361 231 -- 6,592 ------- ------- ------- ------- Income (loss) before income taxes........... (5,832) 6,517 -- 685 Equity in earnings of joint venture, net of tax....................................... (1,745) -- -- (1,745) Income tax expense.......................... -- 2,124 -- 2,124 ------- ------- ------- ------- Net income (loss)........................... $(4,087) $ 4,393 $ -- $ 306 ======= ======= ======= =======
38 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) CONDENSED COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS) (UNAUDITED)
DECEMBER 31, 2001 ----------------------------------------------------------- ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINED PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS -------------- --------------- ------------ -------- ASSETS Cash and cash equivalents.................. $ 578 $ 1,281 $ -- $ 1,859 Accounts receivable, net................... 15,921 21,533 (3,395) 34,059 Inventories................................ 10,395 6,945 -- 17,340 Prepaid expenses........................... 294 562 -- 856 Property, plant and equipment, net......... 52,612 61,288 -- 113,900 Other assets............................... 199,887 24,373 (19,409) 204,851 --------- -------- -------- -------- Total Assets..................... $ 279,687 $115,982 $(22,804) $372,865 ========= ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) Current liabilities........................ $ 7,071 $ 17,664 $ (3,395) $ 21,340 Liabilities subject to compromise.......... 233,228 -- -- 233,228 Liabilities not subject to compromise...... 143,296 -- -- 143,296 Long-term debt............................. 19,409 15,422 (19,409) 15,422 Non-current liabilities.................... 8,010 13,492 -- 21,502 Stockholders' equity (deficiency in assets).................................. (131,327) 69,404 -- (61,923) --------- -------- -------- -------- Total Liabilities and Stockholders' Equity (Deficiency in Assets)......... $ 279,687 $115,982 $(22,804) $372,865 ========= ======== ======== ========
SEPTEMBER 30, 2001 ----------------------------------------------------------- ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINED PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS -------------- --------------- ------------ -------- 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 ========= ======== ======== ========
39 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, 2001 ------------------------------------------- ENTITIES IN ENTITIES NOT IN REORGANIZATION REORGANIZATION COMBINED PROCEEDINGS PROCEEDINGS TOTALS -------------- --------------- -------- Net cash provided by (used in) operating activities..... $(613) $5,351 $4,738 Cash flows from investing activities: Capital expenditures.................................. (191) (1,007) (1,198) Cash flows from financing activities: Payments on Canadian Credit Agreement................. -- (3,084) (3,084) Effect of exchange rate changes on cash................. -- 7 7 ----- ------ ------ Net increase (decrease) in cash and cash equivalents.... (804) 1,267 463 Cash and cash equivalents at: Beginning of year..................................... 1,382 14 1,396 ----- ------ ------ End of period......................................... $ 578 $1,281 $1,859 ===== ====== ======
40 STERLING CHEMICALS GUARANTORS (DEBTORS-IN-POSSESSION) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES The Guarantors are included in the consolidated federal United States tax return filed by Holdings. The Guarantors' provision 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. The provision for income taxes during the first quarter of fiscal 2002 amounted to $2.1 million compared to $1.6 million during the first quarter of fiscal 2001. 8. NEW ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method and requires separate identification and recognition of intangible assets, other than goodwill. The statement applies to all business combinations initiated after June 30, 2001. 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 Guarantors do not believe that the adoption of SFAS No. 141 or SFAS No. 142 will have a significant impact on their financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which must be applied to fiscal years beginning after June 15, 2002, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Guarantors 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. 41 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Sterling Canada, Inc. Sterling Chemicals Energy, Inc. Sterling Chemicals International, Inc. Sterling Fibers, Inc. Sterling Pulp Chemicals, Inc. Sterling Pulp Chemicals US, Inc. We have reviewed the accompanying combined balance sheet of the Guarantors (Debtors-in-Possession) (as defined in Note 1) as of December 31, 2001, and the related combined statements of operations and cash flows for the three-month periods ended December 31, 2001 and 2000. These financial statements are the responsibility of the Guarantors' management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such combined financial statements for them to be 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 not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to pre-petition liabilities, the amounts that may be allowed for claims or contingencies or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Guarantors; or (d) as to operations, the effect of any changes that may be made in the Guarantors' business. The accompanying financial statements have been prepared assuming that the Guarantors will continue as a going concern. As discussed in Note 1 to the condensed financial statements and Note 1 to the annual financial statements for the year ended September 30, 2001, 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 to the respective financial statements. The financial statements do not include adjustments that might result from the outcome of this uncertainty. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the combined balance sheet of the Guarantors as of September 30, 2001, and the related combined statements of operations, stockholder's equity (deficiency in assets), and cash flows for the year then ended (not presented herein); and in our report dated December 20, 2001, we expressed an unqualified opinion on those combined financial statements and included an explanatory paragraph concerning matters that raise substantial doubt about the Guarantors' ability to continue as a going concern. In our opinion, the information set forth in the accompanying combined balance sheet as of September 30, 2001 is fairly stated, in all material respects, in relation to the combined balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Houston, Texas February 13, 2002 42 ITEM 2.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, its primary operating subsidiary. Chemicals and its subsidiaries own substantially all of our consolidated operating assets. Other than additional interest expense associated with its 13 1/2% Senior Secured Discount Notes due 2008, Holdings' results of operations are essentially the same as those of Chemicals. RECENT DEVELOPMENTS 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 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 can be no assurance that the Bankruptcy Court will grant any requests for such approvals. The filing of the Chapter 11 petitions was driven by the Debtors' inability to meet their funded debt obligations over the long-term, largely brought about by weak demand for petrochemicals products caused by declines in general worldwide economic conditions, the relative strength of the U.S. dollar (which caused their export sales to be at a competitive disadvantage) and higher raw material and energy costs. As a result of these conditions, the Debtors 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 timely filed plan proposed by them until May 12, 2002. The Debtors may intend to seek a further extension of these deadlines. The Debtors aspire to propose a plan of reorganization on or before March 13, 2002, unless a further extension is sought and is granted by the Bankruptcy Court. 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 is likely to result in a significant dilution or elimination of some or all of the Debtors' classes of existing public debt and equity interests. The Debtors are in the process of formulating a plan of reorganization and have engaged in preliminary discussions with some of their creditor groups. 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"). 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. 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 43 Facility"), consisting of an $85 million "current assets revolver" and a $70 million "fixed assets revolver." Commitments under the current assets revolver were increased to $125 million upon entry of the priming order discussed below. The initial draw under the DIP Financing was used to repay all amounts outstanding under the Debtors' pre-petition 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 was appealed to the U.S. District Court by the indenture trustee for the 12 3/8% Notes, but no stay of the final order was sought or imposed, and the order remains fully effective. By order dated February 7, 2002, the U.S. District Court denied the appeal. The indenture trustee may seek further review by the 5th Circuit Court of Appeals. While no assurances can be given, we do not believe the final order will be overturned by the 5th Circuit. 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, and has been granted super-priority administrative expense claim status 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. 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 orders dated December 19, 2001 and January 10, 2002, reinstating the priming order, subject to a compensatory adjustment in favor of the 12 3/8% Notes of the accrual during the bankruptcy proceedings of four percentage points of additional interest on up to $40 million. The priming order was further appealed by the indenture trustee to the U.S. District Court. The priming order will remain effective pending the outcome of any appeal unless stayed by an appellate court. By order dated February 8, 2002, the U.S. District Court denied the appeal of the December 17, 2001 order. The U.S. District Court has yet to rule on the January 10, 2002 order. The indenture trustee may seek further review by the 5th Circuit Court of Appeals. While no assurances can be given, we do not believe the priming order will be overturned by the 5th Circuit. 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. See "Liquidity and Capital Resources." At December 31, 2001, the total credit available under the DIP Financing was limited to $124.0 million due to borrowing base restrictions under the current assets revolver. At December 31, 2001, $51.4 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 December 31, 2001, unused borrowing capacity under the DIP Financing of approximately $68.2 million. However, during the second quarter of fiscal 2002, we are conducting a six-week maintenance turnaround, including catalyst change, on our styrene production unit at our Texas City facility, with total cash expenditures for the turnaround expected to be approximately $20 million, all of which will be funded by borrowings under our DIP Financing. In addition, due to a reduction in levels of our inventories and accounts receivable because of the styrene maintenance turnaround, we anticipate that the borrowing base under the DIP Financing will be reduced by approximately $10-20 million during the second quarter of fiscal 2002. 44 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 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 day's written notice of termination prior to each subsequent anniversary date. At December 31, 2001, $15.4 million was drawn under the Canadian Financing Agreement. 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. As required by the Bankruptcy Court, 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 can be 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: - 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, - the ability of the Debtors to access the incremental $40 million in DIP Financing that is dependent on an effective priming order, - the ability of the Debtors to maintain adequate cash on hand, - the ability of the Debtors to generate sufficient cash from operations, - the ability of the Debtors' subsidiaries that are not included in the Chapter 11 cases to obtain necessary financing, - confirmation of a plan or plans of reorganization under the Bankruptcy Code and - 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. 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. Mr. Diassi was elected Co-Chief Executive Officer along with David G. Elkins, our President, in September 2001. Mr. Diassi has asserted that he had "good reason" to terminate his employment and is claiming that he is entitled to receive payments under our employee retention and severance plans. Our Compensation Committee is evaluating the merits of Mr. Diassi's claim. On January 25, 2002, Mr. Diassi resigned from our Board of Directors. 45 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. 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 our 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. LIQUIDITY AND CAPITAL RESOURCES DIP Financing and Canadian Financing Agreement Effective July 19, 2001, the Debtors (excluding Holdings) entered into the DIP Financing. 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. By interim order dated July 18, 2001 and final order dated September 14, 2001, the Bankruptcy Court approved the $155 million Base Facility consisting of an $85 million "current assets revolver" and a $70 million "fixed assets revolver." Commitments under the current assets revolver were increased to $125 million upon entry of the priming order discussed above. The initial draw under the DIP Financing was used to repay all amounts outstanding under the Debtors' pre- petition 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 was appealed to the U.S. District Court by the indenture trustee for the 12 3/8% Notes, but no stay of the final order was sought or imposed, and the order remains fully effective. By order dated February 7, 2002, the U.S. District Court denied the appeal. The indenture trustee may seek further review by the 5th Circuit Court of Appeals. While no assurances can be given, we do not believe the final order will be overturned on appeal. 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 an EBITDA covenant. 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. 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 claim status 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. At December 31, 2001, the total credit available under the DIP Financing was limited to $124.0 million due to borrowing base restrictions under the current assets revolver. At December 31, 2001, $51.4 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 December 31, 2001, unused borrowing capacity under the DIP Financing of approximately $68.2 million. 