-----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, MjX2oVpSRHEoHwfq8Em3Qcp0vHQavL56AIf7/vBnCkWT4qulcF//WKMLFUoM0vYB 6wZI5vtUn2BhWuf0K5fYrg== 0000950129-00-006003.txt : 20001218 0000950129-00-006003.hdr.sgml : 20001218 ACCESSION NUMBER: 0000950129-00-006003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 27 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING CHEMICALS HOLDINGS INC /TX/ CENTRAL INDEX KEY: 0000795662 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 760502785 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10059 FILM NUMBER: 789618 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 /TX/ DATE OF NAME CHANGE: 19961218 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS HOLDINGS INC DATE OF NAME CHANGE: 19960828 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING CHEMICAL INC CENTRAL INDEX KEY: 0001014669 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 760502785 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-04343-01 FILM NUMBER: 789619 BUSINESS ADDRESS: STREET 1: 1200 SMITH STREET STREET 2: SUITE 1900 CITY: HOUSTON STATE: TX ZIP: 77002-4312 BUSINESS PHONE: 7136503700 MAIL ADDRESS: STREET 1: C/O STERLING GROUP INC STREET 2: EIGHT GREENWAY PLAZA, SUITE 702 CITY: HOUSTON STATE: TX ZIP: 77046 FORMER COMPANY: FORMER CONFORMED NAME: STX CHEMICALS CORP DATE OF NAME CHANGE: 19960516 10-K 1 h82651e10-k.txt STERLING CHEMICALS HOLDINGS, INC. - 9/30/2000 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ---------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2000 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 INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 1200 SMITH STREET, SUITE 1900 HOUSTON, TEXAS 77002-4312 (713) 650-3700 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE
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 INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 1200 SMITH STREET SUITE 1900 HOUSTON, TEXAS 77002-4312 (713) 650-3700 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE STERLING CHEMICALS, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K, AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PROVIDED FOR BY GENERAL INSTRUCTION I(2) OF FORM 10-K ---------- Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. ---- As of December 4, 2000, Sterling Chemicals Holdings, Inc. had 12,784,007 shares of common stock outstanding. As of such date, the aggregate market value of such common stock held by nonaffiliates, based upon the last sales price of these shares as reported on the OTC Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc., was approximately $5 million. As of December 4, 2000, all outstanding equity securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals Holdings, Inc. Portions of the definitive Proxy Statement relating to the 2001 Annual Meeting of Stockholders of Sterling Chemicals Holdings, Inc. are incorporated by reference in Part III of this Form 10-K. ================================================================================ i 2 TABLE OF CONTENTS
PAGE ---- PART I Important Information Regarding this Form 10-K............................................. 1 Item 1. Business................................................................................... 3 Business Strategy....................................................................... 3 Recent Developments..................................................................... 3 Industry Overview....................................................................... 4 Product Summary......................................................................... 6 Products................................................................................ 7 Sales and Marketing..................................................................... 9 Contracts............................................................................... 10 Raw Materials for Products and Energy Resources......................................... 11 Technology and Licensing................................................................ 12 Competition............................................................................. 13 Environmental Matters................................................................... 14 Employees............................................................................... 16 Insurance............................................................................... 16 Item 2. Properties................................................................................. 16 Item 3. Legal Proceedings.......................................................................... 17 Item 4. Submission of Matters to Vote of Security Holders.......................................... 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 19 Item 6. Selected Financial Data of the Company..................................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 22 Overview................................................................................ 22 Liquidity and Capital Resources......................................................... 23 New Accounting Standards................................................................ 26 Certain Known Events, Trends, Uncertainties, and Risk Factors........................... 27 Results of Operations................................................................... 32 Comparison of Fiscal 2000 to Fiscal 1999................................................ 32 Comparison of Fiscal 1999 to Fiscal 1998................................................ 34 Item 7A. Qualitative and Quantitative Disclosure about Market Risk.................................. 37 Item 8. Financial Statements and Supplementary Data................................................ 38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................................. 90 PART III Item 10. Directors and Executive Officers of the Registrant......................................... 90 Item 11. Executive Compensation..................................................................... 90 Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 90 Item 13. Certain Relationships and Related Transactions............................................. 90 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K............... 91
ii 3 IMPORTANT INFORMATION REGARDING THIS FORM 10-K Readers should consider the following information as they review this Form 10-K. PRESENTATION OF FINANCIAL STATEMENTS This Form 10-K includes four separate sets of financial statements and related notes: o The first set of financial statements and related notes present both the consolidated financial position, results of operations, and cash flows of Sterling Chemicals Holdings, Inc. ("Holdings") and its subsidiaries and the consolidated financial position, results of operations, and cash flows of Sterling Chemicals, Inc. ("Chemicals") and its subsidiaries. Holdings directly or indirectly owns all of the other subsidiaries whose financial results are included in this Form 10-K and Chemicals is the primary operating subsidiary of Holdings. o The second set of financial statements and related notes present the combined financial position, results of operations, and cash flows of the Guarantors and their subsidiaries (discussed below). o The third and fourth sets of financial statements and related notes present the consolidated financial position, results of operations, and cash flows of Sterling Canada, Inc. and its subsidiaries ("Sterling Canada") and the financial position, results of operations, and cash flows of Sterling Pulp, Ltd. ("Sterling Pulp"), our two significant subsidiaries whose securities are pledged to secure an issuance of debt securities by Chemicals. Under SEC rules, specified financial information is required to be provided with respect to subsidiaries of an issuer of debt securities that guarantee the repayment of those debt securities. In addition, under different provisions of those rules, specified financial information is required to be provided with respect to subsidiaries meeting certain size criteria of an issuer of debt securities whose capital stock is pledged to secure the repayment of those debt securities. In July of 1999, Chemicals issued $295 million of its 12 3/8% Senior Secured Notes due 2006. The obligations of Chemicals related to the 12 3/8% Notes were guaranteed by most of its subsidiaries incorporated in the United States (the "Guarantors"). In addition, all of the capital stock of each of the Guarantors was pledged to secure the repayment of the 12 3/8% Notes. Finally, 65% of the capital stock of three of Chemicals' subsidiaries incorporated outside of the United States was pledged to secure the repayment of the 12 3/8% Notes, but these subsidiaries did not guarantee the repayment of the 12 3/8% Notes. In order to comply with these SEC rules, the financial statements of the Guarantors, each of which guaranteed the repayment of the 12 3/8% Notes, and the financial statements of Sterling Canada and Sterling Pulp, our significant subsidiaries whose securities are pledged to secure the repayment of the 12 3/8% Notes, are included with this Form 10-K. The financial statements of the Guarantors are included in this Form 10-K under Item 8 and the financial statements of Sterling Canada and Sterling Pulp are filed as exhibits to this Form 10-K. FORWARD-LOOKING STATEMENTS This Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Form 10-K, including without limitation the statements under "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Qualitative and Quantitative Disclosure about Market Risk" regarding the cyclicality of our industry, current and future industry conditions, the potential effects of such matters on our business strategy, results of operations, and financial position, and our market sensitive financial instruments and other statements identified by such words as "expects," "projects," "plans," and similar expressions, are forward-looking statements. The forward-looking statements are based upon current information and expectations. Estimates, forecasts, and other statements contained in or implied by the forward-looking statements speak only as of the date on which they are made, are not guarantees of future performance, and involve certain risks, uncertainties, and assumptions that are difficult to evaluate and predict. Although we believe that the expectations reflected in the forward-looking statements are reasonable, no assurances can be given that such expectations will prove to have been correct. Certain important factors that could cause actual results to differ materially from our expectations or what is expressed, implied, or forecasted by or in the 1 4 forward-looking statements include 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, federal and state regulatory developments, our high financial leverage, the availability of skilled personnel, and operating hazards attendant to the industry. Additional factors that could cause actual results to differ materially from our expectations or what is expressed, implied, or forecasted by or in the forward-looking statements are stated herein in cautionary statements made in conjunction with the forward-looking statements or are included elsewhere in this Form 10-K. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Known Events, Trends, Uncertainties, and Risk Factors." 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, ETC. All statements contained in this Form 10-K, including the forward-looking statements discussed above, are made as of December 14, 2000, unless those statements are expressly made as of another date. We disclaim any responsibility for the correctness of any information contained in this Form 10-K to the extent such information is affected or impacted by events, circumstances, or developments occurring after December 14, 2000, or by the passage of time after such date and, except as required by applicable securities laws, we do not intend to update such information and disclaim any responsibility to do so. DOCUMENT SUMMARIES Statements contained in this Form 10-K describing documents and agreements are provided in summary form only and such summaries are qualified in their entirety by reference to the actual documents and agreements filed as exhibits to this Form 10-K. FISCAL YEAR We keep our books of record and accounts based on annual accounting periods ending on September 30 of each year. Accordingly, all references in this Form 10-K to a particular fiscal year refer to the twelve calendar month period ending on September 30 of that year. 2 5 PART I This combined Form 10-K is separately filed by Sterling Chemicals Holdings, Inc. ("Holdings") and Sterling Chemicals, Inc. ("Chemicals"). Information contained herein relating to Chemicals is filed by Holdings and separately by Chemicals on its own behalf. Unless otherwise indicated, Holdings and its subsidiaries, including Chemicals, are collectively referred to as the "Company," "we," "our," "ours," and "us." ITEM 1. BUSINESS We were organized as a Delaware corporation in 1986 and have our principal executive offices in Houston, Texas. In connection with our August 21, 1996 merger with STX Acquisition Corp., we recapitalized and reorganized into a holding company structure, with our only material asset after the merger being the capital stock of Chemicals, our wholly owned operating subsidiary. Through Chemicals and its subsidiaries, we manufacture seven commodity petrochemicals at our Texas City, Texas plant. Near the end of the first quarter of fiscal 2001, we also began operating a disodium iminodiacetic acid, or "DSIDA," plant at our Texas City facility that is owned by Monsanto. We also manufacture chemicals for use primarily in the pulp and paper industry at five plants in Canada and a plant in Valdosta, Georgia, and acrylic fibers at our plant near Pensacola, Florida. At our Texas City facility, we produce styrene, acrylonitrile, acetic acid, plasticizers, methanol, tertiary butylamine, or "TBA," and sodium cyanide. We generally sell our petrochemicals products to customers for use in the manufacture of other chemicals and products, which in turn are used in the production of a wide array of consumer goods and industrial products. We produce regular textile fibers, specialty textile fibers, and technical fibers at our acrylic fibers facility, as well as licensing our acrylic fibers manufacturing technology to producers worldwide. Sodium chlorate is produced at our five plants in Canada and our Valdosta facility. Sodium chlorite is produced at one of our Canadian locations. In addition, chlor-alkali and calcium hypochlorite are produced at one of our Canadian locations. We also license, engineer, and oversee construction of large-scale chlorine dioxide generators for the pulp and paper industry as part of our pulp chemicals business. These generators convert sodium chlorate into chlorine dioxide at pulp mills. BUSINESS STRATEGY Our objectives are to be a premier producer of chemicals, to maintain a strong market position, to achieve first quartile cost performance in all of our major products, to provide superior customer service and to improve our capital structure. Our management team has adopted the following strategies in pursuit of these objectives: o continue to improve our cost structure; o pursue growth opportunities through facility expansions, upgrades, and strategic alliances; and o optimize capacity utilization rates through long-term supply arrangements. The cyclicality of the markets for our primary products, however, subjects us to periods of overcapacity accompanied by lower prices and profit margins. In addition, the instruments governing our outstanding debt limit our ability to incur additional debt to finance additional acquisitions and other expenditures. These and other factors may limit our ability to successfully implement our business strategy. RECENT DEVELOPMENTS During the third quarter of fiscal 2000, we announced the engagement of Schnitzius & Vaughn, an investment banking firm, to help us identify and evaluate a variety of strategic alternatives with respect to our acrylic fibers operations ranging from an outright sale of this operation to a joint venture or alliance arrangement. We have continued to operate our acrylic fibers facility while we explore these possible strategic alternatives. However, we do not know whether our evaluation process will result in a transaction. In addition, even if an acceptable purchaser or joint venture partner is identified, we may elect to forgo that transaction. During the fourth quarter of fiscal 2000, we recorded a $60 million non-cash charge related to the write down of our acrylic fibers business production assets. On June 29, 2000, we, in conjunction with BP Chemicals, announced a multi-year contract with Methanex Corporation for the purchase of our respective methanol requirements from Methanex. At the time, we granted Methanex exclusive rights to acquire the output of our methanol plant, which we continue to own. Under this agreement, Methanex chose to shut down our methanol plant July 1, 2000, and provide our methanol requirements with methanol produced in countries that have a significant advantage in the cost of natural gas, the primary raw material in the production of methanol. However, Methanex may elect to restart our methanol facility at any time, subject to notice requirements and the payment of related expenses. 3 6 On September 8, 2000, we announced the engagement of Donaldson, Lufkin & Jenrette Securities Corporation (now Credit Suisse First Boston) as financial advisor to assist us in identifying and evaluating possible methods of restructuring or refinancing our 13 1/2% Senior Secured Discount Notes due 2008. CSFB has had preliminary discussions with some of the larger holders of our 13 1/2% Notes regarding a possible restructuring of those Notes. However, we cannot predict whether such discussions will lead to any restructuring of our 13 1/2% Notes. Spot prices for styrene peaked early in the third quarter of fiscal 2000 at approximately $0.48 per pound. However, the completion of several industry turnarounds early in the quarter, combined with decreased styrene purchases by customers and lower polystyrene operating rates, caused spot prices to decline during the fourth quarter of fiscal 2000. Spot prices have continued to be in the $0.25-$0.28 per pound range into the first quarter of fiscal 2001. This decline in sales prices, together with higher raw materials and energy costs, has resulted in a significant decrease in styrene margins and a corresponding decrease in our financial results. INDUSTRY OVERVIEW Petrochemicals Styrene. Current global styrene capacity is approximately 45 billion pounds. Current total North American styrene capacity is approximately 14 billion pounds per year. As is the case with other petrochemicals, styrene from time to time experiences periods of strong demand resulting in tight supply and high prices and margins. This tight balance in supply and demand often results in new capacity additions. In most cases, incremental capacity comes in the form of large new plants or major expansions of existing facilities. As this new capacity comes on line, it often exceeds current demand growth and results in a decline in prices and margins. Following a period of strong demand growth and high utilization rates in 1994 through 1996, several major producers announced new capacity increases in 1997 and 1998, particularly in the Far East. At the time of this announced new capacity, there was a general slowdown in the economic growth rate in the Far East, prompting customers to begin utilizing their available inventories and decrease purchases of additional product. As a result, our average styrene prices declined from fiscal 1997 through fiscal 1999, as the previously announced new capacity came on line at the same time that economic events in various Asian countries significantly reduced demand growth for styrene. During fiscal 2000, styrene prices and margins increased significantly from levels experienced in fiscal 1999. These improvements were driven by a combination of stronger market demand, operating problems experienced at several of our competitors, and generally low inventory levels worldwide. Styrene prices and margins peaked in April of 2000 at a published spot price of $0.48 per pound and decreased over the second half of 2000, with published spot prices dropping to $0.31 per pound in September 2000, due to lower demand and inventory corrections. Currently, Chemical Market Associates, Inc. is reporting styrene spot prices in the $0.25 to $0.28 per pound range. We cannot predict future increases or decreases in styrene prices and margins. Acrylonitrile. Current global acrylonitrile capacity is approximately 12 billion pounds per year. The acrylonitrile market exhibits similar characteristics regarding capacity utilization, selling prices, and profit margins as those of styrene. Moreover, as a result of our high percentage of export acrylonitrile sales, demand for our acrylonitrile is significantly influenced by export customers, particularly those that supply acrylic fibers to customers in China. During 1995, strong demand for acrylic fibers and ABS resins, particularly in China, increased demand for acrylonitrile resulting in high prices and margins. High utilization rates and prices prompted many major producers to announce new capacity increases and approximately two billion pounds of capacity increases came on line between 1996 and 1998. As new acrylonitrile capacity in the United States and Asia came on line and demand growth in Asian markets weakened, acrylonitrile prices and margins decreased significantly from 1996 through 1999. Beginning in early fiscal 2000, acrylonitrile prices increased significantly due to strong market demand, operating problems experienced at several of our competitors, and generally low inventory levels. However, we were not able to fully capitalize on this opportunity as a result of planned shutdowns related to the construction by Monsanto of the DSIDA plant at our Texas City facility and several plant operating problems. Solutia, Inc. began operating a new acrylonitrile production facility in North America in the fourth calendar quarter of 2000, which has a rated annual production capacity of approximately 500 million pounds. In addition, Formosa Plastics, Inc. has begun producing from its new 450 million pound facility in Taiwan. 4 7 Acetic Acid. Current United States acetic acid capacity is approximately 6.5 billion pounds per year. Several capacity additions occurred in 1998 and 1999, including an expansion of our acetic acid unit in Texas City from 800 million pounds of rated annual production capacity to 1 billion pounds. In addition, in late 2000, BP Chemicals Inc. and Celanese AG began operations of 880 million pound and 1,100 million pound acetic acid production units in Malaysia and Singapore, respectively. Demand for acetic acid is linked to demand for vinyl acetate monomer, a key intermediate in the production of a wide array of polymers. Demand for vinyl acetate monomer has increased as a result of strong demand for environmentally friendly coatings. Plasticizers. Our rated plasticizers capacity is 280 million pounds per year. We have an agreement with BASF Corporation pursuant to which we sell all of our plasticizers production to BASF through 2007. Our plasticizers are produced with an ethylene based technology, while most of our competitors use a propylene based technology. Our plasticizers are produced from linear alpha olefins, while many of our competitors use propylene-based technology. Our plasticizers typically receive a premium over certain commodity products based on propylene due to their performance enhancing properties. However, the financial performance of our business can be affected by the cost of underlying raw materials, especially when the cost of one olefin rises faster than the other. Acrylic Fibers. We and Solutia are the only two manufacturers of acrylic fibers in North America. Acrylic fibers compete with other fibers, including polyester and wool. From 1998 through 2000, the acrylic fibers industry experienced decreased sales prices and margins due to a significant drop in the demand for acrylic fibers products which resulted from the economic events in various countries in Asia, increased competition from European suppliers, and a negative growth rate in demand in North America. Pulp Chemicals Sodium Chlorate. Historically, sodium chlorate has also experienced cycles in capacity utilization, selling prices, and profit margins, although not to the extremes seen in the petrochemicals markets. Since the mid-1980s, North American demand for sodium chlorate has grown at an average annual rate of approximately 9% as pulp mills have accelerated substitution of chlorine dioxide for elemental chlorine in bleaching applications. Substitution of chlorine dioxide for elemental chlorine is driven primarily by environmental concerns. Chlorine dioxide is produced from sodium chlorate, which is one of our primary pulp chemicals products. Under the United States Environmental Protection Agency's "Cluster Rules," elemental chlorine cannot be used in bleaching applications, which has resulted in increased substitution of chlorine dioxide for elemental chlorine by the North American pulp and paper industry as the mandatory compliance date of the Cluster Rules, April of 2001, draws near. In 1998 and 1999, demand for sodium chlorate did not increase at historical rates due to weak market conditions and lower operating rates in the pulp and paper industry. In addition, new sodium chlorate production capacity was added while implementation of the Cluster Rules was delayed. United States operating rates remained flat from 1998 to 1999 and average prices for our sodium chlorate decreased by approximately 8% from fiscal 1998 to fiscal 1999. However, during fiscal 2000, average sodium chlorate prices increased due to increased operating rates at pulp mills and the continued conversion to elemental chlorine free bleaching at pulp mills. Our average sodium chlorate prices increased by approximately 4% from fiscal 1999 to fiscal 2000. We and two other companies collectively account for more than 70% of North American sodium chlorate production capacity. 5 8 PRODUCT SUMMARY The following table summarizes our principal products, including our capacity, primary end uses, raw materials, and major competitors for each product. "Capacity" represents rated annual production capacity at September 30, 2000, which is calculated by estimating the number of days in a typical year a production facility is expected to operate after allowing for downtime for regular maintenance and multiplying that number by an amount equal to the facility's optimal daily output based on the design feedstock mix. As the capacity of a facility is an estimated amount, actual production may be more or less than capacity.
STERLING PRODUCT INTERMEDIATE (CAPACITY) PRODUCTS PRIMARY END PRODUCTS RAW MATERIALS MAJOR COMPETITORS - ---------------- ------------ -------------------- ------------- ----------------- PETROCHEMICALS Styrene Polystyrene, Building products, boat Ethylene and benzene Dow Chemical Company, (1.7 billion ABS/SAN resins, and automotive components, Lyondell Chemical pounds per year) styrene butadiene disposable cups and trays, Company, BP latex, and trays, packaging and Chemicals Inc., unsaturated containers, housewares, Chevron Chemical polyester resins tires, audio and video Company, Shell cassettes, luggage, Chemicals, Inc., children's toys, paper Cos-Mar (a coating, appliance joint venture of General parts, and Electric Company and carpet backing FINA Inc.), and Nova Corporation Acrylonitrile Acrylic fibers Apparel, furnishings, Ammonia and BP Chemicals Inc., Cytec (740 million and upholstery, household propylene Industries Inc., E.I. pounds per year) ABS/SAN resins appliances, carpets, and du Pont de Nemours and plastics for automotive Company, Asahi Chemical parts using ABS and SAN Industry Company, Ltd., polymers EC Erdoelchemie GmbH, and Solutia Inc. Acrylic Fibers NA Apparel, fleece, hosiery, Acrylonitrile, vinyl Solutia Inc. (150 million industrial, sweaters, acetate, sodium Cydsa, S.A. de C.V. pounds per year) pile fabrics, outdoor thiocyanate, sodium Bayer AG furniture, friction bisulfate, and finish materials, gaskets, oil specialty papers, and non-wovens Acetic Acid Vinyl acetate, Adhesives, PET bottles, Methanol and carbon Celanese AG, Eastman (1 billion terephthalic fibers, and surface monoxide Chemical Company, and pounds per year) acid, coatings Millennium Chemicals and acetate Inc. solvents Methanol Acetic acid, Adhesives, Natural gas, steam, Methanex Corporation, (150 million MTBE, and surface coatings, and carbon dioxide Borden Chemical, gallons per year) formaldehyde gasoline oxygenate and Lyondell Methanol octane enhancer, and Company, L.P., Celanese plywood adhesives AG, and Terra Industries Plasticizers Polyvinyl Flexible plastics, such Alpha-olefins, carbon Exxon Mobile Corporation, (280 million chloride as shower curtains and monoxide, hydrogen, Aristech Chemical, and pounds per year) (PVC) liners, floor coverings, and orthoxylene Eastman Chemical cable insulation, Company upholstery, and plastic molding TBA NA Pesticides, solvents, Isobutylene, sulfuric BASF Corporation and (21 million pharmaceuticals, and acid, caustic soda, Nitto Chemical Industry pounds per year) synthetic rubber and hydrogen cyanide Co., Ltd. Sodium Cyanide NA Electroplating and Caustic soda and Degussa-Huls (85 million precious metals recovery hydrogen cyanide FMC Corporation pounds per year)
6 9
STERLING PRODUCT INTERMEDIATE (CAPACITY) PRODUCTS PRIMARY END PRODUCTS RAW MATERIALS MAJOR COMPETITORS - ---------------- ------------ -------------------- ------------- ----------------- PULP CHEMICALS Sodium Chlorate Chlorine dioxide Bleaching agent for Electricity, salt, and Akzo Nobel, N.V., (500,000 tons wood pulp production; water Nexen Inc., Kerr-McGee per year) downstream products Corporation, and Huron include high quality Chemicals office and coated papers Chlorine Dioxide NA Chlorine dioxide for use NA Akzo Nobel, N.V. Generators in the bleaching of wood pulp Sodium Chlorite Chlorine dioxide Antimicrobial agent for Sodium chlorate and Vulcan Chemicals (3,500 tons per year) municipal water hydrochloric acid treatment and disinfectant for fresh produce Chlor Alkali NA Bleaching and digesting Electricity, salt, and Occidental Chemical agent for pulp and water Company, Dow Chemical paper, widely used in Company, and Pioneer potable water and Companies, Inc. wastewater treatment programs and in swimming pools Calcium Hypochlorite NA Sanitizing agent to Lime, water, caustic Olin Corporation and (9,000 metric control bacteria soda, and chlorine PPG Industries tons per year) and algae in swimming pools
PRODUCTS Petrochemicals Styrene. We are the fourth largest North American producer of styrene. Our styrene unit, located at our Texas City facility, is one of the largest in the world and has a rated annual production capacity of approximately 1.7 billion pounds, which represents approximately 13% of total North American capacity. We sold approximately 25% of our styrene sales volumes pursuant to conversion and other long-term agreements during fiscal 2000. Approximately 61% of our styrene sales volumes were exported in fiscal 2000, principally to Asia, either directly or through arrangements with large international trading companies. Acrylonitrile. We are the third largest North American producer of acrylonitrile. Our acrylonitrile unit, located at our Texas City facility, has a rated annual production capacity of approximately 740 million pounds, which represents approximately 19% of total North American capacity. We sold approximately 82% of our acrylonitrile sales volumes pursuant to conversion and other long-term agreements during fiscal 2000. Approximately 48% of our acrylonitrile production in fiscal 2000 was exported. All of our acrylonitrile sold in Asia and South America is sold through ANEXCO, LLC, our joint venture with BP Chemicals Inc. During fiscal 2000, we used a portion of our hydrogen cyanide, a by-product of acrylonitrile manufacturing, as a raw material for the production of TBA and sodium cyanide and burned the rest as fuel. In October of 1999, we and Monsanto entered into several agreements related to the construction by Monsanto of the DSIDA plant at our Texas City facility. When the DSIDA plant began operating near the end of the first quarter of fiscal 2001,we started using all of our previously under-utilized hydrogen cyanide as a primary feedstock for the production of DSIDA. As previously discussed, we are currently evaluating a variety of strategic alternatives with respect to our acrylic fibers operations. We do not know whether this process will result in a transaction. In addition, even if an acceptable transaction is identified, we may elect to forgo that transaction. Acetic Acid. We are the second largest North American producer of acetic acid. Our acetic acid unit, located at our Texas City facility, has a rated annual production capacity of approximately 1 billion pounds, which represents approximately 16% of total North American capacity. All of our acetic acid production is sold to BP Chemicals pursuant to a long-term contract that expires in 2016. In March of 1999, we completed an expansion of our acetic acid facilities in conjunction with BP Chemicals. BP Chemicals provided its CativaTM technology and a significant portion of 7 10 the capital for the expansion. The expansion increased our annual acetic acid production capacity by approximately 25% to our current rated annual capacity of 1 billion pounds. Methanol. We own a methanol unit at our Texas City facility with a rated annual production capacity of approximately 150 million gallons. Approximately 57% of our methanol production was used as a raw material in our acetic acid unit during fiscal 2000. On June 29, 2000, we, in conjunction with BP Chemicals, announced a multi-year contract with Methanex Corporation for the purchase of our respective methanol requirements from Methanex. At the time, we granted Methanex exclusive rights to acquire the output of our methanol plant, which we continue to own. Under this agreement, Methanex chose to shut down our methanol plant on July 1, 2000 and provide our methanol requirements with methanol produced in countries that have a significant advantage in the cost of natural gas, the primary raw material in the production of methanol. However, Methanex may elect to restart our methanol facility at any time, subject to notice requirements and the payment of related expenses. Plasticizers. We produce plasticizers at our Texas City facility for BASF Corporation. Under our long-term agreement with BASF, which expires in 2007, we sell all of our plasticizers production to BASF. Our rated annual production capacity of plasticizers is approximately 280 million pounds. TBA. Our rated annual production capacity for TBA is approximately 21 million pounds. We use a portion of our hydrogen cyanide by-product from our Texas City acrylonitrile facility to produce TBA, which we sell to Flexsys America L.P. pursuant to a conversion agreement. In December of 1999, Flexsys notified us of their intention to terminate the contract as of December 31, 2001. We are currently evaluating our options related to TBA production following the termination of this contract. Sodium Cyanide. Pursuant to a long-term arrangement, we operate a sodium cyanide unit at our Texas City facility which is owned by E. I. du Pont de Nemours and Company. This sodium cyanide unit uses hydrogen cyanide by-product from our Texas City acrylonitrile facility as a raw material. The rated annual production capacity of this unit is approximately 85 million pounds. DSIDA. Near the end of the first quarter of fiscal 2001, we began operating a DSIDA plant at our Texas City facility that is owned by Monsanto. DSIDA is an essential intermediate in the production of Monsanto's Roundup(R), a glyphosate based herbicide. Under long-term arrangements with Monsanto, we operate the DSIDA plant on behalf of Monsanto and supply hydrogen cyanide by-product from our Texas City acrylonitrile facility as a raw material. The rated annual production capacity of the DSIDA plant is 80 million pounds. Acrylic Fibers. We are one of two North American producers of acrylic fibers. Our acrylic fibers facility's rated annual production capacity is approximately 150 million pounds, which represents approximately 33% of total North American capacity. Approximately 27% of our acrylic fibers production was exported in fiscal 2000. We produce regular textile fibers, specialty textile fibers, and technical fibers. Regular textile fibers are commodity fibers whose sales are primarily driven by price and service rather than product characteristics. Specialty textile fibers are targeted for specific applications or end uses and typically have higher margins than regular textile fibers. Technical fibers are specially engineered for industrial, non-textile uses such as brake linings and typically have higher margins than textile fibers. Pulp Chemicals Sodium Chlorate. We are the second largest producer of sodium chlorate in North America. Our six sodium chlorate facilities have an aggregate rated annual production capacity of approximately 500,000 tons, which represents approximately 23% of total North American capacity. Chlorine Dioxide Generators. Through our ERCO Systems Group, we are the largest worldwide supplier of patented technology for generators that certain pulp mills use to convert sodium chlorate into chlorine dioxide. Each mill that uses chlorine dioxide requires at least one generator. We receive revenue when a generator is sold to a mill and also receive royalties from the mill after start-up, generally over a ten-year period, based on the amount of chlorine dioxide produced by the generator. We have supplied approximately two-thirds of all existing modern pulp mill generators worldwide. The research and development group of ERCO works to develop new and more efficient generators. When pulp mills move to higher levels of substitution of chlorine dioxide for elemental chlorine, they are usually required to upgrade generator capacity or purchase new generator technology. Pulp mills may also convert to a newer generator to 8 11 take advantage of efficiency advances and technological improvements. Each upgrade or conversion requires a licensing agreement, which generally provides for payment of an additional ten-year royalty. Sodium Chlorite. We have a rated annual production capacity of sodium chlorite of approximately 3,500 tons. For historical information presented on a segmented basis for our petrochemicals business and pulp chemicals business, see Note 7 of the Notes to Consolidated Financial Statements included in this Form 10-K. SALES AND MARKETING We sell our petrochemicals products pursuant to: o multi-year contracts; o conversion agreements; and o spot transactions in both the domestic and export markets. We have certain long-term agreements that provide for the dedication of 100% of our production of acetic acid, plasticizers, sodium cyanide, and DSIDA each to one customer. We also have various sales and conversion agreements that dedicate significant portions of our production of styrene and acrylonitrile to certain customers. Some of these agreements provide for cost recovery plus an agreed profit margin based upon market prices. These agreements help us to: o optimize capacity utilization rates; o lower our selling, general, and administrative expenses; o reduce our working capital requirements; and o insulate our operations to some extent from the effects of declining markets and changes in raw materials prices. We compete on the basis of product price, quality, and deliverability. Prices for our petrochemicals products are determined by global market factors that are largely beyond our control and, except with respect to a number of our multi-year contracts, we generally sell these products at prevailing market prices. Some of our multi-year contracts for our petrochemicals products are structured as conversion agreements, pursuant to which the customer furnishes raw materials that we process into finished products. In exchange, we receive a fee typically designed to cover our fixed and variable costs of production and to generally provide an element of profit depending on the existing market conditions for the product. These conversion agreements help us to maintain lower levels of working capital and, in some cases, to gain access to certain improvements in manufacturing process technology. We believe our conversion agreements help insulate us to some extent from the effects of declining markets and changes in raw materials prices, while allowing us to share in the benefits of favorable market conditions for most of the products sold under these arrangements. The balance of our petrochemicals products are sold by our direct sales force or through ANEXCO, LLC, our marketing joint venture with BP Chemicals. Our acrylic fibers facility currently markets products in North America through our internal sales staff and to international customers through non-affiliated agents. Acrylic fibers are priced based upon market conditions, which include, but are not limited to, raw materials costs, prices of competing and alternative products, and type of end use. We sell sodium chlorate primarily in Canada and the United States, generally under one to five-year supply contracts, most of which provide for minimum and maximum volumes or a percentage of requirements at market prices. In addition, most of our sodium chlorate sales contracts contain certain "meet or release" pricing clauses and restrictions on the amount and timing of future price increases. We market chlorine dioxide generators worldwide to the pulp and paper industry. We sell the technology and equipment, which we design and purchase from our strategic alliance partners. In addition to being paid for the technology and equipment, we receive royalties based on the amount of chlorine dioxide produced by the generator, generally over a ten-year period. 9 12 For information regarding our export sales and domestic and foreign operations, see Note 7 of the Notes to Consolidated Financial Statements included in this Form 10-K. CONTRACTS Our key multi-year contracts, which collectively accounted for 17% of our fiscal 2000 revenues, are described below. BP Chemicals accounted for approximately 12%, 10%, and 12% of our revenues in fiscal 2000, 1999, and 1998, respectively. No other single customer accounted for more than 10% of our revenues in the last three fiscal years. Styrene-Bayer We currently have a conversion agreement with Bayer Corporation, a subsidiary of Bayer AG. Under this agreement, we provide Bayer, subject to specified minimum and maximum quantities, with a major portion of Bayer's styrene requirements for its manufacture of styrene-containing polymers. During fiscal 2000, we delivered approximately 8% of our styrene production pursuant to this agreement. This agreement expires on December 31, 2000. Acrylonitrile-Solutia We had a multi-year conversion agreement with Solutia, formerly the chemical business of Monsanto Company, pursuant to which we delivered approximately 23% of our fiscal 2000 acrylonitrile production to Solutia. Solutia began operating a new acrylonitrile production facility in Chocolate Bayou, Texas, in the fourth calendar quarter of 2000, which has a rated annual production capacity of approximately 500 million pounds. In anticipation of the start-up of this facility, Solutia terminated our conversion agreement, effective September 1, 2000. Acrylonitrile-BP Chemicals In 1988, we entered into a long-term production agreement with BP Chemicals under which BP Chemicals contributed the majority of the capital expenditures required for starting the third acrylonitrile reactor train at our Texas City acrylonitrile facility. Under this agreement, BP Chemicals has the option to take up to approximately one-sixth of our total acrylonitrile capacity. BP Chemicals furnishes the necessary raw materials and pays us a conversion fee for the amount of acrylonitrile it takes and reimburses us for a portion of the fixed costs related to acrylonitrile production at our Texas City facility. To protect BP Chemicals in the event we default under the production agreement, BP Chemicals has a first priority security interest in the third reactor and related equipment and in the first acrylonitrile produced in our three reactor units to the extent BP Chemicals is entitled to purchase acrylonitrile under this production agreement. This agreement was amended and restated during April of 1998 to, among other things, encourage increased manufacturing and technical cooperation. During fiscal 2000, we delivered approximately 25% of our acrylonitrile production to BP Chemicals pursuant to this agreement. The acrylonitrile reactor in which BP Chemicals invested capital incorporates certain BP Chemicals technological improvements under a separate license agreement. We have the right to incorporate these and any future improvements into our other two acrylonitrile reactors. In order to enhance the marketing of our acrylonitrile, we and BP Chemicals formed ANEXCO, LLC, an exclusive 50/50 joint venture to market acrylonitrile in Asia and South America. During fiscal 2000, we sold approximately 32% of our acrylonitrile production through ANEXCO. Acetic Acid-BP Chemicals In 1986, we entered into a long-term production agreement with BP Chemicals, which has since been amended, under which BP Chemicals has the exclusive right to purchase all of our acetic acid production until August of 2016 and is obligated to make certain unconditional monthly payments to us until August of 2006 and reimburse us for our operating costs. We are also entitled to receive a portion of the profits earned by BP Chemicals from the sale of the acetic acid we produce. Methanol-BP Chemicals-Methanex In August of 1996, we entered into a long-term production and sales agreement with BP Chemicals, under which BP Chemicals contributed a significant portion of the capital expenditures required for the construction of our methanol production facility at our Texas City facility and obtained the right to receive a substantial portion of our methanol 10 13 production. The initial term of this agreement expires July 31, 2016. Historically, a portion of the output of the methanol facility was used in our acetic acid unit and the remainder was marketed by BP Chemicals in the merchant market and in BP Chemicals' worldwide acetic acid business. On June 29, 2000, we, in conjunction with BP Chemicals, announced a multi-year contract with Methanex Corporation for the purchase of our respective methanol requirements from Methanex. At the time, we granted Methanex exclusive rights to acquire the output of our methanol plant, which we continue to own. Under this agreement, Methanex chose to shut down our methanol plant July 1, 2000, and provide our methanol requirements with methanol produced in countries that have a significant advantage in the cost of natural gas, the primary raw material in the production of methanol. However, Methanex may elect to restart our methanol facility at any time, subject to notice requirements and the payment of related expenses. The initial term of these arrangements expires December 31, 2003, with automatic annual renewals thereafter unless we or Methanex elect to terminate these arrangements. Plasticizers-BASF Since 1986, we have sold all of our plasticizers production to BASF pursuant to a product sales agreement that has previously been amended and expires at the end of 2007. BASF provides us with some of the required raw materials and markets the plasticizers we produce. BASF is obligated to make certain quarterly payments to us and reimburses us monthly for actual production costs. In addition, we are entitled to a share of the profits earned by BASF that are attributable to the plasticizers we produce. RAW MATERIALS FOR PRODUCTS AND ENERGY RESOURCES For most of our products, the cost of raw materials and energy resources, including utilities in the case of pulp chemicals, is far greater than all other production costs combined. Thus, an adequate supply of raw materials and utilities at reasonable prices and on acceptable terms is critical to the success of our business. Most of the raw materials we use are global commodities which are made by a large number of producers. Prices for many of these raw materials are subject to wide fluctuations for a variety of reasons beyond our control. Although we believe that we will continue to be able to secure adequate supplies of our raw materials and energy, there can be no assurance that we will be able to do so at acceptable prices and payment terms to meet our requirements. See "Certain Known Events, Trends, Uncertainties, and Risk Factors." Petrochemicals Styrene. We manufacture styrene by converting ethylene and benzene into ethylbenzene, which we then process into styrene. Ethylene and benzene are both commodity petrochemicals. Prices for each can fluctuate widely due to significant changes in the availability of these products. We have multi-year arrangements with several major ethylene and benzene suppliers that provide our estimated requirements for purchased ethylene and benzene at generally prevailing and competitive market prices. Our conversion agreements require that the other parties to these agreements furnish us with the ethylene or benzene necessary to fulfill our conversion obligations. Approximately 15% of our fiscal 2000 benzene requirements and approximately 17% of our fiscal 2000 ethylene requirements were furnished by customers pursuant to conversion arrangements. If various customers for whom we now manufacture styrene under conversion agreements were to cease furnishing their own raw materials and seek only to purchase styrene from us without supplying their own raw materials, our requirements for purchased benzene and ethylene could significantly increase. Acrylonitrile. We produce acrylonitrile by reacting propylene and ammonia. Propylene and ammonia are both commodity chemicals and the price for each can fluctuate widely due to significant changes in the availability of these products. The propylene or ammonia needed for the acrylonitrile we produce under conversion agreements is furnished to us by our customers. We purchase the rest of the propylene and ammonia we need for acrylonitrile production. Approximately 50% of our fiscal 2000 propylene requirements and approximately 46% of our fiscal 2000 ammonia requirements were furnished by customers pursuant to conversion agreements. If various customers for whom we now manufacture acrylonitrile under conversion agreements were to cease furnishing their own raw materials and seek only to purchase acrylonitrile from us without supplying their own raw materials, our requirements for purchased propylene and ammonia could significantly increase. Acetic Acid. Acetic acid is manufactured primarily from carbon monoxide and methanol. In the past, we produced all of the methanol required by our acetic acid unit. However, under the previously discussed multi-year agreements with Methanex, we have purchased all of our methanol requirements from Methanex since July 1, 2000. In 1996, 11 14 Praxair Hydrogen Supply, Inc. constructed a partial oxidation unit at our Texas City facility that supplies us with all of the carbon monoxide we require for the production of acetic acid. This unit was recently expanded in conjunction with the expansion of our acetic acid unit. Methanol. Methanol is produced primarily from natural gas and steam. We obtain our natural gas under supply contracts and on the spot market, typically at prevailing market prices, and we produce our own steam. Plasticizers. The primary raw materials for plasticizers are alpha-olefins and orthoxylene, which are supplied by BASF under our long-term conversion agreement. TBA. We produce TBA from hydrogen cyanide, isobutylene, sulfuric acid, and caustic soda. We use hydrogen cyanide produced as a by-product of our acrylonitrile manufacturing process. Currently, Flexsys supplies the isobutylene, sulfuric acid, and caustic soda needed in our TBA operations under our conversion agreement with them. Sodium Cyanide. Sodium cyanide is manufactured from hydrogen cyanide and caustic soda. We use hydrogen cyanide produced as a by-product of our acrylonitrile manufacturing process and DuPont supplies the caustic soda under our long-term conversion agreement. Acrylic Fibers. Acrylonitrile is the most significant raw material used in the production of acrylic fibers, representing approximately 50% of the total cash cost of production. Pursuant to our supply agreement with Cytec, which we assumed in connection with our purchase of the acrylic fibers facility from Cytec, our acrylic fibers facility is required to purchase all of its acrylonitrile requirements from Cytec until February 28, 2002. After this agreement expires, we expect to supply the acrylonitrile requirements of our acrylic fibers facility from our Texas City acrylonitrile facility. Pulp Chemicals Sodium Chlorate. Sodium chlorate is manufactured by passing an electric current through an undivided cell containing a solution of sodium chloride. The primary raw materials for the production of sodium chlorate are electricity, salt, and water. Of these, electric power typically represents approximately 65% of the variable cost of production. Consequently, the rates charged by local electric utilities are an important competitive factor among sodium chlorate producers. Electric power is purchased by each of our pulp chemicals facilities pursuant to contracts with local electric utilities. On average, we believe that our electrical power costs at our pulp chemical facilities are competitive with other producers in the areas in which we operate. The current trend towards deregulation of electric power makes our future cost for electric power uncertain in the short term. We purchase most of the sodium chloride that we use in the manufacture of sodium chlorate under requirements contracts with major suppliers. TECHNOLOGY AND LICENSING Petrochemicals In 1986, Monsanto granted us a non-exclusive, irrevocable, and perpetual right and license to use Monsanto's technology and other technology Monsanto acquired through third-party licenses in effect at the time of the acquisition of our Texas City facility from Monsanto. We use these licenses in the production of styrene, acrylonitrile, methanol, TBA, acetic acid, and plasticizers. During 1991, BP Chemicals Ltd. ("BPCL") purchased the acetic acid technology from Monsanto, subject to existing licenses. Under an Acetic Acid Technology Agreement with BP Chemicals and BPCL, BPCL granted us a non-exclusive, irrevocable, and perpetual right and license to use acetic acid technology owned by BPCL and some of its affiliates at our Texas City facility, including any new acetic technology developed by BPCL at its acetic acid facilities in England during the term of such agreement or pursuant to the research and development program provided by BPCL under the terms of such agreement. BPCL has also granted us a non-exclusive, irrevocable, and perpetual royalty-free license to use its acrylonitrile technology at our Texas City facility as part of the 1988 acrylonitrile expansion project. This license automatically terminates upon the termination of our acrylonitrile production agreement with BP Chemicals. We have agreed with BPCL to cross-license any technology or improvements relating to the manufacture of acrylonitrile at our Texas City facility. 12 15 We believe that the manufacturing processes we utilize at our Texas City facility are cost effective and competitive. Although we do not engage in alternative process research with respect to our Texas City facility, we do monitor new technology developments and, when we believe it is necessary, we typically seek to obtain licenses for process improvements. We own substantially all of the technology used in our acrylic fibers operations. We license certain of our acrylic fibers manufacturing technology to producers worldwide. We hope to capitalize on increasing demand for this technology as developing countries seek to increase acrylic fibers production capacity. Approximately 15% of the world's total acrylic fibers capacity is based on our technology. Pulp Chemicals We produce sodium chlorate using state-of-the-art metal cell technology. Our principal technology business is the design, sale, and technical service of custom-built patented chlorine dioxide generators. Our ERCO Systems Group is involved in the technical support of our sales and marketing group through joint calling efforts which define the scope of a project, as well as producing technical schedules and cost estimates. We perform detailed design of chlorine dioxide generators, which are then fabricated by contractors. Plant installation, instrumentation testing, and generator start-up are supervised by our joint engineering/technical service team. Prior to 1996, we were involved in a number of patent disputes with Akzo Nobel, N.V. regarding chlorine dioxide technology. In 1996, we reached a settlement of these disputes that allows licensees of both companies to operate their respective chlorine dioxide generators within the broadest range of operating conditions. Our pulp chemicals research and development activities are carried out at our Toronto, Ontario laboratories. Activities include the development of new or improved chlorine dioxide generation processes and research into new technologies focusing on electrochemical and membrane technology related to chlorine dioxide, including improvement of quality and reduction of quantity of pulp mill effluents and treatment of municipal water supplies. COMPETITION The industries in which we operate are highly competitive. Many of our competitors, particularly in the petrochemicals industry, are larger and have substantially greater financial resources than we have. Among our competitors are some of the world's largest chemical companies that, in contrast to us, have their own raw materials resources. In addition, a significant portion of our business is based upon widely available technology. The entrance of new competitors into the industry and the addition by existing competitors of new capacity could have a negative impact on our ability to maintain existing market share or maintain or increase profit margins, even during periods of increased demand for our products. You can find a list of our principal competitors in the "Product Summary" table. Historically, profitability of the petrochemicals industry has been affected by vigorous price competition, which may intensify due to, among other things, new domestic and foreign industry capacity. Our businesses are subject to changes in the world economy, including changes in currency exchange rates. In general, weak economic conditions, either in the United States or worldwide, tend to reduce demand and put pressure on the margins for our products. Beginning in fiscal 1997, economic events in various Asian countries negatively impacted the demand growth for our products and, along with increases in supply, had a negative impact on sales volumes, prices, and margins. However, beginning in fiscal 2000, market conditions for our styrene, acrylonitrile, and sodium chlorate began to strengthen as a result of the previously discussed strong market demand, operating problems at some of our competitors, and generally low inventory levels. Spot prices for styrene peaked early in the third quarter of fiscal 2000 at approximately $0.48 per pound. However, the completion of several industry turnarounds early in the quarter, combined with decreased styrene purchases by customers and lower polystyrene operating rates, caused spot prices to decline during the fourth quarter of fiscal 2000. Spot prices have continued to be in the $0.25-$0.28 per pound range into the first quarter of fiscal 2001. Operations outside the United States are subject to the economic and political risks inherent in the countries in which they operate. Additionally, the export and domestic markets can be affected significantly by import laws and regulations. During fiscal 2000, our export sales were approximately 43% of our total revenues. It is not possible to predict accurately how changes in raw materials costs, market conditions, or other factors will affect future sales volumes, prices, and margins for our products. 13 16 ENVIRONMENTAL MATTERS General Our operations involve the handling, production, transportation, treatment, and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental and health and safety laws, regulations, and permit requirements. Environmental permits required for our operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacture, handling, processing, distribution, and use of our chemical products and, if so affected, our business and operations may be materially and adversely affected. In addition, changes in environmental requirements can cause us to incur substantial costs in upgrading or redesigning our facilities and processes, including our waste treatment, storage, disposal, and other waste handling practices and equipment. We conduct environmental management programs designed to maintain compliance with applicable environmental requirements at all of our facilities. We routinely conduct inspection and surveillance programs designed to detect and respond to leaks or spills of regulated hazardous substances and to correct identified regulatory deficiencies. We believe that our procedures for waste handling are consistent with industry standards and applicable requirements. In addition, we believe that our operations are consistent with good industry practice. During fiscal 2000, we withdrew our membership in the American Chemistry Council as part of our ongoing assessment of trade association membership costs versus benefits. However, we continue to participate in the ACC's Responsible Care(R) initiatives as a part of our membership in several trade groups which are partner associations in the ACC in the United States and the Canadian Chemical Producers Association. Notwithstanding our efforts and beliefs, a business risk inherent with chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees, and nearby landowners and occupants. While we believe our business operations and facilities generally are operated in compliance in all material respects with all applicable environmental and health and safety requirements, we cannot be sure that past practices or future operations will not result in material claims or regulatory action, require material environmental expenditures, or result in exposure or injury claims by employees, contractors and their employees, and the public. Some risk of environmental costs and liabilities is inherent in our operations and products, as it is with other companies engaged in similar businesses. Our operating expenditures for environmental matters, mostly waste management and compliance, were approximately $31 million for fiscal 2000 and $30 million for fiscal 1999. We also spent approximately $1 million for environmentally related capital projects in fiscal 2000 and $6 million for these types of capital projects in fiscal 1999. In fiscal 2001, we anticipate spending approximately $4 million for capital projects related to waste management and environmental compliance. There are no capital expenditures related to remediation of environmental conditions projected for fiscal 2001. In light of our historical expenditures and expected future results of operations, 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. 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. Petrochemicals Air emissions from our Texas City facility and our acrylic fibers facility are subject to certain permit requirements and self-implementing emission limitations and standards under state and federal laws. Our Texas City facility is located in an area that the Environmental Protection Agency has classified as not having attained the ambient air quality standards for ozone, which is controlled by direct regulation of volatile organic compounds and nitrogen oxide. The 14 17 Texas Natural Resource Conservation Commission has imposed strict requirements on regulated facilities, including our Texas City facility, to ensure that the air quality control region will achieve the ambient air quality standards for ozone. Our acrylic fibers facility is located in an area currently designated as being in attainment for ozone under the Clean Air Act. Our Texas City facility and our acrylic fibers facility are subject to the federal government's June 1997 National Ambient Air Quality Standards which lower the ozone and particulate matter threshold for attainment. Local authorities also may impose new ozone and particulate matter standards. Compliance with these stricter standards may substantially increase our future nitrogen oxide and particulate matter control costs, the amount and full impact of which cannot be determined at this time. In addition, the Texas Natural Resource Conservation Commission has proposed new regulations requiring significant reductions of nitrogen oxide and particulate matter which, if enacted, will apply to our Texas City facility. These proposed regulations are subject to the approval of the United States Environmental Protection Agency, which is expected to be granted by mid-2001. Under the current form of these proposed regulations, we would be required to reduce emissions of nitrogen oxide at our Texas City facility by more than 90%, which we estimate would require Chemicals to make between $30 million and $50 million in capital improvements at our Texas City facilities. The majority of these capital expenditures would be expected in fiscal 2002, 2003 and 2004. Under our production agreements with BP Chemicals, we would be able to recover a small portion of these costs from BP Chemicals. We are currently evaluating several alternative methods of reducing nitrogen oxide emissions at our Texas City facility that would require a lesser amount of capital expenditures; however, we cannot give any assurances that any alternative methods will be available to us or that, even if available, these alternative methods will reduce the amount of capital expenditures required to be made by a meaningful amount. In addition, some of these expenditures could result in a reduction in operating costs, however, there can be no assurances that we will be able to do so. To reduce the risk of offsite consequences from unanticipated events, we acquired a greenbelt buffer zone adjacent to our Texas City facility in 1991 and, in connection with the acquisition of our acrylic fibers facility, acquired a greenbelt area for our acrylic fibers facility. We also participate in a regional air monitoring network to monitor ambient air quality in the Texas City community. A December 1994 Florida Department of Environmental Protection waiver for use of an onsite nonhazardous landfill applies to our acrylic fibers facility. This waiver was obtained in connection with Cytec's July 1994 petition for a rulemaking to avoid a January 1995 rule prohibiting disposal of industrial waste in other than a Class I landfill. Upon consummation of the acquisition of the acrylic fibers business, we succeeded to the rights of Cytec under that petition and waiver. In February of 2000, this issue was resolved when we received an Industrial Waste Permit from the Florida Department of Environmental Protection which allows us to continue to operate the landfill until February of 2005. A settlement agreement entered into by the Environmental Protection Agency, the Florida Department of Environmental Protection, and an environmental group may also potentially apply to our acrylic fibers facility. This settlement agreement imposes a no-migration standard for injection wells in underground drinking water zones without regard to actual risk considerations. We and several similarly situated companies have been contesting this settlement. An April of 1999 ruling by the United States Court of Appeals for the 11th Circuit may reduce the likelihood that the no-migration rule is enforceable, although we can give you no assurance in that regard. In the event that the no-migration rule becomes enforceable, we may incur material costs in redesigning our wastewater handling systems. However, in September of 2000, the Florida Department of Environmental Protection awarded us a five-year permit to operate the deepwell injection facilities at our acrylic fibers facilities. Under this permit, we were granted an "injection into an aquifer" exemption, subject to monitoring of groundwater. As a result, during the life of this permit, we would not be subject to this no-migration rule even if it became enforceable, assuming that this permit is not revised in any material way. Pulp Chemicals Our pulp chemicals business is sensitive to potential environmental regulations. On November 14, 1997, the Environmental Protection Agency enacted regulations that support substitution of chlorine dioxide for elemental chlorine in paper pulp bleaching processes to reduce the amount of absorbable organic halides and other chlorine derivatives in bleach plant effluent. Chlorine dioxide is produced from sodium chlorate, which is one of our pulp chemicals products. Therefore, regulations restricting, but not completely banning, absorbable organic halides and other chlorine derivatives in bleach plant effluent have a favorable effect on our business. Conversely, a significant ban on all chlorine containing compounds could have a materially adverse effect on us. British Columbia has a regulation in place requiring elimination of the use of all chlorine products, including chlorine dioxide, in the bleaching process by the year 2002. The pulp and paper industry believes that a ban of chlorine dioxide in the bleaching process will yield no measurable environmental or public health benefit and is working to change this 15 18 regulation, but there can be no assurance that this regulation will be changed. In the event such a regulation is implemented, we would seek to sell the products we manufacture at our British Columbia facility to customers in other markets. We are not aware of any other laws or regulations in place in North America that would restrict the use of such products for other purposes. We acquired four of our Canadian pulp chemicals facilities from Tenneco Canada, Inc. in 1992 and our Saskatoon facility from Weyerhauser Canada Ltd. in 1997. Groundwater data obtained during the acquisition of the Tenneco facilities indicated elevated concentrations of certain chemicals in the soil and groundwater. Prior to completion of that acquisition, we conducted a focused baseline sampling of groundwater conditions beneath the facilities and confirmed that previous data. We have addressed or are addressing elevated soil or groundwater concentrations of chemicals that we have encountered from time to time at the facilities we acquired from Tenneco. We also reviewed air emissions sources during the acquisition of these facilities and considered all available dustfall and vegetation stress studies. This review indicated emission excursion episodes at specific locations in the scrubber systems at the Thunder Bay, Buckingham, and Vancouver facilities. The conditions at these three sites have been addressed and satisfactorily resolved. We believe that all of the facilities we acquired from Tenneco are otherwise in compliance in all material respects with all permit requirements under applicable provincial law. At our Saskatoon facility, remediation plans regarding ground water contamination from prior operations are under negotiation. Weyerhauser Canada Ltd. and Crown Treatment Corporation, who previously owned the facility, along with the Saskatchewan Environmental Resource Ministry and ourselves, are participants in the negotiations. Currently, our role is to coordinate the activities and the prior owners are expected to fund the remediation costs. EMPLOYEES As of September 30, 2000, we had approximately 1,180 employees, including approximately 790 assigned to our petrochemicals operations and approximately 390 assigned to our pulp chemicals operations. Approximately 35% of our employees are covered by union agreements. The primary union agreement at our Texas City facility is with the Texas City, Texas Metal Trades Council, AFL-CIO, of Galveston County, Texas, which covers all hourly employees at our Texas City facility. This agreement was renegotiated as of December 28, 1998, and will expire on May 1, 2002. Employees at our Vancouver facility are represented by the Pulp, Paper, and Woodworkers Union. The Vancouver labor agreement was renegotiated in November of 2000 and is subject to further renegotiations in November of 2003. Employees at our Buckingham facility are represented by either the Communications, Energy, and Paperworkers Union or an office and professional workers union. Both Buckingham labor agreements were renegotiated in November of 1999 and are subject to renegotiation in November of 2002. Approximately 81% of the employees at our Saskatoon facility are represented by the Communications, Energy, and Paperworkers of Canada. Our collective agreement with this union expires September 30, 2001. Although we believe our relationship with our employees is generally good, a strike by one or more of the unions representing our employees could have a material adverse effect on us. INSURANCE We maintain full replacement value insurance coverage for property damage to all of our facilities and business interruption insurance. Nevertheless, a significant interruption in the operation of one or more of our facilities could have a material adverse effect on us. We also maintain other insurance coverages for various risks associated with our business. There can be no assurance that we will not incur losses beyond the limits of, or outside the coverage of, our insurance. From time to time various types of insurance for companies in the chemical industry have been very expensive or, in some cases, unavailable. There can be no assurance that in the future we will be able to maintain our existing coverage or that premiums will not increase substantially. ITEM 2. PROPERTIES Our Texas City facility is located approximately 45 miles south of Houston in Texas City, Texas, on a 290-acre site on Galveston Bay near many other chemical manufacturing complexes and refineries. We have facilities to load our products in trucks, railcars, barges, and ocean-going vessels for shipment to customers. The site offers room for future expansion and includes a greenbelt around the northern edge of the plant site. We own or lease all of the real property which comprises our Texas City facility and all of the equipment and facilities located there, other than the sodium cyanide unit which is owned by DuPont, a cogeneration facility owned by a joint venture between us and Praxair Energy Resources, Inc., the partial oxidation unit which is owned by Praxair Hydrogen Supply, Inc., and the DSIDA plant which is owned by Monsanto. We also own storage facilities, approximately 100 rail cars, and an acetic acid barge in connection with our petrochemicals business. 16 19 Our acrylic fibers facility is located on 1,100 acres near Pensacola in Santa Rosa County, Florida. We own all of the real property on which our acrylic fibers facility is situated and own or lease all of the facilities and equipment located there. We have recently entered into an agreement for the construction of a co-generation facility at our acrylic fibers facility that will be owned by Santa Rosa Energy LLC, an affiliate of Polsky Energy Corporation. Our pulp chemicals business includes five manufacturing facilities in Canada and our Valdosta, Georgia facility. We own the property on which our Buckingham, Quebec and Vancouver, British Columbia manufacturing facilities are located, with each site comprising approximately 20 acres. We also own the property on which our Saskatoon manufacturing facility is located, which consists of approximately 270 acres. We lease the property for our Thunder Bay, Ontario, and Grande Prairie, Alberta manufacturing facilities. Our Valdosta facility was constructed in conjunction with, and is leased from, the Valdosta-Lowndes County Industrial Authority. We also lease approximately 572 rail cars in connection with our pulp chemicals business. Headquarters for our pulp chemicals operations are located in Toronto, Ontario in an office building that we lease. We lease our principal executive offices, located in Houston, Texas. We believe our properties and equipment are sufficient to conduct our business. ITEM 3. LEGAL PROCEEDINGS Ammonia Release On May 8, 1994, an ammonia release occurred at our Texas City facility while a reactor in our acrylonitrile unit was being restarted after a shutdown for routine maintenance. Approximately 52 lawsuits and interventions involving approximately 6,000 plaintiffs were filed against us seeking an unspecified amount of money for alleged damages from the ammonia release. All claims related to this release have been resolved within the limits of our insurance coverage. The following ammonia lawsuits were settled or dismissed after September 30, 1999: 1. Otis Pointer Jr., individually and on behalf of all others similarly situated, v. Sterling Chemicals, Inc., Paul Saunders, and an unknown chemical operator; Cause No. 94CV0514; In the 56th Judicial District Court of Galveston County, Texas. 2. Lilly Gordon, et al. v. Sterling Chemicals, Inc.; Cause No. 95-36592; In the 281st Judicial District Court of Harris County, Texas. Nickel Carbonyl Release On July 30, 1997, as our methanol unit at our Texas City facility was being shut down for repair, nickel carbonyl was formed when carbon monoxide reacted with nickel catalyst in the unit's reformer. After isolating the nickel carbonyl within the methanol unit, we worked with the permission and guidance of the Texas Natural Resources Conservation Commission to destroy the nickel carbonyl by incineration on-site. Prior to its incineration, several of our employees and contractor employees may have been exposed to nickel carbonyl in the methanol unit. Two lawsuits and two interventions involving approximately 306 plaintiffs were filed against us seeking an unspecified amount for alleged damages from the nickel carbonyl release. These lawsuits and interventions have either been dismissed or settled within the limits of our insurance coverage. The following nickel carbonyl lawsuits were settled or dismissed after September 30, 1999: 1. Kurt Bodenshot, et al. v. Sterling Chemicals, Inc.; Cause No. 97CV0966; In the 212th Judicial District Court of Galveston County, Texas. 2. Alonjo Ayala, et al. v. Sterling Chemicals Holdings, Inc. and Sterling Chemicals, Inc.; Cause No. 99CV0759; In the 56th Judicial District of Galveston County, Texas. Ethylbenzene Release On April 1, 1998, a chemical leak occurred when a line failed in the ethylbenzene unit at our Texas City facility. The released chemicals included ethylbenzene, benzene, polyethylbenzene, and hydrochloric acid. We do not believe any serious injuries were sustained, although a number of citizens sought medical examinations at local hospitals after a precautionary alert was given to neighboring communities. 17 20 The following ethylbenzene lawsuits are outstanding: 1. Zabrina Alexander, et al. v. Sterling Chemicals Holdings, Inc., et al.; Cause No. 00CV0217; In the 10th Judicial District Court of Galveston County, Texas; 2. James Allen, et al. v. Sterling Chemicals, Inc., et al.; Cause No. 200015823; In the 152nd Judicial District Court of Harris County, Texas 3. Bobbie Adams, et al. v. Sterling Chemicals International, Inc., et al.; Cause No. 00CV0311; In the 212th Judicial District Court of Galveston County, Texas; 4. Nettie Allen, et al. v. Sterling Chemicals, Inc., et al.; Cause No. 00CV0304; In the 10th Judicial District Court of Galveston County, Texas. 5. Climon Davis, et al. v. Sterling Chemicals, Inc.; Cause No. 00CV 0343; In the 212th Judicial District Court of Galveston County, Texas 6. Ida Goldman, et al. v. Sterling Chemicals, Inc., et al.; Cause No. 00CV0338; In the 56th Judicial District Court of Galveston County, Texas; 7. Joe L. Kimble, et al. v. Sterling Chemicals, Inc., et al.; Cause No. 00CV0333; In the 56th Judicial District Court of Galveston, County, Texas; 8. Clyde Shade v. Sterling Chemicals, Inc., et al.; Cause No. 00CV0328; In the 10th Judicial District Court of Galveston County, Texas; and 9. Olivia Ellis v. Sterling Chemicals, Inc.; Cause No. JC7096; In Justice Court No. 5 of Galveston County, Texas. These lawsuits involve 1,292 plaintiffs/intervenors who seek an unspecified amount for damages. We believe that substantially all of our future out-of-pocket costs and expenses, including settlement payments and judgments, relating to these lawsuits 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 us, although we cannot give any assurances to that effect. Other Claims We are subject to various other claims and legal actions that arise in the ordinary course of our business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 18 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for our common stock, par value $.01 per share, although our common stock is traded on the OTC Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc. under the symbol "STXX." The following table sets forth the high and low bid information of our common stock as reported on the OTC Electronic Bulletin Board for the fiscal years ended September 30, 2000 and 1999.
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 2000 High $5 3/4 $7 1/8 $6 1/4 $3 1/2 Low $3 1/2 $4 $2 5/8 $1 3/8 1999 High $7 $7 1/4 $ 7 $5 3/4 Low $4 $3 1/2 $ 5 $2 5/8
As of December 4, 2000, there were approximately 503 record holders of our common stock. We have not paid dividends on our common stock in any of the last three fiscal years and do not anticipate paying dividends in the foreseeable future. Any future determination as to the payment of dividends will be made at the discretion of our Board of Directors and will depend upon our operating results, financial condition, capital requirements, general business conditions, and such other factors that our Board of Directors deems relevant. The payment of dividends on our common stock is also restricted by the terms of the indenture governing our 13 1/2% Senior Secured Discount Notes due 2008 and the terms of both series of our outstanding preferred stock. In addition, our subsidiaries (including Chemicals) are parties to various debt agreements that limit their ability to provide funds to us by way of dividends, distributions, and advances. 19 22 ITEM 6. SELECTED FINANCIAL DATA OF HOLDINGS The following table sets forth selected financial data with respect to our consolidated financial condition and consolidated results of operations and should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and related notes in Item 8 of this Form 10-K.
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------------------------------- 2000 1999 1998 1997(1) 1996(2) ------------ ------------ ------------ ------------ ------------ OPERATING DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues $ 1,078,351 $ 720,752 $ 822,590 $ 908,787 $ 790,465 Gross profit 140,891 38,158 77,267 85,522 102,168 Net income (loss) attributable to common stockholders(3) (89,960) (112,712) (48,579) (28,965) 31,604 Net cash provided by (used in) operating activities 48,133 (13,890) 45,884 47,314 63,601 Net cash used in investing activities (28,797) (25,957) (26,622) (196,351) (95,957) Net cash provided by (used in) financing activities (26,443) 43,274 (15,238) 151,610 7,190 EBITDA(4) 159,474 54,134 88,753 107,318 121,200 PER SHARE DATA: Net income (loss) per common share (7.13) (8.94) (3.99) (2.58) 0.62 Cash dividends -- -- -- -- -- BALANCE SHEET DATA: Working capital $ 83,505 $ 91,399 $ 91,910 $ 120,104 $ 76,933 Total assets 710,212 775,099 765,956 878,971 689,684 Long-term debt (excluding current maturities) 961,570 964,555 873,616 876,281 714,632 Redeemable preferred stock 23,928 20,932 18,249 15,793 -- Stockholders' equity (deficiency in assets) (547,722) (455,387) (348,179) (288,528) (272,439)
(1) During fiscal 1997, we acquired our acrylic fibers facility and our Saskatoon facility. (2) In August of 1996 we recapitalized. (3) During fiscal 2000, we recorded pre-tax charges of $2 million for costs associated with workforce reductions and a $60 million non-cash charge related to the write down of our acrylic fibers production assets. During fiscal 1999, we recorded pre-tax charges of $4 million for costs associated with workforce reductions, $7 million non-cash charge related to early retirement programs and benefit changes, and a $26 million non-cash charge related to the write down of our methanol production assets. During fiscal 1998, we recorded a pre-tax charge of $6 million for costs associated with workforce reductions. (4) EBITDA (earnings before interest, taxes, depreciation, amortization, stock appreciation rights ("SARs"), certain merger-related expenses, impairment of assets, and certain non-cash charges related to an early retirement program and benefit changes) is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. It is not intended as an alternative measure of performance to net income (loss). Because EBITDA 20 23 excludes some, but not all, items that affect net income (loss) and may vary among companies, the EBITDA calculation presented above may not be comparable to similarly titled measures of other companies. SARs expense was $8,540,000 for the fiscal year ended September 30, 1996. Certain merger-related expenses were $3,633,000 for the year ended September 30, 1996. Certain non-cash charges related to an early retirement program and benefit changes were $6,781,000 for the year ended September 30, 1999. Non-cash charges related to the write-down of our production assets were $60,000,000 for acrylic fibers in the fiscal year ended September 30, 2000 and $26,368,000 for methanol in the fiscal year ended September 30, 1999. SELECTED FINANCIAL DATA FOR CHEMICALS The following table sets forth selected financial data with respect to Chemicals' consolidated financial condition and consolidated results of operations and should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Chemicals' Consolidated Financial Statements and related notes in Item 8 of this Form 10-K. All issued and outstanding shares of Chemicals are held by Holdings and, accordingly, per share data is not presented.
PERIOD FROM MAY 14, 1996 (DATE OF YEAR ENDED SEPTEMBER 30, INCEPTION) TO ----------------------------------------------------------- SEPTEMBER 30, 2000 1999 1998 1997(1) 1996(2) ------------ ------------ ------------ ------------ ------------ OPERATING DATA: (Dollars in Thousands) Revenues $ 1,078,351 $ 720,752 $ 822,590 $ 908,787 $ 83,410 Gross profit 140,891 38,158 77,267 85,522 (1,659) Net income (loss) (63,847) (94,722) (33,669) (14,851) 174 BALANCE SHEET DATA: Working capital $ 84,587 $ 92,927 $ 91,997 $ 119,829 $ 77,299 Total assets 677,143 752,106 762,503 875,317 685,451 Long-term debt (excluding current maturities) 791,684 816,927 745,709 768,870 619,875 Stockholder's equity (deficiency in assets) (377,790) (309,590) (220,445) (175,587) (184,302)
(1) During fiscal 1997, we acquired our acrylic fibers facility and our Saskatoon facility. (2) In August of 1996 we recapitalized. Prior to August 21, 1996, Chemicals had no operating activities, other than those related to merger activities. 21 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a holding company whose only material asset is our investment in Chemicals, our primary operating subsidiary. Chemicals owns substantially all of our consolidated operating assets. Other than additional interest expense associated with our 13 1/2% Senior Secured Discount Notes due 2008, our results of operations are essentially the same as Chemicals. The primary markets in which we compete, especially styrene and acrylonitrile, are cyclical and are sensitive to factors such as: o changes in the balance between supply and demand; o the price of raw materials; and o the level of general worldwide economic activity. Styrene prices are cyclical and sensitive to overall supply relative to demand and the level of general business activity. Following a period of strong demand growth and high utilization rates in 1994 through 1996, several major producers announced new capacity increases in 1997 and 1998, particularly in the Far East. At the time of this announced new capacity, there was a general slowdown in the economic growth rate in the Far East, prompting customers to begin utilizing their available inventories and decrease purchases of additional product. As a result, our average styrene prices declined from fiscal 1997 through fiscal 1999, as the previously announced new capacity came on line at the same time that economic events in various Asian countries significantly reduced demand growth for styrene. Beginning in the first quarter of fiscal 2000, styrene prices increased significantly due to the strong market demand, rising raw material costs, operating problems experienced at several of our competitors, and generally low inventory levels. The average prices we received for our styrene increased approximately 78% from fiscal 1999 to fiscal 2000. However, styrene spot selling prices, as reported by Chemical Market Associates, Inc. ("CMAI"), a chemical industry consultant, decreased from a high of $0.48 per pound in April of 2000 to a low of $0.31 per pound in September of 2000, while at the same time margins were further reduced due to higher benzene and energy costs. Currently, CMAI is reporting styrene spot prices in the $0.25 to $0.28 per pound range. We cannot predict future increases or decreases in styrene prices and margins. The acrylonitrile market exhibits characteristics in capacity utilization, selling prices, and profit margins similar to those of styrene. Moreover, as a result of our high percentage of export acrylonitrile sales, demand for our acrylonitrile is significantly influenced by export customers, particularly those that supply acrylic fibers to China. During 1995, strong demand for acrylic fibers and ABS resins, particularly in China, increased demand for acrylonitrile resulting in high prices and margins. Acrylonitrile demand began to weaken in late 1995 for the same reasons that caused the deterioration in the styrene market. Increased acrylonitrile capacity, primarily in Asia, and weakened demand growth in Asian markets resulted in lower acrylonitrile prices and margins beginning in fiscal 1996 and continuing through fiscal 1999. Global production capacity for acrylonitrile is estimated at over 13 billion pounds, including approximately two billion pounds which was added by competitors between 1997 and 2000. The average acrylonitrile sales prices we received declined by approximately 3% from fiscal 1996 to fiscal 1997, approximately 29% from fiscal 1997 to fiscal 1998, and approximately 32% from fiscal 1998 to fiscal 1999. Beginning in early fiscal 2000, acrylonitrile prices increased significantly due to strong market demand, rising raw material costs, operating problems experienced at several of our competitors, and generally low inventory levels. The average prices we received for our acrylonitrile increased approximately 122% from fiscal 1999 to fiscal 2000. However, we were not able to fully capitalize on this opportunity as a result of planned shut downs related to the construction of the DSIDA plant, and several plant operating problems, and higher raw materials and energy costs. We cannot predict future increases or decreases in acrylonitrile prices and margins. The sodium chlorate market has also historically experienced cycles in capacity utilization, selling prices, and profit margins. Since the mid-1980s, North American demand for sodium chlorate has grown at an average annual rate of approximately 9% as pulp mills have accelerated substitution of chlorine dioxide for elemental chlorine in bleaching applications. During fiscal 1998 and fiscal 1999, demand for sodium chlorate did not increase at historical rates as a result of weak market conditions and lower operating rates in the pulp and paper industry. In addition, new production capacity was added while implementation of the Cluster Rules was delayed. Our average sodium chlorate prices decreased by approximately 5% from fiscal 1996 to fiscal 1997, approximately 7% from fiscal 1997 to fiscal 1998, and approximately 8% from fiscal 1998 to fiscal 1999. However, during fiscal 2000, sodium chlorate prices increased due to increased operating rates at pulp mills and the continued conversion to elemental chlorine free bleaching at pulp mills. Our sodium chlorate prices increased by approximately 4% from fiscal 1999 to fiscal 2000. Mandatory 22 25 compliance with the Cluster Rules in the United States beginning in 2001 should continue to impact demand for sodium chlorate in 2001. However, approximately 110,000 metric tons of new capacity of sodium chlorate is expected in calendar year 2002 in North America. We cannot predict future increases or decreases in sodium chlorate prices and margins. We market substantial volumes of petrochemicals and generate substantial revenues under our conversion and long-term agreements. The approximate percentages of our total petrochemicals sales volumes and revenues from our conversion and long-term agreements in the last three fiscal years are shown in the following table:
2000 1999 1998 ---- ---- ---- Percentage of total sales volumes..... 66% 56% 52% Percentage of total revenues.......... 33% 41% 38%
Under our conversion agreements, the customer furnishes some or all of the raw materials, which we process into other petrochemicals in exchange for a fee designed to cover our fixed and variable costs of production. These conversion agreements help us to maintain lower levels of working capital and, in some cases, to gain access to certain improvements in manufacturing process technology. We believe that our petrochemicals conversion agreements help us to: o optimize capacity utilization rates; o lower our selling, general, and administrative expenses; o reduce our working capital requirements; and o insulate our operations to some extent from the effects of declining markets and changes in raw materials prices. LIQUIDITY AND CAPITAL RESOURCES Long-Term Debt As of September 30, 2000, our long-term debt, including current maturities, totaled approximately $964 million and consisted of: o Chemicals' two secured revolving credit facilities; o two secured term loans under a credit facility at our Saskatoon subsidiary; o Chemicals' 11 1/4% Senior Subordinated Notes due 2007, 11 3/4% Senior Subordinated Notes due 2006, and 12 3/8% Senior Secured Notes due 2006; and o Holdings' 13 1/2% Senior Secured Discount Notes due 2008. On July 23, 1999, Chemicals completed a refinancing of all senior debt outstanding under its old senior credit facility by issuing its 12 3/8% Notes, establishing a revolving credit facility secured by its and some of its subsidiaries' fixed assets and certain other assets, and establishing an additional revolving credit facility secured by its and some of its subsidiaries' working capital. The two revolving credit facilities provide Chemicals an aggregate borrowing capacity of $155 million. All indebtedness under the old senior credit facility was repaid and the old senior credit facility was terminated upon consummation of the refinancing. The refinancing increased Chemicals' liquidity by eliminating near-term debt amortization and financial covenants associated with the old senior credit facility, as well as by increasing revolving credit availability. Although no assurances can be given, we believe the additional liquidity provided by the refinancing, when combined with cash flows from operations and other sources of available capital, will be sufficient to enable us to operate through current and expected market conditions for our primary petrochemicals products through fiscal 2001. This belief is largely based upon assumptions regarding the condition of the markets of our primary products over the next several years, which assumptions are based in part on published reports of industry experts as well as our own internal forecasts. If these assumptions prove to be incorrect there is a strong possibility that we would be unable to fund our operations and meet our debt service requirements over an extended period. Additional information regarding our liquidity, both short-term and long-term, appear below in "Certain Known Events, Trends, Uncertainties, and Risk Factors." The 12 3/8% Notes are senior secured obligations of Chemicals and rank equally in right of payment with all other existing and future senior indebtedness of Chemicals and senior in right of payment to all existing and future subordinated indebtedness of Chemicals. The 12 3/8% Notes are guaranteed by all of Chemicals' existing direct and indirect United States subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) on a joint and several basis. Each subsidiary's guarantee ranks equally in right of payment with all of that subsidiary's existing and future senior 23 26 indebtedness and senior in right of payment to all existing and future subordinated indebtedness of that subsidiary. However, the 12 3/8% Notes, and each subsidiary's guarantee, is subordinated to the extent of the collateral securing our secured revolving credit facilities. The 12 3/8% Notes and the subsidiary guarantees are secured by: o a second priority lien on all of our United States production facilities and related assets; o a second priority pledge of all of the capital stock of each subsidiary guarantor; and o a first priority pledge of 65% of the stock of certain of our subsidiaries incorporated outside of the United States. Under the secured revolving credit facilities, Chemicals and each of its direct and indirect United States subsidiaries, other than Sterling Chemicals Acquisitions, Inc., are co-borrowers and are jointly and severally liable for any indebtedness thereunder. The secured revolving credit facilities consist of: o a $70,000,000 revolving credit facility secured by a first priority lien on all of our United States production facilities and related assets, all of Chemicals' capital stock, and all of the capital stock of each co-borrower and a second priority lien on all accounts receivable, inventory, and other specified assets of Chemicals and each co-borrower; and o an $85,000,000 revolving credit facility secured by a first priority lien on all accounts receivable, inventory, and other specified assets of Chemicals and each co-borrower. Available credit under the current assets revolver is subject to a monthly borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory, with an inventory cap of $42,500,000. In addition, the borrowing base for the current assets revolver must exceed outstanding borrowings thereunder by $12,000,000 at all times. Available credit under the fixed assets revolver is not subject to a borrowing base. The commitments for each of the secured revolving credit facilities will be permanently reduced to the extent required under the credit agreement upon prepayments made out of specific sources of funds, including assets sales by Chemicals and the co-borrowers and certain equity issuances by Holdings. The indentures governing the 13 1/2% Notes, the 12 3/8% Notes, the 11 3/4% Notes, and the 11 1/4% Notes and our credit agreement contain numerous covenants, including, but not limited to, restrictions on our ability to incur indebtedness, pay dividends, create liens, sell assets, engage in mergers and acquisitions, and refinance existing indebtedness. In addition, these indentures and the credit agreement specify various circumstances that will constitute, upon occurrence and subject in certain cases to notice and grace periods, an event of default thereunder. However, none of these indentures or the credit agreement require us to satisfy any financial ratios or maintenance tests. The indentures governing the 12 3/8% Notes, the 11 1/4% Notes, and the 11 3/4% Notes and the credit agreement contain provisions which restrict the payment of advances, loans, and dividends from Chemicals to Holdings. The most restrictive of these covenants limits those payments during fiscal 2001 to approximately $2.0 million, plus any amounts due to Holdings from Chemicals under the intercompany tax sharing agreement. At September 30, 2000, the total credit available under the secured revolving credit facilities was $155 million, and approximately $37 million was drawn under the fixed assets revolver. Therefore, at September 30, 2000, Chemicals had additional borrowing capacity of approximately $118 million. Dividend restrictions in the indentures governing the 12 3/8% Notes, the 11 3/4% Notes and the 11 1/4% Notes allow Chemicals to pay dividends to Holdings in connection with required interest payments on the 13 1/2% Notes only if the ratio of the consolidated EBITDA of Chemicals and certain of its subsidiaries to their interest expense is 2.0 to 1.0 or greater, on a trailing four quarter basis. Holdings currently has no viable sources of funds to make interest payments on the 13 1/2% Notes other than the sale or monetization of our investment in unrestricted subsidiaries and dividends from Chemicals. Holdings must make the first cash interest payment on the 13 1/2% Notes on February 15, 2002. For the four quarters ended September 30, 2000, the consolidated EBITDA coverage ratio under these indentures was 1.5 to 1.0, significantly below the required ratio. Based upon our anticipated consolidated interest expense for the four quarter period ending December 31, 2001, Chemicals and its subsidiaries (excluding our subsidiary that conducts operations in Saskatoon) would need to generate approximately $190 million in consolidated EBITDA during such four quarter period in order to pay a dividend to Holdings to make the required cash interest payment on February 15, 2002. While there is a possibility that Chemicals could generate sufficient EBITDA to pay dividends to Holdings for the purpose of paying one or more of the initial interest payments on the 13 1/2% Notes, we can give no assurances to that effect. Moreover, we believe that it is unlikely that Chemicals will generate sufficient EBITDA to pay dividends to Holdings every time an interest payment becomes due on the 13 1/2% Notes through their maturity in 2008. The permissible 24 27 methods for reducing the risk of a cash interest payment default on the 13 1/2% Notes are limited in scope and amount and no assurances can be given that any permissible method will be available or sufficient. We are currently exploring all permissible methods for improving our liquidity, including the possible sale or monetization of our investment in our unrestricted subsidiaries. On September 8, 2000, we announced the engagement of Donaldson, Lufkin & Jenrette Securities Corporation (now Credit Suisse First Boston) as financial advisor to assist us in identifying and evaluating possible methods of restructuring or refinancing our 13 1/2% Notes. CSFB has had preliminary discussions with some of the larger holders of our 13 1/2% Notes regarding a possible restructuring of those Notes. However, we cannot predict whether such discussions will lead to any restructuring of our 13 1/2% Notes. If Holdings fails to make a required interest payment on the 13 1/2% Notes, the holders would have certain remedies available to them under the indenture, including the option of accelerating the maturity of the 13 1/2% Notes. A default under the 13 1/2% Notes will not, in and of itself, cause a default under the indentures for 12 3/8% Notes, the 11 3/4% Notes or the 11 1/4% Notes. However, a default under the 13 1/2% Notes will cause a default under the credit agreement, giving the lenders under the credit agreement the option of accelerating the indebtedness under the credit agreement and terminating all commitments to lend under the credit agreement. If the indebtedness under the credit agreement is accelerated, a default will occur under the indentures for the 12 3/8% Notes, the 11 3/4% Notes or the 11 1/4% Notes. Consequently, whether a default under the 13 1/2% Notes indenture results in a default under the indentures for the 12 3/8% Notes, the 11 3/4% Notes, or the 11 1/4% Notes depends on the actions of the lenders under the credit agreement. If the lenders under the credit agreement do not accelerate the indebtedness under the credit agreement, the default under the 13 1/2% Notes indenture will have no effect under the credit agreement or the indentures for the 12 3/8% Notes, the 11 3/4% Notes, or the 11 1/4% Notes. We cannot predict what actions (if any) any of our lenders or noteholders would take following a default under the 13 1/2% Notes. For additional possible implications of a default under the 13 1/2% Notes see "Certain Known Events, Trends, Uncertainties, and Risk Factors." Standby Equity Commitments In December of 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. Pursuant to the terms of the Standby Purchase Agreements, the purchasers committed to purchase up to 2.5 million shares of our common stock, at a price of $6.00 per share, if, as, and when requested by us at any time or from time to time prior to December 15, 2001. Under each of the Standby Purchase Agreements, we may only require the purchasers to purchase these shares if we believe that such capital is necessary to maintain, reestablish, or enhance Chemicals' borrowing ability under its revolving credit facilities or to satisfy any requirement thereunder to raise additional equity. To induce the purchasers to enter into the Standby Purchase Agreements, we issued warrants to purchase an aggregate of 300,000 shares of our common stock to the purchasers at an exercise price of $6.00 per share. Under the Standby Purchase Agreements, we are obligated to issue additional warrants to purchase up to 300,000 additional shares of our common stock to the purchasers if, as, and when they purchase shares of our common stock under the Standby Purchase Agreements. We do not believe that the Standby Purchase Agreements would provide any meaningful assistance in resolving issues presented by the conversion of our 13 1/2% Notes to cash interest in early 2002. Saskatoon Facility In July of 1997, Sterling Pulp Chemicals (Sask) Ltd., 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 indebtedness under the Saskatoon credit agreement is secured by substantially all of the assets of this subsidiary, including the Saskatoon facility. The Saskatoon credit agreement requires that certain amounts of "Excess Cash Flow" be used to prepay amounts outstanding under the term portion of the credit facility. A prepayment in the amount of approximately Cdn. $7.1 million was made in September of 2000 pursuant to this obligation. The Saskatoon credit agreement provides a revolving credit facility of Cdn. $8 million to be used by our Saskatoon subsidiary solely for its general corporate purposes. No borrowings were outstanding under the Saskatoon revolving credit facility as of September 30, 2000. We believe the credit available under the Saskatoon revolving credit facility, when added to internally generated funds and other sources of capital, will be sufficient to meet our Saskatoon subsidiary's liquidity needs for the reasonably foreseeable future, although we can give no assurances to that effect. Because of restrictions in the Saskatoon credit agreement, we will generally not have access to the cash flows of our Saskatoon subsidiary. In addition, because of its designation as an "Unrestricted Subsidiary" under our credit 25 28 agreement and the indentures for the 13 1/2% Notes, the 12 3/8% Notes, the 11 3/4% Notes, and the 11 1/4% Notes, our Saskatoon subsidiary's results are not considered in determining compliance with the covenants contained therein. The Saskatoon credit agreement contains provisions which restrict the payment of advances, loans, and dividends from our Saskatoon subsidiary to us or Chemicals. The most restrictive of these covenants limits such payments during fiscal 2001 to approximately $1 million, plus any amounts due to us from our Saskatoon subsidiary under the intercompany tax sharing agreement. Working Capital Working capital at September 30, 2000 was $84 million, a decrease of $7 million from September 30, 1999. This increase was the result of the following changes:
Current Assets Current Liabilities -------------- ------------------- (In Millions) (In Millions) Cash and cash equivalents $ (7) Accounts payable $ (11) Accounts receivable 19 Accrued liabilities (11) Inventory 13 Current portion long-term debt 2 ----- Prepaid expenses (4) $ (20) Deferred income tax benefit (8) ----- $ (13)
( ) - Decrease in assets, increase in liabilities Cash Flow Net cash provided by our operations was $48 million in fiscal 2000, an increase of $62 million from the net cash used in our operations in fiscal 1999. This increase in net cash resulted primarily from a decrease in net losses between fiscal 2000 and fiscal 1999. Net cash flow used in our investing activities was $29 million in fiscal 2000 compared to $26 million in fiscal 1999. Net cash flow used in our financing activities was $26 million in fiscal 2000 compared to net cash flows provided by our financing activities of $43 million in fiscal 1999. This decrease in cash provided by financing activities was primarily due to the decrease in borrowings under our secured revolving credit facilities and principal payments on the term portion of the Saskatoon credit facility. Capital Expenditures Our capital expenditures were $29 million in fiscal 2000, $30 million in fiscal 1999, and $27 million in fiscal 1998. Our capital expenditures in fiscal 2000 were primarily related to the DSIDA project, a water disposal project, and routine safety, environmental, and replacement capital. Our capital expenditures in fiscal 1999 were primarily related to the acetic acid expansion, our project to reduce the levels of phenylacetylene, or "PA," in the styrene produced at our Texas City facility, and routine safety, environmental, and replacement capital. Our fiscal 1998 capital expenditures were primarily related to routine safety, environmental, and replacement capital. Capital expenditures are expected to be approximately $35 to $40 million in fiscal 2001, with about $25 to $28 million dedicated to our petrochemicals business and $10 to $12 million dedicated to our pulp chemicals business. These capital expenditures will primarily be for process enhancements for styrene and routine safety, environmental, and replacement capital. Our capital expenditures for environmentally-related prevention, containment, and process improvements were $1 million and $6 million for fiscal 2000 and fiscal 1999, respectively. We anticipate spending approximately $4 million on these types of expenditures during fiscal 2001. During fiscal 2000 and fiscal 1999, we did not incur any other infrequent or non-recurring material environmental expenditures which were required under existing environmental regulations. See "Certain Known Events, Trends, Uncertainties, and Risk Factors." NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," and No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," establish 26 29 accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. We adopted these statements as of October 1, 2000. The transition adjustment related to the adoption of these statements was not material. CERTAIN KNOWN EVENTS, TRENDS, UNCERTAINTIES, AND RISK FACTORS The amount of our outstanding indebtedness is substantial and may limit our ability to fund future working capital needs and increase our exposure during adverse economic conditions. Additionally, our debt level could prevent us from fulfilling our obligations under our indebtedness. Our substantial indebtedness of $964 million and deficiency in assets of $548 million at September 30, 2000 could have important negative consequences. For example, it could: o make it more difficult for us to satisfy our obligations with respect to all of our indebtedness; o make us more vulnerable to a continued downturn in our industry or a downturn in the economy in general; o require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, and other general corporate requirements; o limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate; o impact the availability of raw materials and financial terms of our business with suppliers; o place us at a competitive disadvantage compared to our competitors that have less debt; and o limit our ability to borrow additional funds. The covenants in our debt instruments restrict our flexibility. The covenants in our indentures and credit agreement restrict our ability to: o incur indebtedness; o pay dividends and make other restricted payments or investments; o sell assets; o make capital expenditures; o engage in certain mergers and acquisitions; and o refinance existing indebtedness. Despite current indebtedness levels, we may still be able to incur substantially more debt, which could further exacerbate the risks described above. The terms of the agreements governing our indebtedness restrict but do not prohibit us from incurring more debt. As of September 30, 2000, Chemicals had additional borrowing capacity under its secured revolving credit facilities of up to approximately $118 million. If new debt is added to our current debt levels, the related risks that we now face could increase. Factors beyond our control may impact our ability to meet our debt service requirements. Our ability to meet our debt service requirements will depend on our future performance, which in turn is dependent upon conditions in the global markets for our products, the global economy generally, and other factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to Chemicals under its secured revolving credit facilities in amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. Moreover, we may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we are unable to make scheduled debt payments or comply with the other provisions of our debt instruments, our various lenders will be permitted under certain circumstances to accelerate the maturity of the indebtedness owing to them and exercise other remedies provided for in those instruments and under applicable law. 27 30 Chemicals may be unable to pay dividends to Holdings, which may prevent Holdings from fulfilling its obligations under its 13 1/2% Notes and may lead to a default under our debt instruments or a change in control. The dividend restrictions in the indentures governing the 12 3/8% Notes, the 11 3/4% Notes, and the 11 1/4% Notes allow Chemicals to pay dividends to Holdings in connection with the required interest payments on the 13 1/2% Notes only if the ratio of the consolidated EBITDA of Chemicals and certain of its subsidiaries to their interest expense is 2.0 to 1.0 or greater, on a trailing four quarter basis, after giving pro-forma effect to the dividend. Holdings currently has no source of funds to make interest payments on the 13 1/2% Notes other than dividends from Chemicals and must make the first cash interest payment on the 13 1/2% Notes on February 15, 2002. For the four quarters ended September 30, 2000, the consolidated EBITDA coverage ratio under these indentures was 1.5 to 1.0, significantly below the required ratio. Based on our anticipated consolidated interest expense for the four-quarter period ending December 31, 2001, Chemicals and its subsidiaries (excluding our subsidiary that conducts operations in Saskatoon) would need to generate approximately $190 million in consolidated EBITDA during that four-quarter period in order to pay a dividend to Holdings to make the required cash interest payment on February 15, 2002. While there is a possibility that Chemicals could generate sufficient EBITDA to pay dividends to Holdings for the purpose of paying one or more of the initial interest payments on the 13 1/2% Notes, we can give no assurances to that effect. Moreover, we believe that it is unlikely that Chemicals will generate sufficient EBITDA to pay dividends to Holdings every time an interest payment becomes due on the 13 1/2% Notes through their maturity in 2008. In the event that the consolidated EBITDA coverage ratio is insufficient to make the required dividends, we would need to pursue other permissible methods of distributing cash to or otherwise acquiring cash for Holdings. However, the number of permissible methods of distributing cash to or acquiring cash for Holdings, or otherwise reducing the risk of a cash interest payment default on the 13 1/2% Notes, are limited in scope and amount and no assurances can be given that any such permissible method will be available or sufficient. If Holdings fails to make a required interest payment on the 13 1/2% Notes, the holders would have certain remedies available to them under the indenture for the 13 1/2% Notes, including the option of accelerating the maturity of the 13 1/2% Notes. A default under the 13 1/2% Notes will not, in and of itself, cause a default under the indentures for the 12 3/8% Notes, the 11 3/4% Notes, or the 11 1/4% Notes. However, a default under the 13 1/2% Notes will cause a default under Chemicals' credit agreement, giving the lenders under our credit agreement the option of accelerating the indebtedness under Chemicals' credit agreement and terminating all commitments to make additional loans. If the indebtedness under Chemicals' credit agreement is accelerated, a default will occur under the indentures for the 12 3/8% Notes, the 11 3/4% Notes, and the 11 1/4% Notes. Consequently, whether a default under the indenture for the 13 1/2% Notes by itself will result in a default under the indentures for the 12 3/8% Notes, the 11 3/4% Notes, or the 11 1/4% Notes depends on the actions of the lenders under Chemicals' credit agreement. We cannot predict what actions (if any) any of our lenders or noteholders would take following a default under the 13 1/2% Notes. In addition, the exercise of certain remedies available to the holders of the 13 1/2% Notes or the lenders under Chemicals' credit agreement following a failure to pay cash interest on the 13 1/2% Notes could result in a change of control under Chemicals' credit agreement and each of our indentures and defaults under each of those documents. We may be unable to repurchase our notes upon a change of control, and a change of control may trigger defaults under our debt instruments. All of the capital stock of Chemicals is pledged to secure the 13 1/2% Notes and Chemicals' fixed assets revolver. An event of default under the indenture for the 13 1/2% Notes or our fixed assets revolver may prompt those lenders to foreclose upon Chemicals' stock. Among other things, that foreclosure would likely constitute a change of control under Chemicals' credit agreement 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. Upon the occurrence of this type of change of control, Holdings and Chemicals are required under Chemicals' indentures to offer to repurchase all of their respective notes. It is possible that we will not have sufficient funds at the time of a change of control to make the required repurchases, which would result in a default under Chemicals' indentures and Chemicals' credit agreement. In addition, a change of control under our indentures will result in a default under Chemicals' credit agreement, and other provisions of Chemicals' credit agreement prohibit Chemicals from repurchasing any of its notes in connection with a change of control, meaning that, in the absence of amendments to or waivers under Chemicals' credit agreement, Chemicals could not purchase any of its notes without violating the terms of its credit agreement. As a result, complying with the terms of Chemicals' credit agreement could result in its failure to purchase its notes tendered under the offer to repurchase, which would cause a default under each of our indentures. On the other hand, if Chemicals purchased any of its notes in violation of the prohibition contained in Chemicals' credit agreement, a default would occur under Chemicals' credit agreement which, in turn, would result in a default under each of our indentures. Some important corporate events, such as leveraged recapitalizations that would 28 31 increase the level of our indebtedness, would not constitute a change of control event and would not trigger the required offer to repurchase under our indentures. The industries in which we participate are cyclical and depressed market conditions for our major products can negatively affect our business and make it difficult for us to repay our debts. Demand for our petrochemicals and pulp products are cyclical and are influenced by, among other things, the health of the global economy and changes in overall supply relative to demand. An economic slowdown or a prolonged downturn in our petrochemicals markets will impact both the sales volumes and sales prices of our products and could have a material adverse effect on our financial results. As prices decline, our profit margins generally decrease, which adversely affects our business and our ability to pay interest and principal on our indebtedness. Large global capacity additions of styrene and acrylonitrile were completed between 1997 and 2000. For styrene, approximately eight billion pounds of net new capacity was added and, for acrylonitrile, approximately two billion pounds of net new capacity was added. Further capacity additions for both styrene and acrylonitrile are planned in fiscal 2001 and later years. Further, reduced operating rates at pulp mills have reduced the rate of growth in demand for our pulp chemicals products and services. The resulting impact on prices and margins negatively impacted our results in fiscal 1997, 1998, and 1999, and could negatively impact our results in the future. Although during the first half of fiscal 2000 there was some improvements in the markets for styrene, these positive conditions have since deteriorated and we can give no assurances whether conditions will improve or worsen in the future. If the markets for our primary products do not improve significantly, we may be unable to fulfill our obligations to repay the principal on our indebtedness when that indebtedness matures. We may need to refinance all or a portion of our indebtedness on or before maturity, but we may be unable to do so on commercially reasonable terms or at all. If market conditions for our products decline significantly from current levels, we may be unable to make scheduled interest payments on our indebtedness. The petrochemicals, acrylic fibers, and pulp chemicals industries are highly competitive. Many of our competitors, particularly in the petrochemicals industry, are larger and have substantially greater financial resources than we have. We compete with some of the world's largest chemical companies, many of whom, in contrast to us, supply much of their own raw materials requirements. In addition, a significant portion of our business is based upon widely available technology. The entrance of new competitors into the industry or the addition by existing competitors of new capacity may reduce our ability to maintain profit margins or preserve our market share, even during periods of increased demand for our products. Our business may be adversely affected by deregulation of electric power or if we are unable to obtain raw materials and energy resources from third-party suppliers at reasonable prices or on acceptable terms. For most of our products, the combined cost of raw materials and energy resources, including utilities in the case of pulp chemicals, is far greater than all other costs of production combined. Therefore, an adequate supply of raw materials at reasonable prices and on acceptable terms is critical to the success of our business. If we are unable to obtain raw materials at reasonable prices and on acceptable terms, our results of operations would be negatively impacted by an increase in our costs or a decrease in our capacity or both. Most of the raw materials we use are supplied by others, and many of them are subject to wide price fluctuations for a variety of reasons beyond our control. For example, changes in the availability of these products may result from major capacity additions or significant facility operating problems. The current trend towards deregulation of electric power makes our future cost for electric power uncertain. Electricity is the largest cost of manufacturing sodium chlorate. In addition, natural gas is a significant cost of production for some of our petrochemicals and pulp chemicals, as well as for our suppliers of raw materials. The recent significant increase in natural gas prices has increased our total costs of production, and we may not be able to recover this increase in costs through higher selling prices. We do not currently hedge against changes in natural gas prices. We can give no assurances that we will continue to be able to secure adequate supplies of electric power or any of our raw materials or energy resources at reasonable prices or on acceptable terms. Our industry is subject to extensive environmental regulation, which creates uncertainty regarding future environmental expenditures and liabilities. Our operations involve the handling, production, transportation, treatment, and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental and health and safety laws, 29 32 regulations, and permit requirements. This regulation, and the potential for further expanded regulation, may increase our costs and thereby negatively affect our business. Environmental permits required for our operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements and the potential for further expanded regulation may increase our costs and thereby negatively affect our business. Changing and increasingly strict environmental requirements can affect the manufacturing, handling, processing, distribution, and use of our products and, if so affected, our business and operations may be materially and adversely affected. In addition, changes in these requirements may cause us to incur substantial costs in upgrading or redesigning our facilities and processes, including our waste treatment, storage, disposal, and other waste handling practices and equipment. For these reasons, we are uncertain as to the amount of our future environmental expenditures and liabilities. The Texas Natural Resource Conservation Commission has proposed new regulations requiring significant reductions of nitrogen oxide and particulate matter which, if enacted, will apply to our Texas City facility. These proposed regulations are subject to the approval of the United States Environmental Protection Agency, which is expected to be granted in late December of 2000 or early in 2001. Under the current form of these proposed regulations, we would be required to reduce emissions of nitrogen oxide at our Texas City facility by more than 90%. Based on the current form of these proposed regulations, we estimate that we will be required to make between $30 million and $50 million in capital improvements at our Texas City facilities, with the vast majority of these capital expenditures being required in fiscal 2002, 2003, and 2004. The regulatory outlook for our pulp chemicals business is uncertain. Our pulp chemicals business is sensitive to environmental regulations. Regulations restricting, but not completely banning, absorbable organic halides and other chlorine derivatives in bleach plant effluent have a favorable effect on our pulp chemicals business. Conversely, any significant ban on all chlorine-containing compounds in the pulp bleaching process could have a material adverse effect on our financial condition and results of operations. British Columbia has adopted regulations that require the elimination of the use of all chlorine products, including chlorine dioxide, in the pulp bleaching process by the year 2002, although the pulp and paper industry is working to change this regulation. We are subject to many operating risks, some of which may not be covered by insurance. A business risk inherent in all chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees, and nearby landowners and occupants. While we attempt to operate our facilities responsibly and in compliance in all material respects with all applicable environmental and health and safety requirements, we may face expenses and liabilities as a result of our past or future operations. Some risk of environmental costs and liabilities is inherent in our operations and products, as it is with other companies engaged in similar businesses, and we maintain insurance at levels that we believe are typical for our industry. A major incident or other event at any of our facilities, however, could result in liabilities in excess of our insurance coverages or uncovered liabilities or claims beyond the financial ability of the insurance carrier to pay. Current and future legal proceedings may have unfavorable outcomes. We are currently a party to several legal proceedings, and additional legal proceedings could be filed against us in the future. We are not able to predict the final outcome of the current proceedings, and we cannot guarantee that the ultimate resolution of current or future proceedings will not have a material adverse effect on us. For more information, see Note 6 of the Notes to Consolidated Financial Statement included in this Form 10-K. We depend upon the continued operation of our Texas City facility. All of the petrochemicals we manufacture, including all of our styrene, acrylonitrile, and acetic acid, are produced at our Texas City facility. Significant unscheduled downtime at our Texas City facility could have a material adverse affect on our results. Downtime can occur for a variety of reasons, including equipment breakdowns, interruptions in the supply of raw materials, power failures, natural forces, or other normal hazards associated with the production of petrochemicals. Although we maintain business interruption insurance, we cannot guarantee that a significant interruption in the operation of our Texas City facility would be covered by this insurance or would not otherwise have a material adverse effect on us. 30 33 We may have difficulty forming strategic joint ventures. An element of our long-term business strategy is to pursue attractive strategic joint ventures. However, restrictions under our indentures and credit agreement limit our ability to do so, such as restrictions on our ability to sell assets, incur indebtedness, create liens, and make investments and other restricted payments. We depend upon our long-term contracts and significant customers. We sell significant portions of our acrylonitrile and styrene production and all of our acetic acid, methanol and plasticizers production under long-term contracts. These contracts are intended to provide stability in the event that the demand for or prices of these products decline significantly, but also limit our ability to take full advantage of attractive market conditions during periods of higher prices for these products. During fiscal 2000, a significant portion of the production from our Texas City facility was dedicated to multi-year contracts with Solutia, Bayer, BP Chemicals, and BASF. If the markets for these products are depressed, the loss of one or more of these customers or a material reduction in the amount of product purchased by one or more of them could have a material adverse effect on us. Solutia is building an acrylonitrile manufacturing facility in Chocolate Bayou, Texas and, in anticipation of the completion of this facility, terminated its acrylonitrile purchase agreement with us effective September 1, 2000. In addition, our styrene conversion agreement with Bayer expires on December 31, 2000. We do not believe the termination of these contracts will have a material adverse effect on us, although we can give no assurance to that effect. We face risks related to our foreign operations that may negatively affect our business. Approximately 16% of our fiscal 2000 revenues were derived from our Canadian-based pulp chemicals business and approximately 43% were derived from export sales of our products. Our international operations and exports to foreign markets make us subject to a number of special risks such as: o currency exchange rate fluctuations; o foreign economic conditions; o trade barriers; o exchange controls; o national and regional labor strikes; o political risks and risks of increases in duties; o taxes; o governmental royalties; and o changes in laws and policies governing operations of foreign-based companies. The occurrence of any one or a combination of these factors may increase our costs or have other negative effects on our business. In addition, earnings of foreign subsidiaries and intercompany payments are subject to foreign income tax rules that may reduce cash flow available to meet our required debt service and other obligations. As we derive most of our pulp chemicals revenues from production and sales by our subsidiaries within Canada, we have organized our subsidiary structure and our operations in part based on assumptions regarding various Canadian tax laws, currency exchange laws, capital repatriation laws, and other relevant laws. While we believe that these assumptions are correct, we cannot guarantee that Canadian taxing or other authorities will reach the same conclusion. If our assumptions are incorrect, or if the Canadian government changes or modifies such laws or the current interpretations thereof, we may suffer material adverse tax and financial consequences. A portion of our expenses and sales are denominated in Canadian dollars and, accordingly, our revenues, cash flows, and earnings may be affected by fluctuations in the exchange rate between the United States dollar and the Canadian dollar, which may also have material adverse tax consequences. These currency fluctuations could have a material adverse impact on us as increases in the value of the Canadian dollar relative to the United States dollar have the effect of increasing the United States dollar equivalent of cost of goods sold and other expenses with respect to our Canadian production facilities. 31 34 Our right to directly participate in the earnings of our subsidiaries is limited by our organizational structure and our debt instruments. All of our operations are conducted, and all of our assets are owned, by our subsidiaries (including Chemicals). Our right, and thus the right of our stockholders, to participate in any distribution of earnings or assets of our subsidiaries is subject to the claims of creditors of our subsidiaries. In addition, our subsidiaries are parties to various debt documents and other agreements that limit their ability to incur additional indebtedness and to provide funds to us by way of dividends, distributions, and advances. A substantial portion of Chemicals' operations are conducted, and a substantial portion of Chemicals' assets are owned, by its subsidiaries. The right of Chemicals, and thus our right to participate in any distribution of earnings or assets of Chemicals' subsidiaries is subject to the claims of creditors of such subsidiaries. Chemicals' subsidiaries are parties to various debt documents and other agreements that limit their ability to incur additional indebtedness and to provide funds to Chemicals by way of dividends, distributions, and advances. Labor Relations Approximately 35% of our employees are covered under various union contracts. Approximately 20% of our employees are covered by one union contract at our Texas City facility which expires on May 1, 2002. Approximately 7% of our employees are covered by one union contract at our Saskatoon facility which expires in September 30, 2001. Although we believe our relationship with our employees is generally good, a strike by one or more of the unions representing our employees could have a material adverse effect on our financial condition, results of operations, or cash flows. RESULTS OF OPERATIONS The following table sets forth revenues, gross profit, and operating income (loss) for our segments for the years ended September 30, 2000, 1999, and 1998.
YEAR ENDED SEPTEMBER 30, ------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ (Dollars in Millions) REVENUES: Petrochemicals .................... $ 867 $ 531 $ 622 Pulp Chemicals .................... 211 190 201 ------------ ------------ ------------ $ 1,078 $ 721 $ 823 ============ ============ ============ GROSS PROFIT: Petrochemicals .................... $ 93 $ -- $ 31 Pulp Chemicals .................... 48 38 46 ------------ ------------ ------------ $ 141 $ 38 $ 77 ============ ============ ============ OPERATING INCOME (LOSS): Petrochemicals .................... $ 5 $ (64) $ (3) Pulp Chemicals .................... 35 27 36 ------------ ------------ ------------ $ 40 $ (37) $ 33 ============ ============ ============
COMPARISON OF FISCAL 2000 TO FISCAL 1999 Our revenues were approximately $1,078 million in fiscal 2000, an increase of approximately 50% from the approximately $721 million in revenues we received in fiscal 1999. This increase in our revenues resulted primarily from increased styrene sales prices and sales volumes and, to a lesser extent, increased acrylonitrile, sodium chlorate, and methanol sales prices and sales volumes. We recorded a net loss of approximately $90.0 million, or $7.13 per share, for fiscal 2000 compared to the net loss of approximately $112.7 million, or $8.94 per share, that we recorded for fiscal 1999. Our improved performance was primarily due to increased styrene margins and sales volumes and, to a lesser extent, increased acrylonitrile and sodium chlorate margins and sales volumes. Our improved performance was partially offset by increased interest expense and a $60 million non-cash charge related to the write down of our acrylic fibers business production assets. Our performance in fiscal 1999 was negatively impacted by a $26 million non-cash charge related to the write down of our methanol production assets. 32 35 Revenues, Gross Profit, and Operating Income (Loss) Petrochemicals. Revenues from our petrochemicals operations were approximately $867 million in fiscal 2000, an increase of approximately 63% from the approximately $531 million in revenues we received from these operations in fiscal 1999. This increase in revenues resulted primarily from increased styrene sales prices and sales volumes and, to a lesser extent, increased acrylonitrile and methanol sales prices and sales volumes. Our petrochemicals operations recorded operating income of approximately $5 million for fiscal 2000, compared to operating losses of approximately $64 million from our petrochemicals operations for fiscal 1999. This increase in income resulted primarily from increased styrene margins and sales volumes and, to a lesser extent, increased acrylonitrile margins and sales volumes, partially offset by a larger impairment expense recorded in fiscal 2000 than that recorded in fiscal 1999. Revenues from our styrene operations were approximately $492 million in fiscal 2000, an increase of approximately 100% from the approximately $246 million in revenues we received from these operations in fiscal 1999. Average sales prices for our styrene increased approximately 78% in fiscal 2000 from average sales prices for our styrene in fiscal 1999. In addition, sales volume of our styrene increased approximately 17% for fiscal 2000 from sales volumes of our styrene for fiscal 1999. These increases in revenues, sales prices, and volumes for our styrene resulted primarily from the combination of stronger market demand, operating problems experienced at several of our competitors, and generally low inventory levels worldwide. However, styrene market conditions peaked in April of 2000 with spot prices of $0.48 per pound and decreased to $0.31 per pound as of September 30, 2000. During fiscal 2000, prices for benzene, one of the primary raw materials for styrene, were approximately 56% higher than the prices we paid for benzene in fiscal 1999 and prices for ethylene, the other primary raw material for styrene, were approximately 47% higher than the prices we paid for ethylene in fiscal 1999. Margins on our styrene sales during fiscal 2000 increased from margins on our styrene sales during fiscal 1999, primarily as a result of higher sales prices, which more than offset our higher raw materials costs. Revenues from our acrylonitrile and derivatives operations, including sodium cyanide and TBA, were approximately $164 million in fiscal 2000, an increase of approximately 76% from the approximately $93 million in revenues we received from these operations in fiscal 1999. Average sales prices for our acrylonitrile increased approximately 122% in fiscal 2000 from average sales prices for our acrylonitrile in fiscal 1999. Sales volume of our acrylonitrile increased approximately 19% in fiscal 2000 from sales volumes of our acrylonitrile in fiscal 1999. These increases in revenues, sales prices, and volumes for our acrylonitrile resulted primarily from the combination of stronger market demand, operating problems experienced at several of our competitors, and generally low inventory levels worldwide. During fiscal 2000, prices for propylene, one of the primary raw materials for acrylonitrile, were approximately 79% higher than the prices we paid for propylene in fiscal 1999 and prices for ammonia, the other primary raw material for acrylonitrile, were approximately 27% higher than the prices we paid for ammonia in fiscal 1999. Margins on our acrylonitrile sales during fiscal 2000 increased from the margins we received in fiscal 1999, primarily as a result of higher sales prices, which more than offset our higher raw materials costs. Revenues from our other petrochemicals operations, including acetic acid, plasticizers, and methanol, were approximately $141 million in fiscal 2000, an increase of approximately 12% from the approximately $126 million in revenues we received from these operations in fiscal 1999. This increase in revenues was primarily due to increased methanol volumes and sales prices during the first nine months of fiscal 2000. Our other petrochemicals operations reported a decrease in operating earnings in fiscal 2000 compared to fiscal 1999. This decrease in operating earnings resulted primarily from a reduction in margins for our plasticizers and acetic acid caused by higher raw material and energy costs. Revenues from our acrylic fibers operations were approximately $70 million in fiscal 2000, an increase of approximately 4% from the approximately $67 million in revenues we received from these operations in fiscal 1999. Sales volumes of our acrylic fibers in fiscal 2000 increased 6% from those realized during fiscal 1999. Sales prices for our acrylic fibers in fiscal 2000 remained approximately the same with those realized in fiscal 1999. The performance of our acrylic fibers operations in fiscal 2000 was below the performance of these operations in fiscal 1999 due to weak market conditions, imports from foreign suppliers, and higher acrylonitrile and energy costs. Pulp Chemicals. Revenues from our pulp chemicals operations were approximately $211 million for fiscal 2000, an increase of approximately 11% from the approximately $190 million in revenues we received from these operations in fiscal 1999. Sales volumes of our sodium chlorate, our primary pulp chemical product, in fiscal 2000 increased approximately 7% from those realized in fiscal 1999. Sales prices of our sodium chlorate in fiscal 2000 increased approximately 4% from those realized in fiscal 1999. Our pulp chemicals operations recorded operating earnings of approximately $35 million in fiscal 2000, compared to operating earnings of approximately $27 million in fiscal 1999. 33 36 These increases in revenues, sales volumes, sales prices, and operating earnings resulted primarily from increased operating rates at pulp mills and the continued conversion to elemental chlorine free bleaching at pulp mills. Selling, General, and Administrative Expenses Our SG&A expenses in fiscal 2000 were approximately $39 million, whereas we had SG&A expenses of approximately $38 million in fiscal 1999. Our SG&A expenses were impacted favorably in fiscal 2000 by reduced costs for upgrades of certain of our information technology systems, including year 2000 compliance activities. However, these positive impacts were more than offset by increased costs in fiscal 2000 primarily related to an increase in variable compensation costs as a result of improved business performance. Other Expense We had other expense of approximately $2 million in fiscal 2000 related to workforce reductions in our acrylic fibers operations. We had other expense of approximately $11 million in fiscal 1999 from one-time non-cash charges related to early retirement programs, benefit changes, and workforce reductions. Interest and Debt Related Expenses Our interest and debt related expense was approximately $122 million for fiscal 2000 compared to approximately $104 million in fiscal 1999. This increase resulted primarily from the higher interest rates we paid on some of our indebtedness after we refinanced that indebtedness in July of 1999 and the payment of interest on additional indebtedness we incurred at that time. Provision (Benefit) for Income Taxes Our provision for income taxes in fiscal 2000 was approximately $5 million, reflecting the foreign tax provision on the income of our Canadian subsidiaries. Due to the recurring losses of our United States subsidiaries, in fiscal 2000 we recorded a valuation allowance in an amount equal to the benefit for income taxes generated by the losses from our United States subsidiaries. Our benefit for income taxes in fiscal 1999 was approximately $35 million. Extraordinary Item We had a $4 million after-tax ($6 million pre-tax) extraordinary item in fiscal 1999 related to unamortized debt issue costs which were expensed in fiscal 1999 as a result of the refinancing of some of our indebtedness in July of 1999. COMPARISON OF FISCAL 1999 TO FISCAL 1998 Our revenues were approximately $721 million in fiscal 1999, a decrease of approximately 12% from our revenues of approximately $823 million in fiscal 1998. This decrease in our revenues resulted primarily from lower acrylonitrile, sodium chlorate, and methanol sales prices and reduced acrylonitrile sales volumes, partially offset by increased styrene sales volumes. We recorded a net loss of approximately $112.7 million, or $8.94 per share, for fiscal 1999 compared to a net loss of approximately $48.6 million, or $3.99 per share, that we recorded for fiscal 1998. This increase in net loss resulted primarily from: o reduced acrylonitrile, sodium chlorate, and methanol margins; o decreased acrylonitrile sales volumes; o turnarounds of our styrene and acetic acid facilities; o weak markets in acrylic fibers; o expense of $26.4 million related to the impairment of our methanol production assets; o increased costs associated with early retirement programs, benefit changes, and workforce reductions; o and an extraordinary loss related to unamortized debt issue costs as a result of the refinancing of some of our indebtedness on July 23, 1999. 34 37 Revenues, Gross Profit, and Operating Income (Loss) Petrochemicals. Revenues from our petrochemicals operations were approximately $531 million in fiscal 1999, a decrease of approximately 15% from the approximately $622 million in revenues we received from these operations in fiscal 1998. This decrease in revenues resulted primarily from reduced acrylonitrile, acrylic fibers, and methanol sales prices and decreased acrylonitrile sales volumes. The economic conditions in Asia negatively impacted market conditions in fiscal 1999, particularly for our styrene, acrylonitrile, and acrylic fibers products. Our petrochemicals operations recorded operating losses of approximately $64 million for fiscal 1999, compared to operating losses of approximately $3 million from our petrochemicals operations for fiscal 1998. The increased losses resulted primarily from weaker operational performance in acrylonitrile, acrylic fibers, and methanol and the expense related to the impairment of our methanol plant. Revenues from our styrene operations were approximately $246 million in fiscal 1999, an increase of approximately 4% from the approximately $237 million in revenues we received from these operations in fiscal 1998. Sales prices for our styrene were approximately the same in fiscal 1999 and fiscal 1998. Sales volume of our styrene increased approximately 3% for fiscal 1999 from sales volumes of our styrene for fiscal 1998. This increase in sales volumes of our styrene resulted primarily from improved market conditions in the fourth quarter of fiscal 1999, particularly in Asia. During fiscal 1999, prices for benzene, one of the primary raw materials for styrene, were approximately 7% lower than the prices we paid for benzene in fiscal 1998 and prices for ethylene, the other primary raw material for styrene, were approximately 6% higher than the prices we paid for ethylene in fiscal 1998. Margins on our styrene sales during fiscal 1999 increased from margins on our styrene sales during fiscal 1998, primarily as a result of lower raw materials costs and improved market conditions in the fourth quarter of fiscal 1999. Revenues from our acrylonitrile and derivatives operations, including sodium cyanide and TBA, were approximately $93 million in fiscal 1999, a decrease of approximately 30% from our fiscal 1998 revenues from these operations of approximately $132 million. Sales prices for our acrylonitrile decreased approximately 32% in fiscal 1999 from sales prices for our acrylonitrile in fiscal 1998. This decrease in sales prices resulted primarily from weaker market conditions, particularly in Asia. Sales volume of our acrylonitrile decreased approximately 18% in fiscal 1999 from sales volumes of our acrylonitrile in fiscal 1998. During fiscal 1999, prices for propylene, one of the primary raw materials for acrylonitrile, were approximately 25% lower than the prices we paid for propylene in fiscal 1998 and prices for ammonia, the other primary raw material for acrylonitrile, were approximately 9% lower than the prices we paid for ammonia in fiscal 1998. Margins on our acrylonitrile sales during fiscal 1999 decreased from the margins on our acrylonitrile sales during fiscal 1998, primarily as a result of lower acrylonitrile sales prices, which more than offset our lower raw materials costs. Revenues from our acrylic fibers operations in fiscal 1999 were approximately $67 million, a decrease of approximately 33% from the approximately $100 million in revenues we received from these operations in fiscal 1998. Sales prices and volumes for our acrylic fibers decreased 10% and 25%, respectively, in fiscal 1999 compared to fiscal 1998. Performance of our acrylic fibers operations in fiscal 1999 continued to be negatively impacted by weak market conditions and imports from European suppliers. Revenues from our other petrochemicals operations, including acetic acid, plasticizers, and methanol, were approximately $126 million for fiscal 1999, a decrease of approximately 17% from the approximately $152 million in revenues we received from these operations in fiscal 1998. This decrease in revenues resulted primarily from a 24% decrease in methanol sales prices which resulted from overcapacity in the global methanol market. Our other petrochemicals products reported a decrease in operating earnings in fiscal 1999 compared to fiscal 1998, primarily due to weaker margins in methanol. Pulp Chemicals. Revenues from our pulp chemicals operations were approximately $190 million for fiscal 1999, a decrease of approximately 5% from the approximately $201 million in revenues we received from these operations in fiscal 1998. This decrease in revenues resulted primarily from the approximately 8% decrease in sales prices for our sodium chlorate in fiscal 1999 compared to sales prices for our sodium chlorate in fiscal 1998. This decrease in sales prices of sodium chlorate resulted primarily from an increase in North American sodium chlorate capacity and generally weak market conditions in the pulp and paper industry. Our pulp chemicals operations recorded operating earnings of approximately $27 million in fiscal 1999, a decrease of approximately 25% from the approximately $36 million in operating earnings we recorded from these operations in fiscal 1998. This decrease in operating earnings resulted primarily from reduced sodium chlorate sales prices in fiscal 1999, which were partially offset by slightly increased sodium chlorate sales volumes. 35 38 Selling, General, and Administrative Expenses Our SG&A expenses in fiscal 1999 and fiscal 1998 remained constant at approximately $38 million. Our SG&A expenses were impacted favorably in fiscal 1999 by cost reduction programs. However, these positive impacts were offset by increased costs in fiscal 1999 for upgrades of certain of our information technology systems, including year 2000 compliance activities. Other Expense We had other expense of approximately $11 million in fiscal 1999 from our one-time non-cash charges related to early retirement programs, benefit changes, and workforce reductions. We had other expense of approximately $6 million in fiscal 1998 which was primarily related to the voluntary severance programs we offered in January and April of 1998 at our Texas City facility. Interest and Debt Related Expenses Our interest and debt related expenses for fiscal 1999 and fiscal 1998 remained constant at approximately $104 million. Benefit for Income Taxes Our benefit for income taxes in fiscal 1999 was approximately $35 million, with an effective tax rate of approximately 25%, whereas in fiscal 1998 our benefit for income taxes was approximately $26 million, with an effective tax rate of approximately 36%. This increase in our benefit for income taxes resulted primarily from our pre-tax loss of approximately $141 million in fiscal 1999, compared to a pre-tax loss of approximately $72 million in fiscal 1998. Extraordinary Item We had a $4 million after-tax ($6 million pre-tax) extraordinary item in fiscal 1999 related to unamortized debt issue costs which were expensed in fiscal 1999 as a result of the refinancing of some of our indebtedness in July of 1999. 36 39 ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The table below provides information about our market sensitive financial instruments and constitutes a "forward-looking statement." Our major financial market risk exposure is changing interest rates, primarily in the United States. Interest rate swaps may be used to adjust interest rate exposure, when appropriate, based upon market conditions. A portion of our borrowings and transactions are denominated in foreign currencies which exposes us to market risk associated with exchange rate movements. All items described are non-trading and are stated in United States dollars.
FAIR VALUE EXPECTED MATURITY DATES SEPTEMBER (IN THOUSANDS) 2001 2002 2003 2004 2005 THEREAFTER TOTAL 30, 2000 -------- -------- -------- -------- -------- ---------- -------- -------- DEBT United States $ denominated $ 583 $ 1,531 $ 6,924 $ 51,784 $ 3,714 $ 892,039 $956,575 $755,015 Average interest rates - fixed -- -- -- -- -- 12.2% Average interest rates - variable (c) (c) (c) (a)(c) (c) Interest rate swaps(b) $ 13,393 $ -- $ -- $ -- $ -- $ -- $ -- Canadian $ denominated $ 1,997 $ 3,128 $ 2,450 $ -- $ -- $ -- $ 7,575 $ 7,575 Average interest rates - variable (c) (c) (c) -- -- --
(a) Borrowings under our fixed assets revolver bear interest, at our option, at an annual rate of either the "LIBOR Rate" plus 3.75% or the "Alternate Base Rate" plus 2.25%. Borrowings under our current assets revolver bear interest, at our option, at an annual rate of either the LIBOR Rate plus 3.00% or the Alternate Base Rate plus 1.50%. The "Alternate Base Rate" is equal to the greater of the "Base Rate" as announced from time to time by The Chase Manhattan Bank in New York, New York or the "Federal Funds Effective Rate" plus 1/2%. At September 30, 2000, the weighted average interest rate in effect for our fixed assets revolver was 10.6% and there were no amounts outstanding under our current assets revolver. (b) Expected maturity amounts represent notional amounts. Fair value of September 30, 2000 represents unrealized gain (loss). (c) The Saskatoon tranche A term loan, which is denominated in Canadian dollars, and the Saskatoon revolver borrowings bear interest, at Saskatoon's option, at an annual rate of either the "Bankers Acceptance Rate" or the "Base Rate" plus an "Applicable Margin" ranging from 1% to 2.5% depending upon Saskatoon's "Leverage Ratio". The Saskatoon tranche B term loan, which is denominated in United States dollars, bears interest, at Saskatoon's option, at an annual rate of either the "Eurodollar Rate" or the "Base Rate" plus an Applicable Margin ranging from 0% to 2.5% depending upon Saskatoon's Leverage Ratio. The "Base Rate" for the tranche A term loan and the Saskatoon revolver is equal to the greater of the Prime Rate for Canadian Dollar commercial loans made in Canada, as announced from time to time by the agent bank, or the rate for Canadian Dollar Bankers Acceptances accepted by the agent with a term to maturity of 30 days plus 1%. The "Base Rate" for the tranche B term loan is equal to the greater of the Prime Rate as announced from time to time by the agent bank, the "Federal Funds Effective Rate" plus 1/2% or the "Base CD Rate" plus 1%. At September 30, 2000, the interest rates in effect for the Saskatoon tranche A and tranche B term loans were 8.4% and 9.7%, respectively. 37 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS STERLING CHEMICALS HOLDINGS, INC. AND STERLING CHEMICALS, INC. Sterling Chemicals Holdings, Inc. Consolidated Statements of Operations for the years ended September 30, 2000, 1999, and 1998....................................................................... 40 Sterling Chemicals Holdings, Inc. Consolidated Balance Sheets as of September 30, 2000 and 1999............. 41 Sterling Chemicals Holdings, Inc. Consolidated Statements of Changes in Stockholders' Equity (Deficiency in Assets) for the years ended September 30, 2000, 1999, and 1998............................ 42 Sterling Chemicals Holdings, Inc. Consolidated Statements of Cash Flows for the years ended September 30, 2000, 1999, and 1998....................................................................... 43 Sterling Chemicals, Inc. Consolidated Statements of Operations for the years ended September 30, 2000, 1999, and 1998........................................................................................... 44 Sterling Chemicals, Inc. Consolidated Balance Sheets as of September 30, 2000 and 1999...................... 45 Sterling Chemicals, Inc. Consolidated Statements of Changes in Stockholder's Equity (Deficiency in Assets) for the years ended September 30, 2000, 1999, and 1998 .......................................... 46 Sterling Chemicals, Inc. Consolidated Statements of Cash Flows for the years ended September 30, 2000, 1999, and 1998........................................................................................... 47 Notes to Consolidated Financial Statements.................................................................. 48 Independent Auditors' Reports............................................................................... 70 STERLING CHEMICALS GUARANTORS Sterling Chemicals Guarantors Combined Statements of Operations for the years ended September 30, 2000, 1999, and 1998....................................................................... 72 Sterling Chemicals Guarantors Combined Balance Sheets as of September 30, 2000 and 1999..................... 73 Sterling Chemicals Guarantors Combined Statements of Changes in Stockholder's Equity for the years ended September 30, 2000, 1999, and 1998........................................................... 74 Sterling Chemicals Guarantors Combined Statements of Cash Flows for the years ended September 30, 2000, 1999, and 1998....................................................................... 75
38 41 Notes to Combined Financial Statements...................................................................... 76 Independent Auditors' Report................................................................................ 87 Report of Management....................................................................................... 88
39 42 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30, ------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ Revenues ........................................................ $ 1,078,351 $ 720,752 $ 822,590 Cost of goods sold .............................................. 937,460 682,594 745,323 ------------ ------------ ------------ Gross profit .................................................... 140,891 38,158 77,267 Selling, general, and administrative expenses ................... 39,327 37,649 38,515 Impairment of assets ............................................ 60,000 26,369 -- Other expense ................................................... 1,554 10,832 5,962 Interest and debt related expenses, net of interest income ...... 122,414 104,061 104,455 ------------ ------------ ------------ Loss before taxes and extraordinary item ........................ (82,404) (140,753) (71,665) Provision (benefit) for income taxes ............................ 4,560 (34,936) (25,546) ------------ ------------ ------------ Loss before extraordinary item .................................. (86,964) (105,817) (46,119) Extraordinary item, loss on early extinguishment of debt, net of tax .................................................. -- 4,212 -- ------------ ------------ ------------ Net loss ........................................................ (86,964) (110,029) (46,119) Preferred stock dividends ....................................... 2,996 2,683 2,460 ------------ ------------ ------------ Net loss attributable to common stockholders .................... $ (89,960) $ (112,712) $ (48,579) ============ ============ ============ Per share data: Loss before extraordinary item .................................. $ (7.13) $ (8.60) $ (3.99) Extraordinary item .............................................. -- (0.34) -- ------------ ------------ ------------ Net loss per common share ....................................... $ (7.13) $ (8.94) $ (3.99) ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 40 43 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, --------------------------- 2000 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ....................................................... $ 7,667 $ 14,921 Accounts receivable, net ........................................................ 160,294 141,059 Inventories ..................................................................... 83,726 70,464 Prepaid expenses ................................................................ 1,027 5,157 Deferred income tax benefit ..................................................... 8,470 16,888 ------------ ------------ Total current assets .......................................................... 261,184 248,489 Property, plant, and equipment, net ................................................ 318,626 402,723 Deferred income tax benefit ........................................................ 48,351 37,237 Other assets ....................................................................... 73,051 86,650 ------------ ------------ Total assets .................................................................. $ 701,212 $ 775,099 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) Current liabilities: Accounts payable ................................................................ $ 83,883 $ 72,961 Accrued liabilities ............................................................. 91,216 79,883 Current portion of long-term debt ............................................... 2,580 4,246 ------------ ------------ Total current liabilities ..................................................... 177,679 157,090 Long-term debt ..................................................................... 961,570 964,555 Deferred income tax liability ...................................................... 11,294 8,815 Deferred credits and other liabilities ............................................. 70,944 76,893 Common stock held by ESOP .......................................................... 3,519 2,946 Less: unearned compensation ....................................................... -- (745) Redeemable preferred stock ......................................................... 23,928 20,932 Commitments and contingencies (Note 6) ............................................. -- -- Stockholders' equity (deficiency in assets): Common stock, $.01 par value, 20,000,000 shares authorized, 12,307,000 shares issued and 12,094,000 outstanding at September 30, 2000; and 12,305,000 shares issued and 12,097,000 outstanding at September 30, 1999 ................ 123 123 Additional paid-in capital ...................................................... (542,712) (542,712) Retained earnings ............................................................... 28,099 118,490 Accumulated other comprehensive income .......................................... (30,736) (28,768) Deferred compensation ........................................................... (12) (58) ------------ ------------ (545,238) (452,925) Treasury stock, at cost, 213,000 and 208,000 shares at September 30, 2000 and 1999, respectively ........................................................ (2,484) (2,462) ------------ ------------ Total stockholders' equity (deficiency in assets) ........................... (547,722) (455,387) ------------ ------------ Total liabilities and stockholders' equity (deficiency in assets) ......... $ 701,212 $ 775,099 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 41 44 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) (AMOUNTS IN THOUSANDS)
ACCUMULATED ADDITIONAL OTHER COMMON STOCK PAID-IN RETAINED COMPREHENSIVE DEFERRED TREASURY SHARES AMOUNT CAPITAL EARNINGS INCOME COMPENSATION STOCK TOTAL --------- --------- --------- --------- ------------ --------- --------- --------- Balance, September 30, 1997 ..... 11,714 $ 120 $(542,485) $ 277,691 $ (21,124) $ -- $ (2,730) $(288,528) Comprehensive loss: Net loss ........................ -- -- -- (46,119) -- -- -- Other comprehensive loss, net of tax: Translation adjustment ........ -- -- -- -- (11,466) -- -- Pension adjustment ............ -- -- -- -- (90) -- -- Comprehensive loss ......... (57,675) Common stock issued in connection with the exercise of warrants ...... 345 3 -- -- -- -- -- 3 Preferred stock dividends ....... -- -- -- (2,460) -- -- -- (2,460) Treasury shares issued as restricted stock .............. 23 -- (48) -- -- (222) 270 -- Treasury shares issued to ESOP .. -- -- (168) -- -- -- 168 -- Revaluation of ESOP shares to independently appraised market value .................. -- -- -- 478 -- -- -- 478 Amortization of deferred compensation .................. -- -- -- -- -- 111 -- 111 Treasury stock purchases ........ (9) -- -- -- -- -- (108) (108) --------- --------- --------- --------- --------- --------- --------- --------- Balance, September 30, 1998 ..... 12,073 123 (542,701) 229,590 (32,680) (111) (2,400) (348,179) Comprehensive loss: Net loss ........................ -- -- -- (110,029) -- -- -- Other comprehensive income (loss), net of tax: Translation adjustment ........ -- -- -- -- 3,972 -- -- Pension adjustment ............ -- -- -- -- (60) -- -- Comprehensive loss ......... (106,117) Common stock issued in connection with the exercise of warrants ...... 32 -- -- -- -- -- -- -- Preferred stock dividends ....... -- -- -- (2,683) -- -- -- (2,683) Treasury shares issued as restricted stock ........... 1 -- (11) -- -- (7) 18 -- Revaluation of ESOP shares to independently appraised market value .................. -- -- -- 1,612 -- -- -- 1,612 Amortization of deferred compensation .................. -- -- -- -- -- 60 -- 60 Treasury stock purchases ........ (9) -- -- -- -- -- (80) (80) --------- --------- --------- --------- --------- --------- --------- --------- Balance, September 30, 1999 ..... 12,097 123 (542,712) 118,490 (28,768) (58) (2,462) (455,387) Comprehensive loss: Net loss ........................ -- -- -- (86,964) -- -- -- Other comprehensive income (loss), net of tax: Translation adjustment ........ -- -- -- -- (2,015) -- -- Pension adjustment ............ -- -- -- -- 47 -- -- Comprehensive loss ......... (88,932) Common stock issued in connection with the exercise of warrants ...... 1 -- -- -- -- -- -- -- Preferred stock dividends ....... -- -- -- (2,996) -- -- -- (2,996) Revaluation of ESOP shares to independently appraised market value .................. -- -- -- (431) -- -- -- (431) Amortization of deferred compensation .................. -- -- -- -- -- 46 -- 46 Treasury stock purchases ........ (4) -- -- -- -- -- (22) (22) --------- --------- --------- --------- --------- --------- --------- --------- Balance, September 30, 2000 ..... 12,094 $ 123 $(542,712) $ 28,099 $ (30,736) $ (12) $ (2,484) $(547,722) ========= ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 42 45 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ Cash flows from operating activities: Net loss ....................................................... $ (86,964) $ (110,029) $ (46,119) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ............................. 59,003 57,677 55,963 Interest amortization ..................................... 6,057 3,105 4,376 Extraordinary item, loss on early extinguishment of debt .. -- 4,212 -- Deferred tax benefit ...................................... (257) (38,024) (19,722) Early retirement programs and benefit changes ............. -- 6,781 -- Discount notes amortization ............................... 21,638 19,483 16,878 Impairment of assets ...................................... 60,000 26,369 -- Other ..................................................... 726 1,016 1,820 Change in assets/liabilities: Accounts receivable ....................................... (20,217) (11,547) 44,419 Inventories ............................................... (13,475) 3,207 13,675 Prepaid expenses .......................................... 4,104 (10,760) (2,852) Other assets .............................................. 4,959 (1,477) 654 Accounts payable .......................................... 10,987 19,137 (32,896) Accrued liabilities ....................................... 12,864 4,619 (9,300) Other liabilities ......................................... (11,292) 12,341 18,988 ------------ ------------ ------------ Net cash provided by (used in) operating activities ............ 48,133 (13,890) 45,884 ------------ ------------ ------------ Cash flows from investing activities: Capital expenditures ...................................... (28,797) (29,540) (26,622) Proceeds from sale of assets .............................. -- 3,583 -- ------------ ------------ ------------ Net cash used in investing activities .......................... (28,797) (25,957) (26,622) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from long-term debt .............................. 916,885 814,105 59,862 Repayment of long-term debt ............................... (943,305) (751,001) (75,152) Debt issuance costs ....................................... -- (16,480) -- Purchase of treasury stock ................................ (22) (80) (108) Other ..................................................... (1) (3,270) 160 ------------ ------------ ------------ Net cash provided by (used in) financing activities ............ (26,443) 43,274 (15,238) Effect of United States/Canadian exchange rate on cash ......... (147) 326 (814) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ........... (7,254) 3,753 3,210 Cash and cash equivalents - beginning of year .................. 14,921 11,168 7,958 ------------ ------------ ------------ Cash and cash equivalents - end of year ........................ $ 7,667 $ 14,921 $ 11,168 ============ ============ ============ Supplemental disclosures of cash flow information: Interest paid, net of interest income received ............ $ (96,134) $ (83,167) $ (80,223) Income taxes (paid) received .............................. (1,194) 4,750 6,653
The accompanying notes are an integral part of the consolidated financial statements. 43 46 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ Revenues ........................................... $ 1,078,351 $ 720,752 $ 822,590 Cost of goods sold ................................. 937,460 682,594 745,323 ------------ ------------ ------------ Gross profit ....................................... 140,891 38,158 77,267 Selling, general, and administrative expenses ...... 38,901 36,980 37,319 Impairment of assets ............................... 60,000 26,369 -- Other expense ...................................... 1,554 10,832 5,962 Interest and debt related expenses ................. 99,723 83,897 86,618 ------------ ------------ ------------ Loss before taxes and extraordinary item ........... (59,287) (119,920) (52,632) Provision (benefit) for income taxes ............... 4,560 (29,410) (18,963) ------------ ------------ ------------ Loss before extraordinary item ..................... (63,847) (90,510) (33,669) Extraordinary item, loss on early extinguishment of debt, net of tax ............................. -- 4,212 -- ------------ ------------ ------------ Net loss ........................................... $ (63,847) $ (94,722) $ (33,669) ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 44 47 STERLING CHEMICALS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, ----------------------- 2000 1999 ---------- ---------- ASSETS Current assets: Cash and cash equivalents .............................................. $ 5,740 $ 14,899 Accounts receivable, net ............................................... 163,116 143,556 Inventories ............................................................ 83,726 70,464 Prepaid expenses ....................................................... 1,027 3,980 Deferred income tax benefit ............................................ 8,470 16,888 ---------- ---------- Total current assets ................................................. 262,079 249,787 Property, plant and equipment, net ........................................ 318,626 402,723 Deferred income tax benefit ............................................... 30,748 19,463 Other assets .............................................................. 65,690 80,133 ---------- ---------- Total assets ......................................................... $ 677,143 $ 752,106 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS) Current liabilities: Accounts payable ....................................................... $ 83,883 $ 72,731 Accrued liabilities .................................................... 91,029 79,883 Current portion of long-term debt ...................................... 2,580 4,246 ---------- ---------- Total current liabilities .............................................. 177,492 156,860 Long-term debt ............................................................ 791,684 816,927 Deferred income tax liability ............................................. 11,294 8,815 Deferred credits and other liabilities .................................... 70,944 76,893 Common stock held by ESOP ................................................. 3,519 2,946 Less: unearned compensation .............................................. -- (745) Commitments and contingencies (Note 6) .................................... -- -- Stockholder's equity (deficiency in assets): Common stock, $.01 par value ........................................... -- -- Additional paid-in capital ............................................. (141,786) (139,786) Accumulated deficit .................................................... (205,256) (140,978) Accumulated other comprehensive income ................................. (30,736) (28,768) Deferred compensation .................................................. (12) (58) ---------- ---------- Total stockholder's equity (deficiency in assets) ...................... (377,790) (309,590) ---------- ---------- Total liabilities and stockholder's equity (deficiency in assets) ...... $ 677,143 $ 752,106 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 45 48 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS) (AMOUNTS IN THOUSANDS)
RETAINED ACCUMULATED ADDITIONAL EARNINGS OTHER COMMON STOCK PAID-IN (ACCUMULATED COMPREHENSIVE DEFERRED SHARES AMOUNT CAPITAL DEFICIT) INCOME COMPENSATION TOTAL --------- --------- --------- --------- --------- --------- --------- Balance, September 30, 1997 ....... 1 $ -- $(139,786) $ (14,677) $ (21,124) $ -- $(175,587) Comprehensive loss: Net loss .......................... -- -- -- (33,669) -- -- Other comprehensive loss, net of tax: Translation adjustment .......... -- -- -- -- (11,466) -- Pension adjustment .............. -- -- -- -- (90) -- Comprehensive loss ........... (45,225) Issuance of restricted stock of Holdings ........................ -- -- -- -- -- (222) (222) Revaluation of ESOP shares to independently appraised market value .................... -- -- -- 478 -- -- 478 Amortization of deferred compensation .................... -- -- -- -- -- 111 111 --------- --------- --------- --------- --------- --------- --------- Balance, September 30, 1998 ....... 1 -- (139,786) (47,868) (32,680) (111) (220,445) Comprehensive loss: Net loss .......................... -- -- -- (94,722) -- -- Other comprehensive income (loss), net of tax: Translation adjustment .......... -- -- -- -- 3,972 -- Pension adjustment .............. -- -- -- -- (60) -- Comprehensive loss ........... (90,810) Issuance of restricted stock of Holdings ........................ -- -- -- -- -- (7) (7) Revaluation of ESOP shares to independently appraised market value .................... -- -- -- 1,612 -- -- 1,612 Amortization of deferred compensation .................... -- -- -- -- -- 60 60 --------- --------- --------- --------- --------- --------- --------- Balance, September 30, 1999 ....... 1 -- (139,786) (140,978) (28,768) (58) (309,590) Net loss .......................... -- -- -- (63,847) -- -- Other comprehensive income (loss), net of tax: Translation adjustment .......... -- -- -- -- (2,015) -- Pension adjustment .............. -- -- -- -- 47 -- Comprehensive loss ........... (65,815) Dividend paid to Holdings ......... -- -- (2,000) -- -- -- (2,000) Revaluation of ESOP shares to independently appraised market value .................... -- -- -- (431) -- -- (431) Amortization of deferred compensation .................... -- -- -- -- -- 46 46 --------- --------- --------- --------- --------- --------- --------- Balance, September 30, 2000 ....... 1 $ -- $(141,786) $(205,256) $ (30,736) $ (12) $(377,790) ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 46 49 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ Cash flows from operating activities: Net loss ............................................... $ (63,847) $ (94,722) $ (33,669) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ....................... 64,567 60,349 59,151 Deferred tax expense (benefit) ...................... (257) (32,498) (13,139) Extraordinary item .................................. -- 4,212 -- Early retirement and benefit charges ................ -- 6,781 -- Impairment of assets ................................ 60,000 26,368 -- Other ............................................... 726 1,016 2,020 Change in assets/liabilities: Accounts receivable ................................. (20,347) (10,877) 45,484 Inventories ......................................... (13,475) 3,207 13,675 Prepaid expenses .................................... 4,967 (11,522) (1,838) Other assets ........................................ 4,096 4,811 2,078 Accounts payable .................................... 10,791 17,797 (35,102) Accrued liabilities ................................. 12,864 4,619 (3,441) Other liabilities ................................... (11,857) 6,556 10,654 ------------ ------------ ------------ Net cash provided by (used in) operating activities .... 48,228 (13,903) 45,873 ------------ ------------ ------------ Cash flows from investing activities: Capital expenditures ................................ (28,797) (29,540) (26,622) Proceeds from sale of assets ........................ -- 3,583 -- ------------ ------------ ------------ Net cash used in investing activities .................. (28,797) (25,957) (26,622) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from long-term debt ........................ 916,885 814,105 59,862 Repayment of long-term debt ......................... (943,305) (751,001) (75,153) Dividend paid to Holdings ........................... (2,000) -- -- Debt issuance costs ................................. -- (16,480) -- Other ............................................... (23) (3,350) 55 ------------ ------------ ------------ Net cash provided by (used in) financing activities .... (28,443) 43,274 (15,236) Effect of United States/Canadian exchange rate on cash ................................................ (147) 326 (814) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ... (9,159) 3,740 3,201 Cash and cash equivalents - beginning of period ........ 14,899 11,159 7,958 ------------ ------------ ------------ Cash and cash equivalents - end of year ................ $ 5,740 $ 14,899 $ 11,159 ============ ============ ============ Supplement disclosures of cash flow information: Interest paid, net of interest income received ...... $ (96,139) $ (83,180) $ (80,251) Income taxes (paid) received ........................ (1,194) 4,750 6,653
The accompanying notes are an integral part of the consolidated financial statements. 47 50 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Sterling Chemicals Holdings, Inc. ("Holdings" and, together with its subsidiaries, unless otherwise indicated, are collectively referred to as "we," "our," "ours," and "us") manufactures seven commodity petrochemicals at our Texas City, Texas plant. Additionally, we manufacture chemicals for use primarily in the pulp and paper industry at five plants in Canada and a plant in Valdosta, Georgia, and manufacture acrylic fibers at our plant in Santa Rosa County, Florida. At our Texas City plant, we produce styrene, acrylonitrile, acetic acid, plasticizers, methanol, tertiary butylamine ("TBA"), and sodium cyanide. Near the end of the first quarter of 2001, we also began operating a disodium iminodiacetic acid, or "DSIDA," facility that is owned by Monsanto. We generally sell our petrochemicals products to customers for use in the manufacture of other chemicals and products, which in turn are used in the production of a wide array of consumer goods and industrial products. We produce regular textiles, specialty textiles, and technical fibers at our Santa Rosa plant, as well as licensing our acrylic fibers manufacturing technology to producers worldwide. Sodium chlorate is produced at our five plants in Canada and our Valdosta plant. Sodium chlorite is produced at one of our Canadian locations. In addition, chlor-alkali and calcium hypochlorite are produced at one of our Canadian locations. We also license, engineer, and oversee construction of large-scale chlorine dioxide generators for the pulp and paper industry as part of the pulp chemicals business. These generators convert sodium chlorate into chlorine dioxide at pulp mills. Holdings is a holding company whose only material asset is its investment in Sterling Chemicals, Inc. ("Chemicals"). Chemicals and its subsidiaries own substantially all of the consolidated operating assets. Our significant accounting policies are described below. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of all of our wholly owned and majority-owned subsidiaries, with all significant intercompany accounts and transactions having been eliminated. Our 50% equity investments in a cogeneration joint venture and an acrylonitrile marketing joint venture are accounted for under the equity method, with our share of the operating results of the joint ventures recorded in the Statement of Operations. CASH EQUIVALENTS We consider all investments having a remaining maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Cost is primarily determined on the first-in, first-out basis, except for stores and supplies, which are valued at average cost. We enter into agreements with other companies to exchange chemical inventories in order to minimize working capital requirements and to facilitate distribution logistics. Balances related to quantities due to or payable by us are included in inventory. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost. Major renewals and improvements which extend the useful lives of equipment are capitalized. Major planned maintenance expenses are accrued for during the periods prior to the maintenance, while routine repair and maintenance expenses are charged to operations as incurred. Disposals are removed at carrying cost less accumulated depreciation with any resulting gain or loss reflected in operations. Depreciation is provided using the straight-line method over estimated useful lives ranging from 5 to 25 years, with the predominant life of plant and equipment being 15 years. We capitalize interest costs which are incurred as part of the cost of constructing major facilities and equipment. The amount of interest capitalized for fiscal 2000, 1999, and 1998 was $2.2 million, $1.4 million, and $0.8 million, respectively. 48 51 IMPAIRMENT OF LONG-LIVED ASSETS Impairment tests of long-lived assets are made when conditions indicate their carrying cost may not be recoverable. Such impairment tests are based on a comparison of undiscounted future cash flows or the market value of similar assets to the carrying cost of the asset. If an impairment is indicated, the asset value is written down to its estimated fair value. During fiscal 1999, we incurred an impairment loss of $26.4 million related to our methanol production assets. During fiscal 2000, we incurred an impairment loss of $60.0 million related to our acrylic fibers business. PATENTS AND ROYALTIES The costs of patents are amortized on a straight-line basis over their estimated useful lives, which approximate ten years. We capitalized the value of the chlorine dioxide generator technology acquired in fiscal 1992 based on the net present value of all estimated remaining royalty payments associated with this technology. The resulting intangible amount is included in other assets and is amortized over the average life for these royalty payments of ten years. DEBT ISSUE COSTS Debt issue costs relating to long-term debt are amortized over the term of the related debt instrument using the effective interest method and are included in other assets. INCOME TAXES Deferred income taxes are recorded to reflect the tax effect of the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at enacted rates. REVENUE RECOGNITION We generate revenues through sales in the open market, raw material conversion agreements, and long-term supply contracts. In addition, we have entered into profit sharing arrangements with respect to some of our petrochemicals products. We recognize revenue from sales in the open market, raw material conversion agreements, and long-term supply contracts when the products are shipped. Revenues from profit sharing arrangements are estimated and accrued monthly. Deferred credits are amortized over the life of the contracts which gave rise to them. We also generate revenues from the construction and sale of chlorine dioxide generators, which are recognized using the percentage of completion method. We also receive prepaid royalties, which are recognized over a period, which is typically ten years. In addition, we generate revenues from the sale of acrylic fibers manufacturing technology to producers worldwide, which are recognized as earned. We classify amounts billed to customers for shipping and handling as revenues, with the related shipping and handling costs included in cost of goods sold. FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE Our Canadian subsidiaries use the Canadian dollar as their functional currency. For financial reporting purposes, assets and liabilities of these subsidiaries denominated in Canadian dollars are translated into United States dollars at year-end exchange rates and revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are included in accumulated other comprehensive income, while transaction gains and losses are included in operations when incurred. Our Canadian subsidiaries previously entered into forward foreign exchange contracts to minimize the short-term impact of Canadian dollar fluctuations on some of its Canadian dollar denominated commitments. Gains or losses on these contracts are deferred and are included in operations in the same period in which the related transactions are settled. HEDGING We periodically enter into contracts to hedge against the volatility in the price of natural gas, which is used in the production of styrene and methanol. These transactions generally take the form of price collars, and are placed with major financial institutions and industrial companies. The results of the hedging transactions are included in Cost of Goods Sold as the related production of styrene and methanol occurs. 49 52 EARNINGS PER SHARE For purposes of computing net loss per common share, net loss has been adjusted by an amount equal to the fair market value of "Released Shares," which are shares held by Chemicals' employee stock ownership plan that have been allocated to the ESOP accounts of our employees, minus amounts previously recognized as compensation expense with respect to Released Shares, adjusted to reflect the amount of depreciation/appreciation in value of Released Shares in prior periods. This adjustment to net loss is made because we are obligated, under certain circumstances, to purchase from participants under the plan any shares of Holdings' common stock distributed by the ESOP to these participants. The weighted average number of outstanding shares of the common stock of Holdings and the computation of the net loss per common share are as follows (in thousands):
YEAR ENDED SEPTEMBER 30, ------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ Net loss attributable to common stockholders $ (89,960) $ (112,712) $ (48,579) Adjustment for depreciation (appreciation) in value of Released Shares (431) 1,048 298 ------------ ------------ ------------ Net loss for purpose of computing net loss per share $ (90,391) $ (111,664) $ (48,281) ============ ============ ============ Net loss per common share $ (7.13) $ (8.94) $ (3.99) ============ ============ ============ Weighted average shares outstanding 12,670 12,495 12,104 ============ ============ ============
As losses were incurred in fiscal 2000, 1999, and 1998, basic and diluted earnings per share are the same for these periods. COMPREHENSIVE INCOME (LOSS) (in thousands):
CUMULATIVE TRANSLATION ADJUSTMENT PENSION ADJUSTMENT TOTAL ---------------- ------------------ ---------------- Balance, September 30, 1997 $ (21,093) $ (31) $ (21,124) Changes (11,466) (90) (11,556) ---------------- ---------------- ---------------- Balance, September 30, 1998 (32,559) (121) (32,680) Changes 3,972 (60) 3,912 ---------------- ---------------- ---------------- Balance, September 30, 1999 (28,587) (181) (28,768) Changes (2,015) 47 (1,968) ---------------- ---------------- ---------------- Balance, September 30, 2000 $ (30,602) $ (134) $ (30,736) ================ ================ ================
There is no tax expense or benefit associated with the cumulative translation adjustment amounts above. The pension adjustment amounts are net of tax provision (benefit) of $24,000, $(32,000), and $(49,000) for the fiscal years ended September 30, 2000, 1999, and 1998, respectively. ENVIRONMENTAL COSTS Environmental costs are expensed as incurred unless the expenditures extend the economic useful life of the relevant assets. Costs that extend the economic life of assets are capitalized and depreciated over the remaining life of those assets. Liabilities are recorded when environmental assessments or remedial efforts are probable and the cost can be reasonably estimated. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In preparing disclosures about the fair value of financial instruments, we have assumed that the carrying amount approximates fair value for cash and cash equivalents, receivables, accounts payable, and certain accrued expenses due to the short maturities of these instruments. The fair values of long-term debt instruments are estimated based upon quoted market values (if applicable) or on the current interest rates available to us for debt with similar terms and remaining maturities. Considerable judgment is required in developing these estimates and, accordingly, no assurance can be given that the estimated values presented herein are indicative of the amounts that would be realized in a free market exchange. 50 53 ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Significant estimates include environmental reserves, litigation contingencies, maintenance costs related to shut downs, taxes, and revenues. Actual results could differ from these estimates. RECLASSIFICATION Certain amounts reported in the financial statements for the prior periods have been reclassified to conform with the current financial statement presentation with no effect on net income (loss) or stockholders' equity (deficiency in assets). 2. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
SEPTEMBER 30, ----------------------- 2000 1999 ---------- ---------- (Dollars in Thousands) Inventories: Finished products ................................................. $ 53,746 $ 37,484 Raw materials ..................................................... 14,107 10,355 ---------- ---------- Inventories at cost ................................................. 67,853 47,839 Inventories under exchange agreements ............................. (3,666) 2,562 Stores and supplies ............................................... 19,539 20,063 ---------- ---------- $ 83,726 $ 70,464 ========== ========== Property, plant, and equipment: Land .............................................................. $ 10,237 $ 10,274 Buildings ......................................................... 57,074 56,728 Plant and equipment ............................................... 718,318 673,108 Construction in progress .......................................... 17,618 39,388 Less: accumulated depreciation ................................... (484,621) (376,775) ---------- ---------- $ 318,626 $ 402,723 ========== ========== Other assets: Patents and technology, net ....................................... $ 15,641 $ 21,630 Debt issue costs, net ............................................. 30,791 34,055 Other ............................................................. 26,619 30,965 ---------- ---------- $ 73,051 $ 86,650 ========== ========== Accrued liabilities: Repairs ........................................................... $ 13,500 $ 9,635 Interest .......................................................... 20,650 20,778 Compensation ...................................................... 27,018 18,174 Property taxes .................................................... 6,469 8,243 Other ............................................................. 23,579 23,053 ---------- ---------- $ 91,216 $ 79,883 ========== ========== Deferred credits and other liabilities: Deferred revenue .................................................. $ 4,659 $ 7,667 Accrued postretirement, pension, and post employment benefits ..... 57,583 54,084 Other ............................................................. 8,702 15,142 ---------- ---------- $ 70,944 $ 76,893 ========== ==========
51 54 3. LONG-TERM DEBT Long-term debt consisted of the following:
SEPTEMBER 30, --------------------------- 2000 1999 ------------ ------------ (Dollars in Thousands) Revolving credit facilities ................ $ 37,206 $ 54,643 Saskatoon term loans ....................... 34,904 44,045 11 1/4% notes .............................. 152,154 152,485 11 3/4% notes .............................. 275,000 275,000 12 3/8% notes .............................. 295,000 295,000 ------------ ------------ Total Chemicals' debt outstanding ....... 794,264 821,173 13 1/2% notes .............................. 169,886 147,628 ------------ ------------ Total Holdings' debt outstanding ........ 964,150 968,801 ------------ ------------ Less: Current maturities ...................... (2,580) (4,246) ------------ ------------ Total long-term debt ....................... $ 961,570 $ 964,555 ============ ============
On July 23, 1999, Chemicals completed a private offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006. On November 5, 1999, Chemicals completed a registered exchange offer pursuant to which all of these notes were exchanged for publicly registered 12 3/8% Notes with substantially similar terms (the "12 3/8% Notes"). The 12 3/8% Notes are senior secured obligations of Chemicals and rank equally in right of payment with all other existing and future senior indebtedness of Chemicals and senior in right of payment to all existing and future subordinated indebtedness of Chemicals. The 12 3/8% Notes are guaranteed by all of Chemicals' existing direct and indirect United States subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) on a joint and several basis. Each subsidiary's guarantee ranks equally in right of payment with all of that subsidiary's existing and future senior indebtedness and senior in right of payment to all existing and future subordinated indebtedness of that subsidiary. However, the 12 3/8% Notes and the guarantees are subordinated to the extent of the collateral securing Chemicals' secured revolving credit facilities. The 12 3/8% Notes and the subsidiary guarantees are secured by (i) a second priority lien on all of our United States production facilities and related assets, (ii) a second priority pledge of all of the capital stock of each subsidiary guarantor, and (iii) a first priority pledge of 65% of the stock of certain of the Company's subsidiaries incorporated outside of the United States. The 12 3/8% Notes bear interest at the annual rate of 12 3/8%, payable semi-annually on January 15 and July 15 of each year commencing January 15, 2000. Except as otherwise provided below, the 12 3/8% Notes may not be redeemed by Chemicals prior to July 15, 2003. From that date until July 15, 2004, the 12 3/8% Notes may be redeemed at a premium of the principal amount thereof at maturity of 106.188% and, from July 15, 2004 until July 15, 2005, the 12 3/8% Notes may be redeemed at a premium of the principal amount thereof at maturity of 103.094%. Thereafter, Chemicals may redeem the 12 3/8% Notes at their face value plus accrued and unpaid interest. Prior to July 15, 2002, Chemicals may redeem in the aggregate up to 35% of the original principal amount of the 12 3/8% Notes with the proceeds of one or more specified Public Equity Offerings. Such redemptions may be made at a redemption price of 112.375% of the face value of the 12 3/8% Notes plus accrued and unpaid interest to the redemption date. After such redemption, at least $191.75 million aggregate principal amount of the 12 3/8% Notes must remain outstanding. On July 23, 1999, Chemicals also established two secured revolving credit facilities providing up to $155,000,000 in revolving credit loans (the "Revolvers") under a single Revolving Credit Agreement (the "Credit Agreement"). Under the Credit Agreement, Chemicals and each of its direct and indirect United States subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) are co-borrowers and are jointly and severally liable for any indebtedness thereunder. The Revolvers consist of (i) an $85,000,000 revolving credit facility (the "Current Assets Revolver") secured by a first priority lien on all accounts receivable, inventory, and other specified assets of Chemicals and the other co-borrowers, and (ii) a $70,000,000 revolving credit facility (the "Fixed Assets Revolver") secured by a first priority lien on all of our United States production facilities and related assets, all of the capital stock of Chemicals, and all of the capital stock of each co-borrower and a second priority lien on all accounts receivable, inventory, and other specified assets of Chemicals and the other co-borrowers. Funding under the 12 3/8% Notes offering and the Revolvers occurred on July 23, 1999. The proceeds of the 12 3/8% Notes offering and the initial borrowings under the Revolvers were used to completely repay all outstanding indebtedness under Chemicals' then existing senior credit facility. 52 55 Approximately $37.2 million was drawn under the Fixed Assets Revolver at September 30, 2000. Borrowings under the Fixed Assets Revolver bear interest, at Chemicals' option, at an annual rate of either the "LIBOR Rate" (as defined in the Credit Agreement) plus 3.75% or the Alternate Base Rate plus 2.25%. Borrowings under the Current Assets Revolver bear interest, at Chemicals' option, at an annual rate of either the LIBOR Rate plus 3.00% or the Alternate Base Rate plus 1.50%. The "Alternate Base Rate" is equal to the greater of the Base Rate as announced from time to time by The Chase Manhattan Bank in New York, New York or the "Federal Funds Effective Rate" plus 1/2% (as such terms are defined in the Credit Agreement.). At September 30, 2000, the weighted average interest rate in effect was 11.8%. The Credit Agreement also requires Chemicals and the co-borrowers to pay an aggregate commitment fee ranging from 0.75% to 1.25% on the unused portion of the commitment for the Fixed Assets Revolver, depending on the amount drawn, and an aggregate commitment fee of 0.5% on the unused portion of the commitment for the Current Assets Revolver. Available credit under the Current Assets Revolver is subject to a monthly borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory, with an inventory cap of $42,500,000. In addition, the borrowing base for the Current Assets Revolver must exceed outstanding borrowings thereunder by $12,000,000 at all times. The Fixed Assets Revolver matures on July 23, 2004, with quarterly commitment reductions totaling 30% of the total commitment in the twelve month period ending July 23, 2003 and the balance in the following twelve month period. The Current Assets Revolver matures in five years, with no scheduled commitment reductions prior to that time. However, the commitments for each of the Fixed Assets Revolver and the Current Assets Revolver is permanently reduced to the extent required under the Credit Agreement upon prepayments made out of specific sources of funds, including certain equity issuances by Holdings and certain asset sales. As part of our recapitalization in August of 1996, Chemicals issued $275.0 million of its 11 3/4% Senior Subordinated Notes due 2006 (the "11 3/4% Notes") and Holdings issued 191,751 Units, with each Unit consisting of one 13 1/2% Senior Secured Discount Note due 2008 (the "13 1/2% Notes") and one warrant to purchase three shares of the common stock, par value $0.01 per share, of Holdings ("Holdings Common Stock") for $0.01 per share. Holdings received $100 million in initial proceeds upon issuing $191.8 million of 13 1/2% Notes under the Units offering. On April 7, 1997, Chemicals issued $150.0 million of its 11 1/4% Senior Subordinated Notes due 2007 (the "11 1/4% Notes"). The 11 3/4% Notes are unsecured senior subordinated obligations of Chemicals, ranking subordinate in right of payment to all existing and future senior debt of Chemicals, but pari passu with the 11 1/4% Notes and all future senior subordinated indebtedness. The 11 3/4% Notes bear interest at the annual rate of 11 3/4%, payable semi-annually on February 15 and August 15 of each year commencing February 15, 1997. The 11 3/4% Notes may not be redeemed by Chemicals prior to August 15, 2001. From that date through August 15, 2004, the 11 3/4% Notes may be redeemed at a premium of the principal amount thereof at maturity varying between 105.875% and 101.958%. After August 15, 2004, Chemicals may redeem the 11 3/4% Notes at their face value plus accrued and unpaid interest. The 11 1/4% Notes are unsecured senior subordinated obligations of Chemicals, ranking subordinate in right of payment to all existing and future senior debt of Chemicals, but pari passu with the 11 3/4 % Notes and all future senior subordinated indebtedness of Chemicals. The 11 1/4% Notes bear interest at the annual rate of 11 1/4%, payable semi-annually on April 1 and October 1 of each year commencing October 1, 1997. The 11 1/4% Notes may not be redeemed by Chemicals prior to April 1, 2002. From that date through April 1, 2005, the 11 1/4% Notes may be redeemed at a premium of the principal amount thereof at maturity varying between 105.625% and 101.875%. After April 1, 2005, Chemicals may redeem the 11 1/4% Notes at their face value plus accrued and unpaid interest. The 13 1/2% Notes are senior secured obligations of Holdings and rank equally in right of payment with all other senior indebtedness of Holdings and senior in right of payment to all subordinated indebtedness of Holdings. The 13 1/2% Notes will accrete interest until August 15, 2001, with no interest payable in cash until February 15, 2002, at an annual rate of 13 1/2%, compounded semi-annually. Commencing in 2002, interest will be payable on the 13 1/2% Notes semi-annually on February 15 and August 15 of each year until maturity. The 13 1/2% Notes may not be redeemed by Holdings prior to August 15, 2001. From that date through August 15, 2006, the 13 1/2% Notes may be redeemed at a premium of the principal amount thereof at maturity varying between 106.75% and 101.35%. After August 15, 2006, Holdings may redeem the 13 1/2% Notes at their principal amount plus accrued interest. Under the terms of our Credit Agreement, we cannot redeem all or any portion of the 12 3/8% Notes, 11 3/4% Notes, or 11 1/4% Notes at any time unless expressly required to do so under the relevant indentures. In addition, our ability to redeem all of any portion of the 11 3/4% Notes or 11 1/4% Notes is restricted under the indenture governing the 12 3/8% Notes. 53 56 The indentures governing the 12 3/8% Notes, 11 1/4% Notes, 11 3/4% Notes, and 13 1/2% Notes contain numerous financial and operating covenants, including, but not limited to, restrictions on Chemicals' or Holdings' ability to incur indebtedness, pay dividends, create liens, sell assets, engage in mergers and acquisitions, and refinance existing indebtedness. In addition, these indentures include various circumstances that will constitute, upon occurrence and subject in certain cases to notice and grace periods, an event of default thereunder. However, these indentures and the Credit Agreement do not require Holdings or Chemicals to satisfy any financial ratios or maintenance tests. The indentures governing the 11 1/4 % Notes, the 11 3/4% Notes, and the 12 3/8% Notes and the Credit Agreement contain provisions which restrict the payment of advances, loans, and dividends from Chemicals to Holdings. The most restrictive of these covenants limits such payments during fiscal 2001 to approximately $2.0 million, plus any amounts due Holdings from Chemicals under the intercompany tax sharing agreement. On July 10, 1997, Sterling Pulp Chemicals (Sask) Ltd. ("Sterling Sask"), an indirect wholly owned subsidiary of Holdings and Chemicals, acquired substantially all of the assets of Saskatoon Chemicals Ltd. ("Saskatoon Chemicals"), a subsidiary of Weyerhaeuser Canada Ltd. (the "Saskatoon Acquisition"). In connection with the Saskatoon Acquisition, Sterling Sask entered into a credit agreement (the "Saskatoon Credit Agreement") with The Chase Manhattan Bank of Canada, individually and as administrative agent. Funding under the Saskatoon Credit Agreement occurred July 10, 1997, upon consummation of the Saskatoon Acquisition. The Saskatoon Credit Agreement provides for a revolving credit facility of Cdn. $8.0 million (the "Saskatoon Revolver"), and a term loan facility consisting of a Cdn. $21.2 million Tranche A term loan due June 30, 2003, and a $36.4 million Tranche B term loan due June 30, 2005 (the "Saskatoon Term Loans"). Advances under the Saskatoon Revolver are subject to a borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory, with an inventory cap of 50% of the borrowing base. At September 30, 2000, the borrowing base did not limit available credit and there were no borrowings outstanding under the Saskatoon Revolver. Sterling Sask's obligations under the Saskatoon Credit Agreement are secured by substantially all of the assets of Sterling Sask. The Saskatoon Credit Agreement requires Sterling Sask to satisfy certain financial covenants and tests. In addition, the Saskatoon Credit Agreement requires that certain amounts of "Excess Cash Flow" be used to prepay amounts outstanding under the Saskatoon Term Loans. A prepayment of Cdn. $7.1 million was made in September of 2000 pursuant to this obligation. The Sterling Sask Tranche A term loan and the Saskatoon Revolver borrowings bear interest, at Sterling Sask's option, at an annual rate of either the Bankers Acceptance Rate or the Base Rate plus an Applicable Margin ranging from 1% to 2.5% depending upon Sterling Sask's Leverage Ratio (as such terms are defined in the Saskatoon Credit Agreement). The Tranche B term loan bears interest, at Sterling Sask's option, at an annual rate of either the Eurodollar Rate or the Base Rate plus an Applicable Margin ranging from 0% to 2.5% depending upon Sterling Sask's Leverage Ratio. The "Base Rate" for the Tranche A term loan and the Saskatoon Revolver is equal to the greater of the Prime Rate for Canadian Dollar commercial loans made in Canada, as announced from time to time by the agent bank, or the rate for Canadian Dollar Bankers Acceptances accepted by the agent with a term to maturity of 30 days plus 1% (as such terms are defined in the Saskatoon Credit Agreement). The "Base Rate" for the Tranche B term loan is equal to the greater of the Prime Rate as announced from time to time by the agent bank, the "Federal Funds Effective Rate" plus 1/2% or the "Base CD Rate" plus 1% (as such terms are defined in the Saskatoon Credit Agreement). At September 30, 2000, the interest rates in effect for the Tranche A and Tranche B term loans were 8.4% and 9.7%, respectively. The Saskatoon Credit Agreement also requires Sterling Sask to pay a commitment fee in the amount of 1/2% commitment under the Saskatoon Revolver. The Saskatoon Credit Agreement contains provisions, which restrict the payment of advances, loans, and dividends from Sterling Sask to Chemicals or Holdings. The most restrictive of these covenants limits such payments during fiscal 2001 to approximately $1.0 million, plus any amounts due to Chemicals or Holdings from Sterling Sask under the intercompany tax sharing agreement. 54 57 DEBT MATURITIES The estimated remaining principal payments on the outstanding debt follows:
YEAR ENDING PRINCIPAL SEPTEMBER 30, PAYMENTS - ------------- -------- (Dollars in Thousands) 2001 $ 2,580 2002 4,659 2003 9,374 2004 51,784 2005 3,714 Thereafter ............................................................. 892,039 --------- Total Debt...................................................... $ 964,150 =========
4. INCOME TAXES A reconciliation of federal statutory income taxes to our effective tax provision (benefit) before extraordinary item follows:
YEAR ENDED SEPTEMBER 30, ------------------------------ 2000 1999 1998 -------- -------- -------- (Dollars in Thousands) Benefit for income taxes at statutory rates ... $(28,841) $(51,526) $(26,968) Taxable foreign dividends ..................... 2,889 4,295 -- Change in valuation allowance ................. 31,093 1,514 -- Non-deductible expenses ....................... 879 815 -- State and foreign income taxes ................ (1,437) 550 1,422 Other ......................................... (23) 9,416 -- -------- -------- -------- Effective tax provision (benefit) ............. $ 4,560 $(34,936) $(25,546) ======== ======== ========
The benefit for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30, ----------------------------- 2000 1999 1998 -------- -------- -------- (Dollars in Thousands) Current federal ............................. $ -- $ 2,246 $ (5,900) Deferred federal ............................ -- (36,724) (21,854) Current foreign ............................. 3,328 -- -- Deferred foreign ............................ (257) (1,300) 2,132 Provincial and state income taxes ........... 1,489 842 76 -------- -------- -------- Total tax provision (benefit) ............... $ 4,560 $(34,936) $(25,546) ======== ======== ========
55 58 The components of our deferred income tax assets and liabilities are summarized below:
YEAR ENDED SEPTEMBER 30, --------------------------- 2000 1999 ------------ ------------ (Dollars in Thousands) Deferred tax assets: Accrued liabilities .................... $ 11,513 $ 12,050 Accrued postretirement cost ............ 13,638 11,991 Tax loss and credit carry forwards ..... 58,982 64,044 Discount note interest ................. 24,466 17,393 Other .................................. 16,275 12,707 ------------ ------------ Total deferred tax assets .............. 124,874 118,185 ------------ ------------ Deferred tax liabilities: Property, plant and equipment .......... $ (42,018) $ (68,732) Other .................................. (4,722) (2,629) ------------ ------------ Total deferred tax liabilities ......... (46,740) (71,361) Valuation allowance .................... (32,607) (1,514) ------------ ------------ Net deferred tax assets ................ 45,527 45,310 Less: current deferred tax assets ...... (8,470) (16,888) ------------ ------------ Long-term deferred tax assets .......... $ 37,057 $ 28,422 ============ ============
We have approximately $164 million in United States net operating losses which will be carried forward that will expire from fiscal 2018 to 2019 if not utilized in prior years. We also have approximately Cdn. $8.2 million in Canadian non-capital loss carryforwards and Cdn. $1.4 million of investment tax credits which will expire from 2001 through 2006. 5. EMPLOYEE BENEFITS We have established the following benefit plans: RETIREMENT BENEFIT PLANS We have non-contributory pension plans in the United States and employer and employee contributory plans in Canada which cover all salaried and wage employees. The benefits under these plans are based primarily on years of service and employees' pay near retirement. For our employees who were employed as of September 30, 1986 and who were previously employed by Monsanto Company, we recognize their Monsanto pension years of service for purposes of determining benefits under our plans. For our employees who were employed on August 21, 1992, and who were previously employed by Tenneco Inc., we recognize their Tenneco Inc. pension years of service for purposes of determining benefits under our plans. For our employees who were employed as of January 31, 1997 and, who: (i) were previously employed by Cytec Industries Inc. and (ii) elected to retire on or before January 31, 1999, we supplement the standard pension payable such that the employee's total combined pension from us and from the Cytec Nonbargaining Employees' Retirement Plan equals the amount the employee would have received had he or she remained an employee of Cytec until retirement. The estimated liability for such supplements as of September 30, 2000 and 1999 is immaterial. Our funding policy is consistent with the funding requirements of federal law and regulations. Plan assets consist principally of common stocks and government and corporate securities. 56 59 Information concerning the pension obligation, plan assets, amounts recognized in our financial statements, and underlying actuarial assumptions is stated below.
SEPTEMBER 30, --------------------------- 2000 1999 ------------ ------------ (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year ...................... $ 114,390 $ 96,327 Currency rate conversion ..................................... (293) 556 Service cost ................................................. 4,498 5,198 Interest cost ................................................ 8,446 6,735 Plan amendments .............................................. -- 2,878 FAS 88 additional benefits ................................... -- 10,765 Actuarial gain ............................................... (2,158) (1,205) Benefits paid ................................................ (7,342) (6,864) ------------ ------------ Benefit obligation at end of year ............................ $ 117,541 $ 114,390 ============ ============ Change in plan assets: Fair value at beginning of year .............................. $ 99,291 $ 86,187 Currency rate conversion ..................................... (276) 498 Actual return on plan assets ................................. 15,201 18,705 Employer contributions ....................................... 3,736 765 Participants' contributions .................................. -- -- Benefits paid ................................................ (7,342) (6,864) ------------ ------------ Fair value at end of year .................................... $ 110,610 $ 99,291 ============ ============ Development of net amount recognized: Funded status ................................................ $ (6,931) $ (15,100) Unrecognized cost: Actuarial gain ............................................ (13,051) (4,197) Prior service cost ........................................ 6,764 7,561 Transition liability ...................................... 979 1,354 ------------ ------------ Net amount recognized ........................................ $ (12,239) $ (10,382) ============ ============ Amounts recognized in the statement of financial position: Prepaid pension cost ......................................... $ 418 $ 529 Accrued pension cost ......................................... (12,909) (13,531) Intangible asset ............................................. 45 2,341 Accumulated other comprehensive income (pre-tax) ............. 207 279 ------------ ------------ Net amount recognized ........................................ $ (12,239) $ (10,382) ============ ============
For plans with benefit obligations in excess of plan assets, the benefit obligation and fair value of plan assets were $45.2 million and $39.6 million, respectively, at September 30, 2000. Net periodic pension costs consist of the following components:
SEPTEMBER 30, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- (Dollars in Thousands) Components of net pension costs: Service cost-benefits earned during the year ............ $ 4,498 $ 5,198 $ 5,093 Interest on prior year's projected benefit obligation ... 8,446 6,735 6,153 Expected return on plan assets .......................... (8,537) (7,538) (7,411) Net amortization: Actuarial loss (gain) ................................ 809 634 (130) Prior service cost ................................... 7 73 658 Transition liability ................................. 375 376 378 Settlement/Curtailment loss ............................. -- 11,337 -- ---------- ---------- ---------- Net pension costs ....................................... $ 5,598 $ 16,815 $ 4,741 ========== ========== ========== Weighted-average assumptions: Discount Rate ........................................... 7.50% 7.50% 7.00% Rates of increase in salary compensation level .......... 5.38% 5.38% 4.75% Expected long-term rate of return on plan assets ........ 8.76% 8.77% 8.00%
57 60 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS We provide certain health care benefits and life insurance benefits for retired employees. Substantially all of our employees become eligible for these benefits at normal retirement age. We accrue the cost of these benefits during the period in which the employee renders the necessary service. Health care benefits are provided to employees who retire from us with ten or more years of service credit except for Canadian employees covered by collective bargaining agreements. All of our employees are eligible for postretirement life insurance. Postretirement health care benefits for United States plans are non-contributory. Benefit provisions for most hourly and some salaried employees are subject to collective bargaining. In general, the plans stipulate that retiree health care benefits are paid as covered expenses are incurred. For United States employees, postretirement medical plan deductibles are assumed to increase at the rate of the long-term consumer price index. Information concerning the plan obligation, the funded status, amounts recognized in our financial statements, and underlying actuarial assumptions are stated below.
SEPTEMBER 30, ------------------------ 2000 1999 ---------- ---------- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year .......................... $ 45,674 $ 43,131 Service cost ..................................................... 751 1,200 Interest cost .................................................... 2,759 3,005 Plan amendments, curtailments, and special termination benefit ... (82) (2,472) Actuarial (gain) loss ............................................ (6,168) 3,124 Benefits paid .................................................... (2,872) (2,314) ---------- ---------- Benefit obligation at end of year ................................ $ 40,062 $ 45,674 ========== ========== Development of net amount recognized: Funded status .................................................... $ (40,062) $ (45,674) Unrecognized cost: Actuarial loss ................................................ 4,862 11,380 Prior service cost ............................................ (5,447) (5,943) ---------- ---------- Net amount recognized ............................................ $ (40,647) $ (40,237) ========== ==========
Net periodic plan costs consist of the following components:
SEPTEMBER 30, ---------------------------------- 2000 1999 1998 -------- -------- -------- (Dollars in Thousands) Components of net plan costs: Service cost .................................. $ 751 $ 1,200 $ 1,466 Interest cost ................................. 2,759 3,005 2,818 Net amortization: Actuarial loss (gain) ...................... 268 340 (3) Prior service cost ......................... (496) (233) 29 Curtailment and special termination benefit ... -- (1,150) -- -------- -------- -------- Net plan costs ................................ $ 3,282 $ 3,162 $ 4,310 ======== ======== ======== Weighted-average assumptions: Discount Rate ................................. 7.50% 6.75% 7.50%
The weighted average annual assumed health care trend rate is assumed to be 7.3% for 2000. The rate is assumed to decrease gradually to 5.6% in 2027 and remain level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care trend rates would have the following effects:
1% Increase 1% Decrease ---------------- --------------- (Dollars in Thousands) Effect on total of service and interest cost components............... $ 195 $ (170) Effect on post-retirement benefit obligation.......................... 1,935 (1,679)
58 61 We recorded a $10.2 million charge, included in other expense, increasing our pension liability and other postretirement benefits liability in the second quarter of fiscal 1999 as a result of an early retirement program for employees at our Texas City plant and certain benefit changes for all of our U.S. employees. The early retirement program resulted in curtailment expense for the pension plan and special termination benefits expenses for both the pension and the other postretirement benefits plans, partially offset by the curtailment gain from the reduction of postretirement life insurance benefits for our currently active U.S. employees. EMPLOYEE STOCK OWNERSHIP TRUST In connection with our recapitalization in August of 1996, an Employee Stock Ownership Trust (the "ESOT") was established which covers substantially all United States employees. Allocations of shares of common stock were made annually to participants. The ESOT primarily invests in shares of Holdings Common Stock and borrowed $6.5 million from Chemicals to purchase approximately 542,000 shares of Holdings Common Stock. In addition, during fiscal 1998 and 1997, the ESOT purchased 14,000 and 99,000, respectively, shares of Holdings Common Stock. In fiscal 2000, 1999, and 1998, 163,000, 160,000, and 172,000, respectively, ESOT shares were allocated to employees. We recorded $0.9 million, $0.7 million, and $1.4 million of expense related to the ESOT in fiscal 2000, 1999, and 1998, respectively. The shares of Holdings Common Stock purchased by the ESOT in August of 1996 were pledged as security for the ESOP loan. As of September 30, 2000, the ESOP loan had been repaid in full and all shares of Holdings Common Stock held by the ESOT had been released and will be allocated to the ESOT participants' accounts. No additional allocations are contemplated at this time. SAVINGS AND INVESTMENT PLAN Our Sixth Amended and Restated Savings and Investment Plan covers substantially all United States employees, including executive officers. This Plan is qualified under Section 401(k) of the Internal Revenue Code. Each participant has the option to defer taxation of a portion of his or her earnings by directing us to contribute a percentage of such earnings to their Plan. A participant may direct up to a maximum of 20% of eligible earnings to this Plan, subject to certain limitations set forth in the Internal Revenue Code for "highly compensated" participants. A participant's contributions become distributable upon the termination of his or her employment. We did not make any contribution to this plan in fiscal 2000. Beginning October 1, 2000, we began matching 50% of a participant's contributions, to the extent such contributions do not exceed 7% of such participant's cash compensation (excluding bonuses, profit sharing, and similar types of compensation). EMPLOYEE SAVINGS PLAN We introduced an employee savings plan for all eligible full-time Canadian employees effective as of October 1, 2000. Each participant has the option to contribute a percentage of his or her earnings to the Canadian savings plan, with no limit on the maximum percentage contributed. Beginning October 1, 2000 we began matching 100% of a participant's contributions, to the extent such contributions do not exceed 3.5% of such participant's cash compensation (excluding bonuses, profit sharing, and similar types of compensation). PROFIT SHARING AND BONUS PLANS In January 1997, our Board of Directors, upon recommendation of its Compensation Committee, approved the establishment of a Profit Sharing Plan that is designed to benefit all qualified employees, and a Bonus Plan that is designed to provide certain of our exempt salaried employees with the opportunity to earn bonuses depending, among other things, on our annual financial performance. We incurred $3.7 million and $7.4 million of expenses related to the Profit Sharing Plan and Bonus Plan, respectively, in fiscal 2000. No expenses for profit sharing or bonuses were incurred in fiscal 1999 or 1998. OMNIBUS STOCK AWARDS AND INCENTIVE PLAN In April 1997, our Board of Directors approved the establishment of our Omnibus Stock Awards and Incentive Plan (as amended, the "Omnibus Plan"). Under the Omnibus Plan, we may grant our key employees incentive and nonqualified stock options, SARs, restricted stock awards, performance awards, and phantom stock awards. Approximately 1,000,000 shares of Holdings Common Stock are available for issuance under the Omnibus Plan, of 59 62 which 745,645 shares are the subject of outstanding grants. The terms and amounts of the awards (including vesting schedule) are determined by the Compensation Committee of our Board of Directors. Generally, outstanding stock options become exercisable (vest) in equal annual installments beginning a year from date of grant and ending five years from date of grant. In the event of a specified change of control of Holdings or a qualified public offering of Holdings Common Stock, all awards immediately vest and become exercisable. Our Board of Directors has approved an amendment to the Omnibus Plan under which the total number of shares available for issuance under the Omnibus Plan will be increased to 2,000,000. This amendment is being presented to our stockholders for ratification and approval at the annual meeting of our stockholders being held on January 24, 2001. During fiscal 1999 and 1998, we issued 1,500 and 22,500, respectively, restricted stock awards to certain employees. These restricted stock awards vested 25% immediately, with 1/3 of remaining shares vesting each year after the date of grant. AMENDED AND RESTATED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS In April 1997, our Board of Directors approved the establishment of our 1997 Nonqualified Stock Option Plan for Non-Employee Directors. Each of our non-employee directors is eligible to participate in this Plan. Each eligible director on the date of adoption of this Plan was granted an option to acquire 2,000 shares of Holdings Common Stock (4,000 shares for the Vice-Chairman), and each eligible director who was serving on the Board of Directors on each subsequent October 1st was automatically granted an option to acquire 1,000 shares of Holdings Common Stock (2,000 shares for the Vice-Chairman). Effective as of April 26, 2000, our 1997 Nonqualified Stock Option Plan was amended and restated as our Amended and Restated Stock Plan for Non-Employee Directors. Under our Amended and Restated Stock Plan, each of our non-employee directors will receive $15,000 in shares of our common stock and options to purchase 2,000 shares of our common stock on October 1 of each year, starting with October 1, 2000. The annual grant of shares under our Amended and Restated Stock Plan is valued at the average market price for a share of our common stock during the 90-day period ending on the date of grant. Under both our 1997 Nonqualified Stock Option Plan and our Amended and Restated Stock Plan, each of our non-employee directors has the ability to elect not to participate. All options expire ten years from the date of grant, are granted with an exercise price at or above the fair market value of a share of Holdings Common Stock on the date of grant (as determined by our Board of Directors) and vest and are exercisable immediately. As of September 30, 2000, a total of 160,000 shares of Holdings Common Stock are reserved for issuance under this Plan, of which 32,000 shares are the subject of outstanding options. OUTSTANDING STOCK OPTIONS A summary of the status of our outstanding stock options as of September 30, 2000, 1999, and 1998 and changes during the years then ended is presented below:
2000 1999 1998 ----------------------------- ---------------------------- ---------------------------- SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE (IN EXERCISE (IN EXERCISE (IN EXERCISE THOUSANDS) PRICE(1) THOUSANDS) PRICE(1) THOUSANDS) PRICE ---------- ---------------- ---------- ---------------- ---------- ---------------- Outstanding at beginning of year 682 $ 6.14 692 $ 11.74 241 $ 12.00 Granted 123 $ 6.00 95 $ 6.08 489 $ 11.62 Forfeited (27) $ 6.00 (105) $ 6.00 (38) $ 11.94 ---------- ---------- --------- -------- Outstanding at end of year 778 $ 6.13 682 $ 6.14 692 $ 11.74 ========== ======== ========== ======== ========= ======== Options exercisable at end of year 360 178 86 ========== ========== =========
(1) On December 14, 1998, we issued to all of our employees who held stock options on that date new options with an exercise price of $6.00 per share. The new options were issued in exchange for and in cancellation of stock options previously issued to those employees for the same number of shares and with the same vesting schedules. The range of exercise prices for options outstanding at September 30, 2000, was $6.00 - $12.00, with all exercisable options having an exercise price range of $6.00 - $12.00. During fiscal 1998, Holdings granted certain employees rights to purchase an aggregate of 230,000 shares of Holdings Common Stock, at then current market prices. These rights expired without being exercised. 60 63 All stock options are granted with an exercise price at or above fair market value of a share of Holdings Common Stock at the grant date. The weighted average fair value of the stock options granted during fiscal 2000, 1999, and 1998 was $0.6 million, $0.6 million, and $1.9 million, respectively. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for the grants in fiscal 2000, 1999, and 1998: risk free interest rate of 5.8%, 5.9% and 4.4%, respectively; expected dividend yield of 0.0% for all years; expected life of ten years for all years; and expected volatility of 83%, 59%, and 29%, respectively. Stock options generally expire ten years from the date of grant and fully vest after five years. The outstanding stock options at September 30, 2000 have a weighted average contractual life of approximately 8 years. In accordance with Statement of Financial Accounting Standard ("SFAS") 123, "Accounting for Stock-Based Compensation," we utilize the intrinsic value method of accounting for stock-based compensation, and no compensation costs have been recognized for stock option awards described above. Had compensation cost for all option issuances been determined consistent with SFAS No. 123, it would not have had a material impact on our pro forma net loss and loss per share for fiscal 2000, 1999, or 1998. 6. COMMITMENTS AND CONTINGENCIES PRODUCT CONTRACTS We have certain long-term agreements, which provide for the dedication of 100% of our production of acetic acid, methanol, plasticizers, sodium cyanide, calcium hypochlorite, and DSIDA, each to one customer. We also have various sales and conversion agreements, which dedicate significant portions of our production of styrene and acrylonitrile to various customers. Some of these agreements generally provide for cost recovery plus an agreed margin or element of profit based upon market price. LEASE COMMITMENTS We have entered into various long-term noncancellable operating leases. Future minimum lease commitments at September 30, 2000, are as follows: fiscal 2001 -- $6.4 million; fiscal 2002 -- $5.3 million; fiscal 2003 -- $4.7 million; fiscal 2004 -- $4.3 million; fiscal 2005 -- $3.5 million; and thereafter -- $7.1 million. ENVIRONMENTAL AND SAFETY MATTERS Our operations involve the handling, production, transportation, treatment, and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental, health, and safety laws, regulations, and permit requirements. Environmental permits required for our operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacturing, handling, processing, distribution, and use of our chemical products and the raw materials used to produce such products and, if so affected, our business and operations may be materially and adversely affected. In addition, changes in environmental requirements can cause us to incur substantial costs in upgrading or redesigning our facilities and processes, including waste treatment, storage, disposal, and other waste handling practices and equipment. We conduct environmental management programs designed to maintain compliance with applicable environmental requirements at all of our facilities. We routinely conduct inspection and surveillance programs designed to detect and respond to leaks or spills of regulated hazardous substances and to correct identified regulatory deficiencies. We believe that our procedures for waste handling are consistent with industry standards and applicable requirements. In addition, we believe that our operations are consistent with good industry practice. 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 our business operations and facilities generally are operated in compliance in all material respects with all applicable environmental and health and safety requirements, we cannot be sure that past practices or future operations will not result in material claims or regulatory action, require material environmental expenditures, or result in exposure or injury claims by employees, contractors and their employees, and the public. Some risk of environmental costs and liabilities is inherent in our operations and products, as it is with other companies engaged in similar businesses. Our operating expenditures for environmental matters, mostly waste management and compliance, were approximately $31 million for fiscal 2000 and $30 million for fiscal 1999. We also spent approximately $1 million for environmentally related capital projects in fiscal 2000 and $6 million for these types of capital projects in fiscal 1999. In 61 64 fiscal 2001, we anticipate spending approximately $4 million for capital projects related to waste management and environmental compliance. There are no capital expenditures related to remediation of environmental conditions projected for fiscal 2001. Any 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 the year 2002. Chlorine dioxide is produced from sodium chlorate, which is one of our pulp chemicals products. 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, but there can be no assurance that this regulation will be changed. In the event such a regulation is implemented, we would seek to sell the products we manufacture at our British Columbia facility to customers in other markets. We are not aware of any other laws or regulations in place in North America that would restrict the use of such products for other purposes. LEGAL PROCEEDINGS Ammonia Release On May 8, 1994, an ammonia release occurred at our Texas City plant while a reactor in the acrylonitrile unit was being restarted after a shutdown for routine maintenance. Approximately 52 lawsuits and interventions involving approximately 6,000 plaintiffs were filed against us seeking an unspecified amount of money for alleged damages from the ammonia release. All claims related to this release have been resolved within the limits of our insurance coverage. Nickel Carbonyl Release On July 30, 1997, as the methanol unit at our Texas City plant was being shut down for repair, nickel carbonyl was formed when carbon monoxide reacted with nickel catalyst in the unit's reformer. After isolating the nickel carbonyl within the methanol unit, we worked with the permission and guidance of the Texas Natural Resources Conservation Commission to destroy the nickel carbonyl by incineration on-site. Prior to its incineration, several of our employees and contractor employees may have been exposed to nickel carbonyl in the methanol unit. Two lawsuits and two interventions involving approximately 306 plaintiffs were filed against us seeking an unspecified amount for alleged damages from the nickel carbonyl release. These lawsuits and interventions have either been dismissed or settled within the limits of our insurance coverage. Ethylbenzene Release On April 1, 1998, a chemical leak occurred when a line failed in the ethylbenzene unit at our Texas City facility. The released chemicals included ethylbenzene, benzene, polyethylbenzene, and hydrochloric acid. We do not believe any serious injuries were sustained, although a number of citizens sought medical examinations at local hospitals after a precautionary alert was given to neighboring communities. There have been nine lawsuits filed against us related to this release, which involve 1,561 plaintiffs/intervenors who seek an unspecified amount of damages. We believe that substantially all of our future out-of-pocket costs and expenses, including settlement payments and judgments, relating to these lawsuits 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 us, although we cannot give any assurances to that effect. Other Claims We are subject to various other claims and legal actions that arise in the ordinary course of its business. 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 understanding of our insurance policies and indemnification agreements, discussions with our insurers and indemnitors, and consultation with outside legal counsel, in addition to our judgments. Based on the foregoing, as of September 30, 2000, we have accrued approximately $2.8 million as our estimate of our aggregate contingent liability for these matters 62 65 and have also recorded aggregate receivables from our insurers and third-party indemnitors of approximately $2.2 million. At September 30, 2000, management estimates that the aggregate reasonably possible range of loss for all litigation combined, in addition to the amount accrued, is between $0 to $5 million. We believe that this additional reasonably possible loss would be substantially covered by insurance or indemnification. While we have based our estimates on our evaluation of available information to date 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 affect on our financial position, results of operations, or cash flows. In addition, the timing of probable insurance and indemnity recoveries, and payment of liabilities, if any, is not expected to have a material adverse effect on our financial position, results of operations, or cash flows. 7. SEGMENT, GEOGRAPHIC, AND MAJOR CUSTOMER INFORMATION Our operations are divided into two reportable segments: petrochemicals and pulp chemicals. The petrochemicals segment manufactures commodity petrochemicals and acrylic fibers. The pulp chemicals segment manufactures chemicals for use primarily in the pulp and paper industry. Operating segment information for 2000, 1999, and 1998 is presented below.