46 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 (the "Foreign Subs"); and - second priority liens on all accounts receivable, inventory and other specified assets of Chemicals and the other co-borrowers and the remaining 65% of the capital stock of the Foreign Subs; 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 the Foreign Subs; and - third priority liens on the remaining 65% of the stock of the Foreign Subs, 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. As a result of the priming order, (i) maximum availability under the current assets revolving credit facility is now $125 million, (ii) the monthly borrowing base now 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 now 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 remain at $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), 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 the Foreign Subs; and - a third priority lien on the remaining 65% of the stock of the Foreign Subs; 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 the Foreign Subs and a second priority lien on the remaining 65% of the stock of the Foreign Subs; and 47 - 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 the Foreign Subs and fourth priority liens on the remaining 65% of the stock of the Foreign Subs, all of the capital stock of the co-borrowers (excluding Chemicals) and all of our United States production facilities and related assets. 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 October 31, 2001, an order was entered by the Bankruptcy Court approving the continuation of our existing, and implementation of additional, retention and severance plans to ameliorate the effects of the Chapter 11 filings on our key employees. 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 would have been able to require the purchasers to purchase shares if we had been 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. We were not able to meet the conditions to our ability to draw on the Standby Purchase Agreement and, on December 15, 2001, they expired in accordance with their terms. Saskatoon Facility In July 1997, Sterling Pulp Chemicals (Sask) Ltd. ("Sterling Sask"), our Canadian subsidiary that operates our Saskatoon facility, entered into a credit agreement with The Chase Manhattan Bank of Canada, individually and as administrative agent, and certain other financial institutions (the "Saskatoon Credit Agreement"). The indebtedness under the Saskatoon Credit Agreement is secured by substantially all of the assets of Sterling Sask, 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. In addition, the Saskatoon Credit Agreement contains provisions which prohibit the payment of advances, loans and dividends from Sterling Sask to Chemicals or Holdings. The Saskatoon Credit Agreement originally included a revolving credit facility of Cdn. $8 million to be used by Sterling Sask solely for its general corporate purposes. No borrowings were outstanding under the Saskatoon revolving credit facility as of December 31, 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 Sterling Sask's liquidity needs for the reasonably foreseeable future, although we can give no assurances to that effect. The Saskatoon Credit Agreement contains provisions which restrict the payment of advances, loans and dividends from Sterling Sask to us or Chemicals. The most restrictive of these covenants limited such payments during fiscal 2001 to approximately $1 million, plus any amounts due to us from Sterling Sask under our intercompany tax sharing agreement. In addition, because of its designation as an "Unrestricted Subsidiary" under the DIP Financing and the indentures for the 13 1/2% Notes, the 12 3/8% Notes, the 11 3/4% Notes and the 11 1/4% Notes, Sterling Sask's results are not considered in determining compliance with the covenants contained therein. An Event of Default occurred under the Saskatoon Credit Agreement as a result of the Chapter 11 filings by the Debtors. However, the lenders under the Saskatoon Credit Agreement executed a forbearance 48 agreement under which they agreed to not exercise their remedies under that agreement prior to December 31, 2001 in exchange for the elimination of the exceptions to the provisions restricting the payment of advances, loans and dividends from Sterling Sask to us or Chemicals and the inclusion of a prohibition on draws under the revolving credit portion of the facility during the remainder of calendar year 2001. On January 2, 2002 Sterling Sask entered into a waiver and amending agreement (the "Waiver Agreement"), effective December 18, 2001, with its lenders. The Waiver Agreement waived the existing defaults, rescinded the acceleration of the amounts outstanding under the Saskatoon Credit Agreement and reinstated the commitments thereunder. The Waiver Agreement provides for a reduction of the revolving credit facility commitment to Cdn $4.0 million and changes the expiration date on the Tranche A term loan from June 30, 2003 to December 31, 2002 and on the Tranche B term loan from June 30, 2005 to June 30, 2003. During the first quarter of fiscal 2002, a payment of approximately $7.2 million was made pursuant to this obligation. Accordingly, $4.1 million of the remaining debt will mature during the remainder of fiscal 2002 and $20.8 million will mature during fiscal 2003.The Waiver Agreement also set a minimum discount rate and Eurodollar rate margin of 2.50% over the Base Rate or LIBOR, respectively, for the remaining term of the facility. Sterling Sask has not drawn on the revolving credit facility since its inception in 1997 and as of December 31, 2001, had approximately $8.7 million in cash and cash equivalents on hand. Working Capital Working capital at December 31, 2001 was approximately $102 million, an increase of approximately $30 million from our working capital on September 30, 2001. Working capital at December 31, 2001 excludes pre-petition liabilities subject to compromise. The primary cause of the change in working capital was a reduction in the current portion of long-term debt of $25.6 million, primarily due to the reclassification of debt under the Saskatoon Credit Agreement to long-term due to the rescission of the acceleration of that debt provided in the Waiver Agreement. Cash Flow Net cash used in our operations was $0.4 million for the first quarter of fiscal 2002, compared to net cash used in our operations of approximately $7.8 million during the first three months of fiscal 2001. This reduction in net cash used resulted primarily from a reduction in net losses between the first three months of fiscal 2002 and the first three months of fiscal 2001. Net cash flow used in our investing activities was $2.6 million for the first three months of fiscal 2002 compared to $3.2 million during the first three months of fiscal 2001. Net cash used in our financing activities was $1.3 million for the first three months of fiscal 2002 compared to cash provided by financing activities of $12.2 million during the first three months of fiscal 2001. This change was primarily due to repayments on the DIP Financing during fiscal 2002. Capital Expenditures Our capital expenditures were $2.6 million during the first quarter of fiscal 2002, compared to $3.2 million during the first quarter of fiscal 2001. The majority of capital expenditures in the first three months of fiscal 2002 were primarily in our pulp operations. During the remainder of fiscal 2002, capital expenditures are anticipated to be approximately $25-30 million for routine safety, environmental and equipment replacement matters. We expect to fund our remaining fiscal 2002 capital expenditures from operating cash flow, plus borrowings under the DIP Financing and the Canadian Financing Agreement, if needed. RESULTS OF OPERATIONS Our revenues were approximately $125 million in the first quarter of fiscal 2002, compared to approximately $256 million in revenues during the first quarter of fiscal 2001. This decrease in revenues resulted primarily from lower styrene sales prices and volumes and lower acrylonitrile sales volumes. We recorded a net loss attributable to common stockholders of approximately $14.9 million, or $1.16 per share, for the first quarter of fiscal 2002, compared to the net loss attributable to common stockholders of approximately $31.2 million, or $2.45 per share, we recorded for the first quarter of fiscal 2001. Chemicals' recorded a net loss 49 of approximately $14.7 million for the first quarter of fiscal 2002, compared to a net loss of approximately $23.8 million in the first quarter of fiscal 2001. These decreases in our net losses were primarily due to lower interest costs, as we did not accrue interest on our unsecured debt during the first quarter of fiscal 2002, partially offset by reorganization items recorded during the first quarter of fiscal 2002. Revenues, Cost of Goods Sold and Gross Profit Petrochemicals. Revenues from our petrochemicals operations were approximately $63 million in the first quarter of fiscal 2002, compared to $184 million for the first quarter of fiscal 2001. This decrease in revenues resulted primarily from decreases in styrene sales prices and volumes and lower acrylonitrile sales volumes in the first quarter of fiscal 2002 compared to the prior period due to the continued shutdown of our acrylonitrile facility since February 2001. Our petrochemicals operations recorded an operating loss of approximately $12 million for the first quarter of fiscal 2002, whereas these operations recorded an operating loss of approximately $10 million for the first quarter of fiscal 2001, as reduced revenues from these operations were substantially offset by a reduction in cost of sales. Revenues from our styrene operations were approximately $38 million in the first quarter of fiscal 2002, a decrease of approximately 61% from the approximately $97 million in revenues from those operations in the first quarter of fiscal 2001. Direct sales prices for styrene in the first quarter of fiscal 2002 decreased approximately 31% from those realized during the first quarter of fiscal 2001. In addition, our total sales volumes for styrene in the first quarter of fiscal 2002 decreased approximately 37% from those realized during the first quarter of fiscal 2001. 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. Spot prices for styrene decreased in the first quarter of fiscal 2002 to approximately $0.17-$0.19 per pound, from approximately $0.25-$0.28 per pound during the first quarter of fiscal 2001. During the first quarter of fiscal 2002, prices for benzene and ethylene, the two primary raw materials for styrene, decreased approximately 37% and 36%, respectively, from the prices we paid for these products in the first quarter of fiscal 2001. Margins on our styrene sales in the first quarter of fiscal 2002 increased slightly from those realized during the first quarter of fiscal 2001, primarily as a result of the decrease in raw material and natural gas costs. Total sales volumes of our acrylonitrile and derivatives operations decreased approximately 95% in the first quarter of fiscal 2002 compared to the first quarter of fiscal 2001. This was primarily due to the continued shutdown of our acrylonitrile facility which commenced in February 2001. Revenue decreased 97% in the first quarter of fiscal 2002 compared to the first quarter of 2001 as a result of the continued shutdown. Revenues from our acrylic fibers operations were approximately $5 million in the first quarter of fiscal 2002, a decrease of approximately 66% from the $15 million in revenues we received from these operations in the first quarter of fiscal 2001. Sales volumes of our acrylic fibers in the first quarter of fiscal 2002 decreased approximately 81% from those experienced during the first quarter of fiscal 2001. These decreases in revenues and sales volumes resulted primarily from our withdrawal from the traditional commodity textile business in the third quarter of fiscal 2001 and corresponding significant reduction in our operations at our acrylic fibers plant. Sales prices for our acrylic fibers in the first quarter of fiscal 2002 increased approximately 8% from those realized during the first quarter of fiscal 2001. Pulp Chemicals. Revenues from our pulp chemicals operations were approximately $57 million in the first quarter of fiscal 2002, consistent with revenues from these operations in the first quarter of fiscal 2001. Sales prices of our sodium chlorate increased approximately 7% in the first quarter of fiscal 2002 compared to the first quarter of fiscal 2001, while sodium chlorate sales volumes decreased approximately 2% during this period. There was also a reduction in chlorine dioxide generator royalties, down 16% compared to the first quarter of 2001. Our pulp chemicals operations recorded operating earnings of approximately $12 million in the first quarter of fiscal 2001, compared to operating earnings of approximately $11 million during the first quarter of fiscal 2001. 50 Selling, General, and Administrative ("SG&A") Expenses Our SG&A expenses in the first quarter of fiscal 2002 were approximately $6 million compared to approximately $7 million for the same period of fiscal 2001. This decrease was primarily the result of cost reductions in our acrylic fibers business and general cost containment efforts. Reorganization Items Reorganization items incurred during the first quarter of fiscal 2002 were approximately $3.6 million, which was primarily for professional fees incurred in connection with the Debtors' Chapter 11 filings. NEW ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations be accounted for under the purchase method. The statement further requires separate recognition of intangible assets that meet one of two criteria. 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 SFAS No. 142 will have a significant impact on our financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which must be applied to fiscal years beginning after June 15, 2002, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Through the first three months of fiscal 2002, there were no significant changes in our market risk disclosures as set forth in the Annual Report. 51 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information under "Legal Proceedings" in Note 5 of the Notes to Consolidated Financial Statements included herein is hereby incorporated by reference. See also "Item 3. Legal Proceedings" in the Annual Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The following exhibits are filed as part of this Form 10-Q:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 3.1 -- Restated Bylaws of Sterling Chemicals Holdings, Inc. 4.1 -- Letter Agreement dated January 30, 2002 between Sterling Pulp Chemicals, Ltd. and Tyco Capital Business Credit (Canada) Inc. amending the Finance Agreement in certain respects. 10.1 -- First Amendment to the Sixth Amended and Restated Savings and Investment Plan. 11.1 -- Earning Per Share Computation. 15.1 -- Letter of Deloitte & Touche LLP regarding unaudited interim financial information.
(b) Reports on Form 8-K. 1. 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. 2. 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. 3. On January 7, 2002, 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. 4. On February 4, 2002, 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. 52 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (Registrants) /s/ DAVID G. ELKINS ------------------------------------ David G. Elkins President and Co-Chief Executive Officer Date: February 13, 2002 /s/ PAUL G. VANDERHOVEN ------------------------------------ Paul G. Vanderhoven Vice President -- Finance and Chief Financial Officer (Principal Financial Officer) Date: February 13, 2002 53 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 3.1 -- Restated Bylaws of Sterling Chemicals Holdings, Inc. 4.1 -- Letter Agreement dated January 30, 2002 between Sterling Pulp Chemicals, Ltd. and Tyco Capital Business Credit (Canada) Inc. amending the Finance Agreement in certain respects. 10.1 -- First Amendment to the Sixth Amended and Restated Savings and Investment Plan. 11.1 -- Earning Per Share Computation. 15.1 -- Letter of Deloitte & Touche LLP regarding unaudited interim financial information.