YEAR ENDED SEPTEMBER 30, ------------------------------------- 2000 1999 1998 ---------- ---------- ---------- (Dollars in Thousands) Segment Information(1) Revenues: Petrochemicals $ 867,630 $ 530,927 $ 621,605 Pulp chemicals 210,721 189,825 200,985 ---------- ---------- ---------- Total $1,078,351 $ 720,752 $ 822,590 Operating income (loss): Petrochemicals $ 5,330 $ (63,710) $ (3,442) Pulp chemicals 34,680 27,018 36,232 ---------- ---------- ---------- Total $ 40,010 $ (36,692) $ 32,790 Depreciation and amortization expenses: Petrochemicals $ 33,988 $ 34,001 $ 31,894 Pulp chemicals 25,015 23,676 24,069 ---------- ---------- ---------- Total $ 59,003 $ 57,677 $ 55,963 Interest expenses: Petrochemicals $ 77,858 $ 65,426 $ 59,617 Pulp chemicals 44,556 38,635 44,838 ---------- ---------- ---------- Total $ 122,414 $ 104,061 $ 104,455 Capital expenditures: Petrochemicals $ 21,126 $ 21,252 $ 16,768 Pulp chemicals 7,671 8,288 9,854 ---------- ---------- ---------- Total $ 28,797 $ 29,540 $ 26,622 Property, plant, and equipment, net: Petrochemicals $ 153,853 $ 223,519 $ 263,692 Pulp chemicals 164,773 179,204 186,623 ---------- ---------- ---------- Total $ 318,626 $ 402,723 $ 450,315
(1) The petrochemicals segment is based in the United States. The pulp chemicals segment is primarily based in Canada. 63 66 Sales to individual customers constituting 10% or more of total revenues and export sales were as follows:
YEAR ENDED SEPTEMBER 30, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- (Dollars in Thousands) Major Customers: British Petroleum plc and subsidiaries $ 125,942 $ 71,803 $ 100,610 Export Sales: Export revenues $ 460,046 $ 200,448 $ 233,165 Percentage of total revenues 43% 28% 28%
8. FINANCIAL INSTRUMENTS FOREIGN EXCHANGE We have entered into forward foreign exchange contracts to reduce risk due to Canadian dollar exchange rate movements. The forward foreign exchange contracts had varying maturities with none exceeding 18 months. We made net settlements of United States dollars for Canadian dollars at rates agreed to at inception of the contracts. We do not engage in currency speculation. The last of our existing forward exchange contracts expired in March of 2000, and we do not intend to enter into any additional forward exchange contracts. GAS HEDGE We hedged a portion of our natural gas to be used in the production of styrene and methanol during fiscal 1999, and 1998. At September 30, 2000, there were no outstanding natural gas hedges. We had a net loss of $1.5 million and $1.0 million in fiscal 1999 and 1998, respectively, due to natural gas hedging contracts. INTEREST RATE SWAP We have entered into a declining balance interest rate swap contract to hedge a portion of our interest rate risk that expires in January 2002. At September 30, 2000, we had a contractual notional amount of $13.4 million outstanding with a fixed rate of 6.66% and a floating rate based on LIBOR. Our interest rate swap is settled on a quarterly basis, with the interest rate differential received or paid by us recognized as an adjustment to interest expense. CONCENTRATIONS OF RISK We sell our products primarily to companies involved in the petrochemicals, acrylic fibers, and pulp and paper manufacturing industries. We perform ongoing credit evaluations of our customers and generally do not require collateral for accounts receivable. However, letters of credit are required by us on many of our export sales. Historically, our credit losses have been minimal. We maintain cash deposits with major banks, which from time to time may exceed federally insured limits. We periodically assess the financial condition of these institutions and believe that the likelihood of any possible loss is minimal. Approximately 35% of our employees are covered by union agreements. Approximately 7% of our employees are covered by union agreements which could expire within one year. INVESTMENTS It is our policy to invest our excess cash in investment instruments or securities whose value is not subject to market fluctuations, such as certificates of deposit, repurchase agreements, or Eurodollar deposits with domestic or foreign banks or other financial institutions. Other permitted investments include commercial paper of major United States corporations with ratings of A1 by Standard & Poor's Ratings Group or P1 by Moody's Investor Services, Inc., loan participations of major United States corporations with a short term credit rating of A1/P1 and direct obligations of the United States Government or its agencies. In addition, we will not invest more than $5 million with any single bank, financial institution, or United States corporation. 64 67 FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reflected in the consolidated balance sheet for cash and cash equivalents, receivables, payables, and certain accrued expenses approximate fair value due to the short maturities of these instruments. The following table presents the carrying values and fair values of our long-term debt at September 30, 2000:
CARRYING VALUE FAIR VALUE -------------- ---------- (Dollars in Thousands) Revolving credit facilities $ 37,206 $ 37,206 Saskatoon Term Loans 34,904 34,904 11 1/4% Notes 152,154 114,563 11 3/4% Notes 275,000 200,750 12 3/8% Notes 295,000 304,219 13 1/2% Notes 169,886 70,948
The fair values of the 13 1/2% Notes, 12 3/8% Notes, 11 1/4% Notes, and 11 3/4% Notes are based on quoted market prices. Due to the Revolvers and the Saskatoon Term Loans having variable interest rates, the fair value equals their carrying value. At September 30, 2000, our interest rate swap had a fair market value of zero, based on our estimate of what we would have to pay to terminate the swap at September 30, 2000. 9. RELATED PARTY TRANSACTIONS In May of 1999, we engaged Credit Suisse First Boston Corporation ("CSFB") and Donaldson Lufkin & Jenrette Securities Corporation ("DLJ") as Joint-Book Running Managers in connection with the issuance by Chemicals of the 12 3/8% Notes. CSFB and DLJ also underwrote the Credit Agreement with The CIT Group/Business Credit, Inc., as Administrative Agent. We paid CSFB a total of $5,218,750 under these arrangement in fiscal 1999. John L. Garcia, one of our former directors, was a Managing Director and the Head of the Global Chemical Investment Banking Group of CSFB from 1994 until April of 1999. Since October 1, 1991, we have had ongoing commercial relationships in the ordinary course of business with certain affiliates of Koch Industries, Inc., including agreements for the supply of raw materials, sales of petrochemicals, and transportation of natural gas. During our fiscal years ended September 30, 2000, 1999, and 1998: o we made product sales to and purchased raw materials from Koch Chemical and Koch Nitrogren Company, indirect wholly owned subsidiaries of Koch Industries, Inc.; o we made payments to John Zink Company, an indirect wholly owned subsidiary of Koch Industries, Inc., in consideration for certain contracting and construction services performed at our Texas City facility; and o we made payments to Koch Gateway Pipeline Company for the transportation of natural gas to our acrylic fibers plant through a pipeline in which it is a partner. Each of these relationships represented less than 5% of our revenues in each of such fiscal years. In addition, in 1998 we filed a lawsuit against John Zink Company seeking recovery for certain types of damages sustained in connection with a release of nickel carbonyl from our methanol unit on July 30, 1997. This lawsuit has been voluntarily dismissed but, under a tolling agreement between the parties, may be refiled at any time. In May of 2000, we entered into a new 3 1/2 year ammonia supply agreement with Koch Nitrogen. The new ammonia supply agreement replaced our prior ammonia supply agreement with Koch Nitrogen which was not scheduled to expire until 2002. The new ammonia supply agreement requires us to purchase the same annual quantity of ammonia from Koch Nitrogen but at a revised pricing formula. In connection with the execution of the new ammonia supply agreement, we made a payment to Koch Nitrogen of $1.2 million to settle a dispute under the old ammonia supply agreement and we also made a one-time payment to Koch Nitrogen of $1.8 million in exchange for the revised pricing formula. Koch Capital Services, Inc., an affiliate of Koch Industries, Inc., is one of our significant stockholders and, under the Voting Agreement described below, has the right to designate a member of our Board of Directors. George J. Damiris, one of our former directors, is an executive officer of Koch. Koch Capital has elected to waive its right to designate a member of our board. The holders of 6,653,583 shares of Holdings Common Stock, representing approximately 52% of our outstanding shares, are parties to a Third Amended and Restated Voting Agreement dated as of February 1, 1999 (the "Voting Agreement"). Three of our directors, Frank P. Diassi, Frank J. Hevrdejs, and T. Hunter Nelson, and one of our former directors, William A. McMinn, are parties to the Voting Agreement. Other parties to the Voting Agreement include 65 68 Koch Capital Services, Inc. (an affiliate of Koch Industries), affiliates of Clipper ("The Clipper Group"), affiliates of Olympus, CSFB, and Gordon A. Cain. The parties to the Voting Agreement are required to vote any shares of Holdings Common Stock owned by them in favor of three nominees to the Board of Directors of Holdings, one to be designated by each of Koch Capital Services, Inc., The Clipper Group, and Mr. Cain. Rolf H. Towe is the current designee of The Clipper Group. William A. McMinn, who recently resigned from our Board, was Mr. Cain's designee and Mr. Cain has the right to designate Mr. McMinn's replacement. Koch Capital has elected to waive its right to designate a member of our board. The rights of each of Koch Capital Services, Inc. and The Clipper Group to designate nominees under the Voting Agreement terminates on the earlier of August 21, 2006 or the time at which they beneficial own less than 5% of the outstanding shares of our Common Stock, respectively. The right of Mr. Cain to designate a nominee terminates upon the earlier of (i) December 15, 2008 and (ii) the later of (a) the expiration of the Standby Purchase Agreement to which he is a party (described below) and (b) the time at which Mr. Cain beneficial owns less than 5% of the outstanding shares of Holdings Common Stock. Under engagement letters dated April 15, 1998 and April 27, 1998, we engaged Chem Systems, an IBM company, to perform certain consulting services related to our styrene monomer business. In addition, on August 10, 1998, we engaged Chem Systems to conduct a site study of our Texas City plant and to benchmark our best practices and organizational structures against top quartile performers in the industry. Also, in connection with the refinancing in July of 1999, we paid Chem Systems amounts owed to them by DLJ related to the performance of an appraisal of some of our assets required for the refinancing. Finally, in 2000, Chem Systems performed ongoing appraisal evaluation services. In fiscal 1999 we paid Chem Systems an aggregate of $421,164. Peter Spitz, who is the father of Gary M. Spitz (Chief Financial Officer and a Vice President of the Company), was the Director of Chem Systems until August of 1999. Peter Spitz did not personally perform any direct services under any of these arrangements. As of December 15, 1998, we entered into separate Standby Purchase Agreements with each of Gordon A. Cain, William A. McMinn, James Crane, Frank P. Diassi, Frank J. Hevrdejs, and Koch Capital Services, Inc. as described below in Footnote 10. 10. CAPITAL STOCK In connection with the issuance of the 13 1/2% Notes (see Note 3), Holdings issued 191,751 warrants to purchase three shares of Holdings Common Stock for $0.01, exercisable from August 1998 until August 2008. During fiscal 2000, 1999, and 1998, 1,515, 32,460, and 345,123 shares, respectively, of Holdings Common Stock were issued as a result of 505, 10,820, and 115,041, respectively, of these warrants being exercised. In connection with the Saskatoon Acquisition, Holdings also issued to holders of the Series B Preferred Stock warrants to purchase 201,048 shares of Holdings Common Stock for $0.01, exercisable from July 1997 until December 2007. In December 1998, we entered into separate Standby Purchase Agreements (collectively, the "Purchase Agreements") with each of Gordon A. Cain, William A. McMinn, James Crane, Mr. Diassi, Mr. Hevrdejs, and Koch Capital Services, Inc. (collectively, the "Purchasers"). Pursuant to the terms of the Purchase Agreements, the Purchasers committed to purchase up to 2.5 million shares of Holdings Common Stock, at a price of $6.00 per share, if, as, and when requested by us at any time or from time to time prior to December 15, 2001. Under each of the Purchase Agreements, we may only require the Purchasers to purchase such shares if we believe that such capital is necessary to maintain, reestablish, or enhance Chemicals' borrowing ability under its revolving credit facilities or to satisfy any requirement thereunder to raise additional equity. To induce the Purchasers to enter into the Purchase Agreements, we issued them warrants to purchase an aggregate of 300,000 shares of Holdings Common Stock at an exercise price of $6.00 per share In addition, we agreed to issue to the Purchasers additional warrants to purchase up to 300,000 additional shares of Holdings Common Stock if, as, and when they purchase shares of Holdings Common Stock under the Purchase Agreements. Any shares of Holdings Common Stock purchased under the Purchase Agreement and the warrants issued to the Purchasers as contemplated by the Purchase Agreements will be subject to the terms of the Third Amended and Restated Voting Agreement dated as of February 1, 1999, the Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, as amended, and the Tag-Along Agreement dated as of August 21, 1996. At September 30, 2000, warrants to purchase an aggregate of 697,203 shares Holdings Common Stock were outstanding. 66 69 11. MANDATORY REDEEMABLE PREFERRED STOCK In connection with the acquisition of our acrylic fibers facility, we authorized 350,000 shares and issued 104,110 shares of non-voting Series A Preferred Stock with a fair value and carrying value of $10.0 million. The Series A Preferred Stock has a cumulative dividend rate of 10%, payable in kind semi-annually on January 1 and July 1 of each year commencing July 1, 1997. We may redeem all or any number of shares of Series A Preferred Stock at any time with proper written notice at a price of $100 per share plus accrued and unpaid dividends. The holders of Series A Preferred Stock may elect to have us redeem shares on any dividend payment date after June 30, 2009, with proper written notice, at a price of $100 per share plus accrued and unpaid dividends. The carrying value of the Series A Preferred Stock at September 30, 2000 and 1999, was $14.3 million and $13.0 million, respectively (liquidation value of $100 per share). In connection with the Saskatoon Acquisition, we authorized 58,000 shares and issued approximately 7,532 shares of non-voting Series B Preferred Stock with a fair value of $4.9 million. The Series B Preferred Stock has a 14% dividend rate through July 10, 2002, and thereafter a variable rate between 14% and 18% depending on payment terms until redeemed. The dividend is payable in kind on January 1, April 1, July 1, and October 1 of each year, commencing October 1, 1997. We may redeem all or any number of shares of Series B Preferred Stock at any time with proper written notice at a price of $1,000 per share plus a premium ranging from 5% to 1% depending on the date of redemption plus accrued and unpaid dividends. The holders of Series B Preferred Stock may elect to have us redeem shares on any dividend payment date after June 30, 2009, with proper written notice, at a price of $1,000 per share plus accrued and unpaid dividends. The carrying value of the Series B Preferred Stock at September 30, 2000 and 1999, was $9.6 million and $7.9 million, respectively, based on liquidation value of $1,000 per share, reflecting a reduction in the carrying value of the Series B Preferred Stock in an amount equal to the fair market value of warrants issued to the holders of the Series B Preferred Stock in connection with the financing. The difference in the carrying value and the redemption amount is accreted as a charge to retained earnings over the holding period using the effective interest rate method. 12. NEW ACCOUNTING STANDARDS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. We adopted these statements as of October 1, 2000. The transition adjustment relating to the adoption of these statements was not material. 67 70 STERLING CHEMICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Except as modified below, the Notes to Holdings' Consolidated Financial Statements are incorporated herein by reference insofar as they relate to Chemicals. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INCOME TAXES Chemicals is included in the consolidated federal tax return filed by its parent, Holdings. A tax sharing agreement between Holdings and Chemicals defines the computation of Chemicals' obligations to Holdings. Chemicals' provision for income taxes is computed as if Chemicals and its subsidiaries file their annual tax return on a separate company basis. Deferred income taxes are recorded to reflect the tax effect of the temporary differences between the financial reporting basis and the tax basis of Chemicals' assets and liabilities at enacted rates. EARNINGS PER SHARE All issued and outstanding shares of Chemicals are held by Holdings, and accordingly, earnings per share are not presented. 2. INCOME TAXES A reconciliation of federal statutory income taxes to Chemicals' effective tax provision (benefit) before extraordinary item follows:
YEAR ENDED SEPTEMBER 30, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- (Dollars in Thousands) Benefit for income taxes at statutory rates ... $ (20,750) $ (44,235) $ (20,385) Taxable foreign dividends ..................... 2,889 4,295 -- Change in valuation allowance ................. 23,700 1,514 -- Non-deductible expenses ....................... 182 195 -- State and foreign income taxes ................ (1,437) 550 1,422 Other ......................................... (24) 8,271 -- ---------- ---------- ---------- Effective tax provision (benefit) ............. $ 4,560 $ (29,410) $ (18,963) ========== ========== ==========
The provision (benefit) for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ (Dollars in Thousands) Current federal ..................... $ -- $ 2,246 $ (5,900) Deferred federal .................... -- (31,198) (15,271) Current foreign ..................... 3,328 Deferred foreign .................... (257) (1,300) 2,132 Provincial and state income taxes ... 1,489 842 76 ------------ ------------ ------------ Total tax provision (benefit) ....... $ 4,560 $ (29,410) $ (18,963) ============ ============ ============
68 71 The components of Chemicals' deferred income tax assets and liabilities are summarized below:
SEPTEMBER 30, ---------------------------- 2000 1999 ------------ ------------ (Dollars in Thousands) Deferred tax assets: Accrued liabilities ........................... $ 11,513 $ 12,050 Accrued postretirement cost ................... 13,638 11,991 Tax loss and credit carryforward and other .... 58,452 63,663 Other ......................................... 16,275 12,707 ------------ ------------ Total deferred tax assets ..................... 99,878 100,411 ------------ ------------ Deferred tax liabilities: Property, plant and equipment ................. $ (42,018) $ (68,732) Other ......................................... (4,722) (2,629) ------------ ------------ Total deferred tax liabilities ................ (46,740) (71,361) Valuation allowance ........................... (25,214) (1,514) ------------ ------------ Net deferred tax assets ....................... 27,924 27,536 Less current deferred tax assets .............. (8,470) (16,888) ------------ ------------ Long-term deferred tax assets (liabilities) ... $ 19,454 $ 10,648 ============ ============
69 72 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Sterling Chemicals Holdings, Inc. We have audited the accompanying consolidated balance sheets of Sterling Chemicals Holdings, Inc. and subsidiaries as of September 30, 2000 and 1999, and the related consolidated statements of operations, changes in stockholders' equity (deficiency in assets), and cash flows for each of the three years in the period ended September 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sterling Chemicals Holdings, Inc. and subsidiaries as of September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Houston, Texas December 12, 2000 70 73 INDEPENDENT AUDITORS' REPORT To the Stockholder of Sterling Chemicals, Inc. We have audited the accompanying consolidated balance sheets of Sterling Chemicals, Inc. and subsidiaries as of September 30, 2000 and 1999, and the related consolidated statements of operations, changes in stockholder's equity (deficiency in assets), and cash flows for each of the three years in the period ended September 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sterling Chemicals, Inc. and subsidiaries as of September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the period ended September 30, 2000 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Houston, Texas December 12, 2000 71 74 STERLING CHEMICALS GUARANTORS COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Revenues ........................................... $ 245,402 $ 224,116 $ 263,884 Cost of goods sold ................................. 211,632 190,059 211,777 ---------- ---------- ---------- Gross profit ....................................... 33,770 34,057 52,107 Selling, general, and administrative expenses ...... 24,290 19,280 22,098 Impairment of assets ............................... 60,000 -- -- Interest and debt related expenses ................. 43,051 41,743 39,074 ---------- ---------- ---------- Loss before income taxes ........................... (93,571) (26,966) (9,065) Equity in earnings of joint venture, net of tax .... (747) (2,549) (1,872) Provision (benefit) for income taxes ............... 2,951 (4,530) (3,192) ---------- ---------- ---------- Net Loss ........................................... $ (95,775) $ (19,887) $ (4,001) ========== ========== ==========
The accompanying notes are an integral part of the combined financial statements. 72 75 STERLING CHEMICALS GUARANTORS COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, ---------------------------- 2000 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ............................... $ 499 $ 9,323 Accounts receivable, net ................................ 46,190 45,240 Inventories ............................................. 31,252 29,207 Prepaid expenses ........................................ 301 1,669 ------------ ------------ Total current assets .................................. 78,242 85,439 Property, plant, and equipment, net ........................ 127,667 201,692 Due from affiliates ........................................ 165,531 157,882 Other assets ............................................... 30,720 43,814 ------------ ------------ Total assets .......................................... $ 402,160 $ 488,827 ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS) Current liabilities: Accounts payable ........................................ $ 20,397 $ 22,695 Accrued liabilities ..................................... 24,041 16,515 ------------ ------------ Total current liabilities ............................. 44,438 39,210 Long-term debt due to parent ............................... 351,337 351,337 Deferred income taxes ...................................... 8,338 7,272 Deferred credits and other liabilities ..................... 11,574 7,227 Commitments and contingencies (Note 7) ..................... -- -- Stockholder's equity (deficiency in assets): Common stock ............................................ -- -- Additional paid-in capital .............................. 92,735 92,735 Retained earnings (accumulated deficit) ................. (77,229) 18,546 Accumulated other comprehensive income .................. (29,033) (27,500) ------------ ------------ Total stockholder's equity (deficiency in assets) ..... (13,527) 83,781 ------------ ------------ Total liabilities and stockholder's equity (deficiency in assets) .................... $ 402,160 $ 488,827 ============ ============
The accompanying notes are an integral part of the combined financial statements. 73 76 STERLING CHEMICALS GUARANTORS COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS) (AMOUNTS IN THOUSANDS)
RETAINED ACCUMULATED ADDITIONAL EARNINGS OTHER COMMON PAID-IN (ACCUMULATED COMPREHENSIVE STOCK CAPITAL DEFICIT) INCOME TOTAL ------------ ------------ ------------ ------------- ------------ Balance, September 30, 1997 .... $ -- $ 92,735 $ 42,434 $ (20,772) $ 114,397 Comprehensive income: Net loss .................... -- -- (4,001) -- Translation adjustment ...... -- -- -- (10,041) Comprehensive loss ....... (14,042) ------------ ------------ ------------ ------------ ------------ Balance, September 30, 1998 .... -- 92,735 38,433 (30,813) 100,355 Comprehensive income: Net loss .................... -- -- (19,887) -- Translation adjustment ...... -- -- -- 3,313 Comprehensive loss ....... (16,574) ------------ ------------ ------------ ------------ ------------ Balance, September 30, 1999 .... -- 92,735 18,546 (27,500) 83,781 Net loss .................... -- -- (95,775) -- Translation adjustment ...... -- -- -- (1,533) Comprehensive loss ....... (97,308) ------------ ------------ ------------ ------------ ------------ Balance, September 30, 2000 .... $ -- $ 92,735 $ (77,229) $ (29,033) $ (13,527) ============ ============ ============ ============ ============
The accompanying notes are an integral part of the combined financial statements. 74 77 STERLING CHEMICALS GUARANTORS COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, --------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Cash flows from operating activities: Net loss ........................................................................... $ (95,775) $ (19,887) $ (4,001) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ................................................... 26,050 24,153 23,502 Impairment of asset ............................................................. 60,000 -- -- Deferred tax expense (benefit) .................................................. 1,066 206 (2,479) Other ........................................................................... 66 (234) 446 Change in assets/liabilities: Accounts receivable ............................................................. (950) (6,499) 14,422 Inventories ..................................................................... (2,045) 3,325 (77) Prepaid expenses ................................................................ 1,368 4,421 (3,291) Due from affiliates ............................................................. (9,181) 3,512 1,055 Other assets .................................................................... 8,673 1,841 (456) Accounts payable ................................................................ (2,298) 712 397 Accrued liabilities ............................................................. 7,524 238 (531) Other liabilities ............................................................... 4,342 (4,792) 298 ---------- ---------- ---------- Net cash flows provided by (used in) operating activities .......................... (1,160) 6,996 29,285 ---------- ---------- ---------- Cash flows from investing activities: Capital expenditures ............................................................ (7,604) (7,682) (10,550) Proceeds from sale of assets .................................................... -- 3,583 -- ---------- ---------- ---------- Net cash used in investing activities .............................................. (7,604) (4,099) (10,550) ---------- ---------- ---------- Cash flows from financing activities - Net change in long-term debt due to Parent ...................................... -- 2,099 (20,410) ---------- ---------- ---------- Effect of United States/Canadian exchange rate on cash ............................. (60) 234 (447) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents ............................... (8,824) 5,230 (2,122) Cash and cash equivalents--beginning of year ....................................... 9,323 4,093 6,215 ---------- ---------- ---------- Cash and cash equivalents--end of year ............................................. $ 499 $ 9,323 $ 4,093 ========== ========== ========== Supplemental disclosures of cash flow information: Income taxes paid ............................................................... $ (696) $ (749) $ (541)
The accompanying notes are an integral part of the combined financial statements. 75 78 STERLING CHEMICALS GUARANTORS NOTES TO COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS On July 23, 1999, Sterling Chemicals, Inc. ("Chemicals"), a wholly owned subsidiary of Sterling Chemicals Holdings, Inc. ("Holdings"), completed a private offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006. On November 5, 1999, Chemicals completed a registered exchange offer pursuant to which all of these notes were exchanged for publicly registered 12 3/8% Notes with substantially similar terms (the "12 3/8% Notes"). The 12 3/8% Notes are guaranteed by all of Chemicals' existing direct and indirect United States subsidiaries (other than Sterling Chemicals Acquisitions, Inc.) on a joint and several basis and are secured by, among other things, a second priority pledge of 100% of the stock of these subsidiaries. These subsidiaries consist of Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Chemicals Energy, Inc., Sterling Chemicals International, Inc., and Sterling Fibers, Inc. and, together with two Canadian subsidiaries of Sterling Canada, Inc., are collectively referred to as the "Guarantors." The consolidated financial statements of each of these guarantor subsidiaries have been combined to produce the accompanying financial statements. The Guarantors manufacture chemicals for use primarily in the pulp and paper industry at four plants in Canada and a plant in Valdosta, Georgia, and manufacture acrylic fibers at a plant in Santa Rosa County, Florida. Sodium chlorate is produced at the four plants in Canada and the Valdosta plant. Sodium chlorite is produced at one of the Canadian locations. The Guarantors also license, engineer, and oversee construction of large-scale chlorine dioxide generators, which convert sodium chlorate into chlorine dioxide, for the pulp and paper industry. The Guarantors produce regular textiles, specialty textiles, and technical fibers at the Santa Rosa plant, as well as licensing their acrylic fibers manufacturing technology to producers worldwide. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies of the Guarantors are described below. PRINCIPLES OF COMBINATION The combined financial statements include the accounts of all wholly owned and majority-owned subsidiaries of the combined entities. All significant intercompany accounts and transactions among entities included in the combined financial statements have been eliminated. The Guarantors' investment in a cogeneration joint venture in which the Guarantors have a fifty percent interest is accounted for under the equity method. CASH EQUIVALENTS The Guarantors consider all investments with a remaining maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Cost is primarily determined on the first-in, first-out basis, except for stores and supplies which are valued at average cost. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost. Major renewals and improvements, which extend the useful lives of equipment are capitalized. Major planned maintenance expenses are accrued for during the periods prior to the maintenance, while routine repair and maintenance expenses are charged to operations as incurred. Disposals are removed at carrying cost less accumulated depreciation with any resulting gain or loss reflected in operations. Depreciation is provided using the straight-line method over estimated useful lives ranging from 5 to 25 years, with the predominant life of the plant and equipment being 15 years. IMPAIRMENT OF LONG-LIVED ASSETS Impairment tests of long-lived assets are made when conditions indicate their carrying cost may not be recoverable. Such impairment tests are based on a comparison of undiscounted future cash flows or the market value of similar assets 76 79 to the carrying cost of the asset. If an impairment is indicated, the asset value is written down to its estimated fair value. During fiscal 2000, the Guarantors incurred an impairment loss of $60.0 million related to their acrylic fibers business. PATENTS AND ROYALTIES The costs of patents are amortized on a straight-line basis over their estimated useful lives, which approximate ten years. The Guarantors capitalized the value of their chlorine dioxide generator technology acquired in fiscal 1992 based on the net present value of all estimated remaining royalty payments associated with this technology. The resulting intangible amount is included in other assets and is amortized over an average life for these royalty payments of ten years. INCOME TAXES The Guarantors are included in the consolidated United States federal income tax returns filed by Holdings. The Guarantors' provision (benefit) for United States income taxes has been allocated by Holdings as if the Guarantors filed their annual tax returns on a separate return basis. The Guarantors' Canadian subsidiaries file separate federal Canadian tax returns, as well as returns in the provinces in which they operate. For these Canadian subsidiaries, deferred income taxes are recorded to reflect the tax effect of the temporary differences between the financial reporting basis and the tax basis of the Guarantors' assets and liabilities. REVENUE RECOGNITION The Guarantors generate revenues through sales in the open market and long-term supply contracts and recognize these revenues as the products are shipped. Deferred credits are amortized over the life of the contracts which gave rise to them. The Guarantors also generate revenues from the construction and sale of chlorine dioxide generators, which are recognized using the percentage of completion method. The Guarantors also receive prepaid royalties, which are typically recognized over a period of ten years. In addition, the Guarantors generate revenues from the sale of acrylic fibers manufacturing technology to producers worldwide, which are recognized as earned. We classify amounts billed to customers for shipping and handling as revenues, with the related shipping and handling costs included in cost of goods sold. FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE The Canadian companies included in the consolidated financial statements of the Guarantors use the Canadian dollar as the functional currency. For financial reporting purposes, assets and liabilities of these companies denominated in Canadian dollars are translated into United States dollars at year-end exchange rates and revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are included in accumulated other comprehensive income, while transaction gains and losses are included in operations when incurred. The Guarantors' Canadian subsidiaries previously entered into forward foreign exchange contracts to minimize the short-term impact of Canadian dollar fluctuations on some of their Canadian dollar denominated commitments. Gains or losses on these contracts are deferred and are included in operations in the same period in which the related transactions are settled. EARNINGS PER SHARE All issued and outstanding shares of the entities included in Guarantors' financial statements are held directly or indirectly by Chemicals and Holdings and, accordingly, earnings per share information is not presented. ENVIRONMENTAL COSTS Environmental costs are expensed as incurred unless the expenditures extend the economic useful life of the relevant assets. Costs that extend the economic life of assets are capitalized and depreciated over the remaining life of those assets. Liabilities are recorded when environmental assessments or remedial efforts are probable and the cost can be reasonably estimated. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In preparing disclosures about the fair value of financial instruments, the Guarantors have assumed that the carrying amount approximates fair value for cash and cash equivalents, receivables, accounts payable, and certain 77 80 accrued expenses due to the short maturities of those instruments. The fair values of long-term debt instruments allocated to the Guarantors by Chemicals are estimated based upon quoted market values (if applicable) or on the current interest rates available for debt with similar terms and remaining maturities. Considerable judgment is required in developing these estimates and, accordingly, no assurance can be given that the estimated values presented herein are indicative of the amounts that would be realized in a free market exchange. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Significant estimates include environmental reserves, litigation contingencies, and taxes. Actual results could differ from these estimates. ALLOCATIONS The Guarantors are directly or indirectly wholly owned by Chemicals, which incurs certain direct and indirect expenses for the benefit and support of the Guarantors. These services include, among others, tax planning, treasury, legal, risk management, and the maintenance of insurance coverage for the Guarantors. Chemicals allocated $4.9 million, $3.5 million, and $4.1 million of such expenses to the Guarantors in fiscal years 2000, 1999, and 1998, respectively, which are included in selling, general, and administrative expenses. Allocations are based on the Guarantors' proportionate share of the respective amounts and are determined using various criteria including headcount, payroll, number of vehicles, and revenue. In addition, the Guarantors are dependent on Chemicals for financing. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," and No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities," establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Guarantors adopted these statements as of October 1, 2000. The transition adjustment relating to the adoption of these statements was not material. RECLASSIFICATION Certain amounts reported in the financial statements for prior periods have been reclassified to conform with the current financial statement presentation with no effect on net income (loss) or stockholder's equity (deficiency in assets). 78 81 3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
SEPTEMBER 30, ------------------------- 2000 1999 ----------- ----------- (Dollars in Thousands) Inventories: Finished products.......................... $ 20,119 $ 17,513 Raw materials.............................. 2,222 2,235 ----------- ----------- Inventories at cost............................. 22,341 19,748 Inventories under exchange agreements...... 277 170 Stores and supplies........................ 8,634 9,289 ----------- ----------- $ 31,252 $ 29,207 =========== =========== Property, plant, and equipment: Land....................................... $ 2,773 $ 2,808 Buildings.................................. 35,442 34,919 Plant and equipment........................ 236,583 230,057 Construction in progress................... 9,951 13,073 ----------- ----------- Property, plant, and equipment at cost..... 284,749 280,857 Less: accumulated depreciation............. (157,082) (79,165) ----------- ----------- $ 127,667 $ 201,692 =========== =========== Other assets: Patents and technology, net................ $ 14,790 $ 20,718 Other...................................... 15,930 23,096 ----------- ----------- $ 30,720 $ 43,814 =========== =========== Accrued liabilities: Accrued compensation....................... $ 5,048 $ 4,988 Accrued interest........................... 6,559 1,976 Billings in excess of costs incurred....... 787 3,135 Other...................................... 11,647 6,416 ----------- ----------- $ 24,041 $ 16,515 =========== ===========
4. LONG-TERM DEBT In August of 1996, in connection with a recapitalization transaction, Chemicals allocated $276.8 million of debt to the Guarantors. In addition, $81 million of debt incurred at the time Chemicals acquired its acrylic fibers business was allocated to the Guarantors. Principal payments are allocated to the Guarantors by Chemicals as scheduled principal payments are made on a basis consistent with the original allocation. In addition, the Guarantors have made payments to Chemicals, from time to time, out of available cash which were applied by Chemicals as a reduction of the principal of the previously allocated debt. Interest expense is allocated to the Guarantors based on the terms of Chemicals' debt agreements. At September 30, 2000, interest rates on the allocated debt ranged from 11.25% to 12.375%. Debt issue costs relating to long-term debt have been allocated to the Guarantors by Chemicals on a basis consistent with long-term debt and are included in other assets. On July 23, 1999, Chemicals completed a private offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006 which were subsequently exchanged for the 12 3/8% Notes. The 12 3/8% Notes are guaranteed by all of the Guarantors (other than the two Canadian subsidiaries of Sterling Canada, Inc.) on a joint and several basis. Each guarantee ranks equally in right of payment with all of the relevant Guarantor's existing and future senior indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness. However, the 12 3/8% Notes and the guarantees are subordinated to the extent of the collateral securing Chemicals' secured revolving credit facilities. The 12 3/8% Notes and the guarantees are secured by (i) a second priority lien on all of Chemicals' and the Guarantors' United States production facilities and related assets, (ii) a second priority pledge of all of the capital stock of each Guarantor incorporated in the United States, and (iii) a first priority pledge of 65% of the stock of certain of the Chemicals' subsidiaries incorporated outside of the United States. The proceeds of the offering of the 12 3/8% Notes were used to fully repay and terminate Chemicals' three outstanding term loans. Upon consummation of the offering of the 12 3/8% Notes, the debt allocated to the Guarantors by Chemicals increased to $351.3 million. On July 23, 1999, Chemicals also established two secured revolving credit facilities providing for up to $155,000,000 in revolving credit loans under a single Revolving Credit Agreement (the "Credit Agreement"). Under the Credit Agreement, Chemicals and the Guarantors (other than the two Canadian subsidiaries of Sterling Canada, Inc.) 79 82 are co-borrowers and are jointly and severally liable for any indebtedness thereunder. The revolvers consist of (i) an $85,000,000 revolving credit facility (the "Current Assets Revolver") secured by a first priority lien on all accounts receivable, inventory, and other specified assets of Chemicals and the Guarantors incorporated in the United States, and (ii) a $70,000,000 revolving credit facility (the "Fixed Assets Revolver") secured by a first priority lien on all United States production facilities and related assets of Chemicals and the Guarantors incorporated in the United States, all of the capital stock of Chemicals and the Guarantors incorporated in the United States and a second priority lien on all accounts receivable, inventory, and other specified assets of Chemicals and the Guarantors incorporated in the United States. Funding under the 12 3/8% Notes and the revolvers occurred on July 23, 1999. The proceeds of the 12 3/8% Notes and the initial borrowings under the revolvers were used to completely repay all outstanding indebtedness under Chemicals' then existing senior credit facility. Approximately $37.2 million was drawn by Chemicals under the Fixed Assets Revolver at September 30, 2000, of which no amounts were allocated to the Guarantors. Borrowings under the Fixed Assets Revolver bear interest, at Chemicals' option, at an annual rate of either the "LIBOR Rate" (as defined in the Credit Agreement) plus 3.75% or the "Alternate Base Rate" plus 2.25%. Borrowings under the Current Assets Revolver bear interest, at Chemicals' option, at an annual rate of either the LIBOR Rate plus 3.00% or the "Alternate Base Rate" plus 1.50%. The "Alternate Base Rate" is equal to the greater of the "Base Rate" as announced from time to time by The Chase Manhattan Bank in New York, New York or the "Federal Funds Effective Rate" plus 1/2% (as such terms are defined in the Credit Agreement). The Credit Agreement also requires Chemicals and the Guarantors to pay an aggregate commitment fee ranging from 0.75% to 1.25% on the unused portion of the commitment for the Fixed Assets Revolver, depending on the amount drawn, and an aggregate commitment fee of 0.5% on the unused portion of the commitment for the Current Assets Revolver. Available credit under the Current Assets Revolver is subject to a monthly borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory, with an inventory cap of $42,500,000. In addition, the borrowing base for the Current Assets Revolver must exceed outstanding borrowings thereunder by $12,000,000 at all times. The Fixed Assets Revolver matures on July 23, 2004, with quarterly commitment reductions totaling 30% of the total commitment in the twelve month period ending July 23, 2003 and the balance in the following twelve month period. The Current Assets Revolver matures in five years, with no scheduled commitment reductions prior to that time. However, the commitments for each of the Fixed Assets Revolver and the Current Assets Revolver are permanently reduced to the extent required under the Credit Agreement upon prepayments made out of specific sources of funds, including certain equity issuances by Holdings and certain asset sales. 5. INCOME TAXES The Guarantors are included in the consolidated federal United States tax return filed by Holdings. The Guarantors' provision (benefit) for United States income taxes has been allocated as if the Guarantors filed their annual federal United States tax returns on a separate return basis. As of September 30, 2000 and 1999, $14.6 million and $14.6 million, respectively, of deferred income tax assets were included in Due from Affiliates. For the years ended September 30, 2000, 1999, and 1998, the Guarantors recorded zero, $4.0 million, and $4.0 million, respectively, of United States income tax benefit in the provision (benefit) for income taxes. Canadian deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and the financial reporting amounts at each year-end. A reconciliation of the Canadian income taxes to the Canadian effective tax provision follows:
YEAR ENDED SEPTEMBER 30, ------------------------------------ 2000 1999 1998 ----------- ---------- ----------- (Dollars in Thousands) Provision for federal income tax at the statutory rate.............. $ 2,308 $ 259 $ 1,367 Provincial income taxes at the statutory rate....................... 1,114 88 563 Federal and provincial manufacturing and processing tax credits..... (477) (50) (286) Other............................................................... -- 16 156 ---------- --------- -------- Total Canadian tax provision........................................ $ 2,945 $ 313 $ 1,800 ========== ========= ========
80 83 The provision for Canadian income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30, --------------------------------------- 2000 1999 1998 ------------ ------------ ------------ (Dollars in Thousands) Current federal.................................................. $ 3,328 $ 2,098 $ 2,852 Deferred federal................................................. (1,380) (1,859) (1,611) Current provincial............................................... 1,702 619 1,427 Deferred provincial.............................................. (705) (545) (868) ---------- ---------- --------- Total Canadian tax provision..................................... $ 2,945 $ 313 $ 1,800 ========== ========== =========
The components of the Guarantors' Canadian deferred income tax assets and liabilities are summarized below:
SEPTEMBER 30, ------------------------ 1999 ---------- ---------- (Dollars in Thousands) Deferred tax assets: Accrued liabilities ...................... $ 249 $ 318 Accrued postretirement cost .............. 1,339 1,236 Investment tax credits ................... 1,408 4,767 ---------- ---------- 2,996 6,321 ---------- ---------- Deferred tax liabilities: Property, plant, and equipment ........... (11,334) (13,593) Other .................................... -- -- ---------- ---------- (11,334) (13,593) ---------- ---------- Net deferred tax liabilities ................ $ (8,338) $ (7,272) ========== ==========
6. EMPLOYEE BENEFITS The Guarantors' United States employees participate in various employee benefit plans of Chemicals. Costs, assets, and liabilities associated with United States employees participating in these various plans are allocated to the Guarantors by Chemicals based on the number of employees. In addition, the Guarantors sponsor various employee benefit plans in Canada. RETIREMENT BENEFIT PLANS Chemicals has non-contributory pension plans in the United States which cover all salaried and wage employees. The benefits under these plans are based primarily on years of service and employees' pay near retirement. Chemicals' funding policy is consistent with the funding requirements of federal law and regulations. Plan assets consist principally of common stocks and government and corporate securities. The liability relating to United States employees allocated to the Guarantors by Chemicals for the retirement benefit plans and included in Due from Affiliates was $4.8 million and $3.6 million at September 30, 2000 and 1999, respectively. The total pension expense relating to United States employees allocated to the Guarantors was $1.2 million, $1.1 million, and $1.1 million for the years ended September 30, 2000, 1999, and 1998, respectively. 81 84 The Guarantors have employer and employee contributor plans in Canada which cover all salaried and wage employees. Information for Canadian benefit plans concerning the pension obligation, plan assets, amounts recognized in the Guarantors' financial statements, and underlying actuarial assumptions is stated below.
SEPTEMBER 30, ------------------------ 2000 1999 ---------- ---------- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year ..................... $ 16,283 $ 14,577 Currency rate conversion .................................... (293) 556 Service cost ................................................ 716 919 Interest cost ............................................... 1,240 1,112 Plan amendments ............................................. -- -- FAS 88 additional benefits .................................. -- -- Actuarial loss (gain) ....................................... (31) (124) Benefits paid ............................................... (307) (757) ---------- ---------- Benefit obligation at end of year ........................... $ 17,608 $ 16,283 ========== ========== Change in plan assets: Fair value at beginning of year ............................. $ 15,330 $ 13,062 Currency rate conversion .................................... (276) 498 Actual return on plan assets ................................ 2,412 1,858 Employer contributions ...................................... 658 669 Participants' contributions ................................. -- -- Benefits paid ............................................... (307) (757) ---------- ---------- Fair value at end of year ................................... $ 17,817 $ 15,330 ========== ========== Development of net amount recognized: Funded status ............................................... $ 209 $ (953) Unrecognized cost: Actuarial loss (gain) .................................... (1,318) (22) Prior service cost ....................................... 298 333 ---------- ---------- Net amount recognized ....................................... $ (811) $ (642) ========== ========== Amounts recognized in the statement of financial position: Prepaid pension cost ........................................ $ 418 $ 529 Accrued pension cost ........................................ (1,229) (1,198) Intangible asset ............................................ -- 27 ---------- ---------- Net amount recognized ....................................... $ (811) $ (642) ========== ==========
Net periodic pension costs for the Canadian pension plan consist of the following components:
SEPTEMBER 30, ---------------------------------------- 2000 1999 1998 ---------- ---------- ---------- (Dollars in Thousands) Components of net pension costs: Service cost-benefits earned during the year ................ $ 716 $ 919 $ 748 Interest on prior year's projected benefit obligation ....... 1,240 1,112 1,016 Expected return on plan assets .............................. (1,144) (963) (1,092) Net amortization: Actuarial loss (gain) .................................... 28 68 (130) Prior service cost ....................................... (2) 29 15 ---------- ---------- ---------- Net pension costs ........................................... $ 838 $ 1,165 $ 557 ========== ========== ========== Weighted-average assumptions: Discount Rate ............................................... 7.5% 7.5% 7.0% Rates of increase in salary compensation level .............. 4.5% 4.5% 4.0% Expected long-term rate of return on plan assets ............ 7.5% 7.5% 7.0%
82 85 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Chemicals and the Guarantors provide certain health care benefits and life insurance benefits for retired employees. Substantially all employees become eligible for these benefits at normal retirement age. The cost of these benefits are accrued during the period in which the employee renders the necessary service. Health care benefits are provided to employees who retire with ten or more years of service except for Canadian employees covered by collective bargaining agreements. All employees are eligible for postretirement life insurance. Postretirement health care benefits for United States plans are non-contributory. Benefit provisions for most hourly and some salaried employees are subject to collective bargaining. In general, the plans stipulate that retiree health care benefits are paid as covered expenses are incurred. The liability relating to United States employees allocated to the Guarantors by Chemicals for the postretirement benefits other than pensions and included in Due from Affiliates was $7.6 million and $7.3 million at September 30, 2000 and 1999, respectively. The total postretirement benefits other than pensions expense for United States employees allocated to the Guarantors was $0.7 million, $0.8 million, and $0.8 million for the years ended September 30, 2000, 1999, and 1998, respectively. In addition, a curtailment gain of $0.8 million was allocated to the Guarantors during fiscal 1999 related to the reduction of postretirement life insurance benefits for currently active U.S. employees of the Guarantors. Information for Canadian benefit plans with respect to the plan obligation, the funded status, amounts recognized in the Guarantors' financial statements, and underlying actuarial assumptions is stated below.
SEPTEMBER 30, ------------------------ 2000 1999 ---------- ---------- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year ....... $ 4,886 $ 4,306 Service cost .................................. 314 307 Interest cost ................................. 329 299 Actuarial loss (gain) ......................... -- -- Benefits paid ................................. (67) (26) ---------- ---------- Benefit obligation at end of year ............. $ 5,462 $ 4,886 ========== ========== Development of net amount recognized: Funded status ................................. $ (5,462) $ (4,886) Unrecognized cost: Actuarial loss ............................. 620 637 ---------- ---------- Net amount recognized ......................... $ (4,842) $ (4,249) ========== ==========
Net periodic plan costs for the Canadian postretirement benefit consist of the following components:
SEPTEMBER 30, --------------------------------------------- 2000 1999 1998 ------------ ------------- ------------ (Dollars in Thousands) Components of net plan costs: Service cost........................................................ 314 $ 307 $ 264 Interest cost....................................................... 329 299 286 Net amortization actuarial loss (gain).............................. 16 32 -- ---------- ---------- ---------- Net plan costs (income)............................................. 659 $ 638 $ 550 ========== ========== ========== Weighted-average assumptions: Discount Rate....................................................... 7.50% 6.75% 7.5%
The weighted average annual assumed health care trend rate is assumed to be 7.3% for 2000. The rate is assumed to decrease gradually to 5.6% in 2027 and remain level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care trend rates would have the following effects:
1% INCREASE 1% DECREASE ----------- ----------- (Dollars in Thousands) Effect on total of service and interest cost components............... $ 36 $ (31) Effect on post-retirement benefit obligation........................ 229 (199)
83 86 SAVINGS AND INVESTMENT PLAN Chemicals' Sixth Amended and Restated Savings and Investment Plan covers substantially all United States employees of the Guarantors, including executive officers. This United States Plan is qualified under Section 401(k) of the Internal Revenue Code. Each participant has the option to defer taxation of a portion of his or her earnings by directing the Guarantors to contribute a percentage of such earnings to this Plan. A participant may direct up to a maximum of 20% of eligible earnings to this Plan, subject to certain limitations set forth in the Internal Revenue Code for "highly compensated" participants. A participant's contributions become distributable upon the termination of his or her employment. The Guarantors did not make any contributions to this Plan in fiscal 2000. Beginning October 1, 2000, the Guarantors began matching 50% of a participant's contributions, to the extent such contributions do not exceed 7% of such participant's cash compensation (excluding bonuses, profit sharing, and similar types of compensation). EMPLOYEE SAVINGS PLAN The Guarantors introduced an employee savings plan for all eligible full-time Canadian employees with an effective date of October 1, 2000. Each participant has the option to contribute a percentage of his or her earnings to the Canadian savings plan, with no limit on the maximum percentage contributed. The Guarantors will match 100% of a participant's contributions, to the extent such contributions do not exceed 3.5% of such participant's cash compensation (excluding bonuses, profit sharing, and similar types of compensation). PROFIT SHARING AND BONUS PLANS In January of 1997, the Board of Directors of Holdings, upon recommendation of its Compensation Committee, approved the establishment of a profit sharing plan that is designed to benefit all qualified employees, and a bonus plan that is designed to provide certain exempt salaried employees of the Guarantors with the opportunity to earn bonuses, depending, among other things, on the annual financial performance of Holdings. The Guarantors incurred $2.0 million and $2.0 million of expenses related to the profit sharing plan and bonus plan, respectively, in fiscal 2000. No expenses for profit sharing or bonuses were incurred by or allocated to the Guarantors in fiscal 1999 or 1998. PHANTOM STOCK PLAN The Guarantors have a phantom stock plan for all eligible full-time Canadian employees. The effective date of this Plan was August 21, 1996 and the expiration date is December 31, 2000. At the end of each plan year, the plan administrator establishes a "determined percentage" for the preceding plan year. This percentage is then multiplied be each participant's compensation for the plan year to determine the award amount. The award amount is then divided by the fair market value of one share of the common stock of Holdings, as of December 31 of that plan year, to determine the number of rights to be credited to the participant. Upon termination of employment, the benefit amount becomes payable to the participant. The benefit amount is the number of vested rights in the participant's account, multiplied by the fair market value of one share of common stock of Holdings as of the most recent valuation date. The Guarantors recorded expense of $159,000, $248,000, and $238,000 related to the phantom stock plan for the fiscal years ended September 30, 2000, 1999, or 1998, respectively. 7. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Guarantors have entered into various long-term noncancelable operating leases, some of which have been allocated to commonly controlled companies. Future minimum lease commitments at September 30, 2000, are as follows: fiscal 2001 -- $5.0 million; fiscal 2002 -- $4.1 million; fiscal 2003 -- $4.0 million; fiscal 2004 -- $3.8 million; fiscal 2005 -- $3.1 million; and thereafter -- $6.4 million. ENVIRONMENTAL AND SAFETY MATTERS The Guarantors' operations involve the handling, production, transportation, treatment, and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental, health, and safety 84 87 laws, regulations, and permit requirements. Environmental permits required for the Guarantors' operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacturing, handling, processing, distribution, and use of the Guarantors' chemical products and the raw materials used to produce such products and, if so affected, the Guarantors' business and operations may be materially and adversely affected. In addition, changes in environmental requirements can cause the Guarantors to incur substantial costs in upgrading or redesigning their facilities and processes, including their waste treatment, storage, disposal, and other waste handling practices and equipment. The Guarantors conduct environmental management programs designed to maintain compliance with applicable environmental requirements at all of their facilities. The Guarantors routinely conduct inspection and surveillance programs designed to detect and respond to leaks or spills of regulated hazardous substances and to correct identified regulatory deficiencies. The Guarantors believe that their procedures for waste handling are consistent with industry standards and applicable requirements. In addition, the Guarantors believe that their operations are consistent with good industry practice. However, a business risk inherent with chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees, and nearby landowners and occupants. While the Guarantors believe that their business operations and facilities generally are operated in compliance in all material respects with all applicable environmental, health, and safety requirements, they cannot be sure that past practices or future operations will not result in material claims or regulatory action, require material environmental expenditures, or result in exposure or injury claims by employees, contractors and their employees, or the public. Some risk of environmental costs and liabilities is inherent in the operations and products of the Guarantors, as it is with other companies engaged in similar businesses. In addition, a catastrophic event at any of the Guarantors' facilities could result in the incurrence of liabilities substantially in excess of their insurance coverages. Any significant ban on all chlorine containing compounds could have a materially adverse effect on the Guarantors' financial condition and results of operations. British Columbia has a regulation in place requiring elimination of the use of all chlorine products, including chlorine dioxide, in the bleaching process by the year 2002. Chlorine dioxide is produced from sodium chlorate, which is one of the Guarantors' primary pulp chemicals products. 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 but there can be no assurance that the regulation will be changed. In the event such a regulation is implemented, the Guarantors would seek to sell the products they manufacture at their British Columbia facility to customers in other markets. The Guarantors are not aware of any other laws or regulations in place in North America which would restrict the use of such products for other purposes. The Guarantors operating expenditures for environmental matters, mostly waste management and compliance, were approximately $3.3 million for fiscal 2000 and $3.8 million for fiscal 1999. The Guarantors also spent approximately $0.7 million for environmentally related capital projects in fiscal 2000 and $1.4 million for these types of capital projects in fiscal 1999. In fiscal 2001, the Guarantors anticipate spending approximately $0.9 million for capital projects related to waste management and environmental compliance. There are no capital expenditures related to remediation of environmental conditions projected for fiscal 2001. LEGAL PROCEEDINGS The Guarantors are subject to claims and legal actions that arise in the ordinary course of their business. The Guarantors believe that the ultimate liability, if any, with respect to these claims and legal actions will not have a material effect on their financial position, results of operations, or cash flows, although the Guarantors cannot give any assurances to that effect. PLEDGE OF COMMON STOCK In order to secure the repayment of indebtedness under the Fixed Assets Revolver, a first priority pledge of 100% of the common stock of each of those Guarantors incorporated in the United States was granted by the holders of such stock. In order to secure the repayment of the 12 3/8% Notes, a second priority pledge of 100% of the common stock of each of the Guarantors incorporated in the United States was granted by the holders of such stock. In addition, a first priority pledge of 65% of the common stock of each of the Guarantors not incorporated in the United States was given by the holders of such stock. 85 88 8. FINANCIAL INSTRUMENTS FOREIGN EXCHANGE The Guarantors have entered into forward foreign exchange contracts to reduce risk due to Canadian dollar exchange rate movements. The forward foreign exchange contracts had varying maturities with none exceeding 18 months. The Guarantors made net settlements of United States dollars for Canadian dollars at rates agreed to at inception of the contracts. The Guarantors do not engage in currency speculation. The last of the Guarantors' existing forward exchange contracts expired in March of 2000, and they do not intend to enter into any additional forward exchange contracts. CONCENTRATIONS OF RISK The Guarantors sell their products primarily to companies involved in the acrylic fibers and pulp and paper manufacturing industries. The Guarantors perform ongoing credit evaluations of their customers and generally do not require collateral for accounts receivable. However, letters of credit are required by the Guarantors on many of their export sales. Historically, the Guarantors' credit losses have been minimal. The Guarantors maintain cash deposits with major banks, which from time to time may exceed federally insured limits. The Guarantors periodically assess the financial condition of these institutions and believe that any possible loss is minimal. Approximately 16% of the Guarantors' employees are covered by union agreements. INVESTMENTS It is the policy of the Guarantors to invest their excess cash in investment instruments or securities whose value is not subject to market fluctuations, such as certificates of deposit, repurchase agreements, or Eurodollar deposits with domestic or foreign banks or other financial institutions. Other permitted investments include commercial paper of major United States corporations with ratings of A1 by Standard & Poor's Ratings Group or P1 by Moody's Investor Services, Inc., loan participations of major United States corporations with a short term credit rating of A1/P1, and direct obligations of the United States Government or its agencies. In addition, not more than $5 million will be invested by the Guarantors with any single bank, financial institution, or United States corporation. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reflected in the consolidated balance sheet for cash and cash equivalents, receivables, payables, and certain accrued expenses approximate fair value due to the short maturities of these instruments. Based on the Guarantors' allocated portion of Chemicals' debt at September 30, 2000, the carrying value was $351.3 million, and the fair value is $ 300.8 million. 86 89 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of Sterling Canada, Inc. Sterling Fibers, Inc. Sterling Chemicals International, Inc. Sterling Chemicals Energy, Inc. Sterling Pulp Chemicals, Inc. Sterling Pulp Chemicals US, Inc. We have audited the accompanying combined balance sheets of the Guarantors (as defined in Note 1) as of September 30, 2000 and 1999, and the related combined statements of operations, changes in stockholder's equity (deficiency in assets), and cash flows for each of the three years in the period ended September 30, 2000. These financial statements are the responsibility of the Guarantors' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the financial position of the Guarantors as of September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Houston, Texas December 12, 2000 87 90 REPORT OF MANAGEMENT Management is responsible for the preparation and content of the financial statements and other information included in this annual report and in the exhibits to this annual report. The financial statements have been prepared in conformity with generally accepted accounting principles appropriate under the circumstances to reflect, in all material respects, the substance of events and transactions that should be included. The financial statements reflect management's judgments and estimates as to the effects of events and transactions that are accounted for or disclosed. Management maintains accounting systems which are supported by internal accounting controls that provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. The concept of reasonable assurance is based on the recognition that the cost of a system of internal accounting controls should not exceed the benefits. Deloitte & Touche LLP performed an independent audit of our financial statements for fiscal years 2000, 1999, and 1998, for the purpose of determining that the statements are presented fairly and in accordance with generally accepted accounting principles. The independent auditors are appointed by the Board of Directors and meet regularly with the Audit and Compliance Committee of the Board of Directors, which is comprised solely of outside directors. The Audit and Compliance Committee meets periodically with our senior officers and independent accountants to review the adequacy and reliability of our accounting, financial reporting, and internal controls. Frank P. Diassi Chairman of the Board of Directors Paul G. Vanderhoven Vice President - Finance and Controller - Principal Accounting Officer December 15, 2000 88 91 STERLING CHEMICALS HOLDINGS, INC. SUPPLEMENTAL FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL FIRST SECOND THIRD FOURTH YEAR QUARTER QUARTER QUARTER QUARTER ------ ------- ------- ------- ------- Revenues 2000 $ 246,921 $ 264,827 $ 293,049 $ 273,554 1999 171,929 152,472 181,729 214,622 Gross Profit 2000 30,568 44,355 43,523 22,445 1999 16,717 4,312 12,198 4,931 Net income (loss) before extraordinary item(1) 2000 (10,362) 3,301 575 (80,478) 1999 (13,100) (24,820) (16,415) (51,482) Net income (loss)(1) 2000 (10,362) 3,301 575 (80,478) 1999 (13,100) (24,820) (16,415) (55,694) Per Share Data: Income (loss) before extraordinary item 2000 $ (0.88) $ 0.20 $ (0.05) $ (6.39) 1999 $ (1.11) $ (1.96) $ (1.37) $ (4.15) Net income (loss) attributable to common stockholders 2000 $ (.88) 0.20 (0.05) (6.39) 1999 (1.11) (1.96) (1.37) (4.49)
(1) During the fourth quarter of fiscal 2000, we recorded $1.6 million of expense related to workforce reductions at our acrylic fibers facility. We also recorded non-cash expense related to the impairment of our acrylic fibers production assets of $60.0 million in the fourth quarter of fiscal 2000. During the first and third quarters of fiscal 1999, we recorded $2.3 million and $1.7 million, respectively, of expense related to workforce reductions in our petrochemicals and pulp chemicals businesses. In addition, during the second quarter of fiscal 1999, we recorded a one-time non-cash pretax charge of $6.8 million related to early retirement programs and benefit changes. During the fourth quarter of fiscal 1999, we recorded a $4.2 million after-tax ($6.5 million pre-tax) extraordinary item related to unamortized debt issue costs as a result of the prepayment of certain term loans. We also recorded non-cash expense related to the impairment of our methanol production assets of $26.4 million in the fourth quarter of fiscal 1999. 89 92 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The portions of the Proxy Statement for Holdings' 2001 Annual Meeting of Stockholders under the headings "Election of Directors" and "Executive Officers of the Company" are hereby incorporated herein by reference in response to this item. ITEM 11. EXECUTIVE COMPENSATION The portion of the Proxy Statement for Holdings' 2001 Annual Meeting of Stockholders under the heading "Executive Compensation and Other Information" is hereby incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The portion of the Proxy Statement for Holdings' 2001 Annual Meeting of Stockholders under the heading "Amount and Nature of Shares Beneficially Owned" is hereby incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The portions of the Proxy Statement for Holdings' 2001 Annual Meeting of Stockholders under the headings "Election of Directors" and "Certain Transactions" are hereby incorporated herein by reference in response to this item. 90 93 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements, Financial Statement Schedules and Exhibits 1. Consolidated Financial Statements See "Item 8. Financial Statements and Supplementary Data - Index to Financial Statements." In addition, the consolidated financial statements of Sterling Canada, Inc. and Sterling Pulp Chemicals, Ltd. for the years ended September 30, 2000, 1999, and 1998 are filed as Exhibits 99.1 and 99.2 hereto. 2. All schedules for which provision is made in Regulation S-X of the Securities and Exchange Commission are not required under the related instruction or are inapplicable and, therefore, have been omitted. 3. Exhibits The following exhibits are filed as part of this Form 10-K: EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 2.1 - Amended and Restated Agreement and Plan of Merger between STX Acquisition Corp. and Sterling Chemicals, Inc. dated as of April 24, 1996, incorporated by reference from the Company's Current Report on Form 8-K dated April 24, 1996, as amended by Form 8-K/A. 3.1 - Restated Certificate of Incorporation of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 3.2 - Certificate of Incorporation of Sterling Chemicals, Inc., as amended, incorporated by reference from Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 3.3 - Restated Bylaws of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 3.4 - Restated Bylaws of Sterling Chemicals, Inc., incorporated by reference from Exhibit 3.2 to the Registration Statement on Form S-4 of Sterling Chemicals, Inc. (Registration No. 333-87471). 4.1 - Warrant Agreement (including form of Warrant) dated as of August 15, 1996 between Sterling Chemicals Holdings, Inc. and KeyCorp Shareholder Services, Inc., as Warrant Agent, incorporated by reference from Exhibit 4.4 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.2 - Warrant Agreement dated as of July 10, 1997 between Sterling Chemicals Holdings, Inc. and Harris Trust and Savings Bank, as Warrant Agent, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 4.3 - Warrant Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Harris Trust and Savings Bank, as Warrant Agent, incorporated by reference from Exhibit 4.3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 4.4 - Registration Rights Agreement, incorporated by reference from Exhibit 4.11 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.5 - Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, incorporated by reference from Exhibit 4.10 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.5(a) - First Amendment to Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of December 31, 1997, incorporated by reference from Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.5(b) - Second Amendment to Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of May 1, 1998, incorporated by reference from Exhibit 4.9(b) of the Company's Annual Report on Form 10-K for the fiscal year ending September 30, 1998. 91 94 EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 4.6 - Third Amended and Restated Voting Agreement dated as of February 1, 1999, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. 4.7 - Tag-Along Agreement dated as of August 21, 1996, incorporated by reference from Exhibit 4.13 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.8 - Indenture dated as of August 15, 1996 between Sterling Chemicals Holdings, Inc. and Fleet National Bank governing the 13 1/2% Senior Secured Discount Notes due 2008 of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 4.5 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.8(a) - First Supplemental Indenture dated October 1, 1997 governing the 13 1/2% Senior Secured Discount Notes due 2008 of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.8(b) - Second Supplemental Indenture dated March 16, 1998 governing the 13 1/2% Senior Secured Discount Notes due 2008 of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.9 - Indenture dated as of August 15, 1996 between Sterling Chemicals, Inc. and Fleet National Bank governing the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.7 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.9(a) - First Supplemental Indenture dated October 1, 1997 governing the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.9(b) - Second Supplemental Indenture dated March 16, 1998 governing the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.10 - Indenture dated as of April 7, 1997 between Sterling Chemicals, Inc. and Fleet National Bank governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997. 4.10(a) - First Supplemental Indenture dated March 16, 1998 governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.11 - Indenture dated as of July 23, 1999 among Sterling Chemicals, Inc., as Issuer, Sterling Canada Inc., Sterling Chemicals Energy, Inc., Sterling Chemicals International, Inc., Sterling Fibers, Inc., Sterling Pulp Chemicals US, Inc., and Sterling Pulp Chemicals, Inc., as Guarantors, and Harris Trust Company of New York, as Trustee, incorporated by reference from Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.12 - Second Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 by Sterling Chemicals, Inc., Trustor, to John Dorris, Trustee for the benefit of Harris Trust Company of New York, Beneficiary, incorporated by reference from Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.13 - Second Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 between Sterling Fibers, Inc., Mortgagor, and Harris Trust Company of New York, Mortgagee, incorporated by reference from Exhibit 4.11 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 92 95 EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 4.14 - Second Leasehold Deed to Secure Debt, Assignment and Security Agreement dated as of July 23, 1999 by Sterling Pulp Chemicals, Inc., Grantor, to Harris Trust Company of New York, as Collateral Agent, and U.S. Bank Trust National Association, as Georgia co-agent, incorporated by reference from Exhibit 4.12 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.15 - Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals, Inc., Sterling Pulp Chemicals US, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc., and Sterling Chemicals International, Inc., as Assignors, and Harris Trust Company of New York, as Collateral Agent, incorporated by reference from Exhibit 4.13 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.16 - Stock Pledge and Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., and Sterling Pulp Chemicals US, Inc., as Pledgors, and Harris Trust Company of New York, as Collateral Agent, incorporated by reference from Exhibit 4.14 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.17 - Stock Pledge and Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc. and Sterling Canada, Inc., as Pledgors, and Harris Trust Company of New York, as Collateral Agent, incorporated by reference from Exhibit 4.15 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.18 - Revolving Credit Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, Credit Suisse First Boston, as the Documentation Agent, DLJ Capital Funding, Inc., as the Syndication Agent, and various financial institutions, as the Lenders, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.18(a) - First Amendment to Revolving Credit Agreement dated effective as of December 17, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, Credit Suisse First Boston, as the Documentation Agent, DLJ Capital Funding, Inc., as the Syndication Agent, and various financial institutions, as the Lenders, incorporated by reference from Exhibit 4.20(a) of the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. 4.19 - Parent Pledge Agreement dated as of July 23, 1999 between Sterling Chemicals Holdings, Inc. and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.20 - Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 by Sterling Chemicals, Inc., Trustor, to Linda H. Earle, Trustee for the benefit of The CIT Group/Business Credit, Inc., as Administrative and Collateral Agent, Beneficiary, incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.21 - Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 by Sterling Fibers, Inc., Mortgagor, to The CIT Group/Business Credit, Inc., Mortgagee, incorporated by reference from Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.22 - Leasehold Deed to Secure Debt, Assignment and Security Agreement dated as of July 23, 1999 by Sterling Pulp Chemicals, Inc. to The CIT Group/Business Credit, Inc., as Administrative Agent, and U.S. Bank Trust National Association, as Georgia co-agent, incorporated by reference from Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 93 96 EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 4.23 - Fixed Assets Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Grantors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.24 - Current Assets Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Grantors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Current Assets Secured Parties, incorporated by reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.25 - Obligor Pledge Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc. and Sterling Pulp Chemicals US, Inc., as the Pledgors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.26 - Intercreditor Agreement dated as of August 21, 1996 between Texas Commerce Bank National Association and Fleet National Bank, incorporated by reference from Exhibit 4.14 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.26(a) - Amendment of Intercreditor Agreement dated as of July 23, 1999 among Sterling Chemicals Holdings, Inc., Chase Bank of Texas, N.A. (formerly known as Texas Commerce Bank National Association), as Administrative Agent, and State Street Bank and Trust Company, as Trustee, incorporated by reference from Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.27 - Senior Debt Intercreditor Agreement dated as of July 23, 1999 among Harris Trust Company of New York, as Trustee, The CIT Group/Business Credit, Inc., as Administrative Agent, and Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.17 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. **10.1 - Amended and Restated Stock Plan for Non-Employee Directors. 10.2 - Amended and Restated Key Employee Protection Plan, incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000. **10.3 - Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and Incentive Plan, as amended. **10.4 - Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of May 1, 1996). **10.4(a) - First Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of January 31, 1997). **10.4(b) - Second Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of January 1, 1997). **10.4(c) - Third Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of November 1, 1998). **10.4(d) - Fourth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of December 31, 1998). **10.4(e) - Fifth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of April 1, 1999). **10.4(f) - Sixth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of May 14, 1999). 10.5 - Sterling Chemicals, Inc. Pension Benefit Equalization Plan, incorporated by reference from Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020). 94 97 EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 10.6 - Sterling Chemicals, Inc. Amended and Restated Supplemental Employee Retirement Plan, incorporated by reference from Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1989 (Commission File Number 1-10059). 10.7 - Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of May 1, 1996), incorporated by reference from Exhibit 10.3(c) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. **10.7(a) - First Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of December 31, 1998). **10.7(b) - Second Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of December 17, 1998). **10.7(c) - Third Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of September 20, 1999). **10.8 - Sterling Chemicals, Inc. Sixth Amended and Restated Savings and Investment Plan dated as of October 1, 2000. 10.9 - Sterling Chemicals ESOP, incorporated by reference from Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. **10.9(a) - Sterling Chemicals ESOP (First Amendment) (Effective as of December 27, 1996). **10.9(b) - Sterling Chemicals ESOP (Second Amendment) (Effective as of August 21, 1996). **10.9(c) - Third Amendment to Sterling Chemicals ESOP (Effective as of January 31, 1997). **10.9(d) - Fourth Amendment to Sterling Chemicals ESOP (Effective as of November 1, 1998). **10.9(e) - Fifth Amendment to Sterling Chemicals ESOP (Effective as of December 31, 1998). 10.10 - Articles of Agreement between Sterling Chemicals, Inc., its successors and assigns, and Texas City, Texas Metal Trades Council, AFL-CIO Texas City, Texas, December 18, 1998 to May 1, 2002, incorporated by reference from Exhibit 10.23 to the Registration Statement on Form S-4 of Sterling Chemicals, Inc. (Registration No. 333-87471). **10.11 - Agreement between Sterling Pulp Chemicals Ltd., North Vancouver, British Columbia, and Pulp, Paper and Woodworkers of Canada, Local 5, British Columbia effective December 1, 1997 to November 30, 2000. 10.12 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Frank P. Diassi, incorporated by reference from Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 10.13 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Frank J. Hevrdejs, incorporated by reference from Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 10.14 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Koch Capital Services, Inc., incorporated by reference from Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 10.15 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals, Holdings, Inc. and William A. McMinn, incorporated by reference from Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. 10.16 - Form of Indemnity Agreement executed between the Company and each of its officers and directors, incorporated by reference from Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.17 - Form of Indemnity Agreement executed between the Company and each of its officers and directors, incorporated by reference from Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. **10.18 - Severance Agreement dated as of May 1, 2000 among Peter W. De Leeuw and the Company. 10.19 - Employment Agreement dated as of January 19, 1998 between Gary M. Spitz and the Company, incorporated by reference from Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 95 98 EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 10.20 - Employment Agreement dated as of November 12, 1997 between David G. Elkins and the Company, incorporated by reference from Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. +10.21 - Amended and Restated Production Agreement dated March 31, 1998 between BP Chemicals, Inc. and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.22 - Second Amended and Restated Production Agreement dated effective as of August 1, 1996 between BP Chemicals Inc. and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.23 - Amended and Restated Product Sales Agreement dated effective as of January 1, 1998 between BASF Corporation and Sterling Chemicals, Inc., incorporated by referenced from Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. 10.24 - License Agreement dated August 1, 1986 between Monsanto Company and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.25 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020). +10.25 - Joint Venture Agreement dated March 31, 1998 between Sterling Chemicals, Inc. and BP Chemicals, Inc., incorporated by reference from Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.25(a) - First Amendment to Joint Venture Agreement dated effective as of March 31, 1998 between Sterling Chemicals, Inc. and BP Chemicals Inc., incorporated by reference from Exhibit 10.26(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. **21.1 - Subsidiaries of Sterling Chemicals Holdings, Inc. **23.1 - Consent of Deloitte & Touche LLP **27.1 - Financial Data Schedule - Sterling Chemicals Holdings, Inc. **27.2 - Financial Data Schedule - Sterling Chemicals, Inc. **99.1 - Sterling Canada, Inc. consolidated financial statements and notes thereto for the years ended September 30, 2000, 1999, and 1998, including independent auditors' report. **99.2 - Sterling Pulp Chemicals, Ltd. consolidated financial statements and notes thereto for the years ended September 30, 2000, 1999, and 1998, including independent auditors' report. ** Filed herewith. + Confidential treatment has been requested with respect to portions of this Exhibit, and such request has been granted. (b) Reports on Form 8-K. None. 96 99 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANTS HAVE DULY CAUSED THIS REPORT TO BE SIGNED ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. STERLING CHEMICALS HOLDINGS, INC. STERLING CHEMICALS, INC. (Registrants) By /s/ FRANK P. DIASSI ---------------------------------- Chairman of the Board of Directors DATE: DECEMBER 15, 2000 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF EACH OF THE REGISTRANTS AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ FRANK P. DIASSI Chairman of the Board of December 15, 2000 - -------------------------------------------- Directors (Frank P. Diassi) (principal executive officer) /s/ GARY M. SPITZ Executive Vice President-Finance December 15, 2000 - -------------------------------------------- and Chief Financial Officer (Gary M. Spitz) (principal finance officer) /s/ PAUL G. VANDERHOVEN Vice President - Finance and Controller December 15, 2000 - -------------------------------------------- (principal accounting officer) (Paul G. Vanderhoven) /s/ ROBERT W. ROTEN Vice Chairman of the Board of December 15, 2000 - -------------------------------------------- Directors (Robert W. Roten) /s/ FRANK J. HEVRDEJS Director December 15, 2000 - -------------------------------------------- (Frank J. Hevrdejs) /s/ T. HUNTER NELSON Director December 15, 2000 - -------------------------------------------- (T. Hunter Nelson) /s/ ALLAN R. DRAGONE Director December 15, 2000 - -------------------------------------------- (Allan R. Dragone) /s/ ROLF H. TOWE Director December 15, 2000 - -------------------------------------------- (Rolf H. Towe)
100 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------ ----------- 2.1 - Amended and Restated Agreement and Plan of Merger between STX Acquisition Corp. and Sterling Chemicals, Inc. dated as of April 24, 1996, incorporated by reference from the Company's Current Report on Form 8-K dated April 24, 1996, as amended by Form 8-K/A. 3.1 - Restated Certificate of Incorporation of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 3.2 - Certificate of Incorporation of Sterling Chemicals, Inc., as amended, incorporated by reference from Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 3.3 - Restated Bylaws of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 3.4 - Restated Bylaws of Sterling Chemicals, Inc., incorporated by reference from Exhibit 3.2 to the Registration Statement on Form S-4 of Sterling Chemicals, Inc. (Registration No. 333-87471). 4.1 - Warrant Agreement (including form of Warrant) dated as of August 15, 1996 between Sterling Chemicals Holdings, Inc. and KeyCorp Shareholder Services, Inc., as Warrant Agent, incorporated by reference from Exhibit 4.4 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.2 - Warrant Agreement dated as of July 10, 1997 between Sterling Chemicals Holdings, Inc. and Harris Trust and Savings Bank, as Warrant Agent, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 4.3 - Warrant Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Harris Trust and Savings Bank, as Warrant Agent, incorporated by reference from Exhibit 4.3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 4.4 - Registration Rights Agreement, incorporated by reference from Exhibit 4.11 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.5 - Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, incorporated by reference from Exhibit 4.10 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.5(a) - First Amendment to Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of December 31, 1997, incorporated by reference from Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.5(b) - Second Amendment to Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of May 1, 1998, incorporated by reference from Exhibit 4.9(b) of the Company's Annual Report on Form 10-K for the fiscal year ending September 30, 1998.
101
EXHIBIT NUMBER DESCRIPTION ------ ----------- 4.6 - Third Amended and Restated Voting Agreement dated as of February 1, 1999, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. 4.7 - Tag-Along Agreement dated as of August 21, 1996, incorporated by reference from Exhibit 4.13 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.8 - Indenture dated as of August 15, 1996 between Sterling Chemicals Holdings, Inc. and Fleet National Bank governing the 13 1/2% Senior Secured Discount Notes due 2008 of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 4.5 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.8(a) - First Supplemental Indenture dated October 1, 1997 governing the 13 1/2% Senior Secured Discount Notes due 2008 of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.8(b) - Second Supplemental Indenture dated March 16, 1998 governing the 13 1/2% Senior Secured Discount Notes due 2008 of Sterling Chemicals Holdings, Inc., incorporated by reference from Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.9 - Indenture dated as of August 15, 1996 between Sterling Chemicals, Inc. and Fleet National Bank governing the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.7 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.9(a) - First Supplemental Indenture dated October 1, 1997 governing the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.9(b) - Second Supplemental Indenture dated March 16, 1998 governing the 11 3/4% Senior Subordinated Notes due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.10 - Indenture dated as of April 7, 1997 between Sterling Chemicals, Inc. and Fleet National Bank governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997. 4.10(a) - First Supplemental Indenture dated March 16, 1998 governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.11 - Indenture dated as of July 23, 1999 among Sterling Chemicals, Inc., as Issuer, Sterling Canada Inc., Sterling Chemicals Energy, Inc., Sterling Chemicals International, Inc., Sterling Fibers, Inc., Sterling Pulp Chemicals US, Inc., and Sterling Pulp Chemicals, Inc., as Guarantors, and Harris Trust Company of New York, as Trustee, incorporated by reference from Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.12 - Second Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 by Sterling Chemicals, Inc., Trustor, to John Dorris, Trustee for the benefit of Harris Trust Company of New York, Beneficiary, incorporated by reference from Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.13 - Second Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 between Sterling Fibers, Inc., Mortgagor, and Harris Trust Company of New York, Mortgagee, incorporated by reference from Exhibit 4.11 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999.
102
EXHIBIT NUMBER DESCRIPTION ------ ----------- 4.14 - Second Leasehold Deed to Secure Debt, Assignment and Security Agreement dated as of July 23, 1999 by Sterling Pulp Chemicals, Inc., Grantor, to Harris Trust Company of New York, as Collateral Agent, and U.S. Bank Trust National Association, as Georgia co-agent, incorporated by reference from Exhibit 4.12 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.15 - Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals, Inc., Sterling Pulp Chemicals US, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc., and Sterling Chemicals International, Inc., as Assignors, and Harris Trust Company of New York, as Collateral Agent, incorporated by reference from Exhibit 4.13 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.16 - Stock Pledge and Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., and Sterling Pulp Chemicals US, Inc., as Pledgors, and Harris Trust Company of New York, as Collateral Agent, incorporated by reference from Exhibit 4.14 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.17 - Stock Pledge and Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc. and Sterling Canada, Inc., as Pledgors, and Harris Trust Company of New York, as Collateral Agent, incorporated by reference from Exhibit 4.15 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.18 - Revolving Credit Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, Credit Suisse First Boston, as the Documentation Agent, DLJ Capital Funding, Inc., as the Syndication Agent, and various financial institutions, as the Lenders, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.18(a) - First Amendment to Revolving Credit Agreement dated effective as of December 17, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Borrowers, The CIT Group/Business Credit, Inc., as the Administrative Agent, Credit Suisse First Boston, as the Documentation Agent, DLJ Capital Funding, Inc., as the Syndication Agent, and various financial institutions, as the Lenders, incorporated by reference from Exhibit 4.20(a) of the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. 4.19 - Parent Pledge Agreement dated as of July 23, 1999 between Sterling Chemicals Holdings, Inc. and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.20 - Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 by Sterling Chemicals, Inc., Trustor, to Linda H. Earle, Trustee for the benefit of The CIT Group/Business Credit, Inc., as Administrative and Collateral Agent, Beneficiary, incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.21 - Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of July 23, 1999 by Sterling Fibers, Inc., Mortgagor, to The CIT Group/Business Credit, Inc., Mortgagee, incorporated by reference from Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.22 - Leasehold Deed to Secure Debt, Assignment and Security Agreement dated as of July 23, 1999 by Sterling Pulp Chemicals, Inc. to The CIT Group/Business Credit, Inc., as Administrative Agent, and U.S. Bank Trust National Association, as Georgia co-agent, incorporated by reference from Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999.
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EXHIBIT NUMBER DESCRIPTION ------ ----------- 4.23 - Fixed Assets Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Grantors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.24 - Current Assets Security Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc., Sterling Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Fibers, Inc., Sterling Chemicals Energy, Inc. and Sterling Chemicals International, Inc., as the Grantors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Current Assets Secured Parties, incorporated by reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.25 - Obligor Pledge Agreement dated as of July 23, 1999 among Sterling Chemicals, Inc., Sterling Canada, Inc. and Sterling Pulp Chemicals US, Inc., as the Pledgors, and The CIT Group/Business Credit, Inc., as Administrative Agent for each of the Fixed Assets Secured Parties, incorporated by reference from Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.26 - Intercreditor Agreement dated as of August 21, 1996 between Texas Commerce Bank National Association and Fleet National Bank, incorporated by reference from Exhibit 4.14 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.26(a) - Amendment of Intercreditor Agreement dated as of July 23, 1999 among Sterling Chemicals Holdings, Inc., Chase Bank of Texas, N.A. (formerly known as Texas Commerce Bank National Association), as Administrative Agent, and State Street Bank and Trust Company, as Trustee, incorporated by reference from Exhibit 4.18 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. 4.27 - Senior Debt Intercreditor Agreement dated as of July 23, 1999 among Harris Trust Company of New York, as Trustee, The CIT Group/Business Credit, Inc., as Administrative Agent, and Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.17 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. **10.1 - Amended and Restated Stock Plan for Non-Employee Directors. 10.2 - Amended and Restated Key Employee Protection Plan, incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000. **10.3 - Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and Incentive Plan, as amended. **10.4 - Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of May 1, 1996). **10.4(a) - First Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of January 31, 1997). **10.4(b) - Second Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of January 1, 1997). **10.4(c) - Third Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of November 1, 1998). **10.4(d) - Fourth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of December 31, 1998). **10.4(e) - Fifth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of April 1, 1999). **10.4(f) - Sixth Amendment to the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of May 14, 1999). 10.5 - Sterling Chemicals, Inc. Pension Benefit Equalization Plan, incorporated by reference from Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020).
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EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.6 - Sterling Chemicals, Inc. Amended and Restated Supplemental Employee Retirement Plan, incorporated by reference from Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1989 (Commission File Number 1-10059). 10.7 - Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of May 1, 1996), incorporated by reference from Exhibit 10.3(c) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. **10.7(a) - First Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of December 31, 1998). **10.7(b) - Second Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of December 17, 1998). **10.7(c) - Third Amendment to the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (Effective as of September 20, 1999). **10.8 - Sterling Chemicals, Inc. Sixth Amended and Restated Savings and Investment Plan dated as of October 1, 2000. 10.9 - Sterling Chemicals ESOP, incorporated by reference from Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. **10.9(a) - Sterling Chemicals ESOP (First Amendment) (Effective as of December 27, 1996). **10.9(b) - Sterling Chemicals ESOP (Second Amendment) (Effective as of August 21, 1996). **10.9(c) - Third Amendment to Sterling Chemicals ESOP (Effective as of January 31, 1997). **10.9(d) - Fourth Amendment to Sterling Chemicals ESOP (Effective as of November 1, 1998). **10.9(e) - Fifth Amendment to Sterling Chemicals ESOP (Effective as of December 31, 1998). 10.10 - Articles of Agreement between Sterling Chemicals, Inc., its successors and assigns, and Texas City, Texas Metal Trades Council, AFL-CIO Texas City, Texas, December 18, 1998 to May 1, 2002, incorporated by reference from Exhibit 10.23 to the Registration Statement on Form S-4 of Sterling Chemicals, Inc. (Registration No. 333-87471). **10.11 - Agreement between Sterling Pulp Chemicals Ltd., North Vancouver, British Columbia, and Pulp, Paper and Woodworkers of Canada, Local 5, British Columbia effective December 1, 1997 to November 30, 2000. 10.12 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Frank P. Diassi, incorporated by reference from Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 10.13 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Frank J. Hevrdejs, incorporated by reference from Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 10.14 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Koch Capital Services, Inc., incorporated by reference from Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 10.15 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals, Holdings, Inc. and William A. McMinn, incorporated by reference from Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. 10.16 - Form of Indemnity Agreement executed between the Company and each of its officers and directors, incorporated by reference from Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.17 - Form of Indemnity Agreement executed between the Company and each of its officers and directors, incorporated by reference from Exhibit 10.30 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. **10.18 - Severance Agreement dated as of May 1, 2000 among Peter W. De Leeuw and the Company. 10.19 - Employment Agreement dated as of January 19, 1998 between Gary M. Spitz and the Company, incorporated by reference from Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998.
94 105
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.20 - Employment Agreement dated as of November 12, 1997 between David G. Elkins and the Company, incorporated by reference from Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. +10.21 - Amended and Restated Production Agreement dated March 31, 1998 between BP Chemicals, Inc. and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.22 - Second Amended and Restated Production Agreement dated effective as of August 1, 1996 between BP Chemicals Inc. and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.23 - Amended and Restated Product Sales Agreement dated effective as of January 1, 1998 between BASF Corporation and Sterling Chemicals, Inc., incorporated by referenced from Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. 10.24 - License Agreement dated August 1, 1986 between Monsanto Company and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.25 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020). +10.25 - Joint Venture Agreement dated March 31, 1998 between Sterling Chemicals, Inc. and BP Chemicals, Inc., incorporated by reference from Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.25(a) - First Amendment to Joint Venture Agreement dated effective as of March 31, 1998 between Sterling Chemicals, Inc. and BP Chemicals Inc., incorporated by reference from Exhibit 10.26(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. **21.1 - Subsidiaries of Sterling Chemicals Holdings, Inc. **23.1 - Consent of Deloitte & Touche LLP **27.1 - Financial Data Schedule - Sterling Chemicals Holdings, Inc. **27.2 - Financial Data Schedule - Sterling Chemicals, Inc. **99.1 - Sterling Canada, Inc. consolidated financial statements and notes thereto for the years ended September 30, 2000, 1999, and 1998, including independent auditors' report. **99.2 - Sterling Pulp Chemicals, Ltd. consolidated financial statements and notes thereto for the years ended September 30, 2000, 1999, and 1998, including independent auditors' report.
EX-10.1 2 h82651ex10-1.txt AMENDED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS 1 EXHIBIT 10.1 STERLING CHEMICALS HOLDINGS, INC. AMENDED AND RESTATED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS Preliminary Statements 1. On April 23, 1997, the Board of Directors (the "Board") of Sterling Chemicals Holdings, Inc., a Delaware corporation (the "Company"), adopted the Sterling Chemicals Holdings, Inc. 1997 Nonqualified Stock Option Plan for Non-Employee Directors (the "Original Plan"). 2. The Board has, from time to time, heretofore amended the original Plan (as so amended, the "Existing Plan"). 3. Pursuant to Section 7 of the Existing Plan, the Board desires to (i) amend the Existing Plan in certain respects, including adding an annual stock grant and increasing the number of stock options granted on an annual basis to the Eligible Directors (as defined below), and (ii) restate the Existing Plan, as so amended, in its entirety. NOW, THEREFORE, the Board hereby amends the Existing Plan, effective as of April 26, 2000, to read in its entirety as follows: ARTICLE I Purpose; Etc. Section 1.01. Purpose. The purpose of this Plan is to attract and retain the services of experienced and knowledgeable non-employee directors for the Company and to provide such non-employee directors an opportunity for ownership of Common Stock. Section 1.02. Effect of Amendment and Restatement. The Existing Plan is hereby amended and completely restated as set forth herein and all rights and benefits under this Plan shall hereafter be determined under the terms and provisions hereof; provided, however, that the amendment and restatement of the Existing Plan effected hereby shall not operate or be construed to impair the rights of any current or former director of the Company under any option granted prior to April 26, 2000 under the Existing Plan. Section 1.03. Certain Defined Terms. Capitalized terms used in this Plan shall have the following respective meanings, except as otherwise provided herein or as the context shall otherwise require: "1933 Act" means the Securities Act of 1933, as amended. 2 "1934 Act" means the Securities Exchange Act of 1934, as amended. "Board" has the meaning specified in the Preliminary Statements hereto. "Change of Control" means the occurrence after the date hereof of any of the following events: (i) the Company shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of the Company), (ii) the Company sells, leases or exchanges all or substantially all of its assets to any other person or entity (other than a wholly-owned subsidiary of the Company), (iii) the Company is dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the 1934 Act, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting stock (based upon voting power), or (v) as a result of or in connection with a contested election of directors, the persons who were directors of the Company before such election cease to constitute a majority of the Board. "Code" means the Internal Revenue Code of 1986, as amended. Reference in this Plan to any section of the Code shall be deemed to include any regulations under such section and any amendments or successor provisions to such section or regulations. "Common Stock" means the common stock, par value $0.01 per share, of the Company. "Company" has the meaning specified in the Preliminary Statements hereto. "Date of Grant" means, with respect to any Option or Stock Grant, the October 1 on which such Option or Stock Grant was granted pursuant to Section 4.02. "Eligible Director" has the meaning specified in Section 4.01. "Existing Plan" has the meaning specified in the Preliminary Statements hereto. "Fair Market Value" means, with respect to a share of Common Stock as of any specified date, (i) in the event that Common Stock is listed on a national stock exchange, the mean of the high and low sales prices of Common Stock reported on the stock exchange composite tape on that date or, if no prices are reported on that date, on the last preceding date on which such prices of Common Stock are so reported, or (ii) in the event that Common Stock is not traded on a national stock exchange, the fair market value of a share of Common Stock determined by the Board in such reasonable manner as it deems appropriate. "Fundamental Change" has the meaning specified in Section 4.03(f). "Grant" means the grant of an Option or Stock Grant under this Plan. "Immediate Family Member" has the meaning specified in Section 4.03(d)(i). -2- 3 "Option" means an option granted to an Eligible Director pursuant to Section 4.02 of this Plan. "Option Agreement" means a written agreement between the Company and an Eligible Director with respect to an Option. "Original Plan" has the meaning specified in the Preliminary Statements hereto. "Plan" means this Amended and Restated Stock Plan for Non-Employee Directors, as amended from time to time. "Stock Grant" means a grant of Common Stock to an Eligible Director pursuant to Section 4.02 of this Plan. "Stockholders Agreement" has the meaning specified in Section 4.05. "Subsidiary" means any corporation or entity of which more than 50% of the outstanding securities or ownership interest having ordinary voting power to elect a majority of the members of the Board of Directors, or persons in similar capacity of such corporation or entity, is directly or indirectly owned by the Company. ARTICLE II Administration Section 2.01. Administration of this Plan. This Plan shall be administered by the Board. Subject to the terms and conditions of this Plan, the Board shall have the power to interpret the provisions and supervise the administration of this Plan. All decisions made by the Board pursuant to the provisions of this Plan shall be made at a duly held regular or special meeting or by written consent in lieu of any such meeting. A majority of the directors in office shall constitute a quorum and all decisions made by the Board pursuant to the provisions of this Plan shall be made by a majority of the directors present at any duly held regular or special meeting at which a quorum is present (unless the concurrence of a greater proportion is required by law or by the Certificate of Incorporation or Bylaws of the Company) or by the written consent of a majority of the directors in lieu of any such meeting. Section 2.02. Expenses; Engagement of Professionals. All expenses and liabilities incurred by the Board in the administration of this Plan shall be borne by the Company. The Board may employ attorneys, consultants, accountants or other persons to assist the Board in exercising its authority and carrying out of its duties hereunder. -3- 4 ARTICLE III Stock Subject To This Plan Subject to adjustment as provided in Section 4.03(f) and Section 4.03(g), the aggregate number of shares of Common Stock that may be optioned under this Plan is 160,000 (including shares optioned under the Original Plan as amended and in effect from time to time) and the aggregate number of shares of Common Stock that may be issued in Stock Grants hereunder is 300,000. The shares subject to this Plan shall consist of authorized but unissued shares of Common Stock or previously issued shares of Common Stock reacquired and held by the Company or any Subsidiary, and such number of shares shall be and is hereby reserved for issuance for such purposes. Shares of Common Stock shall be deemed to have been issued under this Plan only to the extent actually issued and delivered pursuant to a Grant or the exercise of an Option. Any of such shares which remain unissued and which are not subject to outstanding Options at the termination of this Plan shall cease to be reserved for purposes of this Plan; provided, however, that until the later to occur of the termination of this Plan and the termination of the last of the Options granted under this Plan, the Company shall at all times reserve a sufficient number of shares of Common Stock to meet the requirements of this Plan. In the event that any Option expires or is canceled prior to its exercise in full, the shares of Common Stock that were subject to the portion of such Option which remains unexercised at such expiration or cancellation may again be made subject to an Option under this Plan. ARTICLE IV Eligibility and Grants Section 4.01. Eligibility. Each director of the Company who is serving on the Board on a Date of Grant and who is not otherwise an employee of the Company or any Subsidiary (an "Eligible Director") shall participate in this Plan; provided, however, that an Eligible Director may voluntarily elect to not participate in this Plan or to terminate participation in this Plan at any time. Section 4.02. Annual Grants. Each Eligible Director who is serving on the Board on October 1 of any year, commencing with October 1, 2000, shall be granted (a) an Option to acquire 2,000 shares of Common Stock and (b) a number of shares of Common Stock determined by dividing $15,000 by the average of the closing sales prices of a share of Common Stock reported on the OTC Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc. during the 90-day period ending on such October 1. All Grants under this Plan shall be automatic and non-discretionary. Section 4.03. Terms and Conditions of Options. Each Option under this Plan will be a non-qualified option that is not intended to qualify as an Incentive Stock Option pursuant to Section 422 of the Code. Each Option shall be evidenced by an Option Agreement, in a form approved by the Board, which shall be subject to the following express terms and conditions and such other terms and conditions as the Board deems appropriate: -4- 5 (a) Option Period. Each Option Agreement shall provide that the Option evidenced thereby shall terminate and be of no force or effect with respect to any shares not previously purchased under such Option upon the first to occur of (i) the expiration of ten years from the Date of Grant of such Option or (ii) the expiration of 90 days after the termination of the Eligible Director's service as a director of the Company for any reason prior to a Change of Control; provided, however, that if an Eligible Director dies or becomes disabled within 90 days after termination of his or her service as a director of the Company prior to a Change of Control, all Options held by such Eligible Director shall terminate and be of no force or effect with respect to any shares not previously purchased under such Option at the expiration of ten years from the Date of Grant of such Option. If, following a Change of Control, an Eligible Director's service as a director of the Company is terminated for any reason, each Option previously granted to such Eligible Director (to the extent not previously exercised) may be exercised during the remainder of its full ten-year term. (b) Exercise Price. The exercise price for each share of Common Stock subject to an Option shall be the Fair Market Value of a share of Common Stock on the Date of Grant of such Option. (c) Procedure for Exercise. Each Option shall be exercised by the delivery by the Eligible Director holding such Option of written notice to the Secretary of the Company setting forth the number of shares of Common Stock with respect to which such Option is being exercised. The notice shall be accompanied by, at the election of such Eligible Director, either (i) cash, cashier's check, bank draft or postal or express money order payable to the order of the Company in an amount equal to the aggregate exercise price for the shares of Common Stock with respect to which such Option is being exercised, (ii) certificates representing shares of Common Stock owned by the Eligible Director duly endorsed for transfer to the Company and having an aggregate Fair Market Value equal to the aggregate exercise price for the shares of Common Stock with respect to which such Option is being exercised, (iii) an election by such Eligible Director to have the Company withhold delivery of shares of Common Stock with respect to which such Option is being exercised having an aggregate Fair Market Value equal to the aggregate exercise price for the shares of Common Stock with respect to which such Option is being exercised or (iv) any combination of the preceding having aggregate value equal to the full amount of the aggregate exercise price for the shares of Common Stock with respect to which such Option is being exercised. Notice may also be delivered by telecopy provided that the exercise price for the number of shares with respect to which such Option is being exercised is received by the Company via wire transfer on the same day the telecopy transmission is received by the Company. The notice shall specify the address to which the certificates for such shares are to be mailed. An Option shall be deemed to have been exercised immediately prior to the close of business on the date on which the Company receives (A) written notice of such exercise and (B) payment in full of the exercise price for the number of shares with respect to which such Options is being exercised, and the Eligible Director shall be treated for all purposes as the record holder of such shares of Common Stock as of such date. -5- 6 As promptly as practicable after receipt of such written notice and payment, the Company shall deliver to the applicable Eligible Director certificates for the number of shares of Common Stock with respect to which such Option has been so exercised, issued in such Eligible Director's name or such other name as such Eligible Director directs; provided, however, that such delivery shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited such certificates in the United States mail, addressed to the Eligible Director at the address specified pursuant to this Section 4.03(c). (d) Restriction on Transfer. Except as provided below, each Option shall not be transferable otherwise than by will or the laws of descent and distribution and shall be exercisable during the Eligible Director's lifetime only by such Eligible Director or such Eligible Director's guardian or legal representative. However, the Board may, in its discretion, provide in any Option Agreement that the relevant Options may be transferred (in whole or in part and subject to such terms and conditions as the Board may impose thereon, including, without limitation, the approval by the Company of the form of transfer agreement) by such Eligible Director to (i) the spouse, children or grandchildren of such Eligible Director ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of Immediate Family Members and, if applicable, such Eligible Director, (iii) a partnership in which Immediate Family Members and, if applicable, such Eligible Director are the only partners or (iv) any other person or entity otherwise permitted by the Board. Following any transfer of an Option, such Option shall continue to be subject to this Plan, the relevant Option Agreement and all other terms and conditions that were applicable to such Option immediately prior to such transfer; provided, however, that no transferred Option may be exercised unless arrangements satisfactory to the Company have been made to satisfy any tax withholding obligations the Company may have with respect to such Option. (e) No Rights as Stockholder. No Eligible Director or any other person shall have any rights as a stockholder with respect to any shares of Common Stock covered by an Option until such Option is exercised by written notice and accompanied by payment as provided in Section 4.03(c). (f) Extraordinary Corporate Transactions. The existence of outstanding Options shall not affect in any way the right or power of the Company or its stockholders to make, authorize or consummate (i) any adjustment, recapitalization, reorganization, exchange or other change in the Company's capital structure or its business, (ii) any merger or consolidation of the Company, (iii) any issuance of Common Stock or other securities or subscription rights thereto, (iv) any issuance of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, (v) the dissolution or liquidation of the Company, (vi) any sale or transfer of all or any part of its assets or business or (vii) any other corporate act or proceeding, whether of a similar character or otherwise. No Eligible Director or other person shall have any claim against the Company or any Subsidiary as a result of any such act or proceeding. If the Company recapitalizes or otherwise changes its capital structure, or merges, consolidates, sells all of its assets or dissolves (each of the foregoing, a "Fundamental Change"), then thereafter upon any exercise of any Option theretofore granted to an Eligible Director, such Eligible Director shall be entitled to purchase under such Option, in lieu of the -6- 7 number of shares of Common Stock as to which Option shall then be exercisable, the number and class of shares of stock, securities or other property to which such Eligible Director would have been entitled pursuant to the terms of the Fundamental Change if, immediately prior to such Fundamental Change, such Eligible Director had been the holder of record of the number of shares of Common Stock as to which such Option is then exercisable. (g) Changes in Capital Structure. If the outstanding shares of Common Stock or other securities of the Company, or both, for which any Option is then exercisable shall at any time be changed or exchanged by declaration of a stock dividend, stock split, combination of shares or recapitalization, the number and kind of shares of Common Stock or other securities which are subject to this Plan or subject to any Options theretofore granted, and the exercise prices, shall be appropriately and equitably adjusted so as to maintain the proportionate number of shares or other securities without changing the aggregate exercise price. Section 4.04. Stock Grants. As promptly as practicable after each Date of Grant, the Company shall deliver to each Eligible Director certificates for the number of shares of Common Stock to which such Eligible Director is entitled with respect to such Date of Grant pursuant to Section 4.02, issued in such Eligible Director's name or such other name as such Eligible Director directs; provided, however, that such delivery shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited such certificates in the United States mail, addressed to such Eligible Director at his or her address as reflected in the books and records of the Company. Section 4.05. Stockholders Agreement. All shares of Common Stock purchased pursuant to the exercise of an Option or granted to an Eligible Director pursuant to a Stock Grant shall be subject to the provisions of the Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996 (as amended from time to time, the "Stockholders Agreement"). Prior to the exercise of any Option or the receipt of any shares of Common Stock pursuant to a Stock Grant, the relevant Eligible Director (or, in the case of an Option, any permitted transferee exercising such Option) shall, if such person is not already a party to the Stockholders Agreement, execute and deliver to the Company a written agreement, in form and substance acceptable to the Company, providing that such Eligible Director or other person expressly agrees to be bound by the terms of the Stockholders Agreement. ARTICLE V Miscellaneous Section 5.01. Amendments or Termination. The Board may, at any time and from time to time, amend, alter or discontinue this Plan; provided, however, that no amendment, alteration or termination of this Plan shall impair the rights of any Eligible Director, without the Eligible Director's consent, under any Option or Stock Grant made prior to such amendment, alteration or termination. -7- 8 Section 5.02. Compliance With Other Laws and Regulations. This Plan, each Grant, the exercise of Options and the obligation of the Company to sell and deliver shares of Common Stock pursuant to Grants and the exercise of Options, shall be subject to all applicable federal and state laws, rules and regulations and to such approvals by any governmental or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for shares of Common Stock granted under this Plan or pursuant to the exercise of any Option at any time when the shares covered by such Grant or exercise have not been registered under the 1933 Act and such other state and federal laws, rules or regulations as the Company deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules or regulations available for the issuance of such shares of Common Stock. Section 5.03. Purchase for Investment. Unless the Grants and the shares of Common Stock covered by this Plan have been registered under the 1933 Act or the Company has determined that such registration is unnecessary, each person receiving shares of Common Stock pursuant to this Plan may be required by the Company to give a representation in writing that such person is acquiring such shares for his or her own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof. No fractional shares of Common Stock shall be delivered, nor shall any cash in lieu of fractional shares be paid. Section 5.04. Taxes. The Company may make such provisions as it deems appropriate for the withholding of any taxes which it determines is required in connection with any Grant or the exercise of any Option. Any Eligible Director may pay all or any portion of the taxes required to be withheld by the Company or paid by such Eligible Director in connection with such Grant or the exercise of such Option by electing to have the Company withhold shares of Common Stock, or by delivering previously owned shares of Common Stock, having a Fair Market Value equal to the amount required to be withheld or paid; provided, however, that such Eligible Director makes such election on or before the date that the amount of tax to be withheld is determined. All such elections will be irrevocable and subject to disapproval by the Board. Section 5.05. Liability for Non-Issuance of Shares and Tax Consequences. The Company and any Subsidiary which is in existence or hereafter comes into existence shall not be liable to an Eligible Director or any other person with respect or in connection with: (a) the non-issuance of any shares of Common Stock as to which the Company has been unable to obtain from any regulatory body having jurisdiction the authority deemed by the Company's counsel to be necessary for the lawful issuance of such shares; or (b) any tax consequences expected, but not realized, by any Eligible Director or other person due to any Grant or the exercise of any Option. Section 5.06. Indemnification. Each person who is or shall have been a member of the Board and any employee delegated authority hereunder shall be indemnified and held harmless by the Company against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit or proceeding to which he or she may be a party or in which he or she may be involved by reason of -8- 9 any action taken or failure to act under this Plan, and against and from any and all amounts paid by him or her in settlement thereof (with the Company's approval) or paid by him or her in satisfaction of any judgment in any such claim, action, suit or proceeding; provided, however, that he or she gives the Company prompt written notice of any such claim, action, suit or proceeding and an opportunity, at its own expense, to handle, defend and settle the same before he or she undertakes to handle, defend or settle such claim, action, suit or proceeding on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights or indemnification to which such persons may be entitled under the Company's Certificate of Incorporation or Bylaws, as a matter of law or otherwise, or any power that the Company may have to indemnify them or hold them harmless. Section 5.07. Effectiveness and Expiration of Plan. This Plan shall be effective as of April 23, 1997 and expire on April 23, 2007. No Grants shall be made under this Plan after April 23, 2007. Section 5.08. Non-Exclusivity of this Plan. The adoption of this Plan by the Board shall not be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of restricted stock or stock options other than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. Section 5.09. Governing Law. This Plan and any Option Agreements hereunder shall be interpreted and construed in accordance with the laws of the State of Delaware and applicable federal law. IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the foregoing by the Board, the Company has caused this document to be duly executed in its name and on its behalf by its proper officer thereunto duly authorized as of the date of the adoption of this Amended and Restated Stock Plan for Non-Employee Directors by the Board, being April 26, 2000. STERLING CHEMICALS HOLDINGS, INC. By: ------------------------------------ Frank P. Diassi Chairman of the Board of Directors -9- EX-10.3 3 h82651ex10-3.txt OMNIBUS STOCK AWARDS AND INCENTIVE PLAN 1 EXHIBIT 10.3 STERLING CHEMICALS HOLDINGS, INC. Omnibus Stock Awards and Incentive Plan --------------------------------------- (As Amended) I. PURPOSE The purpose of the STERLING CHEMICALS HOLDINGS, INC. OMNIBUS STOCK AWARDS AND INCENTIVE PLAN (the "Plan") is to provide a means through which STERLING CHEMICALS HOLDINGS, INC., a Delaware corporation (the "Company"), and its Subsidiaries (as defined herein), may attract able persons to enter the employ of the Company and its Subsidiaries and to provide a means whereby those employees upon whom the responsibilities of the successful administration and management of the Company and its Subsidiaries rest, and whose present and potential contributions to the welfare of the Company and its Subsidiaries are of importance, can acquire and maintain stock ownership, thereby strengthening their concern for the welfare of the Company and its Subsidiaries and their desire to remain in the Company's and its Subsidiaries' employ. A further purpose of the Plan is to provide such employees with additional incentive and reward opportunities designed to enhance the profitable growth of the Company and its Subsidiaries. Accordingly, the Plan provides for granting Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Performance Awards, Phantom Stock Awards, or any combination of the foregoing, as is best suited to the circumstances of the particular employee as provided herein. II. DEFINITIONS The following definitions shall be applicable throughout the Plan unless specifically modified by any paragraph: (a) "Affiliates" means any "parent corporation" of the Company and any "subsidiary" of the Company within the meaning of Code Sections 424(e) and (f), respectively. (b) "Agreement" means, individually or collectively, any Option Agreement, Performance Award Agreement, Phantom Stock Award Agreement, Restricted Stock Agreement and Stock Appreciation Rights Agreement. (c) "Award" means, individually or collectively, any Option, Restricted Stock Award, Phantom Stock Award, Performance Award or Stock Appreciation Right. (d) "Board" means the Board of Directors of the Company. (e) "Change of Control" means the occurrence of any of the following events: (i) the Company shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of the Company), (ii) the Company sells, leases or exchanges all or substantially all of its assets to any other person or entity (other than a wholly-owned subsidiary of the Company), (iii) the Company is to be dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the 1934 Act, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting stock (based upon voting power), or (v) as a result of or in connection with a contested election of 2 directors, the persons who were directors of the Company before such election shall cease to constitute a majority of the Board. (f) "Change of Control Value" shall mean (i) the per share price offered to stockholders of the Company in any such merger, consolidation, reorganization, sale of assets or dissolution transaction, (ii) the price per share offered to stockholders of the Company in any tender offer or exchange offer whereby a Change of Control takes place, or (iii) if such Change of Control occurs other than in (i) or (ii) above, the Fair Market Value per share of the shares into which Awards are exercisable, as determined by the Committee, whichever is applicable. In the event that the consideration offered to stockholders of the Company consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash. (g) "Code" means the Internal Revenue Code of 1986, as amended. Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to any section and any regulations under such section. (h) "Committee" means the Compensation Committee of the Board which shall be (i) constituted so as to permit the Plan to comply with Rule16b-3 and (ii) constituted solely of "outside directors," within the meaning of section 162(m) of the Code and applicable interpretive authority thereunder. (i) "Company" means Sterling Chemicals Holdings, Inc. and any successors thereto. (j) "Director" means an individual elected to the Board by the stockholders of the Company or by the Board under applicable corporate law who is serving on the Board on the date the Plan is adopted by the Board or is elected to the Board after such date. (k) "Disabled" means a Holder who is on Long-Term Disability as defined in the Pension Plan. (l) An "employee" means any person (including an officer or a Director) in an employment relationship with the Employer. (m) "Employer" means the Company, an Affiliate or any Subsidiary. (n) "Fair Market Value" means, with respect to a share of Stock as of any specified date, (i) if the Stock is listed on a national stock exchange the mean of the high and low sales prices of the Stock reported on the stock exchange composite tape on that date, or if no prices are reported on that date, on the last preceding date on which such prices of Stock are so reported; or (ii) in the event the Stock is not traded on a national stock exchange, the fair market value of a share of Stock determined by the Committee in such reasonable manner as it deems appropriate. (o) "Forfeiture Restrictions" means with regard to shares of Stock that are subject to a Restricted Stock Award, restrictions placed on a Holder's disposition of such shares under certain circumstances or an obligation of a Holder to forfeit and surrender such shares under certain circumstances. (p) "Holder" means an employee who has been granted an Award. -2- 3 (q) "Incentive Stock Option" means an incentive stock option within the meaning of section 422(b) of the Code. (r) "Initial Public Offering" or "IPO" means the consummation of an underwritten public offering of Stock pursuant to a registration statement of the Company filed under the Securities Act of 1933, as amended, after the effective date of the Plan (other than any registration statement (a) relating to warrants, options or shares of capital stock of the Company granted or to be granted or sold primarily to employees, directors, or officers of the Company, (b) filed in connection with a transaction described in Rule 145 under the Securities Act of 1933, as amended, or any successor rule, (c) relating to employee benefit plans or interests therein, or (d) primarily relating to preferred stock or other securities issued in connection with any financing by the Company which is principally debt or preferred stock financing) wherein the aggregate net proceeds (after deducting all costs, discounts, commissions and other expenses of the offering) to the Company are at least $100,000,000. (s) "1934 Act" means the Securities Exchange Act of 1934, as amended. (t) "Nonqualified Stock Option" means an option granted under Paragraph VII of the Plan to purchase Stock which does not constitute an Incentive Stock Option. (u) "Option" means an Award granted under Paragraph VII of the Plan and includes both Incentive Stock Options to purchase Stock and Nonqualified Stock Options to purchase Stock. (v) "Optionee" means a Holder who has been granted an Option. (w) "Option Agreement" means a written agreement between the Company and a Holder with respect to an Option. (x) "Pension Plan" means the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of May 1, 1996). (y) "Performance Award" means an Award granted under Paragraph X of the Plan. (z) "Performance Award Agreement" means a written agreement between the Company and a Holder with respect to a Performance Award. (aa) "Phantom Stock Award" means an Award granted under Paragraph XI of the Plan. (bb) "Phantom Stock Award Agreement" means a written agreement between the Company and a Holder with respect to a Phantom Stock Award. (cc) "Plan" means the Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and Incentive Plan, as amended from time to time. (dd) "Restricted Stock Agreement" means a written agreement between the Company and a Holder with respect to a Restricted Stock Award. (ee) "Restricted Stock Award" means an Award granted under Paragraph IX of the Plan. -3- 4 (ff) "Retirement" means a Holder's Early Retirement, Normal Retirement or Late Retirement as set forth in the Pension Plan. (gg) "Rule 16b-3" means SEC Rule 16b-3 promulgated under the 1934 Act, as such may be amended from time to time, and any successor rule, regulation or statute fulfilling the same or a similar function. (hh) "Spread" means, in the case of a Stock Appreciation Right, an amount equal to the excess, if any, of the Fair Market Value of a share of Stock on the date such right is exercised over the exercise price of such Stock Appreciation Right; provided, however, the Committee may establish, in its sole discretion, in any Stock Appreciation Rights Agreement, the maximum amount of Spread attributable to a Stock Appreciation Right. (ii) "Stock" means the common stock, $0.01 par value of the Company. (jj) "Stock Appreciation Right" means an Award granted under Paragraph VIII of the Plan. (kk) "Stock Appreciation Rights Agreement" means a written agreement between the Company and a Holder with respect to an Award of Stock Appreciation Rights. (ll) "Subsidiary" means any corporation or entity of which more than 50% of the outstanding securities or ownership interests having ordinary voting power to elect a majority of the members of the Board of Directors, or persons in similar capacity of such corporation or entity, is, directly or indirectly owned by the Company. III. EFFECTIVE DATE AND DURATION OF THE PLAN The Plan shall be effective upon the date of its adoption by the Board, provided that the Plan is approved by the stockholders of the Company within twelve months thereafter. No further Awards may be granted under the Plan after the expiration of ten years from the date of its adoption by the Board. The Plan shall remain in effect until all Awards granted under the Plan have been satisfied or expired. IV. ADMINISTRATION (a) Committee. The Plan shall be administered by the Committee. (b) Powers. Subject to the provisions of the Plan, the Committee shall have sole authority, in its discretion, to determine which employees shall receive an Award, the time or times when such Award shall be made, whether an Incentive Stock Option, Nonqualified Option or Stock Appreciation Right shall be granted, the number of shares of Stock which may be issued under each Option, Stock Appreciation Right or Restricted Stock Award, and the value of each Performance Award and Phantom Stock Award. In making such determinations the Committee may take into account the nature of the services rendered by the respective employees, their present and potential contributions to the Employer's success and such other factors as the Committee in its discretion shall deem relevant. (c) Additional Powers. The Committee shall have such additional powers as are delegated to it by the other provisions of the Plan. Subject to the express provisions of the Plan, the Committee is authorized to construe the Plan and the respective agreements executed thereunder, to prescribe such rules and regulations relating to the Plan as it may deem advisable to carry out the Plan, and to determine the terms, restrictions and provisions of each Award including such terms, restrictions and provisions as -4- 5 shall be requisite in the judgment of the Committee to cause designated Options to qualify as Incentive Stock Options, and to make all other determinations necessary or advisable for administering the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in any agreement relating to an Award in the manner and to the extent it shall deem expedient to carry it into effect. The determinations of the Committee on the matters referred to in this Article IV shall be conclusive. (d) Expenses. All expenses and liabilities incurred by the Committee in the administration of this Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants or other persons to assist the Committee in the carrying out of its duties hereunder. V. STOCK SUBJECT TO THE PLAN (a) Stock Grant and Award Limits. The Committee may from time to time grant Awards to one or more employees determined by it to be eligible for participation in the Plan in accordance with the provisions of Paragraph VI. Subject to Paragraph XII, the aggregate number of shares of Stock that may be issued under the Plan shall not exceed 2,000,000 shares. The shares subject to this Plan shall consist of authorized but unissued shares of Stock or previously issued shares of Stock reacquired and held by the Company, and such number of shares shall be and is hereby reserved for such purpose. Shares of Stock shall be deemed to have been issued under the Plan only to the extent actually issued and delivered pursuant to an Award. To the extent that an Award lapses or the rights of its Holder terminate or the Award is to only be paid in cash or is paid in cash, any shares of Stock subject to such Award shall again be available for the grant of an Award. To the extent that an Award lapses or the rights of its Holder terminate, any shares of Stock subject to such Award shall again be available for the grant of an Award. Separate stock certificates shall be issued by the Company for those shares acquired pursuant to the exercise of an Incentive Stock Option and for those shares acquired pursuant to the exercise of a Nonqualified Stock Option. (b) Stock Offered. The stock to be offered pursuant to the grant of an Award may be authorized but unissued Stock or Stock previously issued and outstanding and reacquired by the Company. VI. ELIGIBILITY Awards may be granted only to persons who, at the time of grant, are employees. Awards may not be granted to any Director who is not an employee. An Award may be granted on more than one occasion to the same person, and, subject to the limitations set forth in the Plan, such Award may include an Incentive Stock Option or a Nonqualified Stock Option, a Stock Appreciation Right, a Restricted Stock Award, a Performance Award, a Phantom Stock Award or any combination thereof. VII. STOCK OPTIONS (a) Option Period. The term of each Option shall be as specified by the Committee at the date of grant. (b) Limitations on Exercise of Option. An Option shall be exercisable in whole or in such installments and at such times as determined by the Committee. (c) Special Limitations on Incentive Stock Options. To the extent that the aggregate Fair Market Value (determined at the time the respective Incentive Stock Option is granted) of Stock with -5- 6 respect to which Incentive Stock Options are exercisable for the first time by an employee during any calendar year under all incentive stock option plans of the Company and its Affiliates exceeds $100,000, such Incentive Stock Options shall be treated as Nonqualified Stock Options as determined by the Committee. The Committee shall determine, in accordance with applicable provisions of the Code, Treasury Regulations and other administrative pronouncements, which of an Optionee's Incentive Stock Options will not constitute Incentive Stock Options because of such limitation and shall notify the Optionee of such determination as soon as practicable after such determination. No Incentive Stock Option shall be granted to an employee if, at the time the Option is granted, such employee owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporation, within the meaning of section 422(b)(6) of the Code, unless (i) at the time such Option is granted the option price is at least 110% of the Fair Market Value of the Stock subject to the Option and (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant. (d) Option Agreement. Each Option shall be evidenced by an Option Agreement in such form and containing such provisions not inconsistent with the provisions of the Plan as the Committee from time to time shall approve, including, without limitation, provisions to qualify an Incentive Stock Option under section 422 of the Code. An Option Agreement may provide for the payment of the option price, in whole or in part, in cash or by the delivery of a number of shares of Stock (plus cash if necessary) having a Fair Market Value equal to such option price. Each Option shall specify the effect of termination of employment on the exercisability of the Option; provided, that upon the death of an Optionee, the Retirement of an Optionee, or upon the Optionee becoming Disabled, all outstanding Options of such Optionee shall immediately vest and become exercisable. Moreover, an Option Agreement may provide for a "cashless exercise" of the Option by establishing procedures whereby the Holder, by a properly-executed written notice, directs (i) an immediate market sale or margin loan respecting all or a part of the shares of Stock to which he is entitled upon exercise pursuant to an extension of credit by the Company to the Holder of the option price, (ii) the delivery of the shares of Stock from the Company directly to a brokerage firm and (iii) the delivery of the option price from the sale or margin loan proceeds from the brokerage firm directly to the Company. Such Option Agreement may also include, without limitation, provisions relating to (i) vesting of Options, subject to the provisions hereof accelerating such vesting upon the occurrence of an IPO or a Change of Control, (ii) tax matters (including provisions (y) permitting the delivery of additional shares of Stock or the withholding of shares of Stock from those acquired upon exercise to satisfy federal or state income tax withholding requirements and (z) dealing with any other applicable employee wage withholding requirements), and (iii) any other matters not inconsistent with the terms and provisions of this Plan that the Committee shall in its sole discretion determine. The terms and conditions of the respective Option Agreements need not be identical. (e) Option Price and Payment. The price at which a share of Stock may be purchased upon exercise of an Option shall be determined by the Committee, but (i) such purchase price shall not be less than the Fair Market Value of Stock subject to an Incentive Stock Option on the date the Incentive Stock Option is granted and (ii) such purchase price shall be subject to adjustment as provided in Paragraph XII. The Option or portion thereof may be exercised by delivery of an irrevocable notice of exercise to the Company. The purchase price of the Option or portion thereof shall be paid in full in the manner prescribed by the Committee. (f) Stockholder Rights and Privileges. The Holder shall be entitled to all the privileges and rights of a stockholder only with respect to such shares of Stock as have been purchased under the Option and for which certificates of stock have been registered in the Holder's name. -6- 7 (g) Options and Rights in Substitution for Stock Options Granted by Other Corporations. Options and Stock Appreciation Rights may be granted under the Plan from time to time in substitution for stock options held by individuals employed by corporations who become employees as a result of a merger or consolidation of the employing corporation with the Company, an Affiliate, or any Subsidiary, or the acquisition by the Company, an Affiliate or a Subsidiary of the assets of the employing corporation, or the acquisition by the Company, an Affiliate or a Subsidiary of stock of the employing corporation with the result that such employing corporation becomes a Subsidiary. VIII. STOCK APPRECIATION RIGHTS (a) Stock Appreciation Rights. A Stock Appreciation Right is the right to receive an amount equal to the Spread with respect to a share of Stock upon the exercise of such Stock Appreciation Right. Stock Appreciation Rights may be granted in connection with the grant of an Option, in which case the Option Agreement will provide that exercise of Stock Appreciation Rights will result in the surrender of the right to purchase the shares under the Option as to which the Stock Appreciation Rights were exercised. The Spread with respect to a Stock Appreciation Right may be payable either in cash, shares of Stock with a Fair Market Value equal to the Spread or in a combination of cash and shares of Stock. With respect to Stock Appreciation Rights that are subject to Section 16 of the 1934 Act, however, the Committee shall, except as provided in Paragraph XII(c), retain sole discretion (i) to determine the form in which payment of the Stock Appreciation Right will be made (i.e., cash, securities or any combination thereof) or (ii) to approve an election by a Holder to receive cash in full or partial settlement of Stock Appreciation Rights. (b) Stock Appreciation Rights Agreement. Stock Appreciation Rights granted independently of Options shall be evidenced by a Stock Appreciation Rights Agreement. Each Stock Appreciation Rights Agreement shall specify the effect of termination of employment on the exercisability of the Stock Appreciation Rights; provided, that upon the death of a Holder of a Stock Appreciation Right, the Retirement of such Holder, or upon such Holder becoming Disabled, all outstanding Stock Appreciation Rights of such Holder shall immediately vest and become exercisable. Stock Appreciation Rights Agreements may also include, without limitation, provisions relating to (i) vesting of Awards, subject to the provisions hereof accelerating vesting upon the occurrence of an IPO or a Change of Control, (ii) tax matters (including provisions covering applicable wage withholding requirements), and (iii) any other matters not inconsistent with the terms and provisions of this Plan, that the Committee shall in its sole discretion determine. The terms and conditions of the respective Stock Appreciation Rights Agreements need not be identical. (c) Exercise Price. The exercise price of each Stock Appreciation Right shall be determined by the Committee in its sole discretion and shall be subject to adjustment as provided in Paragraph XII. (d) Exercise Period. The term of each Stock Appreciation Right shall be as specified by the Committee at the date of grant. (e) Limitations on Exercise of Stock Appreciation Right. A Stock Appreciation Right shall be exercisable in whole or in such installments and at such times as determined by the Committee. IX. RESTRICTED STOCK AWARDS (a) Restricted Stock Awards. A Restricted Stock Award shall be represented by a certificate of Stock registered in the name of the Holder of such Restricted Stock Award. The Holder -7- 8 shall have the right to receive dividends with respect to Stock subject to a Restricted Stock Award, to vote Stock subject thereto and to enjoy all other stockholder rights, except that (i) the Holder shall not be entitled to delivery of the Stock certificate until the Forfeiture Restrictions shall have expired, (ii) the Company shall retain custody of the Stock until the Forfeiture Restrictions shall have expired, (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the Stock until the Forfeiture Restrictions shall have expired, and (iv) a breach of the terms and conditions established by the Committee pursuant to the Restricted Stock Agreement shall cause a forfeiture of the Restricted Stock Award. (b) Forfeiture Restrictions to be Established by the Committee. The Forfeiture Restrictions on shares of Stock that are the subject of a Restricted Stock Award shall be determined by the Committee in its sole discretion, and the Committee may provide that the Forfeiture Restrictions shall lapse upon (i) the attainment of targets established by the Committee that are based on (1) the price of a share of Stock, (2) the Company's earnings per share, (3) the Company's revenue, (4) the revenue of a business unit of the Company designated by the Committee, (5) the return on stockholders' equity achieved by the Company, or (6) the Company's pre-tax cash flow from operations, (ii) the Holder's continued employment with the Employer for a specified period of time, or (iii) a combination of any two or more of the factors listed in clauses (i) and (ii) of this sentence. Each Restricted Stock Award may have different Forfeiture Restrictions, in the discretion of the Committee. The Forfeiture Restrictions applicable to a particular Restricted Stock Award shall not be changed except as permitted by Paragraph IX(b) or Paragraph XII. (c) Other Terms and Conditions. At the time of a Restricted Stock Award, the Committee may, in its sole discretion, prescribe additional terms, conditions or restrictions relating to Restricted Stock Awards, including, but not limited to, rules pertaining to the termination of employment of a Holder prior to expiration of the Forfeiture Restrictions; provided, that upon the death of a Holder of a Restricted Stock Award, the Retirement of such Holder, or upon such Holder becoming Disabled, all Forfeiture Restrictions applicable to all Restricted Stock Awards of such Holder shall lapse and expire. Such additional terms, conditions or restrictions shall be set forth in a Restricted Stock Agreement made in conjunction with the Award. Such Restricted Stock Agreement may also include, without limitation, provisions relating to (i) subject to the provisions hereof accelerating vesting upon the occurrence of an IPO or a Change of Control, vesting of Awards, (ii) tax matters (including provisions (y) covering any applicable employee wage withholding requirements and (z) prohibiting an election by the Holder under section 83(b) of the Code), and (iii) any other matters not inconsistent with the terms and provisions of this Plan that the Committee shall in its sole discretion determine. The terms and conditions of the respective Restricted Stock Agreements need not be identical. (d) Payment for Restricted Stock. The Committee shall determine the amount and form of any payment for Stock received pursuant to a Restricted Stock Award, provided that in the absence of such a determination, a Holder shall not be required to make any payment for Stock received pursuant to a Restricted Stock Award, except to the extent otherwise required by law. (e) Agreements. At the time any Award is made under this Paragraph IX, the Company and the Holder shall enter into a Restricted Stock Agreement setting forth each of the matters as the Committee may determine to be appropriate. The terms and provisions of the respective Restricted Stock Agreements need not be identical. -8- 9 X. PERFORMANCE AWARDS (a) Performance Period. The Committee shall establish, with respect to and at the time of each Performance Award, a performance period over which the performance of the Holder shall be measured. (b) Performance Awards. Each Performance Award shall have a maximum value established by the Committee at the time of such Award. (c) Performance Measures. A Performance Award shall be awarded to an employee contingent upon future performance of the employee, the Company, an Affiliate, any Subsidiary, or any division or department thereof by or in which he is employed during the performance period. The Committee shall establish the performance measures applicable to such performance prior to the beginning of the performance period but subject to such later revisions as the Committee shall deem appropriate to reflect significant, unforeseen events or changes. (d) Awards Criteria. In determining the value of Performance Awards, the Committee shall take into account an employee's responsibility level, performance, potential, other Awards and such other considerations as it deems appropriate. (e) Payment. Following the end of the performance period, the Holder of a Performance Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Performance Award, based on the achievement of the performance measures for such performance period, as determined by the Committee. Payment of a Performance Award may be made in cash, Stock or a combination thereof, as determined by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee. Any payment to be made in Stock shall be based on the Fair Market Value of the Stock on the payment date. If a payment of cash is to be made on a deferred basis, the Committee shall establish whether interest shall be credited, the rate thereof and any other terms and conditions applicable thereto. (f) Termination of Employment. A Performance Award shall terminate if the Holder does not remain continuously in the employ of the Employer at all times during the applicable performance period, except as maybe determined by the Committee or as may otherwise be provided in the Award at the time granted. (g) Agreements. At the time any Award is made under this Paragraph X, the Company and the Holder shall enter into a Performance Stock Award Agreement setting forth each of the matters contemplated hereby, and, in addition such matters are set forth in Paragraph IX(b) as the Committee may determine to be appropriate. The terms and provisions of the respective agreements need not be identical. XI. PHANTOM STOCK AWARDS (a) Phantom Stock Awards. Phantom Stock Awards are rights to receive shares of Stock (or cash in an amount equal to the Fair Market Value thereof), or rights to receive an amount equal to any appreciation in the Fair Market Value of Stock (or portion thereof) over a specified period of time, which vest over a period of time (subject to the provisions hereof accelerating vesting upon the occurrence of an IPO or a Change of Control) as established by the Committee, without payment of any amounts by the Holder thereof (except to the extent otherwise required by law) or satisfaction of any performance -9- 10 criteria or objectives. Each Phantom Stock Award shall have a maximum value established by the Committee at the time of such Award. (b) Award Period. The Committee shall establish, with respect to and at the time of each Phantom Stock Award, a period over which or the event upon which the Award shall vest with respect to the Holder. (c) Awards Criteria. In determining the value of Phantom Stock Awards, the Committee shall take into account an employee's responsibility level, performance, potential, other Awards and such other considerations as it deems appropriate. (d) Payment. Following the end of the vesting period for a Phantom Stock Award, the Holder of a Phantom Stock Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Phantom Stock Award, based on the then vested value of the Award. Payment of a Phantom Stock Award may be made in cash, Stock or a combination thereof as determined by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee in its sole discretion. Any payment to be made in Stock shall be based on the Fair Market Value of the Stock on the payment date. Cash dividend equivalents may be paid during or after the vesting period with respect to a Phantom Stock Award, as determined by the Committee. If a payment of cash is to be made on a deferred basis, the Committee shall establish whether interest shall be credited, the rate thereof and any other terms and conditions applicable thereto. (e) Termination of Employment. Except as may be otherwise determined by the Committee or as set forth in the Award at the time of grant, a Phantom Stock Award shall terminate if the Holder does not remain continuously in the employ of the Employer at all times during the applicable vesting period; provided, however, that upon the death of a Holder of a Phantom Stock Award, the Retirement of such Holder, or upon such Holder becoming Disabled, all outstanding Phantom Stock Awards of such Holder shall immediately vest and become distributable. (f) Agreements. At the time any Award is made under this Paragraph XI, the Company and the Holder shall enter into a Phantom Stock Award Agreement setting forth each of the matters contemplated hereby and, in addition, such matters as are set forth in Paragraph IX(b) as the Committee may determine to be appropriate. The terms and provisions of the respective agreements need not be identical. XII. RECAPITALIZATION OR REORGANIZATION (a) The shares with respect to which Awards may be granted are shares of Stock as presently constituted, but if, and whenever, prior to the expiration of an Award theretofore granted, the Company shall effect a subdivision or consolidation of such shares of Stock or other capital readjustment, the number of shares of Stock with respect to which such Award may thereafter be exercised or satisfied, as applicable, (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and the purchase price per share shall be proportionately increased. (b) If the Company recapitalizes or otherwise changes its capital structure, thereafter upon any exercise or satisfaction, as applicable, of an Award theretofore granted the Holder shall be entitled to (or entitled to purchase, if applicable) under such Award, in lieu of the number of shares of Stock then covered by such Award, the number and class of shares of stock and securities to which the Holder -10- 11 would have been entitled pursuant to the terms of the recapitalization if, immediately prior to such recapitalization, the Holder had been the holder of record of the number of shares of Stock then covered by such Award. (c) In the event of an IPO or a Change of Control, all outstanding Awards shall immediately vest and become exercisable or satisfiable, as applicable. The Committee, in its discretion, may determine that upon the occurrence of a Change of Control, each Award other than an Option outstanding hereunder shall terminate within a specified reasonable number of days after notice to the Holder, and such Holder shall receive, with respect to each share of Stock subject to such Award, cash in an amount equal to the excess, if any, of the Change of Control Value over any exercise price or purchase price paid, if applicable. Further, in the event of a Change of Control, the Committee, in its discretion shall act to effect one or more of the following alternatives with respect to outstanding Options, which may vary among individual Holders and which may vary among Options held by any individual Holder: (i) determine a reasonable period of time on or before a specified date (before or after such Change of Control) after which specified date all unexercised Options and all rights of Holders thereunder shall terminate, (2) require the mandatory surrender to the Company by selected Holders of some or all of the outstanding Options held by such Holders (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of a date, before or after such Change of Control, specified by the Committee, in which event the Committee shall thereupon cancel such Options and the Company shall pay to each Holder an amount of cash per share equal to the excess, if any, of the Change of Control Value of the shares subject to such Option over the exercise price(s) under such Options for such shares, or (3) provide that thereafter upon any exercise of an Option theretofore, granted the Holder shall been titled to purchase under such Option, in lieu of the number of shares of Stock then covered by such Option, the number and class of shares of stock or other securities or property (including, without limitation, cash) to which the Holder would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets and dissolution if, immediately prior to such merger, consolidation or sale of assets and dissolution the Holder has been the holder of record of the number of shares of Stock then covered by such Option. The provisions contained in this paragraph shall not terminate any rights of the Holder to further payments pursuant to any other agreement with the Company following a Change of Control. (d) In the event of changes in the outstanding Stock by reason of recapitalization, reorganizations, mergers, consolidations, combinations, exchanges or other relevant changes in capitalization occurring after the date of the grant of any Award and not otherwise provided for by this Paragraph XII, any outstanding Awards and any agreements evidencing such Awards shall be subject to adjustment by the Committee at its reasonable discretion as to the number and price of shares of Stock or other consideration subject to such Awards. In the event of any such change in the outstanding Stock, the aggregate number of shares available under the Plan may be appropriately adjusted by the Committee, whose determination shall be reasonable and conclusive. (e) The existence of the Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities ahead of or affecting Stock or the rights thereof, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. (f) Any adjustment provided for in Subparagraphs (a), (b), (c) or(d) above shall be subject to any required stockholder action. -11- 12 (g) Except as herein before expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares of obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to Awards theretofore granted or the purchase price per share, if applicable. XIII. AMENDMENT AND TERMINATION OF THE PLAN The Board, in its discretion, may at any time or times amend, suspend or terminate the Plan; provided, however, such action shall be subject to the approval of the stockholders of the Company where stockholder approval (i) is required by applicable law or (ii) the Board determines (A) such approval is necessary to comply with any requirements of any securities exchange on which the stock is listed or (B) such approval is desired for any other reason; provided, further, however, that no amendment, suspension or termination of the Plan may, without the consent of the holder of an Award, terminate such Award or adversely affect such person's rights in any material respect. XIV. MISCELLANEOUS (a) No Right to An Award. Neither the adoption of the Plan by the Company nor any action of the Board or the Committee shall be deemed to give an employee any right to be granted an Award to purchase Stock, a right to a Stock Appreciation Right, a Restricted Stock Award, a Performance Award or a Phantom Stock Award or any of the rights hereunder except as may be evidenced by an Award or by an Option Agreement, Stock Appreciation Rights Agreement, Restricted Stock Agreement, Performance Award Agreement or Phantom Stock Award Agreement on behalf of the Company, and then only to the extent and on the terms and conditions expressly set forth therein. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of funds or assets to assure the payment of any Award. (b) Employees' Rights Unsecured. The right of an employee to receive Stock, cash or any other payment under this Plan shall be an unsecured claim against the general assets of the Company. The Company may, but shall not be obligated to, acquire shares of Stock from time to time in anticipation of its obligations under this Plan, but a Participant shall have no right in or against any shares of Stock so acquired. All Stock shall constitute the general assets of the Company and may be disposed of by the Company at such time and for such purposes as it deems appropriate. (c) Agreement Controls. No discretionary action by the Committee as set forth herein shall amend or supersede the express terms of any Agreement. (d) No Employment Rights Conferred. Nothing contained in the Plan shall (i) confer upon any employee any right with respect to continuation of employment with any Employer or (ii) interfere in any way with the right of any Employer to terminate an employee's employment at any time. (e) Other Laws; Withholding. The Company shall not be obligated to issue any Stock pursuant to any Award granted under the Plan at any time when the shares covered by such Award have not been registered under the Securities Act of 1933 and such other state and federal laws, rules or regulations as the Company or the Committee deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules or regulations available for the issuance and sale of such shares. Unless the Awards and Stock covered by this Plan -12- 13 have been registered under the Securities Act of 1933, or the Company has determined that such registration is unnecessary, each Holder exercising an Award under this Plan may be required by the Company to give representation in writing that such Holder is acquiring such shares for his or her own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof. No fractional shares of Stock shall be delivered, nor shall any cash in lieu of fractional shares be paid. The Company shall have the right to deduct in connection with all Awards any taxes required by law to be withheld and to require any payments required to enable it to satisfy its withholding obligations. (f) No Restriction on Corporate Action. Nothing contained in the Plan shall be construed to prevent the Company, an Affiliate or any Subsidiary from taking any corporate action which is deemed by the Company, an Affiliate or any Subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Award made under the Plan. No employee, beneficiary or other person shall have any claim against the Company, an Affiliate or any Subsidiary as a result of any such action. (g) Restrictions on Transfer. Except as provided below, an Award shall not be transferable otherwise than by will or the laws of descent and distribution and shall be exercisable during the Holder's lifetime only by such Holder or the Holder's guardian or legal representative. However, the Committee may, in its discretion, provide in an option agreement (other than with respect to an Incentive Stock Option) that the option right granted to the individual may be transferred (in whole or in part and shall be subject to such terms and conditions as the Committee may impose thereon, including, without limitation, the approval by the Company of the form of transfer agreement) by the individual to (i) the spouse, children or grandchildren of the individual ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of the Immediate Family Members and, if applicable, the individual, (iii) a partnership in which such Immediate Family Members and, if applicable, the individual are the only partners, or (iv) any other person or entity otherwise permitted by the Committee. Following transfer, any such transferred option rights shall continue to be subject to the same terms and conditions as were applicable to the option rights immediately prior to transfer; provided, however, that no transferred option rights shall be exercisable unless arrangements satisfactory to the Company have been made to satisfy any tax withholding obligations the Company may have with respect to the option rights. (h) Beneficiary Designation. Each Holder may name, from time to time, any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each designation will revoke all prior designations by the same Holder, shall be in a form prescribed by the Committee, and will be effective only when filed by the Holder in writing with the Committee during his lifetime. In the absence of any such designation, benefits remaining unpaid at the Holder's death shall be paid to his estate. (i) Rule 16b-3. It is intended that the Plan and any grant of an Award made to a person subject to Section 16 of the 1934 Act meet all of the requirements of Rule 16b-3. If any provision of the Plan or any such Award would disqualify the Plan or such Award under, or would otherwise not comply with, Rule 16b-3, such provision or Award shall be construed or deemed amended to conform to Rule 16b-3. (j) Section 162(m). If the Plan is subject to Section 162(m) of the Code, it is intended that the Plan comply fully with and meet all the requirements of Section 162(m) of the Code so that Options and Stock Appreciation Rights granted hereunder and, if determined by the Committee, Restricted Stock Awards, shall constitute "performance-based" compensation within the meaning of such section. If any -13- 14 provision of the Plan would disqualify the Plan or would not otherwise permit the Plan to comply with Section 162(m) as so intended, such provision shall be construed or deemed amended to conform to the requirements or provisions of Section 162(m);provided that no such construction or amendment shall have an adverse effect on the economic value to a Holder of any Award previously granted hereunder. (k) Indemnification. Each person who is or shall have been a member of the Committee or of the Board and any employee delegated authority hereunder shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be a party or in which he may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of any judgment in any such action, suit, or proceeding against him, provided he shall give the Company prompt written notice of any such action, suit or proceeding, and an opportunity, at its own expense, to handle, defend and/or settle the same before he undertakes to handle, defend and/or settle it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights or indemnification to which such persons may be entitled under the Company's Articles of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. (l) Governing Law. This Plan shall be construed in accordance with the laws of the State of Delaware and applicable federal law. IN WITNESS WHEREOF, Sterling Chemicals Holdings, Inc. has caused this document to be duly executed in its name and behalf by its proper officer thereunto duly authorized, effective for all purposes as of the date of the adoption of the Plan by the Board, being April 23, 1997. STERLING CHEMICALS HOLDINGS, INC. By: /s/ FRANK P. DIASSI ---------------------- Frank P. Diassi Chairman of the Board of Directors -14- EX-10.4 4 h82651ex10-4.txt AMENDED SALARIED EMPLOYEES PENSION PLAN 1 EXHIBIT 10.4 STERLING CHEMICALS, INC. AMENDED AND RESTATED SALARIED EMPLOYEES' PENSION PLAN (Effective as of May 1, 1996) 2 TABLE OF CONTENTS
Page ---- SECTION 1 INTRODUCTION.......................................................................................2 1.1 PURPOSE..................................................................................................2 1.2 PLAN ADMINISTRATION......................................................................................2 1.3 FUNDS MANAGEMENT, TRUST AGREEMENT........................................................................2 1.4 EFFECTIVE DATE...........................................................................................2 1.5 PLAN YEAR................................................................................................2 1.6 EMPLOYERS................................................................................................2 1.7 USE OF TERMS.............................................................................................3 SECTION 2 ELIGIBILITY FOR PARTICIPATION AND VESTING..........................................................4 2.1 PARTICIPATION............................................................................................4 2.2 VESTING..................................................................................................4 SECTION 3 RETIREMENT DATES, EMPLOYMENT TERMINATION DATE......................................................5 3.1 NORMAL RETIREMENT DATE...................................................................................5 3.2 EARLY RETIREMENT DATE....................................................................................5 3.3 DISABILITY TERMINATION DATE..............................................................................5 3.4 RETIREMENT DATE..........................................................................................5 3.5 EMPLOYMENT TERMINATION DATE..............................................................................5 3.6 EMPLOYMENT WITH SUBSIDIARIES NOT PARTICIPATING IN PLAN...................................................5 SECTION 4 NORMAL AND EARLY RETIREMENT BENEFITS...............................................................6 4.1 NORMAL RETIREMENT........................................................................................6 4.2 LATE RETIREMENT..........................................................................................6 4.3 MONTHLY RETIREMENT INCOME - NORMAL RETIREMENT............................................................6 4.4 EARLY RETIREMENT - DEFERRED PAYMENT......................................................................7 4.5 EARLY RETIREMENT - EARLY PAYMENT.........................................................................7 4.6 SPECIAL EARLY RETIREMENT SUPPLEMENT......................................................................8 4.7 PARTICIPANTS WITH PRIOR MONSANTO COMPANY SERVICE.........................................................8 4.8 PARTICIPANTS WITH PRIOR ALBRIGHT & WILSON SERVICE........................................................8 4.9 SECTION 401(A)(17) PARTICIPANTS..........................................................................8 SECTION 5 DISABILITY INCOME.................................................................................10
i 3 5.1 LONG-TERM DISABILITY....................................................................................10 5.2 RETIREMENT OPTIONS WHILE ON LONG-TERM DISABILITY........................................................10 SECTION 6 TERMINATION BEFORE RETIREMENT.....................................................................11 6.1 VESTED TERMINATION - DEFERRED PAYMENT...................................................................11 6.2 VESTED TERMINATION - EARLY PAYMENT......................................................................11 6.3 TERMINATION PRIOR TO VESTING............................................................................11 SECTION 7 DEATH BENEFITS....................................................................................12 7.1 DEATH DURING EMPLOYMENT.................................................................................12 7.2 DEATH AFTER TERMINATION OF EMPLOYMENT...................................................................12 SECTION 8 LIMITATION ON BENEFITS AND TOP-HEAVY PROVISIONS...................................................13 8.1 SINGLE DEFINED BENEFIT PLAN.............................................................................13 8.2 TWO OR MORE DEFINED BENEFIT PLANS.......................................................................15 8.3 DEFINED CONTRIBUTION PLAN AND DEFINED BENEFIT PLAN......................................................15 8.4 DEFINITIONS.............................................................................................17 8.5 TOP-HEAVY PROVISIONS....................................................................................19 SECTION 9 PAYMENT OF RETIREMENT INCOME AND OTHER BENEFITS...................................................27 9.1 NORMAL FORM OF BENEFITS PAYMENT.........................................................................27 9.2 OPTIONAL FORMS OF MONTHLY BENEFITS......................................................................28 9.3 ADJUSTMENTS FOR DISABLED TERMINATED EMPLOYEES...........................................................30 9.4 ELECTION AND DISCONTINUANCE OF OPTIONS..................................................................30 9.5 SPOUSE'S RETIREMENT INCOME BENEFIT......................................................................33 9.6 SPECIAL SPOUSE'S RETIREMENT INCOME BENEFIT..............................................................34 9.7 SURVIVING SPOUSE BENEFIT................................................................................34 9.8 SPECIAL PAYMENT LIMITATIONS.............................................................................36 9.9 PAYMENT OF SMALL AMOUNTS................................................................................38 9.10 HOURLY-PAID EMPLOYEES TRANSFERRED TO SALARIED BASIS.....................................................38 9.11 PAYMENT OF DISTRIBUTION DIRECTLY TO ELIGIBLE RETIREMENT PLAN............................................39 9.12 DEFINITIONS.............................................................................................39 9.13 LIMITATION OF BENEFITS UPON TERMINATION.................................................................40 SECTION 10 REEMPLOYMENT......................................................................................42 10.1 REINSTATEMENT OF PARTICIPATION..........................................................................42 10.2 DETERMINATION OF BENEFITS...............................................................................42 10.3 DETERMINATION OF SUSPENDED BENEFITS.....................................................................42
ii 4 SECTION 11 EMPLOYER CONTRIBUTIONS............................................................................44 11.1 EMPLOYER CONTRIBUTIONS..................................................................................44 11.2 APPLICATION OF FORFEITURES..............................................................................44 SECTION 12 THE PLAN COMMITTEE................................................................................45 12.1 MEMBERSHIP..............................................................................................45 12.2 PLAN COMMITTEE'S GENERAL POWERS, RIGHTS AND DUTIES......................................................45 12.3 MANNER OF ACTION........................................................................................45 12.4 INFORMATION REQUIRED BY PLAN COMMITTEE..................................................................46 12.5 PLAN COMMITTEE DECISION FINAL...........................................................................46 12.6 REVIEW OF BENEFIT DETERMINATIONS........................................................................46 12.7 UNIFORM RULES...........................................................................................47 12.8 PAYMENT OF EXPENSES.....................................................................................47 SECTION 13 RELATING TO THE EMPLOYERS.........................................................................48 13.1 ACTION BY EMPLOYERS.....................................................................................48 13.2 ADDITIONAL EMPLOYERS....................................................................................48 13.3 RESTRICTIONS AS TO REVERSION OF TRUST ASSETS TO EMPLOYERS...............................................48 SECTION 14 GENERAL PROVISIONS................................................................................49 14.1 NOTICES.................................................................................................49 14.2 WAIVER OF NOTICE........................................................................................49 14.3 ABSENCE OF GUARANTY.....................................................................................49 14.4 EMPLOYMENT RIGHTS.......................................................................................49 14.5 INTERESTS NOT TRANSFERABLE..............................................................................49 14.6 FACILITY OF PAYMENT.....................................................................................49 14.7 GENDER AND NUMBER.......................................................................................50 14.8 EVIDENCE................................................................................................50 14.9 CONTROLLING STATE LAW...................................................................................50 14.10 SEVERABILITY............................................................................................50 SECTION 15 AMENDMENT, TERMINATION OR PLAN MERGER.............................................................51 15.1 AMENDMENT...............................................................................................51 15.2 INTERNAL REVENUE SERVICE APPROVAL.......................................................................51 15.3 TERMINATION.............................................................................................51 15.4 PLAN MERGER OR CONSOLIDATION............................................................................52
iii 5 15.5 NOTICE OF AMENDMENT, TERMINATION OR PLAN MERGER.........................................................52 15.6 NON-FORFEITABILITY ON "TERMINATION" OR "PARTIAL TERMINATION"............................................52 15.7 LIMITATION OF BENEFITS ON PLAN TERMINATION..............................................................52 SECTION 16 ALLOCATION AND DISTRIBUTION ON TERMINATION........................................................53 SECTION 17 DEFINITIONS.......................................................................................55 17.1 VESTING SERVICE.........................................................................................55 17.2 BENEFIT SERVICE.........................................................................................59 17.3 PRIOR EMPLOYER PARTICIPANT BENEFIT SERVICE..............................................................59 17.4 POST BENEFIT SERVICE....................................................................................59 17.5 HOURS OF SERVICE........................................................................................62 17.6 BREAK IN SERVICE........................................................................................64 17.7 STANDARD WORK WEEK......................................................................................65 17.8 LAYOFF..................................................................................................65 17.9 FISCAL YEAR.............................................................................................65 17.10 SUBSIDIARY..............................................................................................65 17.11 SUBSIDIARY..............................................................................................65 17.12 QUALIFIED ACTUARY.......................................................................................65 17.13 ACTUARIAL EQUIVALENT....................................................................................65 17.14 AVERAGE MONTHLY EARNINGS................................................................................66 17.15 AFFILIATE COMPANY.......................................................................................67 17.16 AFFILIATE UNIT..........................................................................................67 17.17 INCENTIVE PAY...........................................................................................68 17.18 FOREIGN OPERATING SUBSIDIARY............................................................................68 17.19 FOREIGN SUBSIDIARY......................................................................................69 17.20 U.S. FOREIGN SERVICE EMPLOYEES/DESIGNATED NON-U.S. CITIZEN FOREIGN SERVICE EMPLOYEES....................69 17.21 PART-TIME EMPLOYEE......................................................................................70 17.22 LONG-TERM DISABILITY....................................................................................70 17.23 CODE....................................................................................................71 17.24 ERISA...................................................................................................71 EXHIBIT A........................................................................................................72
iv 6 STERLING CHEMICALS, INC. AMENDED AND RESTATED SALARIED EMPLOYEES' PENSION PLAN (Effective as of May 1, 1996) WITNESSETH: WHEREAS, effective August 1, 1986 Sterling Chemicals, Inc. (the "Corporation") established the Sterling Chemicals, Inc. Salaried Employees' Pension Plan (the "Plan") in recognition of the contribution the employees have made to the operation of the Corporation; WHEREAS, effective January 1, 1991, the Corporation amended the Plan to incorporate effective amendments required by the Tax Reform Act of 1986, to make certain additional changes required by subsequent legislation and Regulations, and to make other changes desired by the Corporation; WHEREAS, effective October 1, 1993 the Corporation amended and restated the Plan to make certain changes desired by the Corporation; WHEREAS, in Section 15.1 of the Plan, the Corporation reserved the right to amend the Plan at any time. NOW, THEREFORE, effective May 1, 1996, the Corporation hereby amends the Plan to incorporate certain changes desired by the Corporation, which Plan shall read as follows: 7 STERLING CHEMICALS, INC. AMENDED AND RESTATED SALARIED EMPLOYEES' PENSION PLAN (EFFECTIVE AS OF OCTOBER 1, 1996) SECTION 1 Introduction 1.1 Purpose. The Plan is maintained by the Corporation to provide retirement benefits for eligible employees of the Corporation and of its subsidiaries which adopt the Plan. 1.2 Plan Administration. The Plan is administered by a committee known as the Employee Benefits Plans Committee (the "Plan Committee") appointed by the Corporation. The Plan Committee shall constitute the Named Fiduciary under the Plan for the purpose of administering and managing the Plan. 1.3 Funds Management, Trust Agreement. The Plan Committee is appointed by and derives its authority from the Corporation, and shall constitute the Named Fiduciary under the Plan with the power and authority on its own behalf or through its agents to manage and control the assets of the Trust Fund including, in addition to the powers and authority specifically granted to the Committee by the Trust Agreement, all powers and all authority necessary or appropriate to the discharge of its duties as such Named Fiduciary. The funds contributed under the Plan are held and invested by one or more corporate trustees (the "Trustee") appointed by the Committee or by such Trustee selected by the Committee. The Trustee acts in accordance with one or more trust agreements (the "Trust Agreement") which may, but need not, provide for the appointment of investment managers to make investments of the Trust Fund, and which implement and form a part of this Plan. As of the date the "Trust Fund" means the total assets of any kind including Qualifying Employer Securities, but only to the extent that immediately after such investment or reinvestment, the aggregate fair market value of all such Qualifying Securities held under this Plan does not exceed 10% of the total assets of the combined Trust Fund held by the Trustee. Copies of the Plan and the Trust Agreement are on file at the principal office of the Corporation where they may be examined by any participant. 1.4 Effective Date. The "Effective Date" of the Plan is August 1, 1986. 1.5 Plan Year. The Plan is administered on the basis of a plan year (the "Plan Year") which coincides with the corporate Fiscal Year, except for the first Plan Year which commenced August 1. 1.6 Employers. With approval of the Corporation, any other subsidiary of the Corporation may adopt this Plan in accordance with the provisions of Section 13.2. The Corporation and its subsidiaries which adopt the Plan are referred to below collectively as the "Employers" and individually as an "Employer". 2 8 1.7 Use of Terms. Certain terms, as used in this Plan, are defined in Section 17 or elsewhere in this Plan and when so used shall have the meanings so assigned to them. 3 9 SECTION 2 Eligibility for Participation and Vesting 2.1 Participation. Each employee of an Employer shall be immediately eligible to participate in the Plan if such employee was (i) employed by an Employer as of September 30, 1986, (ii) previously employed by the Monsanto Company (whether or not just prior to formation of Employer), and (iii) during such employment, was a participant in the Monsanto Company Salaried Employees' Pension Plan. Upon meeting the above participation requirements, such employee shall be considered a Prior Employer Participant. Each employee of an Employer as of August 21, 1992 who was (i) previously an employee of Albright & Wilson based in the United States and (ii) a participant in the Tenneco, Inc. Retirement Plan during such employment with Albright and Wilson, shall be immediately eligible to participate in the Plan as of August 21, 1992. Upon meeting the above participation requirements, such employee shall be considered a Former Albright & Wilson Participant. Thereafter each employee of an Employer will become a participant in this Plan on any date as of which he becomes a member of a group of employees to which the Plan has been and continues to be extended by his Employer. For all purposes of this Plan, Leased Employees (as defined in Section 414(n)(2) of the Code) shall not be considered to be employees of the Corporation or the Employers. 2.2 Vesting. A participant shall be fully vested and have a Vested Percentage of 100% in this Plan on the later of (a) the date he attains age 65 or (b) the 5th anniversary of the date he commenced participation in the Plan. The computation of a participant's nonforfeitable percentage of his interest in the Plan shall not be reduced as the result of any direct or indirect amendment to this Section. In the event that the Plan is amended to change or modify any vesting schedule, a participant with a least three (3) Years of Service as of the expiration date of the election period may elect to have his nonforfeitable percentage computed under the Plan without regard to such amendment. If a participant fails to make such election, then such participant shall be subject to the new vesting schedule. The participant's election period shall commence on the adoption date of the amendment and shall end 60 days after the latest of: (a) the adoption date of the amendment, (b) the effective date of the amendment, or (c) the date the participant receives written notice of the amendment from the Employer or Plan Committee. 4 10 SECTION 3 Retirement Dates, Employment Termination Date 3.1 Normal Retirement Date. A participant's "Normal Retirement Date" will be the first day of the month next following the later of the month in which he attains age 65 or the month in which he attains five years of Vesting Service. A participant's "Normal Retirement Age" shall be his age at his Normal Retirement Date. The first day of the month following the month in which a participant fails to complete 40 or more Hours of Service with the Employers after his Normal Retirement Date shall be the participant's "Late Retirement Date." However, if such a participant shall subsequently complete 40 or more Hours of Service in a calendar month, the participant shall be treated as a reemployed participant in accordance with Section 10 as of the first day of such month. A participant who works beyond his Normal Retirement Date shall continue to accrue Benefit Service until his Late Retirement Date. 3.2 Early Retirement Date. A participant's "Early Retirement Date" will be the first day of the month following the month in which he retires from the employ of all the Employers before his Normal Retirement Date, but after he has both attained at least age 55 years and is vested pursuant to Section 2.2. 3.3 Disability Termination Date. A participant's "Disability Termination Date" will be the first day of the month next following the month in which he terminates from the employ of all the Employers before his Normal Retirement Date because of Long-Term Disability, but after he has completed at least two and one-half years of Benefit Service as of his last full day of active employment. 3.4 Retirement Date. A participant's "Retirement Date" will be that one of the dates described in Sections 3.1 and 3.2 as of which he retires from the employ of his Employers and subsidiaries. 3.5 Employment Termination Date. A participant's "Employment Termination Date" will be the date on which his employment with all of the Employers terminates before he qualifies for retirement on a Retirement Date. 3.6 Employment with Subsidiaries Not Participating In Plan. For the purpose of determining a participant's Retirement Date, Employment Termination Date, or Disability Termination Date, references in the Plan to his retirement or termination from the employ of all of the Employers shall mean his retirement or termination from the employment of all Employers and all subsidiaries, including those which have not adopted the Plan. 5 11 SECTION 4 Normal and Early Retirement Benefits 4.1 Normal Retirement. Subject to the conditions and limitations of the Plan, a participant who retires on a Normal Retirement Date will be entitled to a Monthly Retirement Income for life in the form of a single life annuity commencing at his Normal Retirement Date in an amount determined in accordance with Section 4.3. Whenever any participant attains his Normal Retirement Age while covered under the Plan, he shall become fully vested and have a non-forfeitable interest in any benefit then or thereafter accrued under the Plan. 4.2 Late Retirement. Subject to the terms and conditions of the Plan, a participant who retires on a Late Retirement Date will be entitled to a Monthly Retirement Income based on Benefit Service, Average Monthly Earnings, and all other factors (except age) for determining Monthly Retirement Income in effect on his Late Retirement Date but paid in the form of a single life annuity commencing on his Late Retirement Date as if such date had been his Normal Retirement Date. Subject to the foregoing and subject to Section 9 hereof, this annuity shall be determined in accordance with Section 4.1. 4.3 Monthly Retirement Income - Normal Retirement. For a participant who retires on his Normal Retirement Date (or, if applicable, his Late Retirement Date), his Monthly Retirement Income will be the greatest of: (a) Standard Amount. The Standard Amount shall be applicable to a Prior Employer participant employed by the Monsanto Company prior to April 1, 1986, and shall be the Monthly Retirement Income determined by multiplying 1.4% times Average Monthly Earnings times Years of Benefit Service times the Vested Percentage set forth in Section 2.2. For purposes of this computation, Years of Benefit Service shall include full and partial years of Benefit Service as such service is determined under Sections 17.3 and 17.4; or (b) Alternate Amount. The Alternate Amount shall be applicable to a Prior Employer participant employed by the Monsanto Company on or after April 1, 1986, or any other participant employed by the Employer on or after the Effective Date and shall be the Monthly Retirement Income of 1.2% times Average Monthly Earnings times Years of Benefit Service times the Vested Percentage set forth in Section 2.2; or (c) Minimum Amount. The Minimum Amount shall be the product of the number of years of Benefit Service and fractions thereof completed at Normal Retirement Date (or Late Retirement Date, if applicable), times the Vested Percentage set forth in 6 12 Section 2.2, multiplied by the Minimum Retirement Income Factor set forth in Exhibit "A" determined with respect to such participant. Notwithstanding the foregoing, a participant who retires between January 1, 1991 and March 1, 1991 has the option to retire under the terms of this Plan or under the terms of the Plan in effect on December 31, 1990. Notwithstanding the foregoing, paragraph (c) shall not apply with respect to any participant who commences employment with the Employer on or after June 1, 1996. The Normal Retirement Income provided to participants pursuant to this Section shall not discriminate in favor of the officers, shareholders, and/or Key Employees (as defined in Section 416(i)(1) of the Code) of the Corporation. Participants With Affiliate Company or Affiliate Unit Service. If a participant subsequent to participation in this Plan or a later amended form thereof accrues Vesting Service with an Affiliate Company or Affiliate Unit, the amount of Monthly Retirement Income shall be the amount determined by the formula for Monthly Retirement Income set forth in the amended form of this Plan in effect when he ceases all further service with the Employers, subsidiaries and Subsidiaries, Affiliate Companies and Affiliate Units as a group. All other benefits shall be determined in a corresponding manner at such time. Benefit Service will not accrue to a former participant hereunder during any period of time during which such former participant is employed by an Affiliate Company or Affiliate Unit. There shall be no duplication of benefits under this Plan and the pension plan of any subsidiary or Subsidiary, Affiliate Company or Affiliate Unit, and it is further intended that there shall be no unjust enrichment of a participant as a result of employment among the Employers, subsidiaries and/or Subsidiaries, Affiliate Companies, and/or Affiliate Units. 4.4 Early Retirement - Deferred Payment. Subject to the conditions and limitations of the Plan, if a participant retires on an Early Retirement Date and elects to defer his Monthly Retirement Income until his Normal Retirement Date, he will be entitled to a Monthly Retirement Income for life commencing at his Normal Retirement Date. Such Monthly Retirement Income shall be computed in accordance with Section 4.1 through 4.3 (as in effect as of his Early Retirement Date) based upon his Benefit Service determined as of his Early Retirement Date. 4.5 Early Retirement - Early Payment. In lieu of the Monthly Retirement Income payable under Section 4.4 commencing on his Normal Retirement Date, a participant who retires on an Early Retirement Date and does not elect to defer his Monthly Retirement Income in accordance with Section 4.4 will be entitled to a Monthly Retirement Income commencing on his Early Retirement Date or, if he so elects, on the first day of any month thereafter before his Normal Retirement Date. The Monthly Retirement Income which is payable to a participant in accordance with the preceding sentence will be computed by determining the amount of Monthly Retirement Income which the participant would have been entitled to receive under Section 4.4 commencing at his Normal 7 13 Retirement Date and reducing such amount by one-fourth of one percent for each complete calendar month by which the date his Monthly Retirement Income payments commence precedes his Normal Retirement Date, except that the reduction provided for above shall not apply if the sum of his age and years of Vesting Service as of his Early Retirement Date equals or exceeds 80. 4.6 Special Early Retirement Supplement. A participant who retires and commences to receive Monthly Retirement Income on an Early Retirement Date occurring between age 55 and age 62 will be entitled to a monthly Special Early Retirement Supplement until the earlier of the first of the month after he attains age 62 or the first of the month in which his death occurs, of an amount equal to the product of the number of his years of Benefit Service and fractions thereof multiplied by $4.00. 4.7 Participants with Prior Monsanto Company Service. For a Prior Employer participant, the amount of his Monthly Retirement Income will be reduced by an amount equal to the monthly amount of benefits payable under the Monsanto Salaried Employees' Pension Plan and the Monsanto Hourly Paid Employees' Pension Plan as of the Effective Date calculated as a single life annuity as if such Prior Employer participant commenced retirement benefits from the Monsanto Company on the date of his retirement or employment termination from the Employer. 4.8 Participants with Prior Albright & Wilson Service. For a Former Albright & Wilson Participant, the amount of his Monthly Retirement Income will be reduced by an amount equal to the monthly amount of benefits payable under the Tenneco, Inc. Retirement Plan as of the date the Former Albright & Wilson Participant became a participant in this Plan calculated as a single life annuity as if such Former Albright & Wilson Participant commenced retirement benefits from Albright & Wilson on the date of his retirement or employment termination from the Employer. 4.9 Section 401(a)(17) Participants. The accrued benefit of any participant with at least one Hour of Service in a Plan Year beginning after December 31, 1988 shall be equal to the greater of (a) the participant's Frozen Accrued Benefit, or (b) the participant's accrued benefit calculated above based on the Normal Retirement Benefit formula provided in the Supplement. "Frozen Accrued Benefit" means a participant's accrued benefit under the Plan determined as of the latest Fresh-Start Date as if the participant terminated employment with the Employer on that date and without regard to any amendment to the Plan adopted after that date, other than amendments recognized as effective as of or before that date under Code Section 401(b) or Regulation Section 1.401(a)(4)-11(g). If, as of the latest Fresh-Start Date, the amount of a participant's Frozen Accrued Benefit was limited by the application of Code Section 415, the participant's Frozen Accrued Benefit will be increased for years after the latest Fresh-Start Date to the extent permitted under Code Section 415(d)(1). If: (a) the Plan's normal form of benefit in effect on the latest Fresh-Start Date is not the same as the normal form under the Plan after the latest Fresh-Start Date and/or (b) the Normal Retirement Age for any participant on that date was greater than the Normal Retirement Age for that participant under the Plan after the latest Fresh-Start Date, the stated Frozen Accrued Benefit will be expressed as an actuarially equivalent benefit in the normal form under the Plan after the latest 8 14 Fresh-Start Date, commencing at the participant's Normal Retirement Age under the Plan in effect after the latest Fresh-Start Date. "Fresh-Start Date" means the last day of the Plan Year preceding a Plan Year for which any amendment of the Plan that directly or indirectly affects the amount of a participant's benefit determined under the current benefit formula, is made effective. Notwithstanding any other provision in the Plan, each "Section 401(a)(17) Participant's" accrued benefit under this Plan will be the greater of: (a) the participant's accrued benefit as of the last day of the last Plan Year beginning before January 1, 1994, frozen in accordance with Regulation 1.401(a)(4)-13, or (b) the participant's accrued benefit determined with respect to the benefit formula applicable for the Plan Year beginning on or after January 1, 1994, as applied to the participant's total years of service taken into account under the Plan for purposes of benefit accruals. A "Section 401(a)(17) Participant" means a participant whose current accrued benefit as of a date on or after the first day of the first Plan Year beginning on or after January 1, 1994, is based on compensation for a year beginning prior to the first day of the first Plan Year beginning on or after January 1, 1994 that exceeded $150,000. 9 15 SECTION 5 Disability Income 5.1 Long-Term Disability. If a participant is terminated on a Disability Termination Date because of Long-Term Disability, he is herein referred to as a "Disabled Terminated Employee" or a "Qualified Disabled Terminated Employee". "Certain Part-Time Employees" as defined in Section 17.21 can be included in the definition of Qualified Disabled Terminated Employee and Disabled Terminated Employee as and to the extent provided in Section 17.21. 5.2 Retirement Options While on Long-Term Disability. Retirement options described in Sections 9.1 and 9.2 of the Plan shall not be available to a participant who is on Long-Term Disability and receiving payments under any disability plan supported by the Employer. When such a participant ceases receiving benefits under such disability plan at or after age 65 and provided that he is otherwise eligible for benefits hereunder, all options described in Sections 9.1 and 9.2 of this Plan shall be available. 10 16 SECTION 6 Termination Before Retirement 6.1 Vested Termination - Deferred Payment. Subject to the conditions and limitations of the Plan, if a participant's employment with all of the Employers and all of the subsidiaries terminates before age 55 for a reason other than his being determined on Long-Term Disability or his death, but after he is vested pursuant to Section 2.2, the participant shall be eligible to receive a Monthly Vested Termination Benefit commencing at his Normal Retirement Date. Such monthly benefit shall be computed in accordance with Sections 4.1 through 4.3 (as in effect as of his Employment Termination Date) based upon his Benefit Service and Average Monthly Earnings determined as of his Employment Termination Date. 6.2 Vested Termination - Early Payment. In lieu of the Monthly Vested Termination Benefit otherwise payable under Section 6.1 commencing at his Normal Retirement Date, a participant may elect to receive a reduced Monthly Vested Termination Benefit commencing on the first day of the calendar month next following the month in which he attains age 55 years or on the first day of any month thereafter before his Normal Retirement Date. The Monthly Vested Termination Benefit payable to a participant in accordance with the preceding sentence will be computed by determining the amount of Monthly Vested Termination Benefit to which the participant would have been entitled under Section 6.1 commencing at his Normal Retirement Date and reducing such amount by one-fourth of one percent for each complete calendar month by which the date his Monthly Vested Termination Benefits commence precedes his Normal Retirement Date. 6.3 Termination Prior to Vesting. If a participant's employment with the Employer and the Subsidiaries terminates prior to his Normal Retirement Age for a reason other than Long-Term Disability, or his death, and prior to his becoming vested pursuant to Section 2.2, no benefit shall be payable to him under the Plan attributable to his employment with the Employer. 11 17 SECTION 7 Death Benefits 7.1 Death During Employment. No death benefits shall be payable under the Plan on account of the death of any participant who dies while still employed by an Employer unless such participant qualifies for a Spouse's Retirement Income Benefit or a Surviving Spouse Benefit as defined in Sections 9.5, 9.6 and 9.7 hereof. 7.2 Death After Termination of Employment. The death benefit, if any, payable with respect to any retired participant who was in receipt of, or entitled to receive, benefits payable hereunder on such date shall be the amount or amounts payable to any Beneficiary under any payment form applicable pursuant to Section 9.2 hereof or any comparable provision of any Predecessor Plan, any spouse of such retired participant receiving benefits under Section 9.1 hereof. The death benefit, if any, payable with respect to any participant eligible to receive a Monthly Vested Termination Benefit shall be determined in accordance with Section 9.7. 12 18 SECTION 8 Limitation on Benefits And Top-Heavy Provisions Notwithstanding any provision of this Plan to the contrary, the total Annual Benefit received by a participant shall be subject to the following limitations: 8.1 Single Defined Benefit Plan: The normal retirement benefit of any participant under this Plan cannot exceed the lesser of $90,000 (increased annually for Limitation Years beginning after December 31, 1987 in accordance with Section 415(d) of the Code to reflect cost-of-living adjustments) or one hundred percent (100%) of such participant's Average Compensation. For purposes of determining whether a participant's benefits exceed these limitations, the following rules shall apply: (a) Adjustment If Benefit Not Single Life Annuity. If the normal form of benefit is other than a single life annuity, such form must be adjusted actuarially to the equivalent of a single life annuity. This single life annuity cannot exceed the maximum dollar or percent limitations outlined above. No adjustment is required for the following: qualified joint and survivor annuity benefits, preretirement disability benefits, preretirement death benefits and post-retirement medical benefits. (b) Adjustment If Benefit Commences Before Social Security Retirement Age. If benefit distributions begin before the participant's Social Security Retirement Age, but on or after age 62, the $90,000 limitation shall be reduced by: (1) in the case of a participant whose Social Security Retirement Age is 65, 5/9 of 1% for each month by which benefits commence before the month in which the participant attains age 65, or (2) in the case of a participant whose Social Security Retirement Age is greater than 65, 5/9 of 1% for each of the first 36 months and 5/12 of 1% for each additional month (up to 24) by which benefits commence before the month in which the participant attains his Social Security Retirement Age. If benefit distributions begin before age 62, the $90,000 limitation shall be the actuarial equivalent of the participant's limitation for benefits commencing at age 62, reduced for each month by which benefits commence before the month in which the participant attains age 62. In order to determine actuarial equivalence for this purpose, the interest rate assumption shall be as set forth in Section 8.1(e). (c) Adjustment If Benefit Commences After Social Security Retirement Age. If benefit distributions begin after the participant's Social Security Retirement Age, the $90,000 limitation shall be increased so that it is the actuarial equivalent of the $90,000 limitation at the participant's Social Security Retirement Age. The increased maximum benefit may not exceed 100% of the participant's highest three year average Compensation. (d) Social Security Retirement Age Defined. "Social Security Retirement Age" as used herein shall mean the age used as the retirement age under Section 216(1) of the Social Security Act, except that such Section shall be applied without regard to the age 13 19 increase factor and as if the early retirement age under Section 216(1)(2) of such Act were sixty-two (62). (e) Interest Assumption. The interest rate used for adjusting the maximum limitations above shall be: (i) For benefits commencing before Social Security Retirement Age and for forms of benefit other than straight life annuity, the greater of: (1) 5%, or (2) the rate used to determine actuarial equivalence for other purposes of this Plan. (ii) For benefits commencing after Social Security Retirement Age, the lesser of: (1) 5%, or (2) the rate used to determine actuarial equivalence for other purposes of this Plan. (f) Reduction For Service Less Than 10 Years. In the case of a participant who has less than ten (10) years of participation in a defined benefit plan of any member of the Extended Group, the benefits shall not exceed the limit set forth in Section 8.1 multiplied by a fraction, the numerator of which is the number of years (or part thereof) of participation in a defined benefit plan of any member of the Extended Group, and the denominator of which is ten (10). (g) Adjustment For Small Benefits. In the case of a participant whose Annual Benefit is not in excess of $10,000, the benefits payable with respect to such participant under this Plan shall be deemed not to exceed the limitation of this Section if: (i) The Annual Benefits payable with respect to such participant under this Plan and all other defined benefit plans of any member of the Extended Group do not exceed $10,000 for the Plan Year or for any prior Plan Year, and (ii) The Employer or any member of the Extended Group has not at any time maintained a defined contribution plan in which the participant participated. (h) Protected Accrued Benefit. Notwithstanding anything in this Section 8 to the contrary, the maximum annual benefit for any participant in a defined benefit plan in existence on July 1, 1982 shall not be less than the protected current accrued benefit, payable annually, as provided for under question T-3 of Internal Revenue Service Notice 83-10, 14 20 1983-1 C.B. 536. In the case of an individual who was a participant in one or more defined benefit plans of any member of the Extended Group as of the first day of the first Limitation Year beginning after December 31, 1986, the application of the limitation of this Section 8 shall not cause the maximum permissible amount for such individual under all such defined benefit plans to be less than the individual's current accrued benefit. The preceding sentence applies only if such defined benefit plans met the requirements of Code Section 415 for all Limitation Years beginning before January 1, 1987. 8.2 Two or More Defined Benefit Plans: If the Employer or any member of the Extended Group maintains one or more defined benefit plans in addition to this Plan, the sum of the normal retirement benefits of all plans will be treated as a single benefit for the purposes of applying the limitations in Section 8.1. If these benefits exceed, in the aggregate, the limitations in Section 8.1, the normal retirement benefit under this Plan shall be reduced (but not below zero) until the sum of the benefits of the remaining plans satisfy the limitations. 8.3 Defined Contribution Plan and Defined Benefit Plan: (a) General Rule: If the Employer or any member of the Extended Group maintains (or has ever maintained) one or more defined contribution plans and one or more defined benefit plans, the sum of the "defined contribution plan fraction" and the "defined benefit plan fraction," as defined below, cannot exceed 1.0 for any Limitation Year. For purposes of this paragraph, participant contributions to a qualified defined benefit plan are treated as a separate defined contribution plan. For purposes of this paragraph, all defined contribution plans of any member of the Extended Group are to be treated as one defined contribution plan and all defined benefit plans of any member of the Extended Group are to be treated as one defined benefit plan, whether or not such plans have been terminated. If the sum of the defined contribution plan fraction and defined benefit plan fraction exceeds 1.0, the Annual Benefit of the defined benefit plans will be reduced so that the sum of the fractions will not exceed 1.0. In no event will the Annual Benefit be decreased below the amount of the accrued benefit to date. If additional reductions are required for the sum of the fractions to equal 1.0, the reductions will then be made to the Annual Additions of the defined contribution plans. (b) Defined Contribution Plan Fraction: (i) General Rule: The defined contribution plan fraction for any Limitation Year is (1) divided by (2), where: (1) is the sum of the actual Annual Additions to the participant's account under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior Limitation Years (including the annual additions attributable to the participant's nondeductible Employee contributions to all defined benefit plans, whether or not 15 21 terminated, maintained by the Employer, and the annual additions attributable to all welfare benefit funds, as defined in Code Section 419(e), and individual medical accounts, as defined in Code Section 415(l)(2), maintained by the Employer); and (2) is the sum of maximum aggregate amounts for the current and all prior Limitation Years of service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The maximum aggregate amount in any Limitation Year is the lesser of 125 percent of the dollar limitation determined under Code Sections 415(b) and (d) in effect under Code Section 415(c)(1)(A) or 35 percent of the participant's Compensation for such year. (ii) If the participant was a participant as of the first day of the First Limitation Year beginning after December 31, 1986, in one or more defined contribution plans maintained by any member of the Extended Group which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the plans made after May 5, 1986, but using the Code Section 415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987. (c) Defined Benefit Plan Fraction: (i) General Rule: The defined benefit plan fraction for any year is (1) divided by (2), where: (1) is the projected Annual Benefit of the participant under the Plan (determined as of the close of the Limitation Year), and (2) is the lesser of (A) 1.25 times the dollar limitation (adjusted, if necessary) for such year, or (B) 1.4 times one hundred percent (100%) of the participant's Average Compensation for the high three (3) years (adjusted, if necessary). 16 22 (ii) Notwithstanding the above, if the participant was a participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined benefit plans maintained by any member of the Extended Group which were in existence on May 6, 1986, the denominator of this fraction with not be less than one hundred twenty-five percent (125%) of the sum of the Annual Benefits under such plans which the participant had accrued as of the close of the last Limitation Year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plans after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Code Section 415 as in effect for all Limitation Years beginning before January 1, 1987. 