EX-3.1 3 h94159ex3-1.txt RESTATED BYLAWS OF STERLING CHEMICAL HOLDINGS INC EXHIBIT 3.1 ================================================================================ ================================================================================ RESTATED BYLAWS OF STERLING CHEMICALS HOLDINGS, INC. ================================================================================ EFFECTIVE AS OF DECEMBER 18, 2001 ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I - OFFICES AND RECORDS........................................... 1 Section 1.01 Registered Office and Agent....................... 1 Section 1.02 Other Offices..................................... 1 Section 1.03 Books and Records................................. 1 ARTICLE II - MEETINGS OF STOCKHOLDERS..................................... 1 Section 2.01 Annual Meeting.................................... 1 Section 2.02 Special Meetings.................................. 2 Section 2.03 Place of Meetings................................. 2 Section 2.04 Notice of Meetings................................ 2 Section 2.05 Voting List....................................... 3 Section 2.06 Quorum and Adjournment............................ 3 Section 2.07 Adjourned Meetings................................ 3 Section 2.08 Voting............................................ 4 Section 2.09 Proxies........................................... 5 Section 2.10 Record Date....................................... 5 Section 2.11 Conduct of Meetings; Agenda....................... 6 Section 2.12 Inspectors of Election; Opening and Closing of Polls........................................... 6 Section 2.13 Procedures for Bringing Business Before Meetings........................................ 7 Section 2.14 Action Without Meeting............................ 8 ARTICLE III - BOARD OF DIRECTORS - POWERS, NUMBER, NOMINATIONS, RESIGNATIONS, REMOVAL, VACANCIES AND COMPENSATION........... 8 Section 3.01 Management........................................ 8 Section 3.02 Number, Qualification and Term of Office.......... 9 Section 3.03 Nominations....................................... 9 Section 3.04 Resignations...................................... 11 Section 3.05 Removal........................................... 11 Section 3.06 Vacancies......................................... 11 Section 3.07 Subject to Rights of Holders of Preferred Stock... 12 Section 3.08 Subject to Rights of Certain Stockholders under Voting Agreement................................ 12 Section 3.09 Compensation...................................... 12 ARTICLE IV - BOARD OF DIRECTORS - MEETINGS AND ACTIONS.................... 12 Section 4.01 Regular Meetings.................................. 12 Section 4.02 Special Meetings.................................. 12 Section 4.03 Quorum; Voting.................................... 12 Section 4.04 Chairman of the Board............................. 13
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Page ---- Section 4.05 Conduct of Meetings; Presiding Officer and Secretary....................................... 13 Section 4.06 Action Without Meeting............................ 13 Section 4.07 Telephonic Meetings............................... 13 ARTICLE V - COMMITTEES OF THE BOARD OF DIRECTORS.......................... 14 Section 5.01 Executive Committee............................... 14 Section 5.02 Other Committees.................................. 14 Section 5.03 Term.............................................. 14 Section 5.04 Committee Changes; Removal........................ 14 Section 5.05 Alternate Members................................. 14 Section 5.06 Rules and Procedures.............................. 15 Section 5.07 Action Without Meeting............................ 15 Section 5.08 Telephonic Meetings............................... 15 Section 5.09 Resignations...................................... 15 Section 5.10 Limitations on Authority.......................... 15 ARTICLE VI - OFFICERS .................................................... 16 Section 6.01 Number; Titles; Qualification; Term of Office..... 16 Section 6.02 Election.......................................... 17 Section 6.03 Removal........................................... 17 Section 6.04 Resignations...................................... 17 Section 6.05 Vacancies......................................... 17 Section 6.06 Salaries.......................................... 17 Section 6.07 Executive Chairman................................ 17 Section 6.08 Chief Executive Officer........................... 18 Section 6.09 President......................................... 18 Section 6.10 Vice Presidents................................... 18 Section 6.11 Treasurer......................................... 19 Section 6.12 Assistant Treasurers.............................. 19 Section 6.13 Secretary......................................... 19 Section 6.14 Assistant Secretaries............................. 19 ARTICLE VII - CAPITAL STOCK............................................... 20 Section 7.01 Certificates...................................... 20 Section 7.02 Signatures on Certificates........................ 20 Section 7.03 Legends........................................... 20 Section 7.04 Lost, Stolen or Destroyed Certificates............ 20 Section 7.05 Transfer of Shares................................ 21 Section 7.06 Registered Stockholders........................... 21 Section 7.07 Regulations....................................... 21 Section 7.08 Stock Options, Warrants, etc...................... 21
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Page ---- ARTICLE VIII - INDEMNIFICATION............................................ 21 Section 8.01 Third Party Actions............................... 21 Section 8.02 Actions By or in the Right of the Corporation..... 22 Section 8.03 Certain Limitations............................... 23 Section 8.04 Expenses.......................................... 23 Section 8.05 Non-exclusivity................................... 23 Section 8.06 Enforceability.................................... 24 Section 8.07 Survival.......................................... 24 Section 8.08 Amendment......................................... 24 Section 8.09 Definitions....................................... 24 ARTICLE IX - NOTICES AND WAIVERS.......................................... 25 Section 9.01 Methods of Giving Notices......................... 25 Section 9.02 Waiver of Notice.................................. 25 ARTICLE X - MISCELLANEOUS PROVISIONS...................................... 25 Section 10.01 Dividends........................................ 25 Section 10.02 Reserves......................................... 26 Section 10.03 Checks........................................... 26 Section 10.04 Corporate Contracts and Instruments.............. 26 Section 10.05 Limitation of Access of Stockholders to Books and Records.................................... 26 Section 10.06 Attestation...................................... 26 Section 10.07 Fiscal Year...................................... 26 Section 10.08 Seal............................................. 26 Section 10.09 Invalid Provisions............................... 27 Section 10.10 Headings......................................... 27 Section 10.11 References/Gender/Number......................... 27 Section 10.12 Amendments....................................... 27
-iii- RESTATED BYLAWS OF STERLING CHEMICALS HOLDINGS, INC. [As amended through, and effective on, December 18, 2001] PREAMBLE These Bylaws are subject to, and governed by, the General Corporation Law of the State of Delaware ("DGCL") and the Certificate of Incorporation of the Corporation, as amended (the "Certificate of Incorporation", such term to include the resolutions of the Board of Directors of the Corporation creating any series of preferred stock, par value $0.01 per share, of the Corporation). In the event of a direct conflict between the provisions of these Bylaws and the mandatory provisions of the DGCL or the provisions of the Certificate of Incorporation, such provisions of the DGCL or the Certificate of Incorporation, as the case may be, will be controlling. ARTICLE I Offices and Records Section 1.01. Registered Office and Agent. The registered office and registered agent of the Corporation shall be as designated from time to time by the appropriate filing by the Corporation in the office of the Secretary of State of the State of Delaware. Section 1.02. Other Offices. The Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors of the Corporation (the "Board of Directors") may from time to time determine or the business of the Corporation may require. Section 1.03. Books and Records. The books and records of the Corporation may be kept at the Corporation's principal executive office in Houston, Texas or at such other locations outside the State of Delaware as may from time to time be designated by the Board of Directors. ARTICLE II Meetings of Stockholders Section 2.01. Annual Meetings. An annual meeting of the Corporation's stockholders (the "Stockholders") shall be held each calendar year for the purposes of (i) electing directors as provided in Section 3.02 and (ii) transacting such other business as may properly be brought before the meeting. Each annual meeting shall be held on such date (no later than 13 -1- months after the date of the last annual meeting of Stockholders) and at such time as shall be designated by the Board of Directors and stated in the notice or waivers of notice of such meeting. Section 2.02. Special Meetings. (a) Special meetings of the Stockholders, for any purpose or purposes, may be called at any time by the Chairman of the Board (if any) or the Chief Executive Officer and shall be called by the Secretary at the written request, or by resolution adopted by the affirmative vote, of a majority of the total number of directors which the Corporation would have if there were no vacancies (the "Whole Board"), which request or resolution shall fix the date, time and place, and state the purpose or purposes, of the proposed meeting. Except as provided by applicable law, these Bylaws, the Certificate of Incorporation or the Voting Agreement (defined below), Stockholders shall not be entitled to call a special meeting of Stockholders or to require the Board of Directors or any officer to call such a meeting. Business transacted at any special meeting of Stockholders shall be limited to the purposes stated in the notice or waivers of notice of such meeting. (b) As used in these Bylaws, "Voting Agreement" means that certain Voting Agreement, dated as of August 12, 1996, among the Corporation and certain stockholders of the Corporation, as supplemented and amended from time to time. Section 2.03. Place of Meetings. The Board of Directors may designate the place of meeting (either within or without the State of Delaware) for any meeting of Stockholders. If no designation is made by the Board of Directors, the place of meeting shall be held at the principal executive office of the Corporation. Section 2.04. Notice of Meetings. (a) Written notice of each meeting of Stockholders shall be given to each Stockholder of record entitled to vote thereat, which notice shall (i) state the place, date and time of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called and (ii) be given not less than 10 nor more than 60 days before the date of the meeting. (b) Each notice of a meeting of Stockholders shall be given as provided in Section 9.01, except that if no address appears on the Corporation's books or stock transfer records with respect to any Stockholder, notice to such Stockholder shall be deemed to have been given if sent by first-class mail or telecommunication to the Corporation's principal executive office or if published at least once in a newspaper of general circulation in the county where such principal executive office is located. (c) If any notice addressed to a Stockholder at the address of such Stockholder appearing on the books of a Corporation is returned to the Corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the Stockholder at such address, all further notices to such Stockholder at such address shall be deemed to have been duly given without further mailing if the same shall be available to such Stockholder upon written demand of such Stockholder at the principal executive office of the Corporation for a period of one year from the date of the giving of such notice. -2- (d) Any previously scheduled meeting of the Stockholders may be postponed by resolution of the Board of Directors upon Public Announcement of such postponement prior to the time previously scheduled for such meeting. As used in these Bylaws, "Public Announcement" means the disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act (as defined in Section 2.13(f)). Section 2.05. Voting List. At least 10 days before each meeting of Stockholders, the Secretary or other officer or agent of the Corporation who has charge of the Corporation's stock ledger shall prepare a complete list of the Stockholders entitled to vote at such meeting, arranged in alphabetical order and showing, with respect to each Stockholder, his address and the number of shares registered in his name. Such list shall be open to the examination of any Stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice or waivers of notice of the meeting or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept open at the time and place of the meeting during the whole time thereof, and may be inspected by any Stockholder who is present. The stock ledger of the Corporation shall be the only evidence as to who are the Stockholders entitled to examine any list required by this Section 2.05 or to vote at any meeting of Stockholders. Section 2.06. Quorum and Adjournment. The holders of a majority of the voting power of the outstanding shares of the Corporation entitled to vote generally in the election of directors (the "Voting Stock"), present in person or by proxy, shall constitute a quorum at any meeting of Stockholders, except as otherwise provided by applicable law, the Certificate of Incorporation or these Bylaws. If a quorum is present at any meeting of Stockholders, such quorum shall not be broken by the withdrawal of enough Stockholders to leave less than a quorum and the remaining Stockholders may continue to transact business until adjournment. If a quorum shall not be present at any meeting of Stockholders, the holders of a majority of the voting stock represented at such meeting or, if no Stockholder entitled to vote is present at such meeting, any officer of the Corporation may adjourn such meeting from time to time until a quorum shall be present. Notwithstanding anything in these Bylaws to the contrary, the chairman of any meeting of Stockholders shall have the right, acting in his sole discretion, to adjourn such meeting from time to time. Section 2.07. Adjourned Meetings. When a meeting of Stockholders is adjourned to another time or place, unless otherwise provided by these Bylaws, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken; provided, however, if an adjournment is for more than 30 days or if after an adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Stockholder entitled to vote thereat. At any adjourned meeting at which a quorum shall be present in person or by proxy, the Stockholders entitled to vote thereat may transact any business which might have been transacted at the meeting as originally noticed. -3- Section 2.08. Voting. (a) Election of directors at all meetings of Stockholders at which directors are to be elected shall be by written ballot and, except as otherwise provided in the Certificate of Incorporation, a plurality of the votes cast thereat shall elect. Except as otherwise provided by applicable law, the Certificate of Incorporation or these Bylaws, all matters other than the election of directors submitted to the Stockholders at any meeting shall be decided by a majority of the votes cast with respect thereto. Except as otherwise provided in the Certificate of Incorporation or by applicable law, (i) no Stockholder shall have any right of cumulative voting and (ii) each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of Stockholders. (b) Shares standing in the name of another corporation (whether domestic or foreign) may be voted by such officer, agent or proxy as the bylaws of such corporation may prescribe or, the absence of such provision, as the board of directors of such corporation may determine. Shares standing in the name of a deceased person may be voted by the executor or administrator of such deceased person, either in person or by proxy. Shares standing in the name of guardian, conservator or trustee may be voted by such fiduciary, either in person or by proxy, but no fiduciary shall be entitled to vote shares held in such fiduciary capacity without a transfer of such shares into the name of such fiduciary. Shares standing in the name of a receiver may be voted by such receiver. A Stockholder whose shares are pledged shall be entitled to vote such shares, unless in the transfer by the pledgor on the books of the Corporation he has expressly empowered the pledgee to vote thereon, in which case only the pledgee (or his proxy) may represent the stock and vote thereon. (c) If shares or other securities having voting power stand of record in the name of two or more persons (whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise) or if two or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (i) if only one votes, his act binds all; (ii) if more than one votes, the act of the majority so voting binds all; and (iii) if more than one votes but the vote is evenly split on any particular matter, each fraction may vote the securities in question proportionately or any person voting the shares or a beneficiary (if any) may apply to the Delaware Court of Chancery or such other court as may have jurisdiction to appoint an additional person to act with the person so voting the shares, which shall then be voted as determined by a majority such persons and the person so appointed by the court. If the instrument so filed shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of the paragraph (c) shall be a majority or even-split in interest. -4- Section 2.09. Proxies. (a) At any meeting of Stockholders, each Stockholder having the right to vote thereat may be represented and vote either in person or by proxy executed in writing by such Stockholder or by his duly authorized attorney-in-fact. Each such proxy shall be filed with the Secretary of the Corporation at or before the beginning of each meeting at which such proxy is to be voted. Unless otherwise provided therein, no proxy shall be valid after three years from the date of its execution. Each proxy shall be revocable unless expressly provided therein to be irrevocable and coupled with an interest sufficient in law to support an irrevocable power or unless otherwise made irrevocable by applicable law. (b) A proxy shall be deemed signed if the Stockholder's name is placed on the proxy (whether by manual signature, telegraphic transmission or otherwise) by the Stockholder or his attorney-in-fact. In the event any proxy shall designate two or more persons to act as proxies, a majority of such persons present at the meeting (or, if only one shall be present, then that one) shall have and may exercise all the powers conferred by the proxy upon all the persons so designated unless the proxy shall otherwise provide. (c) Except as otherwise provided by applicable law, by the Certificate of Incorporation or by these Bylaws, the Board of Directors may, in advance of any meeting of Stockholders, prescribe additional regulations concerning the manner of execution and filing of proxies (and the validation of same) which may be voted at such meeting. Section 2.10. Record Date. (a) For the purpose of determining the Stockholders entitled to notice of or to vote at any meeting of Stockholders (or any adjournment thereof), the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors or be more than 60 nor less than 10 days prior to the date of such meeting. If no record date is fixed, the record date for determining Stockholders entitled to notice of or to vote at a meeting of Stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of Stockholders of record entitled to notice of or to vote at a meeting of Stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) For the purpose of determining the Stockholders entitled to consent to any corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors or be more than 10 days after the date on which the resolution fixing the record date is adopted by the Board of Directors. If no record date is fixed, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. (c) For the purpose of determining the Stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of -5- any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors or be more than 60 days prior to any other action. If no record date is fixed, the record date for determining Stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 2.11. Conduct of Meetings; Agenda. (a) Meetings of the Stockholders shall be presided over by the officer of the Corporation whose duties under these Bylaws require him to do so; provided, however, if no such officer of the Corporation shall be present at any meeting of Stockholders, such meeting shall be presided over by a chairman to be chosen by a majority of the Stockholders entitled to vote at the meeting who are present in person or by proxy. At each meeting of Stockholders, the officer of the Corporation whose duties under these Bylaws require him to do so shall act as secretary of the meeting; provided, however, if no such officer of the Corporation shall be present at any meeting of Stockholders, the chairman of such meeting shall appoint a secretary. The order of business at each meeting of Stockholders shall be as determined by the chairman of the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him in order. (b) The Board of Directors may, in advance of any meeting of Stockholders, adopt an agenda for such meeting, adherence to which the chairman of the meeting may enforce. Section 2.12. Inspectors of Election; Opening and Closing of Polls. (a) Before any meeting of Stockholders, the Board of Directors may, and if required by law shall, appoint one or more persons to act as inspectors of election at such meeting or any adjournment thereof. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and if required by law shall, appoint a substitute inspector. If no inspectors are appointed by the Board of Directors, the chairman of the meeting may, and if required by law shall, appoint one or more inspectors at the meeting. Notwithstanding the foregoing, inspectors shall be appointed consistent with the mandatory provisions of Section 231 of the DGCL. (b) Inspectors may include individuals who serve the Corporation in other capacities (including as officers, employees, agents or representatives); provided, however, that no director or candidate for the office of director shall act as an inspector. Inspectors need not be Stockholders. (c) The inspectors shall (i) determine the number of shares of capital stock of the Corporation outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum and the validity and effect of proxies and (ii) receive votes or ballots, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes and ballots, determine the results and do such acts as are proper to conduct the election or vote with fairness to all Stockholders. On request of the chairman of the meeting, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. The inspectors shall have such other duties as may be prescribed by Section 231 of the DGCL. -6- (d) The chairman of the meeting may, and if required by the DGCL shall, fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the Stockholders will vote at the meeting. Section 2.13. Procedures for Bringing Business Before Meetings. (a) At any annual meeting of Stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) properly brought before the meeting by a Stockholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a Stockholder, the Stockholder must have given timely notice thereof in writing to the Secretary except as otherwise provided in the Voting Agreement. To be timely, a Stockholder's notice must be delivered to the Secretary at the principal executive office of the Corporation not less than 120 days nor more than 150 days prior to the first anniversary of the previous year's annual meeting of Stockholders; provided, however, that if no annual meeting was held in the previous year or the date of the annual meeting of Stockholders has been changed by more than 30 calendar days from such anniversary date, the notice must be so delivered to the Secretary not earlier than the 150th day prior to such annual meeting and not later than the close of business on the later of the 120th day prior to such annual meeting or the 10th day following the day on which Public Announcement of the date of such annual meeting is first made. Any annual meeting of Stockholders which is adjourned and will reconvene within 30 days after the meeting date as originally noticed shall, for purposes of any Stockholder's notice contemplated by this paragraph (a), be deemed to be a continuation of the original meeting, and no business may be brought before such adjourned meeting by any Stockholder unless timely notice of such business was given to the Secretary for the meeting as originally noticed. (b) Each notice given by a Stockholder as contemplated by paragraph (a) above shall set forth, as to each matter the Stockholder proposes to bring before the annual meeting, (i) the nature of the proposed business with reasonable particularity, including the exact text of any proposal to be presented for adoption and any supporting statement, which proposal and supporting statement shall not in the aggregate exceed 500 words, and his reasons for conducting such business at the annual meeting, (ii) any material interest of the Stockholder in such business, (iii) the name, principal occupation and record address of the Stockholder, (iv) the class and number of shares of the Corporation which are held of record or beneficially owned by the Stockholder, (v) the dates upon which the Stockholder acquired such shares of stock and documentary support for any claims of beneficial ownership and (vi) such other matters as may be required by the Certificate of Incorporation. (c) The foregoing right of a Stockholder to propose business for consideration at an annual meeting of Stockholders shall be subject to such conditions, restrictions and limitations as may be imposed by the Certificate of Incorporation. -7- (d) At any special meeting of Stockholders, only such business shall be conducted as shall have been specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors. Nothing in this Section 2.13 shall entitle any Stockholder to propose business for consideration at any special meeting of Stockholders. (e) The chairman of any meeting of Stockholders shall determine whether business has been properly brought before the meeting and, if the facts so warrant, may refuse to transact any business at such meeting which has not been properly brought before the meeting. (f) Notwithstanding any other provision of these Bylaws, the Corporation shall be under no obligation to include any Stockholder proposal in its proxy statement or otherwise present any such proposal to Stockholders at a meeting of Stockholders if the Board of Directors reasonably believes that the proponents thereof have not complied with Sections 13 and 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder, and the Corporation shall not be required to include in its proxy statement to Stockholders any Stockholder proposal not required to be included in its proxy statement to Stockholders in accordance with the Exchange Act and such rules or regulations. (g) Nothing in this Section 2.13 shall be deemed to affect (i) any rights of Stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 of the Exchange Act or (ii) any rights under the Voting Agreement relating to the nomination of any person for election or re-election as a director of the Corporation. (h) Reference is made to Section 3.03 for procedures relating to the nomination of any person for election or reelection as a director of the Corporation. Section 2.14. Action Without Meeting. Except as otherwise provided in the Voting Agreement, no action shall be taken by Stockholders other than at a meeting of Stockholders. Except as otherwise provided in the Voting Agreement, Stockholders may not act by written consent in lieu of a meeting. ARTICLE III Board of Directors -- Powers, Number, Nominations, Resignations, Removal, Vacancies and Compensation Section 3.01. Management. The business and property of the Corporation shall be managed by and under the direction of the Board of Directors. In addition to the powers and authorities expressly conferred upon the Board of Directors by these Bylaws, the Board of Directors may exercise all the powers of the Corporation and do all such lawful acts and things as are not by law, by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the Stockholders. -8- Section 3.02. Number, Qualification and Term of Office. (a) The number of directors shall be fixed from time to time exclusively pursuant to resolution adopted by a majority of the Whole Board, but shall consist of not less than three nor more than 15 directors, subject, however, to increases above 15 members as may be required by the Certificate of Incorporation in order to permit the holders of any series of preferred stock of the Corporation to elect directors under specified circumstances. In no event shall the number of directors be less, at any time, than the minimum number then required by the Voting Agreement. (b) The directors need not be Stockholders nor residents of the State of Delaware. Each director must have attained 21 years of age. (c) Except as otherwise provided in the Voting Agreement, directors shall be elected only at annual meetings of Stockholders and at any special meeting of Stockholders where to the business to be transacted at such special meeting, as set forth in the official notice of such meeting, includes the election of directors. Each director shall hold office until his successor is elected and qualified or until his earlier death, resignation or removal. No decrease in the number of directors constituting the Whole Board shall have the effect of shortening the term of any incumbent director. Section 3.03. Nominations. (a) Notwithstanding anything in these Bylaws to the contrary, except as otherwise provided in the Voting Agreement, only persons who are nominated in accordance with the procedures hereinafter set forth in this Section 3.03 shall be eligible for election as directors of the Corporation. (b) Except as otherwise provided in the Voting Agreement, nominations of persons for election to the Board of Directors at a meeting of Stockholders may be made only (i) by or at the direction of the Board of Directors or (ii) by any Stockholder entitled to vote for the election of directors at the meeting who satisfies the eligibility requirements (if any) set forth in the Certificate of Incorporation and who complies with the notice procedures set forth in this Section 3.03 and in the Certificate of Incorporation; provided, however, Stockholders may not nominate persons for election to the Board of Directors at any special meeting of Stockholders unless the business to be transacted at such special meeting, as set forth in the official notice of such meeting, includes the election of directors. Except as otherwise provided in the Voting Agreement, nominations by Stockholders shall be made pursuant to timely notice in writing to the Secretary. A Stockholder's notice given in the context of an annual meeting of Stockholders shall not be timely unless it is delivered to the Secretary at the principal executive office of the Corporation not earlier than the 150th day and not later than the 120th day prior to the first anniversary of the previous year's annual meeting of Stockholders; provided, however, that if no annual meeting was held in the previous year or the date of the annual meeting of Stockholders has been changed by more than 30 calendar days from such anniversary date, the notice must be so delivered to the Secretary not earlier than the 150th day prior to such annual meeting and not later than the close of business on the later of the 120th day prior to such annual meeting or the 10th day following the day on which Public Announcement of the date of such annual meeting is first made. A Stockholder's notice given in the context of a special meeting of Stockholders shall not be timely unless it is delivered to the Secretary at the principal executive office of the -9- Corporation not earlier than the 150th day prior to such special meeting and not later than the close of business on the later of the 120th day prior to such special meeting or the 10th day following the day on which Public Announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such special meeting. Any meeting of Stockholders which is adjourned and will reconvene within 30 days after the meeting date as originally noticed shall, for purposes of any notice contemplated by this paragraph (b), be deemed to be a continuation of the original meeting and no