8.4 Definitions: (a) Extended Group: All Subsidiaries and subsidiaries of the Corporation, as defined respectively in Sections 17.10 and 17.11, plus any other company, trade or business which would be included in the definition of subsidiary if such company, trade or business were a corporation. A "member of the Extended Group" means any component member of the Extended Group. (b) Excess Amount: The excess of the participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount. (c) Limitation Year: A twelve (12) consecutive month period ending on September 30. (d) Maximum Permissible Amount: For a Limitation Year, the Maximum Permissible Amount with respect to any participant shall be the lesser of: (i) $30,000 (increased annually for Limitation Years beginning after December 31, 1987 in accordance with Section 415(d) of the Code to reflect cost-of-living adjustments), or (ii) 25 % of the participant's Compensation for the Limitation Year. (e) Compensation: For purposes of determining compliance with the limitations of Code Section 415, Compensation shall mean a participant's earned income, wages, salaries, fees for professional services and other amounts received for personal services actually rendered in the course of employment with an Employer maintaining the Plan, including, but not limited to, commissions paid to salesmen, compensation for services based on a percentage of profits, commissions on insurance premiums, tips and bonuses, and excluding the following: 17 23 (i) Employer contributions to a plan of deferred compensation to the extent contributions are not included in gross income of the participant for the taxable year in which contributed, or on behalf of an participant to a simplified employee pension plan to the extent such contributions are deductible under Code Section 210(b)(2), and any distributions from a plan of deferred compensation whether or not includable in the gross income of the participant when distributed (however, any amounts received by a participant pursuant to an unfunded nonqualified plan may be considered as Compensation in the year such amounts are included in the gross income of the participant); (ii) amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by a participant becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (iii) amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (iv) other amounts which receive special tax benefits, or contributions made by an Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described under Code Section 403(b) (whether or not the contributions are excludable from the gross income of the participant). For purposes of applying the limitations in this Article, amounts included as Compensation are those actually paid or made available to a participant within the Limitation Year. For Limitation Years beginning after December 31, 1988, Compensation shall be limited to $200,000 (unless adjusted in the same manner as permitted under Code Section 415(d)). Notwithstanding anything to the contrary in the definition, Compensation shall include any and all items which may be includable in Compensation under Section 415(c)(3) of the Code. In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the Compensation of each participant taken into account under the Plan shall not exceed the "OBRA '93 Annual Compensation Limit." The "OBRA '93 Annual Compensation Limit" is $150,000, as adjusted for increases in the cost of living in accordance with Code Section 401(a)(17)(B). The cost of living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined ("Determination Period") beginning in such calendar year. If a Determination Period consists of fewer than 12 months, the "OBRA '93 Annual Compensation Limit" will be multiplied by a fraction, the numerator of which is the number of months in the Determination Period, and the denominator of which is 12. In applying this limitation, the family group of a highly compensated employee (as defined in Code Section 414(q)) who is subject to the family member aggregation rules of Code Section 414(q)(6) because such participant is either a "five-percent owner" of the Employer or one of the ten (10) highly 18 24 compensated employees paid the greatest Compensation during the year, shall be treated as a single participant, except that for this purpose family members shall include only the affected participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. If, as a result of the application of such rules the adjusted "OBRA '93 Annual Compensation Limit" is exceeded, then the limitation shall be prorated among the affected family members in proportion to each such family members Compensation prior to the application of this limitation, or the limitation shall be adjusted in accordance with any other method permitted by regulation. Any reference in this Plan to the limitation under Code Section 401(a)(17) shall mean the "OBRA '93 Annual Compensation Limit" set forth in this Section. If Compensation for any prior Determination Period is taken into account in determining a participant's benefits accruing in the current Plan Year, the Compensation for that prior Determination Period is subject to the "OBRA '93 Annual Compensation Limit" in effect for that prior Determination Period. For this purpose, for Determination Periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the "OBRA '93 Annual Compensation Limit" is $150,000. (f) Average Compensation: The average Compensation during a participant's high three (3) years of service, which period is the three (3) consecutive calendar years (or, the actual number of consecutive years of employment for those participants who are employed for less than three (3) consecutive years with the Employer or any member of the Extended Group) during which the participant had the greatest aggregate Compensation from the Employer or any member of the Extended Group. (g) Annual Benefit: A benefit payable annually in the form of a straight life annuity (with no ancillary benefits) under a plan to which participants do not contribute and under which no rollover contributions are made. (h) Annual Additions: With respect to each Limitation Year, the total of the employer contributions, employee contributions, forfeitures, and amounts described in Code Sections 415(1) and 419A(d)(2) which are allocated on behalf of a participant. 8.5 Top-Heavy Provisions: For any Plan Year for which this Plan is a Top-Heavy Plan, as defined in Section 8.5(g), any other provisions of this Plan to the contrary notwithstanding, this Plan shall be subject to the provisions of this Section 8.5. (a) Vesting Provisions: Each participant who has completed an "Hour of Service" (as defined in Section 17.5 hereof) after the Plan becomes top heavy and while the Plan is top heavy and who has completed the Service specified in the following table shall be vested in his accrued benefit under this Plan at least as rapidly as is provided in the following schedule; except that the vesting provision set forth in Section 2.2 shall be used at any time in which it provides for more rapid vesting: 19 25 Years of Service Vested Percentage ---------------- ----------------- Less than 2 years 0% 2 but less than 3 years 20% 3 but less than 4 years 40% 4 but less than 5 years 60% 5 but less than 6 years 80% 6 years or more 100% If an account becomes vested by reason of the application of the preceding schedule, it may not thereafter be forfeited by reason of reemployment after retirement pursuant to a suspension of benefits provision, by reason of withdrawal of any mandatory employee contributions to which employer contributions were keyed, or for any other reason. If the Plan subsequently ceases to be top-heavy, the preceding schedule shall continue to apply with respect to any participant who had at least three (3) years of service (as defined in Treasury Regulation Section 1.411(a)-8T(b)(3)) as of the close of the last year that the Plan was top-heavy, except that each participant whose non-forfeitable percentage of his accrued benefit derived from employer contributions is determined under such amended schedule, and who has completed at least three (3) years of service with the employer, may elect, during the election period, to have the non-forfeitable percentage of his accrued benefit derived from employer contributions determined without regard to such amendment if his non-forfeitable percentage under the Plan as amended is, at any time, less than such percentage determined without regard to such amendment. For all other participants, the non-forfeitable percentage of their accrued benefit prior to the date the Plan ceased to be top-heavy shall not be reduced, but future increases in the non-forfeitable percentage shall be made only in accordance with Section 2.2. (b) Minimum Benefit Provisions: Each participant who is a Non-Key Employee, as defined in Section 8.5(h)(iv), shall be entitled to an accrued benefit in the form of a single-life annuity (with no ancillary benefits) beginning at his normal retirement date, that shall not be less than his average annual participant's Compensation, within the meaning of Code Section 415, for years in the Testing Period multiplied by the lesser of: (a) two percent (2%) multiplied by the number of years of Top-Heavy Service or (b) twenty percent (20%). A Non-Key Employee may not fail to receive a minimum benefit because of a failure to receive a specified amount of Compensation or a failure to make mandatory employee or elective contributions. "Testing Period" means, with respect to a participant, the period of consecutive years of Top-Heavy Service, not exceeding five (5), during which the participant had the greatest aggregate compensation, within the meaning of Code Section 415, from the Corporation. "Top-Heavy Service" means his Service credited under Section 17.5. Top-Heavy Service shall not include any Service before July 1, 1984 or any Service that begins after the close of the last Plan Year in which the Plan was a Top-Heavy Plan. Years before and after such 20 26 excluded periods shall be considered consecutive for purposes of determining the Testing Period. (c) Limitation on Compensation: A participant's annual Compensation taken into account under this Section 8.5 and for purposes of computing benefits under this Plan shall not be in excess of Two Hundred Thousand Dollars ($200,000). Such amount shall be adjusted automatically for each Plan Year to the amount prescribed by the Secretary of the Treasury or his delegate pursuant to regulations for the calendar year in which such Plan Year commences. For Plan Years beginning on or after January 1, 1994, a participant's annual Compensation taken into account under this Section 8.5 and for purposes of computing benefits under this Plan shall not be in excess of the limitation under Code Section 401(a)(17). (d) Limitation on Benefits: In the event that the Corporation, other Employer or any member of the Extended Group (hereinafter in this Section collectively referred to as a "Considered Company") also maintains a defined contribution plan providing contributions on behalf of participants in this Plan, one of the two following provisions shall apply: (i) If for a Plan Year this would not be a Top-Heavy Plan if "90 percent" were substituted for "60 percent" in Section 8.5(g), then the percentages used in Section 8.5(b) are changed to be the lesser of (i) three percent (3%) multiplied by the number of years of Top-Heavy Service or (ii) the lesser of thirty percent (30%) or twenty percent (20%) plus one percent (I%) for each year the Plan is taken into account under this subsection (a). (ii) If for a Plan Year this Plan would continue to be a Top-Heavy Plan if "90 percent" were substituted for "60 percent" in Section 8.5(g), then the denominator of both the defined contribution plan fraction and the defined benefit plan fraction shall be calculated as set forth in Section 8.3, for the limitation year ending in such Plan Year by substituting "one (1.0)" for "one and twenty-five hundredths (1.25)" in each place such figure appears. This subsection (b) will not apply for such Plan Year with respect to any individual for whom there are no (i) Corporation contributions, forfeitures or voluntary non-deductible contributions allocated to such individual or (ii) accruals for such individual under the defined benefit plan. Furthermore, the limitation rules set forth in Code Section 415(e)(6)(B)(i) shall be applied by substituting "Forty-one Thousand Five Hundred Dollars ($41,500)' for "Fifty-One Thousand Eight Hundred Seventy-Five Dollars ($51,875)" where it appears therein. (e) Coordination With Other Plans: In the event that another defined contribution or defined benefit plan maintained by a Considered Company provides contributions or benefits on behalf of participants in this Plan, such other plan shall be treated as a part of this Plan pursuant to applicable principles prescribed by U.S. Treasury Regulations or applicable IRS rulings (such as Revenue Ruling 81-202 or any successor 21 27 ruling) to determine whether this Plan satisfies the requirements of Sections 8.5(a), 8.5(b) and 8.5(c) and to avoid inappropriate omissions or inappropriate duplication of minimum contributions. Such determination shall be made upon the advice of counsel by the Committee. In the event a participant is covered by a defined benefit plan which is top-heavy pursuant to Section 416 of the Code, a comparability analysis (as prescribed by Revenue Ruling 81-202 or any successor ruling) shall be performed in order to establish that the plans are providing benefits at least equal to the defined benefit minimum. (f) Distributions to Certain Key Employees: Notwithstanding any other provision of this Plan to the contrary, the entire interest in this Plan of each participant who is a five percent (5%) owner (as described in Section (416)(i)(A) of the Code determined with respect to the Plan Year ending in the calendar year in which such individual attains age 70 1/2), shall be distributed to such participant not later than the first day of April following the calendar year in which such individual attains age 70 1/2. (g) Determination of Top-Heavy Status: The Plan shall be a Top-Heavy Plan for any Plan Year if, as of the Determination Date, the present value of the cumulative accrued benefits under the Plan determined as of the Valuation Date for participants (including former participants) who are Key Employees exceeds sixty percent (60%) of the present value of the cumulative accrued benefits under the Plan for all participants (including former participants) or, if this Plan is required to be in an Aggregation Group, any such Plan Year in which such Group is a Top-Heavy Group. In determining Top-Heavy status, if an individual has not performed one (1) Hour of Service for a Considered Company at any time during the five-year period ending on the Determination Date, any accrued benefit for such individual and the aggregate accounts of such individual shall not be taken into account. The accrued benefit of any employee (other than a Key Employee) shall be determined under (a) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Aggregation Group or (b) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Code Section 411(b)(1)(C). (h) For purposes of this Section, the capitalized words have the following meanings: (i) "Aggregation Group" means the group of plans, if any, that includes both the group of plans that is required to be aggregated and the group of plans that is permitted to be aggregated. The group of plans that is required to be aggregated (the "required aggregation group") includes: (1) Each plan of a Considered Company in which a Key Employee is a member, including collectively bargained plans, and 22 28 (2) Each other plan, including collectively bargained plans, of a Considered Company which enables a plan in which a Key Employee is a member to meet the requirements of either Code Section 401(a)(4) or 410. The group of plans that is permitted to be aggregated (the "permissive aggregation group") includes the required aggregation group and any plan that is not part of the required aggregation group that the Committee certifies as constituting a plan within the permissive aggregation group. Such plans may be added to the permissive aggregation group only if, after the addition, the aggregation group as a whole continues to meet the requirements of both Code Sections 401(a)(4) and 410. (ii) "Determination Date" means for any Plan Year the last day of the immediately preceding Plan Year or in the case of the first Plan Year of the Plan, Determination Date means the last day of such Plan Year. (iii) "Key Employee" means an Employee as defined in Code Section 416(i) and the Regulations thereunder. Generally, any Employee or former Employee (as well as each of his Beneficiaries) is considered a Key Employee if he, at any time during the Plan Year or any of the preceding four (4) Plan Years, has been included in one of the following categories: (1) an officer of the Employer (as that term is defined within the meaning of the Regulations under Code Section 416) having annual Compensation greater than 50 percent of the amount in effect under Code Section 415(b)(1)(A) for any such Plan Year; (2) one of the ten Employees having annual Compensation from the Employer for a Plan Year greater than the dollar limitation in effect under Code Section 415(c)(1)(A) for the calendar year in which such Plan Year ends and owning (or considered as owning within the meaning of Code Section 318) both more than one-half percent interest and the largest interests in the Employer; (3) a "five percent owner" of the Employer. "Five percent owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than five percent (5%) of the outstanding stock of the Employer or stock possessing more than five percent (5%) of the total combined voting power of all stock of the Employer, or, in the case of an unincorporated business, any person who owns more than five percent (5%) of the capital or profits interest in the Employer. In determining percentage ownership hereunder, Employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate employers; or 23 29 (4) a "one percent owner" of the Employer having an annual Compensation from the Employer of more than $150,000. "One percent owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than one percent (1%) of the outstanding stock of the Employer or stock possessing more than one percent (1%) of the total combined voting power of all stock of the Employer, or, in the case of an unincorporated business, any person who owns more than one percent (1%) of the capital or profits interest in the Employer. In determining percentage ownership hereunder, Employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate Employers. However, in determining whether an individual has Compensation of more than $150,000, Compensation from each employer required to be aggregated under Code Sections 414(b), (c), (m) and (o) shall be taken into account. For purposes of this Section, the determination of Compensation shall be based only on Compensation which is actually paid and shall be made by including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the participant under Code Sections 125, 402(e)(3), 402(h), 403(b) or 457, and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. (iv) A "Non-Key Employee" means any employee (and any beneficiary of an employee) who is not a Key Employee. (v) "Top-Heavy Group" means the Aggregation Group, if as of the applicable Determination Date, the sum of the present value of the cumulative accrued benefits for Key Employees under all defined benefit plans included in the Aggregation Group plus the aggregate of the accounts of Key Employees under all defined contribution plans included in the Aggregation Group exceeds sixty percent (60%) of the sum of the present value of the cumulative accrued benefits for all employees, excluding former Key Employees as provided in paragraph (i) below, under all such defined benefit plans plus the aggregate accounts for all employees, excluding former Key Employees as provided in paragraph (i) below, under all such defined contribution plans. In determining Top-Heavy status, if an individual has not performed one (1) Hour of Service for a Considered Company at any time during the five-year period ending on the Determination Date, any accrued benefit for such individual and the aggregate accounts of such individual shall not be taken into account. If the Aggregation Group that is a Top-Heavy Group is a permissive aggregation group, only those plans that are part of the required aggregation group will be treated as Top-Heavy Plans. If the Aggregation Group is not a Top Heavy Group, no plan within such group will be a Top-Heavy Plan. 24 30 (i) In determining whether this Plan constitutes a Top Heavy Plan, the Committee (or its agent) will make the following adjustments in connection therewith: (i) When more than one plan is aggregated, the Committee shall determine separately for each plan as of each plan's Determination Date the present value of the accrued benefits (for this purpose using the actuarial assumptions set forth in the applicable plan, and if such assumptions are not set forth in the applicable plan, using the assumptions set forth in this Plan) or account balance. The results shall then be aggregated by adding the results of each plan as of the Determination Dates for such plans that fall within the same calendar year. (ii) In determining the present value of the cumulative accrued benefit (for this purpose using the actuarial assumptions set forth in Section 17.13 hereof) or the amount of the account of any employee, such present value or account will include the amount in dollar value of the aggregate distributions made to such employee under the applicable plan during the five-year period ending on the Determination Date unless reflected in the value of the accrued benefit or account balance as of the most recent Valuation Date. The amounts will include distributions to employees which represented the entire amount credited to their accounts under the applicable plan. (iii) Further, in making such determination, such present value or such account shall not include any rollover contribution (or similar transfer) initiated by the employee and made after December 31, 1983 to an applicable plan. (1) If the rollover contribution (or similar transfer) is initiated by the employee and made to or from a plan maintained by a Considered Company, the plan providing the distribution shall include such distribution in the present value or such account; the plan accepting the distribution shall not include such distribution in the present value or such account unless the plan accepted it before December 31, 1983. (2) If the rollover contribution (or similar transfer) is not initiated by the employee or made from a plan maintained by a Considered Company, the plan accepting the distribution shall include such distribution, in the present value or such account, whether the plan accepted the distribution before or after December 31, 1983; the plan making the distribution shall not include the distribution in the present value or such account. (iv) Further, in making such determination, in any case where an individual is a Non-Key Employee with respect to an applicable plan but was a Key Employee with respect to such plan for any prior Plan Year, any accrued benefit and any account of such employee shall be altogether disregarded. For this purpose, to the extent that a Key Employee is deemed to be a Key Employee if he or she met the 25 31 definition of Key Employee within any of the four (4) preceding Plan Years, this provision shall apply following the end of such period of time. (j) "Valuation Date" means for purposes for determining the present value of an accrued benefit as of the Determination Date the date determined as of the most recent valuation date which is within a twelve-month period ending on the Determination Date. For the first plan year of a plan, the accrued benefit for a current employee shall be determined either as if the individual (i) terminated service as of the Determination Date or (ii) terminated service as of the Valuation Date, but taking into account the estimated accrued benefit as of the Determination Date. The Valuation Date shall be determined in accordance with the principles set forth in Q.&A. T-25 of Treasury Regulations Section 1.416-1. (k) For purposes of this Section, "Compensation" shall have the meaning given to it in Section 8.4(e) of the Plan. 26 32 SECTION 9 Payment of Retirement Income and Other Benefits 9.1 Normal Form of Benefits Payment. Except as otherwise specifically provided, payment of a participant's Monthly Retirement Income or Monthly Vested Termination Benefit in accordance with Sections 4 or 6 shall be made to him as follows: (a) A participant who has a spouse on the date as of which such payments commence and who has not made an election in accordance with paragraphs (b) and (c) below or Section 9.2 shall receive payments in the form of a joint and survivor annuity and such payments shall be actuarially equivalent to the amount of Monthly Retirement Income or Monthly Vested Termination Benefit otherwise payable to the participant in accordance with Sections 4 or 6 on a life annuity basis. Such joint and survivor annuity shall provide for a reduced Monthly Retirement Income or Monthly Vested Termination Benefit continuing during the participant's lifetime, and upon the participant's death, payment of one-half of such reduced Monthly Retirement Income or reduced Monthly Vested Termination Benefit shall be made to such spouse if such spouse is then living. The benefit payments described in this paragraph (a) will commence to be paid to the participant, if then living, as of his Retirement Date or, in the case of a Vested Terminated participant, on the date on which his Monthly Vested Termination Benefits actually commence. The monthly payments to which a participant's spouse is entitled under this paragraph (a) shall commence as of the first day of the month following the month in which the participant dies and the last such payment shall be made as of the first day of the month in which the spouse dies. (b) A participant who has one or more Hours of Service and who is entitled to payment of a Monthly Retirement Income or a Monthly Vested Termination Benefit commencing on or after the Effective Date and who has a spouse on the date as of which such benefit payments commence shall receive payments in the form of a joint and survivor annuity pursuant to paragraph (a) above unless such spouse has consented to an election to waive the joint and survivor annuity pursuant to Section 9.4 below. (c) A participant who does not qualify for a joint and survivor annuity under paragraphs (a) and (b) above, or a participant who prior to the date as of which his payments commence elects in accordance with Section 9.4 not to receive a Monthly Retirement Income or a Monthly Vested Termination Benefit in the form of a joint and survivor annuity, shall receive a Monthly Retirement Income or a Monthly Vested Termination Benefit in accordance with Sections 4 or 6, whichever applies, on a single life annuity basis as described in Section 4.1. A former participant who is entitled to a Monthly Vested Termination Benefit shall only be entitled to a benefit payable under this Section 9.1 and shall not be entitled to elect any of the options described in the remainder of this Section 9. Each such former participant shall in all cases 27 33 commence such payment no later than the first day of the month following the month in which he attains age 65. 9.2 Optional Forms of Monthly Benefits. In lieu of the normal forms and amounts of Monthly Retirement Income specified in Section 9.1 and subject to the provisions of Sections 9.1(b), 9.3 and 9.4, a participant may elect a Monthly Retirement Income of an actuarially equivalent value in one of the following optional forms except that a Disabled Terminated Employee may not elect a Level Income Option or a Commuted Value Option and except that a participant in Monthly Vested Termination Benefits may not elect any of the following Options: (a) Options. (i) A Ten-Year Certain and Continuous Option providing the participant with an amount of Monthly Retirement Income until his death with the provision that if the participant dies before 120 monthly payments are made there shall be a continuing payment of the same amount to a beneficiary or beneficiaries designated by him for the balance of such 120 payments, or if the beneficiary or beneficiaries are an estate or trust or trusts, then the balance will be paid as provided herein. No payment to an estate or trust shall be made prior to 120 days from the participant's death. Such balance will first become payable on the 120th day after the participant's death. The beneficiary may irrevocably elect in writing, within 60 days said 120th day, and before the beneficiary receives any payment, to receive distribution in either (1) a lump sum or (2) in monthly installments until a total of 120 monthly payments have been made to the participant and his beneficiary. If no such election is made within such period, the balance will be paid in a commuted lump sum amount. The beneficiary may submit a written statement of his election to the Plan Committee at any time after the participant's death to be effective on the 121st day after the participant's death. (ii) A Contingent Annuitant Option providing the participant with an amount of Monthly Retirement Income until his death, with the provision that a payment of 100 percent, 75 percent, 50 percent or 25 percent of that monthly amount (as the participant elects) will be made to his surviving contingent annuitant (designated by the participant) for life. (iii) A Level Income Option providing a participant who retires early pursuant to Section 4.5 with an increased amount of retirement income up to age 62 or age 65 if he retires prior to age 62, or up to age 65 if he retires after age 62, at which time the amount of his retirement income shall be decreased commencing with the first day of the month following the month in which he attains either age 62 or 65. The amount of decrease at age 62 or age 65, whichever is applicable, shall be equal to the amount of his Old Age Insurance benefit under the Social Security Act as estimated by the Plan Committee, to which the participant will then be entitled. 28 34 (iv) A Level Income Option in conjunction with one of the optional forms of payment described in paragraphs (a)(i) or (a)(ii) above, providing the participant with an amount of Monthly Retirement Income determined in accordance with paragraph (a)(iii) above except that the monthly amount otherwise payable to the participant during his life under paragraph (a)(iii) will be further reduced at the time of his retirement to provide for a continuation of monthly payments, commencing with the first day of the month next following the month in which the participant dies, in accordance with paragraphs (a)(i) or (a)(ii) above (as the participant elects). (v) A Reversionary Contingent Annuitant Option with the participant's spouse as the contingent annuitant providing the participant with a reduced amount of Monthly Retirement Income with the provision that if the participant predeceases his spouse, payment of the same monthly amount or 75 percent, 50 percent or 25 percent of that monthly amount (as the participant elects) shall be made to his surviving spouse for life and if the participant's spouse predeceases the participant, the participant's Monthly Retirement Income shall revert to a single life annuity basis commencing with the first day of the month next following the month in which such spouse dies. (vi) Other Optional forms may be elected by a participant with the approval of the Plan Committee and in accordance with the rules adopted by the Plan Committee for this purpose. (b) Limitation on Certain Options. Notwithstanding the provisions of paragraphs (a)(ii), (a)(iv), and (a)(v) above, the options reflected in said paragraphs shall not be available unless the actuarial value of the amounts paid to the participant shall be more than 50 percent of the actuarial value of the total payments to be made to the participant and to his beneficiaries; provided, however, that this limitation shall not be applicable where all the following conditions are satisfied: (i) The beneficiary is the participant's spouse; (ii) The distribution is in the form of periodic payments starting with the participant's retirement; (iii) Each payment made to the spouse can be no greater than each payment made to the participant; and (iv) Such payments cannot be made over a period which extends longer than 30 years from the participant's Normal Retirement Date. In determining whether a particular option for a particular participant is within the limitation of this paragraph, the determination shall be made as of the participant's actual retirement date, shall be based on a 30-year period beginning with the participant's Normal Retirement Date, and shall be determined by the terms of the options selected and the 29 35 life expectancy of the participant and his beneficiary at time of retirement, as determined by appropriate actuarial data. Provided, further, that: (v) Paragraph (iv) above shall not apply where a Contingent Annuitant Option is elected under Section 9.2(a)(ii) or 9.2(a)(iv) in which the participant's spouse is the contingent annuitant, and (vi) The limitations contained in this paragraph (b) shall not apply where the Level Income Option is elected in conjunction with the Ten Year Certain and Continuous Option. 9.3 Adjustments for Disabled Terminated Employees. Notwithstanding the provisions of Section 9.1(a) and Section 9.2, the monthly amount payable under Section 9.1(a) and Section 9.2 to a participant who is a Disabled Terminated Employee, and who elects early retirement and commences to receive Monthly Early Retirement Income prior to his Normal Retirement Date after the actuarial adjustments provided for in Section 9.1(a) and Section 9.2 have been made following reduction pursuant to Section 4.5 for the effect of early payment of Monthly Retirement Income prior to his Normal Retirement Date, shall be increased by a special supplement effective as of the date he commences to receive such Monthly Early Retirement Income, by the amount of such actuarial adjustment, and such increased monthly amount shall be payable thereafter to such Disabled Terminated Employee, until the earliest of the following dates: (a) The first day of the month following the date he ceases to be classified as a Disabled Terminated Employee; or (b) his Normal Retirement Date; or (c) the first day of the month following the month in which his death occurs. 9.4 Election and Discontinuance of Options. An election by a participant who is not a Disabled Terminated Employee of an optional form of Monthly Retirement Income specified in Section 9.2 shall be subject to the following: (a) An election of an option must be in writing signed and dated by the participant, and filed with the Plan Committee. (b) Unless otherwise provided in this Section 9.4, a participant's benefits under the Plan shall commence on his Retirement Date, which shall be the effective date of such option. (c) Any election to waive the joint and survivor annuity under Section 9.1(b) and to elect benefits payable under Sections 9.1(c) or 9.2 shall not be effective unless: 30 36 (i) the spouse of the participant consents in writing to such election and acknowledges the effect of such election on forms provided by and filed with the Plan Committee and witnessed by a plan representative or a notary public; or (ii) it is established that there is no spouse, the spouse cannot be located, or under such other circumstances as may be provided by regulations prescribed by the Code. (iii) The spousal consent must designate a specific beneficiary and a specific form of benefit. Such designations may not be changed without spousal consent. The election must be filed during the period described in paragraph (e) below for married participants and may be changed or revoked in writing by the participant at any time during such period. The number of revocations shall not be limited. The election may be revoked but not changed by the participant without consent of the participant's spouse in accordance with this paragraph. Any consent by a spouse pursuant to this paragraph shall be irrevocable and shall be effective only with respect to such spouse. Notwithstanding anything in this Section 9.4 to the contrary, an election to waive the joint and survivor annuity under Section 9.1(b) shall not be required where the participant elects a 50 percent, 75 percent, or 100 percent Contingent Annuitant Option in accordance with Section 9.2(a)(ii) with his spouse as the surviving contingent annuitant. (d) A participant may elect an option under Sections 9.1 and 9.2 at any time prior to his Retirement Date. In all events a married participant must make the election to waive the joint and survivor annuity pursuant to paragraph (c) above within the 90-day period ending on the participant's "annuity starting date." For purposes of this Section, the "annuity starting date" means the first day of the first period for which an amount is paid as an annuity, or, in the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred which entitle the participant to such benefit. Within a reasonable period of time before the "annuity starting date," the married participant shall be provided with a written notification, in nontechnical terms, of the terms and conditions of the joint and survivor annuity and the effect of electing not to receive it, including the financial effect upon the participant's annuity in terms of dollars per annuity payment, the participant's right to make, and the effect of, an election under paragraph (c) to waive the joint and survivor annuity form of benefit, and the rights of the participant's spouse and the right to make, and the effect of, a revocation of an election under paragraph (c). 31 37 If a married participant does not elect a benefit payment form other than the joint and survivor annuity during this 90 day period, he shall be deemed to have elected the joint and survivor annuity. If the married participant does not elect out of another benefit payment form back into the joint and survivor annuity during this 90 day period, he shall be deemed to have elected to receive the other benefit payment form. If a married participant elects out of a benefit payment form other than the joint and survivor, he may only elect into a joint and survivor benefit in which case he may thereafter, within the election period, only change his election in the manner set forth in paragraph (c) to a single life annuity. An unmarried individual may also elect out of a benefit payment form other than a single life annuity during such 90 day period ending on the participant's "annuity starting date." In lieu of his prior election he may elect only the single life annuity provided in Section 9.1(c) and he may thereafter not elect any other payment form. (e) A participant who has elected an option may revoke or change it at any time prior to the effective date of the option by written election filed with the Plan Committee. A revocation or change of an option may be made without the consent of any person the participant had designated in the option; provided, however, that any revised election shall be subject to the requirements of paragraph (c) above. A participant may revoke an election of one of the options set forth in Sections 9.1 and 9.2 on or after the effective date of the option only with the approval of the Plan Committee. (f) If a participant who had elected an optional form of monthly benefit under Sections 9.1(c) and 9.2 dies before the effective date of the option, the option elected will be cancelled automatically and no benefits will be paid to any person under the option except as provided in Sections 9.5 and 9.6. (g) If a participant elects a Ten Year Certain and Continuous Option under Section 9.2(a)(i) or in conjunction with Sections 9.2(a)(iv) or 9.2(a)(v) and the person designated by him under the option dies after the effective date of the option with the participant still then living, the option shall remain in effect and the participant may designate another person or persons to receive any benefits payable under the option after his death. (h) If the participant elects a Contingent Annuitant Option under Section 9.2(a)(ii) or in conjunction with Sections 9.2(a)(iv) or 9.2(a)(v) and the person designated by him dies before the effective date of the option, the option elected will be cancelled automatically and the participant's Monthly Retirement Income will be paid to him under the normal form unless a new election can be and is made for the participant. (i) If a participant elects a Contingent Annuitant Option under Section 9.2(a)(ii) or in conjunction with one of the optional forms of payment described in Sections 9.2(a)(iv) or 9.2(a)(v) and the person designated by him dies after the effective date of the option, pay- 32 38 ments under the option then being made to the participant shall continue for the remainder of the participant's life. An election by a participant who is a Disabled Terminated Employee of an optional form of Monthly Retirement Income specified in Section 9.2 shall be subject to the following and subject to the above provisions of this Section 9.4 except as modified by the following: (j) A participant who (i) is a Disabled Terminated Employee, (ii) has attained age 55 years, but less than 65 years, and (iii) has not commenced to receive Monthly Retirement Income, may elect an optional form of benefit payments provided by Section 9.2 other than a Level Income Option with such election to become effective on the later of the first of the month following the month in which he attains age 55 years or his Disability Termination Date. Such participant upon commencing to receive Monthly Retirement Income at either an Early Retirement Date or his Normal Retirement Date may elect at any time prior to his Retirement Date (i) to retain the optional form of benefit payments which he had previously elected, (ii) receive his Monthly Retirement Income in the normal form as provided by Section 9.1, or (iii) elect an optional form of benefit payments, other than a Level Income Option, available under Section 9.2 if he had not previously elected an optional form of benefit payments. 9.5 Spouse's Retirement Income Benefit. A Spouse's Retirement Income Benefit in an amount determined below will be payable with respect to the "Eligible Surviving Spouse" (as defined below) of a participant who: (a) dies after completion of 5 or more years of Vesting Service and before his Normal Retirement Date (or, if applicable, his Late Retirement Date) (i) while employed by an Employer and after attaining age 50 or (ii) while in the status of a Disabled Terminated Employee and after attaining age 55, or (b) dies after completion of 20 or more years of Vesting Service while employed by an Employer. A participant's "Eligible Surviving Spouse" means the person to whom he was married on the date of his death. The Spouse's Retirement Income Benefit shall be a monthly amount payable for life to the participant's Eligible Surviving Spouse and shall be equal to fifty percent (50%) of the Monthly Retirement Income that would have been payable to the participant in accordance with Section 9.1(a) if the participant had retired on the date of his death and had commenced to receive benefits on the first day of the month next following the month in which his death occurred and based upon his Benefit Service and Average Monthly Earnings as of the date of his death and calculated under Section 4 of the Plan. Such Benefit shall commence on the first day of the month following the month in which the participant's death occurred. 33 39 This Section shall also be applicable to any participant, as defined in Section 2, who works beyond his Normal Retirement Date and who dies prior to his Late Retirement Date. A Spouse's Retirement Income Benefit will also be paid to an Eligible Surviving Spouse of any participant who dies on or after his Normal Retirement Age or his Early Retirement Date and prior to commencement of receipt of benefits hereunder, if his Eligible Surviving Spouse would be otherwise deprived of a benefit hereunder of at least a monthly amount, or the equivalent thereof, equal to the Spouse's Retirement Income Benefit. If the Eligible Surviving Spouse takes under this Section, all other optional forms of benefits and other Beneficiaries and/or contingent annuitants shall be revoked. 9.6 Special Spouse's Retirement Income Benefit. A special Spouse's Retirement Income Benefit in an amount determined below will be payable with respect to the Eligible Surviving Spouse of a participant who dies (i) after completion of 10 or more years of Vesting Service, (ii) while in the status of a Disabled Terminated Employee, and (iii) before attaining age 55. The Special Spouse's Retirement Income Benefit shall be a monthly amount payable for life to the participant's Eligible Surviving Spouse and shall be equal to fifty percent (50%) of the Monthly Retirement Income that would have been payable to the participant in accordance with paragraph 9.1(a) if the participant had retired on the date of his death and had been permitted by the terms of this Plan to commence to receive benefits on the first day of the month next following the month in which his death occurred and based upon his Benefit Service and Average Monthly Earnings as of the date he is deemed to be on Long-Term Disability and computed without any reduction for the effect of receipt of Monthly Retirement Income at an Early Retirement Date. Such Benefit shall commence on the first day of the month following the month in which the participant's death occurred. 9.7 Surviving Spouse Benefit. (a) Subject to the provisions of this Section 9.7, a Surviving Spouse Benefit in an amount determined below will be payable with respect to a participant's Eligible Surviving Spouse as defined in Section 9.5 with respect to a participant who has at least one Hour of Service, and who dies after completion of 5 or more years of Vesting Service and before commencement of his Monthly Retirement Income or his Monthly Vested Termination Benefit. The amount of the Surviving Spouse Benefit shall be equal to: (i) in the case of a participant who dies after the first day on which the participant would have attained his Early Retirement Date, the amount that would have been paid to the Eligible Surviving Spouse had the participant retired on the day preceding his date of death and had then immediately commenced receiving benefits pursuant to Section 9.1(a) in the form of a joint and survivor annuity; (ii) in the case of a participant who dies on or before the first day on which the participant would have attained his Early Retirement Date, the amount that 34 40 would have been paid to the Eligible Surviving Spouse pursuant to Section 9.1(a) in the form of a joint and survivor annuity had the participant: (A) separated from service on the date of his death (if an active employee); (B) survived to the first day on which he would have attained his Early Retirement Date; and (C) died on the day after the first day on which he would have attained his Early Retirement Date. A Surviving Spouse Benefit shall be payable to the Eligible Surviving Spouse on the first day of the month next following the month in which the participant would have first attained his Early Retirement Date. (b) The Plan shall fully subsidize the costs of the Surviving Spouse Benefit in the case of a participant who satisfies the provisions of paragraph (a) and who dies while in the employ of the Company or an Employer. In the case of a participant who satisfies the provisions of paragraph (a) and who is no longer in the employ of the Employer immediately prior to the commencement of Monthly Vested Termination Benefits, the Monthly Vested Termination Benefit of such participant shall be reduced for each complete twelve month period in which such participant had not elected to waive the Surviving Spouse Benefit as provided in paragraph (c) beginning with the first day of the month in which the participant separates from service in the following manner: one-tenth of one percent for each complete twelve month period until age 45, two-tenths of one percent for each complete twelve month period beginning with the first day of the month in which the participant attains age 45 until age 55, and five-tenths of one percent for each complete twelve month period beginning with the first day of the month in which the participant attains age 55 until commencement of payment of benefits. Such reduction shall only apply for each complete twelve month period in which no election to waive the Surviving Spouse Benefit is in effect under paragraph (c). (c) Participants who are entitled to a Monthly Vested Termination Benefit payable under Sections 6.1 and 6.2 may elect to waive the Surviving Spouse Benefit as provided in this paragraph (c). Such election to waive the Spouse's Survivor Annuity must be made on forms provided by and filed with the Plan Committee and shall not be effective unless: (i) the Eligible Surviving Spouse of the participant consents to and acknowledges the effect of such election on forms provided by the Plan Committee and witnessed by a plan representative or a notary public; or 35 41 (ii) it is established that there is no spouse, the spouse cannot be located, or under such other circumstances as may be provided by regulations prescribed by the Code. Such election may be filed at any time beginning with the Employment Termination Date and ending with the date of the participant's death and may be changed or revoked in writing by the participant at any time until the date of the participant's death. The election may be revoked but not changed by the participant without the consent of the participant's spouse in accordance with this paragraph. Any consent by a spouse pursuant to this paragraph shall be irrevocable and shall be effective only with respect to such spouse. As soon as practicable after the Employment Termination Date, the participant shall be provided with a written notification, in nontechnical terms, of the terms and conditions of the Surviving Spouse Benefit and the effect of electing not to receive it, including the financial effect upon the participant's annuity, the participant's right to make, and the effect of an election to waive the Surviving Spouse Benefit, the rights of the participant's spouse, and the effect of a revocation of an election. The Monthly Vested Termination Benefit payable to a participant who elects to waive the Surviving Spouse Benefit shall not be reduced as provided by paragraph (b) above for the period covered by such election. (d) An Eligible Surviving Spouse who is entitled to payment of benefits under Sections 9.5 or 9.6 shall not be entitled to payment of benefits under this Section 9.7. 9.8 Special Payment Limitations. (a) Unless an election by a participant to defer payment is approved by the Plan Committee, payment of benefits under the Plan to a participant shall commence not later than the 60th day after the latest of the end of the calendar year in which: (i) The participant attains age 65 years; (ii) The tenth anniversary of the year in which the participant commenced participation in the Plan occurs; or (iii) the participant terminates his employment with all the Employers. No deferral of commencement of benefits elected under this Section shall be permitted unless the present value of the benefits payable to the participant at the end of the deferral period pursuant to the payment option elected by the participant shall be more than 50% of the present value of benefits payable to the participant and his beneficiaries, subject to the qualifications established in Section 9.2(b) of the Plan. If a participant elects to defer payment of benefits as permitted in this Section, such election shall be filed in writing with 36 42 the Committee no earlier than 90 days prior to age 65 and no later than 60 days prior to such age and must be accompanied by an election of a payment option pursuant to which benefits shall be payable to the participant and his beneficiaries at the end of such deferral period. Such payment option shall, when accepted by the Committee, be irrevocable. Provided, however, that no election under this paragraph shall be accepted for consideration from any participant unless and until the Committee adopts rules permitting and implementing such deferral elections. Such rules shall specify, with such particularity as the Committee in its discretion deems appropriate, the nature and terms of deferral elections available to participants together with any election or approval procedure deemed appropriate by the Committee which is consistent with this paragraph. (b) Notwithstanding anything in this Section 9 to the contrary, in no event shall payment of benefits under the Plan to a participant commence later than the date the participant attains age 70-1/2 or if later, in the case of a participant who is not a Key Employee in a Top Heavy Plan as described in Section 8.5(g), the date he retires. (c) Any participant who commences to receive benefits, notwithstanding anything in paragraphs (a) and (b) to the contrary, the entire interest of a participant under the Plan must be distributed: (i) not later than the Required Beginning Date; or (ii) commencing not later than the Required Beginning Date, in accordance with applicable regulations under the Code, over the life of such participant or over the lives of such participant and a designated beneficiary. (d) The Required Beginning Date shall mean April 1 of the calendar year following the later of: (i) the calendar year in which the participant attains age 70-1/2; or (ii) in the case of a participant who is not a 5-percent owner (as defined in Section 416 of the Code), the calendar year in which the participant retires under the Plan. If a participant dies before his entire interest under the Plan has been distributed to him, the remaining portion of such interest will be distributed at least as rapidly as under the method of distribution being used under paragraph (c)(2) above as of the date of his death. (e) Where payment of a participant's Monthly Retirement Income or Monthly Vested Termination Benefit has not commenced prior to the date of the participant's death and payments are to be made to the Eligible Surviving Spouse as provided in Sections 9.5, 9.6 and 9.7, amounts payable shall be distributed to the Eligible Surviving Spouse (in accordance with regulations under the Code) over the life of the spouse. 37 43 9.9 Payment of Small Amounts. If upon his retirement or other termination of employment the lump sum actuarially equivalent value of the portion of a participant's monthly benefits attributable to Employer Contributions does not exceed $3,500, the Plan Committee, in its discretion, may direct that a lump sum payment equal to the lump sum actuarially equivalent value of such participant's accrued benefits be paid to the participant. The lump sum actuarial equivalent value of the participant's accrued benefits shall be determined as of the date of the distribution and by using an interest rate not greater than the interest rate which would be used by the Pension Benefit Guaranty Corporation at the beginning of the Plan Year for determining lump sum distributions on plan termination. A benefit is "immediately distributable" if any part of the benefit may be distributed to the participant before the later of Normal Retirement Date or age 62. 9.10 Hourly-Paid Employees Transferred to Salaried Basis. The Monthly Retirement Income payable to a participant, who was an hourly-paid employee prior to the date his participation under this Plan commenced and who is otherwise entitled to a benefit under an hourly-paid employee's pension plan maintained by the Corporation or its subsidiaries (the "Hourly Plan"), with respect to his participation in this Plan and his participation in the Hourly Plan shall be the greater of: (a) The Monthly Retirement Income or Monthly Vested Termination Benefit computed under this Plan as if all Benefit Service accrued under the Hourly Plan and this Plan had been accrued under this Plan alone; or (b) The sum of: (i) The Monthly Retirement Income or Monthly Vested Termination Benefit under this Plan computed on the basis of his Benefit Service solely attributable to his service with the Employers on and after the date his participation in this Plan commenced; and (ii) His non-contributory Regular Benefits under the Hourly Plan determined on the basis of his Benefit Service accrued under the Hourly Plan prior to the date his participation in this Plan commenced. Such Regular Benefits shall be computed on the basis of the provisions of the Hourly Plan as in effect on the date he ceased to be an hourly employee actively participating thereunder. There shall be no duplication of Benefits for the same period of time and if paragraph (a) above is applicable, the benefits payable hereunder shall be reduced by the amount of benefits payable under the Hourly Plan. A participant subject to this Section 9.10 must retire under both the Hourly Plan and this Plan at the same time, must elect the same form of pension payments, must name the same beneficiaries and must make all other elections in the same manner under both the Hourly Plan and this Plan. If such participant qualified as a Prior Employer Participant under the 38 44 Hourly Plan, he shall be considered a Prior Employer Participant under this Plan to the same extent as under the Hourly Plan. 9.11 Payment of Distribution Directly to Eligible Retirement Plan. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee's election under this Section, a Distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. 9.12 Definitions. (a) Eligible Rollover Distribution: An Eligible Rollover Distribution is any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (b) Eligible Retirement Plan: An Eligible Retirement Plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. (c) Distributee: A Distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are Distributees with regard to the interest of the spouse or former spouse. (d) Direct Rollover: A Direct Rollover is a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. 9.13 Limitation of Benefits upon Termination. (a) Benefits distributed to any of the twenty-five (25) most highly compensated employees (as defined in Code Section 414(q) and the regulations thereunder) and highly compensated former employees with the greatest compensation in the current or prior year 39 45 are restricted such that the monthly payments are no greater than an amount equal to the monthly payment that would be made on behalf of such individual under a straight line annuity that is the actuarial equivalent of the sum of the individual's accrued benefit, the individual's other benefits under the Plan (other than a social security supplement within the meaning of Treasury Regulation 1.411(a)-7(c)(4)(ii)), and the amount the individual is entitled to receive under a social security supplement. However, the limitation of this Section shall not apply if: (i) after payment of the benefit to an individual described above, the value of Plan assets equals or exceeds 110 percent of the value of current liabilities, as defined in Code Section 412(l)(7); (ii) the value of the benefits for an individual described above is less than one percent of the value of current liabilities before distribution; or (iii) the value of the benefits payable under the Plan to an individual described above does not exceed $3,500. (b) For purposes of this Section, benefit includes any periodic income, any withdrawal values payable to a living participant, and any death benefits not provided for by insurance on the individual's life. (c) An individual's otherwise restricted benefit may be distributed in full to the affected individual if, prior to receipt of the restricted amount, the individual enters into a written agreement with the Committee to secure repayment to the Plan of the restricted amount. The restricted amount is the excess of the amounts distributed to the individual (accumulated with reasonable interest) over the amounts that could have been distributed to the individual under the straight life annuity described above (accumulated with reasonable interest). The individual may secure repayment of the restricted amount upon distribution by: (i) entering into an agreement for promptly depositing in escrow with an acceptable depositary, property having a fair market value equal to at least 125 percent of the restricted amount; (ii) providing a bank letter of credit in an amount equal to at least 100 percent of the restricted amount; or (iii) posting a bond equal to at least 100 percent of the restricted amount. The bond must be furnished by an insurance company, bonding company or other surety for federal bonds. (d) The escrow arrangement may permit an individual to withdraw from escrow amounts in excess of 125 percent of the restricted amount. If the market value of the 40 46 property in an escrow account falls below 110 percent of the remaining restricted amount, the individual must deposit additional property to bring the value of the property held by the depositary up to 125 percent of the restricted amount. The escrow arrangement may provide that the individual has the right to receive any income from the property placed in escrow, subject to the individual's obligation to deposit additional property, as set forth in the preceding sentence. (e) A surety or bank may release any liability on a bond or letter of credit in excess of 100 percent of the restricted amount. (f) If the Committee certifies to the depositary, surety or bank that the individual (or the individual's estate) is no longer obligated to repay any restricted amount, a depositary may deliver to the individual any property held under an escrow arrangement, and a surety or bank may release any liability on an individual's bond or letter of credit. (g) Notwithstanding the foregoing, with respect to Plan Years beginning prior to January 1, 1994, compliance with the Plan and Treasury Regulations then in effect shall be deemed compliance with this Section. 41 47 SECTION 10. Reemployment 10.1 Reinstatement of Participation. If a former participant is reemployed by an Employer or if a participant who is receiving or is entitled to receive a Monthly Retirement Income or Monthly Vested Termination Benefits is reemployed by an Employer or a Subsidiary (referred to below as a "rehired employee"), and meets the eligibility requirements described in Section 2 on or after the date of his reemployment he shall become an active participant on the first date he meets such requirements. If payment of a participant's Monthly Retirement Income or Monthly Vested Termination Benefit pursuant to Code Section 411(a)(7)(B) has taken place, such participant, upon reemployment with the Employer, may repay the value of his Monthly Retirement Income or Monthly Vested Termination Benefit, plus interest at the rate determined under Code Section 411(c)(2)(C), to the Plan. The period to make such repayment shall not exceed the earlier of five (5) consecutive one year Breaks in Service or five (5) years from the date of reemployment with the Employer. 10.2 Determination of Benefits. (a) No benefits shall be payable to a rehired employee under the Plan after his rehire during each month of his reemployment in which he works at least 40 or more actual hours. Benefits payable to a retired employee after his period of reemployment ends shall be the Monthly Retirement Income payable at his subsequent retirement including the additional benefit accrued, if any, during his period of reemployment in accordance with the provisions of the Plan as in effect on the date his reemployment ends, plus the benefit which was suspended on the date of his reemployment as adjusted according to Section 10.3. (b) Reemployment Outside the Controlled Group. If a former participant who is receiving or is entitled to receive a Monthly Retirement Income or Monthly Vested Termination Benefit is reemployed by any entity in which the Company has a less than 80% interest, including a subsidiary, Affiliate Company or Affiliate Unit, or any other entity in which the corporation directly or indirectly has at least a 10% ownership interest, no benefits shall be payable to him under the Plan during the period of reemployment. Benefits for such employee shall again be payable at the earlier of the date his reemployment ends or his Normal Retirement Age, determined in either case according to Section 10.3. 10.3 Determination of Suspended Benefits. When benefit payments which are suspended according to Sections 10.1 and 10.2 are resumed, the monthly payment shall be increased such that the benefit at the time payments are resumed shall be equal to the sum of: (a) the Required Benefit at the time the payments were suspended due to reemployment, plus (b) the amount of any benefit which is in excess of the Required Benefit at the time payments were suspended due to reemployment reduced by 1/120th of such excess amount for each month such employee was reemployed. For purposes of this paragraph, the term "Required Benefit" shall mean the actuarial equivalent of the Monthly Retirement Income or Monthly Vested Termination Benefit payable at Normal Retire- 42 48 ment Date which had been accrued at the time of the first termination of the participant's employment and resulting commencement of benefits prior to the suspension of such benefits as provided in this Section 10. 43 49 SECTION 11 Employer Contributions 11.1 Employer Contributions. The Employers will contribute to the Plan from time to time such amounts as shall be determined by the "Qualified Actuary" (as defined in Section 17.12) at least sufficient to meet the normal costs for the Plan and to amortize the past service liability of the Plan over the amortization period required by applicable funding requirements imposed by federal law. In no event shall the Employer Contributions for any year exceed the amount which is deductible by the Employers for tax purposes for that year. Nothing in this Section 11.1 shall be deemed to prevent the Employers from making contributions to the Trust Fund in an amount which is greater than the amount which is required to be contributed in accordance with this Section 11.1. 11.2 Application of Forfeitures. Benefits that would have been payable to a participant if his employment with the Employers had not terminated before he was eligible to receive a Monthly Retirement Income or a Monthly Vested Termination Benefit and any benefits that would have been payable to such participant or to any other person, but for the participant's death shall not be applied to increase the benefits of any other participants or of any other person entitled to benefits under the Plan. 44 50 SECTION 12 The Plan Committee 12.1 Membership. The Plan Committee shall consist of three or more members appointed by the Corporation. 12.2 Plan Committee's General Powers, Rights and Duties. The Plan Committee, which is established by and derives its authority from the Corporation, is (except as otherwise provided in this Plan), as respects the rights and obligations of all parties with an interest in this Plan, given the powers, rights and duties specifically stated elsewhere in the Plan, the Trust Agreement or any other document, and in addition is given the following powers, rights and duties: (a) To determine all questions concerning administration and management arising under the Plan, including the power to determine the rights or eligibility of employees or participants and any other persons, and the amounts of their benefits under the Plan, and to remedy ambiguities, inconsistencies or omissions. (b) To adopt such rules of procedure and regulations as in its opinion may be necessary for the proper and efficient administration of the Plan and as are consistent with the Plan and Trust Agreement. (c) To enforce the Plan in accordance with the terms of the Plan and the Trust Agreement and in accordance with the rules and regulations adopted by the Plan Committee as above. (d) To direct the Trustee as respects payments or distributions from the Trust Fund in accordance with the provisions of the Plan. (e) To furnish the Employers with such information as may be required by them for tax or other purposes as respects the Plan. (f) To employ or designate agents, attorneys, accountants, actuaries or other persons (who also may be employed by any Employers or the Trustee), and to allocate or delegate to them such powers, rights and duties as the Plan Committee may consider necessary or advisable to properly carry out the administration of the Plan, provided that such allocation or delegation and the acceptance thereof by such agents, attorneys, accountants, actuaries or other persons, shall be in writing. 12.3 Manner of Action. During any period in which two or more Plan Committee members are acting, the following provisions apply where the context admits: (a) The Plan Committee members may act by meeting or by writing signed without meeting, and may sign any document by signing one document or concurrent documents. 45 51 (b) Subject to Section 12.3(d) below, an action or a decision of a majority of the members of the Plan Committee as to a matter shall be as effective as if taken or made by all members of the Plan Committee. (c) A Plan Committee member by writing may delegate any or all of his rights, powers, duties and discretions to any other Plan Committee member, with the consent of the latter. (d) If, because of the number qualified to act, there is an even division of opinion among the Plan Committee members as to a matter, a disinterested party selected by the Plan Committee may decide the matter and such party's decision shall control. (e) Except as otherwise provided by law, no member of the Plan Committee shall be liable or responsible for an act or omission of the other Plan Committee members in which the former has not concurred. (f) The certificate of the Secretary of the Plan Committee or of a majority of the Plan Committee members that the Plan Committee has taken or authorized any action shall be conclusive in favor of any person relying on the certificate. 12.4 Information Required by Plan Committee. The Employers shall furnish the Plan Committee with such data and information as the Plan Committee may deem necessary or desirable in order to administer the Plan. The records of the Employers as to an employee's or participant's period or periods of employment, termination of employment and the reason therefor, leave of absence, re-employment and earnings will be conclusive on all persons unless determined to the Plan Committee's satisfaction to be incorrect. Participants and other persons entitled to benefits under the Plan also shall furnish the Plan Committee with such evidence, data or information as the Plan Committee considers necessary or desirable to administer the Plan. 12.5 Plan Committee Decision Final. Subject to applicable law and the provisions of Section 12.6, any interpretation of the provisions of the Plan and any decision on any matter within the discretion of the Plan Committee made by the Plan Committee in good faith shall be binding on all persons. A misstatement or other mistake of fact shall be corrected when it becomes known and the Plan Committee shall make such adjustment on account thereof as it considers equitable and practicable. 12.6 Review of Benefit Determinations. The Plan Committee will provide notice in writing to any participant, Beneficiary or other person whose claim for benefits under the Plan is denied and the Plan Committee shall afford such participant, Beneficiary or other person a full and fair review of its decision, if so requested. 12.7 Uniform Rules. The Plan Committee shall administer the Plan on a reasonable and non-discriminatory basis and shall apply uniform rules to all participants similarly situated. 46 52 12.8 Payment of Expenses. All expenses of administration may be paid out of the Trust Fund unless paid by the Employer. Such expenses shall include any expenses incident to the functioning of the Administrator, including, but not limited to, fees of accountants, counsel, and other specialists and their agents, and other costs of administering the Plan. Until paid, the expenses shall constitute a liability of the Trust Fund. However, the Employer may reimburse the Trust Fund for any administration expense incurred. 47 53 SECTION 13 Relating to the Employers 13.1 Action by Employers. Any action required or permitted of an Employer under the Plan shall be by resolution of its Board of Directors, by a duly authorized committee of its Board of Directors, or by a person or persons authorized by resolution of its Board of Directors or by resolution of such committee. 13.2 Additional Employers. Any subsidiary that is not an Employer may adopt the Plan and become an Employer under the Plan and a party to the Trust Agreement or any other applicable document: (a) By filing with the Plan Committee and the Trustee a certified copy of a resolution of the Board of Directors of the subsidiary providing for its adoption of the Plan; and (b) By filing with the Plan Committee and the Trustee a certified copy of a resolution of the Board of Directors of the Corporation consenting to the adoption of the Plan by such subsidiary. 13.3 Restrictions as to Reversion of Trust Assets to Employers. Except as to contributions and premiums paid as a result of actuarial error, the Employers shall have no right, title or interest in the assets of the Trust Fund, nor will any part of the assets of the Trust Fund at any time revert or be repaid to an Employer, unless the Internal Revenue Service initially determines that the Plan, as applied to any Employer that had not maintained a Predecessor Plan, does not meet the requirements of a "qualified plan" under the Code, or unless all fixed and contingent liabilities or obligations to or on account of persons entitled to benefits under the Plan shall have been paid or provided for in full and assets remain in the Trust Fund. Notwithstanding the foregoing, contributions may, at the Plan Committee's option, revert back to the Employer if such contributions were made pursuant to their tax deductibility by the Employer and such contributions were subsequently found not to be deductible. All reversions pursuant to this Section 13.3 shall be limited in amount, circumstances and timing to the provisions of Section 403(c) of ERISA, and no such reversion shall be allowed if, solely on account of such reversion, the Plan would cease to be a qualified plan pursuant to Section 401(a) of the Code. 48 54 SECTION 14 General Provisions 14.1 Notices. Each person entitled to benefits under the Plan must file in writing with the Plan Committee such person's post office address and each change of post office address. Any communication, statement or notice addressed to any such person at the last post office address filed with the Plan Committee will be binding upon such person for all purposes of the Plan, and none of the Plan Committee, the Employers or the Trustee shall be obligated to search for or ascertain the whereabouts of any such person. Any notice or document required to be given to or filed with the Plan Committee shall be considered as given or filed if delivered or mailed by registered mail, postage prepaid, to Employee Benefits Plans Committee in care of Sterling Chemicals, Inc., P. O. Box 1311, 201 Bay Street South, Texas City, Texas 77590. 14.2 Waiver of Notice. Any notice required under this Plan may be waived by the person entitled to notice. 14.3 Absence of Guaranty. Neither the Plan Committee nor any Employer in any way guarantees the Trust Fund or any other fund from loss or depreciation, nor guarantees any payment to any person. The liability of the Employers, the Trustee or the Plan Committee to make any payment under the Plan will be limited to the assets which are held by the Trustee which are available for that purpose. 14.4 Employment Rights. The Plan does not constitute a contract of employment, and participation in the Plan will not give any participant the right to be retained in the employ of the Employers, nor any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued and vested under the terms of the Plan. 14.5 Interests Not Transferable. Except as may be required by the tax withholding provisions of the Code, Section 401(a)(13)(B) of the Code dealing with Qualified Domestic Relations Orders, or of a state's income tax act, and except (to the extent permitted by law) as to any debt owing the Trustee, the interests of any person under this Plan, under the Trust Agreement are not subject to the claims of their creditors and may not be voluntarily or involuntarily sold, transferred, alienated, assigned or encumbered. 14.6 Facility of Payment. When a person entitled to benefits under the Plan is under a legal disability, or, in the Plan Committee's opinion, is in any way incapacitated so as to be unable to manage his financial affairs, the Plan Committee may direct that all or part of the benefits to which such person otherwise would be entitled shall be made to such person's legal representative, or to a relative or friend of such person for such person's benefit, or the Plan Committee may direct the application of such benefits for the benefit of such person. If the Plan Committee receives proper authorization by a participant or any other person entitled to benefits under the Plan, and unless and until the Plan Committee is notified or becomes aware that such authorization no longer is in effect, the Plan Committee may direct that periodic deposits of the benefits which otherwise would be payable directly to the participant shall be made into a savings or checking account established in 49 55 his name at a bank or other financial institution. Any payment made in accordance with the provisions of this Section 14.6 shall be a full and complete discharge of any liability for such payment under the Plan. 14.7 Gender and Number. Where the context admits, words denoting the masculine gender shall include the feminine and neuter genders, the singular shall include the plural, and the plural shall include the singular. 14.8 Evidence. Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties. 14.9 Controlling State Law. To the extent not superseded by the laws of the United States, the laws of Texas shall be controlling in all matters relating to the Plan. 14.10 Severability. In case any provisions of the Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of the Plan, and the Plan shall be construed and enforced as if such illegal and invalid provisions had never been set forth in the Plan. 50 56 SECTION 15 Amendment, Termination or Plan Merger 15.1 Amendment. While the Employers expect and intend to continue the Plan, the Corporation reserves the right to amend or modify, retroactively or prospectively, the Plan from time to time, subject to the following: (a) No such amendment or modification, except as may be required by the Internal Revenue Service for the purpose of meeting the conditions for qualification or for tax deduction under Section 401 through 415 and Section 501 of the Code or any applicable regulations or court decisions thereunder, or as may be required by ERISA or any other state or federal law shall alter the operation of the Plan as it applies to employees with whom or with whose representatives a written agreement respecting such Plan has been made in contravention of the provisions of any such agreement pertaining to retirement income benefits, during the term of any such agreement. (b) Except as provided in Section 13.3 under no condition shall any amendment result in the return or repayment to any Employer of any part of the Trust Fund or the income therefrom, or result in the distribution of the Trust Fund for the benefit of anyone other than employees and former employees of the Employers and any other persons entitled to benefits under the Plan. 15.2 Internal Revenue Service Approval. This Plan is contingent upon, and subject to obtaining and maintaining such approvals of the Internal Revenue Service as may be necessary to establish: (a) That the Plan meets the requirements of Sections 401, 410, 411, 415 and other applicable provisions of the Code and regulations thereunder; (b) That any Trust established under the Plan is entitled to exemption from federal income tax under Section 501(a) and other applicable provisions of the Code and regulations thereunder; and (c) That any contributions made by the Employers under the Plan shall be deductible for federal income tax purposes under Section 404 and other applicable provisions of the Code and regulations thereunder. Any modification or amendment of the Plan may be made retroactively, if necessary or appropriate to qualify or maintain the Plan as a plan and trust or trusts meeting the requirements of Sections 401, 404, 410, 411, 415 and 501 or other applicable provisions of the Code and regulations thereunder. 15.3 Termination. The Plan will terminate as to all Employers on any date specified by the Corporation if 30 days' advance written notice of the termination is given to the Plan Committee, the Trustee and the other Employers. The Plan shall terminate as to an individual Employer on the first to occur of the following: 51 57 (a) The date it is terminated by the Board of Directors of that Employer. (b) The date the Employer completely discontinues its contributions under the Plan. (c) The date that Employer is judicially declared bankrupt or insolvent. (d) The dissolution, merger, consolidation or reorganization of that Employer, or the sale by that Employer of all or substantially all of its assets, except that: (i) In any such event arrangements may be made with the consent of the Corporation whereby the Plan may be continued by any successor to that Employer or any purchaser of all or substantially all of its assets, in which case the successor or purchaser may be substituted for that Employer under the Plan and the Trust Agreement; and (ii) If any Employer is merged, dissolved or in any way reorganized into, or consolidated with, any other Employer, the Plan as applied to the former Employer will automatically continue in effect without a termination thereof. 15.4 Plan Merger or Consolidation. In no event shall there be any merger or consolidation of the Plan with, or transfer of assets or liabilities to, any other Plan unless each participant in the Plan would (if the Plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit the participant would have been entitled to receive immediately before the merger, consolidation, or transfer (if the Plan had then terminated). 15.5 Notice of Amendment, Termination or Plan Merger. Affected participants will be notified of any termination, plan merger, consolidation or substantial amendment within a reasonable time. 15.6 Non-forfeitability on "Termination" or "Partial Termination". On a "Termination" or "Partial Termination" of the Plan, as such terms are defined or determined pursuant to the applicable provisions of the Code and regulations thereunder, the rights of all affected participants to benefits accrued to the date of such Termination or Partial Termination, to the extent funded as of such date, shall be non-forfeitable. 15.7 Limitation of Benefits on Plan Termination. In the event of Plan termination, the benefit of any highly compensated employee (as defined in Code Section 414(q) and the regulations thereunder) or any highly compensated former employee shall be limited to a benefit that is nondiscriminatory under Code Section 401(a)(4). 52 58 SECTION 16 Allocation and Distribution on Termination On termination of the Plan as respects any Employer, the Plan Committee will direct the allocation and distribution of Plan assets allocable to participants employed by the Employer and to retired or terminated participants and other persons entitled to benefits under the Plan to the extent of their benefits attributable to employment with the Employer. The distribution of Plan assets on termination shall be made in the form prescribed by Sections 9.1 and 9.2. After payment of any expenses of administration and liquidation allocable to such Plan assets, such Plan assets remaining shall be allocated and distributed to such participants and other persons in the following manner and order to the extent of the sufficiency of such Plan Assets: (a) First, to each participant or other person, the portion of a participant's Monthly Retirement Income, or Monthly Vested Termination Benefits (including benefits vested by virtue of the termination of the Plan in accordance with Section 15.6) to which the participant or such other person is entitled which is attributable to the participant's contributions. (b) Next, to the following persons: (i) To each person who was receiving a benefit under the Plan as of the beginning of the three-year period ending on the date of termination of the Plan, the full extent of such persons's benefit, determined in accordance with the terms of the Plan in effect during the five year period ending on such date under which such person's benefit would be the least, properly adjusted for any allocation of assets with respect to such benefit under paragraph (a) above; and (ii) To each participant who was eligible for retirement at the beginning of the three year period ending on the date of termination, to the full extent of such person's benefit, determined in accordance with the terms of the Plan in effect during the five year period ending on such date under which such participant's benefit would be the least, properly adjusted for any allocation of assets with respect to such benefit under paragraph (a) above. (c) Next, to each person who was entitled to a benefit under the Plan as of the date of termination of the Plan, the portion of such benefit which constitutes a "basic benefit" under Title IV of ERISA (determined without regard to Sections 4022(b) (5) and (b) (6) thereof), properly adjusted for any allocation of assets with respect to such benefit made under paragraphs (a) or (b) above. (d) Next, to each person who was entitled to a benefit under the Plan as of the date of termination of the Plan, such person's non-forfeitable benefit, properly adjusted for 53 59 any allocation of assets with respect to such benefit made under paragraph (a), (b) or (c) above. (e) Finally, to each person who was a participant in the Plan on the date of termination of the Plan, such person's benefit under the Plan accrued up to that date, properly adjusted for any allocation of assets with respect to such benefit made under paragraphs (a), (b), (c) or (d) above. In making such allocations, the benefits contemplated under paragraph (a) above shall be completely provided for before any allocations are made under paragraphs (b), (c), (d) and (e), and the allocations provided for in paragraph (b) above shall be completely provided for before making any allocations under paragraphs (c), (d) and (e) and so forth. In the event that the assets available for allocation under either paragraphs (a), (b) or (c) above are not sufficient to satisfy in full the benefits of all persons described in any such paragraph, the assets shall be allocated pro rata among such persons on the basis of the present value (as of the date of termination of the Plan) of their respective benefits described in such paragraph. In the event that the assets available for allocation under paragraph (d) above are not sufficient to satisfy in full the benefits of persons described in that paragraph, except as provided in the following sentence, the assets shall be allocated to each such person on the basis of such person's benefit determined in accordance with the terms of the Plan in effect at the beginning of the five-year period ending on the date of termination of the Plan, properly adjusted for any allocation of assets with respect to such person's benefit made under paragraphs (a), (b) or (c). If the assets available for allocation under paragraph (d) above are sufficient to satisfy the benefits described in the preceding sentence, then the benefits of persons described in that paragraph shall be determined on the basis of the Plan as amended by the most recent Plan amendment effective during such five-year period under which the assets available for allocation are sufficient to satisfy in full the benefits of such persons, and any assets remaining to be allocated under such paragraph shall be allocated on the basis of the Plan as amended by the next succeeding Plan amendment effective during such period. In the event that there are not sufficient assets to make the allocation under paragraph (e) above, the allocation otherwise to be made under that paragraph shall be proportionately reduced. Distribution may be made in cash, property or annuity or partly in each, provided property is distributed at its fair market value as of the date of distribution as determined by the Trustee. If the Plan Committee so determines, and with the consent of the Corporation, the benefits distributable under this Section 16 to any participant who continues in the employ of an Employer may be retained in the Trust Fund until the participant's employment with the Employers is terminated. Notwithstanding anything herein to the contrary, distributions due to termination of the Plan shall be made in a manner consistent with Section 9. 54 60 SECTION 17 Definitions 17.1 Vesting Service. A participant's "Vesting Service" means the total of his years of service and fractional years of service determined in accordance with the following rules: (a) Service with the Employers and the Subsidiaries, including former subsidiaries during the period they were in the status of a Subsidiary, will be treated as Vesting Service as follows: (i) Effective January 1, 1996, a participant will be credited with one year of Vesting Service for each calendar year during which he completes at least 1,000 "Hours of Service" (as defined in Section 17.5) with the Employers and the Subsidiaries. A participant who completes at least 1,000 Hours of Service in both (i) the period beginning October 1, 1995 and ending September 30, 1996 and (ii) the calendar year beginning January 1, 1996, shall be credited with two (2) years of Vesting Service. (ii) If a participant completes less than 1,000 Hours of Service in any calendar year, he shall be entitled to a fractional portion of a year of Vesting Service for such calendar year which fraction shall be determined by dividing the number of such participant's Hours of Service during such calendar year by the number of Hours of Service (not less than 1,000 hours) which are included in the participant's Standard Work Year (as defined in Section 17.7). (iii) Notwithstanding the provisions of paragraphs (i) and (ii) above, a participant who is a Qualified Disabled Terminated Employee will be credited with one year of Vesting Service and fractions thereof, respectively, for each calendar year during which he is deemed to be on Long-Term Disability. (iv) Notwithstanding the provisions of paragraph (i) and (ii) above, a participant's Vesting Service for Plan Years ending prior to the Effective Date shall in no event be less than his Credited Service as a Prior Employer Participant under the Monsanto Company Salaried Employees' Pension Plan or the Monsanto Company Hourly Paid Employees' Pension Plan. (v) Notwithstanding the provisions of paragraph (i) and (ii) above, a Former Albright & Wilson Participant's Vesting Service for Plan Years ending prior to the date on which he became a participant in this Plan shall in no event be less than his Credited Service as a Former Albright & Wilson Participant under the Tenneco, Inc. Retirement Plan. 55 61 (vi) If a participant who has previously completed five years of Vesting Service incurs a one year "Break in Service" (as defined in Section 17.6) and is subsequently re-employed by an Employer or an Affiliate Company, his years of Vesting Service before such Break in Service shall not be taken into account in determining his Vesting Service after such Break in Service unless: (1) He subsequently completes a year of Vesting Service with the Employers and the Subsidiaries; or (2) His Break in Service was a result of a layoff and he is subsequently re-employed by an Employer or a Subsidiary following such layoff; or (3) His Break in Service was a result of termination of employment on his Disability Termination Date and he is re-employed by an Employer or a Subsidiary upon the cessation of his Long-Term Disability; or (4) His years of Vesting Service before and after such Break in Service aggregates at least 15 years of Vesting Service, but the years of Vesting Service before such Break in Service shall not be taken into account until retirement, termination or death. (vii) If a participant who has not yet completed five years of Vesting Service incurs a one year Break in Service and is subsequently re-employed by an Employer or an Affiliate Company, his years of Vesting Service before such Break in Service shall not be taken into account in determining his Vesting Service after such Break in Service unless: (1) He subsequently completes a year of Vesting Service with the Employers and the Subsidiaries and the number of consecutive Breaks in Service prior to such re-employment is less than the aggregate number of his years of Vesting Service prior to such Break in Service; or (2) He subsequently completes ten years of Post Break Vesting Service with the Employers and the Subsidiaries; or (3) His Break in Service was a result of a layoff and he is subsequently re-employed by an Employer or a Subsidiary within the three year period following the commencement of such layoff; or (4) His Break in Service was a result of his termination of employment on his Disability Termination Date and he is re-employed by an Employer or a Subsidiary upon the cessation of his Long-Term Disability; or 56 62 (5) His years of Vesting Service before and after such Break in Service aggregates at least 15 years of Vesting Service, but the years of Vesting Service before such Break in Service shall not be taken into account until retirement, termination or death; or (6) He subsequently completes a year of Vesting Service with the Employers and the Subsidiaries and the number of consecutive Breaks in Service prior to such reemployment is less than the greater of: (A) five consecutive one-year Breaks in Service; or (B) the aggregate number of years of Vesting Service before such Break in Service. Solely for the purpose of determining whether any one-year Break in Service under this paragraph (vii) has occurred, Hours of Service will be credited pursuant to the normal method of crediting Hours of Service under this Plan not to exceed 501 Hours of Service as a result of any period of absence of employment due to: (i) the pregnancy of the participant; (ii) the birth of a child of a participant; (iii) the placement of a child with the participant in connection with the adoption of such child by such participant; or (iv) the care of such child by the participant immediately following such birth or placement. The Hours of Service to be credited under this Section 17.1(a)(vii)(6) shall only be credited in the year in which the absence from work begins, if a participant would be prevented from incurring a one-year Break in Service solely because the period of absence is treated as Hours of Service or, in any other case, in the immediately following year. No credit for such enumerated absences will be given pursuant to this Section 17.1(a)(vii)(6) unless the participant furnishes to the Plan Committee such timely information as the Committee may reasonably require to establish that the absence and the length of absence was due to an enumerated reason. (b) The termination of a participant's employment with one Employer will not interrupt the continuity of his employment if, concurrently with or immediately after such termination, he is employed by one or more other Employers. 57 63 (c) If and to the extent the Corporation so provides, the last continuous period of a participant's service with a Predecessor Company (as defined below) will be considered as service with the Employers if such participant becomes employed by one or more of the Employers. For purposes of this subparagraph, a "Predecessor Company" means any corporation or other entity the stock, assets or business of which is acquired by an Employer, whether by merger, consolidation, purchase of assets or otherwise, and any predecessor thereto designated by the Corporation. (d) For purposes of Section 17.1, if a participant had a prior period or periods of service with a Subsidiary that has not adopted the Plan, such period or periods of service with the Subsidiary will be considered as service with the Employer. (e) A period of concurrent service with two or more Employers under the Plan or Subsidiaries that have not adopted the Plan will be considered as employment with only one of them during that period. (f) A period of continuous service with a corporation or other organization immediately prior to and during its status as an Affiliate Company or an Affiliate Unit, irrespective of whether or not such service be prior or subsequent to his participation in this Plan or amended form thereof shall be deemed as Vesting Service, but such continuous service shall be deemed to have terminated at the date of the earliest of a circumstance comparable to any one of the following: (i) the date he retires pursuant to the provisions of this Plan; (ii) the date he dies, quits or is discharged; (iii) twelve months after the date of a layoff or the date he fails to report to work in accordance with local practices and procedures after being recalled from layoff, whichever is earlier; or (iv) the date of expiration of a leave of absence or extension thereof approved by the Corporation for the participant, for illness, disability or any other reason, without immediate return to active employment, provided that the Corporation shall approve and administer leaves of absence in accordance with the requirements of the Plan. For this purpose if a participant is absent for military service for the United States of America, or any subdivision thereof, or if a participant is absent, with the approval of the Corporation, for other services for the United States of America, and if he returns to active employment with an Employer within 90 days after such service is terminated, such absence shall be deemed a leave of absence approved by the Corporation; 58 64 or the earliest of the occurrence of a comparable circumstance while employed by any Affiliate Company or Affiliate Unit, whereupon he ceases all further service with Employers, Subsidiaries, Affiliate Companies and Affiliate Units as a group. (g) A participant's Vesting Service shall include all Credited Service credited to the participant under the terms of the Employer Plans by reason of his transfer from an hourly paid employee status to a salaried employee status. (h) Solely for the purpose of computing Vesting Service, a participant who is or was a "Part-Time Employee" will be credited with the number of Hours of Service equal to that of a regular full time employee at the participant's location of employment for each calendar month during which he furnished employment service to an Employer or a Subsidiary while employed in the status of a Part-Time Employee. (i) The Credited Service accrued by a Prior Employer Participant under the Monsanto Company Salaried Employees' Pension Plan or the Monsanto Company Hourly Paid Employees' Pension Plan, or by a Former Albright & Wilson Participant under the Tenneco, Inc. Retirement Plan shall be considered as Vesting Service. 17.2 Benefit Service. A participant's "Benefit Service" means the sum of his Prior Employer Participant Benefit Service (as defined in Section 17.3) and his "Post Benefit Service" (as defined in Section 17.4). For purposes of Section 4 a participant's years of Benefit Service shall only include such years to the extent that they are attributable to employment by an Employer and as a Prior Employer Participant. For the purposes of this Section 17.2 and Section 4, a predecessor employer shall be considered to be an Employer to the extent the Corporation so provides. 17.3 Prior Employer Participant Benefit Service. The number of years of Benefit Service, and any fraction thereof, to which a participant shall be entitled on the Effective Date of this Plan for service rendered prior to the Effective Date as a Prior Employer Participant shall be equal to the years of Credited Service said participant accrued under the Monsanto Company Salaried Employees' Pension Plan and the Monsanto Company Hourly Paid Employees' Pension Plan. In addition, the number of years of Benefit Service, and any fraction thereof, to which a Former Albright & Wilson Participant shall be entitled on the date on which he became a participant in this Plan for service rendered prior to such date as a Former Albright & Wilson Participant shall be equal to the years of Credited Service said participant accrued under the Tenneco, Inc. Retirement Plan. 17.4 Post Benefit Service. A participant's "Post Benefit Service" means the total of his years of service and fractional years of service after the Effective Date determined in accordance with the following rules: (a) Service with the Employers and the Subsidiaries on and after the Effective Date will be treated as Post Benefit Service as follows: 59 65 (i) Effective January 1, 1997, a participant will be credited with one year of Post Benefit Service for any calendar year in which the participant completes the number of Hours of Service (not less than 1,000 Hours) which are included in the participant's Standard Work Year (as defined in Section 17.7). (ii) In determining a participant's years of Post Benefit Service for any calendar year in which the participant completes at least 1,000 Hours of Service, but less than the number of Hours of Service set forth in paragraph (i) above, the participant will be entitled to a fractional part of a year of Post Benefit Service determined by dividing the number of Hours of Service actually completed by such participant by the number of Hours of Service (not less than 1,000 Hours) which are included in the participant's Standard Work Year. (iii) If a participant completes less than 1,000 Hours of Service in any calendar year, he shall be entitled to a fractional portion of a year of Post Benefit Service for such year, which fraction shall be determined by dividing the number of such participant's Hours of Service during such calendar year by the amount determined in subsection (i) above. (iv) For the period beginning October 1, 1996 and ending December 31, 1996, a participant will be credited with a fractional part of a year of Benefit Service determined by dividing (A) the number of Hours of Service actually completed by such participant during such period by (B) the number of Hours of Service (not less than 1,000 hours) which are included in the participant's Standard Work Year. (v) If a participant who has previously completed five years of Vesting Service (as defined in Section 17.1) incurs a one year "Break in Service" (as defined in Section 17.6) and is subsequently re-employed by an Employer, his Post Benefit Service before such Break in Service shall not be taken into account in determining his Post Benefit Service after such Break in Service unless: (1) He subsequently completes a year of Vesting Service with the Employers and the Subsidiaries; or (2) His Break in Service was a result of a layoff and he is subsequently re-employed by an Employer or a Subsidiary following such layoff; or (3) His Break in Service was a result of termination of employment on his Disability Termination Date and he is subsequently re-employed by an Employer or a Subsidiary upon the cessation of his Long-Term Disability. 60 66 (4) His years of Vesting Service before and after such Break in Service aggregates at least 15 years of Vesting Service, but the years of Vesting Service before such Break in Service shall not be taken into account until retirement, termination or death for the purpose of restoring the pre-Break Benefits Service. (vi) If a participant who has not yet completed five years of Vesting Service incurs a one year Break in Service and is subsequently re-employed by an Employer, his Post Benefit Service before such Break in Service shall not be taken into account in determining his Post Benefit Service after such Break in Service unless: (1) He subsequently completes a year of Vesting Service with the Employers and the Subsidiaries and the number of consecutive Breaks in Service prior to such re-employment is less than the aggregate number of his years of Vesting Service prior to such Break in Service; or (2) He subsequently completes ten years of Vesting Service with the Employers and Subsidiaries; or (3) His Break in Service was a result of a layoff and he is subsequently re-employed by an Employer or a Subsidiary within the three year period following the commencement of such layoff; or (4) His years of Vesting Service before and after such Break in Service aggregates at least 15 years of Vesting Service, but the years of Vesting Service before such Break in Service shall not be taken into account until retirement, termination or death for purpose of restoring the pre-Break Benefits Service; or (5) He subsequently completes a year of Vesting Service with the Employers and the Subsidiaries and the number of consecutive Breaks in Service prior to such reemployment is less than the greater of: (A) five consecutive one-year Breaks in Service; or (B) the aggregate number of years of Vesting Service before such Breaks in Service. (b) Notwithstanding the provisions of paragraphs (a)(i), (a)(ii), and (a)(iii) above, a participant who is a Qualified Disabled Terminated Employee, until he commences to receive Monthly Retirement Income, will be credited with one year and fractions thereof, of Post Benefit Service for each calendar year and fractions thereof during which he is entitled to disability benefits from any employee welfare benefit plan maintained by his Employer. 61 67 (c) The termination of a participant's employment with one Employer will not interrupt the continuity of his employment if, concurrently with or immediately after such termination, he is employed by one or more other Employers. (d) If and to the extent the Corporation so provides, the last continuous period of a participant's service with a Predecessor Company (as defined below) will be considered as service with the Employers if such participant becomes employed by one or more of the Employers. For purposes of this paragraph, a "Predecessor Company" means any corporation or other entity the stock, assets or business of which is acquired by an Employer, whether by merger, consolidation, purchase of assets or otherwise, and any predecessor thereto designated by the Corporation. (e) A period of concurrent service with two or more Employers under the Plan or Subsidiaries that have not adopted the Plan will be considered as employment with only one of them during that period. 17.5 Hours of Service. An "Hour of Service" means an hour for which an employee is directly or indirectly compensated by the Employers or by a Subsidiary in the case of service with such Subsidiary, for the performance of duties for the Employers or such Subsidiary (including hours for which an employee has been awarded backpay by the Employers or such Subsidiary or by any governmental agency or judicial body to the extent such hours are not otherwise treated as Hours of Service). Notwithstanding the preceding sentence, the following special rules shall apply: (a) To the extent not otherwise treated as Hours of Service the following shall constitute Hours of Service: (i) Overtime clock hours; (ii) Hours of service required to be taken into account to satisfy federal military service laws or regulations or to satisfy any other federal laws (but not in excess of four years); (iii) Hours of absence from active work because of regular paid vacations or holidays; (iv) Hours of absence from active work because of occupational illness or disability not yet determined to constitute Long-Term Disability; (v) Hours of absence from active work during the first 12 months of an absence due to non-occupational illness or disability not yet determined to constitute Long-Term Disability or due to a layoff; 62 68 (vi) Hours during an authorized leave of absence or during such shorter period during such a leave of absence as may be specified by the Plan Committee. (b) Hours of Service shall also include hours, not otherwise treated as Hours of Service, for which a participant is directly or indirectly compensated by the Employers or the Subsidiaries, or entitled to compensation from the Employers or Subsidiaries, for absences due to sickness, disability or similar reason. (c) For purposes of Section 17.1, Hours of Service shall also include hours, not otherwise treated as Hours of Service, for which a Part-Time Employee participant is credited and deemed to have accrued during a calendar month as provided by Section 17.1(h). (d) Hours of Service shall include Hours of Service accrued by a Qualified Disabled Terminated Employee for purposes of Vesting Service and Post Benefit Service, pursuant to Sections 17.1(a)(iii) and 17.4(b) of this Plan. (e) The number of Hours of Service which are awarded under this Section during a participant's absence from work and during which he performs no duties for his Employer, whether or not he receives direct or indirect compensation from an Employer during such absence, shall be the number of Hours of Service in his Standard Work Week and/or Standard Work Year (pro-rated) during which he would have ordinarily performed duties for his Employer if he had reported for work instead of being absent. No more than eight Hours of Service shall be awarded for any day of absence; no more than 1,000 Hours of Service shall be awarded under this Section for purposes of Section 17.1 in any Plan Year; and no more than 2,080 Hours of Service shall be awarded under this Section for purposes of Section 17.2 in any Plan Year. All Hours of Service awarded a participant under this Section for periods of absence from work shall be included in the Plan Year in which such absence occurred. (f) In determining the Hours of Service of any employee who is compensated by the Employers or the Subsidiaries on a basis not dependent on the number of hours worked by such employee, the Plan Committee may credit such employee with 95 Hours of Service for each semi-monthly payroll period in which such employee is directly or indirectly compensated by the Employers or Subsidiaries for the performance of duties for the Employers and the Subsidiaries, or may utilize such other method of estimating the Hours of Service of such employee during such period as may be authorized under the applicable regulations. (g) Once it is determined that an employee should be credited with an Hour of Service, such Hour of Service shall be credited to the computation period or periods in which the duties are performed or are deemed to have been performed or to which the payment pertains; provided, however, that except as may be otherwise provided in this Section 17.5 for certain specified types of absences, no more than 501 Hours of Service shall be credited 63 69 during any absence from employment and during which no services are rendered notwithstanding the fact that the employee may have been deemed to have performed service during such period or for which payments are due and the number of hours which will be credited during such absences shall be credited according to the number of hours which are scheduled in the participant's Standard Work Week. (h) No Hours of Service shall be credited to an employee: (i) during any period of lay-off in excess of 12 months; (ii) during any absence for which the employee performs no duties and is solely compensated under, or by a plan established pursuant to, applicable workers' compensation laws, unemployment compensation or disability income laws of any state; (iii) during any period during which an employee or former employee is in receipt of retirement benefits from any Employer and/or subsidiary under any plan established by an Employer and/or a subsidiary (or to which any of such entities contributes) unless or until the employee or former employee ceases drawing such benefits and performs services for any Employer; (iv) for any payment made solely for medical or medically related benefits; and (v) for any payment made on account of pay in lieu of vacations; Hours of Service may be computed and recorded under the "elapsed time" regulations if the Employer so elects. 17.6 Break In Service. Effective January 1, 1996, a one year "Break in Service" means a calendar year in which the participant completes not more than 500 Hours of Service, except: (a) Where such calendar year is the year in which the participant either: (i) first commenced employment with an Employer and continuously accrued Hours of Service from the date of hire to the end of such calendar year; or (ii) terminated all further employment with the Employers following an unbroken, continuous accrual of Hours of Service from January 1 of such calendar year to the date of such termination of employment. (b) A transfer by the participant to an Affiliate Company or Affiliate Unit shall not constitute a "Break in Service". 64 70 17.7 Standard Work Week. With respect to any regular, full-time employee covered under the Plan, his "Standard Work Week" shall mean 40 Hours of Service and the "Standard Work Year" shall mean 2,080 Hours of Service. With respect to employees who are not regular, full-time employees, the "Standard Work Week" shall mean the average number of hours which are regularly scheduled to be worked each week by the employee, and the "Standard Work Year" for such employees shall mean the number of hours in the employee's Standard Work Week multiplied by 52. 17.8 Layoff. "Layoff" shall mean layoff of the participant from employment with an Employer. 17.9 Fiscal Year. The term "Fiscal Year" as applied to any Employer means the taxable year of that Employer for federal income tax purposes. 17.10 Subsidiary. A "Subsidiary" is any subsidiary or affiliate of the Corporation, 80 percent of the stock of which is controlled by the Corporation by application of Sections 414(b) and 1563(a) of the Code. 17.11 Subsidiary. A "subsidiary" is any subsidiary or affiliate of the corporation not described in Section 17.10 which would be so described if the figure "51" were replaced for the figure "80" in Section 17.10; provided, however, that only for purposes of exclusion of persons on international assignment from foreign operations of a domestic subsidiary, "20" shall be substituted for "51" in Section 17.11. 17.12 Qualified Actuary. "Qualified Actuary" means either an independent individual actuary who is a member of the Society of Actuaries, or a firm of independent actuaries, one of whose members is a member of the Society of Actuaries and who is enrolled with the Joint Board for the Enrollment of Actuaries, and is selected by the Plan Committee. 17.13 Actuarial Equivalent. Except to the extent expressly provided to the contrary by ERISA, a benefit shall be actuarially equivalent to any other benefit if the actuarial reserve required to provide the same is equal to the actuarial reserve required to provide such other benefit, computed on the basis of the actuarial rates, tables and procedures last adopted by the Plan Committee for this purpose. No adjustment in a determination of an actuarially equivalent value or amount shall be made if such tables, rates and procedures are changed by the Plan Committee subsequent to such determination. Actuarially equivalent amounts or values will be determined on the basis of the following actuarial rates and tables: (a) The assumed mortality rates will be based on the 1971 Towers, Perrin, Forster and Crosby Forecast Mortality Table using a one-year age setback for the participant and a five-year age setback for the beneficiary or spouse. 65 71 (b) The assumed annual rate of investment return will be 7%. 17.14 Average Monthly Earnings. The "Average Monthly Earnings" of a participant shall be the greater of (a) the average of his monthly earnings during the 36 months immediately prior to his Retirement Date or Employment Termination Date, whichever first occurs, or (b) the average monthly earnings received during the highest three of the five calendar years immediately prior to the year of the participant's Retirement Date or Employment Termination Date, whichever first occurs, except that: (a) if he has no earnings during one or more of such final 36 months, then his Average Monthly Earnings shall be the average of his monthly earnings during the final 36 months in which he had earnings; (b) if his base salary has been reduced because of a decline in his physical or mental capacity to continue his former assignment, or because he was transferred to a position of reduced responsibilities or his assignment was abolished or its responsibilities curtailed, his Average Monthly Earnings shall be computed as if his base salary had not been reduced; and (c) if he received disability income from any employee welfare benefit plan maintained by his Employer or in which his Employer participates, then his average monthly earnings for the computation periods for determination of Average Monthly Earnings shall be computed: (i) on the assumption that for each month of such computation periods during which month he received disability income under such plan he had monthly earnings equal to his base salary for the month immediately preceding the month in which his disability income commenced under such plan and any employee welfare benefit plan maintained by his Employer or in which his Employer participates; and (ii) with respect to the balance of such computation periods, if any, by applying the actual monthly earnings received in each of such months. The Average Monthly Earnings of a participant shall include all compensation paid to him by any Employer, any Affiliate Company and any Affiliate Unit, including shift differential pay, overtime pay, holiday pay, fire brigade pay, military summer encampment pay, sick leave pay, including Incentive Pay (as defined below), including any deferred compensation pursuant to a salary reduction agreement under Code Sections 401 or 125, but excluding strike time and other bonuses, amounts paid under any incentive plans in the future, commissions, amounts paid by his Employer for insurance or other welfare plans or benefits, and pay in lieu of vacations. Overtime pay will be considered as having been earned in the month in which it is paid. The Average Monthly Earnings of a participant who was not a regular full-time employee of the Employer or Employers during said computation period shall be determined as provided 66 72 above, except that for purposes of such determination his actual monthly earnings during any period of said computation period when he was not in a regular full-time employee status shall be increased to an amount of monthly earnings equal to that amount he would have received during such period as a regular full-time employee based upon the standard work week at such location during such period. The above provisions shall be subject to special provisions for the Average Monthly Earnings set forth in the Benefit Service provisions of this Plan. In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the compensation of each participant taken into account under the Plan for purposes of determining Average Monthly Earnings shall not exceed the "OBRA '93 Annual Compensation Limit." The "OBRA '93 Annual Compensation Limit" is $150,000, as adjusted for increases in the cost of living in accordance with Code Section 401(a)(17)(B). The cost of living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which compensation is determined ("Determination Period") beginning in such calendar year. If a Determination Period consists of fewer than 12 months, the "OBRA '93 Annual Compensation Limit" will be multiplied by a fraction, the numerator of which is the number of months in the Determination Period, and the denominator of which is 12. If compensation for any prior Determination Period is taken into account in determining a participant's benefits accruing in the current Plan Year, the compensation for that prior Determination Period is subject to the "OBRA '93 Annual Compensation Limit" in effect for that prior Determination Period. For this purpose, for Determination Periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the "OBRA '93 Annual Compensation Limit" is $150,000. 