nominations by a Stockholder of persons to be elected directors of the Corporation may be made at any such reconvened meeting other than pursuant to a notice that was timely for the meeting on the date originally noticed. (c) Each notice given by a Stockholder as contemplated by paragraph (b) above shall set forth the following information, in addition to any other information or matters required by the Certificate of Incorporation: (i) as to each person whom the Stockholder proposes to nominate for election or re-election as a director, (A) the exact name of such person, (B) such person's age, principal occupation, business address and telephone number and residence address and telephone number, (C) the number of shares (if any) of each class of stock of the Corporation owned directly or indirectly by such person and (D) all other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors pursuant to Regulation 14A under the Exchange Act or any successor regulation thereto (including such person's notarized written acceptance of such nomination, consent to being named in the proxy statement as a nominee and statement of intention to serve as a director if elected); (ii) as to the Stockholder giving the notice, (A) his name and address, as they appear on the Corporation's books, (B) his principal occupation, business address and telephone number and residence address and telephone number, (C) the class and number of shares of the Corporation which are held of record or beneficially owned by him and (D) the dates upon which he acquired such shares of stock and documentary support for any claims of beneficial ownership; and (iii) a description of all agreements, arrangements or understandings between the Stockholder giving the notice and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such Stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a Stockholder's notice of nomination which pertains to the nominee. (d) The foregoing right of a Stockholder to nominate a person for election or reelection to the Board of Directors shall be subject to such conditions, restrictions and limitations as may be imposed by the Certificate of Incorporation. -10- (e) The chairman of a meeting of Stockholders shall have the power and duty to determine whether a nomination was made in accordance with the procedures set forth in this Section 3.03 and, if any nomination is not in compliance with this Section 3.03, to declare that such defective nomination shall be disregarded. (f) Nothing in this Section 3.03 shall be deemed to affect (i) any nomination rights conferred by the Voting Agreement or (ii) any rights of Stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 of the Exchange Act. Section 3.04. Resignations. Any director may resign at any time by giving written notice to the Board of Directors or the Secretary. Such resignation shall take effect at the date of receipt of such notice or at any later time specified therein. Acceptance of such resignation shall not be necessary to make it effective. Section 3.05. Removal. No director may be removed except by the affirmative vote of the holders of not less than a majority of the voting power of all outstanding Voting Stock, voting together as a single class. The Board of Directors may not remove any director, and no recommendation by the Board of Directors that a director be removed may be made to the Stockholders unless such recommendation is set forth in a resolution adopted by the affirmative vote of not less than 66-2/3% of the Whole Board. Nothing in this Section 3.05 shall be deemed to affect any removal rights conferred by the Voting Agreement. Section 3.06. Vacancies. (a) In case any vacancy shall occur on the Board of Directors because of death, resignation or removal, such vacancy may be filled by a majority of the directors remaining in office (though less than a quorum), and the director so appointed shall serve until his successor is elected and qualified or until his earlier death, resignation or removal. If there are no directors then in office, an election of directors may be held in the manner provided by applicable law. (b) Any newly-created directorship resulting from any increase in the number of directors constituting the Whole Board may be filled by a majority of the directors then in office (though less than a quorum). Each director so appointed shall hold office until his successor is elected and qualified or until his earlier death, resignation or removal. (c) Except as expressly provided in these Bylaws, the Certificate of Incorporation or the Voting Agreement or as otherwise provided by law, Stockholders shall not have any right to fill vacancies on the Board of Directors, including newly-created directorships. (d) If, as a result of a disaster or emergency (as determined in good faith by the then remaining directors), it becomes impossible to ascertain whether or not vacancies exist on the Board of Directors and a person is or persons are elected by the directors, who in good faith believe themselves to be a majority of the remaining directors, to fill a vacancy or vacancies that such remaining directors in good faith believe exists, then the acts of such person or persons who are so elected as directors shall be valid and binding upon the Corporation and the Stockholders, -11- although it may subsequently develop that at the time of the election (i) there was in fact no vacancy or vacancies existing on the Board of Directors or (ii) the directors who so elected such person or persons did not in fact constitute a majority of the remaining directors. Section 3.07. Subject to Rights of Holders of Preferred Stock. Notwithstanding the foregoing provisions of this Article III, if the resolutions of the Board of Directors creating any series of preferred stock of the Corporation entitle the holders of such preferred stock, voting separately by series, to elect additional directors under specified circumstances, then all provisions of such resolutions relating to the nomination, election, term of office, removal, filling of vacancies and other features of such directorships shall, as to such directorships, govern and control over any conflicting provisions of this Article III. Section 3.08. Subject to Rights of Certain Stockholders under Voting Agreement. In case any provision of this Article III conflicts with the provisions of the Voting Agreement relating to the nomination, election, term of office, removal, filling of vacancies and other features of the Designees (as defined in the Voting Agreement), such provisions of the Voting Agreement shall govern and be controlling. Section 3.09. Compensation. The Board of Directors shall have the authority to fix, and from time to time to change, the compensation of directors. Each director shall be entitled to reimbursement from the Corporation for his reasonable expenses incurred in attending meetings of the Board of Directors (or any committee thereof) and meetings of the Stockholders. Nothing contained in these Bylaws shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE IV Board of Directors -- Meetings and Actions Section 4.01. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and place (within or without the State of Delaware) as shall from time to time be determined by the Board of Directors. Except as otherwise provided by applicable law, any business may be transacted at any regular meeting of the Board of Directors. Section 4.02. Special Meetings. Special meetings of the Board of Directors shall be called by the Secretary at the request of the Chairman of the Board (if any) or the Chief Executive Officer on not less than 24 hours' notice to each director, specifying the time, place (within or without the State of Delaware) and purpose of the meeting. Special meetings shall be called by the Secretary on like notice at the written request of any two directors, which request shall state the purpose of the meeting. Section 4.03. Quorum; Voting. (a) At all meetings of the Board of Directors, a majority of the Whole Board shall be necessary and sufficient to constitute a quorum for the transaction of business. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time (without -12- notice other than announcement at the meeting) until a quorum shall be present. A meeting of the Board of Directors at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors; provided, however, that no action of the remaining directors shall constitute the act of the Board of Directors unless the action is approved by at least a majority of the required quorum for the meeting or such greater number of directors as shall be required by applicable law, by the Certificate of Incorporation or by these Bylaws. (b) The act of a majority of the directors present at any meeting of the Board of Directors at which there is a quorum shall be the act of the Board of Directors unless by express provision of law, the Certificate of Incorporation or these Bylaws a different vote is required, in which case such express provision shall govern and control. Section 4.04. Chairman of the Board. The Board of Directors may at any time and from time to time designate any director as Chairman of the Board to preside at all meetings of the Board of Directors and to have such other powers as may be prescribed with respect to such position by the Board of Directors or these Bylaws. Unless designated as an Executive Chairman pursuant to Section 6.01(b) of these Bylaws, the Chairman of the Board (if any) shall not be considered an officer of the Corporation, although nothing contained in these Bylaws shall preclude any officer of the Corporation from serving in the additional capacity of Chairman of the Board. The Chairman of the Board (if any) shall serve at the pleasure of the Board of Directors. Section 4.05. Conduct of Meetings; Presiding Officer and Secretary. (a) At meetings of the Board of Directors, business shall be transacted in such order as shall be determined by the chairman of the meeting unless the Board of Directors shall otherwise determine the order of business. The Board of Directors shall keep regular minutes of its proceedings which shall be placed in the minute book of the Corporation. (b) At each meeting of the Board of Directors, the Chairman of the Board (if any), if present, shall preside and the Secretary shall act as secretary of the meeting. Section 4.06. Action Without Meeting. Unless otherwise provided in the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all directors consent thereto in writing. All such written consents shall be filed with the minutes of proceedings of the Board of Directors. Section 4.07. Telephonic Meetings. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors may participate in a meeting of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. -13- ARTICLE V Committees of the Board of Directors Section 5.01. Executive Committee. (a) The Board of Directors may, by resolution adopted by the affirmative vote of the Whole Board, designate an Executive Committee which, during the intervals between meetings of the Board of Directors and subject to Section 5.11, shall have and may exercise, in such manner as it shall deem to be in the best interests of the Corporation, all of the powers of the Board of Directors in the management or direction of the business and affairs of the Corporation, except as reserved to the Board of Directors or as delegated by the Board of Directors to another committee of the Board of Directors or as may be prohibited by law. The Executive Committee shall consist of not less than two directors, the exact number to be determined from time to time by the affirmative vote of the Whole Board. None of the members of the Executive Committee need be an officer of the Corporation. (b) Meetings of the Executive Committee may be called at any time by the Chairman of the Board (if any) or the Chief Executive Officer on not less than one day's notice to each member given verbally or in writing, which notice shall specify the time, place (within or without the State of Delaware) and purpose of the meeting. Section 5.02. Other Committees. The Board of Directors may, by resolution adopted by a majority of the Whole Board, establish additional standing or special committees of the Board of Directors, each of which shall consist of one or more directors (the exact number to be determined from time to time by the Board of Directors) and, subject to Section 5.10, shall have such powers and functions as may be delegated to it by the Board of Directors. No member of any such additional committee need be an officer of the Corporation. Section 5.03. Term. Each member of a committee of the Board of Directors shall serve as such until the earliest of (i) his death, (ii) the expiration of his term as a director, (iii) his resignation as a member of such committee or as a director and (iv) his removal as a member of such committee or as a director. Section 5.04. Committee Changes; Removal. The Board of Directors shall have the power at any time to fill vacancies in, to change the membership of and to abolish any committee of the Board of Directors; provided, however, that no such action shall be taken in respect of the Executive Committee unless approved by a majority of the Whole Board. Section 5.05. Alternate Members. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. If no alternate members have been so appointed or each such alternate committee member is absent or disqualified, the committee member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. -14- Section 5.06. Rules and Procedures. (a) The Board of Directors may designate one member of each committee as chairman of such committee; provided, however, that, except as provided in the following sentence, no person shall be designated as chairman of the Executive Committee unless approved by a majority of the Whole Board. If the Board of Directors fails to designate a chairman for any committee, the members thereof shall designate a chairman. (b) Each committee shall adopt its own rules (not inconsistent with the Certificate of Incorporation or these Bylaws or, with any specific direction as to the conduct of its affairs, as shall have been given by the Board of Directors) governing the time, place and method of holding its meetings and the conduct of its proceedings and shall meet as provided by such rules. (c) If a committee is comprised of an odd number of members, a quorum shall consist of a majority of that number. If a committee is comprised of an even number of members, a quorum shall consist of one-half of that number. If a committee is comprised of two members, a quorum shall consist of both members. (d) Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when requested. (e) Unless otherwise provided by these Bylaws or by the rules adopted by any committee, notice of the time and place of each meeting of such committee shall be given to each member of such committee as provided in these Bylaws with respect to notices of special meetings of the Board of Directors. Section 5.07. Action Without Meeting. Any action required or permitted to be taken at any meeting of a committee of the Board of Directors may be taken without a meeting if all members of such committee consent thereto in writing. All such written consents shall be filed with the minutes of proceedings of such committee. Section 5.08. Telephonic Meetings. Members of any committee of the Board of Directors may participate in a meeting of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. Section 5.09. Resignations. Any committee member may resign at any time by giving written notice to the Board of Directors or the Secretary. Such resignation shall take effect at the date of receipt of such notice or at any later time specified therein. Acceptance of such resignation shall not be necessary to make it effective. Section 5.10. Limitations on Authority. Unless otherwise provided in the Certificate of Incorporation, no committee of the Board of Directors shall have the power or authority to (i) authorize an amendment to the Certificate of Incorporation, (ii) adopt an agreement of merger or consolidation, recommend to the Stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, (iii) recommend to the Stockholders a dissolution of -15- the Corporation or a revocation of a dissolution, (iv) amend these Bylaws, (v) declare a dividend or other distribution on, or authorize the issuance, purchase or redemption of, securities of the Corporation, (vi) elect any officer of the Corporation or (vii) approve any material transaction between the Corporation and one or more of its directors, officers or employees or between the Corporation and any corporation, partnership, association or other organization in which one or more of its directors, officers or employees are directors or officers or have a financial interest; provided, however, that the Executive Committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of preferred stock adopted by the Board of Directors as provided in the Certificate of Incorporation, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the decrease or increase of the shares of any such series. For purposes of the foregoing clause (vii), a transaction shall be deemed material if it involves consideration or other obligation in excess of $1,000,000. ARTICLE VI Officers Section 6.01. Number; Titles; Qualification; Term of Office. (a) The officers of the Corporation shall be a Chief Executive Officer, a President, a Secretary and a Treasurer. The Board of Directors from time to time may also elect such other officers (including, without limitation, an Executive Chairman and one or more Vice Presidents) as the Board of Directors deems appropriate or necessary. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his earlier death, resignation or removal. Any two or more offices may be held by the same person, but no officer shall execute any instrument in more than one capacity if such instrument is required by law or any act of the Corporation to be executed or countersigned by two or more officers. None of the officers need be a Stockholder or a resident of the State of Delaware. No officer (other than the Executive Chairman, if any) need be a director. (b) The Board of Directors may, by resolution adopted by the affirmative vote of a majority of the Whole Board, designate any director as Chairman or Vice Chairman of the Board and fix his duties as such. However, no such Chairman of the Board shall be considered an officer of the Corporation unless specifically designated as an officer of the Corporation by the affirmative vote of a majority of the Whole Board (any such Chairman of the Board who is so designated being referred to herein as the "Executive Chairman"), and no such Vice Chairman of the Board shall be considered an officer of the Corporation, the officers of the Corporation being limited to those officers elected by the Board of Directors in accordance with paragraph (a) above and the Executive Chairman (if any). The designation of any director as Chairman or Vice Chairman of the Board may be rescinded by a majority of the Whole Board at any time, in which event such person shall automatically cease to be Chairman or Vice Chairman of the Board, as the case may be. The designation of any Chairman of the Board as the Executive Chairman may be rescinded by a majority of the Whole Board at any time, in which event such Executive -16- Chairman shall automatically cease to be Executive Chairman or otherwise be considered an officer of the Corporation by virtue of such position. (c) The Board of Directors may delegate to the Executive Chairman (if any) and/or the Chief Executive Officer the power to appoint one or more employees of the Corporation as divisional or departmental vice presidents and fix their duties as such appointees. However, no such divisional or departmental vice presidents shall be considered an officer of the Corporation, the officers of the Corporation being limited to the Executive Chairman (if any) and those officers elected by the Board of Directors in accordance with paragraph (a) above. Section 6.02. Election. At the first meeting of the Board of Directors after each annual meeting of Stockholders at which a quorum shall be present, the Board of Directors shall elect the officers of the Corporation. Section 6.03. Removal. Any officer may be removed, either with or without cause, by the Board of Directors; provided, however, that (i) the Executive Chairman (if any) and the Chief Executive Officer may be removed only by the affirmative vote of a majority of the Whole Board and (ii) the removal of any officer shall be without prejudice to the contract rights, if any, of such officer. Election or appointment of an officer shall not of itself create contract rights. Section 6.04. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board (if any) or the Chief Executive Officer. Any such resignation shall take effect on receipt of such notice or at any later time specified therein. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any such resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. Section 6.05. Vacancies. If a vacancy shall occur in any office because of death, resignation, removal, disqualification or any other cause, the Board of Directors may elect or appoint a successor to fill such vacancy for the remainder of the term. Section 6.06. Salaries. The salaries of all officers of the Corporation shall be fixed by the Board of Directors or pursuant to its direction, and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation. Section 6.07. Executive Chairman. The Executive Chairman (if any) shall (i) if present, preside at all meetings of the Board of Directors and of the Stockholders, (ii) have the power to sign all certificates, contracts and other instruments of the Corporation which may be authorized by the Board of Directors, (iii) have and perform such other powers and duties as may be prescribed by the Board of Directors or these Bylaws and (iv) shall serve at the pleasure of the Board. During the time of any vacancy in the office of Chief Executive Officer or in the event of the absence or disability of the Chief Executive Officer, the Executive Chairman (if any) shall have the duties and powers of the Chief Executive Officer unless otherwise determined by the Board of Directors. In no event shall any third party having dealings with the Corporation be -17- bound to inquire as to any facts required by the terms of this Section 6.07 for the exercise by the Executive Chairman of the powers of the Chief Executive Officer. Section 6.08. Chief Executive Officer. (a) The Chief Executive Officer shall be the chief executive officer of the Corporation and, subject to the supervision, direction and control of the Board of Directors, shall have general supervision, direction and control of the business and officers of the Corporation with all such powers as may be reasonably incident to such responsibilities. He shall have the general powers and duties of management usually vested in the chief executive officer of a corporation and such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. (b) During the time of any vacancy in the office of President or in the event of the absence or disability of the President, the Chief Executive Officer shall have the duties and powers of the President unless otherwise determined by the Board of Directors. In no event shall any third party having any dealings with the Corporation be bound to inquire as to any facts required by the terms of this Section 6.08 for the exercise by the Chief Executive Officer of the powers of the President. Section 6.09. President. (a) The President shall be the chief operating officer of the Corporation and, subject to the supervision, direction and control of the Chief Executive Officer and the Board of Directors, shall manage the day-to-day operations of the Corporation. He shall have the general powers and duties of management usually vested in the chief operating officer of a corporation and such other powers and duties as may be assigned to him by the Board of Directors, the Chief Executive Officer or these Bylaws. (b) During the time of any vacancy in the office of the Chief Executive Officer or in the event of the absence or disability of the Chief Executive Officer, if there is no Executive Chairman at such time, the President shall have the duties and powers of the Chief Executive Officer unless otherwise determined by the Board of Directors. In no event shall any third party having any dealings with the Corporation be bound to inquire as to any facts required by the terms of this Section 6.09 for the exercise by the President of the powers of the Chief Executive Officer. Section 6.10. Vice Presidents. In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the President, shall perform all the duties of the President as chief operating officer of the Corporation, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President as chief operating officer of the Corporation. In no event shall any third party having dealings with the Corporation be bound to inquire as to any facts required by the terms of this Section 6.10 for the exercise by any Vice President of the powers of the President as chief operating officer of the Corporation. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be assigned to them by the Board of Directors, the Chief Executive Officer or the President. -18- Section 6.11. Treasurer. The Treasurer shall (i) have custody of the Corporation's funds and securities, (ii) keep full and accurate account of receipts and disbursements, (iii) deposit all monies and valuable effects in the name and to the credit of the Corporation in such depository or depositories as may be designated by the Board of Directors and (iv) perform such other duties as may be prescribed by the Board of Directors or the Chief Executive Officer. Section 6.12. Assistant Treasurers. Each Assistant Treasurer shall have such powers and duties as may be assigned to him by the Board of Directors, the Chief Executive Officer or the President. In case of the absence or disability of the Treasurer, the Assistant Treasurer designated by the President (or, in the absence of such designation, the Treasurer) shall perform the duties and exercise the powers of the Treasurer during the period of such absence or disability. In no event shall any third party having dealings with the Corporation be bound to inquire as to any facts required by the terms of this Section 6.12 for the exercise by any Assistant Treasurer of the powers of the Treasurer under these Bylaws. Section 6.13. Secretary. (a) The Secretary shall keep or cause to be kept, at the principal office of the Corporation or such other place as the Board of Directors may order, a book of minutes of all meetings and actions of the Board of Directors, committees of the Board of Directors and Stockholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at meetings of the Board of Directors and committees thereof, the number of shares present or represented at Stockholders' meetings and the proceedings thereof. (b) The Secretary shall keep, or cause to be kept, at the principal office of the Corporation or at the office of the Corporation's transfer agent or registrar, a share register, or a duplicate share register, showing the names of all Stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same and the number and date of cancellation of every certificate surrendered for cancellation. (c) The Secretary shall give, or cause to be given, notice of all meetings of the Stockholders and of the Board of Directors required by these Bylaws or by law to be given, and he shall keep the seal of the Corporation, if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors, the Executive Chairman (if any), the Chief Executive Officer, the President or these Bylaws. (d) The Secretary may affix the seal of the Corporation, if one be adopted, to contracts of the Corporation. Section 6.14. Assistant Secretaries. Each Assistant Secretary shall have such powers and duties as may be assigned to him by the Board of Directors, the Executive Chairman (if any), the Chief Executive Officer or the President. In case of the absence or disability of the Secretary, the Assistant Secretary designated by the President (or, in the absence of such designation, the Secretary) shall perform the duties and exercise the powers of the Secretary during the period of such absence or disability. In no event shall any third party having dealings with the Corporation -19- be bound to inquire as to any facts required by the terms of this Section 6.14 for the exercise by any Assistant Secretary of the powers of the Secretary under these Bylaws. ARTICLE VII Stock Section 7.01. Certificates. Certificates for shares of stock of the Corporation shall be in such form as shall be approved by the Board of Directors. The certificates shall be signed (i) by the Executive Chairman (if any), the Chief Executive Officer, the President or a Vice President and (ii) by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer. Section 7.02. Signatures on Certificates. Any or all of the signatures on the certificates may be a facsimile and the seal of the Corporation (or a facsimile thereof), if one has been adopted, may be affixed thereto. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 7.03. Legends. The Board of Directors shall have the power and authority to provide that certificates representing shares of stock of the Corporation bear such legends and statements (including, without limitation, statements relating to the powers, designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions of the shares represented by such certificates) as the Board of Directors deems appropriate in connection with the requirements of federal or state securities laws or other applicable laws. Section 7.04. Lost, Stolen or Destroyed Certificates. The Board of Directors, the Secretary and the Treasurer each may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, in each case upon the making of an affidavit of that fact by the owner of such certificate, or his legal representative. When authorizing such issue of a new certificate or certificates, the Board of Directors, the Secretary or the Treasurer, as the case may be, may, in its or his discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as the Board of Directors, the Secretary or the Treasurer, as the case may be, shall require and/or to furnish the Corporation a bond in such form and substance and with such surety as the Board of Directors, the Secretary or the Treasurer, as the case may be, may direct as indemnity against any claim, or expense resulting from any claim, that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. -20- Section 7.05. Transfers of Shares. Shares of stock of the Corporation shall be transferable only on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives. Upon surrender to the Corporation, or the transfer agent of the Corporation, of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the Corporation or its transfer agent shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon the Corporation's books. Section 7.06. Registered Stockholders. The Corporation shall be entitled to treat the holder of record of any share of stock of the Corporation as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim or interest in such share on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as expressly provided by the laws of the State of Delaware. Section 7.07. Regulations. The Board of Directors shall have the power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer and registration or the replacement of certificates for shares of stock of the Corporation. The Board of Directors may (i) appoint and remove transfer agents and registrars of transfers and (ii) require all stock certificates to bear the signature of any such transfer agent and/or any such registrar of transfers. Section 7.08. Stock Options, Warrants, etc. Unless otherwise expressly prohibited in the resolutions of the Board of Directors creating any class or series of preferred stock of the Corporation, the Board of Directors shall have the power and authority to create and issue (whether or not in connection with the issue and sale of any stock or other securities of the Corporation) warrants, rights or options entitling the holders thereof to purchase from the Corporation any shares of capital stock of the Corporation of any class or series or any other securities of the Corporation for such consideration and to such persons, firms or corporations as the Board of Directors, in its sole discretion, may determine, setting aside from the authorized but unissued stock of the Corporation the requisite number of shares for issuance upon the exercise of such warrants, rights or options. Such warrants, rights and options shall be evidenced by one or more instruments approved by the Board of Directors. The Board of Directors shall be empowered to set the exercise price, duration, time for exercise and other terms of such warrants, rights and operations; provided, however, that the consideration to be received for any shares of capital stock subject thereto shall not be less than the par value thereof. ARTICLE VIII Indemnification Section 8.01. Third Party Actions. The Corporation (i) shall, to the maximum extent permitted from time to time under the laws of the State of Delaware, indemnify every person who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that such person is or was a -21- director or officer of the