17.15 Affiliate Company. "Affiliate Company" shall mean a corporation organized under the laws of any state of the United States of America or of any foreign country, which meets the following criteria: (a) 50% or more of whose shares of stock normally entitled to be voted for the election of its directors is owned directly or indirectly by the Corporation; (b) which is not an Employer in this Plan of subsequent form or a Participating Company in any Predecessor Plan; and (c) which is then classified as an "Affiliate Company" by the Corporation. Such corporation shall be deemed an Affiliate Company only for such period as the Board of Directors of the Corporation may, in its discretion, determine. 17.16 Affiliate Unit. "Affiliate Unit" shall mean: 67 73 (a) a division, department, unit or a separate group of employees of an Employer or an Affiliate Company; (b) which is not participating in this Plan or amended form thereof; (c) which has its own separate pension plan for its employees; and (d) which is classified as an "Affiliate Unit" by the Corporation. All references herein to an Employer shall be deemed to not include any Affiliate Unit of such Participating Company or Affiliate Company. Such division, department, unit or separate group of employees shall be deemed to be an Affiliate Unit only for such period as the Board of Directors may, in its discretion, determine. 17.17 Incentive Pay. "Incentive Pay" shall be the additional compensation (other than any award made to participants under the Employer incentive plan) which may be paid on an annual or more frequent basis to one or more participants and which is computed under a formula directly reflecting the performance of such participant or group of participants. It does not mean any distributions made to participants from the Incentive Plan or Profit Sharing Plan. 17.18 Foreign Operating Subsidiary. A "Foreign Operating Subsidiary" means a domestic corporation which is a Subsidiary and which satisfies the following requirements: (a) 80 percent or more of its outstanding voting stock is owned by an Employer; and (b) Except as provided below, as of the close of its taxable year which ends on or before the close of the most recent Fiscal Year of the Employer described in paragraph (a) above 95 percent or more of its gross income for the immediately preceding three year period (or for the entire immediately preceding period of its existence if it has not been in existence for three years as of such date) was derived from sources without the United States of America (determined by the Plan Committee in a manner consistent with Sections 861 through 864 of the Code); and (c) Except as provided below, 90 percent or more of its gross income for the period described in paragraph (b) above was derived from the active conduct of a trade or business. If for the period described in paragraph (b) above such Subsidiary has no gross income, the provisions of paragraphs (b) and (c) above shall be considered to be satisfied if the Plan Committee determines that it is reasonable to anticipate that such provisions will be satisfied with respect to the period ending on the close of the first taxable year of such Subsidiary ending after the last day of the period described in paragraph (b) above. 68 74 17.19 Foreign Subsidiary. A "Foreign Subsidiary" means a foreign corporation or entity in which the Corporation or one of the other Employers owns (directly or through one or more entities) not less than 10 percent of the voting stock, in the case of a corporation, or not less than 10 percent of the profits, in the case of any other entity. 17.20 U.S. Foreign Service Employees/Designated Non-U.S. Citizen Foreign Service Employees. A person who is not an employee of the Corporation or one of the other Employers shall not be eligible to participate in the Plan unless he is a U.S. Foreign Service Employee or a Designated Non-U.S. Foreign Service Employee. A "U.S. Foreign Service Employee" is a person employed by a Foreign Subsidiary (as defined in Section 17.19) or a Foreign Operating Subsidiary (as defined in Section 17.18) who satisfies all of the following requirements: (a) He is a Citizen or Resident (as defined in Section 7701(b) of the Code) of the United States of America; and (b) He is not covered by or participating in any funded plan of deferred compensation maintained by or otherwise provided by any party other than the Corporation (or where the requisite stock ownership of a Foreign Subsidiary or a Foreign Operating Subsidiary is owned by another Employer, such other Employer) with respect to the remuneration paid to him by such Foreign Subsidiary or Foreign Operating Subsidiary; and (c) If he is an employee of a Foreign Subsidiary, the Corporation (or where the requisite stock ownership of a Foreign Subsidiary or a Foreign Operating Subsidiary is owned by another Employer, such other Employer) has entered into an agreement with the Secretary of the Treasury or his delegate under Section 3121(1) of the Code which applies to the Foreign Subsidiary of which he is an employee. (d) He is on international assignment from the Corporation (or, where the requisite stock ownership of a Foreign Subsidiary or a Foreign Operating Subsidiary is owned by another Employer, such other Employer). Notwithstanding the foregoing, the Plan Committee or its delegate may preclude participation or impose such terms, conditions, and restrictions on the participation of a U.S. Foreign Service Employee as the Committee or its delegate, in the exercise of its sole discretion, deems necessary or desirable in order to comply with U.S. or foreign law (including but not limited to tax reporting and withholding, securities registration or currency law requirements imposed by law or treaty) as it affects the U.S. Foreign Service Employee, the Corporation, any Employer, any Foreign Subsidiary, any Foreign Operating Subsidiary, the Plan Committee, the Trustee or any agent of any of the foregoing. A "Designated Non-U.S. Citizen Foreign Service Employee" is a person employed by a Subsidiary (as defined in Section 17.10) who satisfies all of the following requirements: 69 75 (a) He is not a Citizen or Resident (as defined in Section 7701(b) of the Code) of the United States of America; and (b) He is not covered by or participating in any funded plan of deferred compensation maintained by or otherwise provided by any party other than the Corporation and its subsidiaries with respect to the remuneration paid to him by such Foreign Subsidiary or Foreign Operating Subsidiary; and (c) He is on international assignment from the Corporation or one of the other Employers and is employed at a location outside the United States; and (d) He has been designated by the Plan Committee or its delegate as a Designated Non-U.S. Citizen Foreign Service Employee. Notwithstanding the foregoing, the Plan Committee or its delegate may preclude participation or impose such terms, conditions, and restrictions on the participation of a Designated Non-U.S. Citizen Foreign Service Employee as the Committee or its delegate, in the exercise of its sole discretion, deems necessary or desirable in order to comply with U.S. or foreign law (including, but not limited to tax reporting and withholding, securities registration or currency law requirements imposed by law or treaty) as it affects the Designated Non-U.S Citizen Foreign Service Employee, the Corporation, any Employer, any Subsidiary, the Plan Committee, the Trustee or any agent of any of the foregoing. 17.21 Part-Time Employee. A "Part-Time Employee" shall mean an employee hired on a permanent basis and employed to work at least 1/3, but less than all of the total number of hours which constitute the standard work week for a regular full-time employee at his location of employment. All references in the Plan to Disabled Terminated Employee and Qualified Disabled Terminated Employee shall be deemed also to include a Part-Time Employee under such employment or post-employment circumstances or status unless otherwise specified in the applicable Section or Article. 17.22 Long-Term Disability. A participant will be considered to have a condition of Long-Term Disability for the purposes of this Plan if he has been deemed to be on Long-Term Disability under the terms of the Salaried Disability Income Plan. 70 76 17.23 Code. "Code" shall mean the Internal Revenue Code of 1986, as amended, or any comparable future legislation that amends, supplements or supersedes said Internal Revenue Code. 17.24 ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. IN WITNESS WHEREOF, the Corporation has executed this Amended and Restated Salaried Employees' Pension Plan this ____ day of ______________, 19____. STERLING CHEMICALS, INC. ATTEST: By: ------------------------ - ---------------------------- Name: ---------------------- Title: --------------------- 71 77 EXHIBIT "A" Minimum Retirement Income Factor The "Minimum Retirement Income Factor" applicable with respect to a covered employee whose Retirement Date or Employment Termination Date occurs on or after the Effective Date shall be determined in accordance with the following table: Retirement Date or Employment Retirement Termination Date Occurring: Income Factor ----------------------------- ------------- Before January 1, 1991 $30.00 On or after January 1, 1991 $35.00 EX-10.4A 5 h82651ex10-4a.txt 1ST AMEND. TO SALARIED EMPLOYEES' PENSION PLAN 1 EXHIBIT 10.4a FIRST AMENDMENT TO THE STERLING CHEMICALS, INC. AMENDED AND RESTATED SALARIED EMPLOYEES' PENSION PLAN WHEREAS, there is reserved to Sterling Chemicals, Inc. ("Chemicals") in Section 15.1 of the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (the "Plan") the right to amend the Plan; and WHEREAS, Sterling Fibers, Inc. ("Fibers"), a subsidiary of Chemicals, has adopted the Plan for its eligible employees in conjunction with the purchase of certain operations from Cytec Industries, Inc. and its affiliates ("Cytec"); NOW, THEREFORE, the Plan is hereby amended effective as of January 31, 1997 by adding thereto the following: 1. Each Cytec employee who became an employee of Fibers on January 31, 1997 shall receive credit for his service that was credited under the Cytec Salaried and Nonbargaining Employees' Retirement Plan ("Cytec Plan") on January 31, 1997 for eligibility and vesting purposes only under the Plan. 2. Each such former Cytec employee who retires under the Plan during the period beginning February 1, 1997 and ending January 31, 1999, shall receive a supplemental monthly straight life annuity benefit equal to the excess of (1) the monthly straight life annuity benefit he would have received under the Cytec Plan, had he remained employed with Cytec from February 1, 1997 through his retirement date under the Plan, and (2) the monthly straight life annuity benefit he would be entitled to receive under the Plan but for this paragraph 2 ("basic benefit"). Notwithstanding the foregoing however, if the Participant receives his basic benefit in a form other than a straight life annuity, the supplemental benefit provided by this paragraph 2 shall be paid in the same form as is his basic benefit and shall be actuarially adjusted in the same manner as is his basic benefit. All terms used herein that are defined in the Plan shall have the same meanings given to such terms in the Plan, except as otherwise expressly provided herein. Except as amended and modified hereby, the Plan shall continue in full force and effect and the Plan and this amendment shall be read, taken and construed as one and the see instrument. 2 This amendment may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument which may be evidenced by any one counterpart. IN WITNESS WHEREOF, Chemicals has executed this instrument effective for all purposes as of the date provided above. STERLING CHEMICALS, INC. By: ---------------------------------- EX-10.4B 6 h82651ex10-4b.txt 2ND AMEND. TO SALARIED EMPLOYEES' PENSION PLAN 1 EXHIBIT 10.4b SECOND AMENDMENT TO THE STERLING CHEMICALS, INC. AMENDED AND RESTATED SALARIED EMPLOYEES' PENSION PLAN WHEREAS, there is reserved to Sterling Chemicals, Inc. ("Chemicals") in Section 15.1 of the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (the "Plan") the right to amend the Plan; NOW, THEREFORE, the Plan is hereby amended by adding thereto a new Section 9.10A to read as follows: 9.10A Canadian Employees Transferred to Salaried Basis. The Monthly Retirement Income payable to a participant, who was an employee of a Canadian Affiliate Company prior to the date his participation under this Plan commenced and who is otherwise entitled to a benefit under a defined benefit pension plan maintained by the Canadian Affiliate Company (the "Canadian Plan"), with respect to his participation in this Plan and his participation in the Canadian Plan shall be the greater of: (a) the Monthly Retirement Income or Monthly Vested Termination Benefit computed under this Plan as if all benefit service accrued under the Canadian Plan and this Plan had been accrued under this Plan alone; or (b) the sum of: (i) the Monthly Retirement Income or Monthly Vested Termination Benefit under this Plan computed on the basis of his benefit service solely attributable to his service with the Employers on and after the date his participation in this Plan commenced; and (ii) his non-contributory regular benefits under the Canadian Plan determined on the basis of his benefit service accrued under the Canadian Plan prior to the date his participation in this Plan commenced. Such regular benefits shall be computed on the basis of the provisions of the Canadian Plan as in effect on the date he ceased to be an employee of the Canadian Affiliate Company. There shall be no duplication of benefits for the same period of time and if paragraph (a) above is applicable, the benefits payable hereunder shall be reduced by the actuarial equivalence of the benefits payable under the Canadian Plan. A participant subject to this Section 9.10A must retire under both the Canadian Plan and this Plan at the same time. 2 All terms used herein that are defined in the Plan shall have the same meanings given to such terms in the Plan, except as otherwise expressly provided herein. Except as amended and modified hereby, the Plan shall continue in full force and effect and the Plan and this amendment shall be read, taken and construed as one and the same instrument. This amendment may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument which may be evidenced by any one counterpart. IN WITNESS WHEREOF, Chemicals has executed this instrument to be effective as of January 1, 1997 upon the receipt of a favorable IRS determination letter for this amendment. STERLING CHEMICALS, INC. By: ----------------------------- EX-10.4C 7 h82651ex10-4c.txt 3RD AMEND. TO SALARIED EMPLOYEES' PENSION PLAN 1 EXHIBIT 10.4c THIRD AMENDMENT TO THE STERLING CHEMICALS, INC. AMENDED AND RESTATED SALARIED EMPLOYEES' PENSION PLAN WHEREAS, there is reserved to Sterling Chemicals, Inc. (the "Company") in Section 15.1 of the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (the "Plan") the right to amend the Plan; NOW, THEREFORE, the Plan is hereby amended effective as of November 1, 1998, as follows: 1. Section 3.2 is amended to read as follows: "Early Retirement Date. A participant's "Early Retirement Date" will be the first day of the month following the month in which he retires from the employ of all the Employers before his Normal Retirement Date, but after he has both attained at least age 55 years and is vested pursuant to Section 2.2. However, a participant who receives Post Benefit Service credit pursuant to Section 17.4(a)(vii) will, upon reaching age 55, be deemed to have terminated his employment on having reached such date." 2. A new subparagraph (vii) is added to Section 17.4(a) to read as follows: If a participant between the ages of 54 and 55 is involuntarily terminated by an Employer other than for cause as part of a formal reduction in force or layoff program, the participant will continue to receive Post Benefit Service credit until he attains the age of 55; provided, however, there shall be no duplication of Post Benefit Service that is credited for the same period of time under any other provision of the Plan. All terms used herein that are defined in the Plan shall have the same meanings given to such terms in the Plan, except as otherwise expressly provided herein. Except as amended and modified hereby, the Plan shall continue in full force and effect and the Plan and this amendment shall be read, taken and construed as one and the same instrument. This amendment may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument which may be evidenced by any one counterpart. 2 IN WITNESS WHEREOF, the Company has executed this instrument this _______________, 1999, effective for all purposes as provided above. STERLING CHEMICALS, INC. By: ------------------------------- Name: ------------------------------- Title: ------------------------------- EX-10.4D 8 h82651ex10-4d.txt 4TH AMEND. TO SALARIED EMPLOYEES' PENSION PLAN 1 EXHIBIT 10.4d FOURTH AMENDMENT TO THE STERLING CHEMICALS, INC. AMENDED AND RESTATED SALARIED EMPLOYEES' PENSION PLAN WHEREAS, there is reserved to the Company the right to amend the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (the "Plan"); and WHEREAS, the Company deems it advisable to amend the Plan in the manner hereafter set forth; NOW, THEREFORE, the Plan is hereby amended effective as of December 31, 1998 as follows: "Notwithstanding anything in the Plan to the contrary, with respect to a participant who attains age 70 1/2 after 1998 (other than an owner, within the meaning of IRC Section 318), benefits shall not be paid or begin prior to the participant's termination of employment with the Company and all members of its controlled group of employers; however, in no event shall the participant's accrued benefit be less than the Actuarial Equivalent of the accrued benefit that would have been payable as of April 1 of the year following the year the participant attained age 70 1/2, had the participant terminated employment on the last day of such year, adjusted for the period of deferral in accordance with the applicable regulations. Except to the extent required by IRC Section 401(a)(9), the Plan shall not preclude such a participant from receiving benefits in any of the same optional forms (except for the difference in the timing of the commencement of payments) that would have been available had the participant retired in the calendar year in which the participant attained age 70 1/2." All terms used herein that are defined in the Plan shall have the same meanings given to such terms in the Plan, except as otherwise expressly provided herein. Except as amended and modified hereby, the Plan shall continue in full force and effect and the Plan and this instrument shall be read, taken and construed as one and the same instrument. This instrument may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument which may be evidenced by any one counterpart. 2 IN WITNESS WHEREOF, the Company has caused this instrument to be executed effective for all purposes as provided above. STERLING CHEMICALS, INC. By: --------------------- Name: ------------------- Title: ------------------ EX-10.4E 9 h82651ex10-4e.txt 5TH AMEND. TO SALARIED EMPLOYEES' PENSION PLAN 1 EXHIBIT 10.4e FIFTH AMENDMENT TO THE STERLING CHEMICALS, INC. AMENDED AND RESTATED SALARIED EMPLOYEES' PENSION PLAN WHEREAS, there is reserved to Sterling Chemicals, Inc. (the "Company") in Section 15.1 of the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (the "Plan") the right to amend the Plan; NOW, THEREFORE, the Plan is hereby amended effective as of April 1, 1999, as follows: 1. Section 4.3(b) is amended to read as follows: Alternate Amount. The Alternate Amount shall be applicable to any participant employed by the Employer on or after April 1, 1999 and shall be the Monthly Retirement Income equal to the sum of (A) 1.2% times Average Monthly Earnings times Years of Benefit Service and (B) 0.45% of Average Monthly Earnings in excess of Average Covered Compensation times Years of Benefit Service (not to exceed 35), times the Vested Percentage set forth in Section 2.2; or 2. Section 4.5 is amended to read as follows: Early Retirement - Early Payment. In lieu of the Monthly Retirement Income payable under Section 4.4 commencing on his Normal Retirement Date, a participant who retires on an Early Retirement Date and does not elect to defer his Monthly Retirement Income in accordance with Section 4.4 will be entitled to a Monthly Retirement Income commencing on his Early Retirement Date or, if he so elects, on the first day of any month thereafter before his Normal Retirement Date. The Monthly Retirement Income which is payable to a participant in accordance with the preceding sentence will be computed by determining the amount of Monthly Retirement Income which the participant would have been entitled to receive under Section 4.4 commencing at his Normal Retirement Date and, except as provided below, reducing such amount by one-fourth of one percent for each complete calendar month by which the date his Monthly Retirement Income payments commence precedes his Normal Retirement Date. If the sum of the participant's age and years of Vesting Service as of his Early Retirement Date equals or exceeds 80, the reduction provided for above shall apply only to the portion of such benefit calculated under part (B) of the Alternate Amount formula in Section 4.3(b). 2 3. A new 17.25 is added to Section 17 to read as follows: Average Covered Compensation. Average Covered Compensation is the average (without indexing) of the Social Security taxable wage bases in effect for each calendar year during the 35-year period ending with the last day of the calendar year in which the participant attains (or will attain) Social Security retirement age. In determining a participant's Average Covered Compensation for a Plan Year, the Social Security taxable wage base for all calendar years beginning after the first day of the Plan Year is assumed to be the same as the Social Security taxable wage base in effect as of the beginning of the Plan Year for which the determination is being made. Average Covered Compensation will be determined based on the Plan Year. A participant's Average Covered Compensation for a Plan Year before the 35-year period ending with the last day of the calendar year in which the participant attains Social Security retirement age is the taxable wage base in effect as of the beginning of the Plan Year. A participant's Average Covered Compensation for a Plan Year after such 35-year period is the participant's Average Covered Compensation for the Plan Year during which the 35-year period ends. All terms used herein that are defined in the Plan shall have the same meanings given to such terms in the Plan, except as otherwise expressly provided herein. Except as amended and modified hereby, the Plan shall continue in full force and effect and the Plan and this amendment shall be read, taken and construed as one and the same instrument. This amendment may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument which may be evidenced by any one counterpart. IN WITNESS WHEREOF, the Company has executed this instrument this _______________, 1999, effective for all purposes as provided above. STERLING CHEMICALS, INC. By: --------------------- Name: ------------------- Title: ------------------ EX-10.4F 10 h82651ex10-4f.txt 6TH AMEND. TO SALARIED EMPLOYEES' PENSION PLAN 1 EXHIBIT 10.4f SIXTH AMENDMENT TO THE STERLING CHEMICALS, INC. AMENDED AND RESTATED SALARIED EMPLOYEES' PENSION PLAN WHEREAS, there is reserved to Sterling Chemicals, Inc. (the "Company") in Section 15.1 of the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (the "Plan") the right to amend the Plan; NOW, THEREFORE, Section 2.1 of the Plan is hereby amended by adding thereto the following: For all purposes of this Plan, an employee of an Employer who is a member of a collective bargaining unit shall not be an eligible employee unless the bargaining agreement with the Employer provides for his coverage. All terms used herein that are defined in the Plan shall have the same meanings given to such terms in the Plan, except as otherwise expressly provided herein. Except as amended and modified hereby, the Plan shall continue in full force and effect and the Plan and this amendment shall be read, taken and construed as one and the same instrument. This amendment may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument which may be evidenced by any one counterpart. IN WITNESS WHEREOF, the Company has executed this instrument this _______________, 1999. STERLING CHEMICALS, INC. By: --------------------- Name: ------------------- Title: ------------------ EX-10.7A 11 h82651ex10-7a.txt 1ST AMEND. TO HOURLY PAID EMPLOYEES' PENSION PLAN 1 EXHIBIT 10.7a FIRST AMENDMENT TO THE STERLING CHEMICALS, INC. AMENDED AND RESTATED HOURLY PAID EMPLOYEES' PENSION PLAN WHEREAS, there is reserved to the Company the right to amend the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (the "Plan"); and WHEREAS, the Company deems it advisable to amend the Plan in the manner hereafter set forth; NOW, THEREFORE, the Plan is hereby amended effective as of December 31, 1998 as follows: "Notwithstanding anything in the Plan to the contrary, with respect to a participant who attains age 70 1/2 after 1998 (other than an owner, within the meaning of IRC Section 318), benefits shall not be paid or begin prior to the participant's termination of employment with the Company and all members of its controlled group of employers; however, in no event shall the participant's accrued benefit be less than the Actuarial Equivalent of the accrued benefit that would have been payable as of April 1 of the year following the year the participant attained age 70 1/2, had the participant terminated employment on the last day of such year, adjusted for the period of deferral in accordance with the applicable regulations. Except to the extent required by IRC Section 401(a)(9), the Plan shall not preclude such a participant from receiving benefits in any of the same optional forms (except for the difference in the timing of the commencement of payments) that would have been available had the participant retired in the calendar year in which the participant attained age 70 1/2." All terms used herein that are defined in the Plan shall have the same meanings given to such terms in the Plan, except as otherwise expressly provided herein. Except as amended and modified hereby, the Plan shall continue in full force and effect and the Plan and this instrument shall be read, taken and construed as one and the same instrument. This instrument may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument which may be evidenced by any one counterpart. 2 IN WITNESS WHEREOF, the Company has caused this instrument to be executed effective for all purposes as provided above. STERLING CHEMICALS, INC. By: --------------------- Name: ------------------- Title: ------------------ EX-10.7B 12 h82651ex10-7b.txt 2ND AMEND. TO HOURLY PAID EMPLOYEES' PENSION PLAN 1 EXHIBIT 10.7b SECOND AMENDMENT TO THE STERLING CHEMICALS, INC. AMENDED AND RESTATED HOURLY PAID EMPLOYEES' PENSION PLAN WHEREAS, there is reserved to Sterling Chemicals, Inc. (the "Company") in Section 15.1 of the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (the "Plan") the right to amend the Plan; NOW, THEREFORE, the Plan is hereby amended effective as of December 17, 1998 as follows: 1. Section 3 is amended by adding thereto a new Section 3.8 to read as follows: 3.8 Window Retirement Program. Notwithstanding anything in the Plan to the contrary, each Window Participant who retires during the Window Period shall be credited with an additional five years of Vesting Service and Benefit Service and with an additional five years of age (other than for purposes of calculating a joint and survivor annuity for such participant). For purposes of this Section 3.8, the following terms shall have the meanings set forth below: (a) Window Participant means a participant in the Plan who (i) on December 17, 1998, is an active employee (or on lay off status), (ii) is, or prior to February 1, 1999 will be age 50 or older (iii) retires not later than February 28, 1999, on or after reaching age 50 with the commencement of his Monthly Retirement Income being not later than March 1, 1999, and (iv) has in effect prior to the commencement of his Monthly Retirement Income an executed Waiver and Release. If a participant who has executed a Waiver and Release dies prior to its becoming effective or after it becomes effective but prior to reaching his retirement date, his Eligible Surviving Spouse, if any, shall be entitled to the applicable benefit under Section 9.4 or 9.5 as if the participant had become a Window Participant and then died. (b) Waiver and Release means a form of waiver and release prepared by the Company under which the participant releases all employment related claims against the Company and its affiliated persons. (c) Window Period means the period beginning on December 17, 1998 and ending February 16, 1999. 2 2. Section 4.4 is amended by adding thereto a new sentence to read as follows: In addition, the reduction provided above shall not apply to a Window Participant (as defined in Section 3.8). All terms used herein that are defined in the Plan shall have the same meanings given to such terms in the Plan, except as otherwise expressly provided herein. Except as amended and modified hereby, the Plan shall continue in full force and effect and the Plan and this amendment shall be read, taken and construed as one and the same instrument. This amendment may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument which may be evidenced by any one counterpart. IN WITNESS WHEREOF, the Company has executed this instrument this _________________, 1999, effective for all purposes as provided above. STERLING CHEMICALS, INC. By: --------------------- Name: ------------------- Title: ------------------ EX-10.7C 13 h82651ex10-7c.txt 3RD AMEND. TO HOURLY PAID EMPLOYEES' PENSION PLAN 1 EXHIBIT 10.7c THIRD AMENDMENT TO THE STERLING CHEMICALS, INC. AMENDED AND RESTATED HOURLY PAID EMPLOYEES' PENSION PLAN WHEREAS, there is reserved to Sterling Chemicals, Inc. (the "Company") in Section 15.1 of the Sterling Chemicals, Inc. Amended and Restated Hourly Paid Employees' Pension Plan (the "Plan") the right to amend the Plan; NOW, THEREFORE, Exhibit A to the Plan is hereby amended for participants whose Employment Termination Date is on or after December 31, 1998 as follows: "Exhibit A Retirement Income Factor The "Retirement Income Factor" applicable with respect to a participant shall be determined based on Final Average Pay in accordance with the following table:
Final Average Pay Retirement Income Factor ----------------- ------------------------ Less than $35,500 $35 $35,500 - $36,499 $36 $36,500 - $37,499 $37 $37,500 - $38,499 $38 $38,500 - $39,499 $39 $39,500 - $40,499 $40 $40,500 - $41,499 $41 $41,500 - $42,499 $42 $42,500 - $43,499 $43 $43,500 - $44,499 $44 $44,500 - $45,499 $45 $45,500 - $46,499 $46 $46,500 - $47,499 $47 $47,500 - $48,499 $48 $48,500 - $49,499 $49 $49,500 - $50,499 $50 $50,500 - $51,499 $51 $51,500 - $52,499 $52 $52,500 - $53,499 $53 $53,500 - $54,499 $54 $54,500 - $55,499 $55 $55,500 - $56,499 $56 $56,500 - $57,499 $57 $57,500 - $58,499 $58 $58,500 - $59,499 $59 $59,500 and greater $60"
2 All terms used herein that are defined in the Plan shall have the same meanings given to such terms in the Plan, except as otherwise expressly provided herein. Except as amended and modified hereby, the Plan shall continue in full force and effect and the Plan and this amendment shall be read, taken and construed as one and the same instrument. This amendment may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument which may be evidenced by any one counterpart. IN WITNESS WHEREOF, the Company has executed this instrument this ___________________, 1999, effective for all purposes as provided above. STERLING CHEMICALS, INC. By: --------------------- Name: ------------------- Title: ------------------ EX-10.8 14 h82651ex10-8.txt 6TH AMEND. SAVINGS & INVESTMENT PLAN 1 EXHIBIT 10.8 ================================================================================ ================================================================================ STERLING CHEMICALS, INC. SIXTH AMENDED AND RESTATED SAVINGS AND INVESTMENT PLAN ================================================================================ DATED AS OF OCTOBER 1, 2000 ================================================================================ 2 STERLING CHEMICALS, INC. SIXTH AMENDED AND RESTATED SAVINGS AND INVESTMENT PLAN Table Of Contents
Page ---- ARTICLE I - PURPOSE AND EFFECT OF PLAN; DEFINITIONS AND INTERPRETATION...................................... 1 Section 1.01 Purpose........................................................................... 1 Section 1.02 Effect of Amendment and Restatement............................................... 1 Section 1.03 Certain Defined Terms............................................................. 2 Section 1.04 Interpretation.................................................................... 11 ARTICLE II - PARTICIPATION.................................................................................. 11 Section 2.01 Eligibility....................................................................... 11 Section 2.02 Service........................................................................... 12 Section 2.03 Notice of Eligibility; Election of Participation.................................. 16 ARTICLE III - PERIOD OF PARTICIPATION....................................................................... 16 Section 3.01 Change in Participant's Status.................................................... 16 Section 3.02 Restricted Participation.......................................................... 16 ARTICLE IV - FORM OF PARTICIPATION.......................................................................... 16 Section 4.01 Participant Contribution Options.................................................. 16 Section 4.02 Employer Matching Contributions................................................... 17 Section 4.03 Actual Contribution Percentage Tests.............................................. 17 Section 4.04 Adjustment to Actual Contribution Percentage Tests................................ 20 Section 4.05 Discontinuance and Resumption of Contributions.................................... 21 ARTICLE V - PRE-TAX CONTRIBUTIONS........................................................................... 21 Section 5.01 Eligibility....................................................................... 21 Section 5.02 Pre-Tax Contributions............................................................. 21 Section 5.03 Limitation on Pre-Tax Contributions............................................... 22 Section 5.04 Deduction of Pre-Tax Contributions................................................ 22 Section 5.05 Cessation of Pre-Tax Contributions................................................ 23 Section 5.06 Distribution of Pre-Tax Contributions............................................. 23 Section 5.07 Actual Deferral Percentage Tests.................................................. 23 Section 5.08 Adjustment to Actual Deferral Percentage Tests.................................... 25 Section 5.09 Modification of Pre-Tax Contribution Percentage................................... 26
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Page ---- ARTICLE VI - AFTER-TAX CONTRIBUTIONS........................................................................ 26 Section 6.01 Eligibility....................................................................... 26 Section 6.02 After-Tax Contributions........................................................... 26 Section 6.02 Limitation on After-Tax Contributions............................................. 27 Section 6.03 Deduction of After-Tax Contributions.............................................. 27 Section 6.04 Cessation of After-Tax Contributions.............................................. 27 Section 6.05 Modification of After-Tax Contribution Percentage................................. 27 ARTICLE VII - LIMITATIONS ON CONTRIBUTIONS.................................................................. 27 Section 7.01 Maximum Annual Additions.......................................................... 27 Section 7.02 Adjustment for Excessive Annual Additions......................................... 29 ARTICLE VIII - ACCOUNTING .................................................................................. 30 Section 8.01 Participant Accounts.............................................................. 30 Section 8.02 Rollovers From Qualified Plans.................................................... 31 Section 8.03 Adjustment of Accounts............................................................ 31 Section 8.04 Charging Payments and Distributions............................................... 32 Section 8.05 Crediting After-Tax Contributions................................................. 32 Section 8.06 Crediting Pre-Tax Contributions................................................... 32 Section 8.07 Employer Matching Contributions Account........................................... 32 Section 8.08 Cytec Accounts and Historical Employer Matching Contributions Accounts........................................................ 32 Section 8.09 Allocation of Employer Matching Contributions and Forfeitures..................... 32 ARTICLE IX - THE FUNDS...................................................................................... 33 Section 9.01 The Investment Funds.............................................................. 33 Section 9.02 Investment Elections.............................................................. 33 Section 9.03 Transfers Between Investment Funds................................................ 34 Section 9.04 Company Stock Fund................................................................ 34 ARTICLE X - PAYMENT OF ACCOUNT BALANCES..................................................................... 34 Section 10.01 Retirement, Disability or Death................................................... 34 Section 10.02 Resignation or Dismissal.......................................................... 34 Section 10.03 Distribution Options.............................................................. 35 Section 10.04 Limitations on Distributions...................................................... 38 Section 10.05 Designation of Beneficiaries...................................................... 40 Section 10.06 Forfeitures....................................................................... 41 Section 10.07 Payment of Distribution Directly to Eligible Retirement Plan...................... 42 Section 10.08 Qualified Domestic Relations Order Distribution................................... 43
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Page ---- ARTICLE XI - IN-SERVICE WITHDRAWALS......................................................................... 43 Section 11.01 General Withdrawals by Participants............................................... 43 Section 11.02 Periodic Distributions............................................................ 44 Section 11.03 Form of Withdrawals............................................................... 44 Section 11.04 Charging and Allocations of Withdrawals and Periodic Distributions................ 44 ARTICLE XII - LOANS .................................................................................. 44 Section 12.01 Loans............................................................................. 44 Section 12.02 Loan Administration............................................................... 44 Section 12.03 Loan Eligibility.................................................................. 45 Section 12.04 Loan Application.................................................................. 45 Section 12.05 Terms and Conditions of Loans..................................................... 45 Section 12.06 Maximum Loan...................................................................... 45 Section 12.07 Interest.......................................................................... 46 Section 12.08 Terms of Loan and Repayment....................................................... 46 Section 12.09 Risk of Loss...................................................................... 46 Section 12.10 Source of Loan Funds.............................................................. 47 Section 12.11 Debiting of Accounts.............................................................. 47 Section 12.12 Accounting for Loans.............................................................. 47 Section 12.13 Distributions While Loan Balance is Outstanding................................... 47 Section 12.14 Unpaid Balances at End of Sixty-Month Period...................................... 48 Section 12.15 Hardship Withdrawal in Bankruptcy................................................. 48 Section 12.16 Default........................................................................... 48 Section 12.17 Reductions in Force............................................................... 49 ARTICLE XIII - THE COMMITTEE................................................................................ 49 Section 13.01 Membership........................................................................ 49 Section 13.02 Committee's General Powers, Rights and Duties..................................... 49 Section 13.03 Manner of Action.................................................................. 50 Section 13.04 Information Required by Committee................................................. 51 Section 13.05 Committee Decision Final.......................................................... 51 Section 13.06 Review of Benefit Determinations.................................................. 51 Section 13.07 Uniform Rules..................................................................... 51 ARTICLE XIV - RELATING TO THE EMPLOYERS..................................................................... 51 Section 14.01 Action by Employers............................................................... 51 Section 14.02 Additional Employers.............................................................. 51 Section 14.03 Restrictions as to Reversion of Trust Assets to Employers......................... 52
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Page ---- ARTICLE XV - GENERAL PROVISIONS............................................................................. 52 Section 15.01 Notices........................................................................... 52 Section 15.02 Waivers........................................................................... 52 Section 15.03 Absence of Guaranty............................................................... 52 Section 15.04 No Employment Rights.............................................................. 52 Section 15.05 Interests Not Transferable........................................................ 53 Section 15.06 Facility of Payment............................................................... 53 Section 15.07 Distribution of Payment........................................................... 53 Section 15.08 Evidence.......................................................................... 53 Section 15.09 Indemnity......................................................................... 53 Section 15.10 Controlling State Law............................................................. 54 Section 15.11 Severability...................................................................... 54 Section 15.12 Successors........................................................................ 54 ARTICLE XVI - AMENDMENT, TERMINATION OR PLAN MERGER......................................................... 54 Section 16.01 Amendment......................................................................... 54 Section 16.02 Termination....................................................................... 55 Section 16.03 Plan Merger or Consolidation...................................................... 55 Section 16.04 Notice of Amendment, Termination or Plan Merger................................... 55 Section 16.05 Distribution on Termination....................................................... 55 ARTICLE XVII - TOP-HEAVY PROVISIONS......................................................................... 56 Section 17.01 Determination of Top-Heavy........................................................ 56 Section 17.02 Minimum Allocations............................................................... 57 Section 17.03 Compensation Limitation........................................................... 57 Section 17.04 Repeal, Modification or Postponement of Top-Heavy Provisions...................... 57 Section 17.05 Minimum Vesting................................................................... 57 Section 17.06 Key Employee...................................................................... 57 Section 17.07 Compensation...................................................................... 58
EXHIBITS Exhibit A - Investment Funds -iv- 6 STERLING CHEMICALS, INC. SIXTH AMENDED AND RESTATED SAVINGS AND INVESTMENT PLAN PRELIMINARY STATEMENTS A. Sterling Chemicals, Inc. (the "Corporation") established the Sterling Chemicals, Inc. Savings and Investment Plan (the "Original Plan") effective as of August 1, 1986, in recognition of the contributions of its employees to the operation of the Corporation. B. The Corporation has heretofore amended, and amended and restated, the Original Plan from time to time (as amended immediately prior to the date hereof, the "Existing Plan"). C. In connection with the acquisition of certain assets from Cytec Industries Inc. and certain of its affiliates (collectively, "Cytec") on January 31, 1997, the Corporation assumed the sponsorship of a plan created by the spin-off of the accounts of those participants under the Cytec Employees Savings and Profit Sharing Plan (the "Cytec Plan") who became employees of Sterling Fibers, Inc., a Delaware corporation and a wholly-owned subsidiary of the Corporation, and such plan was merged into the Existing Plan, as constituted on January 31, 1997. D. The Corporation desires to amend the Existing Plan in certain respects and restate the Existing Plan as so amended in its entirety. NOW, THEREFORE, the Corporation hereby amends and restates the Existing Plan, effective as of October 1, 2000, to read in its entirety as follows: ARTICLE I Purpose and Effect of Plan; Definitions and Interpretation Section 1.01. Purpose. This Plan is maintained by the Corporation and certain of its Affiliates to provide benefits for Eligible Employees and shall be administered for the exclusive benefit of the Participants and their Beneficiaries. Section 1.02. Effect of Amendment and Restatement. The Existing Plan is hereby amended and completely restated as set forth herein and all rights and benefits under this Plan shall hereafter be determined under the terms and provisions hereof; provided, however, that the amendment and restatement of the Existing Plan effected hereby shall not operate or be construed to deprive any Participant of any "protected benefit" (within the meaning of Section 411(d)(6) of the Code and the Regulations thereunder) that he or she may have had under the Existing Plan as in effect immediately prior to this amendment and restatement. Further, this amendment and restatement shall not operate or be construed to confer on or provide for any 7 Participant whose employment terminated for any reason prior to the Effective Date any additional or different rights or benefits than those to which he or she may have been entitled under the Existing Plan as in effect at the time his or her employment terminated, except as otherwise specifically provided herein or required by Law. Section 1.03. Certain Defined Terms. Capitalized terms used in this Plan shall have the following respective meanings, except as otherwise provided herein or as the context shall otherwise require: "60% Test" has the meaning specified in Section 17.01(a)(i). "414(s) Compensation" means, with respect to any Participant for any Plan Year, such Participant's Pre-Tax Contributions attributable to Deferred Compensation recharacterized as After-Tax Contributions pursuant to Section 5.08(a) plus 415 Compensation paid to such Participant during such Plan Year. The amount of 414(s) Compensation with respect to any Participant shall include 414(s) Compensation for the entire 12-month period ending on the last day of such Plan Year and shall include amounts which are contributed by any Employer pursuant to a salary reduction agreement and which are not includable in the gross income of the participant under Sections 125, 402(e)(3), 402(h), 403(b) or 457 of the Code and Employee contributions described in Section 414(h)(2) of the Code that are treated as Employer contributions; provided, however, that: (i) 414(s) Compensation in excess of the greater of $150,000 and the amount specified by the Secretary of the Treasury in accordance with Section 401(a)(17) of the Code (prorated for any Plan Year of less than 12 months) shall be disregarded; (ii) 414(s) Compensation shall be adjusted at the same time and in such manner as permitted under Section 415(d) of the Code (except that the dollar increase in effect on January 1 of any calendar year shall be effective for the Plan Year beginning with or within such calendar year); (iii) for any short Plan Year, the 414(s) Compensation limit shall be an amount equal to the 414(s) Compensation limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by 12; and (iv) in addition to other applicable limitations set forth in this Plan, and notwithstanding any other provision of this Plan to the contrary, the annual 414(s) Compensation of each Employee taken into account under this Plan shall not exceed the annual compensation limit as set forth in Section 5.03. "415 Compensation" means, with respect to any Participant for any Limitation Year, the "total compensation" (as defined in Section 415(c)(3) of the Code) actually paid to such Participant by the Employers during such Limitation Year plus any amounts that the Employers contributed on behalf of such Participant during such Limitation Year under any salary reduction arrangement which are excludable from gross income under Sections -2- 8 402(e)(3), 402(h)(1)(B), 403(b) or 125 of the Code; provided, however, that 415 Compensation in excess of the greater of $150,000 and the amount specified by the Secretary of the Treasury in accordance with Section 401(a)(17) of the Code (prorated for any Plan Year of less than 12 months) shall be disregarded. "Accounts" means, with respect to any Participant, such Participant's After-Tax Matched Contributions Account, After-Tax Supplemental Contributions Account, Cytec Accounts, Employer Matching Contributions Account, Historical Employer Matching Contributions Account, Pre-Tax Matched Contributions Account, Pre-Tax Supplemental Contributions Account or Rollover Account. "Accounting Dates" means each day that the New York Stock Exchange is open for trading. "Actual Contribution Percentage" means, with respect to any person or group as of any date of determination, the Actual Contribution Percentage for the relevant person or group at such time, as determined in accordance with Sections 4.03 and 4.04. "Actual Contribution Ratio" means, with respect to any Highly Compensated Participant for any Plan Year, the ratio of (i) such Highly Compensated Participant's Actual Contribution Percentage to (ii) the greater of: (A) 1.25 times the Actual Contribution Percentage for the Non-Highly Compensated Participant group for the immediately preceding Plan Year; and (B) the lesser of (x) 2.0 times the Actual Contribution Percentage for the Non-Highly Compensated Participant group for the immediately preceding Plan Year and (y) the Actual Contribution Percentage for the Non-Highly Compensated Participant group for the immediately preceding Plan Year plus two percentage points. "Actual Deferral Percentage" means, with respect to the Highly Compensated Participant group and the Non-Highly Compensated Participant group for any Plan Year, the Actual Deferral Percentage for such group for such Plan Year, as determined in accordance with Sections 5.07 and 5.08. "Actual Deferral Ratio" means, with respect to any Employee for any Plan Year, the ratio of (i) the amount of Pre-Tax Contributions allocated to such Employee's Pre-Tax Contributions Accounts (unreduced by distributions made pursuant to Section 5.03) for such Plan Year to (ii) such Employee's 414(s) Compensation for such Plan Year. "Adjudication of Bankruptcy" has the meaning specified in Section 12.15. "Affiliate" means (i) any corporation that is a member of a "controlled group of corporations" (as defined in Section 414(b) of the Code) that include the Corporation, (ii) any trade or business (whether or not incorporated) that is under "common control" (as -3- 9 defined in Section 414(c) of the Code) with the Corporation, (iii) any organization (whether or not incorporated) that is a member of an "affiliated service group" (as defined in Section 414(m) of the Code) that includes the Corporation and (iv) any other entity required to be aggregated with the Corporation pursuant to the Regulations under Section 414(o) of the Code. "After-Tax Contributions" means After-Tax Matched Contributions and After-Tax Supplemental Contributions. "After-Tax Contributions Accounts" means, with respect to any Participant, such Participant's After-Tax Matched Contributions Account and After-Tax Supplemental Contributions Account. "After-Tax Matched Contributions" has the meaning specified in Section 6.02. "After-Tax Matched Contributions Account" has the meaning specified in Section 8.01(c). "After-Tax Supplemental Contributions" has the meaning specified in Section 6.02. "After-Tax Supplemental Contributions Account" has the meaning specified in Section 8.01(d). "Aggregate Excess Contributions" means, for any Plan Year: (i) with respect to any Highly Compensated Participant, the amount of Aggregate Excess Contributions for such Highly Compensated Participant for such Plan Year, as determined pursuant to Section 4.03(d); and (ii) with respect to the Highly Compensated Participant group, the amount by which (A) the aggregate amount of Employer contributions, After-Tax Contributions, Excess Contributions recharacterized as After-Tax Contributions and any Qualified Non-Elective Contributions or Elective Deferrals taken into account on behalf of all Highly Compensated Participants for such Plan Year exceeds (B) the maximum amount of such contributions permitted under the limitations of Section 4.03(a). "Annual Additions" means, with respect to any Participant for any Limitation Year, the amount of Annual Additions for such Participant for such Limitation Year, as determined in accordance with Article VII. "Beneficiaries" means the persons, trusts, estates or other entities to whom a deceased Participant's benefits under this Plan are payable. "Code" means the Internal Revenue Code of 1986, as amended from time to time. -4- 10 "Committee" means the committee established under Article XIII of this Plan. "Company Stock" means the common stock, par value $0.01 per share, of Sterling Chemicals Holdings, Inc. (or its successor). "Company Stock Fund" has the meaning specified in Section 9.04. "Corporation" has the meaning specified in the Preliminary Statements hereof. "Correcting Contribution" has the meaning specified in Section 4.02(c). "Cytec" has the meaning specified in the Preliminary Statements hereof. "Cytec Accounts" has the meaning specified in Section 8.08. "Cytec Employees" has the meaning specified in Section 2.02(j). "Cytec Plan" has the meaning specified in the Preliminary Statements hereof. "Deferred Compensation" means, with respect to any Participant, the amount of such Participant's total Eligible Earnings which has been contributed to this Plan in accordance with such Participant's deferral election. "Direct Rollover" has the meaning specified in Section 10.07(d). "Distributee" has the meaning specified in Section 10.07(c). "Effective Date" means October 1, 2000. "Elective Deferral" has the meaning specified in Regulation 1.402(g)-I(b). "Eligible Earnings" means, with respect to any Participant for any applicable period, such Participant's cash compensation paid for services rendered to the Employers, including any elective salary reduction pursuant to Sections 401(k) and 129 of the Code, but only to the extent that such cash compensation does not exceed straight time pay plus overtime plus shift differential, exclusive of all other forms of premium pay; provided, however, that notwithstanding any other provision of this Plan to the contrary, (i) for Plan Years beginning on or after January 1, 1997, the annual Eligible Earnings of each Participant taken into account under this Plan shall not exceed $160,000, as adjusted for increases in the cost of living in accordance with Section 401(a)(17) of the Code, (ii) the cost of living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Eligible Earnings is determined beginning in such calendar year and (iii) if a determination period consists of fewer than 12 months, the annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. -5- 11 "Eligible Matched Earnings" means, with respect to any Participant for any applicable period, such Participant's cash compensation paid for services rendered to the Employers, including any elective salary reduction pursuant to Sections 401(k) and 129 of the Code, but only to the extent that such cash compensation does not exceed straight time pay, exclusive of all other forms of premium pay. "Eligible Employee" means an Employee who is not (i) a member of a collective bargaining unit, unless the bargaining agreement with the relevant Employer provides for his coverage, (ii) regularly scheduled to work outside the United States or (iii) a leased employee, as defined in Section 414(n) of the Code. "Eligible Rollover Distribution" has the meaning specified in Section 10.07(a). "Eligible Retirement Plan" has the meaning specified in Section 10.07(b). "Employee" means a person who is a common law employee of the Corporation or any Affiliate. "Employer Matching Contributions" means any contributions made by any Employer to an Employer Matching Contributions Account pursuant to Section 4.02. "Employer Matching Contributions Account" has the meaning specified in Section 8.07. "Employers" means the Corporation, Sterling Pulp Chemicals, Inc., Sterling Pulp Chemicals US, Inc., Sterling Fibers, Inc. and any other Affiliate which adopts this Plan. "ERISA" means Public Law 93-406, the Employee Retirement Income Security Act of 1974, as amended from time to time, or any comparable section or sections of future legislation that amends, supplements or supersedes any applicable provisions of ERISA or any other applicable regulations or court decisions thereunder. "Excess Contributions" means, with respect to any Highly Compensated Participant for any Plan Year, the amount of Excess Contributions for such Highly Compensated Participant for such Plan Year, as determined pursuant to Section 5.08(a). "Existing Plan" has the meaning specified in the Preliminary Statements hereof. "Extended Group" means all Affiliates and any other company, trade or business which would be included in the definition of Affiliate pursuant to Section 415(h) of the Code. "Five Percent Owner" means any person who owns (or is considered as owning within the meaning of Section 318 of the Code) more than 5% of the outstanding stock of an employer or stock possessing more than 5% of the total combined voting power of all stock of an employer or, in the case of an unincorporated business, any person who owns -6- 12 more than 1% of the capital or profits interest in an employer; provided, however, that in determining percentage ownership hereunder, employers that would otherwise be aggregated under Sections 414(b), (c), (m) and (o) of the Code shall be treated as separate employers. "Five Year Break in Service" means five or more consecutive One Year Breaks in Service. "Forfeiture" has the meaning specified in Section 10.06(a). "Highly Compensated Employee" means, as of the date of determination, any Employee or former Employee who is a "highly compensated employee" (as defined in Section 414(q) of the Code and the Regulations thereunder), including any Employee or former Employee that: (i) was at any time during the year of determination or the preceding year a Five Percent Owner of the Employer; or (ii) for the preceding year: (A) received 415 Compensation (as adjusted) from the Employer in excess of $80,000; and (B) was in the group consisting of the top 20% of Employees when ranked on the basis of 415 Compensation during such year. "Highly Compensated Participant" means any Highly Compensated Employee who is eligible to participate in this Plan. "Historical Employer Matching Contributions Account" means, with respect to any Participant, such Participant's Employer Matching Contributions Account in effect immediately prior to the amendment and restatement of the Existing Plan effected by this Plan. "Investment Funds" has the meaning specified in Section 9.01(a). "Hour of Service" has the meaning specified in Section 2.02(b). "Key Employee" has the meaning specified in Section 17.06. "Laws" means all laws, statutes, rules, regulations, ordinances, orders, writs, injunctions or decrees and other pronouncements having the effect of law of any governmental authority. "Layoff" means, with respect to any Participant, a layoff of such Participant from employment with an Employer or Affiliate. -7- 13 "Limitation Year" means the "limitation year" for purposes of Section 415 of the Code, which shall be a calendar year; provided, however, that for periods prior to January 1, 1996, the Limitation Year was a period of 12 months ending each September 30, with the period commencing October 1, 1995 and ending December 31, 1995 being a short Limitation Year. "Loan Account" has the meaning specified in Section 12.12. "Loan Fund" has the meaning specified in Section 9.01(b). "Long Term Disability" means, with respect to any Participant, that such Participant qualifies for long term disability benefits under a long term disability income plan of an Employer or an Affiliate or if the Committee determines that such Participant is unable to engage in any occupation or employment for remuneration or profit by reason of a bodily injury or disease which has existed for six continuous months and which disability the Committee presumes in its judgment will be permanent during the remainder of such Participant's life, exclusive of any disability resulting from service in the armed forces of any country, resulting from warfare or acts of the public enemy, intentional self-inflicted injury, willful misconduct or participation in any criminal or unlawful act. The Committee shall have the responsibility for determining whether a Participant has become disabled and may require medical proof of such disability, including requiring that the Participant submit to medical examination no more frequently than semi-annually. "Lump Sum Distribution" has the meaning specified in Section 10.03(a). "Lump Sum Deferral Option" has the meaning specified in Section 10.03(b)(ii). "Non-Highly Compensated Participant" means any Participant who is not a Highly Compensated Participant. "Normal Retirement Age" means, with respect to any Participant, the later of such Participant's 65th birthday or the fifth anniversary of the date such Participant's participation in this Plan commenced. "One Percent Owner" means any person who owns (or is considered as owning within the meaning of Section 318 of the Code) more than one percent of the outstanding stock of an employer or stock possessing more than one percent of the total combined voting power of all stock of an employer or, in the case of an unincorporated business, any person who owns more than one percent of the capital or profits interest in an employer; provided, however, that (i) in determining percentage ownership hereunder, employers that would otherwise be aggregated under Sections 414(b), (c), (m) and (o) of the Code shall be treated as separate employers. "One Year Break in Service" has the meaning specified in Section 2.02(d). -8- 14 "Original Plan" has the meaning specified in the Preliminary Statements hereof. "Participant" means any person who has an Account balance under this Plan. "Plan" means this Sixth Amended and Restated Savings and Investment Plan, as amended, supplemented or modified from time to time in accordance with its terms. "Plan Year" means a calendar year; provided, however, that for periods prior to January 1, 1996, the Plan Year was a period of 12 months ending each September 30, with the period commencing October 1, 1995 and ending December 31, 1995 being a short Plan Year. "Pre-Tax Contributions" means, with respect to any Participant, such Participant's Pre-Tax Matched Contributions and Pre-Tax Supplemental Contributions. "Pre-Tax Contributions Accounts" means, with respect to any Participant, such Participant's Pre-Tax Matched Contributions Account and Pre-Tax Supplemental Contributions Account. "Pre-Tax Matched Contributions" has the meaning specified in Section 5.02. "Pre-Tax Matched Contributions Account" has the meaning specified in Section 8.01(a). "Pre-Tax Supplemental Contributions" has the meaning specified in Section 5.02. "Pre-Tax Supplemental Contributions Account" has the meaning specified in Section 8.01(b). "Prior Employer" means The Monsanto Company. "Prior Plan" means the Monsanto Savings and Investment Plan. "Qualified Election" has the meaning specified in Section 10.05(c). "Qualified Non-Elective Contributions" has the meaning specified in Section 401(m)(4)(C) of the Code. "Regulations" means the Income Tax Regulations, as promulgated by the Secretary of the Treasury or his or her delegate, and as amended from time to time. "Related Defined Contribution Plans" has the meaning specified in Section 7.02. "Retirement" means, with respect any Participant, such Participant's ceasing to be an Employee (i) on or after reaching his or her Normal Retirement Age or (ii) in connection with his or her retirement under a defined benefit plan of Employer that is qualified under Section 401(a) of the Code. -9- 15 "Rollover Account" has the meaning specified in Section 8.01(e). "Settlement Dates" means, with respect to any Participant, the Accounting Date following the date on which such Participant's employment with all Employers and Affiliates is terminated for any reason, including retirement, disability, death, resignation or dismissal. "Standard Work Week" means (i) with respect to any regular, full-time Employee, 40 Hours of Service, and (ii) with respect to any Employee who is not a regular, full-time Employee, the average number of hours which are regularly scheduled to be worked each week by such Employee. "Terminated ESOP" means the Sterling Chemicals, Inc. Employee Stock Ownership Plan, which was terminated as of August 21, 1996. "Top Heavy Plan" has the meaning specified in Section 17.01(a). "Total and Permanent Disability" means, as determined by the Committee, a Participant's complete inability to substantially perform each of the material duties of any gainful occupation for which the Participant is reasonably qualified by reason of his education, training or experience, which condition is reasonably expected to continue for an extended period of time. "Trust" means the trust established under the Trust Agreement. "Trust Agreement" means one or more trust agreements pursuant to which the Trustee shall hold and invest the funds accumulated under this Plan and that implement and form a part of this Plan. "Trust Fund" means any and all assets of this Plan which are held by the Trustee in accordance with this Plan and the Trust Agreement. "Trustee" means one or more corporate trustees appointed by the Committee or another Trustee who shall hold and invest the funds accumulated under this Plan and who shall act in accordance with the Trust Agreement. "Vesting Computation Period" means each calendar year. -10- 16 "Vesting Percentage" means, with respect to any Participant, the percentage set forth in the following table opposite the number of such Participant's Years of Service with the Employers and Affiliates:
Years of Service Vesting Percentage ---------------- ------------------ Less than 1 year.....................................................0% 1 year but less than 2 years........................................20% 2 years but less than 3 years.......................................40% 3 years but less than 4 years.......................................60% 4 years but less than 5 years.......................................80% 5 years or more....................................................100%
"Year of Service" has the meaning specified in Section 2.02(a). Section 1.04. Interpretation. In this Plan, unless a clear contrary intention appears: (a) the words "hereof," "herein" and "hereunder" and words of similar import refer to this Plan as a whole and not to any particular provision of this Plan; (b) reference to any gender includes each other gender and the neuter; (c) all terms defined in the singular shall have the same meanings in the plural and vice versa; (d) all references to Articles and Sections shall be deemed to be references to the Articles and Sections of this Plan; (e) the word "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; (f) with respect to the determination of any period of time, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding"; (g) the captions and headings contained in this Plan shall not be considered or given any effect in construing the provisions hereof if any question of intent should arise; and (h) reference to any Law means such Law as amended, modified, codified, reenacted, supplemented or superseded in whole or in part, and in effect from time to time. ARTICLE II Participation Section 2.01. Eligibility. Each Employee who was eligible to participate in the Existing Plan on the date immediately prior to the Effective Date shall continue to be eligible to -11- 17 participate in this Plan. Thereafter, each Employee will be eligible to become a Participant (in the manner described in Section 2.03) on any Accounting Date on which he or she is an Eligible Employee. If an Eligible Employee does not elect to become a Participant as of the first Accounting Date on which he or she is eligible to do so, such Eligible Employee may join this Plan on any subsequent Accounting Date; provided, however, that he or she is then an Eligible Employee. Section 2.02. Service. In determining Years of Service, the following rules shall apply: (a) A "Year of Service" means a period of twelve consecutive months during which an Employee has completed at least 1,000 Hours of Service and, if an Employee was employed by an Employer on August 1, 1986, Years of Service shall include Years of Service as determined under the Prior Plan as of that date. A Participant who completes at least 1,000 Hours of Service in both (i) the period beginning October 1, 1995 and ending September 30, 1996 and (ii) the calendar year beginning January 1, 1996, shall be credited with two Years of Service for purposes of vesting under this Plan. (b) An "Hour of Service" means an hour for which an Employee is directly or indirectly compensated by any Employer or Affiliate for the performance of duties for an Employer or an Affiliate (including hours for which an Employee has been awarded back pay by any Employer or Affiliate or by any governmental agency or judicial body to the extent such hours are not otherwise treated as Hours of Service). Notwithstanding the preceding sentence, the following special rules shall apply: (i) To the extent not otherwise treated as Hours of Service, the following shall constitute Hours of Service: (A) overtime clock hours; (B) Hours of Service required to be taken into account to satisfy federal military service Laws or to satisfy any other federal Laws; (C) hours of absence from active work because of regular paid vacations or holidays; (D) hours of absence from active work because of occupational illness or disability not yet determined to constitute Long Term Disability; (E) hours of absence from active work during the first 12 months of an absence due to non-occupational illness or disability not yet determined to constitute Long Term Disability or due to a Layoff; provided, however, that the Participant returns to work with an Employer or an Affiliate at the expiration of such absence or Layoff; -12- 18 (F) hours during an approved leave of absence or such shorter period during such leave of absence as may be specified by an Employer; and (G) for any Employee who immediately prior to August 1, 1986 was employed by the Prior Employer, Hours of Service shall include those hours which were recognized and counted under the Prior Plan, as adopted and in effect on July 31, 1986. (ii) During the absences from employment during which no duties are performed for any Employer or Affiliate as specified above, an Employee will be credited with the number of Hours of Service such Employee would have worked for an Employer or Affiliate during a Standard Work Week if such Employee had reported for work during each week of absence, subject, however, to Section 2.02(b)(iii). No more than eight Hours of Service shall be credited for any day of absence and no more than 1,000 Hours of Service shall be awarded under this Section in any one Vesting Computation Period. (iii) No Hours of Service shall be credited to an Employee: (A) during any period of Layoff in excess of 12 months; (B) during any absence for which the Employee performs no duties and is solely compensated under, or by a plan established pursuant to, applicable workers' compensation laws, unemployment compensation or disability income Laws of any state; (C) during any period during which an Employee or former Employee is in receipt of retirement benefits under any plan established by any Employer or Affiliate (or to which any such entity contributes) unless or until such Employee or former Employee ceases drawing such benefits and performs services for any Employer or Affiliate; (D) for any payment made solely to reimburse an Employee for medical or medically related benefits; (E) for any payment made on account of pay in lieu of vacation; (F) for any Hours of Service in excess of the Standard Work Week (pro-rated) on account of payments made as back-pay awards or agreement in amounts in excess of the standard rate of compensation which would have been made if the Employee had actually worked during the period at issue; or (G) for any Hours of Service in excess of the Standard Work Week (pro-rated) on account of any other payment made during an absence set forth in this Section. -13- 19 (iv) Effective May 1, 1996, in determining the Hours of Service of any Employee, such Employee will be credited with 95 Hours of Service for each semi-monthly payroll period in which such Employee is directly or indirectly compensated by any Employer or Affiliate for the performance of duties for any Employer or Affiliate. (v) Once it is determined that an Employee should be credited with an Hour of Service, such Hour of Service shall be credited to the computation period or periods in which the duties are performed or are deemed to have been performed or to which the payment pertains; provided, however, that, except as may be otherwise provided in this Section 2.02 for certain specified types of absences, no more than 501 Hours of Service shall be credited during any absence from employment during which no services are rendered, notwithstanding the fact that the Employee may have been deemed to have performed services or for which payments are due. (c) If an Employee's employment with all of the Employers and Affiliates terminates and such Employee is later re-employed without incurring a One Year Break in Service, such Employee's Years of Service both before employment termination and after reemployment shall be aggregated for purposes of this Plan. (d) For purposes of this Plan, a "One Year Break in Service" means a Vesting Computation Period in which an Employee completes not more than 500 Hours of Service, except where such Vesting Computation Period is the year in which the Employee either: (i) first commenced employment with any Employer or Affiliate and continuously accrued Hours of Service from the date of hire to the end of such Vesting Computation Period; or (ii) terminated all further employment with the Employers and Affiliates following an unbroken, continuous accrual of Hours of Service from the first day of such Vesting Computation Period to the date of such termination. In determining whether a One Year Break in Service has occurred, Hours of Service will be credited pursuant to the normal method of crediting Hours of Service under this Plan, not to exceed 501 Hours of Service due to any period of absence from employment due to: (A) the pregnancy of the Participant; (B) the birth of a child of the Participant; (C) the placement of a child with the Participant in connection with the adoption of such child by such Participant; or -14- 20 (D) the care of such child by the Participant immediately following such birth or placement. The Hours of Service to be credited under this paragraph (d) shall only be credited in the Vesting Computation Period in which the absence from work begins, if a Participant would be prevented from incurring a One Year Break in Service solely because the period of absence is treated as Hours of Service or, in any other case, in the immediately following Vesting Computation Period. No credit for such enumerated absences shall be given pursuant to this paragraph (d) unless the Participant furnishes the Committee with such timely information as the Committee may reasonably require to establish that the absence and the length of the absence was due to an enumerated reason. (e) The termination of an Employee's employment with one Employer or Affiliate will not interrupt the continuity of such Employee's employment if, concurrently with or immediately after such termination, such Employee is employed by one or more other Employers or Affiliates. (f) If and to the extent the Committee so provides, the last continuous period of an Employee's service with any corporation or other entity, the stock, assets or business of which is acquired by an Employer (whether by merger, consolidation, purchase of assets or otherwise), and any predecessor thereto designated by the Corporation, will be considered as service with the Employers if such Employee becomes employed by one or more of the Employers. (g) For purposes of this Section 2.02, if an Employee had a prior period or periods of service with an Affiliate that has not adopted this Plan, such period or periods of service with the Affiliate will be considered as service with an Employer. (h) A period of concurrent service with two or more Employers under this Plan or Affiliates that have not adopted this Plan will be considered as employment with only one of them during that period. (i) If an Employee incurs a Five Year Break in Service and is subsequently re-employed by any Employer or Affiliate, such Employee's Years of Service after such Five Year Break in Service shall not be taken into account when determining his or her Vesting Percentage applicable to the portion of his or her Employer Matching Contributions Account balance which is attributable to his or her employment prior to such Five Year Break in Service. However, such an Employee's Years of Service before and after his Five Year Break in Service shall be aggregated for purposes of determining his or her Vesting Percentage applicable to the portion of his or her Employer Matching Contributions Account balance which is attributable to employment subsequent to such Five Year Break in Service. (j) Employees of Cytec who became Employees on February 1, 1997 ("Cytec Employees") shall receive credit for all purposes under this Plan for all service that was credited under the Cytec Plan as of January 31, 1997. -15- 21 (k) Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code. Section 2.03. Notice of Eligibility; Election of Participation. The Committee will notify an Employee of the circumstances under which such Employee will be eligible to participate in this Plan and the steps required for participation. The Committee will also notify each person that first becomes an Eligible Employee on or after October 2, 2000 that, unless and until the earlier of (a) such Employee making an election to participate in this Plan at a specified rate or to not participate in this Plan and (b) such Employee ceasing to be an Eligible Employee, the Corporation will deduct 3% of such Employee's Eligible Compensation from each of such Employee's paychecks, and contribute such amounts to this Plan on behalf of such Employee as Pre-Tax Contributions (with such amounts being invested in the ML Retirement Preservation Trust until redirected into another Investment Fund by the relevant Participant). ARTICLE III Period of Participation Section 3.01. Change in Participant's Status. If a Participant ceases to be an Eligible Employee, such Participant shall not be entitled to make any additional contributions to this Plan unless such Participant again becomes an Eligible Employee. Section 3.02. Restricted Participation. When payment of all of a Participant's benefits is not made at his or her Settlement Date, such Participant or, in the event of his or her death, such Participant's Beneficiary will be considered as a Participant for all purposes of this Plan, except that: (a) a Beneficiary of a deceased Participant cannot designate a beneficiary under Section 10.05; (b) a Beneficiary of a deceased Participant shall not be entitled to retain Accounts in this Plan except to the extent permitted by Section 10.04(c); (c) such persons cannot make contributions to this Plan; and (d) such persons cannot take out loans or make in-service withdrawals that are available only to Participants who are Employees. ARTICLE IV Form of Participation Section 4.01. Participant Contribution Options. Each Participant who is an Eligible Employee shall have the right to make Pre-Tax Contributions pursuant to Article V, After-Tax Contributions pursuant to Article VI or both. -16- 22 Section 4.02. Employer Matching Contributions. (a) Each Employer shall make Employer Matching Contributions to this Plan, determined by the Pre-Tax Contributions made by such Employer on behalf of the Participants to the Pre-Tax Contributions Accounts or the After-Tax Contributions made by such Employer on behalf of the Participants to the After-Tax Contributions Accounts as specified herein. Employer Matching Contributions with respect to any Participant shall first be used to match such Participant's Pre-Tax Contributions. All Employer Matching Contributions made to this Plan shall be allocated to such Participant's Employer Matching Contributions Account. (b) Except as otherwise provided in Article V or Article VI, for each pay period, the Employers will make Employer Matching Contributions under this Plan in an amount equal to 50% of the Pre-Tax Matched Contributions and After-Tax Matched Contributions made for such pay period minus the aggregate amounts of any outstanding Forfeitures. Employer Matching Contributions for any pay period shall be paid to the Trustee at the same time and in the same manner as Pre-Tax Matched Contributions and After-Tax Matched Contributions are paid to the Trustee. (c) In addition to the Employer Matching Contributions described in paragraph (b) above, the Employers may make such additional contributions to this Plan as may be necessary to correct any error which occurs in the administration of this Plan (a "Correcting Contribution"). Any Correcting Contribution which relates to correction of an investment loss occasioned by the administration of the Accounts under the Plan shall not constitute an Annual Addition to this Plan under Article VII and shall not be deemed Employer Matching Contributions for purposes of this Section or Sections 8.07, 8.09 and 9.02 hereof. A Correcting Contribution which relates to errors made by the Corporation in crediting the proper amount of Employer Matching Contributions to a Participant's account for any Plan Year under this Section or Sections 8.07, 8.09 or 9.02 shall be attributable to the Annual Addition for the Plan Year to which such Correcting Contribution relates and which may not be the Plan Year in which such Correcting Contribution is made. (d) Notwithstanding anything in Article V, VII or VII to the contrary, the Employers shall not make Employer Matching Contributions in an amount in excess of the amount which will be deductible by the Employers under Section 404 of the Code for the taxable year with respect to which such contributions are made. Section 4.03. Actual Contribution Percentage Tests. (a) The Actual Contribution Percentage for the Highly Compensated Participant group for any Plan Year shall not exceed the greater of: (i) 1.25 times the Actual Contribution Percentage for the Non-Highly Compensated Participant group for the immediately preceding Plan Year; and (ii) the lesser of (A) 2.0 times the Actual Contribution Percentage for the Non-Highly Compensated Participant group for the immediately preceding Plan Year and (B) the Actual Contribution Percentage for the Non-Highly Compensated Participant group for the immediately preceding Plan Year plus two percentage points; -17- 23 provided, however, that in order to prevent the multiple use of the alternative method described in clause (ii) above and Section 401(m)(9)(A) of the Code, any Highly Compensated Participant eligible to make Elective Deferrals pursuant to any cash or deferred arrangement maintained by any Employer and to make Employee contributions or to receive matching contributions under this Plan or any other plan maintained by any Employer shall have his or her Actual Contribution Ratio reduced pursuant to Regulation 1.401(m)-2. The provisions of Section 401(m) of the Code and Regulations 1.401(m)-1(b) and 1.401(m)-2 are incorporated herein by reference. (b) For purposes of this Section 4.03 and Section 4.04, the Actual Contribution Percentage for a Plan Year with respect to the Highly Compensated Participant group and the Non-Highly Compensated Participant group is the average of the ratios (calculated separately for each Participant in each group) of: (i) the sum of (A) all Employer Matching Contributions made pursuant to Section 4.02 plus (B) all After-Tax Contributions made pursuant to Section 6.02 plus (C) all Excess Contributions characterized as After-Tax Contributions pursuant to Section 5.08(a) on behalf of such Participant (determined with respect to the current Plan Year for a Highly Compensated Participant and with respect to the immediately preceding Plan Year for a Non-Highly Compensated Participant); to (ii) such Participant's 414(s) Compensation for such Plan Year. (c) In the event that the Actual Contribution Percentage test under Section 4.03(a) for any Plan Year is not satisfied, the Actual Contribution Ratio of the Highly Compensated Participant with the highest Actual Contribution Ratio will be reduced (or if two or more Highly Compensated Participants have the highest Actual Contribution Ratio, the Actual Contribution Ratios of all of such Highly Compensated Participants will be reduced pro rata) by reducing the amount of After-Tax Contributions and Employer Matching Contributions made by or on behalf such Highly Compensated Participant in the order specified in Section 4.04(a) until either the Actual Contribution Percentage test is satisfied or such Highly Compensated Participant's Actual Contribution Ratio is equal the Actual Contribution Ratio of the Highly Compensated Participant(s) with the next highest Actual Contribution Ratio. This process shall be repeated until the Actual Contribution Percentage test under Section 4.03(a) is satisfied for such Plan Year. The amount of "Aggregate Excess Contributions" for any Highly Compensated Participant is equal to the sum of these hypothetical reductions multiplied, in each case, by such Highly Compensated Participant's compensation. (d) The distribution (or Forfeiture, if applicable) of Aggregate Excess Contributions shall be made on the basis of the respective amounts attributable to each Highly Compensated Participant. The Highly Compensated Participants subject to actual distribution or Forfeiture in any Plan Year shall be determined using the "dollar leveling method" starting with the Highly Compensated Participant with the greatest dollar amount of employee contributions for such Plan Year and continuing until the amount of the Aggregate Excess Contributions has been accounted for. -18- 24 (e) For purposes of determining Actual Contribution Percentage and the amount of Aggregate Excess Contributions pursuant to Section 4.03(d), only Employer Matching Contributions (excluding those Forfeited pursuant to Section 4.04(a)) contributed to this Plan prior to the end of the succeeding Plan Year shall be considered. In addition, the Committee may elect to take into account, with respect to Employees eligible to have Employer Matching Contributions or After-Tax Contributions allocated to their accounts, Elective Deferrals and Qualified Non-Elective Contributions contributed to any plan maintained by any Employer. Such Elective Deferrals and Qualified Non-Elective Contributions shall be treated as Employer Matching Contributions subject to Regulation 1.401(m)-I(b)(5), which is incorporated herein by reference. However, the Plan Year must be the same as the plan year of the plan to which such Elective Deferrals and Qualified Non-Elective Contributions are made. Qualified Non-Elective Contributions shall be non-forfeitable when made and subject to the provisions of Section 5.06. (f) For purposes of this Section 4.03 and Sections 401(a)(4), 410(b) and 401(m) of the Code, if two or more plans of the Employers to which matching contributions, Employee contributions or both are made are treated as one plan for purposes of Sections 401(a)(4) or 410(b) of the Code (other than the average benefits test under Section 410(b)(2)(A)(ii) of the Code), such plans shall be treated as one plan. In addition, two or more plans of the Employers to which matching contributions, Employee contributions or both are made may be considered as a single plan for purposes of determining whether or not such plans satisfy Sections 401(a)(4), 410(b) and 401(m) of the Code. In such a case, the aggregated plans must satisfy this Section and Sections 401(a)(4), 410(b) and 401(m) of the Code as though such aggregated plans were a single plan. Plans may be aggregated under this paragraph (f) only if they have the same plan year. (g) If a Highly Compensated Participant is a participant under two or more plans which are maintained by the Employers to which matching contributions, Employee contributions or both are made, all such contributions on behalf of such Highly Compensated Participant shall be aggregated for purposes of determining such Highly Compensated Participant's Actual Contribution Ratio. However, if the plans have different plan years, this paragraph (g) shall be applied by treating plans ending with or within the same calendar year as a single plan. For purposes of this paragraph (g), contributions under a plan that is an employee stock ownership plan described in Section 4975(e)(7) or 409 of the Code may not be aggregated with contributions under a plan that is not an employee stock ownership plan. (h) For purposes of this Section 4.03 and Section 4.04, the Highly Compensated Participants and the Non-Highly Compensated Participants for any Plan Year shall include any Employee eligible to have Employer Matching Contributions or After-Tax Contributions allocated to his or her account for such Plan Year. For purposes of this Section 4.03, an Employee who is eligible to have Employer Matching Contributions allocated to his or her account includes (i) any Employee who would be a Participant but for the failure to make required contributions, (ii) any Employee whose eligibility to receive Employer Matching Contributions has been suspended because of an election (other than certain one-time elections) -19- 25 not to participate, a distribution or a loan, (iii) any Employee who cannot receive Employer Matching Contributions because of the limits under Section 415 of the Code and (iv) any Employee who, although otherwise eligible, does not elect to participate in this Plan. Section 4.04.Adjustment to Actual Contribution Percentage Tests. (a) In the event that the Actual Contribution Percentage for the Highly Compensated Participant group exceeds the Actual Contribution Percentage for the Non-Highly Compensated Participant group pursuant to Section 4.03(a), the Committee (on or before the 15th day of the third month following the end of the Plan Year, but in no event later than the close of the following Plan Year) shall direct the Trustee to distribute to each Highly Compensated Participant whose Actual Contribution Ratio was hypothetically reduced pursuant to Section 4.03(c), the vested portion of such Highly Compensated Participant's Aggregate Excess Contributions (and income allocable to such contributions) and, if forfeitable, forfeit any non-vested Aggregate Excess Contributions of such Highly Compensated Participant attributable to Employer Matching Contributions (and income allocable to such Forfeitures). The distribution and/or Forfeiture of Aggregate Excess Contributions shall be made in the following order: (i) first, After-Tax Contributions including Excess Contributions recharacterized as After-Tax Contributions pursuant to Section 5.08(a); and (ii) second, Employer Matching Contributions. With respect to the distribution of After-Tax Contributions pursuant to clause (i) above, such distribution shall be made first from unmatched After-Tax Contributions and, thereafter, from After-Tax Contributions which are matched. Employer Matching Contributions which relate to such After-Tax Contributions shall be forfeited. (b) Any distribution and/or Forfeiture of less than the entire amount of Aggregate Excess Contributions (and income) shall be treated as a pro rata distribution and/or Forfeiture of Aggregate Excess Contributions and income thereon. Distribution of Aggregate Excess Contributions shall be designated by the Employer as a distribution of Aggregate Excess Contributions (and income). Forfeitures of Aggregate Excess Contributions shall be treated in accordance with Section 8.09. (c) Aggregate Excess Contributions attributable to amounts other than After-Tax Contributions, including forfeited matching contributions, shall be treated as Employer contributions for purposes of Sections 404 and 415 of the Code, even if distributed from this Plan. Forfeited matching contributions that are reallocated to Participants' Accounts for the Plan Year in which the Forfeiture occurs shall be treated as an Annual Addition for the Participants to whose Accounts they are reallocated and for the Participants from whose Accounts they are forfeited. (d) The determination of the amount of Aggregate Excess Contributions with respect to any Plan Year shall be made after first determining the Excess Contributions, if any, to be treated as After-Tax Contributions due to recharacterization for the Plan Year of any other "qualified cash or deferred arrangement" (as defined in Section 401(k) of the Code) maintained by the Employer that ends with or within the Plan Year or which are treated as After-Tax Contributions due to recharacterization pursuant to Section 5.08(a). -20- 26 (e) If, during a Plan Year, the projected aggregate amount of Employer Matching Contributions, After-Tax Contributions and Excess Contributions to be recharacterized as After-Tax Contributions to be allocated to all Highly Compensated Participants under this Plan would, by virtue of the tests set forth in Section 4.03(a), cause this Plan to fail such tests, then the Committee may automatically reduce, in the order provided in Section 4.03(d), each affected Highly Compensated Participant's projected share of such contributions by an amount necessary to satisfy one of the tests set forth in Section 4.03(a). Section 4.05. Discontinuance and Resumption of Contributions. Effective the first day of the next available payroll period, a Participant may: (a) elect to discontinue making After-Tax Contributions in accordance with Section 6.02 and have his or her Employer discontinue making Pre-Tax Contributions on his or her behalf in accordance with Section 5.02; or (b) elect to resume making After-Tax Contributions and have his or her Employer resume making Pre-Tax Contributions on his or her behalf. A resumption of contributions may only be made if the Participant then meets the eligibility requirements of Article II. The Participant's specified Investment Funds (both After-Tax Contributions and Pre-Tax Contributions) and the percentage thereof, and his or her Beneficiary designation in effect at the time of discontinuance, shall remain the same unless the Participant has elected to make such changes as provided in this Plan. ARTICLE V Pre-Tax Contributions Section 5.01. Eligibility. Each Participant who is an Eligible Employee shall have the right to make Pre-Tax Contributions to this Plan. Section 5.02. Pre-Tax Contributions. Each Participant shall specify the amount by which his or her Eligible Earnings shall be reduced by his or her Employer and contributed to this Plan on his or her behalf; provided, however, that such Participant may not direct that more than 20% of his or her Eligible Earnings be contributed to this Plan as Pre-Tax Contributions or After-Tax Contributions, on a combined basis. The first 7% of a Participant's contributions based upon his or her Eligible Matched Earnings shall be considered "Pre-Tax Matched Contributions". Pre-Tax Matched Contributions shall be contributed by the Employer on behalf of a Participant to such Participant's Pre-Tax Matched Contributions Account. All remaining Pre-Tax Contributions made by the Employer on behalf of such Participant shall be considered "Pre-Tax Supplemental Contributions" and shall be contributed by the Employer on behalf of such Participant to such Participant's Pre-Tax Supplemental Contributions Account. -21- 27 Section 5.03. Limitation on Pre-Tax Contributions. (a) Notwithstanding anything to the contrary contained in Sections 5.01 or 5.02, no Employer may make any Pre-Tax Contributions on behalf of any Participant for any pay period which will cause the limitations of either Section 5.07 or 7.01 to be exceeded. A Participant's Deferred Compensation made pursuant to this Plan and all other plans, contracts or arrangements of the Employers and Affiliates shall not exceed, during any taxable year of the Participant, the limitation imposed by Section 402(g) of the Code, as in effect at the beginning of such taxable year. The dollar limitation shall be adjusted annually pursuant to the method provided in Section 415(d) of the Code in accordance with the Regulations. (b) If a Participant's Deferred Compensation under this Plan, together with any Elective Deferrals under another "qualified cash or deferred arrangement" (as defined in Section 401(k) of the Code), a "simplified employee pension" (as defined in Section 408(k) of the Code), a "salary reduction arrangement" (within the meaning of Section 3121(a)(5)(D) of the Code), a "deferred compensation plan" under Section 457 of the Code or a trust described in Section 501(c)(18) of the Code, cumulatively exceed the limitation imposed by Section 402(g) of the Code (as adjusted annually in accordance with the method provided in Section 415(d) of the Code pursuant to the Regulations) for such Participant's taxable year, such Participant may, not later than March 1 following the close of such taxable year, notify the Committee in writing of such excess and request that his or her Deferred Compensation under this Plan be reduced by an amount specified by such Participant. In such event, the Committee may direct the Trustee to distribute such excess amount, and any income allocable to such amount, to such Participant not later than the first April 15th following the close of such Participant's taxable year. Any distribution of less than the entire amount of excess Deferred Compensation and income shall be treated as a pro rata distribution of excess Deferred Compensation and income. The amount distributed shall not exceed such Participant's Deferred Compensation under this Plan for such taxable year. Any distribution on or before the last day of such Participant's taxable year must satisfy each of the following conditions: (i) the distribution must be made after the date on which this Plan received the excess Deferred Compensation; (ii) such Participant shall designate the distribution as excess Deferred Compensation; and (iii) this Plan must designate the distribution as a distribution of excess Deferred Compensation. Any distribution made pursuant to this Section 5.03 shall be made first from unmatched Deferred Compensation and, thereafter, simultaneously from Deferred Compensation which is matched and matching contributions which relate to such Deferred Compensation; provided, however, that any such matching contributions which are not vested shall be forfeited in lieu of being distributed. Section 5.04. Deduction of Pre-Tax Contributions. The contributions made by an Employer on behalf of a Participant in accordance with Section 5.02 shall be made at regular -22- 28 payroll intervals and shall be paid to the Trustee as soon as practicable after the end of the payroll period for which such contributions were made. The Employer shall collect and withhold any Social Security, federal or state unemployment taxes, other payroll taxes and any state or local income or earnings taxes which are imposed on Pre-Tax Contributions and shall pay such amounts to the applicable government authorities in a timely manner. Section 5.05. Cessation of Pre-Tax Contributions. Except as otherwise provided herein, no contributions shall be made for any pay period which begins after a Participant ceases to be an Eligible Employee. Section 5.06. Distribution of Pre-Tax Contributions. Amounts held in a Participant's Pre-Tax Contributions Accounts may not be distributable prior to the earlier of: (a) such Participant's retirement, disability, death or separation from service; (b) such Participant's attainment of age 59 1/2; (c) termination of this Plan without establishment of a "successor plan" (as described in Regulation 1.401(k)-1(d)(3)) by any Employer or Affiliate; (d) the date of the sale by an Employer to an entity that is not an Affiliate of substantially all of the assets of an Employer's trade or business (within the meaning of Section 409(d)(2) of the Code) with respect to a Participant who continues employment with the entity acquiring such assets; or (e) the date of the sale by an Employer or Affiliate of its interest in a subsidiary (within the meaning of Section 409(d)(3) of the Code) to an entity which is not an Affiliate with respect to a Participant who continues employment with such subsidiary. Section 5.07. Actual Deferral Percentage Tests. (a) For each Plan Year, the annual allocation derived from Pre-Tax Contributions to a Participant's Pre-Tax Contributions Accounts shall satisfy one of the following tests: (i) the Actual Deferral Percentage for the Highly Compensated Participant group for such Plan Year shall not be more than the Actual Deferral Percentage of the Non-Highly Compensated Participant group for the immediately preceding Plan Year multiplied by 1.25, or (ii) the excess of the Actual Deferral Percentage for the Highly Compensated Participant group for such Plan Year over the Actual Deferral Percentage for the Non-Highly Compensated Participant group for the immediately preceding Plan Year shall not be more than two percentage points. Additionally, the Actual Deferral Percentage for the Highly Compensated Participant group for such Plan Year shall not exceed the Actual Deferral Percentage for the Non-Highly Compensated Participant group for the immediately preceding Plan Year multiplied by two. The provisions of Section 401(k)(3) of the Code and Regulation 1.401(k)-I(b) are incorporated herein by reference. -23- 29 To prevent the multiple use of the alternate method described in clause (ii) above and in Section 401(m)(9)(A) of the Code, any Highly Compensated Participant eligible to make Pre-Tax Contributions pursuant to Section 5.02 of this Plan or under any other plan maintained by any Employer or Affiliate shall have his or her Actual Contribution Ratio reduced pursuant to Regulation 1.401(m)-2, the provisions of which are incorporated herein by reference. A Pre-Tax Contribution shall be taken into account for purposes of the Actual Deferral Percentage test for a Plan Year only if it relates to compensation that either would have been received by an Employee in such Plan Year (but for the deferral election) or is attributable to services performed by the Employee in the Plan Year and would have been received by the Employee within 2 1/2 months after the close of the Plan Year (but for the deferral election). In addition, a Pre-Tax Contribution shall be taken into account for purposes of the Actual Deferral Percentage test for a Plan Year only if it is allocated to the Employee as of a date within such Plan Year. For this purpose, a Pre-Tax Contribution is considered allocated as of a date within a Plan Year if the allocation is not contingent on participation or performance of services after such date and the Pre-Tax Contribution is actually paid to the Trust no later than 12 months after the Plan Year to which the contribution relates. (b) For purposes of this Plan, the Actual Deferral Percentage of the Highly Compensated Participant group and the Non-Highly Compensated Participant group for a Plan Year is the average of the Actual Deferral Ratios of all Employees in the relevant group. The Actual Deferral Ratio for each Employee and the Actual Deferral Percentage for each group shall be calculated to the nearest 1/100th of 1%. (c) For purposes of this Section 5.07, if two or more plans (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code) that include cash or deferred arrangements are considered one plan for the purposes of Section 401(a)(4) or 410(b) of the Code (other than Section 410(b)(2)(A)(ii) of the Code), the cash or deferred arrangements included in such plans shall be treated as one arrangement. (d) For purposes of this Section 5.07, if a Highly Compensated Participant is a participant under two or more cash or deferred arrangements of the Employers or Affiliates (other than a cash or deferred arrangement that is part of an employee stock ownership plan as defined in Section 4975(e)(7) of the Code), all such cash or deferred arrangements shall be treated as one cash or deferred arrangement for the purpose of determining the Actual Deferral Percentage of such Highly Compensated Participant; provided, however, that if the cash or deferred arrangements have different plan years, this paragraph (d) shall be applied by treating all cash or deferred arrangements ending with or within the same calendar year as a single arrangement. (e) Notwithstanding anything to the contrary contained in this Section 5.07, the determination and treatment of Pre-Tax Contributions and the Actual Deferral Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. -24- 30 (f) For purposes of this Section 5.07, (i) the Highly Compensated Participant group and the Non-Highly Compensated Participant group for any Plan Year shall include each Employee who is directly or indirectly eligible to make a Pre-Tax Contribution, whether or not such Pre-Tax Contribution was made, and (ii) Employees who are eligible to make a Pre-Tax Contribution include (A) any Employee who would be a Participant but for the failure to make required contributions, (B) any Employee whose eligibility to make Pre-Tax Contributions has been suspended because of an election (other than certain one-time elections) not to participate, a distribution or a loan, (C) any Employee who cannot make Pre-Tax Contributions because of the limits under Section 415 of the Code and (D) any Employee who, although otherwise eligible, does not elect to participate in this Plan. Section 5.08. Adjustment to Actual Deferral Percentage Tests. In the event that the initial allocations of the Pre-Tax Contributions made pursuant to Section 5.02 do not satisfy one of the tests set forth in Section 5.07(a), the Committee shall adjust the Pre-Tax Contributions pursuant to the options set forth below: (a) On or before the 15th day of the third month following the end of each Plan Year, the Excess Contributions for the Highly Compensated Participant group shall be determined by (i) reducing the Actual Deferral Ratio of the Highly Compensated Participant having the highest Actual Deferral Ratio until either the Actual Deferral Percentage test set forth in Section 5.07(a) is satisfied or such Highly Compensated Participant's Actual Deferral Ratio is equal the Actual Deferral Ratio of the Highly Compensated Participant with the next highest Actual Deferral Ratio. This process shall be repeated until the Actual Deferral Percentage test under Section 5.07(a) is satisfied for such Plan Year. The amount of "Excess Contributions" for any Highly Compensated Participant is equal to the sum of these hypothetical reductions multiplied, in each case, by such Highly Compensated Participant's compensation. The Highly Compensated Participants subject to distribution (or recharacterization) of Excess Contributions in any Plan Year shall be determined using the "dollar leveling method" starting with the Highly Compensated Participant with the greatest dollar amount of elective and other contributions treated as elective contributions for such Plan Year and continuing until the amount of the Excess Contributions has been accounted for. Such Excess Contribution amounts (and any earnings allocable thereto) shall be distributed and/or recharacterized as After-Tax Contributions pursuant to Article VI until one of the tests set forth in Section 5.07(a) is satisfied. In determining the amount of Excess Contributions (and any earnings allocable thereto) to be distributed and/or recharacterized with respect to any affected Highly Compensated Participant, such Excess Contribution amount shall be reduced by any excess Deferred Compensation previously distributed to such affected Highly Compensated Participant for his or her taxable year ending with or within such Plan Year. If there is a loss allocable to such excess amount, the distribution shall in no event be less than the lesser of such Participant's Pre-Tax Contributions and such Participant's Deferred Compensation for the Plan Year. (b) Within 12 months after the end of the Plan Year, if necessary, the Employer may make a special Qualified Non-Elective Contribution on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy one of the tests set forth in -25- 31 Section 5.07(a). Such contribution shall be allocated to the Pre-Tax Contributions Accounts of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's compensation for the year bears to the total compensation of all Non-Highly Compensated Participants. Qualified Non-Elective Contributions shall be non-forfeitable when made and subject to the provisions of Section 5.07. Qualified Non-Elective Contributions used to satisfy the tests set forth in Section 5.07(a) shall be required to satisfy the discrimination requirements of Regulation 1.401(k)-1(b)(5), the provisions of which are specifically incorporated herein by reference. (c) If during a Plan Year the projected aggregate amount of Pre-Tax Contributions to be allocated to all Highly Compensated Participants under this Plan would, by virtue of the tests set forth in Section 5.07(a), cause this Plan to fail such tests, then the Committee may automatically reduce proportionately, or in the order provided in Section 5.08(a), each affected Highly Compensated Participant's Pre-Tax Contributions, as specified by such Highly Compensated Participant pursuant to Section 5.02, by an amount necessary to satisfy one of the tests set forth in Section 5.07(a), as determined by the Committee, in its sole discretion. Unless an affected Highly Compensated Participant elects otherwise, any Pre-Tax Contributions reduced pursuant to this paragraph (c) shall be treated as After-Tax Contributions. Section 5.09. Modification of Pre-Tax Contribution Percentage. A Participant may change the percentage of his or her Eligible Earnings that is contributed as Pre-Tax Contributions at any time in 1/2% increments. Any such change shall be effective the first day of the next available payroll period. ARTICLE VI After-Tax Contributions Section 6.01. Eligibility. Each Participant who is an Eligible Employee may make After-Tax Contributions to this Plan. Section 6.02. After Tax Contributions. Each Participant shall specify the percentage of his or her Eligible Earnings to be contributed to this Plan; provided, however, that such Participant may not direct that more than 20% of his or her Eligible Earnings be contributed as After-Tax Contributions or Pre-Tax Contributions, on a combined basis. The first 7% of a Participant's After-Tax Contributions based upon his or her Eligible Matched Earnings shall be considered "After-Tax Matched Contributions"; provided, however, that if the sum of a Participant's After-Tax Matched Contributions plus such Participant's Pre-Tax Matched Contributions exceeds 7% of such Participant's Eligible Matched Earnings, such Participant's After-Tax Matched Contributions shall be reduced until such sum equals 7% of such Participant's Eligible Matched Earnings. After-Tax Matched Contributions shall be contributed by the Employer on behalf of a Participant to such Participant's After-Tax Matched Contributions Account. All remaining After-Tax Contributions made by the Employer on behalf of such Participant shall be considered "After-Tax Supplemental Contributions" and shall be contributed by the Employer on behalf of such Participant to such Participant's After-Tax Supplemental Contributions Account. -26- 32 Section 6.03. Limitation on After-Tax Contributions. Notwithstanding anything to the contrary contained in Sections 6.01 or 6.02, no Participant may make After-Tax Contributions for any pay period which will cause the limitations of Section 4.03 or Section 7.01 to be exceeded. Section 6.04. Deduction of After-Tax Contributions. A Participant's After-Tax Contributions shall be made by regular payroll deductions. After-Tax Contributions deducted by an Employer will be paid to the Trustee as soon as practicable after the end of the payroll period for which such contributions were made. Section 6.05. Cessation of After-Tax Deductions. Except as otherwise provided in this Plan, no After-Tax Contributions will be accepted on behalf of any Participant for any pay period which begins after such Participant ceases to be an Eligible Employee. Section 6.06. Modification of After-Tax Contribution Percentage. A Participant may change the percentage of his or her Eligible Earnings that is contributed as After-Tax Contributions at any time in 1/2% increments. Any such change shall be effective the first day of the next available payroll period. ARTICLE VII Limitations on Contributions Section 7.01. Maximum Annual Additions. (a) Notwithstanding anything contained in this Plan to the contrary, the maximum Annual Additions credited to any Participant's account for any Limitation Year shall equal the lesser of (i) $30,000 (as adjusted for cost of living increases pursuant to Sections 415(c)(1), 415(d)(1), 415(d)(3) or 415(d)(4) under Section 415(b)(1)(A) of the Code) and (ii) 25% of such Participant's 415 Compensation for such Limitation Year. For any short Limitation Year, the dollar limitation in clause (i) above shall be reduced by a fraction, the numerator of which is the number of full months in the short Limitation Year and the denominator of which is 12. (b) For purposes of applying the limitations of Section 415 of the Code, the Annual Additions for a Participant is the sum credited to such Participant's accounts for any Limitation Year of: (i) such Participant's Pre-Tax Contributions and Employer Matching Contributions for such Limitation Year; plus (ii) such Participant's After-Tax Contributions for such Limitation Year; plus (iii) such Participant's Forfeitures for such Limitation Year; plus -27- 33 (iv) amounts allocated to an "individual medical account" (as defined in Section 415(l)(2) of the Code) on behalf of such Participant which is part of a pension or annuity plan maintained by the Employer for such Limitation Year; plus (v) amounts derived from contributions paid or accrued which are attributable to post-retirement medical benefits allocated to the separate account of such Participant if he or she is a "key employee" (as defined in Section 419A(d)(3) of the Code) under a "welfare benefit plan" (as defined in Section 419(e) of the Code) maintained by the Employer for such Limitation Year; provided, however, that the 415 Compensation percentage limitation referred to in paragraph (a) above shall not apply to (A) any contribution for "medical benefits" (within the meaning of Section 419(A)(f)(2) of the Code) after separation from service which is otherwise treated as an Annual Addition or (B) any amount otherwise treated as an Annual Addition under Section 415(l)(1) of the Code. (c) For purposes of applying the limitations of Section 415 of the Code, the transfer of funds from one qualified plan to another is not an Annual Addition. In addition, the following are not Employee contributions for the purposes of Section 7.01(b): (i) "rollover contributions" (as defined in Sections 402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3) of the Code); (ii) repayments of loans made to a Participant from this Plan; (iii) repayments of distributions received by an Employee pursuant to Section 411(a)(7)(B) of the Code (cash-outs); (iv) repayments of distributions received by an Employee pursuant to Section 411(a)(3)(D) of the Code (mandatory contributions); and (v) Employee contributions to a simplified employee pension excludable from gross income under Section 408(k)(6) of the Code. (d) The dollar limitation under Section 415(b)(1)(A) of the Code referred to in paragraph (a) above shall be adjusted annually as provided in Section 415(d) of the Code pursuant to the Regulations. The adjusted limitation is effective as of January 1st of each calendar year and is applicable to Limitation Years ending with or within that calendar year. (e) For purposes of this Section, all qualified defined benefit plans (whether terminated or not) ever maintained by the Employer shall be treated as one defined benefit plan, and all qualified defined contribution plans (whether terminated or not) ever maintained by the Employer shall be treated as one defined contribution plan. (f) For purposes of this Section, if the Employer is a member of a controlled group of corporations, trades or businesses "under common control" (as defined by Section 1563(a) or -28- 34 Section 414(b) and (c) of the Code, as modified by Section 415(h) of the Code), is a member of an "affiliated service group" (as defined by Section 414(m) of the Code) or is a member of a group of entities required to be aggregated pursuant to the Regulations under Section 414(o) of the Code, all Employees of such Employers shall be considered to be employed by a single Employer. (g) For purpose of this Section 7.01, if this Plan is a Section 413(c) of the Code plan, all Employers of a Participant who maintain this Plan will be considered to be a single Employer. (h)(i) If a Participant participates in more than one defined contribution plan maintained by the Employers which have different anniversary dates, the maximum Annual Additions under this Plan for any Limitation Year shall equal the maximum Annual Additions for such Limitation Year minus any Annual Additions previously credited to such Participant's accounts during such Limitation Year. (ii) If a Participant participates in both a defined contribution plan subject to Section 412 of the Code and a defined contribution plan not subject to Section 412 of the Code maintained by the Employers which have the same anniversary date, Annual Additions will be credited to such Participant's accounts under the defined contribution plan subject to Section 412 of the Code prior to crediting Annual Additions to such Participant's accounts under the defined contribution plan not subject to Section 412 of the Code. (iii) If a Participant participates in more than one defined contribution plan not subject to Section 412 of the Code maintained by the Employers which have the same anniversary date, the maximum Annual Additions under this Plan for any Limitation Year shall equal the product of (A) the maximum Annual Additions for such Limitation Year minus any Annual Additions previously credited under clauses (i) or (ii) above, multiplied by (B) a fraction, the numerator of which is the Annual Additions which would be credited to such Participant's accounts under this Plan without regard to the limitations of Section 415 of the Code and the denominator of which is such Annual Additions for all plans described in this clause. Section 7.02. Adjustment for Excessive Annual Additions. It is intended that in applying Section 7.01, the Annual Additions to a Participant's Accounts under this Plan will be limited before the Annual Additions to such Participant's accounts under any other defined contribution plan maintained by the Extended Group ("Related Defined Contribution Plans"), if any, are limited. This Section 7.02 shall be applied as follows: (a) first, such Participant's After-Tax Supplemental Contributions in such year shall be reduced until such Participant's Annual Additions are within the limits specified above; (b) second, if, after applying clause (a) above, such Participant's Annual Additions are still in excess of the limits specified above, then such Participant's Pre-Tax -29- 35 Supplemental Contributions shall be reduced until such Participant's Annual Additions are within the limits specified above; (c) third, if, after applying clauses (a) and (b) above, such Participant's Annual Additions are still in excess of the limits specified above, then Employer Matching Contributions hereunder shall be reduced by applying any amount which cannot be credited to such Participant's Employer Matching Contributions Account because of the foregoing limitations in accordance with Section 4.02 to reduce the share of Employer Matching Contributions due this Plan by such Participant's Employer for such year; (d) fourth, if, after applying clauses (a), (b) and (c) above, such Participant's Annual Additions are still in excess of the limits specified above, then such Participant's After-Tax Matched Contributions shall be reduced until such Participant's Annual Additions are within the limits specified above; and (e) fifth, if, after applying clauses (a), (b), (c) and (d) above, such Participant's Annual Additions are still in excess of the limits specified above, then such Participant's Pre-Tax Matched Contributions shall be reduced until such Participant's Annual Additions are within the limits specified above. If, in any Plan Year, as the result of a reasonable error in estimating a Participant's compensation or in determining the amount of such Participant's Pre-Tax Contributions, such Participant's Annual Additions exceed the maximum amount that may be allocated to such Participant, the excess amount attributable, first, to such Participant's After-Tax Supplemental Contributions (and allocable earnings), second, to such Participant's Pre-Tax Supplemental Contributions (and allocable earnings), third, to such Participant's After-Tax Matched Contributions (and allocable earnings) and, fourth, to such Participant's Pre-Tax Matched Contributions (and allocable earnings), shall be returned to such Participant to the extent necessary to cure such excess. ARTICLE VIII Accounting Section 8.01. Participant Accounts. The Committee shall maintain the Accounts set forth below in the name of each Participant to reflect such Participant's After-Tax Contributions, Pre-Tax Contributions and rollover contributions: (a) a "Pre-Tax Matched Contributions Account" to reflect the Pre-Tax Matched Contributions made by an Employer on behalf of such Participant in accordance with Section 5.02, as well as the income, losses, appreciation and depreciation attributable to such contributions; (b) a "Pre-Tax Supplemental Contributions Account" to reflect the Pre-Tax Supplemental Contributions made by an Employer on behalf of such Participant in accordance with Section 5.02, as well as the income, losses, appreciation and depreciation attributable to such contributions; -30- 36 (c) an "After-Tax Matched Contributions Account" to reflect the After-Tax Matched Contributions made by an Employer on behalf of such Participant in accordance with Section 6.02, as well as the income, losses, appreciation and depreciation attributable to such contributions; (d) an "After-Tax Supplemental Contributions Account" to reflect the After-Tax Supplemental Contributions made by an Employer on behalf of such Participant in accordance with Section 6.02, as well as the income, losses, appreciation and depreciation attributable to such contributions; and (e) a "Rollover Account" to reflect the rollover contributions made by such Participant, as well as the income, losses, appreciation and depreciation attributable to such contributions. Each Participant shall have a full 100% vested interest in such Participant's Pre-Tax Contributions Accounts, After-Tax Contributions Accounts and Rollover Account. Section 8.02. Rollovers From Qualified Plans. Any Participant may transfer an eligible rollover distribution from a qualified retirement plan under Section 401(a) of the Code to this Plan subject to the rules set forth in the Regulations; provided, however, that effective on and after September 1, 1997, no rollovers from the Terminated ESOP (including indirectly through a conduit IRA) shall be permitted. Any direct rollover from the Terminated ESOP made prior to September 1, 1997 shall be continued in the same Investment Fund as invested thereunder until changed by the Participant as permitted by this Plan. Section 8.03. Adjustment of Accounts. As of each Accounting Date, the Committee shall: (a) first, charge to the proper Accounts all payments, distributions or loans made since the last preceding Accounting Date that have not been charged previously as provided in Section 8.04; (b) second, credit each Participant's Accounts with such Participant's pro rata share of any increase, or charge such Accounts with such Participant's pro rata share of any decrease, in the value of the adjusted net worth of each Investment Fund in which such Accounts have an interest as of that date; (c) third, credit all After-Tax Contributions made by Participants that are to be credited as of that date to the appropriate After-Tax Contributions Accounts in accordance with Section 8.05; (d) fourth, credit all Pre-Tax Contributions made on behalf of Participants that are to be credited as of that date to the appropriate Pre-Tax Contributions Accounts in accordance with Section 8.06; and -31- 37 (e) fifth, allocate and credit any Employer Matching Contributions (including any Forfeitures applied to reduce those contributions) as of that date in accordance with Section 8.09. For purposes of this Plan, the "adjusted net worth" of an Investment Fund as of any Accounting Date means the then net worth of that Investment Fund as determined by the Trustee less an amount equal to any Employer Matching Contributions and any Participants' After-Tax Contributions and Pre-Tax Contributions that have not previously been credited to Participants' Accounts in accordance with paragraphs (c), (d) and (e) above. The adjustment of Participants' Accounts provided for in this Section shall be made on the basis of an Accounting Date valuation of Investment Funds as determined by the Trustee on a fair market value basis. Section 8.04. Charging Payments and Distributions. As of each Accounting Date, all payments or distributions made under this Plan since the last preceding Accounting Date to or for the benefit of a Participant or any Beneficiary will be charged to the proper Account of such Participant unless previously charged. Section 8.05. Crediting After-Tax Contributions. After-Tax Contributions made by an Employer on behalf of a Participant shall be credited to such Participant's applicable After-Tax Contributions Accounts as of the Accounting Date on which the Trustee received the contributions from the Employer. Section 8.06. Crediting Pre-Tax Contributions. Pre-Tax Contributions made by an Employer on behalf of a Participant shall be credited to such Participant's applicable Pre-Tax Contributions Accounts as of the Accounting Date on which the Trustee received the contributions from the Employer. Section 8.07. Employer Matching Contributions Account. The Committee shall maintain an "Employers Matching Contributions Account" in the name of each Participant to reflect such Participant's share of the Employer Matching Contributions and the Forfeitures arising under the Plan which are credited to such Employer Matching Contributions Account as a part of the Employer Matching Contributions in accordance with Section 10.06, as well as the income, losses, appreciation and depreciation attributable to both such items. Section 8.08. Cytec Accounts and Historical Employer Matching Contributions Accounts. The accounts of the Cytec Employees that were spun off to this Plan from the Cytec Plan (the "Cytec Accounts") and each Participant's Historical Employer Matching Contributions Account (if any) shall be separately accounted for under this Plan. Section 8.09. Allocation of Employer Matching Contributions and Forfeitures. Employer Matching Contributions made by an Employer on behalf of a Participant (after giving effect to any Forfeitures applied to reduce that Employer's Employer Matching Contributions in accordance with Section 7.01(b) and Section 10.06) shall be credited to such Participant's Employer Matching Contributions Account as of the Accounting Date on which the Trustee received such Employer Matching Contributions from the Employer. For purposes of this Section 8.09, the portion of any Forfeiture arising under this Plan during any period which is -32- 38 attributable to the prior contributions by any Employer shall be that proportion of such Forfeiture which the contributions made by that Employer and credited to the Employer Matching Contributions Accounts of the Participant with respect to whom the Forfeiture arose bears to the total contributions of all Employers which are credited to such Employer Matching Contributions Accounts. Until credited in accordance with this Section 8.09, all Forfeiture accounts will be treated the same as Participants' Accounts and will be adjusted in accordance with Section 8.03. ARTICLE IX The Funds Section 9.01. The Investment Funds. (a) The Trust Fund shall consist of the Investment Funds set forth in Exhibit A as it may be amended from time to time (the "Investment Funds"). The Trustee, pursuant to any discretion given it by the Trust Agreement, may retain all or any portion of any of the Investment Funds and, on a temporary or interim basis, may invest any of the Investment Funds in property other than that specified as the primary type of investment for such Investment Funds. Any Investment Fund, at the discretion of the Trustee, may be partially or entirely invested in any commingled or mutual fund which is invested in property of the type specified for that Investment Fund. Except as provided in Section 9.04, no stocks or obligations issued by the Corporation or its Affiliates shall be included in any of the Investment Funds; provided, however, that any investment of any such Investment Fund through the medium of commingled funds shall not constitute an investment in the stocks or obligations of the Employers or the Affiliates, even though the commingled funds may contain such stocks or obligations. (b) As part of the Trust Fund, a "Loan Fund" shall be maintained which shall include promissory notes executed by each Participant for whom a loan has been made, which shall be reflected in the Loan Account of such Participant. As of the time a loan is made, the borrowing Participant's other Accounts shall be debited to reflect the amount of the loan to such Participant in the manner specified in Section 12.11 and the amount of such loan shall be credited to such Participant's Loan Account. As payments of principal and interest are made on the loan, the Loan Account shall be debited as specified in Section 12.12 hereof. Section 9.02. Investment Elections. Each Participant may elect to have his or her Accounts invested in any or all of the Investment Funds in 1% increments. An investment election must be made in the time and manner prescribed by the Committee. A Participant's After-Tax Contributions, Pre-Tax Contributions, rollover contributions and Employer Matching Contributions shall be invested, as soon as practicable after the Accounting Date for which the contributions were made, in the Investment Funds in accordance with such Participant's investment election then in effect; provided, however, that a Participant's Employer Matching Contributions shall be invested in accordance with such Participant's investment elections for his or her Pre-Tax Contributions or, in the absence of any such investment election, in the ML Retirement Preservation Trust. After making an investment election, a Participant may change his or her investment election at any time, effective the first day of the next available payroll period. -33- 39 Section 9.03. Transfers Between Investment Funds. A Participant may elect as of any business day on which the national stock exchanges are open to transfer all or a portion of his or her After-Tax Contributions Accounts and, separately, all or a portion of his or her Pre-Tax Contributions Accounts, Employer Matching Contributions Account and Rollover Account between the Investment Funds. Such Participant shall make such election in the time and manner prescribed by the Committee, which shall specify how the contributions and earnings are to be allocated between the Investment Funds after the transfer. Section 9.04. Company Stock Fund. The "Company Stock Fund" shall consist solely of those shares of Company Stock rolled over to this Plan upon the liquidation of the Terminated ESOP's trust, including any "default" rollovers with respect to those participants in the Terminated ESOP who did not consent to a distribution upon such liquidation. Shares of Company Stock so rolled over from the Terminated ESOP may not be directed to be sold and reinvested in any other Investment Fund. Any withdrawal or distribution from the Company Stock Fund shall be made solely in shares of Company Stock. Notwithstanding anything in this Plan to the contrary, any distribution received by the Trustee with respect to Company Stock, except for a stock dividend in shares of Company Stock, shall be automatically reinvested in the ML Retirement Preservation Trust, until redirected into another Investment Fund by the relevant Participant. No amounts may be contributed to, redirected into or otherwise added to the Company Stock Fund. ARTICLE X Payment of Account Balances Section 10.01. Retirement, Disability or Death. If a Participant terminates employment due to Retirement or a Total and Permanent Disability, or dies while an Employee, the entire balances of such Participant's Accounts as of such Participant's Settlement Date (after any adjustments then required under this Plan) shall be vested and become distributable to such Participant or his or her Beneficiary, as the case may be, in accordance with Section 10.03. Section 10.02. Resignation or Dismissal. (a) If a Participant resigns, is dismissed from the employ of the Employers and the Affiliates before his or her Normal Retirement Age or otherwise incurs a separation from service, the vested balance of such Participant's Accounts as of such Participant's Settlement Date (after any adjustments then required under this Plan) shall become distributable to such Participant in accordance with Section 10.03. The vested balance in such Participant's Employer Matching Contributions Account shall be determined by multiplying such balance by such Participant's Vesting Percentage and the product thereof shall become distributable to such Participant in accordance with Section 10.03. . (b) The computation of a Participant's non-forfeitable percentage interest in his or her Accounts shall not be reduced as the result of any direct or indirect amendment to this Section. In the event that this Plan is amended to change or modify any vesting schedule, a Participant with a least three Years of Service as of the expiration date of the election period may elect to have his or her non-forfeitable percentage computed under this Plan without regard to such amendment. If a Participant fails to make such election, then such Participant shall be -34- 40 subject to the new vesting schedule. The Participant's election period shall commence on the adoption date of the amendment and shall end 60 days after the latest of: (i) the adoption date of the amendment; (ii) the effective date of the amendment; or (iii) the date such Participant receives written notice of the amendment from the Employer or Committee. Notwithstanding anything herein to the contrary, a Participant shall have a non-forfeitable interest in such Participant's Account balances on the attainment of his or her Normal Retirement Age, Total and Permanent Disability or death, while an Employee. Section 10.03. Distribution Options. (a) Lump Sum Distribution. Subject to the conditions and limitations set forth in this paragraph (a) and Sections 10.04 and 10.05, the vested balances in a Participant's Accounts will be distributed to such Participant or, in the case of such Participant's death, to his or her Beneficiaries by payment in a lump sum (a "Lump Sum Distribution"). If the vested value of such Participant's Account balances as of such Participant's Settlement Date (or as of the date of any prior withdrawal) does not exceed $5,000, the balances in such Participant's Accounts will be paid in a Lump Sum Distribution as soon as practicable after such Participant's Settlement Date (after all adjustments, if any, then required under this Plan have been made). (b) Lump Sum Deferral Option. If the vested value of a Participant's Account balances as of such Participant's Settlement Date (or as of the date of any prior withdrawal) exceeds $5,000, such Participant may elect to receive payment of the balances in his or her Accounts as follows: (i) in a Lump Sum Distribution as set forth in paragraph (a) above as soon as practicable after such Participant's Settlement Date; or (ii) in a lump sum at any time after his or her termination but in no event beyond the Participant's attainment of age 65 (a "Lump Sum Deferral Option"). If such Participant fails to make an election under clauses (i) or (ii) above, such Participant shall be deemed to have elected a Lump Sum Deferral Option under clause (ii). There shall be no immediate distribution of a Participant's Account balances when his or her vested Account balances exceed $5,000 in the aggregate. A Participant's Account balances are immediately distributable if any part of the Account balances may be distributed to such Participant before the later of Normal Retirement Age and age 62. However, this paragraph (b) shall not be applicable after the death of a Participant. If a Participant elects to retain the balances in his or her Accounts in this Plan under a Lump Sum Deferral Option, such Participant shall be entitled to make transfers between Investment Funds but shall not be entitled to make After-Tax Contributions, to have Pre-Tax -35- 41 Contributions made on his or her behalf, to receive withdrawals or periodic distributions as provided in Article XI or to obtain a loan under Article XII. If such Participant elects a Lump Sum Deferral Option and dies prior to receipt of the balances in his or her Accounts, the Accounts of such Participant shall be distributed in a single lump sum to his or her Beneficiary as soon as practicable after the death of such Participant. Upon termination of a Lump Sum Deferral Option, in lieu of payment in a lump sum and subject to the provisions of paragraph (c) below, the Participant may elect the Installment Payout Option. (c) Installment Payout Option. Subject to the conditions and limitations set forth in this paragraph (c) and in Sections 10.04 and 10.05, if (i) a Participant retires while an Employee with an entitlement to receive an Employer or an Affiliate pension benefit (as determined under the terms of the pension plan in which such Participant participates) and (ii) the lump sum value of the Participant's Account balances as of such Participant's Settlement Date exceeds $5,000, such Participant may direct that the value of the balances in his or her Accounts be distributed in monthly, quarterly or annual installments from this Plan over a number of years up to the lesser of 20 years (30 years with respect to a Cytec Account) or the life expectancy of such Participant on the date the installments commence; provided, however, that in no event shall installment payments under this paragraph (c) begin after such Participant's attainment of age 65 or, if later, his or her retirement date, even if such Participant had previously elected a Lump Sum Deferral Option. The amount of the payments for the first calendar year in which such installment payments shall commence shall be determined by dividing the value of such Participant's Accounts, determined as of such Participant's Settlement Date, by the number of remaining calendar years. For each subsequent calendar year, the amount of the payments shall be determined at the beginning of each calendar year by dividing the value of the balances of such Participant's Accounts, determined as of the last day of the previous calendar year, by the number of remaining calendar years. If a Participant dies prior to the receipt of the entire balance of his or her Accounts under this Plan pursuant to this paragraph (c), the remaining account balances shall be payable in a single lump sum to his or her Beneficiary as soon as practicable after the death of such Participant. If a Participant elects the Installment Payout Option, such Participant shall be entitled to make transfers between Investment Funds but shall not be entitled to make After-Tax Contributions or to have Pre-Tax Contributions made on his or her behalf, to receive withdrawals or periodic distributions as provided in Article XI or to obtain a loan under Article XII. Once each Plan Year, a Participant who is receiving payments under the Installment Payout Option may elect to withdraw all or any portion of his or her Account balances under this Plan; provided, however, that if the remaining Account balances immediately after such withdrawal do not equal or exceed $5,000, the remaining Account balances shall be distributed to the Participant in a lump sum. (d) Life Expectancy Payout Option. Subject to the conditions and limitations set forth below and in Sections 10.04 and 10.05, if (i) a Participant retires while an Employee on or after a date determined by the Committee with an entitlement to receive an Employer or an Affiliate pension benefit (as determined under the terms of the pension plan in which such Participant participates), and (ii) the vested value of such Participant's Account balances exceeds $5,000 as of such Participant's Settlement Date, such Participant may elect to receive payment of -36- 42 his or her Account balances in the form of a Life Expectancy Payout Option, even if such Participant had previously elected a Lump Sum Deferral Option. Under the Life Expectancy Payout Option, the Account balances of such Participant will be distributed to such Participant over a period equal to the life expectancy of such Participant in monthly, quarterly or annual installments; provided, however, that in no event shall installment payments under this paragraph (d) begin after such Participant's attainment of age 65 or, if later, his or her retirement date, even if such Participant had previously elected a Lump Sum Deferral Option. The amount of the payment for each Plan Year shall be determined at the beginning of each Plan Year by dividing the vested value of the balances of the relevant Participant's Accounts determined as of the last day of the previous Plan Year by the life expectancy of such Participant, which shall be recalculated annually as of the last day of each Plan Year. If such Participant predeceases his or her designated Beneficiary, the remaining Account balances shall be payable to the designated Beneficiary in a single lump sum as soon as practicable after the death of such Participant. The life expectancy of such Participant shall be determined by the qualified actuary for the Corporation's qualified pension plan, and the qualified actuary's determination shall be final and binding on all parties. If a Participant elects the Life Expectancy Payout Option, such Participant shall be entitled to make transfers between Investment Funds but shall not be entitled to make After-Tax Contributions or to have Pre-Tax Contributions made on his or her behalf, to receive withdrawals or periodic distributions as provided in Article XI or to obtain a loan under Article XII. Once each Plan Year, a Participant who is receiving payments under the Life Expectancy Payout Option may elect to withdraw all or any portion of his or her Account balances under this Plan; provided, however, that if the remaining Account balances immediately after such withdrawal do not equal or exceed $5,000, the remaining Account balances shall be distributed to such Participant in a lump sum. In addition, a Cytec Employee may elect, with respect to his or her Cytec Account, to have such Account used to purchase a non-transferable single life annuity contract or a 50% joint and survivor annuity contract from an insurance company selected by the Committee. (e) Cytec Account Annuities. Each Cytec Employee may elect, with respect to his or her Cytec Accounts, to use the balance of such Cytec Accounts to purchase a non-transferable single life annuity contract or a 50% joint and survivor annuity contract from an insurance company selected by the Committee. (f) Any distribution to a Participant who has a vested benefit which exceeds, or has ever exceeded, $5,000 at the time of any prior distribution shall require such Participant's consent if such distribution commences prior to the later of his or her Normal Retirement Age or age 62. With regard to this required consent: (i) notice of the rights specified under this paragraph (e) shall be provided no less than 30 days and no more than 90 days before the first day on which all events have occurred which entitle such Participant to such benefit; and -37- 43 (ii) written consent of such Participant to the distribution may not be made before such Participant receives the notice and may not be made more than 90 days before the first day on which all events have occurred which entitle such Participant to such benefit; provided, however, that notwithstanding the foregoing, if a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the required notice is given if, but only if, (A) the Committee clearly informs such Participant that such Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (B) such Participant, after receiving the notice, affirmatively elects a distribution. Section 10.04. Limitations on Distributions. (a) Payment of benefits under this Plan to a Participant shall not commence later than the 60th day after the latest of the end of the Plan Year during which: (i) such Participant attains age 65 years; (ii) the tenth anniversary of the date on which such Participant's participation in this Plan occurs; or (iii) such Participant's employment with the Employers and Affiliates terminates. (b) Notwithstanding any provision in this Plan to the contrary, the distribution of a Participant's benefits shall be made in accordance with the following requirements and shall otherwise comply with Section 401(a)(9) of the Code and the Regulations thereunder (including Regulation Section 1.401(a)(9)-2): (i) a Participant's benefits shall be distributed to him or her not later than April 1 of the calendar year following the calendar year in which such Participant attains age 70 1/2 or, alternatively, distributions to a Participant must begin no later than the April 1st as determined under the preceding sentence and must be made over the life expectancy of such Participant (or the life expectancies of such Participant and his or her designated Beneficiaries) in accordance with the Regulations; and (ii) distributions to such Participant and his or her Beneficiaries shall only be made in accordance with the incidental death benefit requirements of Section 401(a)(9)(G) of the Code and the Regulations thereunder; provided, however, that with respect to any Participant who attains age 70 1/2 after 1998 (other than an "owner" within the meaning of Section 318 of the Code), benefits shall not be paid or begin prior to such Participant's termination of employment with all Employers and Affiliates but, except to the extent otherwise required by Section 401(a)(9) of the Code, this Plan shall not preclude such Participant from receiving benefits in any of the same optional forms (except for the difference in the timing of the commencement of payments) that would have been available to such Participant hereunder if such Participant retired in the calendar year in which he or she attained the age 70 1/2. -38- 44 (c) Notwithstanding anything to the contrary contained in this Plan, distributions upon the death of a Participant shall be made in accordance with the following requirements and shall otherwise comply with Section 401(a)(9) of the Code and the Regulations thereunder. If it is determined, pursuant to the Regulations, that the distribution of such Participant's interest has begun and such Participant dies before his or her entire interest has been distributed, the remaining portion of such interest shall be distributed at least as rapidly as under the method of distribution selected pursuant to Section 10.03 as of the date of such Participant's death. If such Participant dies before he or she has begun to receive any distributions of his or her interest under this Plan or before distributions are deemed to have begun pursuant to the Regulations, then such Participant's death benefit shall be distributed to his or her Beneficiaries by December 31st of the calendar year in which the fifth anniversary of the date of such Participant's death occurs. However, in the event that such Participant's spouse (determined as of the date of such Participant's death) is such Participant's Beneficiary, then in lieu of the preceding rules, distributions must be made over a period not extending beyond the life expectancy of the spouse and must commence on or before the later of: (i) December 31st of the calendar year immediately following the calendar year in which such Participant died; or (ii) December 31st of the calendar year in which such Participant would have attained age 70 1/2. If the surviving spouse dies before distributions to such spouse begin, then the 5-year distribution requirement of this Section 10.04 shall apply as if the spouse was the Participant. (d) For purposes of this Section 10.04, the life expectancy of a Participant and a Participant's spouse may, at the election of such Participant or such Participant's spouse, respectively, be redetermined in accordance with the Regulations; provided, however, that any such election, once made, shall be irrevocable. If no election is made by the time distributions must commence, then the life expectancy of such Participant and such Participant's spouse shall not be subject to recalculation. (e) If a distribution is made at a time when a Participant is not fully vested in any of his or her Accounts and such Participant may increase the vested percentage in such Account: (i) a separate account shall be established for such Participant's interest in this Plan as of the time of the distribution; and (ii) at any relevant time, such Participant's vested portion of the separate account shall equal: -39- 45 P(AB + (R x D)) - (R x D), where P = the vested percentage at the relevant time, AB = the account balance at the relevant time, D = the amount of distribution and R = the ratio of the account balance at the relevant time to the account balance after distribution. Section 10.05. Designation of Beneficiaries. (a) Each Participant may, from time to time, designate any person or persons (who may be designated concurrently, contingently or successively) to whom any benefits payable on behalf of such Participant are to be distributed if such Participant dies before he or she receives all of his or her benefits. Such Beneficiary designation shall also be effective if a Participant dies after such Participant's Settlement Date but prior to distribution of all of the balances of his or her Accounts. A Beneficiary designation shall be effective only when it is signed, dated and filed with the Committee while the Participant is alive and will cancel all beneficiary forms previously signed and filed by such Participant. (b) In the event of the death of a Participant prior to distribution of the balances of such Participant's Accounts pursuant to Section 10.03, if such Participant was married on the date of his or her death, the balances in such Participant's Accounts will be distributed by payment in a lump sum to the surviving spouse unless such Participant had made a Qualified Election prior to his or her death, in which event payment shall be made in a lump sum to or for the benefit of such Participant's Beneficiaries. (c) For purposes of this Plan, a "Qualified Election" means, with respect to any Participant, an election made by such Participant (on forms provided by and filed with the Committee) providing that the balances of such Participant's Accounts will not be distributed in full to the surviving spouse, and: (i) the spouse of such Participant consents in writing to such Qualified Election (witnessed by a Plan representative or a notary public) and the designation of the applicable Beneficiary (which may not be changed without spousal consent) and acknowledges the effect of such election on forms provided by and filed with the Committee and; or (ii) it is established that there is no spouse, the spouse cannot be located or there exists such other circumstances as may be provided by the Regulations prescribed by the Code. Any Qualified Election consented to by a spouse pursuant to this paragraph (c) shall be irrevocable and shall be effective only with respect to such spouse. A Qualified Election may be revoked but not changed by such Participant without consent of such Participant's spouse in accordance with this paragraph (c). (d) If a Participant fails to designate a Beneficiary or if the designated Beneficiary predeceases such Participant, for purposes of this Plan it shall be conclusively presumed that -40- 46 such Participant intended to and did designate as the Beneficiary (i) his or her surviving spouse or (ii) in the event that such Participant has no surviving spouse, his or her estate. Section 10.06. Forfeitures. (a) For purposes of this Plan, "Forfeiture" shall mean that portion of a Participant's Employer Matching Contributions Account, if any, that is not vested, and occurs on the earlier of the last day of the Plan Year in which such Participant incurs five consecutive One Year Breaks in Service or receives the distribution of the entire vested balances of his or her Accounts. (b) As of each Accounting Date, any amounts which became Forfeitures since the last Accounting Date shall first be made available to reinstate previously forfeited account balances of former Participants, if any, in accordance with paragraph (c) below. The remaining Forfeitures, if any, shall be applied to reduce the Employer Matching Contributions in accordance with Section 4.02 for the Plan Year in which such Forfeiture occurs. (c)(i) If any former Participant shall be reemployed by an Employer or an Affiliate before a One Year Break in Service occurs, such Participant shall continue to participate in this Plan in the same manner as if such termination had not occurred and any Forfeitures shall be reinstated pursuant to clause (ii) below. (ii) If any former Participant shall be reemployed by an Employer or an Affiliate before five consecutive One Year Breaks in Service, and such former Participant received a distribution of the vested balances of his or her Accounts prior to reemployment, any amounts which became Forfeitures shall be reinstated if, but only if, such Participant repays the full amount distributed to him or her before the earlier of five years after the first date on which such Participant is subsequently reemployed by an Employer or an Affiliate or the close of the first period of five consecutive One Year Breaks in Service commencing after the distribution. In the event that such former Participant does repay the full amount distributed to him or her, the undistributed portion of such Participant's Employer Matching Contributions Account shall be restored in full, unadjusted by any gains or losses occurring subsequent to the Accounting Date coinciding with or preceding such Participant's termination. The source for such reinstatement shall first be any Forfeitures of other Participants occurring during the year in which such Participant's Employer Matching Contributions Account is reinstated. If such source is insufficient, then such Participant's Employer shall contribute an amount which is sufficient to restore any such forfeited Employer Matching Contributions Accounts. (iii) If any former Participant is reemployed after a One Year Break in Service has occurred, Years of Service shall include Years of Service prior to his One Year Break in Service, subject to the following rules: (A) if a former Participant has a One Year Break in Service, such Participant's pre-break and post-break service shall be used for computing Years of Service for eligibility and for vesting purposes only after such Participant has been employed for one Year of Service following the date of his or her reemployment with an Employer; -41- 47 (B) any former Participant who under this Plan does not have a non-forfeitable right to any interest in this Plan resulting from Employer contributions shall lose credits otherwise allowable under clause (A) above if such Participant's consecutive One Year Breaks in Service equal or exceed the greater of (x) five and (y) the aggregate number of such Participant's pre-break Years of Service; (C) after five consecutive One Year Breaks in Service, a former Participant's vested Employer Matching Contributions Account balance attributable to pre-break service shall not be increased as a result of post-break service; (D) if a former Participant who has not had his or her Years of Service before a One Year Break in Service disregarded pursuant to clause (B) above completes one Year of Service for eligibility purposes following his or her reemployment with an Employer, such Participant shall participate in this Plan retroactively from the date of reemployment; and (E) if a former Participant who has not had his or her Years of Service before a One Year Break in Service disregarded pursuant to clause (B) above completes a Year of Service (a One Year Break in Service previously occurred, but employment had not terminated), such Participant shall participate in this Plan retroactively from the first day of the Plan Year during which such Participant completes one Year of Service. (d) Subject to the foregoing provisions of this Section 10.06, if (i) a Participant elects the Lump Sum Deferral Option pursuant to Section 10.03(b), (ii) such Participant (or his or her Beneficiary) has not requested distribution of the balances of such Participant's Accounts on or before the date such Participant would have attained age 65 and (iii) such Participant cannot be located by the Corporation, then the balances in such Participant's Accounts may be forfeited at the end of a Plan Year and shall be applied to reduce the Employer Matching Contributions in accordance with Section 4.02 at the Accounting Date which occurs at the end of such Plan Year. Any such Participant (or his or her Beneficiary) who subsequently requests a distribution of the balances of such Participant's Accounts shall have his or her Accounts restored by the Corporation based upon the balances in such Accounts on the Accounting Date on which such Forfeiture occurred, unadjusted by any subsequent gains or losses. Section 10.07. Payment of Distribution Directly to Eligible Retirement Plan. Notwithstanding any provision of this Plan to the contrary that would otherwise limit a Distributee's election under this Section 10.07, a Distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. For purposes of this Section: (a) "Eligible Rollover Distribution" means, with respect to any Distributee, any distribution of all or any portion of the balance of an Account to the credit of such Distributee; provided, however, that an "Eligible Rollover Distribution" does not include (i) -42- 48 any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of such Distributee or the joint lives (or joint life expectancies) of such Distributee and such Distributee's designated beneficiary, or for a specified period of ten years or more, (ii) any distribution to the extent such distribution is required under Section 401(a)(9) of the Code or (iii) the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Employer securities); (b) "Eligible Retirement Plan" means, with respect to any Distributee, an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code or a qualified trust described in Section 401(a) of the Code, in each case, that accepts such Distributee's Eligible Rollover Distribution; provided, however, that in the case of an Eligible Rollover Distribution to a surviving spouse, "Eligible Retirement Plan" means an individual retirement account or individual retirement annuity; (c) "Distributee" means (i) a Participant or former Participant, (ii) the surviving spouse of a Participant or former Participant and (iii) with respect to the interest of a spouse or former spouse of a Participant or former Participant who is the alternate payee under a "qualified domestic relations order" (as defined in Section 414(p) of the Code), such spouse or former spouse; and (d) "Direct Rollover" means a payment by this Plan to the Eligible Retirement Plan specified by a Distributee. Section 10.08. Qualified Domestic Relations Order Distribution. All rights and benefits, including elections, provided to a Participant in this Plan shall be subject to the rights afforded to any alternate payee under a "qualified domestic relations order." Furthermore, a distribution to an alternate payee shall be permitted if such distribution is authorized by a qualified domestic relations order, even if the affected Participant has not separated from service and has not reached the "earliest retirement age" under this Plan. For purposes of this Section 10.08, "alternate payee," "qualified domestic relations order" and "earliest retirement age" shall have the meaning set forth under Section 414(p) of the Code. ARTICLE XI In-Service Withdrawals Section 11.01. General Withdrawals by Participants. Twice each calendar year, a Participant who is an Employee may elect to withdraw up to (a) the balance of his or her Rollover Account and all earnings credited to such Rollover Account and (b) the vested balance of his or her After-Tax Supplemental Contributions Account, Historical Employer Matching Contributions Account, Cytec Accounts (excluding any Cytec Account designated as a "Pre-Tax Account") and After-Tax Matched Contributions Account; provided, however, that, with respect to such Participant's After-Tax Matched Contributions Account, such amounts have been in this Plan for at least two years. The minimum withdrawal shall be the lesser of $500 and the entire -43- 49 vested balance of the relevant Account. Withdrawals from the Accounts of a Participant specified in clause (b) above shall be made in the order established by Plan administrative procedures. Notwithstanding anything contained in this Section 11.01 to the contrary, any withdrawals during a calendar year pursuant to Section 11.02 shall be considered to be withdrawals under this Section 11.01 for purposes of the requirement that withdrawals be made no more than twice each calendar year. Section 11.02. Periodic Distributions. Twice each calendar year, a Participant who is an Employee and age 59 1/2 or older may elect to withdraw up to the vested balance of any of his or her Accounts other than his or her Employer Matching Contributions Account; provided, however, that, with respect to such Participant's After-Tax Matched Contributions Account, such amounts have been in this Plan for at least two years. The minimum withdrawal shall be the lesser of $500 and the entire balance of the relevant Account. Notwithstanding anything contained in this Section 11.02 to the contrary, any withdrawals during a calendar year pursuant to Section 11.01 shall be considered to be withdrawals under this Section 11.02 for purposes of the requirement that withdrawals be made no more than twice each calendar year. Except as provided above, withdrawals and distributions from a Participant's Pre-Tax Contributions Accounts, Rollover Account and Employer Matching Contributions Account shall be prohibited until the earlier of such Participant's retirement, death, disability or separation from service. Section 11.03. Form of Withdrawals. Withdrawals shall be in the form of a lump sum, except to the extent a Participant elects to receive Installment Payments pursuant to Section 10.03. Section 11.04 Charging and Allocations of Withdrawals and Periodic Distributions. All withdrawals under Sections 11.01 and 11.02 shall be charged to the proper Accounts of the Participant and taken from his or her interests in the Investment Funds as directed by such Participant. ARTICLE XII Loans Section 12.01. Loans. The Committee, or its delegate, may, in its sole discretion, direct the Trustee to loan a Participant who is an Employee amounts from any of such Participant's Accounts (to the extent vested); provided, however, that all loans (including the amount thereof) shall be subject to all of the terms, conditions, requirements and limitations specified in this Article XII. It is intended that all loans made to participants under this Article XII shall meet the requirements of Section 72(p) of the Code and Department of Labor Regulation 2550.408b. Section 12.02. Loan Administration. The loan provisions of this Plan shall be administered by the Committee, which shall establish the terms and conditions generally applicable to loans made under this Plan. The Committee is authorized to delegate to a committee or Employees the authority to review loan applications, execute loan agreements and collect loan payments. The Committee is also authorized to: -44- 50 (a) adopt such rules and regulations as it deems necessary for the proper and efficient administration of loans under this Plan, including such adjustments to the accounting provisions of this Plan as it deems necessary and advisable to facilitate accounting for loans under this Plan; (b) establish standards which shall be used to determine if a loan application should be approved; (c) prescribe the forms to be used in administering the loan provisions of this Plan; (d) determine how the interest rate to be charged on outstanding loans is to be calculated and when the rate to be charged for new loans is to be changed; (e) determine, from time to time, the minimum loan amount (which shall not be less than $1,000); (f) employ agents, attorneys, accountants and other persons to properly and efficiently administer the loan provisions of this Plan and to collect outstanding loans; and (g) take all other actions necessary or advisable to carry out the provisions of this Article XII. Section 12.03. Loan Eligibility. Only those Participants who are Employees shall be eligible to submit loan applications or to obtain a loan. Section 12.04. Loan Application. The Committee shall set procedures by which Participants may apply for a loan and by which loans shall be approved. Only three loans per Participant may be outstanding at any time. All loan applications are to be considered on a reasonably equivalent basis, and in making such loans the Committee should consider only those factors which would be considered in a normal commercial setting by a person in the business of making similar types of loans. Section 12.05. Terms and Conditions of Loans. From time to time the Committee shall establish rules governing the making of loans, including the minimum amount for which a loan shall be made (which shall not be less than $1,000) and the terms and conditions of repayment of principal and interest. Such rules shall be uniformly applied to all similarly situated Participants. Each loan shall be evidenced by a promissory note in a form approved by the Committee, shall provide for a reasonable annual rate of interest and shall be adequately secured. Section 12.06. Maximum Loan. The maximum aggregate amount for which loans may be made to any Participant shall be the lesser of the following amounts: (a) 50% of the vested balances in such Participant's Accounts; or -45- 51 (b) $50,000, reduced by the amount (if any) by which (i) the highest outstanding balance of such Participant's loans from this Plan (and all other plans of the Employers and Affiliates) during the one year period ending on the day before the date on which such loan is to be made exceeds (ii) the outstanding balance of such Participant's loans from this Plan on the date the loan is made. The foregoing loan limit shall apply only at the time the loan is made. The Committee shall also establish guidelines relating to the ability of Participants to repay loans, which shall determine the maximum amount of any loan which can be made to any Participant. Section 12.07. Interest. Each loan shall bear interest at a reasonable rate to be fixed by the Committee. In determining the interest rate, the Committee shall provide this Plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances. Interest rates shall be fixed for the term of the loan at the time the loan is made, and the Committee shall determine periodically, but not less often than annually, the interest rate to be charged on new loans. Section 12.08. Terms of Loan and Repayment. (a) The Committee, or its delegate, shall review each loan application in accordance with the provisions of this Plan and decide whether or not the relevant loan shall be approved. The decision of the Committee, or its delegate, regarding the approval or rejection of a loan application shall be final and binding on all parties. The period of repayment for any loan shall be determined by mutual agreement between the Committee, or its delegate, and the Participant, but such period shall in no event exceed 60 months. (b) Each loan to a Participant must be adequately secured. A Participant's vested balance in this Plan is the only collateral which may be used as security for a loan. (c) Loan payments shall be required to be made through payroll deductions and each Participant shall be required to execute irrevocable authorization forms authorizing the Employers to deduct the loan payments from such Participant's wages or salary, which amounts shall be transmitted to the Trustee and applied against the outstanding loan balance. A Participant may prepay the entire outstanding unpaid principal balance on any loan (and all remaining interest due thereon) other than by payroll deduction at any time without penalty. If a Participant is not receiving wages or a salary from the Employer, repayment of any loan to such Participant shall be made in accordance with the terms and procedures established by the Committee. (d) Loan repayments will be suspended under this Plan as permitted by Section 414(u)(4) of the Code. Section 12.09. Risk of Loss. To insure the loan program does not place other Participants at risk with respect to their interest in this Plan, the Committee may administer any Participant's loan as a Participant directed investment of that portion of the vested balances of such Participant's Accounts and, as such, may charge any expenses related to issuing, maintaining or collecting such loan to such Participant's Accounts. -46- 52 Section 12.10. Source of Loan Funds. Loans to a Participant may be made from any of such Participant's Accounts (to the extent vested); provided, however, that notwithstanding anything contained in this Plan to the contrary, Company Stock held in a Participant's Account may not under any circumstances be sold to fund a loan. Section 12.11. Debiting of Accounts. Accounts of a Participant shall be debited to satisfy a loan request in the order established by Plan administrative procedures. If a Participant has Account balances in more than one of the Investment Funds, such Investment Funds shall be reduced in the manner established by Plan administrative procedures, except that balances invested in Company Stock will not be sold to fund a loan or distributed as a loan. Company Stock may, however, be used as security for a loan. Section 12.12. Accounting for Loans. Any loan made to a Participant from any of such Participant's Accounts specified in Section 12.11 shall be made by liquidating and converting to cash the appropriate Accounts and Investment Funds (other than Company Stock). A "Loan Account" shall then be established for such Participant, which shall reflect the outstanding unpaid balance of the loan from time to time. Repayments towards such loan shall be separated into principal and interest payments. Principal and interest payments shall be debited against such Participant's Loan Account and credited to such Participant's Accounts in the order established by Plan administrative procedures. Principal and interest payments credited to such Participant's Accounts shall be invested in Investment Funds in accordance with such Participant's current investment election with respect to new deposits or, if such Participant does not have a current investment election, in the ML Retirement Preservation Trust. Section 12.13. Distributions While Loan Balance is Outstanding. (a) When a final distribution is made with respect to a Participant who has an outstanding loan balance, such Participant (or his or her Beneficiaries) shall receive a distribution equal to (i) the vested balances in such Participant's Accounts minus (ii) any balance in such Participant's Loan Account plus accrued and unpaid interest through the date of distribution. In addition, such Participant's promissory note shall be delivered to such Participant (or his or her Beneficiaries) and the balance in such Participant's Loan Account shall be reduced to zero. (b) If a Participant who has an outstanding loan balance elects a Lump Sum Distribution, a Lump Sum Deferral Option, an Installment Payout Option or a Life Expectancy Payout Option, the entire outstanding unpaid principal amount of all loans plus accrued and unpaid interest must be extinguished prior to such Participant's Settlement Date. If such Participant does not pay the entire outstanding unpaid principal amount of all loans plus accrued and unpaid interest in cash prior to his or her Settlement Date, such Participant's promissory note shall be delivered to him or her (or his or her Beneficiaries) and the balance in such Participant's Loan Account shall be reduced to zero; provided, however, that none of such Participant's Accounts shall be credited in connection with such reduction in the balance of such Participant's Loan Account. -47- 53 (c) In no event shall any Participant, Beneficiary or any other person be paid in cash or property (other than the promissory note of the relevant Participant) an amount attributable to a balance in such Participant's Loan Account. Section 12.14. Unpaid Balances at End of Sixty-Month Period. In the event that any principal or interest on any loan remains outstanding at the end of 60 months, the Committee or its delegate shall declare the remaining unpaid loan balance to be a taxable distribution from this Plan for purposes of Section 72(p) of the Code. If the outstanding loan balance is subsequently repaid, the principal payments shall be credited as provided in Section 12.12. For all other purposes, the remaining unpaid loan balance shall remain a legal obligation of the Participant, and the Trustee and the Committee shall take all necessary action to ensure its collection. Section 12.15. Hardship Withdrawal in Bankruptcy. Upon an Adjudication of Bankruptcy with respect to any Participant that has an outstanding loan, the Committee, or its delegate, shall determine if such Adjudication of Bankruptcy has caused such Participant to incur a hardship. If the Committee or its delegate, in its sole discretion, determines that a hardship (within the meaning of Section 401(k)(2)(B) of the Code) exists for such Participant, the Committee or its delegate shall declare a hardship distribution, such Participant's promissory note shall be delivered to him or her (or his or her Beneficiaries) and the balance in such Participant's Loan Account shall be reduced to zero; provided, however, that none of such Participant's Accounts shall be credited in connection with such reduction in the balance of such Participant's Loan Account. For purposes of this Plan, an "Adjudication of Bankruptcy" means, with respect to any Participant, the earliest of the following to occur: (a) an entry of an order for relief with respect to such Participant under the United States Bankruptcy Code, as amended; or (b) the filing of a petition against such Participant in an involuntary case under the United States Bankruptcy Code, as amended. Section 12.16. Default. The Committee will treat a loan to any Participant as in default if any scheduled payment remains unpaid more than 90 days. If a loan is required to be treated as in default hereunder, the entire outstanding principal amount of such loan and accrued and unpaid interest thereon shall automatically become immediately due and payable on demand. To the extent a distribution to a Participant whose loan is required to be treated as in default hereunder is permissible under this Plan, the Committee will, as soon as practicable after such loan is required to be treated as in default hereunder, reduce the vested balances in such Participant's Accounts by the lesser of (a) the outstanding principal amount of such loan plus accrued and unpaid interest thereon and (b) the aggregate vested balances in such Participant's Accounts. To the extent a distribution to a Participant whose loan is required to be treated as in default hereunder is not permissible under this Plan, such Participant may be treated as having a deemed taxable distribution in an amount equal to the outstanding principal amount of such loan plus accrued and unpaid interest thereon and the Committee will treat the promissory note as repaid to the extent of, and after making, any permissible offset or deemed distribution. -48- 54 Section 12.17. Reductions in Force. Notwithstanding anything to the contrary contained in this Article XII, in the event that a Participant's employment is involuntarily terminated on or after November 16, 1998 by an Employer (other than for cause) as part of a formal reduction in force or a layoff program, the term of such Participant's loan shall not be accelerated by reason of such termination of employment and, thereafter, each monthly installment payment shall be due at the end of each month remaining in such term. This provision shall constitute a part of the terms and provisions of each loan; provided, however, that to the extent that this Section 12.17 constitutes a modification to an outstanding loan, it shall be effective with respect to such loan only if the requirements of Section 2550.408b-1 of the regulations of the Department of Labor are determined to have been complied with at the time of such modification. ARTICLE XIII The Committee Section 13.01. Membership. The Committee shall consist of three or more members appointed by the Corporation. Section 13.02. Committee's General Powers, Rights and Duties. The Committee, which is established by and derives its authority from the Corporation, is, as respects the rights and obligations of all parties with an interest in this Plan, given the powers, rights and duties specifically stated elsewhere in this Plan, the Trust Agreement or any other document, and in addition is given the power, right and duty to: (a) determine all questions arising under this Plan, including the power to determine the rights or eligibility of Employees or Participants and any other persons, and the amounts of their benefits under this Plan, and to remedy ambiguities, inconsistencies or omissions; (b) adopt such rules of procedure and regulations as in its opinion may be necessary for the proper and efficient administration of this Plan and as are consistent with this Plan and the Trust Agreement; (c) enforce this Plan in accordance with the terms of this Plan and the Trust Agreement and in accordance with any rules of procedure and regulations adopted by the Committee pursuant to clause (b) above; (d) direct the Trustee in connection with payments, distributions or loans from the Trust Fund in accordance with the provisions of this Plan; (e) furnish the Employers with such information as may be required by them for tax or other purposes in connection with this Plan; and (f) employ agents, attorneys, accountants or other persons (who also may be employed by any Employer or the Trustee), and allocate or delegate to them such powers, -49- 55 rights and duties as the Committee may consider necessary or advisable to properly carry out the administration of this Plan; provided, however, that such allocation or delegation and the acceptance thereof by such agents, attorneys, accountants or other persons are in writing. Section 13.03. Manner of Action. During any period in which two or more Committee members are acting, the following provisions apply where the context admits: (a) at all meetings of the Committee, a majority of the members of the Committee shall be necessary and sufficient to constitute a quorum for the transaction of business; (b) if a quorum shall not be present at any meeting of the Committee, the members of the Committee present thereat may adjourn the meeting from time to time (without notice other than announcement at the meeting) until a quorum shall be present; (c) a meeting of the Committee at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of members of the Committee; provided, however, that no action of the remaining members of the Committee shall constitute the act of the Committee; (d) an action or a decision of a majority of the members of the Committee shall be the act of the Committee; (e) any action required or permitted to be taken at any meeting of the Committee may be taken without a meeting if a majority of the members of the Committee consent thereto in writing; (f) members of the Committee may participate in a meeting of the 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; (g) any document to be signed by the Committee may be signed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument; (h) a Committee member may delegate any or all of his or her rights, powers, duties and discretion to any other Committee member, with the consent of the latter; provided, however, that such delegation and the acceptance thereof by such other Committee member are in writing; (i) if, because of the number qualified to act, there is an even division of opinion among the Committee members as to a matter, a disinterested party selected by the Committee shall decide the matter and such party's decision shall control; -50- 56 (j) except as otherwise provided by Law, no member of the Committee shall be liable or responsible for an act or omission of the other Committee members in which the former has not concurred; and (k) a certificate signed by the Secretary of the Committee or a majority of the members of the Committee certifying that the Committee has taken or authorized any action shall be conclusive in favor of any person relying on such certificate. Section 13.04. Information Required by Committee. The Employers shall furnish the Committee with such data and information as the Committee may deem necessary or desirable in order to administer this Plan. The records of the Employers as to an Employee's or Participant's period of employment, termination of employment and the reason therefor, leave of absence, reemployment and earnings will be conclusive on all persons unless determined to the Committee's satisfaction to be incorrect. Participants and other persons entitled to benefits under this Plan also shall furnish the Committee with such evidence, data or information as the Committee considers necessary or desirable to administer this Plan. Section 13.05. Committee Decision Final. Subject to applicable Law and the provisions of Section 13.06, any interpretation of the provisions of this Plan and any decision on any matter within the discretion of the Committee made by the Committee in good faith shall be binding on all persons. A misstatement or other mistake of fact shall be corrected when it becomes known and the Committee shall make such adjustment on account thereof as it considers equitable and practicable. Section 13.06. Review of Benefit Determinations. The Committee will provide notice in writing to any Participant, Beneficiary or other person whose claim for benefits under this Plan is denied and the Committee shall afford such Participant, Beneficiary or other person a full and fair review of its decision, if so requested. Section 13.07. Uniform Rules The Committee shall administer this Plan on a reasonable and nondiscriminatory basis and shall apply uniform rules to all Participants similarly situated. ARTICLE XIV Relating to the Employers Section 14.01. Action by Employers. Any action required or permitted of an Employer under this Plan shall be by resolution of its Board of Directors, by a duly authorized committee of its Board of Directors or by a person or persons authorized by resolution of its Board of Directors or duly authorized committee. Section 14.02. Additional Employers. Any Affiliate that is not an Employer may adopt this Plan and become an Employer under this Plan, with the consent of the Committee. -51- 57 Section 14.03. Restrictions as to Reversion of Trust Assets to Employers. An Employer contribution made based on a good faith mistake of fact or good faith mistake in determining the deductibility of the contribution or conditioned upon the initial qualification of this Plan shall be returned to the Employer within one year of the mistaken payment or disallowance of the deduction or denial of qualification, as the case may be. The amount returnable is the excess of the amount contributed over the amount that would have been contributed had there not occurred such mistaken payment or disallowance of the deduction or denial of qualification, as the case may be. However, earnings on the excess amount may not be so returned and any losses attributable to such amount shall reduce the amount returnable. Further, the amount returnable cannot cause the individual account of any Participant to be reduced to less than it would have been had such amount not been contributed. ARTICLE XV General Provisions Section 15.01. Notices. Each person entitled to benefits under this Plan must file in writing with the Committee such person's post office address and each change of post office address. Any communication, statement or notice addressed to any person at the last post office address filed with the Committee will be binding upon such person for all purposes of this Plan, and none of the Committee, the Employers or the Trustee shall be obligated to search for or ascertain the whereabouts of any such person. Any notice or document required to be given to or filed with the Committee shall be considered as given or filed if delivered or mailed by registered mail, postage prepaid, to the Committee in care of the Corporation. Section 15.02. Waivers. No amendment, modification, restatement or supplement of this Plan shall be valid unless the same is in writing and signed by the Corporation. No waiver of any provision of this Plan shall be valid unless in writing and signed by the person or entity against whom that waiver is sought to be enforced. No failure or delay on the part of any person or entity in exercising any right, power or privilege hereunder shall operate as a waiver of any right, power or privilege hereunder. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. No notice to or demand on any person or entity in any case shall entitle such person or entity to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of any person or entity to any other or further action in any circumstances without notice or demand. Section 15.03. Absence of Guaranty. None of the Committee, the Employers or the Trustee in any way guarantees the Trust Fund from loss or depreciation, nor guarantees any payment to any person. The liability of the Committee, the Employers and the Trustee to make any payment under this Plan will be limited to the assets held by the Trustee as a part of the Trust Fund. Section 15.04. No Employment Rights. The Plan does not constitute a contract of employment, and participation in this Plan will not give any Employee the right to be retained in -52- 58 the employ of the Employers or Affiliates nor any right or claim to any benefit under this Plan, (other than rights and claims that have specifically accrued under the terms of this Plan). Section 15.05. Interests Not Transferable. Except as may be required or permitted by the Code, and except (to the extent permitted by applicable Law) as to any loan owing to the Trustee under this Plan, the interests of Participants and Beneficiaries under this Plan are not subject to the claims of their creditors and may not be voluntarily or involuntarily sold, transferred, alienated, assigned or encumbered. Section 15.06. Facility of Payment. When a person entitled to benefits under this Plan is under a legal disability or, in the Committee's opinion, is in any way incapacitated so as to be unable to manage his or her financial affairs, the Committee may direct that the benefits to which such person otherwise would be entitled shall be made to such person's legal representative, or to a relative or friend of such person for such person's benefit, or the Committee may direct the application of such benefits for the benefit of such person. If the Committee receives proper authorization by a Participant or any other person entitled to benefits under this Plan, and unless and until the Committee is notified or becomes aware that such authorization no longer is in effect, the Committee will direct that periodic deposits of the benefits which otherwise would be payable directly to such Participant shall be made into a savings or checking account established in such Participant's name at a bank or other financial institution. Any payment made in accordance with the provisions of this Section 15.06 shall be a full and complete discharge of any liability for such payment under this Plan. Section 15.07. Distribution of Payment. In the event that any distribution or payment directed by the Committee shall be mailed by the Trustee to the person specified in such direction at the latest address of such person filed with the Committee, and shall be returned to the Trustee because such person cannot be located at such address, the Trustee shall promptly notify the Committee of the return. Upon the expiration of 60 days after such notification, such direction shall become void and unless and until a further direction by the Committee is received by the Trustee with respect to such distribution or payment, the Trustee shall thereafter continue to administer the Trust as if such direction had not been made by the Committee. The Trustee shall not be obligated to search for or ascertain the whereabouts of any such person. Section 15.08. Evidence. Evidence required of anyone under this Plan may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties. Section 15.09. Indemnity. Without in any way limiting the scope of any indemnity agreement entered into in favor of or by and between parties referred to in this Section 15.09, the Trustee, the Committee, the members of the Committee, the former members of the Committee and any persons who are or were directors, officers or employees of the Employers, any Affiliates or any of their respective subsidiaries, and each of them, shall be indemnified and saved harmless by the Corporation from and against any and all loss, cost, liability or expense that may be imposed upon or reasonably incurred by such indemnified person in connection with or resulting from any claim, action, suit or proceeding to which such indemnified person may be a party or in which such indemnified person may be involved by reason of any action taken or -53- 59 failure to act under this Plan or the Trust, the administration thereof or the investment of the assets held in the Trust Fund, and against and from any and all amounts paid by such indemnified person in settlement thereof, with the Corporation's approval, or paid by such indemnified person in satisfaction of any judgment in any such action, suit or proceeding; provided, however, that such indemnified person shall give the Corporation prompt written notice of any such action, suit or proceeding and an opportunity, at its own expense, to handle, defend and settle the same before such indemnified person undertakes to handle, defend or settle the same. The foregoing right of indemnification shall not be exclusive of any other rights or indemnification to which any such indemnified person may be entitled under the Corporation's Certificate of Incorporation or Bylaws, as a matter of law or otherwise, or any power that the Corporation may have to indemnify them or hold them harmless. Section 15.10. Controlling State Law. To the extent not superseded by the Laws of the United States, the Laws of the State of Texas shall be controlling in all matters relating to this Plan. Section 15.11. Severability. Should any clause, sentence, paragraph, subsection, Section or Article of this Plan be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Plan, and the part or parts of this Plan 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 15.12. Successors. The provisions of this Plan shall be binding upon the Employers and their successors and assigns and upon the Participants and their Beneficiaries and their respective heirs, executors, personal representatives, administrators, successors and assigns. ARTICLE XVI Amendment, Termination or Plan Merger Section 16.01. Amendment. While the Corporation expects and intends to continue this Plan, the Corporation, by action of its Board of Directors or the Committee, reserves the right to amend, retroactively or prospectively, this Plan from time to time; provided, however, that: (a) the Committee may not make any amendment to this Plan that would materially increase the Employers' costs or obligations under this Plan; (b) except as may be required by the Internal Revenue Service for the purpose of meeting the conditions for qualification or for tax deduction under Sections 401 through 415 and Section 501 of the Code or as may be required by ERISA or any other state or federal Law, no action of the Corporation hereunder shall alter the operation of this Plan as it applies to employees with whom or with whose representatives there exists a written agreement pertaining to retirement income benefits, during the term of any such agreement; and -54- 60 (c) except as provided in Section 14.03, under no condition shall any amendment result in the return or repayment to any Employer of any part of the Trust Fund or the income therefrom, or result in the distribution of the Trust Fund for the benefit of anyone other than Participants and any other persons entitled to benefits under this Plan. Section 16.02. Termination. This Plan will terminate as to all Employers on any date specified by the Corporation if 30 days' advance written notice of such termination is given to the Committee, the Trustee and the other Employers. This Plan will terminate as to an individual Employer on the first to occur of the following: (a) the date it is terminated by the Board of Directors of the Corporation as to that Employer; or (b) the date that such Employer ceases to be an Affiliate of the Corporation, such Employer dissolves, merges, consolidates or reorganizes or such Employer sells all or substantially all of its assets, except that: (i) in any such event, arrangements may be made with the consent of the Corporation whereby this Plan may be continued by any successor to that Employer or any purchaser of all or substantially all of its assets, in which case, the successor or purchaser may be substituted for that Employer under this Plan and the Trust Agreement; and (ii) if any Employer is merged, dissolved or in any way reorganized into, or consolidated with, any other Employer, this Plan as applied to the former Employer will automatically continue in effect without a termination thereof. Notwithstanding anything to the contrary contained in this Plan, if this Plan is terminated or partially terminated, or the Employers' contributions under this Plan are completely discontinued, each affected Participant shall thereupon be 100% vested in his or her Accounts as of the date of such discontinuance or termination and in any amount thereafter credited or allocated to such Accounts. Section 16.03. Plan Merger or Consolidation. In no event shall there be any merger or consolidation of this Plan with, or transfer of assets or liabilities of this Plan to, any other plan unless each Participant in this Plan would (if this Plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit such Participant would have been entitled to receive immediately before the merger, consolidation or transfer (if this Plan had then terminated). Section 16.04. Notice of Amendment, Termination or Plan Merger. Affected Participants will be notified of any termination, plan merger, consolidation or substantial amendment within a reasonable time. Section 16.05. Distribution on Termination. On termination of this Plan, distributions shall be paid as soon as practicable thereafter in a lump sum. -55- 61 ARTICLE XVII Top-Heavy Provisions Section 17.01. Determination of Top-Heavy. (a) Except as otherwise provided in this Section 17.01, this Plan shall be considered a "Top-Heavy Plan" with respect to any Plan Year if, as of the last day of the preceding Plan Year: (i) the aggregate of the sum of the Accounts of Participants who are Key Employees exceeds 60% of the aggregate of the sum of the Accounts of all Participants (the "60% Test"); or (ii) this Plan is part of a "required aggregation group" (i.e., each qualified plan of the Employers in which at least one Key Employee participates and any other qualified plan of the Employers which enables any such plan to meet the requirements of Sections 401(a)(4) or 410 of the Code) and, as of the last day of the preceding Plan Year: (A) the sum of (x) the present value of the Accrued Benefits for Key Employees under all defined benefit plans included in such group plus (y) the aggregate of the Accounts of Key Employees under all defined contribution plans included in such group, exceeds (B) 60% of the sum, as of the last day of the preceding Plan Year, of the amounts specified in clause (A) above for all participants under the plans described in clause (A); provided, however, that if any Participant has not performed services for any Employer at any time during the five-year period ending on the determination date, such Participant's Account balances shall not be taken into account for purposes of top heavy determination. For purposes of this Section 17.01, the "determination date" means, for the first plan year of any plan, the last day of such plan year and, for each subsequent plan year of such plan, the last day of the preceding plan year). (b) Notwithstanding anything to the contrary contained in this Section 17.01, this Plan shall not be considered a Top-Heavy Plan with respect to any Plan Year if this Plan is a part of a "permissive aggregation group" (i.e., the required aggregation group of plans plus any other plan or plans of the Employer which, when considered as a group with the required aggregation group, would continue to satisfy the requirements of Sections 401(a)(4) and 410 of the Code) which does not satisfy the requirements of Section 17.01(a)(ii). (c) Distributions made within the preceding Plan Year and within the four Plan Years immediately preceding such Plan Year shall be added to the Account of any Participant in determining whether this Plan shall be considered a Top-Heavy Plan; provided, however, that the Accounts of any Participant who is not a Key Employee but who was a Key Employee in a prior -56- 62 Plan Year or who has not received any compensation from any Employer maintaining this Plan at any time during such five-year period will be disregarded. Section 17.02. Minimum Allocations. Notwithstanding anything contained in this Plan to the contrary, for any Plan Year in which this Plan is deemed a Top-Heavy Plan, the minimum Employer contributions for a Plan Year for each Participant who is not a Key Employee shall be equal to 3% of such Participant's compensation. Section 17.03. Compensation Limitation. The compensation limits of Section 401(a)(17) of the Code shall apply. Section 17.04. Repeal, Modification or Postponement of Top-Heavy Provisions. In the event that all or any portion of Section 416 of the Code is modified, this Article XVII shall be deemed to have been modified in a manner commensurate with such amendment to Section 416 of the Code. In the event that all or any portion of Section 416 of the Code is repealed, this Article XVII shall have no effect as of the effective date of such repeal. Furthermore, if the effective date of Section 416 of the Code is delayed or postponed, this Article XVII shall have no effect until the effective date of Section 416 of the Code. Section 17.05. Minimum Vesting. If a Participant resigns or is dismissed from the employ of the Employers and the Affiliates before retirement, payment of Account balances shall be governed by Section 10.02 of this Plan. Section 17.06. Key Employee. An Employee is considered a "Key Employee" with respect to any Plan Year if such Employee, at any time during such Plan Year or any of the preceding four Plan Years, has been included in one of the following categories: (a) an "officer" of the Employer (as defined in the Regulations under Section 416 of the Code) having annual 415 Compensation greater than 50% of the amount in effect under Section 415(b)(1)(A) of the Code for any such Plan Year; (b) one of the ten Employees having annual 415 Compensation from the Employers for any such Plan Year greater than the dollar limitation in effect under Section 415(c)(1)(A) of the Code for the calendar year in which such Plan Year ends and owning (or considered as owning within the meaning of Section 318 of the Code) both more than a 0.5% interest and the largest interests in the Employer; (c) a Five Percent Owner of any Employer; or (d) a One Percent Owner of any Employer having annual 415 Compensation from such Employer of more than $150,000; provided, however, that in determining whether an individual has 415 Compensation of more than $150,000, 415 Compensation from each Employer required to be aggregated under Sections 414(b), (c), (m) and (o) of the Code shall be taken into account. -57- 63 For purposes of this Section 17.06, the determination of 415 Compensation shall be based only on 415 Compensation which is actually paid, including amounts which are (i) contributed by the Employers pursuant to a salary reduction agreement and which are not includable in the gross income of the relevant Participant under Sections 125, 402(e)(3), 402(h), 403(b) or 457 of the Code and (ii) contributions by such Participant that are described in Section 414(h)(2) of the Code and treated as Employer contributions. Section 17.07. Compensation. For purposes of this Article XVII, the "compensation" to be used for any Employee is the compensation stated on such Employee's Form W-2 for the calendar year that ends within the relevant Plan Year. This definition of compensation shall be used for determining a minimum benefit or a minimum contribution for any Employee and for all Top-Heavy Plan purposes, except that, for the purpose of determining whether an Employee is a Key Employee with respect to any Plan Year beginning on or after January 1, 1989, the compensation to be used is "compensation" (as defined in Section 415(c)(3) of the Code) but including Employer contributions made pursuant to any salary reduction arrangement. IN WITNESS WHEREOF, the Corporation has executed this Sixth Amended and Restated Savings and Investment Plan effective as of October 1, 2000. STERLING CHEMICALS, INC. By: ------------------------------------- Frank P. Diassi Chairman of the Board of Directors -58- 64 EXHIBIT A Investment Funds CORE INVESTMENT OPTIONS AIM BALANCED FUND...................... Ordinarily invests in a broadly diversified portfolio of high-yielding securities, including common stocks, preferred stocks, convertible securities and bonds, in order to meet the Fund's goal of achieving as high a total return as possible, consistent with preservation of capital. CALVERT INCOME FUND.................... Ordinarily invests in bonds and other income-producing securities in order to meet the Fund's goal of maximizing long-term income, consistent with prudent investment management and preservation of capital. DAVIS NY VENTURE FUND.................. Ordinarily invests in equity securities of companies with market capitalization of at least $5 billion in order to meet the Fund's goal of growth of capital. JOHN HANCOCK SMALL CAP................. Ordinarily invests in stocks that VALUE FUND appear comparatively undervalued and are out of favor in order to meet the Fund's goal of capital appreciation, with income as a secondary consideration. MANAGERS INTERNATIONAL................. Ordinarily invests in equity EQUITY FUND securities domiciled outside the U.S. and fixed-income securities denominated in both foreign and domestic currencies in order to meet the Fund's goal of long-term capital appreciation, with income as a secondary objective. MFS EMERGING GROWTH.................... Ordinarily invests in common stocks FUND of emerging growth companies, which are companies that the Fund's management believes are either early in their life cycle but have the potential to become major enterprises or are major enterprises whose rates of earnings growth are expected to accelerate, in order to meet the Fund's goal of providing long-term growth of capital. ML EQUITY INDEX TRUST.................. Ordinarily invests in a portfolio of equity securities designed to substantially track the performance of Standard & Poor's 500 Composite Stock Price Index (before expenses). ML RETIREMENT.......................... Ordinarily invests in a broadly PRESERVATION TRUST diversified portfolio of guaranteed investment contracts, obligations of U.S. government and U.S. government agency securities in order to meet the Fund's goals of preservation of investments, liquidity and current income that is typically higher than money market funds. A-i 65 MUTUAL FUND WINDOW DELAWARE TREND FUND.................... Ordinarily invests in common stocks, including small-capitalization and convertibles, of companies that the Fund's management believes have the fundamental characteristics to support growth in order to meet the Fund's goal of achieving long-term capital appreciation. ML BALANCED CAPITAL FUND............... Ordinarily invests in equity securities, corporate bonds and money market securities in order to meet the Fund's goal of achieving the highest total investment return, consistent with prudent risk. ML GLOBAL ALLOCATION FUND.............. Ordinarily invests in U.S. and foreign equity, debt and money market securities in order to meet the Fund's goal of achieving the highest total investment return, consistent with prudent risk. ML HEALTHCARE FUND..................... Ordinarily invests in worldwide equity securities of companies that, in the opinion of the Fund's management, derive a substantial portion of their sales from products and services in health care in order to meet the Fund's goal of achieving long-term capital appreciation. OPPENHEIMER DEVELOPING................. Ordinarily invests in equity MARKETS FUND securities of issuers whose principal activities are located in at least three different developing markets, debt securities of corporate or government issuers in developing markets, equity and debt securities of corporate issuers in developed markets (including the U.S.) and cash and money market instruments in order to meet the Fund's goal of aggressively seeking capital appreciation. PIMCO INNOVATION FUND.................. Ordinarily invests in common stocks of companies which utilize innovative technologies to gain a strategic competitive advantage in the industry and companies that provide and service those technologies in order to meet the Fund's goal of achieving capital appreciation. OTHERS COMPANY STOCK FUND..................... The Company Stock Fund invested solely in Company Stock and constitutes a "frozen" fund as of September 1, 1997. CYTEC STOCK FUND....................... The Cytec Accounts that were invested in Cytec common stock under the Cytec Plan on January 31, 1997 continue to be in such stock and constitute a "frozen" fund as of that date (i.e., no additional Cytec common stock shall be acquired by this Fund, other than Cytec stock dividends and any cash dividends or other distributions received by such frozen fund which are automatically reinvested in Cytec common stock). A-ii EX-10.9A 15 h82651ex10-9a.txt 1ST AMEND. TO STERLING CHEMICALS ESOP 1 EXHIBIT 10.9a STERLING CHEMICALS ESOP (FIRST AMENDMENT) WHEREAS, there is reserved to the Chief Executive Officer of the Company in Section 9.1 of the Sterling Chemicals ESOP (the "Plan") the right to amend the Plan, subject to certain restrictions set forth therein; and WHEREAS, the Company deems it advisable to amend the Plan; NOW, THEREFORE, Section 7.6(a) of the Plan is hereby amended to read as follows: "Distribution of a Participant's benefit from his Company Stock Account shall be made solely in whole shares of Company Stock, except that any fractional share shall be paid in cash." All terms used herein that are defined in the Plan shall have the same meanings given to such terms in the Plan, except as otherwise expressly provided herein. Except as amended and modified hereby, the Plan shall continue in full force and effect and the Plan and this amendment shall be read, taken and construed as one and the same instrument. This amendment may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument which may be evidenced by any one counterpart. IN WITNESS WHEREOF, this Amendment has been executed on this December ___, 1996, effective for all purposes as of such date. STERLING CHEMICALS, INC. BY: --------------------- NAME: ------------------- TITLE: ------------------ EX-10.9B 16 h82651ex10-9b.txt 2ND AMEND. TO STERLING CHEMICALS ESOP 1 EXHIBIT 10.9b STERLING CHEMICALS ESOP (SECOND AMENDMENT) WHEREAS, there is reserved to the Chief Executive Officer of the Company in Section 9.1 of the Sterling Chemicals ESOP (the "Plan") the right to amend the Plan, subject to certain restrictions set forth therein; and WHEREAS, the Company deems it advisable to amend the Plan; NOW, THEREFORE, the Plan is hereby amended effective as of August 21, 1996 as follows: 1. Section 4.3(g) is amended to read as follows: "All Company Stock acquired by the Plan with the proceeds of an Exempt Loan must be added to and maintained in the Unallocated Company Stock Suspense Account. For each Plan Year during the duration of the Loan, the number of shares of Company Stock released shall equal the number of encumbered shares held immediately before release of the current Plan Year multiplied by a fraction, the numerator of which is the amount of principal paid for the Plan Year and the denominator of which is the sum of the numerator plus the principal to be paid for all future Plan Years. In order to determine the release of shares based solely on principal payments on the Exempt Loan, the Exempt Loan must provide for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for 10 years; interest included in the Exempt Loan payment shall be disregarded only to the extent that it would be determined to be interest under standard loan amortization tables; and if by reason of a renewal, extension, or refinancing, the sum of the expired duration of the Exempt Loan, the renewal period, the extension period, and the duration of the new Exempt Loan exceeds 10 years, then for each Plan Year during the duration of the Exempt Loan, the number of securities released must equal the number of encumbered securities held immediately before release for the current Plan Year multiplied by a fraction, the numerator of which is the amount of principal and interest paid for the year, and the denominator of which is the sum of the numerator plus the principal and interest to be paid for all future years. In addition, in such event the number of future years under the Exempt Loan must be definitely ascertainable and must be determined without taking into account any possible extensions or renewal periods. If the interest rate under the Exempt Loan is variable, the interest to be paid in future years must be computed by using the interest rate applicable as of the end of the Plan Year. If collateral includes more than one class of securities, the number of securities of each class to be released for a Plan Year 2 must be determined by applying the same fraction to each class. As of each Anniversary Date, the Plan must consistently allocate to each Participant's Account pursuant to Section 4.3(b), shares and fractional shares of Company Stock representing each Participant's interest in the shares withdrawn from the Unallocated Company Stock Suspense Account; provided, however, to the extent any cash dividends on allocated shares of Company Stock have been applied to repay the loan that year, the number of shares released shall first be allocated to the accounts of those Participants equal in amount to the cash dividends diverted from such accounts for repayment of the Exempt Loan. Income earned with respect to Company Stock in the Unallocated Company Stock Suspense Account shall be used to repay the Exempt Loan or used to purchase such Company Stock. Any income which is not so used must be allocated as income of the Plan." 2. Section 4.6(b)(2) is amended to read as follows: "Qualified Election Period means the six Plan Year period beginning with the first Plan Year in which the Participant first became a Qualified Participant." All terms used herein that are defined in the Plan shall have the same meanings given to such terms in the Plan, except as otherwise expressly provided herein. Except as amended and modified hereby, the Plan shall continue in full force and effect and the Plan and this amendment shall be read, taken and construed as one and the same instrument. This amendment may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument which may be evidenced by any one counterpart. IN WITNESS WHEREOF, this Amendment has been executed on this _____________, 1997, effective for all purposes as provided above. STERLING CHEMICALS, INC. By: --------------------- Name: ------------------- Title: ------------------ EX-10.9C 17 h82651ex10-9c.txt 3RD AMEND. TO STERLING CHEMICALS ESOP 1 EXHIBIT 10.9c THIRD AMENDMENT TO THE STERLING CHEMICALS ESOP WHEREAS, there is reserved to Sterling Chemicals, Inc. ("Chemicals") in Section 9.1 of the Sterling Chemicals ESOP (the "Plan") the right to amend the Plan; and WHEREAS, Sterling Fibers, Inc. ("Fibers"), a subsidiary of Chemicals, has adopted the Plan for its eligible employees in conjunction with the purchase of certain operations from Cytec Industries, Inc. and its affiliates ("Cytec"); NOW, THEREFORE, Section 1.53 of the Plan is hereby amended effective as of January 31, 1997 by adding thereto a new subparagraph (d) to read as follows: "(d) Each Cytec employee who became an employee of Fibers on January 31, 1997 shall receive credit for his service that was credited under the Cytec Savings and Profit Sharing Plan ("Cytec Plan") on January 31, 1997 for vesting purposes under the Plan." All terms used herein that are defined in the Plan shall have the same meanings given to such terms in the Plan, except as otherwise expressly provided herein. Except as amended and modified hereby, the Plan shall continue in full force and effect and the Plan and this amendment shall be read, taken and construed as one and the see instrument. This amendment may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument which may be evidenced by any one counterpart. IN WITNESS WHEREOF, Chemicals has executed this instrument effective for all purposes as of the date provided above. STERLING CHEMICALS, INC. By: --------------------- EX-10.9D 18 h82651ex10-9d.txt 4TH AMEND. TO STERLING CHEMICALS ESOP 1 EXHIBIT 10.9d FOURTH AMENDMENT TO THE STERLING CHEMICALS ESOP WHEREAS, there is reserved to Sterling Chemicals, Inc. (the "Company") in Section 9.1 of the Sterling Chemicals ESOP (the "Plan") the right to amend the Plan; NOW, THEREFORE, the Plan is amended effective as of November 1, 1998 as follows: 1. Section 1.27 is amended by adding thereto the following sentence: "To the extent not otherwise treated as Hours of Service, the following shall constitute Hours of Service: hours of absence from active work (i) because of occupational illness or disability not yet determined to constitute a long-term disability and (ii) if a member of a collective bargaining unit, due to a layoff not exceeding 12 months or, if earlier, the date the Participant waives his recall rights." 2. Section 4.3(b) of the Plan is amended by adding thereto the following sentence: "A Participant who is involuntarily terminated by the Employer other than for cause as part of a formal reduction in force or layoff program shall be deemed to be an "eligible Participant" on the last day of such Plan Year for purposes of sharing in the Employer Contributions or Forfeitures for that year." 3. Section 7.5 is amended by adding thereto a new subparagraph (j) to read as follows: "The Benefit Commencement Date for a Participant who continues to receive Hours of Service credited pursuant to Section 1.27 shall not occur until the date such crediting ceases." All terms used herein that are defined in the Plan shall have the same meanings given to such terms in the Plan, except as otherwise expressly provided herein. Except as amended and modified hereby, the Plan shall continue in full force and effect and the Plan and this amendment shall be read, taken and construed as one and the see instrument. This amendment may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument which may be evidenced by any one counterpart. 2 IN WITNESS WHEREOF, the Company has executed this instrument this _______________, 1999, effective for all purposes as of the date provided above. STERLING CHEMICALS, INC. By: --------------------- Name: ------------------- Title: ------------------ EX-10.9E 19 h82651ex10-9e.txt 5TH AMEND. TO STERLING CHEMICALS ESOP 1 EXHIBIT 10.9e FIFTH AMENDMENT TO THE STERLING CHEMICALS ESOP WHEREAS, there is reserved to the Company the right to amend the Sterling Chemicals ESOP (the "Plan"); and WHEREAS, the Company deems it advisable to amend the Plan in the manner hereafter set forth; NOW, THEREFORE, the Plan is hereby amended effective as of December 31, 1998 as follows: "Notwithstanding anything in the Plan to the contrary, with respect to a participant who attains age 70 1/2 after 1998 (other than an owner, within the meaning of IRC Section 318), benefits shall not be paid or begin prior to the participant's termination of employment with the Company and all members of its controlled group of employers. Except to the extent required by IRC Section 401(a)(9), the Plan shall not preclude such a participant from receiving benefits in any of the same optional forms (except for the difference in the timing of the commencement of payments) that would have been available had the participant retired in the calendar year in which the participant attained age 70 1/2." All terms used herein that are defined in the Plan shall have the same meanings given to such terms in the Plan, except as otherwise expressly provided herein. Except as amended and modified hereby, the Plan shall continue in full force and effect and the Plan and this instrument shall be read, taken and construed as one and the same instrument. This instrument may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument which may be evidenced by any one counterpart. IN WITNESS WHEREOF, the Company has caused this instrument to be executed effective for all purposes as provided above. STERLING CHEMICALS, INC. By: --------------------- Name: ------------------- Title: ------------------ EX-10.11 20 h82651ex10-11.txt AGREEMENT - PULP, PAPER AND WOODWORKERS OF CANADA 1 EXHIBIT 10.11 AGREEMENT BETWEEN STERLING PULP CHEMICALS LTD. NORTH VANCOUVER BRITISH COLUMBIA AND PULP, PAPER AND WOODWORKERS OF CANADA LOCAL 5 BRITISH COLUMBIA EFFECTIVE DECEMBER 1, 1997 to NOVEMBER 30, 2000 2 TABLE OF CONTENTS ARTICLE 1 PURPOSE 1 2 RECOGNITION 1 3 MANAGEMENT FUNCTIONS 1 4 UNION SECURITY 2 5 TERMS OF AGREEMENT AND CHANGES IN AGREEMENT 2 6 STRIKES AND LOCKOUTS 3 7 HOLIDAYS 3 8 CALL TIME 5 9 HOURS OF WORK 5 10 DEFINITIONS 7 11 ALLOWANCE FOR FAILURE TO PROVIDE WORK 7 12 UNION NOTICES 8 13 SAFETY 8 14 SENIORITY 9 15 GRIEVANCE PROCEDURE 15 16 ARBITRATION 16 17 DAYS OFF AND SCHEDULE OF SHIFTS 17 18 VACATIONS 17 19 TEMPORARY EMPLOYEES 20 20 JOB CLASSIFICATIONS AND JOB RATES 21 21 WAGE RATE ADJUSTMENTS 21
i 3 TABLE OF CONTENTS (CONT'D) 22 OVERTIME AND PREMIUM TIME 22 23 JURY DUTY PAY 23 24 BEREAVEMENT LEAVE 23 25 MAINTENANCE DEPARTMENT APPRENTICES 24 26 SUSPENSION AND/OR DISCHARGE 24 27 LEAVE OF ABSENCE 24 28 COMMITTEES 25 29 TRAINING 25 30 TECHNOLOGICAL CHANGE AND TERMINATION PAY 26 31 CONTINUOUS 12-HOUR SHIFTS 27 32 HEALTH AND WELFARE 27 33 PENSION PLAN 27 EARLY RETIREMENT PROVISION 28 34 BANKING OF OVERTIME 29 APPENDIX "A" 30 MULTI SKILL/DUAL TRADES 30 APPENDIX "B" 32 APPENDIX "C" BENEFITS OF HOURLY-PAID EMPLOYEES NORTH VANCOUVER PLANT 34 SUPPLEMENTARY PENSION FUND 35 APPENDIX "D" PRODUCTION SCHEDULE 36