Corporation or any of its direct or indirect subsidiaries or is or was serving at the request of the Corporation or any of its direct or indirect subsidiaries as a director, officer or fiduciary of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, and (ii) may, to the maximum extent permitted from time to time under the laws of the State of Delaware, indemnify every person who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that such person is or was an employee or agent of the Corporation or any of its direct or indirect subsidiaries or is or was serving at the request of the Corporation or any of its direct or indirect subsidiaries as an employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including counsel fees), judgments, fines and amounts paid or owed in settlement actually and reasonably incurred by such person or rendered or levied against such person in connection with such action, suit or proceeding; provided, however, that no indemnification shall be made to any person under this Section 8.01 unless such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, in itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal action or proceeding, that the person had reasonable cause to believe that his conduct was unlawful. Any person seeking indemnification under this Section 8.1 shall be deemed to have met the standard of conduct required for such indemnification unless the contrary is established. Section 8.02. Actions By or in the Right of the Corporation. The Corporation (i) shall, to the maximum extent permitted from time to time under the laws of the State of Delaware, indemnify every person who is or was a party or who is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or officer of the Corporation or any of its direct or indirect subsidiaries or is or was serving at the request of the Corporation or any of its direct or indirect subsidiaries as a director, officer or fiduciary of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, and (ii) may, to the maximum extent permitted from time to time under the laws of the State of Delaware, indemnify every person who is or was a party or who is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was an employee or agent of the Corporation or any of its direct or indirect subsidiaries or is or was serving at the request of the Corporation or any of its direct or indirect subsidiaries as an employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including counsel fees) actually and reasonably incurred by such person in connection with the defense or settlement or such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation; provided, however, that no indemnification shall be made to -22- any person under this Section 8.02 with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnification. Section 8.03. Certain Limitations. Unless otherwise determined by the affirmative vote of a majority of the Whole Board, no indemnification shall be made to any person under Section 8.01 or 8.02: (i) for amounts actually paid to such person pursuant to one or more policies of directors and officers liability insurance maintained by the Corporation or pursuant to a trust fund, letter of credit or other security or funding arrangement provided by the Corporation; provided, however, that if it should subsequently be determined that such person is not entitled to retain any such amount, this clause (i) shall no longer apply to such amount; (ii) in respect of remuneration paid to such person if it shall be determined by a final judgment or other final adjudication that payment of such remuneration was in violation of applicable law; (iii) on account of such person s conduct which is finally adjudged to constitute willful misconduct or to have been knowingly fraudulent, deliberately dishonest or from which such person derives an improper personal benefit; or (iv) on account of any suit in which final judgment is rendered against such person for an accounting of profits made from the sale or purchase by such person of securities of the Corporation pursuant to the provisions of Section 16(b) of the Exchange Act. Section 8.04. Expenses. Expenses, including counsel fees and court costs, actually and reasonably incurred by a director or officer of the Corporation or any of its direct or indirect subsidiaries in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article VIII. Such expenses incurred by other employees and agents of the Corporation and other persons eligible for indemnification under this Article VIII may be paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. Section 8.05. Non-exclusivity. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any provision of law, the Certificate of Incorporation, the certificate of incorporation or bylaws or other governing documents of any direct or indirect subsidiary of the Corporation, under any agreement, vote of stockholders or disinterested directors or under any policy or policies of insurance maintained by the Corporation on behalf of any person or otherwise, both as to action -23- in his official capacity and as to action in another capacity while holding any of the positions or having any of the relationships referred to in this Article VIII. Section 8.06. Enforceability. The provisions of this Article VIII (i) are for the benefit of, and may be enforced directly by, each director or officer of the Corporation the same as if set forth in their entirety in a written instrument executed and delivered by the Corporation and such director or officer and (ii) constitute a continuing offer to all present and future directors and officers of the Corporation. The Corporation, by its adoption of these Bylaws, (A) acknowledges and agrees that each present and future director and officer of the Corporation has relied upon and will continue to rely upon the provisions of this Article VIII in becoming, and serving as, a director or officer of the Corporation or, if requested by the Corporation, a director, officer or fiduciary or the like of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, (B) waives reliance upon, and all notices of acceptance of, such provisions by such directors and officers and (C) acknowledges and agrees that no present or future director or officer of the Corporation shall be prejudiced in his right to enforce directly the provisions of this Article VIII in accordance with their terms by any act or failure to act on the part of the Corporation. Section 8.07. Survival. The provisions of this Article VIII shall continue as to any person who has ceased to be a director or officer of the Corporation and shall inure to the benefit of the estate, executors, administrators, heirs, legatees and devisees of any person entitled to indemnification under this Article VIII. Section 8.08. Amendment. No amendment, modification or repeal of this Article VIII or any provision hereof shall in any manner terminate, reduce or impair the right of any past, present or future director or officer of the Corporation to be indemnified by the Corporation, nor the obligation of the Corporation to indemnify any such director or officer, under and in accordance with the provisions of this Article VIII as in effect immediately prior to such amendment, modification or repeal with respect to claims arising, in whole or in part, from a state of facts extant on the date of, or relating to matters occurring prior to, such amendment, modification or repeal, regardless of when such claims may arise or be asserted. Section 8.09. Definitions. For purposes of this Article VIII, (i) reference to any person shall include the estate, executors, administrators, heirs, legatees and devisees of such person, (ii) "employee benefit plan" and "fiduciary" shall be deemed to include, but not be limited to, the meaning set forth, respectively, in sections 3(3) and 21(A) of the Employee Retirement Income Security Act of 1974, as amended, (iii) references to the judgments, fines and amounts paid or owed in settlement or rendered or levied shall be deemed to encompass and include excise taxes required to be paid pursuant to applicable law in respect of any transaction involving an employee benefit plan and (iv) references to the Corporation shall be deemed to include any predecessor corporation or entity and any constituent corporation or entity absorbed in a merger, consolidation or other reorganization of or by the Corporation which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents and fiduciaries so that any person who was a director, officer, employee, agent or fiduciary of such predecessor or constituent corporation or entity, or served at the request of -24- such predecessor or constituent corporation or entity as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article VIII with respect to the Corporation as such person would have with respect to such predecessor or constituent corporation or entity if its separate existence had continued. ARTICLE IX Notices and Waivers Section 9.01. Methods of Giving Notices. Whenever, by applicable law, the Certificate of Incorporation or these Bylaws, notice is required to be given to any Stockholder, any director or any member of a committee of the Board of Directors and no provision is made as to how such notice shall be given, personal notice shall not be required and such notice may be given (i) in writing, by mail, postage prepaid, addressed to such Stockholder, director or committee member at his address as it appears on the books or (in the case of a Stockholder) the stock transfer records of the Corporation or (ii) by any other method permitted by law (including, but not limited to, overnight courier service, telegram, telex or telecopier). Any notice required or permitted to be given by mail shall be deemed to be delivered and given at the time when the same is deposited in the United States mail as aforesaid. Any notice required or permitted to be given by overnight courier service shall be deemed to be delivered and given one business day after delivery to such service with all charges prepaid and addressed as aforesaid. Any notice required or permitted to be given by telegram, telex or telecopy shall be deemed to be delivered and given at the time transmitted with all charges prepaid and addressed as aforesaid. Section 9.02. Waiver of Notice. Whenever any notice is required to be given to any Stockholder, director or member of a committee of the Board of Directors by applicable law, the Certificate of Incorporation or these Bylaws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Attendance of a Stockholder (whether in person or by proxy), director or committee member at a meeting shall constitute a waiver of notice of such meeting, except where such person attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE X Miscellaneous Provisions Section 10.01. Dividends. Subject to applicable law and the provisions of the Certificate of Incorporation, dividends may be declared by the Board of Directors at any meeting and may be paid in cash, in property or in shares of the Corporation's capital stock. Any such declaration shall be at the discretion of the Board of Directors. A director shall be fully protected in relying in good faith upon the books of account of the Corporation or statements prepared by any of its officers as to the value and amount of the assets, liabilities or net profits of the -25- Corporation or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared. Section 10.02. Reserves. There may be created by the Board of Directors, out of funds of the Corporation legally available therefor, such reserve or reserves as the Board of Directors from time to time, in its absolute discretion, considers proper to provide for contingencies, to equalize dividends or to repair or maintain any property of the Corporation, or for such other purpose as the Board of Directors shall consider beneficial to the Corporation, and the Board of Directors may thereafter modify or abolish any such reserve in its absolute discretion. Section 10.03. Checks. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the Corporation shall be signed by such officer or officers or by such employees or agents of the Corporation as may be designated from time to time by the Board of Directors. Section 10.04. Corporate Contracts and Instruments. Subject always to the specific directions of the Board of Directors, the Executive Chairman (if any), the Chief Executive Officer, the President, any Vice President, the Secretary or the Treasurer may enter into contracts and execute instruments in the name and on behalf of the Corporation. The Board of Directors and, subject to the specific directions of the Board of Directors, the Executive Chairman (if any), the Chief Executive Officer or the President may authorize one or more officers, employees or agents of the Corporation to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. Section 10.05. Limitation of Access of Stockholders to Books and Records. Subject to applicable law, the Board of Directors is expressly authorized and empowered to determine from time to time whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to inspection of Stockholders. Except as so determined or as expressly provided in the Certificate of Incorporation, no Stockholder shall have any right to inspect any account, book or document of the Corporation other than such rights as may be conferred by applicable law. Section 10.06. Attestation. With respect to any deed, deed of trust, mortgage or other instrument executed by the Corporation through its duly authorized officer or officers, the attestation to such execution by the Secretary or an Assistant Secretary of the Corporation shall not be necessary to constitute such deed, deed of trust, mortgage or other instrument a valid and binding obligation of the Corporation unless the resolutions, if any, of the Board of Directors authorizing such execution expressly state that such attestation is necessary. Section 10.07. Fiscal Year. The fiscal year of the Corporation shall be October 1 through September 30, unless otherwise fixed by the Board of Directors. Section 10.08. Seal. The seal of the Corporation shall be such as from time to time may be approved by the Board of Directors. -26- Section 10.09. Invalid Provisions. If any part of these Bylaws shall be invalid or inoperative for any reason, the remaining parts, so far as is possible and reasonable, shall remain valid and operative. Section 10.10. Headings. The headings used in these Bylaws have been inserted for administrative convenience only and shall not limit or otherwise affect any of the provisions of these Bylaws. Section 10.11. References/Gender/Number. Whenever in these Bylaws the singular number is used, the same shall include the plural where appropriate. Words of any gender used in these Bylaws shall include the other gender where appropriate. In these Bylaws, unless a contrary intention appears, all references to Articles and Sections shall be deemed to be references to the Articles and Sections of these Bylaws. Section 10.12. Amendments. These Bylaws may be altered, amended or repealed or new bylaws may be adopted by the affirmative vote of a majority of the Whole Board; provided, however, that no such action shall be taken at any special meeting of the Board of Directors unless notice of such action is contained in the notice of such special meeting. These Bylaws may not be altered, amended or rescinded, nor may new bylaws be adopted, by the Stockholders except by the affirmative vote of the holders of not less than 66-2/3% of the voting power of all outstanding Voting Stock, voting together as a single class. Each alteration, amendment or repeal of these Bylaws shall be subject in all respects to Section 8.07. -27- EX-4.1 4 h94159ex4-1.txt LETTER AGREEMENT EXHIBIT 4.1 January 18, 2002 Sterling Pulp Chemicals, Ltd. 302 The East Mall, Suite 200 Toronto, Ontario M9B 6C7 RE: FINANCING AGREEMENT-THIRD AMENDING AGREEMENT Reference is made to the financing agreement dated as of July 11, 2001, as amended by letter agreements dated July 26, 2001 and September 14, 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 the Financing Agreement is amended as follows: 1. DEFINITION OF "BOWATER PROJECT" The definition of "Bowater Project" is hereby deleted in its entirety and replaced with the following: "BOWATER PROJECT means the lease and related agreements to be entered into by the Company with Bowater pursuant to which the Company will lease from Bowater the facility for a merchant sodium chlorite plant to be located at Bowater's Thunder Bay, Ontario, pulp mill." 2. DEFINITION OF "LEASES" The definition of "Leases" is hereby deleted in its entirety and replaced with the following: "LEASES means the leases, subleases, rights to occupy and licences of real property or buildings and fixtures to which the Company is a party as listed on Schedule 3." 3. DEFINITION OF "LETTER OF CREDIT SUB-LINE" The definition of "Letter of Credit Sub-Line" is hereby deleted in its entirety and replaced with the following: 2 "LETTER OF CREDIT SUB-LINE shall mean the commitment of the Lenders to assist the Company in obtaining Letters of Credit, pursuant to Section 5 hereof, in an aggregate amount not to exceed $10,000,000." 4. DEFINITION OF "OWNED PROPERTIES" The definition of "Owed Properties" is hereby deleted in its entirety and replaced with the following: "OWNED PROPERTIES means, collectively, the land and premises owned by the Company as listed on Schedule 4." 5. DEFINITION OF "SURPLUS CASH" The definition of "Surplus Cash" is hereby deleted in its entirety and replaced with the following: "SURPLUS CASH shall mean for any Fiscal Year (a) the sum of (i) EBITDA and (ii) other non-cash charges of the Company (excluding depreciation and amortization to the extent already included in EBITDA) less (b) the sum of (i) all interest obligations paid or due by the Company, (ii) the amount of principal repaid to the Lenders on the Term Loan, (iii) Capital Expenditures actually incurred, (iv) all federal, provincial, state and local cash taxes paid by the Company and (v) any dividends or management fees permitted by the Agent and the Lenders to be included in this definition of Surplus Cash." 6. SECTION 4(5) Section 4(5) is hereby deleted in its entirety and replaced with the following: "(5) At any time prior to repayment in full of the Term Loan, in the event the Company has Surplus Cash in any Fiscal Year commencing with the Fiscal Year beginning on October 1, 2001, the Company must make a Mandatory Prepayment of the Term Loan by an amount equal to twenty-five percent (25%) of said Surplus Cash on or before the 90th day after the end of each Fiscal Year of the Company." 7. SECTIONS 7(5)(b) AND (c)(i) Sections 7(5)(b) and (c)(i) are hereby deleted in their entirety and replaced with the following: 3 "(b) Without limiting the generality of the foregoing, the Company agrees to maintain insurance (or cause to be maintained) on its Real Estate, Equipment and Inventory under such policies of insurance, with such insurance companies, in such reasonable amounts and covering such insurable risks as are at all times reasonably satisfactory to the Agent. All policies covering the Company's Real Estate, Equipment and Inventory are, subject to the rights of any holders of Permitted Liens holding claims senior to the Agent, to be made payable to the Agent, on behalf of the Lenders, in case of loss, under a standard non-contributory "MORTGAGEE", "LENDER" or "SECURED PARTY" clause and are to contain such other provisions as the Agent may require to fully protect the Agent's interest in the Company's Real Estate, Inventory and Equipment and to any payments to be made under such policies. All original policies or true copies thereof are to be delivered to the Agent, premium prepaid, with the loss payable endorsement in the Agent's favour, and shall provide for not less than thirty (30) days prior written notice to the Agent of the exercise of any right of cancellation. At the Company's request, or if the Company fails to maintain such insurance, the Agent may arrange for such insurance, but at the Company's expense and without any responsibility on the Agent's part for: (i) obtaining the insurance; (ii) the solvency of the insurance companies; (iii) the adequacy of the coverage; or (iv) the collection of claims. Upon the occurrence of an Event of Default which is not waived in writing by the Required Lenders, the Agent shall, subject to the rights of any holders of Permitted Liens holding claims senior to the Agent, have the sole right and at its option, in the name of the Agent or the Company, to file claims under any such insurance policies, to receive, receipt and give acquittance for any payments that may be payable thereunder, and to execute any and all endorsements, receipts, releases, assignments, reassignments or other documents that may be necessary to effect the collection, compromise or settlement of any claims under any such insurance policies. (c) (i) In the event of any loss or damage by fire or other casualty, Insurance Proceeds relating to Inventory shall first reduce the Company's Revolving Loans, then the Term Loan. Upon the occurrence of a Default or Event of Default, such Insurance Proceeds may be applied to the Obligations in such order as the Agent may elect;" 4 8. SECTION 7(13)(b) Section 7(13)(b) is hereby deleted in its entirety and replaced with the following: "(b) not enter into or permit any subsidiary to enter into any Operating Lease if after giving effect thereto the aggregate obligations with respect to Operating Leases of the Company during any Fiscal Year would exceed $10,000,000;" 9. SECTION 7(16) Section 7(16) is hereby deleted in its entirety and replaced with following: "(16) Except as otherwise specifically permitted by this Agreement, without the prior written consent of the Agent, the Company agrees that it will not enter into any transaction, including, without limitation, any purchase, sale, lease, loan or exchange of property, with the Parent or any subsidiary or affiliate of either the Company or Parent, provided that, except as otherwise set forth in this Financing Agreement, the Company may enter into sale, service and other transactions in the ordinary course of its business and pursuant to the reasonable requirements of the Company, and upon standard terms and conditions and fair and reasonable terms, no less favourable to the Company than the Company could obtain in a comparable arm's length transaction with an unrelated third party, provided further that no Default or Event of Default exists or will occur hereunder prior to and after giving effect to any such transaction. Notwithstanding the foregoing, the Company is permitted to enter into the transactions and agreements described in Schedule 11." 10. SECTION 7(17) The following Section 7(17) is hereby added to the Financing Agreement: "(17) The Company may from time to time supplement or amend (i) Schedules 1, 3, 4, 9 and 10 without the consent of the Agent and for no additional fee, and (ii) Schedules 2, 5, 6, 7, 8 and 11 only with the prior written consent of the Agent, and, at the discretion of the Agent, upon payment of a fee agreed to between the Agent and the Company. No such supplement or amendment to any such schedule shall be or be deemed to be a waiver of any Default or Event of Default arising as a result of the information disclosed in such supplement or amendment, except as otherwise consented to 5 by the Agent. For the purpose of any requirement under this Agreement or the other Loan Documents that the Company or one of its officers confirms, repeats or is deemed to have repeated, the accuracy of a representation and warranty which relies upon a schedule for disclosure of information as at any time after the date hereof, the schedule referred to in that representation and warranty shall be deemed to be a reference to the most recently amended or supplemented schedule." 11. SECTION 10(1)(b) Section 10(1)(b) is hereby deleted in its entirety and replaced with the following: "(b) any of the Company, the Parent or any of the Parent's subsidiaries fails to pay the principal of, or premium or interest on, any of its Debt (excluding Debt under this Financing Agreement or under the Parent Credit Agreement) which is outstanding in an aggregate principal amount exceeding $2,000,000 in the case of the Company and U.S.$5,000,000 in the case of the Parent or any of its subsidiaries (or the equivalent amount in any other currency) when such amount becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure continues after the applicable grace period, if any, specified in the agreement or instrument relating to the Debt or any other event occurs or condition exists and continues after the applicable grace period, if any, specified in any agreement or instrument relating to any such Debt, if its effect is to accelerate, or permit the acceleration of the Debt; or any such Debt shall be declared to be due and payable prior to its stated maturity; provided, however, that this Event of Default (b) shall not apply with respect to the Parent and any of its subsidiaries in respect of any obligations of the Parent or such subsidiaries incurred prior to the Filing Date (as defined in the Parent Credit Agreement);" 12. SCHEDULE 1 Schedule 1 is hereby amended by adding the following address under "Collateral Locations": "302 The East Mall Suite 200 Toronto, Ontario M9B 6C7" 6 13. SECTION 10(1)(o) Section 10(1)(o) is hereby deleted in its entirety. 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: ---------------------------------- Per: ---------------------------------- ACKNOWLEDGED AND AGREED THIS ________ DAY OF JANUARY 2002. STERLING PULP CHEMICALS, LTD. Per: ---------------------------------- Per: ---------------------------------- EX-10.1 5 h94159ex10-1.txt 1ST AMEND.TO 6TH AMENDED SAVINGS & INVESTMENT PLAN EXHIBIT 10.1 FIRST AMENDMENT TO THE SIXTH AMENDED AND RESTATED SAVINGS AND INVESTMENT PLAN WHEREAS, Sterling Chemicals, Inc. (the "Corporation") currently maintains its Sixth Amended and Restated Savings and Investment Plan (the "Existing Plan"); WHEREAS, Section 16.01 of the Existing Plan authorizes and empowers the Board of Directors of the Corporation (the "Board") to amend the Existing Plan; and WHEREAS, the Board desires to amend the Existing Plan in order to (i) provide for the transfer of all Company Stock held in the Company Stock Fund (as such terms are defined in the Existing Plan) to the Sterling Chemicals ESOP and (ii) eliminate the Company Stock Fund as an "Investment Fund" under the Existing Plan, and, in furtherance of that desire, the Board has duly authorized and approved this First Amendment to the Sixth Amended and Restated Savings and Investment Plan (the "Amendment"); NOW, THEREFORE, the Existing Plan is hereby amended as follows: Section 1. Amendment of Section 1.03 of the Existing Plan. Section 1.03 of the Existing Plan is hereby amended by amending the definition of "414(s) Compensation" appearing therein to read in its entirety as follows: "414(s) Compensation" means, with respect to any Participant for any Plan Year, such Participant's "compensation" (within the meaning of Section 414(s) of the Code and the Regulations), as limited by Section 401(a)(17) of the Code and any other applicable limits. Section 2. Further Amendment of Section 1.03 of the Existing Plan. Section 1.03 of the Existing Plan is hereby further amended by removing the definition of "Terminated ESOP" therefrom. Section 3. Amendment of Section 8.02 of the Existing Plan. Section 8.02 of the Existing Plan is hereby amended by deleting the last sentence thereof. Section 4. Amendment of Section 9.04 of the Existing Plan. Section 9.04 of the Existing Plan is hereby amended by adding two sentences at the end thereof, to read in their entirety as follows: The shares of Company Stock held in the Company Stock Fund shall be transferred to the Sterling Chemicals ESOP in a trust-to-trust transfer pursuant to Section 16.03, as soon as administratively feasible after the trustee of the Sterling Chemicals ESOP communicates to the Trustee of this Plan that it is ready to accept the transfer. After the shares are transferred to the ESOP, the Company Stock Fund shall cease to be an Investment Fund under the Plan. Section 5. Amendment of Section 16.03 of the Existing Plan. Section 16.03 of the Existing Plan is hereby amended to read in its entirety as follows: Section 16.03. Plan Merger or Consolidation. The Corporation reserves the right at any time and from time to time to merge or consolidate the Plan with another plan, to transfer assets or liabilities of the Plan to another plan, or to accept a transfer of assets or liabilities from another plan to this Plan. To the extent that Section 414(l) of the Code applies, no merger, consolidation, or transfer may be undertaken unless each Participant shall be entitled to receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he or she would have been entitled to receive immediately prior to the merger, consolidation, or transfer if the Plan had been terminated at such time, or unless such alternative requirements as may be imposed by regulations under Section 414(l) of the Code are satisfied. Section 6. Amendment of Exhibit A of the Existing Plan. Exhibit A of the Existing Plan is hereby amended by deleting the reference to the "Company Stock Fund" and the corresponding description thereof from such Exhibit, such amendment to become effective as of the date on which all shares of Company Stock held in the Company Stock Fund are transferred to the Sterling Chemicals ESOP pursuant to Sections 9.04 and 16.03 of the Existing Plan, as amended hereby. Section 7. Effect of Amendments. Except as amended and modified by this Amendment, the Existing Plan shall continue in full force and effect. The Existing Plan and this Amendment shall be read, taken and construed as one and the same instrument. Upon the effectiveness of this Amendment, each reference in the Existing Plan to "this Plan" shall mean and be a reference to the Existing Plan as amended hereby. Section 8. Binding Effect. This Amendment shall inure to the benefit of, and shall be binding upon the Employers (as defined in the Existing Plan) and their successors and assigns and upon the Participants and their Beneficiaries (as such terms are defined in the Existing Plan) and their respective heirs, executors, personal representatives, administrators, successors and assigns. Section 9. Severability. Should any clause, sentence, paragraph, subsection or Section of this Amendment be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Amendment, and the part or parts of this Amendment so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom as if such stricken part or parts had never been included herein. Section 10. Governing Law. TO THE EXTENT NOT SUPERSEDED BY THE LAWS OF THE UNITED STATES, THIS AMENDMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF TEXAS, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW. -2- IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the foregoing by the Board, the Corporation has caused this Amendment to be duly executed in its name and on its behalf by its proper officer thereunto duly authorized as of November 28, 2001, being the date of the adoption of this Amendment by the Board. STERLING CHEMICALS, INC. -------------------------------------- David G. Elkins, President and Co-Chief Executive Officer -3- EX-11.1 6 h94159ex11-1.txt EARNING PER SHARE COMPUTATION EXHIBIT 11.1 STERLING CHEMICALS HOLDINGS, INC. EARNINGS PER SHARE COMPUTATION (Amounts in thousands, except per share data)
THREE MONTHS ENDED DECEMBER 31, -------------------------- 2001 2000 ---------- ---------- BASIC EARNINGS PER SHARE Weighted average number of shares of common stock outstanding 12,777 12,776 Net loss $ (14,873) $ (30,442) Less: preferred dividend requirements and accretion -- (802) ---------- ---------- Net loss used in basic loss per share $ (14,873) $ (31,244) ========== ========== BASIC LOSS PER SHARE $ (1.16) $ (2.45) ========== ========== DILUTED EARNINGS PER SHARE Weighted average number of shares of common stock outstanding 12,777 12,776 Effect of dilutive warrants -- -- ---------- ---------- Total weighted average number of shares outstanding used in diluted income (loss) per share computation 12,777 12,776 ---------- ---------- Net loss $ (14,873) $ (30,442) Less: preferred dividend requirements and accretion -- (802) ---------- ---------- Net loss used in diluted earning per share $ (14,873) $ (31,244) ========== ========== DILUTED LOSS PER SHARE $ (1.16) $ (2.45) ========== ==========
EX-15.1 7 h94159ex15-1.txt LETTER OF DELOITTE & TOUCHE RE: FINANCIAL INFO EXHIBIT 15.1 Deloitte & Touche LLP 333 Clay Street Suite 2300 Houston, Texas 77002 February 13, 2002 Sterling Chemicals Holdings, Inc. 1200 Smith Street, Suite 1900 Houston, Texas 77002 We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of Sterling Chemicals Holdings, Inc. and subsidiaries (the "Company") for the three-month periods ended December 31, 2001 and 2000, as indicated in our report dated February 13, 2002; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended December 31, 2001, is incorporated by reference in Registration Statement No. 333-30917 for the Company on Form S-3 and in Registration Statement No. 333-52795 for the Company on Form S-8. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statements prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. DELOITTE & TOUCHE LLP -----END PRIVACY-ENHANCED MESSAGE-----