Changes from previous contract (November 1997) are indicated by SHADING & BOLDING. ii 4 AGREEMENT BETWEEN STERLING PULP CHEMICALS LTD. NORTH VANCOUVER, B.C. (HEREINAFTER REFERRED TO AS "THE COMPANY") AND LOCAL 5 PULP, PAPER AND WOODWORKERS OF CANADA (HEREINAFTER REFERRED TO AS THE "UNION") Article 1 PURPOSE 1.01 The purpose of the Agreement is to provide for orderly collective bargaining, prompt disposition of grievances, wages, hours of work and other terms and working conditions to the extent and in the manner provided herein. Article 2 RECOGNITION 2.01 The Company recognizes the Union as the sole and exclusive bargaining agent for its employees employed in production and maintenance except those excluded by the Labour Relations Code of British Columbia (1993), foreman, those above the rank of foreman, sales staff, office and clerical staff test and quality control staff, laboratory technicians, draftsmen, security guards and those engaged in office janitor work. 2.02 The terms "employee" and "employees" when used in this agreement shall mean persons in the employ of the Company within the bargaining unit described herein above and covered by this Agreement. Gender: The use of "he", "his" and "him" refer to both the masculine and feminine genders. 2.03 The Company recognizes the Union's right to communicate with its members on the Company's property so that the Union, through its elected officials, may fairly represent the employees. Article 3 MANAGEMENT FUNCTIONS 3.01 All functions, powers, or authority which the Company has not specifically abridged, delegated or modified by this Agreement will be recognized by the Union as being retained by the Company. 1 5 Article 4 UNION SECURITY 4.01 Any employee who is now a member in good standing or who becomes or is reinstated as a member of the Union shall, as a condition of employment, maintain such membership in good standing throughout the term of this Agreement. Any new employee hired shall become a member of the Union thirty (30) days after his or her employment. In the event of a Local Union intending to suspend a member for non-maintenance of membership, the Company shall be notified by the local, in writing at least seven (7) days before suspension. 4.02 No employee shall be subject to any penalties against his application for membership or reinstatement, except as may be provided for in the Constitution of the Pulp, Paper and Woodworkers of Canada. 4.03 There shall be no discrimination against any employee or employees in any manner whatsoever because of race, colour, creed, nationality, Union membership, and non-Union membership. 4.04 In case a dispute arises as to whether or not an employee has failed to maintain his Union membership in good standing, the Union agrees to save harmless from and indemnify the Company for any liability that may arise from any acts of the Company taken under provisions of ARTICLE 4, as a result of its reliance on a representation of facts by the Union. 4.05 The Company will deduct a Union initiation fee and monthly Union dues in amounts authorized by individual employees and presented in writing to the Company. Any Union dues passed in compliance with Local 5 of the Pulp, Paper and Woodworkers of Canada by-laws shall be applied and deducted upon notification from the Secretary of Local 5 sent to the Company. Such deductions shall be remitted to the Local Secretary - Treasurer as soon as possible after the first pay period of each month and any adjustments will be made the following month. The Union shall advise the Company of the address of the Local Treasurer and of any changes in this address. Deductions of Union dues from an employee's pay shall be discontinued when written authorization furnished the Company by the employee is revoked, in writing by the employee. 4.06 There shall be no solicitation for membership, meetings, etc., during working hours and/or on Company premises except with the permission of the Company. 4.07 For the purpose of this Agreement, a member of the Union in good standing shall mean an employee who has paid or tendered an amount equivalent to the regular monthly Union dues and assessments. Article 5 TERMS OF AGREEMENT AND CHANGES IN AGREEMENT 5.01 This Agreement shall be in effect until the 30TH OF NOVEMBER, 2000 and shall continue thereafter from year to year unless during the four months immediately preceding the expiry date either party has given written notice to the other party that desires revision of this Agreement and its expiry date. 5.02 If notice of desire for changes has been given the parties shall, as soon as agreeable, meet for collective bargaining. If such negotiations cannot be completed prior to December 1st following the October 1st on which such notice was given, any changes in compensation to employees shall be retroactive to December 1st. 2 6 Article 6 STRIKES AND LOCKOUTS 6.01 The Union and its members agree that it will not cause, authorize or sanction any strike or stoppage of any of the Company's operations or any Curtailment of work or restriction of or interference with production during the terms of this Agreement. 6.02 The Company agrees that it will not cause or sanction a lockout during the terms of this Agreement. Article 7 HOLIDAYS 7.01 Recognized Holidays (a) New Year's Day Canada Day Remembrance Day Good Friday 1st Monday In August Christmas Day Easter Monday Labour Day Boxing Day Victoria Day Thanksgiving Day (b) In the event that Heritage Day is declared as a Statutory Holiday by the Federal Government it will be included in the above list of holidays. 7.02 The period of time recognized as a holiday is the twenty- four (24) hour period from 0001 hrs to 2400 hrs on the date recognized as the holiday. However for those employees working the 12 hour shift schedule, the holiday will commence at 1830 hours immediately preceding such 12:01am and will end twenty-four (24) hours later. (i.e. 1830 hours on the day of the holiday) . 7.03 The hours of commencing and ending specified above may be varied by mutual agreement of the Management and the Union Standing committee. The specified hours of commencing or ending will be adjusted to coincide with regular hours for changing shifts. 7.04 a) It is understood that day workers will not be required to work on a holiday except to meet the needs of the continued uninterrupted operation of the plant. b) Further, and with special reference to the Christmas holiday the parties recognized that shift workers will be held to absolute reasonable minimum and that only those activities required to maintain the necessary efficient operation of the plant shall be performed. 7.05 a) When any of the holidays listed in the Agreement falls on a Saturday or Sunday, shift workers should observe the holiday on the day which it falls. Day workers, scheduled Monday to Friday, will observe the holiday on such a day as will provide them with a long weekend. The determination of such day or days shall be determined by the Company consistent with operational requirements. b) In the event a holiday falls on a day when a day worker would otherwise be scheduled off, then said employee will take the holiday on the Thursday before or the Tuesday following the holiday whichever is applicable and is mutually agreed. 3 7 c) In the event the holiday falls on the day when a shift worker would otherwise be scheduled off, he has the option of banking the time and/or the money. d) For shift workers, holiday pay is calculated as 8 hours pay at straight time, and in the case of banking, 8 hours will be banked for each holiday that falls on a scheduled day off, and 12 hours for each holiday worked. 7.06 Overtime shall be paid for all work performed during holidays at the rates hereinafter specified. 7.07 In addition to any other compensation earned, all employees who are on the payroll of the Company on any of the forgoing recognized holidays will be granted eight (8) hours pay on the straight time rate of the employee's regular job, provided however, that: (a) Any new employee must have been on the payroll for not less than thirty (30) days just preceding the holiday and must have worked a minimum of eighty five (85) hours during that thirty (30) day qualifying period. b) The employees must have worked his scheduled work day before and his scheduled work day after the holiday unless failure to work was due to any of the following events. (1) When the employee is on his regular authorized vacation. (2) When the employee's absence is due to bonafide sickness or occupational or non-occupational accident provided however, that payment for such holiday is not being covered by W.C.B. or sick benefit insurance. Payment for such holiday will not be extended beyond the time limit of W.C.B. or sick benefit insurance. (3) When a trade in shifts agreed upon between employees, and approved in advance by Management, results in temporary change of the scheduled work day after the holiday, provided the employee works the shift agreed upon. (4) When the employee's absence is due to an approved leave of absence granted by the Company; provided however that such leave of absence does not exceed ten (10) days prior to or ten (10) days following such holiday. (5) When the employee's absence is due to Jury Duty, subpoenaed witness or bereavement leave as provided by this Agreement. (6) When the operation in which the employee is engaged is curtailed or discontinued by the decision of management and which curtailment of discontinuance changes or eliminates the employee's scheduled work day before, or his scheduled work day after, such holiday. 7.08 An employee whose work schedule conflicts with the normal observance of a specified holiday may elect to bank the holiday, and take the time off and pay thereof, provided the following conditions are met: (a) The holiday(s) and holiday(s) pay shall be taken at a time convenient to the employee and management consistent with the continued, economic and efficient operation of the plant. It is understood that requests for time off received and granted thirty (30) days in advance will be honoured. 4 8 (b) Employees must notify their supervisor in writing at least one week in advance of the holiday of his intent to bank that holiday. (c) It is also agreed and understood that the employee will take such banked holidays within one year of banking. If the employee does not arrange to take the holiday within the given delay, the Company will schedule time off at its own discretion in lieu thereof or alternatively, if mutually agreed, reimburse any banked holiday pay and forfeit the banked time. 7.09 Employees working temporarily at a higher job rate will be paid at the higher job rate for a statutory holiday providing they work at that higher job rate on either side of said statutory holiday, otherwise they will be paid for the statutory holiday based on their regular job rate. If the employee is scheduled off on either side of the statutory holiday, then his last scheduled day on before, or his first scheduled day on after the statutory holiday, will satisfy this section. 7.10 In the event that an employee is called in, or is scheduled to work, on a recognized statutory holiday on a job paying a higher rate than his regular job, he will be paid for the statutory holiday at the higher rate of pay. Article 8 CALL TIME 8.01 Call time is an occasion when an employee, after leaving the premises, is called in to work before his next regularly scheduled reporting time. In such cases, the Company will pay an additional amount over and above pay for hours worked, equal to three (3) hours pay at the employee's straight time hourly rate, which shall be known as call time. Such call time shall not be payable when the employee, before leaving the premises, is notified to report for work before his next regularly scheduled reporting time. 8.02 When the hours worked on call time are extended to the employee's regularly scheduled starting time, overtime rates as called for by this section, shall cease at the employee's regularly scheduled starting time unless such call-in was of such duration as to give the employee a full shift prior to his regular starting time consistent with article 22.10. Article 9 HOURS OF WORK 9.01 Hours of work shall be scheduled by the Company in accordance with the requirements of the plant. 9.02 Employees shall be at their work place and ready to assume their duties at the commencement of their work day. 9.03 Shift workers will not leave their work place until 0630 HRS (or 1830 HRS) unless relieved by the employee assigned to the same position on the following shift. 9.04 Employees are expected to co-operate in the execution of necessary overtime work. The Company will make every effort to keep overtime to a minimum consistent with the continued efficient operation of the plant. 9.05 The normal hours of work shall be: 5 9 a) For Day Workers - from 0700 Hrs. to 1200 Hrs. and from 1230 Hrs. to 1650 Hrs. A ten minute wash up period will be provided prior to lunch and at the completion of the work day. Labourers and Relief Brine Operators assigned to the Maintenance Department (for a period of a week or more), will be classified as Day Workers. b) For Shift Workers - from 0630 Hrs. to 1830 Hrs., and 1830 Hrs. to 0630 Hrs. - as per Article 31. c) For Labourers and Relief Brine Operators assigned to the Production Department - Two different workday formats are available: i) From 0630 Hrs. (or 0730 Hrs.) to 1600 Hrs. (or 1700 Hrs.), and 1600 Hrs. (or 1700 Hrs.) to 0130 Hrs. (or 0230 Hrs.). A one-half hour lunch break is included, with a ten minute wash up period prior to lunch and at the completion of the work day. ii) From 0630 Hrs. to 1830 Hrs., and 1830 Hrs. to 0630 Hrs. - similar to a shift worker. 9.06 The regular schedule of hours of work shall be: a) For Day Workers - 9 1/3 hours per day and 37 1/3 hours per week. The normal work week will be either Monday to Thursday, or Tuesday to Friday. b) For Shift Workers - 12 hours per day and 36 or 48 hours per week with compensating scheduled time off to average 37 1/3 hours/week - as per Article 31. Compensating time off for Shift Workers shall be covered by the Senior Relief Operators and taken in blocks of three (3) day shifts as outlined in the shift schedule in Appendix D. When ever the Senior Relief Operator is scheduled as a spare operator, he may be rescheduled to provide relief on dayshift or nightshift as required. c) For Labourers & Relief Brine Operators assigned to the Production Department - either: i) Four workdays of 9 hours per day, with compensation to allow averaging of 37 1/3 hours/week over a 9 week period, or ii) Three workdays of 12 hours per day, with compensation to allow averaging of 37 1/3 hours/week over a 9 week period. Labourers and Relief Brine Operators assigned to the Production Department will receive shift premiums (when working the evening shift(s) outlined in Article 9.05(c) as per Article 22.09, & statutory holiday compensation as per Article 7.05(c) & (d). Every effort shall be made to schedule consecutive days off in each work week when ever possible. This article is for the purpose of providing a basis for calculating overtime and shall not be construed as a guarantee of hours of work. 6 10 Article 10 DEFINITIONS 10.01 The words "shift workers" means employees assigned to a job on a regularly rotating shift schedule. All other employees are considered day workers. 10.02 The word "day" shall mean a calendar day and shall be a period of twenty-four (24) hours beginning at 0001 hours. However, in the case of the work schedule a shift worker working the 12 hour schedule, and only in such cases, the day shall deem to have commenced at 0630 HRS. 10.03 The word "week" means a period of seven (7) days beginning at 0001 hours Monday. However, in the case of the work schedule of a shift worker working the 12 hour schedule, and only in such cases, the week shall deem to have commenced at 0630 HRS Monday. 10.04 Further to Article 18: (a) The word "week", when used to define a length of vacation, and for the purposes of calculating vacation pay, shall mean 37 1/3 average working hours. (b) The word "day", when used to define a length of a vacation, shall mean 9 1/3 working hours. 10.05 Bargaining Unit Work It is the policy of the Company not to use non-bargaining unit personnel to do work normally performed by hourly paid employees. It is recognized by the parties that there may be exceptions to the above, such as: (a) in emergency situations (b) when no qualified hourly employee is available It is recognized by both parties, however, that for the practical and efficient operation of the plant, there are occasions when a supervisor must help. These occasions will be temporary in nature and will not result in the displacement or exclusion of hourly rated employees. Article 11 ALLOWANCE FOR FAILURE TO PROVIDE WORK 11.01 An employee who reports for work at his regularly scheduled time and who has not been notified by the Company not to report, shall receive not less than one half his regular shifts work at his regular straight time hourly rate, or pay in lieu thereof at the discretion of the Company. 11.02 A telephone call to the number on record in the employee's name in the plant personnel files will be considered as proof of notification. An employee who leaves no telephone number by which he can be contacted forfeits the right to the one half shift or pay in lieu there of as mentioned in 11.01 above. 7 11 Article 12 UNION NOTICES 12.01 The Company will provide the Union with a secured bulletin board in the plant for the purpose of posting official Union notices and papers. Notices will be posted and initialed by a member of the Union Standing Committee, or the authorized representative of the Bargaining Agent. Article 13 SAFETY 13.01 Employees and the Company are to comply with established Safety Rules as amended by the Joint Occupational Health and Safety Committee from time to time. Employees will not be expected to operate with unsafe equipment or under unsafe working conditions. Employees are expected to report immediately any unsafe equipment or condition to the Production or Maintenance Manager using where appropriate the Safety Work Order System. 13.02 The Union will elect three of its members to serve on the Joint Occupational Health and Safety Committee preferably with representation from each Department. The Plant Manager will appoint three Company representatives. The Occupational Health and Safety Committee will meet monthly to develop and promote the safety program. It is agreed that the Committee will appoint a Chairman with the responsibility alternating between the Company and the Union. Where the Chairman is a Union employee, the Secretary shall be a Company representative and vice versa. 13.03 The Union undertakes to encourage its members to cooperate in the execution of the Plant Safety Program and Safety Education. 13.04 FIRST AID ATTENDANTS As of September 1st, 1994, the Occupational First Aid Regulations require that the First Aid Attendants only require a Level II certificate. First Aid Attendants currently holding a Level III equivalent certificate, (i.e.: an Industrial First Aid 'A' or 'B' certificate) and who desires to renew at that level may do so. All new candidates will only be given necessary training to acquire a Level II certificate. If a person lapses in renewing his First Aid certificate and then wants to renew, he will be treated as a new candidate. Wages during training and exams will be paid as for scheduled hours of work: - During the training period. - On the day before the exam. - On the exam or re-exam day. THE COMPANY WILL PAY FOR ASSOCIATED COSTS OF CERTIFICATION WITH PRIOR AUTHORIZATION OF THE SUPERVISOR. AN EMPLOYEE HOLDING A LEVEL II OR III W.C.B. OCCUPATIONAL FIRST AID CERTIFICATE WILL BE PAID $1.00 PER HOUR OVER AND ABOVE THE EMPLOYEE'S REGULAR RATE. 8 12 Article 14 SENIORITY 14.01 General Principles (a) The company recognizes the principles of seniority in the administration of promotions, demotions, transfers, layoffs and recalls. In the application of seniority, provided an employee has the necessary qualifications and ability to perform the work in accordance with job requirements, seniority shall prevail. Definitions (b) Plant seniority shall mean the length of continuous service in the employ of the signatory Company in the North Vancouver Bargaining Unit. (c) Departmental seniority shall mean the length of continuous service in a permanent position within the recognized departments. 14.02 Establishing Seniority (a) Plant seniority shall be established from the original date of hire, after completion of a probationary period. A probationary period consists of 40 working days and may be extended by mutual agreement between the company and the union. (b) During the probationary period defined in 14.02(a), a new employee will not have any seniority rights and shall be subject to transfer, demotion, promotion, layoff or discharge at the sole discretion of the Company without recourse to the grievance procedure of this Agreement. (c) The Company will appraise each probationary employee at the end of his first thirty (30) working days in his presence. A Shop Steward or Union Standing Committee Member shall be present if requested by the employee. Copy of the appraisal to be sent to the employee and the Union Standing Committee. (d) An employee who exercises his seniority to promote or bump into another job within the Bargaining Unit, shall be probationary in the new job for a period of two (2) weeks after training is completed. In such instance, the employee shall be formally appraised in his presence and within the stipulated probationary period. A Shop Steward or Union Standing Committee Member shall be present if requested by the employee. 14.03 Loss of Seniority (a) Plant or Departmental An employee shall cease to have Plant seniority or Departmental seniority if the employee: 1) quits or resigns, or 2) is discharged 3) Is laid off for a period exceeding recall provisions. 9 13 4) Is absent from work for three (3) consecutive days on which he is scheduled to work without notifying his immediate supervisor, giving satisfactory reasons. 5) When recalled to work, once notice by registered mail to the address on record with the company has been made, fails to indicate his intent to return to company service within three (3) days or fails to report to work within seven (7) days. 6) Is absent without cause, to the satisfaction of Management, beyond the time limit of a sick leave or an authorized leave of absence granted by the Company. However, Plant and Departmental seniority shall continue to accrue: i) If absent due to illness or injury provided the absence does not exceed the period provided for in the L.T.D. program, unless seniority would have otherwise been lost. ii) If absent due to industrial illness or accident at work (recognized by the Worker's Compensation Board) which occurs while working for the Company, unless seniority would have otherwise been lost. (b) Departmental Seniority An employee shall cease to have Departmental seniority in the Department from which he was displaced, if the employee is: 1) Laid off or demoted out of the Department, because of cutbacks, for a period exceeding the recall rights as set out in 14.05(a). 2) Permanently transferred to another Department for a period exceeding six (6) months. 3) Is demoted outside the recognized Departments either voluntarily or for inability to perform the work. If the cause for the demotion has been corrected the employees' previous Departmental seniority will be reinstated. 14.04 Layoffs In the event of departmental layoff resulting from cutbacks, employees affected will be re-classified to Relief Brine Operator or Labourer positions. Layoff from these positions will be on the basis of Plant seniority. (Refer to diagram in 14.06) 14.05 Recall Provisions (a) In the event of a layoff, recall rights shall be established according to: 1) An employee who is laid off with more than the probationary period, but less than one (1) year of continuous service, shall be entitled to recall rights according to his accumulated Plant seniority for six (6) months from the date of layoff. 2) An employee with one or more years of continuous service shall be entitled to recall rights according to his accumulated Plant seniority for twelve (12) months from the date of layoff, plus one (1) additional month for each year's service up to an additional six (6) months. 10 14 (b) Departmental Recall Rights An employee shall have recall rights to the Department from which he was displaced as follows: 1) Less than one (1) year of Departmental seniority: - six (6) months recall rights from date of displacement. 2) One (1) or more years of Departmental seniority: - twelve (12) months recall rights plus one (1) month for each year of service up to a maximum of six (6) additional months. However, departmental recall rights shall decrease from the time of displacement and ultimately expire, unless the affected employee is permanently recalled to or promoted to his former position. In such instance the employee affected will be reinstated with his previous accumulated Departmental seniority. (c) Employees shall be recalled to the plant on the basis of Departmental or Plant seniority, subject to Article 14.01(a) depending on where the vacancy occurs. (d) Benefits All benefit plans shall immediately be reinstated upon the recall of an employee. (e) It shall be the duty of all employees to notify the Company promptly of any change in their address or phone number. If an employee fails to do this, the Company will not be responsible for failure to contact the employee. 14.06 Departmental Organization The parties recognize the following two departments for seniority purposes in matters of permanent promotions, demotions, layoffs, recalls and transfers: 1) Production Department 2) Maintenance Department 11 15 The lines of progression shall be as follows: [FLOW CHART] 14.07 Promotions (a) Permanent promotions in established lines of progression will take place with Departmental seniority governing subject to Article 14.01(a). The positions outlined in Article 14.06 that are excluded from lines of progression shall be subject to posting provisions. (See Article 14.08) (b) It is understood that promotion to the position of Tradesman can only be done through the apprenticeship program as outlined in Article 25, or through the promotion of a qualified person. (c) In the event that an employee declines to exercise his Departmental seniority to step up to the next position in his Department, whether permanently or temporarily, to which he would otherwise have been entitled by virtue of Departmental seniority, ability and qualifications, he will no longer be able to exercise his Departmental seniority to obtain a job senior to the employee who bypassed him. A refusal to step up to the next position in the line of progression shall be recorded and a copy sent to the Union. (d) 4th Class Stationary Engineer's Certificate (Permanent 4th Class Certificate) 1) Upon permanent shutdown of the current boiler and temporary low pressure boiler, a permanent certificate is not a requirement for the purpose of promotion in the production department. It is understood and agreed that production department seniority as of the boiler(s) shutdown date prevails, in accordance with Article 14.07(c). 2) Present Brine Operators and Relief Brine Operators have the option to obtain their permanent 4th Class certificate as per Article 14.07(d)3 iv). Upon successful completion of a permanent 4th Class certificate the Brine Operator / Relief Brine Operator will receive the steam ticket rate when working as a Brine Operator. 12 16 3) Should the need arise in the future for a permanent 4th Class certificate because of physical plant changes, the following will apply: i) A permanent 4th Class certificate is required for the permanent positions of Cell Operator & Crystal Operator. The Relief & Temporary Crystal Operators will also require a permanent 4th Class certificate. ii) In order to assist an employee who is promoted to the position of temporary or permanent Cell Operator, he will be supported in his application for a temporary 4th Class certificate. He will be required to obtain a permanent 4th Class certificate within 12 months. This may be extended to 15 months if he has attempted and failed his exam in the first 12 months. This also applies to Relief, Temporary, or Permanent Crystal Operators. iii) If after the 15 months, or after 12 months if no attempt is made to write the exam, he shall be demoted to a position not requiring a permanent 4th Class certificate. iv) In order to assist a production employee to obtain a permanent 4th Class certificate (to study and write the necessary material and exam) he will be allowed paid time off to a maximum of 84 hours. This will also include employees who, prior to 1994, have previously been given the opportunity to write the exam for a permanent 4th Class certificate. 14.08 Postings Permanent vacancies in the following job classifications will be posted and shall be filled on the basis of Plant seniority subject to 14.01(a) and Article 14.07. (1) Brine Operator (2) Maintenance Helper (3) Storesperson (4) Tradesperson Notice of permanent vacancies within the scope of the agreement will be posted for twelve (12) days, on the bulletin boards. During this time, applications may be made to the Administration Manager. 14.09 Temporary Openings Temporary openings in the Production Department will be divided into two (2) categories, namely: Type "A" having a duration in excess of three (3) months, and will be applicable only in cases of extended leave of absence and long term sickness or disability. Type "B" having a duration of up to three (3) months to cover vacation relief, short term illness and short term absence. Type "A" openings will be filled in the same manner as that outlined in Article 14.06 for permanent openings. However, in the event that the circumstances which caused the opening, return to normal, then the temporary position will cease to exist. The accrual of Departmental seniority in such cases will be governed by Article 14.01. 13 17 Type "B" openings may be filled by employees in the lowest classification within the respective Department, out of line of Departmental seniority and subject to Article 14.01(a), to meet the continued and efficient operation of the Plant. The Company, in administering Type "A" openings, will estimate the expected duration of an opening without prejudice, from the information available. 14.10 Transfers (a) In the case of permanent transfer from one Department to another, Plant seniority shall govern subject to the provision of Article 14.01(a). 14.11 Demotions (a) Demotions resulting in bumping in the recognized Departments for whatever reason inclusive of layoffs, shall take place in reverse progression to that outlined in Article 14.06 with accumulated Departmental seniority governing subject to Article 14.01(a). It is understood that Maintenance employees in such instance shall exercise Departmental seniority to displace only those employees in the Maintenance Helper and Storesperson positions. (b) An employee who is demoted, within his Department, either voluntarily or for inability to perform the work shall not be entitled to exercise Departmental seniority to move up to a higher job classification. If the cause for the demotion has been corrected the employees' previous Departmental seniority will be reinstated. 14.12 Seniority Lists The company shall, within thirty (30) days of the date on which this Agreement is signed, furnish the Union with two (2) copies of a list showing the Plant and Departmental seniority of each employee then on the payroll and will thereafter revise such list each six (6) months. 14.13 Any employee promoted to a supervisory or staff position which removes him from the Bargaining Unit shall retain and accumulate his Plant and Departmental seniority within the Bargaining Unit for a period of up to twelve (12) months following this promotion. The employee will continue to pay the prescribed union dues while he maintains his seniority within the Bargaining Unit. If during this twelve (12) month period such employee is transferred back to the Bargaining Unit, he shall exercise his accumulated Plant and Departmental seniority in returning his to his former job. Any extension of the above shall be by mutual agreement and limited to two (2) month intervals. 14 18 Article 15 GRIEVANCE PROCEDURE 15.01 A grievance is any difference of opinion or dispute with respect to the interpretation, application or alleged violation of this Agreement. A grievance must be presented in the following manner. 15.02 Step No. One (1) If an employee has a complaint, that employee alone or accompanied by a shop steward shall submit the complaint to his Department Manager. The Department Manager shall render his decision to the employee within the following ten (10) calendar days. If the decision is not satisfactory the complaint shall be reduced to writing as a grievance. 15.03 Step No. Two (2) If a settlement is not reached as outlined above, the grievance, reduced to writing, shall be submitted to the employee's Department Manager within fourteen (14) calendar days following receipt of the Department Manager's step one (1) decision. A meeting between the Union Standing Committee, the grievor and the Department Manager shall take place within fourteen (14) calendar days following the submission of the written grievance. The Department Manager shall render his written decision within fourteen (14) calendar days following the step two (2) meeting. 15.04 Step No. Three (3) If the written decision of the Department Manager is not accepted, the Union Standing Committee may within fourteen (14) calendar days submit the grievance to the Plant Manager. A further meeting shall be held between the Union Counsellor and/or an officer of the National Union, the Union Standing Committee and the Plant Manager or his designate. The Plant Manager shall render his written decision within fourteen (14) days following the step three (3) meeting. 15.05 If the decision of the Plant Manager is not accepted the Union may refer the grievance to arbitration. 15.06 Notice of reference to arbitration specifying the matter or matters to be arbitrated shall be given in writing to the other party within forty-five (45) calendar days after the rendering of the decision by the Plant Manager. 15.07 The Company or Union may submit a Policy Grievance which directly affects the interests of the party to the Collective Agreement and shall not be administered as an employee grievance. The Policy Grievance may be submitted within thirty (30) working days from the date of occurrence of the incident giving rise to the grievance. The recipient of the grievance shall render a decision in writing within thirty (30) working days of receipt of the grievance. The Policy Grievance shall be submitted at Step No. Three (3) of the Grievance Procedure. 15.08 In the event that either of the parties does not take a grievance to the next higher step within the time limits set out above the grievance shall be deemed to have been withdrawn. If the recipient of the grievance fails to respond within the time limits set out above, the grievance shall be deemed resolved in favor of the grieving party. 15 19 15.09 A grievance shall be presented as soon as practicable after the occurrence causing the grievance 15.10 When an agreement has been reached between the Company and the Union at any stage of the grievance procedure it shall be put in writing and it shall be final and binding on both parties. 15.11 Nothing in this agreement shall be construed to prevent any employee from presenting any complaints on his own behalf directly to the Company or to prevent the Company from making adjustments in respect of such individual complaints not inconsistent with the terms and provisions of this agreement. 15.12 The time limit between steps may be extended by mutual consent. All time extensions must be confirmed in writing. Article 16 ARBITRATION 16.01 A grievance which has not been settled after being carried through the steps of the Grievance Procedure may be referred to Arbitration in accordance with the following procedure. 16.02 When notice is given in accordance with Article 15.06 the party giving the notice shall, at the same time, in writing, nominate an arbitrator. 16.03 Within seven (7) days thereafter the other party shall nominate an arbitrator and so advise the other party in writing within the said delay. 16.04 The two nominees shall endeavour to select a third person who shall act as chairman. 16.05 In all matters of procedure not covered by the provisions of this section, including alternating procedures for the selection of a third arbitrator the provisions of the Labour Relations Code of British Columbia (1993) shall apply. 16.06 The Arbitration Board shall have jurisdiction to interpret the provision of this Agreement in so far as shall be necessary to the determination of the grievance, but shall not have jurisdiction or authority to alter in any way, add to, subtract from or modify any of the terms hereof, nor make any decision inconsistent with the provisions of this agreement. 16.07 The decision of the Arbitration Board shall be final and binding upon the parties hereto and the employee or employees concerned. 16.08 Each of the parties shall bear equally the expense of the Chairman of the Arbitration Board. 16.09 The parties hereby request the Arbitration Board to render its decision as expeditiously as possible. 16.10 The award of the Arbitration Board shall not be made retroactive to a date prior to the date on which the grievance was submitted in writing as provided for in the Grievance Procedure. 16 20 16.11 The Company and the Union may be mutual agreement, elect a single arbitrator instead of a three-man arbitration board, and the powers of the single arbitrator shall be the same as those of the board of arbitration pursuant to this article. Article 17 DAYS OFF AND SCHEDULE OF SHIFTS 17.01 The employer will normally designate consecutive regular days off for each regular employee. 17.02 When extensive changes to the schedule are necessary the Company will so notify the Union in advance whenever practical, and will welcome discussion with the Union Standing Committee. 17.03 Employees may change their day or days off by mutual agreement with the supervisor of the department concerned provided such change shall not involve additional cost to the company. 17.04 Employees will normally not be scheduled to work six (6) consecutive days in a two week period. The exception being that if the shift schedule is altered significantly as a result of layoff, plant shutdown, etc., this may not always be possible. (a) Relief Brine Operators/Labourers (assigned to the Production Department) shifts may be changed at anytime provided the employee is given 24 hour notice prior to shift change. Every effort will be made to give the employee as much notice as possible. Article 18 VACATIONS 18.01 It is hereby understood and agreed that in the application of the following provisions governing vacations and vacation pay, no employee shall be treated less favourably than is provided for under the "Annual Holidays Act". (R.S.B.C. 1980) SBC Chap.10 - #36. 18.02 The Vacation year shall be the twelve (12) months commencing on May 1st and ending the following April 30th. However, for the purposes of calculating vacation pay only May 1st shall be interpreted as being the end of the last pay period in April. 18.03 Management will co-operate in arranging vacation time to suit each employee. However, the scheduling of vacation time is to be decided by Management. Management will give consideration to requests for vacation dates on the basis of plant seniority, provided such requests are made before March 1st for the current year. However, it is understood that no employee can exercise seniority rights over less senior employees in the scheduling of more than two (2) weeks vacation during the period June 15th to September 15th. 18.04 Vacations are not cumulative and must be taken annually within the vacation year as defined in 18.02. However, the Company may extend the vacation year due to extenuating circumstances and as mutually agreed at the request of an employee. 18.05 No employee may continue to work and draw vacation pay in lieu of taking his vacation. 17 21 18.06 Vacation pay will be paid by direct deposit to an employee's account on a weekly basis as vacation is taken. The company may grant vacation pay in advance due to extenuating circumstances and as mutually agreed at the request of the employee. 18.07 Employees of the Company shall receive their vacation with pay entitlement exclusive of recognized holidays to which they are entitled under Article 7 of this Agreement. 18.08 When services of an employee are terminated for any reason, he shall receive vacation pay for the vacation earned but not taken, computed as 4% of his total earnings for the period during which vacation was earned. An employee who qualifies for vacation under 18.12 will be paid 6% of his total earnings on termination, those who qualify for vacations under 18.13 will be paid 8% of their total earnings on termination, and those who qualify for vacation under 18.14 will be paid 10% of their total earnings on termination, those who qualify for vacation under 18.15 will be paid 12% of total earnings on termination, and those who qualify under 18.16 will be paid 14% of total earnings on termination. 18.09 The following shall be considered as time worked (maximum 9 1/3 hours per day and 37 1/3 hours per week) for the purpose of qualifying for a vacation. (a) Time lost as a result of an accident as recognized by the Worker's Compensation Board. (b) Time, not exceeding one year, lost as a result of a non-occupational accident or illness, provided that the employee has completed the probationary period as outlined in Article 14.02, and that he returns to his employment. (c) Time spent on earned vacations. (d) Time spend on holidays as defined in Article 7 of this Agreement. (e) Time absent from work because of Jury Duty or as a subpoenaed witness. (f) Time absent from work because of a death in family. (g) Time absent from work on approved leaves of absence. 18.10 Employees employed by the Company on May 1st of any year and who have: (a) Less than twelve (12) months continuous service and do not qualify under 18.11 below will be granted one quarter (1/4) of a day's vacation with pay for each full week of work performed in the immediately preceding vacation period. No vacation of less than one (1) day, nor more than eight (8) days will be granted under this provision. Fractional entitlements will be rounded off to the nearest full day; e.g.: an employee with three and one-quarter (3 1/4) days vacation credit will be granted three (3) days vacation; whereas, an employee with three and one-half (3 1/2) or three and three quarters (3 3/4) days vacation credit will be granted four (4) days vacation. Pay for such vacations will be computed at four per cent (4%) of the employee's actual earnings during the vacation period in which the vacation was earned. 18 22 18.11 Employees on the payroll of the Company on May 1st who have 1400 hours continuous service have qualified for a first vacation and shall be granted two (2) weeks vacation with pay. Pay for such two-week vacation shall be four per cent (4%) of the employee's actual earnings during the vacation period in which the vacation was earned, or two weeks base pay computed on the basis of the employee's regular job rate at the time he goes on vacation, whichever is greater. 18.12 Employees on the payroll of the Company on May 1st who qualify for a second vacation shall be granted three (3) weeks vacation with pay. Pay for such three-week vacation shall be six per cent (6%) of the employee's actual earnings during the immediately preceding vacation period, or three weeks base pay computed on the basis of the employee's regular job rate at the time he goes on vacation, whichever is greater. 18.13 Employees on the payroll of the Company on May 1st who qualify for a 7th vacation shall be granted four (4) weeks vacation with pay. Pay for such four-week vacation shall be eight per cent (8%) of the employee's actual earnings during the immediately preceding vacation period, or four weeks base pay computed on the basis of the employee's regular job rate at the time he goes on vacation, whichever is greater. 18.14 Employees on the payroll of the Company on May 1st who qualify for a 15th vacation shall be granted five (5) weeks vacation with pay. Pay for such five-week vacation shall be ten per cent (10%) of the employee's actual earnings during the immediately preceding vacation period, or five weeks base pay computed on the basis of the employee's regular job rate at the time he goes on vacation, whichever is greater. 18.15 Employees on the payroll of the Company on May 1st who qualify for a 24th vacation shall be granted six (6) weeks vacation with pay. Pay for such six week vacation shall be twelve per cent (12%) of the employee's actual earnings during the immediately preceding vacation period, or six weeks base pay computed on the basis of the employee's regular job rate at the time he goes on vacation, whichever is greater. 18.16 Employees on the payroll of the Company on May 1st who qualify for a 30th vacation shall be granted seven (7) weeks vacation with pay. Pay for such seven week vacation shall be fourteen per cent (14%) of the employee's actual earnings during the immediately preceding vacation period, or seven weeks base pay computed on the basis of the employee's regular job rate at the time he goes on vacation, whichever is greater. 18.17 For the purpose of calculating vacation pay, actual earnings shall not include profit sharing earnings. 19 23 18.18 After completing the necessary period of continuous service with the Company, an employee shall, in addition to the regular vacation to which he is entitled, become eligible to receive a Supplementary Vacation with pay as set forth below:
Year of Completed Continuous Service Supplementary Vacation ------------------------------------ ---------------------- After 5 years 1 week After 10 years 2 weeks After 15 years 2 weeks After 20 years 2 weeks After 25 years 2 weeks After 30 years 2 weeks
(a) The Supplementary Vacation must be taken within five (5) years of the employee's becoming eligible or before his becoming eligible for his next earning period of Supplementary Vacation as above, whichever comes first. (b) For the purpose of determining eligibility for Supplementary Vacation, an employee's service shall be calculated from the date of his joining the Company. (c) The Supplementary Vacation may be taken in conjunction with the regular vacation to which the employee is entitled, subject to Article 18.03. (d) One week's Supplementary Vacation pay shall be equal to 37 1/3 hours at the straight time hourly rate of the employee's regular job. (e) At retirement or termination from the Company an employee who has qualified for Supplementary Vacation shall be entitled to that portion of Supplementary Vacation Pay proportionate to the number of years of service completed subsequent to his last five-year entitlement period. Article 19 TEMPORARY EMPLOYEES 19.01 A temporary employee shall be an employee who is hired to fill a temporary labour need, be it skilled or unskilled. 19.02 He shall be considered a temporary employee for up to one year. 19.03 The company will notify the Union when a temporary employee is being hired. 19.04 All articles, with the exception of Article 14, will apply to temporary employees. 20 24 Article 20 JOB CLASSIFICATIONS AND JOB RATES 20.01 Job classification during the term of this Agreement shall be in accordance with Appendix "A" appended hereto. 20.02 Job rates as detailed in Appendix "A" will be made effective December 1, 1997 and will remain in effect until November 30, 2000. Article 21 WAGE RATE ADJUSTMENTS 21.01 Job rate shall be defined as the wage rate for any job classification as listed in Appendix "A", "Job Classifications and Job Rates" and excludes all premium pay, bonuses, shift differentials and allowances of any type or kind. 21.02 Should the Company introduce a change(s) that will affect job content during the term of the Agreement, the following procedure shall apply: (a) The Company shall notify the Union as far in advance of the change(s) as is practicable. (b) The Company shall describe the change(s) and provide an estimate of the effect on Union members' jobs. (c) After an appropriate period from commissioning the change(s), up to SIXTY (60) DAYS, a new rate will be settled by discussion between the Company and Union Standing Committee. (d) The Company agrees that failure to resolve any differences there may be after discussions, may result in the Union filing a grievance, as herein provided, alleging that the new rate is incompatible with relevant internal and external comparisons. The company agrees that any change in the new rate that may result from grievance procedure, discussions, or from an arbitration decision will be made retroactive to the date on which the new rate was first applied or the date on which the job changed, whichever first occurs. 21.03 If an employee is temporarily transferred to a job paying a higher rate he shall be paid the higher rate. 21.04 It is understood that when an employee is being trained for a higher paying job he shall receive this regular job rate. 21 25 Article 22 OVERTIME AND PREMIUM TIME 22.01 Overtime Overtime shall be either all authorized time worked in excess of nine and one third (9-1/3) hours in a twenty-four (24) consecutive hour period, starting when an employee reports for work; or, all hours worked in excess of thirty seven and one third (37-1/3) hours in any one week except in the case of those employees assigned to the 12-hour shifts when overtime shall be all hours worked in excess of 12 hours in a 24 consecutive hour period, starting when an employee reports for work, or all hours worked in excess of 36 or 48 hours per week depending on whether such 36 or 48 hours per week fall into the regular schedule of 3 days on and 3 days off. (a) IN THE EVENT THAT AN EMPLOYEE IS REQUIRED TO WORK OVERTIME HOURS THAT RUN CONTINUOUSLY FROM THE END OF HIS SHIFT, HE MUST BE GIVEN A MINIMUM OF EIGHT (8) HOURS OFF, BEFORE STARTING HIS NEXT SHIFT. ANY STRAIGHT TIME EARNINGS LOST AS A RESULT WILL BE PAID TO THE EMPLOYEE AFFECTED. (b) In the event an employee is called in to work overtime hours that occur in, or extend into, the period between 2330 Hrs. and 0700 Hrs. (or 0630 Hrs) when such employee is scheduled to report for work at 0700 Hrs. (or 0630 Hrs), when the time worked in this period is one or more hours the employee will not be required to report for work for a period past 0700 Hrs. (or 0630 Hrs) equivalent to the hours worked during the 2330 Hrs. to 0700 Hrs. (or 0630 Hrs) period, straight time earnings lost as a result will be paid the employee affected. 22.02 In those weeks when a day worker works a scheduled 37 1/3 hour week, hours in excess of 37 1/3 hours shall be paid at overtime rates. 22.03 All authorized overtime shall be paid at double time. 22.04 For the purpose of avoiding pyramiding of overtime, hours compensated for at overtime or premium time rates shall not be counted further for any purpose in determining overtime liability under the same or any other provision. 22.05 Shift Premiums shall not be included when computing pay for overtime. Sunday Premiums shall not be included when computing pay for overtime. 22.06 Time exchanged between employees, hours worked as a result of shift change, shall be paid for at the regular straight time hourly rate of the employee scheduled to work at that time plus shift differential applicable to the time worked. Such changes must have the approval of the supervisor concerned. 22.07 Where an employee's shift schedule is changed with less than 48 hours notice then the employee will be paid overtime for the first shift worked (except as noted in 17.04(a)). 22.08 Sunday Premium A premium of $1.68 per hour shall be paid to all workers for work performed on Sunday which shall be known as "Sunday Premium". 22 26 22.09 Shift Differentials (a) A differential of One Dollar and Forty Four cents ($1.52) per hour for all hours worked on scheduled evening night shifts between the hours of 1830 hrs. and 0630 hrs. (b) An employee working on a regularly scheduled night shift shall continue to receive the shift differential for overtime worked beyond 0630 hrs. 22.10 In the event that an employee is called in and reports to work at least one full shift before his regular starting time he shall continue to receive overtime rates if he is asked to continue on into this regular shift. 22.11 A hot meal, value of $12.50 shall be provided for any employee called in to work four (4) hours or more on a scheduled day off or if less than 24 hours notice is given, or for two (2) hours or more if these overtime hours are continuous with his regular scheduled hours, and every four hours thereafter. In the latter case, depending on the urgency of the work involved, the meal may be taken prior to or during the overtime period provided the actual time worked is two (2) hours or more. When a maintenance employee is called in to work, he will receive the hot meal allowance after four (4) hours of work and every (4) hour hours thereafter, until the completion of the work. Meal vouchers will be included on the pay cheque and be a taxable benefit. Article 23 JURY DUTY PAY 23.01 The Company will pay an employee called for Jury Duty or as a subpoenaed witness, the difference between the jury duty or witness pay and his straight time pay, provided he works his regular shift when not performing such jury or witness service. The employee will be required to furnish proof of performing such service and such duty pay received. Article 24 BEREAVEMENT LEAVE 24.01 In the event of a death of a member of an employee's immediate family, the employee will be allowed a reasonable time off. The Company will pay such employee his straight time pay for any of his scheduled working days lost immediately following the death, up to a maximum of three (3) days to attend the funeral. If the employee is unable to attend such funeral, he will be allowed one (1) day off for personal reasons for which he will be reimbursed, at this straight time rate for any wages lost during such absence. "Immediate Family" means Father, Mother, Child, Spouse, Brother, Sister, SPOUSE'S Father, SPOUSE'S Mother, Step-Father, Step-Mother, Step-Children, Grand Parents and Grand Children, SON'S SPOUSE and DAUGHTER'S SPOUSE. 23 27 Article 25 MAINTENANCE DEPARTMENT APPRENTICES 25.01 Appendix "B" attached hereto and entitled "Maintenance Apprenticeship" shall be part of this agreement. Article 26 SUSPENSION AND/OR DISCHARGE 26.01 When in the opinion of the Company disciplinary action involving suspension or discharge become necessary the Union shall be notified of that intent and the reasons therefore, prior to the action, if such prior notification is practicable. Further the Company welcomes pertinent discussion with the Union about the suspension or the discharge prior to that action when practicable. 26.02 In the event that an employee has been discharged and it is alleged that he has been unjustly dealt with the grievance procedure may be used. The grievance must be submitted to the Company in writing within seven (7) days of the discharge and in such cases steps one and two of the grievance procedure shall be omitted. Article 27 LEAVE OF ABSENCE 27.01 The Company will consider granting a leave of absence to employees for personal reasons consistent with the continued and efficient operation of the plant, and provided there is a minimum of disruption to fellow employees. 27.02 The length of such leave of absence in any one year shall be: (a) Those employees with more than one year's service but less than five year's service - up to one week. (b) Those employee with more than five year's service - up to one month. However under extenuating circumstances, the Plant Manager may alter the above conditions at his sole discretion. 27.03 Such leave of absence shall be without remuneration. 27.04 A leave of absence must be applied for in writing. 27.05 It will be the responsibility of the employee to arrange with the Company for the payment, suspension, or other disposition, of the Company sponsored welfare plans at the time of applying for such leave of absence. 27.06 No employee will be granted a leave of absence to accept other employment. It is understood, however, that other employment does not include duties as elected union officers, elected political representative, (i.e.: M.L.A., M.P., Councillor, Mayor, etc.), or other such assignments, for which remuneration may be paid. 24 28 27.07 The following specific exceptions will be made to the above were a leave of absence is granted by the Company to an employee in order that he may accept an elected Union or political office (as in 27.06 above). (a) It is agreed that an employee who is elected or appointed to Union office shall be granted sufficient leave in order to perform the duties of the position. The length of such leave of absence may be up to one year or for the elected term. (b) The employee will continue to accumulate seniority. 27.08 Parental leave as outlined in the Employment Standards Act. Article 28 COMMITTEES 28.01 The Company shall appoint a Company Standing Committee of three (3) individuals which shall represent the Company. 28.02 The Union shall elect from its membership of employees at Sterling Pulp Chemical's North Vancouver plant a Union Standing Committee of three (3) which shall represent the Union for the purpose stated in this Agreement. 28.03 (a) The Company and Union Standing Committee shall meet quarterly to discuss items of mutual interest. The agenda for each meeting shall consist of the following items. i) Safety ii) Changes to the plant that will affect Union members. Where the change(s) is significant. Workers for the affected areas will be included to provide their input in subsequent discussions. iii) Other items. (b) Minutes of these meetings shall be distributed for signatures within one (1) week after the meeting. Article 29 TRAINING 29.01 The Company recognizes its responsibility to ensure that its employees are adequately trained to perform their jobs in a satisfactory manner. The Company will institute a training program for all Production employees under the direction of the Production Manager or his appointee so that the opportunity will be given to each employee to perform his job satisfactorily and to satisfactorily perform the duties of the next higher job classification. The Union recognizes that it is to the mutual benefit of both parties to have an adequately trained workforce. 25 29 Article 30 TECHNOLOGICAL CHANGE AND TERMINATION PAY 30.01 The Company will endeavour to give as much prior notice of technological change however, not less than 90 days before the date on which the technological change is to be effected. The notice of technological change shall be in writing and shall state: (a) Nature of the technological change. (b) Date of which technological change will be effected. (c) Approximate number and type of employees likely to be affected by the technological change. If the Company and Union are unable to resolve their differences regarding technological change, final and conclusive settlement, without work stoppage, shall be by arbitration or another method agreed to by the parties. 30.02 The Company agrees to pay termination pay to employees permanently laid off because of plant closure, automation, technological change, modernization or for economic reasons at the rate of pay of two (2) weeks pay per year of service. In the event of plant closure the Company agrees to negotiate with the Union the termination payout. The Company also agrees to cooperate with the Government to minimize the impact of plant closure. The terms of payout shall be defined as: (a) Initial payment conforming to provisions of the Employment Standards Act. (b) Remainder, if applicable, on expiry of recall rights. (c) A laid off employee may request in writing payment of his termination pay after three (3) months on layoff providing the employee agrees in writing to waive his remaining recall rights. 30.03 When an employee is terminated as a direct result of plant closure, automation, and/or technological change, Management will assist the Union in communicating with Canada Manpower to advise them of the suitability of the employee for re-training and re-location in another job, and request that they use their facilities for this purpose. In the event of plant closure, the company will endeavor to give as much prior notice as possible, however, not less than 90 days. 30.04 The Company agrees to retrain those employees whose jobs cease to exist due to Modernization or Expansion, for other jobs within the plant. This excludes employees who are laid off or terminated and does not obligate the Company under the Maintenance Apprenticeship program. 26 30 Article 31 CONTINUOUS 12-HOUR SHIFTS The parties hereto agree to the following terms and conditions relating to the continuous rotating shift schedule, as hereafter defined. 31.01 The work schedule considered herein will be applicable to The Job Classifications, currently on the existing continuous rotating shift schedule, in the Production Department. 31.02 The shift schedule is as per Appendix D. 31.03 Upon converting to a revised schedule and during the first week under it, no premiums will be paid to an employee for the sole reason of transferring from one standard work week to another standard work week. 31.04 Each employee's pay will be calculated on a weekly basis. However, if an employee wishes, the Company will hold back a fixed amount each week the employee works in excess of 36 hours, to be paid to the employee at the time he gets his "9 days off". It is clearly understood that this holdback of pay will not be flexible, and will only be paid to the employee when he takes his scheduled 9 days off. 31.05 Vacations will be allotted on a weekly basis and will be paid on a 37 1/3 hr. basis. Article 32 HEALTH AND WELFARE 32.01 Benefits of hourly-paid employees during the term of this Agreement shall be in accordance with appendix "C" appended hereto. For full details refer to the current Sterling Pulp Chemicals Plan Texts and associated policies. For ease of reference, see the current Employees Benefits Program booklet. 32.02 E.I. Premium reduction will be applied to funding the benefits package. 32.03 For the purposes of Weekly Indemnity claims the waiting period will be "0" days for both illness and accidents and subsequently the claim will be paid on the first calendar day. 32.04 THE COMPANY WILL PAY ALL HEALTH AND WELFARE PREMIUMS FOR THE FIRST TWO YEARS DURING AN EMPLOYEE'S RECOVERY WHILE ON L.T.D. Article 33 PENSION PLAN 33.01 a) There shall be a Pension Plan for all employees with contributions made by the Company, to provide for the needs of the employees upon retirement. b) PENSION BENEFITS ARE INCREASED FROM $41.00/MONTH/YEAR TO $43.00/MONTH/YEAR DECEMBER 1, 1998 AND BENEFIT INCREASES TO $45.00/MONTH/YEAR DECEMBER 1, 1999. c) Spousal Pension - Effective December 1st, 1994 the spousal benefit is 60% for all years of service. 27 31 LETTER OF UNDERSTANDING Credited service for future retirees is calculated from day one, provided the employee has satisfied the probation period (40 working days). All other terms as per Plan Text. EARLY RETIREMENT PROVISION I Effective September 8, 1992, retirement at 60 years of age with 20 years of service with no reduction. Effective December 1st, 1994 the following reduction from age 60 to 55 with 20 years service apply (.41667%/month reduction to age 55)
Age Years of Service Reduction --- ---------------- --------- 65 20 0% 64 20 0% 63 20 0% 62 20 0% 61 20 0% 60 20 0% 59 20 5% 58 20 10% 57 20 15% 56 20 20% 55 20 25%
II Age 55-64 minimum of 10 years service -1/4 of 1% per month for each month of early retirement -/from 60 to 64 plus 1/2 of 1% per month prior to age of 60 (55-60)
Current age of 60 (55 to 60) Schedule 65 0% 64 3% 63 6% 62 9% 61 12% 60 15% 59 21% 58 27% 57 33% 56 39% 55 45%
28 32 III Age 55 to 64 - less than 10 years service - 1/2 of 1% per month for each month of early retirement prior to age 65.
Schedule 65 0% 64 6% 63 12% 62 18% 61 24% 60 30% 59 36% 58 42% 57 48% 56 54% 55 60%
Bridging: a) Effective December 1, 1988 a bridging formula of $15.00 per month per year service will be available to those retiring between age 63 and 65. A minimum of 10 years service is required for bridging. Article 34 BANKING OF OVERTIME 34.01 It is understood and agreed that the voluntary banking of overtime hours will involve no extra time or cost to the company, nor will it affect the smooth and efficient operation of the plant. 34.02 Time off in lieu of overtime will receive low priority and requires mutual agreement between supervisor and employee. 34.03 Overtime pay and/or hours may be banked. 34.04 Overtime hours may be banked to a maximum of thirty-six (36) hours at any one time. 34.05 Overtime pay may be banked with no maximum. Pay may be drawn out on any regular pay period. Balances in excess of 36 hours not withdrawn by September 30th of each year will be paid out in the following pay period. 34.06 Overtime pay may be taken when earned and hours banked. 29 33 APPENDIX "A" - JOB CLASSIFICATIONS AND RATES
CLASSIFICATION DEC. 1/96 DEC. 1/97 DEC. 1/98 DEC. 1/99 - -------------- --------- --------- --------- --------- TEMPORARY MAINTENANCE COORDINATOR (TMC) $28.70 $29.43 $30.22 $31.03 TRADESPERSON 26.69 27.42 28.21 29.02 STORESPERSON 23.00 23.73 24.52 25.33 MAINTENANCE HELPER 21.60 22.33 23.12 23.93 SENIOR RELIEF OPERATOR 26.69 27.42 28.21 29.02 CRYSTAL OPERATOR 26.69 27.42 28.21 29.02 CELL OPERATOR 26.57 27.30 28.09 28.90 BRINE OPERATOR (4TH CLASS STEAM TICKET) 24.58 25.66 26.45 27.26 BRINE OPERATOR 24.11 25.19 25.98 26.79 RELIEF BRINE OPERATOR 21.60 22.33 23.12 23.93 LABOURER 20.44 21.17 21.96 22.77
WAGE INCREASES: DECEMBER 1/97 $0.73/HOUR; $0.35/HOUR RATE ADJUSTMENT FOR BRINE OPERATOR INCLUDED DECEMBER 1/98 $0.79/HOUR DECEMBER 1/99 $0.81/HOUR
MULTI SKILLS / DUAL TRADES 1. Multi Skills is defined as a plant recognized provincial TQ Ticket (as defined below) plus in house training for instrumentation, Level "C" Provincial Welding certificate or a BCIT Pipefitting Certificate Program (or equivalent) OR OTHER SKILLS RECOGNIZED BY THE UNION AND THE COMPANY AND SUPPORTED BY TQ TICKET, OR CERTIFICATE OF TRAINING, OR IN-HOUSE TRAINING. 2. Dual Trades is defined as two plant recognized TQ qualifications (as defined below), a single plant recognized TQ ticket plus a Level "B" welding certificate or successful completion of a SAIT (or equivalent) correspondence course for instrumentation. 3. Based on the needs of the plant, multi skills training will be provided to personnel meeting the necessary qualifications. 4. Minimum qualifications is a provincial TQ ticket in at least one of the required trades: Electrician Instrument Mechanic Millwright Pipefitter Welder 5. Employee must be presently active in one of the above trades. 6. A selection board similar to Appendix "B" with a plant committee member representing the bargaining unit will determine who will receive the multi skills training. 7. Such training does not preclude the possibility of hiring from outside the present bargaining unit for a dual trades person if such a tradesperson were required or needed at the plant. 8. A $0.50/hr premium will be paid after successful completion of the training for the multi skilled position. 9. An additional $0.50/hr premium will be paid for the dual trades position as defined in Section 2. 30 34 APPENDIX "B" MAINTENANCE APPRENTICESHIP 1. PURPOSE To train Tradespersons of the highest calibre consistent with plant requirements. 2. SCOPE The program will embrace the Electrical, Instrument Mechanic, Millwright, Pipefitter and Welder trades and will be run in conjunction with the B.C. Department of Labour Apprenticeship Training Branch. Other trades may be added in the future as required. It is intended that there will be no more than one apprentice in each trade at any one time. *3. STERLING PULP CHEMICALS APPRENTICESHIP BOARD (Otherwise known as "The Board") The Board will be established consisting of the Plant Manager, (Chairman), the Maintenance Manager, a member of the personnel function, and a Tradesperson employee of the designated trade involved to made the final selection of apprentices. Said Board will also review the progress of the apprentice from time to time and will be empowered to take appropriate action. The tradesperson employee member of the board will be appointed by the Plant Manager after due consultation with the Union. 4. SELECTION OF CANDIDATES Candidates will be selected from interested employees, recent high school/technical school graduates, and graduates from accredited pre-apprenticeship training course. Psychological, I.Q. aptitude tests and other such aids may be used in assessing prospective candidates. Apprentices will be selected on the basis of ability, personality, and attitude. 5. JOB SECURITY Apprenticeship training under this program does not constitute guaranteed employment to a graduate. He retains and accumulates seniority while employed as an apprentice, as spelled out in the Union Contract, and as such is treated as any other employee on graduation. Over and above any provisions in the B.C. Department of Labour Apprenticeship program for the termination of unsuitable candidates, and apprentice will be on probation for the first year and the Company retains the right to terminate the apprentice if, in the opinion of the "Board", the candidate is in any way unsuitable. 31 35 6. PAY SCHEDULE The pay schedule for apprentices will be as follows: 1st 6 months - Labourer rate 2nd 6 months - Mech. "A" Rate less 7/8 spread (Labourer rate to Tradesperson rate) 3rd 6 months - Tradesperson Rate less 6/8 spread 4th 6 months - Tradesperson Rate less 5/8 spread 5th 6 months - Tradesperson Rate less 4/8 spread 6th 6 months - Tradesperson Rate less 3/8 spread 7th 6 months - Tradesperson Rate less 2/8 spread 8th 6 months - Tradesperson Rate less 1/8 spread On graduation - Tradesperson Rate
While an apprentice is in school the Company will make up his pay to his regular weekly pay less all government sponsored allowances available. Additional traveling and living expenses will not be paid. For the purpose of calculating the regular weekly pay for classroom training, the average weekly hours will be used, i.e.: 37 1/3 hours. 7. PROGRAM On the job training will be done under the direction of the Maintenance Manager through skilled Tradesperson. The apprentice will be expected to perform useful tasks relating to maintenance in general and to a large degree his selected trade in particulate. In no circumstances is an apprentice to be considered a helper. 8. TOOLS Apprentices will be expected to provide their own hand tools within a reasonable period of time. 9. Apprentices will be considered as part of the bargaining unit and will become Union members as provided for in the Sterling Pulp Chemicals Union Contract. They shall be subject to the rights, privileges and responsibilities of full Union membership except as herein specified. 32 36 APPENDIX "C" BENEFITS OF HOURLY-PAID EMPLOYEES NORTH VANCOUVER PLANT
================================================================================================================================= Extended Weekly Long Term Medical Health Indemnity Disability Life A D & D Service Plan Benefits - --------------------------------------------------------------------------------------------------------------------------------- Eligibility 3 Months 3 Months 3 Months 3 Months 1 Month 1 Month - --------------------------------------------------------------------------------------------------------------------------------- Benefits 60% 80% of 1st $1000/yr. Basic monthly wage All medical, 100% above $1000/yr. 75% DEC. 1/97 MAX. Surgical and Max. $100,000/ yr. Hours lost $5000 $85,000 $ 85,000 obstetrical Renewable each year - --------------------------------------------------------------------------------------------------------------------------------- Deductible $25/person or -- -- -- -- -- family per year - --------------------------------------------------------------------------------------------------------------------------------- Elimination Period 0-days acc. 0 day ill 26 weeks -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Duration Period TO 26 weeks AGE 65 -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Amount of Retirement 50% of benefit $85000 Decr. -- -- 5%/Yr. min 25% -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Retirement -- -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Carrier SPC SunLife Sun Life Sun Life M.S.P. M.S.A. - --------------------------------------------------------------------------------------------------------------------------------- SPC Pays 90% 90% 96% 96% 100% 100% - --------------------------------------------------------------------------------------------------------------------------------- Employee Pays First $1000 of First $1000 10% 10% coverage of coverage -- -- - --------------------------------------------------------------------------------------------------------------------------------- Last day of Termination Date active As W.I. other Death or date Death or date month which Last day of month employment than sick, injury employment employment employment which employment ceases or vacation pay terminates terminates terminates terminates - --------------------------------------------------------------------------------------------------------------------------------- Vesting -- -- -- -- -- -- =================================================================================================================================
======================================================================== Dental Pension - ------------------------------------------------------------------------ Eligibility Probation Period/40 Days 3 Months then day one. - ------------------------------------------------------------------------ Benefits 100% Diagnostic December 1, 1996 Preventive/Restorative $41/Month/Year 75% Prosthetics 60% Spousal 50% Crowns, Bridges DECEMBER 1, 1998 50% Orthodontics $43/MONTH/YEAR - $2,500.00 DECEMBER 1, 1999 Lifetime limit $45/MONTH/YEAR - ------------------------------------------------------------------------ Deductible Amounts in excess of B.C. fee guide -- - ------------------------------------------------------------------------ Elimination Period -- -- - ------------------------------------------------------------------------ Duration Period -- -- - ------------------------------------------------------------------------ Amount of Retirement Benefit in effect at retirement x years of -- service - ------------------------------------------------------------------------ Retirement -- Age 65; 60/20 years - ------------------------------------------------------------------------ Carrier London Life Standard Life / Montreal Trust - ------------------------------------------------------------------------ SPC Pays 90% -- - ------------------------------------------------------------------------ Employee Pays 10% -- - ------------------------------------------------------------------------ Termination Last day of the month which employment Death or termination terminates of employment - ------------------------------------------------------------------------ Vesting After 2 years -- service in plan ========================================================================
LETTER OF INTENT Agreed to eliminate for the term of the agreement requirement for physician's statement for absences due to non-occupational sickness or accident up to one week. Physician's statement may be required at the discretion of the supervisor. 33 37 LETTER OF UNDERSTANDING Supplementary Benefit Fund The company (Sterling Pulp Chemicals) agrees to allocate the following amounts of money to a trust fund to be set up by PPWC #5 for use as a supplementary benefit fund for current and past members of the local. Effective DECEMBER 1, 1997 the Company will contribute *$0.40/hour for regular hours worked to the Fund; effective December 1, 1999 the Company will contribute $0.42/hour for regular hours worked to the Fund. Utilization/application of this supplementary benefit shall be at the discretion of members of the local. The company will be kept informed as to application of the fund. This fund will not prejudice the Company reviewing the ad hoc increases to retirees. * Based on 37 1/3 Hrs/week. (For all employees.) 34 38 IN WITNESS WHEREOF we, the undersigned, have as the accredited representatives of the respective parties to this Agreement hereunto set our signatures this day of DECEMBER 1997. For: STERLING PULP CHEMICALS, LTD. For: PULP, PAPER & WOODWORKERS OF CANADA, LOCAL 5 - ---------------------------------- ----------------------------------------- R.W. MacLeod D.R. Kibsey - ---------------------------------- ----------------------------------------- J.D. Kirichenko G.A. Hall - ---------------------------------- ----------------------------------------- T.N. Miller H.W. Weir - ---------------------------------- ----------------------------------------- T.Z. Szpytman, D. Starr 39 LETTER OF INTENT FROM STERLING PULP CHEMICALS, LTD. NORTH VANCOUVER PLANT TO PULP, PAPER AND WOODWORKERS OF CANADA, LOCAL 5 USE OF NON-BARGAINING UNIT PERSONNEL It is the intention of Sterling Pulp Chemicals, Ltd., North Vancouver Plant not to use non-bargaining unit personnel to perform work normally performed by bargaining unit personnel. It is recognized that there are occasions where contractors will be required: a) as provided in Article 10.05 of the Labour Agreement and/or b) when current bargaining unit crew size is not capable of handling such work in a timely fashion. Sterling Pulp Chemicals, Ltd. will review at quarterly Union Standing Committee meetings the utilization of contractors performing normal bargaining unit work to the exclusion of projects. Sincerely, Robert W. MacLeod Plant Manager Dated: November 7, 1997 40 LETTER OF UNDERSTANDING FOR TEMPORARY MAINTENANCE CO-ORDINATOR The Company may as required need an employee to act as a Temporary Maintenance Co-Ordinator (TMC). (The Maintenance Manager may or may not choose to utilize the TMC.) The selection of the TMC will be offered to the maintenance employee meeting qualifications of departmental seniority, plant recognized Provincial TQ Ticket and ability to perform the work. Ability to perform the work will be determined by having the employee perform duties and evaluating his performance. Evaluation will be by the Maintenance Manager, Production Manager and the Plant Manager with input from the Shop Floor. This position is not a full time position and may be implemented when the Maintenance Manager is away from the site or as short term work load dictates. The TMC will work on the tools only in an emergency situation. The number of days will vary from one to five days per week with overtime paid as per the collective agreement. The role of the TMC is to perform work load co-ordinations and administration of the department, so that all work is performed safely. At no time can the TMC discipline or recommend disciplinary measures. The regular rate of pay for the TMC will be $ 27.18/ hr effective December 1st. 1994. See Appendix "A". - ------------------------ ------------------------- Bob MacLeod Dennis Kibsey Plant Manager Plant Chairman December 9, 1997 41 LETTER OF UNDERSTANDING RAIL CAR INSPECTION The company, Sterling Pulp Chemicals Ltd., North Vancouver Plant and PPWC (Pulp, Paper and Woodworkers of Canada) Local # 5 have agreed to transfer the responsibilities of railcar inspections from the Maintenance Department to the Production Department, effective January 18, 1999. The responsibility for the repair of railcars will remain with the Maintenance Department. - -------------------------- ------------------------ Robert W. MacLeod, P. Eng. Greg Hall Plant Manager Plant Chairman January 12, 1999 EX-10.18 21 h82651ex10-18.txt SEVERANCE AGREEMENT - PETER W. DE LEEUW 1 EXHIBIT 10.18 SEVERANCE AGREEMENT This Severance Agreement (this "Agreement") is entered into as of May 1, 2000 by and between Peter W. De Leeuw ("Employee") and Sterling Chemicals Holdings, Inc. ("Holdings") and Sterling Chemicals, Inc. ("Chemicals" and, together with Holdings, the "Company"). WHEREAS, the Company and Employee entered into an Employment Agreement dated as of March 16, 1998 (the "Employment Agreement"); WHEREAS, Employee has announced his decision to retire from the Company effective May 8, 2000 (the "Retirement Date"); and WHEREAS, the Company and Employee are entering into this Agreement primarily to set forth their mutual agreement as to the payments and other benefits to be paid or provided to Employee in connection with or arising out of the termination of his employment with the Company. NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby acknowledge, represent, warrant, covenant and agree as follows: ARTICLE I Termination Section 1.1 Termination of Employment. (a) On the Effective Date, Employee's employment with the Company shall automatically terminate for all purposes as of the Retirement Date. As used in this Agreement, "Effective Date" means the date on which this Agreement becomes effective in accordance with Section 5.5 below. (b) Employee waives all rights to recall, reinstatement, employment and reemployment with the Company and acknowledges and agrees that the Company is not obligated or bound in any manner to provide employment to, or otherwise engage or utilize the services of, Employee. Employee further agrees not to apply for employment with Holdings, Chemicals or their direct and indirect subsidiaries (collectively, the "Constituent Companies"). Section 1.2 Resignation as Director. Consistent with Section 4.05 of the Employment Agreement, Employee resigns as a director of all Constituent Companies, effective as of the Retirement Date. 2 ARTICLE II Benefits Section 2.1 Base Salary. Promptly after the Retirement Date, but subject to all the provisions of this Agreement, the Company shall pay to Employee a lump sum amount for all unpaid base salary earned by Employee as of May 12, 2000. Section 2.2 Severance Payment. As soon as practicable after the Effective Date, but subject to all the provisions of this Agreement, the Company agrees to pay to Employee a lump sum severance payment in the amount of $1,235,000. Employee acknowledges and agrees that the severance payment provided for in this Section 2.2 is in lieu of, and not in addition to, any severance payment, separation payment, termination payment or other similar payment payable to Employee under any contract or agreement (including, without limitation, the Employment Agreement) or under any employee benefit plan (including, without limitation, the Company's Key Employee Protection Plan), program or practice of the Company. Section 2.3 Bonus. Subject to all the provisions of this Agreement, the Company agrees to pay to Employee a bonus in the prorated amount of $341,250 (the "Employee Bonus"), such payment to be made when bonuses for fiscal year 2000 are paid to salaried employees generally under the Company's incentive compensation plan. The amount of the Employee Bonus was calculated on the assumption that the Company will generate at least $150,000,000 of EBITDA during fiscal 2000. In the event actual EBITDA for fiscal 2000 is less than $150,000,000, then the amount of the Employee Bonus will be appropriately reduced in accordance with the Company's incentive compensation plan, with the amount of such reduction being calculated by the Company's Human Resources Department. Employee acknowledges and agrees that the Employee Bonus is in lieu of, and not in addition to, any bonus or other incentive compensation payable to Employee under any contract or agreement (including, without limitation, the Employment Agreement) or under any employee benefit plan (including, without limitation, the Company's incentive compensation plan), program or practice of the Company. Section 2.4 Accrued Vacation. As soon as practicable after the Effective Date, but subject to all the provisions of this Agreement, the Company shall pay to Employee a lump sum payment in the amount of $20,837.50, representing full and complete payment for all unused vacation time earned and accrued by Employee as of the Retirement Date. Section 2.5 Business Expenses. The Company ratifies and confirms in all respects its obligation under Section 3.08 of the Employment Agreement to reimburse Employee for business expenses. Employee understands and agrees that the Company is not obligated to reimburse Employee for any expenses incurred after May 12, 2000. -2- 3 Section 2.6 Stock Options, etc. (a) Employee acknowledges and agrees as follows: (i) Employee does not own or hold any options, warrants, calls, subscriptions or other rights of any nature to acquire any shares of capital stock or other securities of Holdings or any other Constituent Company, except that (A) Employee holds options to purchase 125,000 shares of Holdings' common stock (the "Employee Options"), all of which were granted to Employee pursuant to Holdings' Omnibus Stock Awards and Incentive Plan and (B) as a participant in Holdings' Employee Stock Ownership Plan, Employee is the beneficial owner of a portion of the shares of Holdings' common stock currently held in such Plan; (ii) Employee does not own or hold any phantom stock, stock appreciation right or any similar rights with respect to Holdings or any other Constituent Company; and (iii) none of the Constituent Companies is obligated to repurchase, redeem or otherwise acquire any shares of capital stock or other securities owned or held by Employee. (b) Subject to Sections 5.3 and 5.5 below, the Company agrees that all Employee Options shall automatically vest in full on the Effective Date and shall be exercisable at any time prior to March 16, 2008. Section 2.7 Restricted Stock. Pursuant to Section 3.03 of the Employment Agreement, the Company granted to Employee 10,000 shares of Holdings' common stock contingent upon future vesting as therein provided. Subject to Sections 5.3 and 5.5 below, the Company agrees that all of such shares shall automatically vest in full on the Effective Date and that after the Effective Date none of such shares shall be subject to the provisions or restrictions of Holdings' Stockholders Agreement dated as of August 21, 1996, as heretofore or hereafter amended. Section 2.8 Tax Withholding. Each payment to Employee under this Agreement will be subject to withholding for federal income and FICA taxes and other elected deductions. ARTICLE III Mutual Releases Section 3.1 Release by Employee. (a) Employee, on behalf of himself and his heirs, beneficiaries and personal representatives and assigns, knowingly and voluntarily releases, acquits and forever discharges the Company Parties (defined below) of and from any and all claims, charges, complaints, obligations, liabilities, promises, agreements, contracts, damages, actions, causes of action, suits and accrued benefits of every kind and nature and whether known or unknown, both at law (whether common law, statutory or otherwise) and in equity, arising from or -3- 4 in any way connected with or related to Employee's employment with the Company or the termination of Employee's employment with the Company or any of the events or circumstances leading to, surrounding or resulting in such termination. Employee acknowledges and agrees that the foregoing is a full and complete release which covers, without limitation, any and all: (i) claims, charges, complaints, obligations, liabilities, damages, actions, causes of action and suits based, in whole or in part, on wrongful termination, discrimination, breach of contract, retaliatory discharge, discharge in violation of public policy, intentional infliction of emotional distress, negligent infliction of emotional distress, defamation, fraud, invasion of privacy or violation of any federal, state or local law, including, but not limited to, Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. Section 2000e et seq., the Equal Pay Act, 29 U.S.C. Section 206, the Employee Retirement Income Security Act of 1974, 29 U.S.C. Section 1001 et seq., the Americans with Disabilities Act, 42 U.S.C. Section 12101 et seq., the Fair Labor Standards Act, as amended, 29 U.S.C. Section 215(a)(3), the Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C. Section 621 et seq., the Family and Medical Leave Act, 29 U.S.C. Section 2601 et seq., the Worker Adjustment and Retraining Notification Act, 29 U.S.C. Section 201 et seq., the Occupational Safety and Health Act, 29 U.S.C. Section 660(c), the Texas Commission on Human Rights Act, Texas Labor Code Section 21.001, et. seq., the Texas Workers' Compensation Act, Texas Labor Code Sections 451.001, Texas Payday Law, Title II, Chapter 61 and Texas Labor Code; and (ii) claims for severance pay, bonuses or benefits under any compensation or employee benefit plan, program, policy, contract or other arrangement of the Company, but excluding (A) any severance pay, bonus or benefits which Employee is entitled to receive under Article II of this Agreement and (B) any benefits which Employee is entitled to receive under any Company plan that is a qualified plan under IRC Section 401(a), such as the Company's Salaried Employees' Pension Plan, Holdings' Employee Stock Ownership Plan and 401(k) Plan, or is a group health plan subject to the Consolidated Omnibus Recertification Act of 1985, as amended, to the extent Employee properly elects and pays for continuation coverage under such Act. Subject to Section 5.5 below, the foregoing release is unconditional and irrevocable. (b) As used herein, "Company Parties" means the Constituent Companies and their respective former, present and future directors, officers, employees, agents and stockholders and all persons acting by, through or in concert with any of them. Section 3.2 Release by Company. The Company, on behalf of itself and its successors and assigns, knowingly and voluntarily releases, acquits and forever discharges Employee of and from all claims, charges, complaints, obligations, liabilities, promises, agreements, contracts, damages, actions, causes of action and suits of every kind and nature and whether known or unknown, both at law and in equity, arising from or in any way connected with or related to Employee's employment with the Company or the termination of Employee's employment with the -4- 5 Company, including, but not limited to, claims, charges, complaints, obligations, liabilities, damages, actions, causes of action and suits based, in whole or in part, on breach of contract. Subject to Section 5.5 below, the foregoing release is unconditional and irrevocable. ARTICLE IV Certain Covenants Section 4.1 Non-Competition. Prior to the first anniversary of the Retirement Date, Employee will not own an interest in, manage, operate, join, control, lend money to or render financial or other assistance to or participate or be connected with, as an officer, employee, partner, stockholder, consultant or otherwise, any individual, corporation, partnership or other business organization that competes with Holdings or any other Constituent Company in the manufacture, marketing or sale of styrene monomer, acrylonitrile or sodium chlorate; provided, however, that the foregoing restriction will not preclude Employee from acquiring or holding up to 5% of the voting securities of any corporation that are listed on a national securities exchange. Employee acknowledges and agrees that the foregoing restriction is fair and reasonable in all respects and is reasonably required for the protection of the Company. Employee understands that the foregoing restriction may limit his ability to engage in a business similar to the Company's business, but Employee acknowledges that he will receive sufficiently high remuneration and benefits from the Company hereunder to justify such restriction. If Employee delivers to the Company a written request that the Company waive compliance with the foregoing restriction as to a particular activity which Employee desires to engage in, the Company agrees to consider such request in good faith and further agrees not to unreasonably refuse such request. For this purpose, a refusal by the Company of a request relating to any particular activity will not be deemed unreasonable if such activity could have a detrimental or prejudicial effect on the Company or any other Constituent Company. Nothing in this Section 4.1 shall prohibit Employee from consulting with or serving as a director of any entity whose only business is providing a neutral electronic marketplace (i.e., an online business-to-business exchange) for independent sellers and buyers of chemicals, plastics and rubbers. Section 4.2 Confidentiality. (a) Employee ratifies and confirms in all respects the covenants and agreements set forth in Article V of the Employment Agreement, which provisions are hereby incorporated into this Agreement as if set forth in their entirety. Employee acknowledges and agrees that such covenants and agreement shall survive the termination of Employee's employment with the Company. (b) Each party agrees that the terms and conditions of this Agreement, including without limitation the amount of money and other consideration payable under this Agreement, shall not be revealed or disclosed by such party to any other person or entity whatsoever except (i) that each party may make such disclosures as are required by law or legal process, (ii) that Employee may make disclosures to his family, accountants and legal, tax or financial advisors, (iii) that the Company may make disclosures to its directors, accountants and legal, tax or financial advisors and (iv) that the Company may make disclosures to its employees on a need-to-know basis. The -5- 6 foregoing restriction shall not apply to any information about this Agreement that is publicly known, including, without limitation, information contained in the Company's public filings with the Securities and Exchange Commission. Section 4.3 Non-disparagement. (a) Subject to Section 5.5 below, the Company agrees that it will not make any statements to third parties which are intended to disparage, discredit or injure the reputation of Employee. (b) Subject to Section 5.5 below, Employee agrees that he will not make any statements to third parties which are intended to disparage, discredit or injure the reputation of the Company or any of the other Company Parties. Employee agrees that he will not do anything that would in any way tend to harm the Company's good will and relationships with customers, suppliers and others having business dealings with the Company. (c) Nothing in this Section 4.3 shall obligate either party to commit perjury or violate any law or court order. Section 4.4 Return of Company Property, etc. Employee agrees to promptly turn over to the Company all files, memoranda, records, documents, credit cards, parking cards and other personal property of any Constituent Company in the possession or under the control of Employee. Employee understands and agrees that Employee is no longer authorized to incur any expenses, obligations or liabilities or otherwise act in the name or on behalf of any Constituent Company. Section 4.5 Cooperation. Employee agrees that, if requested by the Company, Employee will be reasonably available to, and will cooperate in all reasonable respects with, the Company and the other Constituent Companies and their respective counsel in connection with any litigation, proceeding or investigation (administrative, civil or criminal). It is understood and agreed that Employee shall not be required to devote more than one day of his time pursuant to any particular request by the Company under this Section 4.5 unless the parties shall have mutually agreed upon the amount of reasonable compensation to be paid to Employee therefor. Upon written request accompanied by appropriate documentation, the Company agrees to reimburse Employee for any reasonable expenses incurred by Employee in connection with any actions taken by Employee pursuant to this Section 4.5. ARTICLE V Miscellaneous Section 5.1 Additional Representations, Warranties, etc. of Employee. (a) Employee represents and warrants that he has not filed any complaints, charges or lawsuits against any Company Party with any governmental agency or in any court. -6- 7 (b) Employee acknowledges and agrees that the execution, delivery and performance of this Agreement by the Company shall not to be construed as an admission of liability of any kind on the part of, or as evidence of unlawful or improper conduct of any kind by, the Company or any other Company Party, all such liability and conduct being expressly denied. (c) Employee voluntarily accepts the payments and other benefits described in Article II hereof as sufficient payment for the release contained in Section 3.1 hereof and the other representations, warranties and agreements of Employee set forth in this Agreement. Employee acknowledges and agrees that no promises, commitments, statements or representations (oral or written) have been made to Employee by or on behalf of the Company or any other Company Party which are contrary to the terms of this Agreement. (d) Employee understands and agrees that the release contained in Section 3.1 above is a full, complete and final release of the Company and all other Company Parties. Employee represents and warrants that Employee has completely read this Agreement and fully understands its terms, contents, conditions and effects. (e) Employee acknowledges that Employee has been represented in connection with this Agreement by the law firm of Glickman & Hughes, his attorneys of choice. (f) Employee represents and warrants that Employee is not presently affected by any disability which would prevent Employee from knowingly and voluntarily signing this Agreement or granting the release set forth in Section 3.1 above. Employee represents and warrants that the representations, warranties, releases and agreements made by Employee in this Agreement are made of his own free will and accord and were not made under duress, coercion or undue influence and that Employee does not consider himself to be in a disparate bargaining position relative to the Company with respect to the matters covered by this Agreement. (g) Employee expressly represents and warrants that Employee has completely read this Agreement prior to executing it, has had an opportunity to review it with Employee's counsel, has been offered twenty-one days within which to consider this Agreement and to understand its terms, contents, conditions and effects and has entered into this Agreement knowingly and voluntarily. Section 5.2 Entire Agreement. This Agreement constitutes the entire understanding and agreement between the parties with respect to the subject matter hereof and supersedes all prior contracts and agreements relating to such matter, whether oral or written, provided, however, that, (i) the Indemnity Agreement between the Company and Employee dated as of March 16, 1998 shall remain in full force and effect in accordance with its terms and (ii) to the extent not inconsistent with or contrary to the terms of this Agreement, Articles V and VI of the Employment Agreement shall remain in full force and effect in accordance with its terms. -7- 8 Section 5.3 Dispute Resolution; Remedies. (a) In the event a dispute shall arise between the parties as to whether the provisions of this Agreement have been complied with, the parties agree, subject to paragraphs (b) and (c) below, to resolve such dispute in accordance with the provisions of Article VI of the Employment Agreement, which provisions are hereby incorporated in this Agreement as if set forth in their entirety. In the event a dispute under this Agreement is resolved by mediation or arbitration in accordance with this paragraph (a), the non-prevailing party shall be responsible for the legal fees and expenses incurred by the prevailing party in connection with such mediation or arbitration. (b) Employee acknowledges and agrees that a breach of any of the covenants contained in Article IV hereof may result in material irreparable injury to the Company for which there is no adquate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach, the Company shall be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining Employee from engaging in activities prohibited by such covenants or such other relief as may be required or appropriate to specifically enforce any of such covenants. Employee submits to the in personam jurisdiction before each and every court in Harris County, Texas for that purpose. (c) The Company acknowledges and agrees that a breach of Section 4.3(a) hereof may result in material irreparable injury to Employee for which there is no adquate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach, Employee shall be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining the Company from engaging in activities prohibited by Section 4.3(a) or such other relief as may be required or appropriate to specifically enforce Section 4.3(a). The Company submits to the in personam jurisdiction before each and every court in Harris County, Texas for that purpose. (d) If Employee breaches any of his obligations under this Agreement, the Company shall be entitled, by giving prior written notice to Employee, to (i) rescind and revoke its obligation to pay the bonus described in Section 2.3 hereof, (ii) reduce the term of the Employee Stock Options so that they may not be exercised after the first anniversary of the Retirement Date and/or (iii) cause the shares described in Section 2.7 hereof to be subject to the provisions Stockholders Agreement referred to therein to the same extent as if this Agreement had not been entered into. Each notice given by the Company pursuant to this paragraph (d) shall describe, in reasonable detail, the breach of this Agreement by Employee which is the basis for such notice. Any dispute under this paragraph (d) shall be resolved as provided in paragraph (a) of this Section 5.3. (e) Subject to paragraph (a) above, no right, power or remedy granted under this Agreement is intended to be exclusive, but each shall be cumulative and in addition to any and all other rights, powers and remedies referred to in this Agreement or otherwise available at law or in equity. -8- 9 Section 5.4 Governing Law. THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO ITS CONFLICT OF LAWS PRINCIPLES. Section 5.5 Employee's Right of Revocation. Employee understands that Employee has until 4:00 p.m. on May 30, 2000 within which to consider this Agreement and that this Agreement is revocable by Employee for a period of seven days following the execution of this Agreement and, if not so revoked, this Agreement will become effective and enforceable. For the revocation to be effective, written notice of revocation must be delivered to Robert O. McAlister, Vice President, Human Resources and Administration, Sterling Chemicals, Inc., 1200 Smith Street, Suite 1900, Houston, TX, 77002, no later than the close of business on the seventh day after Employee has signed this Agreement. If Employee revokes this Agreement as aforesaid, this Agreement shall automatically terminate and cease to be of any force or effect. Section 5.6 Amendments and Waivers. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. The failure of the Company or Employee to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver thereof or deprive that party of the right thereafter to insist upon strict adherence to that term or any other terms of the Agreement. Section 5.7 Severability. The invalidity, illegality or unenforceability of any provision of this Agreement shall not affect the validity, legality or enforceability of any other provision of this Agreement, which shall remain in full force and effect. Section 5.8 Counterparts. This Agreement may be signed in any number of identical counterparts, each of which shall be deemed an original for all purposes. Section 5.9 Interpretation. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. The words "herein", "hereof" and "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision. No provision of this Agreement shall be construed against either party solely because that party (or its counsel) drafted such provision. Section 5.10 Successors and Assigns. This Agreement shall be binding upon and enforceable against the Company and its successors and assigns. Each other Company Party is a beneficiary of this Agreement and may enforce this Agreement the same as if such Company Party were a party thereto. This Agreement shall be binding upon and enforceable against Employee and his heirs, beneficiaries, personal representatives and assigns. Section 5.11 Further Assurances. Each party agrees, from time to time, to do and perform any and all acts and to execute any and all further instruments required or reasonably requested by the other party more fully to effect and carry out the intent and purposes of this Agreement. -9- 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. EMPLOYEE ----------------------------------------- Peter W. De Leeuw Date: May ___, 2000 STERLING CHEMICALS HOLDINGS, INC. By: -------------------------------------- Frank P. Diassi, Chairman of the Board STERLING CHEMICALS, INC. By: -------------------------------------- Frank P. Diassi, Chairman of the Board EX-21.1 22 h82651ex21-1.txt SUBSIDIARIES OF STERLING CHEMICALS HOLDINGS, INC. 1 Exhibit 21.1 Subsidiaries of STERLING CHEMICALS HOLDINGS, INC. As of September 30, 2000 Owns 100% of: Sterling Chemicals, Inc., a Delaware corporation Owns 100% of: Sterling Fibers, Inc., a Delaware corporation Sterling Chemicals Acquisitions, Inc., a Delaware corporation Owns 100% of: Sterling Pulp Chemicals Fuzhou, Ltd., an Ontario corporation Sterling (Sask) Holdings Ltd., an Ontario corporation Owns 100% of: Sterling Pulp Chemicals (Sask) Ltd., an Ontario corporation Owns 100% of 619220 Saskatchewan Ltd., a Saskatchewan corporation Sterling Chemicals International, Inc., a Delaware corporation Sterling Chemicals Energy, Inc., a Delaware corporation Sterling Chemicals Marketing, Inc., a Barbados corporation Sterling Canada, Inc., a Delaware corporation Owns 100% of: Sterling Pulp Chemicals US, Inc., a Delaware corporation Owns 100% of: Sterling Pulp Chemicals, Inc., a Georgia corporation Sterling NRO, Ltd., an Ontario corporation Sterling Pulp Chemicals, Ltd., an Ontario corporation EX-23.1 23 h82651ex23-1.txt CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-30917 of Sterling Chemicals Holdings, Inc. on Form S-3 and Registration Statement No. 333-52795 of Sterling Chemicals Holdings, Inc. on Form S-8 of our report dated December 12, 2000 appearing on page 70 in this Annual Report on Form 10-K of Sterling Chemicals Holdings, Inc. for the year ended September 30, 2000. DELOITTE & TOUCHE LLP Houston, Texas December 12, 2000 EX-27.1 24 h82651ex27-1.txt FDS - STERLING CHEMICALS HOLDINGS, INC.
5 0000795662 STERLING CHEMICALS HOLDINGS, INC. 1,000 YEAR SEP-30-2000 OCT-01-1999 SEP-30-2000 7,667 0 162,480 (2,186) 83,726 261,184 803,247 484,621 701,212 177,679 961,570 23,928 0 123 (547,845) 701,212 1,078,351 1,078,351 937,460 937,460 100,881 0 122,414 (82,404) 4,560 (86,964) 0 0 0 (86,964) (7.13) (7.13)
EX-27.2 25 h82651ex27-2.txt FDS - STERLING CHEMICALS, INC.
5 0001014669 STERLING CHEMICALS, INC. 1,000 YEAR SEP-30-2000 OCT-01-1999 SEP-30-2000 5,740 0 165,302 (2,186) 83,726 262,079 803,247 484,621 677,143 177,492 791,684 0 0 0 (377,790) 677,143 1,078,351 1,078,351 937,460 937,460 100,455 0 99,723 (59,287) 4,560 (63,847) 0 0 0 (63,847) 0 0
EX-99.1 26 h82651ex99-1.txt STERLING CANADA, INC. CONSOLIDATED FINANCIAL STMTS 1 EXHIBIT 99.1 STERLING CANADA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ------------------------------------ 2000 1999 1998 ---------- ---------- ---------- Revenues ......................................... $ 173,204 $ 155,673 $ 162,066 Cost of goods sold ............................... 135,049 125,812 124,887 --------- --------- --------- Gross profit ..................................... 38,155 29,861 37,179 Selling, general, and administrative expenses .... 12,746 9,839 9,941 Interest and debt related expenses ............... 29,768 29,463 28,484 --------- --------- --------- Net loss before income taxes ..................... (4,359) (9,441) (1,246) Provision (benefit) for income taxes ............. 2,946 487 (534) --------- --------- --------- Net loss ......................................... $ (7,305) $ (9,928) $ (712) ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 2 STERLING CANADA, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, ----------------------- 2000 1999 ---------- ---------- ASSETS Current assets: Cash and cash equivalents .......................... $ 86 $ 8,588 Accounts receivable, net ........................... 49,930 33,342 Inventories ........................................ 7,459 6,288 Prepaid expenses ................................... 568 1,869 --------- --------- Total current assets ............................. 58,043 50,087 Property, plant, and equipment, net ................... 117,785 127,658 Due from affiliates ................................... 168,008 150,946 Other assets .......................................... 21,450 34,389 --------- --------- Total assets ..................................... $ 365,286 $ 363,080 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable ................................... $ 15,478 $ 14,680 Accrued liabilities ................................ 16,511 11,238 --------- --------- Total current liabilities ........................ 31,989 25,918 Long-term debt due to parent .......................... 244,001 243,999 Deferred income taxes ................................. 8,338 7,272 Deferred credits and other liabilities ................ 8,832 4,927 Commitments and contingencies (Note 7) ................ -- -- Stockholder's equity: Common stock ....................................... -- -- Additional paid-in capital ......................... 83,396 83,396 Retained earnings .................................. 17,763 25,068 Accumulated other comprehensive income ............. (29,033) (27,500) --------- --------- Total stockholder's equity ....................... 72,126 80,964 --------- --------- Total liabilities and stockholder's equity .... $ 365,286 $ 363,080 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 2 3 STERLING CANADA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DOLLARS IN THOUSANDS)
ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE STOCK CAPITAL EARNINGS INCOME TOTAL -------- ---------- -------- ------------- -------- Balance, September 30, 1997 .... $ -- $ 83,396 $ 35,708 $(20,772) $ 98,332 Comprehensive income: Net loss .................... -- -- (712) -- Translation adjustment ...... -- -- -- (10,041) Comprehensive loss ....... (10,753) -------- -------- -------- -------- -------- Balance, September 30, 1998 .... -- 83,396 34,996 (30,813) 87,579 Comprehensive income: Net loss .................... -- -- (9,928) -- Translation adjustment ...... -- -- -- 3,313 Comprehensive loss ....... (6,615) -------- -------- -------- -------- -------- Balance, September 30, 1999 .... -- 83,396 25,068 (27,500) 80,964 Comprehensive income: Net loss .................... -- -- (7,305) -- Translation adjustment ...... -- -- -- (1,533) Comprehensive loss ....... (8,838) -------- -------- -------- -------- -------- Balance, September 30, 2000 .... $ -- $ 83,396 $ 17,763 $(29,033) $ 72,126 ======== ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 3 4 STERLING CANADA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ------------------------------------ 2000 1999 1998 -------- -------- -------- Cash flows from operating activities: Net loss ........................................................................... $ (7,305) $ (9,928) $ (712) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ................................................... 19,476 18,328 18,140 Deferred tax expense (benefit) .................................................. 1,066 763 (361) Other ........................................................................... 60 (234) 448 Change in assets/liabilities: Accounts receivable ............................................................. (16,588) (6,943) 6,863 Inventories ..................................................................... (1,171) 1,578 (1,718) Prepaid expenses ................................................................ 1,301 4,721 (2,846) Due from affiliates ............................................................. (18,595) 2,017 (3,796) Other assets .................................................................... 8,802 2,298 (1,062) Accounts payable ................................................................ 798 1,142 5,208 Accrued liabilities ............................................................. 5,273 (1,629) 1,606 Other liabilities ............................................................... 3,907 (4,792) 298 -------- -------- -------- Net cash flows provided by (used in) operating activities .......................... (2,976) 7,321 22,068 -------- -------- -------- Cash flows from investing activities: Capital expenditures ............................................................ (5,466) (4,357) (6,154) Proceeds on disposal of fixed assets ............................................ -- 3,583 -- -------- -------- -------- Net cash used in investing activities .............................................. (5,466) (774) (6,154) -------- -------- -------- Cash flows from financing activities - Net change in long-term debt due to Parent ...................................... -- (1,765) (17,806) -------- -------- -------- Effect of United States/Canadian exchange rate on cash ............................. (60) 234 (447) -------- -------- -------- Net increase (decrease) in cash and cash equivalents ............................... (8,502) 5,016 (2,339) Cash and cash equivalents--beginning of year ....................................... 8,588 3,572 5,911 -------- -------- -------- Cash and cash equivalents--end of year ............................................. $ 86 $ 8,588 $ 3,572 ======== ======== ======== Supplemental disclosures of cash flow information: Income taxes paid ............................................................... $ (696) $ (749) $ (541)
The accompanying notes are an integral part of the consolidated financial statements. 4 5 STERLING CANADA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS Sterling Canada, Inc., through its subsidiaries (Sterling Canada, Inc. and its subsidiaries collectively, the "Company"), manufactures chemicals for use primarily in the pulp and paper industry at four plants in Canada and one plant in Valdosta, Georgia. These plants primarily produce sodium chlorate, a chemical used primarily to make chlorine dioxide, which in turn is used by pulp mills in the pulp bleaching process. The Company also produces sodium chlorite at one of its Canadian locations and oversees construction of large-scale chlorine dioxide generators for the pulp and paper industry. Sterling Canada, Inc. is a wholly owned subsidiary of Sterling Chemicals, Inc. ("Chemicals"), which is a wholly owned subsidiary of Sterling Chemicals Holdings, Inc. ("Holdings"). On July 23, 1999, Chemicals completed a private offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006. On November 5, 1999, Chemicals completed a registered exchange offer, pursuant to which all of these notes were exchanged for publicly registered 12 3/8% Notes with substantially similar terms (the "12 3/8% Notes"). The 12 3/8% Notes are guaranteed by Sterling Canada, Inc., Sterling Pulp Chemicals, Inc., and Sterling Pulp Chemicals US, Inc. (Sterling Canada, Inc.'s subsidiaries incorporated in the United States) and all of Chemicals' other existing direct and indirect subsidiaries incorporated in the United States (other than Sterling Chemicals Acquisitions, Inc.) on a joint and several basis and are secured by, among other things, a second priority pledge of 100% of the stock of these subsidiaries. The 12 3/8% Notes are also secured by 65% of the stock of Sterling Pulp Chemicals, Ltd. ("Sterling Pulp") and Sterling NRO, Ltd., each of which is a Canadian subsidiary of Sterling Canada, Inc. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies of the Company are described below. The financial statements of the Company are presented in accordance with generally accepted accounting principles in the United States of America ("U.S.") and certain subsidiaries have been translated from Canadian dollars, their functional currency, to U.S. dollars, the reporting currency of the Company following the guidelines established by Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Sterling Canada, Inc. and all of its direct and indirect wholly owned subsidiaries, which include Sterling Pulp, Sterling Pulp Chemicals, Inc., Sterling Pulp Chemicals US, Inc., and Sterling NRO, Ltd. All significant intercompany accounts and transactions have been eliminated. CASH EQUIVALENTS The Company considers all investments with a remaining maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost and market. Cost is determined on the first-in, first-out basis, except for stores and supplies which are valued at average cost. The Company enters into agreements with other companies to exchange chemical inventories in order to minimize working capital requirements and to facilitate distribution logistics. Balances related to quantities due to or payable by the Company are included in inventory. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost. Major renewals and improvements which extend the useful lives of equipment are capitalized, while repair and maintenance expenses are charged to operations as incurred. Disposals are removed at carrying costs less accumulated depreciation with any resulting gain or loss reflected in operations. 5 6 Depreciation is provided using the straight-line method over estimated useful lives ranging from five to 25 years, with the predominant life of plant and equipment being 15 years. IMPAIRMENT OF LONG-LIVED ASSETS Impairment tests of long-lived assets are made when conditions indicate their carrying costs may not be recoverable. Such impairment tests are based on a comparison of undiscounted future cash flows or the market value of similar assets to the carrying cost of the asset. If an impairment is indicated, the asset value is written down to its estimated fair value. PATENTS AND ROYALTIES The costs of patents are amortized on a straight-line basis over their estimated useful lives, which approximate ten years. The Company capitalized the value of its chlorine dioxide generator technology acquired in fiscal 1992 based on the net present value of all estimated remaining royalty payments associated with this technology. The resulting intangible amount is included in other assets and is amortized over the average life for these royalty payments of ten years. INCOME TAXES The Company is included in the consolidated United States federal income tax returns filed by Holdings. The Company's provision (benefit) for United States income taxes has been allocated by Holdings as if the Company filed its annual tax returns on a separate return basis. The Company's Canadian subsidiaries file separate federal Canadian tax returns, as well as returns in the provinces in which they operate. For these Canadian subsidiaries, deferred income taxes are recorded to reflect the tax effect of the temporary differences between the financial reporting basis and the tax basis of the subsidiary's assets and liabilities. REVENUE RECOGNITION The Company generates revenues through sales in the open market pursuant to short-term and long-term contracts with its customers. The Company recognizes revenue from sales as the products are shipped. Revenues associated with the constructing of chlorine dioxide generators are recognized using the percentage of completion method based on cost incurred compared to total estimated cost. The Company also receives prepaid royalties for use of its chlorine dioxide generator technology, which are typically recognized as revenues over a period of ten years. The Company classifies amounts billed to customers for shipping and handling as revenues, with the related shipping and handling costs included in cost of goods sold. FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE Assets and liabilities denominated in Canadian dollars are translated into United States dollars at year-end exchange rates and revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are included in accumulated other comprehensive income, while transaction gains and losses are included in operations when incurred. The Company's Canadian subsidiaries previously entered into forward foreign exchange contracts to minimize the short-term impact of Canadian dollar fluctuations on some of its Canadian dollar denominated commitments. Gains or losses on these contracts were deferred and were included in operations in the same period in which the related transactions were settled. EARNINGS PER SHARE All issued and outstanding shares of the Company are held directly or indirectly by Chemicals and, accordingly, earnings per share information is not presented. ENVIRONMENTAL COSTS Environmental costs are expensed as incurred unless the expenditures extend the economic useful life of the relevant assets. Costs that extend the economic life of assets are capitalized and depreciated over the remaining life of those assets. Liabilities are recorded when environmental assessments or remedial efforts are probable and the cost can be reasonably estimated. 6 7 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In preparing disclosures about the fair value of financial instruments, the Company has assumed that the carrying amount approximates fair value for cash and cash equivalents, receivables, accounts payable, and certain accrued expenses due to the short maturities of these instruments. The fair values of long-term debt instruments are estimated based upon quoted market values (if applicable) of the debt allocated to the Company by Chemicals or on the current interest rates available for debt with similar terms and remaining maturities. Considerable judgment is required in developing these estimates and, accordingly, no assurances can be given that the estimated values presented herein are indicative of the amounts that would be realized in a free market exchange. ACCOUNTING ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. ALLOCATIONS Sterling Canada, Inc. and each of its subsidiaries is directly or indirectly wholly owned by Chemicals, which incurs certain direct and indirect expenses for the benefit and support of the Company. These services include, among others, tax planning, treasury, legal, risk management, and the maintenance of insurance coverage for the Company. Chemicals allocated $3.5 million, $2.5 million, and $2.5 million of such expenses to the Company in fiscal years 2000, 1999, and 1998, respectively, which are included in selling, general, and administrative expenses. Allocations are based on the Company's proportionate share of the respective amounts and are determined primarily on revenue. In addition, the Company is dependent on Chemicals for financing. NEW ACCOUNTING STANDARDS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. We adopted these statements as of October 1, 2000. The transition adjustment relating to the adoption of these statements was not material. RECLASSIFICATION Certain amounts reported in the financial statements for the prior periods have been reclassified to conform with the current financial statement presentation with no effect on net income (loss) or stockholder's equity. 7 8 3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
September 30, ------------------------- 2000 1999 ---------- ---------- (Dollars in Thousands) Inventories: Finished products ....................... $ 3,823 $ 2,512 Raw materials ........................... 250 270 --------- --------- Inventories, at cost ....................... 4,073 2,782 Inventories under exchange agreements ...... 278 170 Stores and supplies ........................ 3,108 3,336 --------- --------- $ 7,459 $ 6,288 ========= ========= Property, plant, and equipment: Land .................................... $ 1,430 $ 1,465 Buildings ............................... 27,109 27,040 Plant and equipment ..................... 163,619 161,824 --------- --------- Property, plant, and equipment, at cost .... 192,158 190,329 Less accumulated depreciation .............. (74,373) (62,671) --------- --------- $ 117,785 $ 127,658 ========= ========= Accrued liabilities: Accrued compensation .................... $ 3,008 $ 2,169 Billings in excess of costs incurred .... 508 3,135 Accrued interest ........................ 6,559 1,976 Other ................................... 6,436 3,958 --------- --------- $ 16,511 $ 11,238 ========= =========
4. LONG TERM DEBT In August of 1996, in connection with a recapitalization transaction, Chemicals allocated $276.8 million of debt to the Company. Principal payments were allocated to the Company by Chemicals as scheduled principal payments were made on a basis consistent with the original allocation. In addition, the Company has made payments to Chemicals, from time to time, out of available cash which were applied by Chemicals as a reduction of the principal of the previously allocated debt. Interest expense is allocated to the Company based on the terms of Chemicals' debt agreements. At September 30, 1999, interest rates on the allocated debt ranged from 11.25% to 12.375%. Debt issue costs relating to long-term debt have been allocated to the Company by Chemicals on a basis consistent with long-term debt and are included in other assets. On July 23, 1999, Chemicals completed a private offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006 which were subsequently exchanged for the 12 3/8% Notes. The 12 3/8% Notes are guaranteed by Sterling Canada, Inc., Sterling Pulp Chemicals, Inc., Sterling Pulp Chemicals US, Inc., and most of Chemicals' other existing direct and indirect subsidiaries incorporated in the United States on a joint and several basis. Each subsidiary's guarantee ranks equally in right of payment with all of its existing and future senior indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness. However, the 12 3/8% Notes and each subsidiary's guarantee are subordinated to the extent of the collateral securing Chemicals' secured revolving credit facilities. The 12 3/8% Notes and the subsidiary guarantees are secured by (i) a second priority lien on all of Chemicals' and the subsidiary guarantors' United States production facilities and related assets, (ii) a second priority pledge of all of the capital stock of each subsidiary guarantor, and (iii) a first priority pledge of 65% of the stock of certain of the Chemicals' subsidiaries incorporated outside of the United States, including Sterling Pulp and Sterling NRO, Ltd. The proceeds of the offering of the 12 3/8% Notes were used to fully repay and terminate Chemicals' three outstanding term loans. Upon 8 9 consummation of the offering of the 12 3/8% Notes, the debt allocated to the Company by Chemicals increased to $244.0 million. On July 23, 1999, Chemicals also established two secured revolving credit facilities providing for up to $155,000,000 in revolving credit loans (the "Revolvers") under a single Revolving Credit Agreement (the "Credit Agreement"). Under the Credit Agreement, Chemicals and most of its direct and indirect subsidiaries incorporated in the United States, including Sterling Canada, Inc., Sterling Pulp Chemicals, Inc., and Sterling Pulp Chemicals US, Inc., are co-borrowers and are jointly and severally liable for any indebtedness thereunder. The Revolvers consist of (i) an $85,000,000 revolving credit facility (the "Current Assets Revolver") secured by a first priority lien on all accounts receivable, inventory, and other specified assets of Chemicals and the other co-borrowers, and (ii) a $70,000,000 revolving credit facility (the "Fixed Assets Revolver") secured by a first priority lien on all United States production facilities and related assets of Chemicals and the other co-borrowers and all of the capital stock of Chemicals and the other co-borrowers and a second priority lien on all accounts receivable, inventory, and other specified assets of Chemicals and the other co-borrowers. Funding under the 12 3/8% Notes and the Revolvers occurred on July 23, 1999. The proceeds of the 12 3/8% Notes and the initial borrowings under the Revolvers were used to completely repay all outstanding indebtedness under Chemicals' then existing senior credit facilities. Approximately $37.2 million was drawn by Chemicals under the Fixed Assets Revolver at September 30, 2000, of which no amounts were allocated to the Company. Borrowings under the Fixed Assets Revolver bear interest, at Chemicals' option, at an annual rate of either the "LIBOR Rate" (as defined in the Credit Agreement) plus 3.75% or the "Alternate Base Rate" plus 2.25%. Borrowings under the Current Assets Revolver bear interest, at Chemicals' option, at an annual rate of either the LIBOR Rate plus 3.00% or the "Alternate Base Rate" plus 1.50%. The "Alternate Base Rate" is equal to the greater of the "Base Rate" as announced from time to time by The Chase Manhattan Bank in New York, New York or the "Federal Funds Effective Rate" plus 1/2% (as defined in the Credit Agreement). The Credit Agreement also requires Chemicals and the other co-borrowers to pay an aggregate commitment fee ranging from 0.75% to 1.25% on the unused portion of the commitment for the Fixed Assets Revolver, depending on the amount drawn, and an aggregate commitment fee of 0.5% on the unused portion of the commitment for the Current Assets Revolver. Available credit under the Current Assets Revolver is subject to a monthly borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory, with an inventory cap of $42,500,000. In addition, the borrowing base for the Current Assets Revolver must exceed outstanding borrowings thereunder by $12,000,000 at all times. The Fixed Assets Revolver matures on July 23, 2004, with quarterly commitment reductions totaling 30% of the total commitment in the twelve month period ending July 23, 2003, and the balance in the following twelve month period. The Current Assets Revolver matures on July 23, 2004, with no scheduled commitment reductions prior to that time. However, the commitments for each of the Fixed Assets Revolver and the Current Assets Revolver are permanently reduced to the extent required under the Credit Agreement upon prepayments made out of specific sources of funds, including certain equity issuances by Holdings and asset sales. 5. INCOME TAXES The Company is included in the consolidated federal United States tax returns filed by Holdings. The Company's provision (benefit) for United States income taxes has been allocated as if the Company filed their annual federal United States tax returns on a separate return basis. As of September 30, 2000, and 1999, $13.1 million and $13.1 million, respectively, of deferred income tax assets were included in Due from Affiliates. For the years ended September 30, 2000, 1999, and 1998, the Company recorded zero, $0.2 million, and $(2.3) million, respectively, of United States income tax provision (benefit) in its provision (benefit) for income taxes. Canadian deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and the financial reporting amounts at each year-end. 9 10 A reconciliation of the Canadian income taxes to the Canadian effective tax provision follows:
Year Ended September 30, ---------------------------------- 2000 1999 1998 -------- -------- -------- (Dollars in Thousands) Provision for federal income tax at the statutory rate ............. $ 2,308 $ 259 $ 1,367 Provincial income taxes at the statutory rate ...................... 1,114 88 563 Federal and provincial manufacturing and processing tax credits .... (477) (50) (286) Other .............................................................. -- 16 156 ------- ------- ------- Total Canadian tax provision ....................................... $ 2,945 $ 313 $ 1,800 ======= ======= =======
The provision for Canadian income taxes is composed of the following:
Year Ended September 30, ---------------------------------- 2000 1999 1998 -------- -------- -------- (Dollars in Thousands) Current federal .................................................... $ 3,328 $ 2,098 $ 2,852 Deferred federal ................................................... (1,380) (1,859) (1,611) Current provincial ................................................. 1,702 619 1,427 Deferred provincial ................................................ (705) (545) (868) ------- ------- ------- Total Canadian tax provision ....................................... $ 2,945 $ 313 $ 1,800 ======= ======= =======
The components of the Company's Canadian deferred income tax assets and liabilities are summarized below:
September 30, ---------------------- 2000 1999 -------- -------- (Dollars in Thousands) Deferred tax assets: Accrued liabilities .................................................... $ 249 $ 318 Accrued postretirement cost ............................................ 1,339 1,236 Investment tax credits ................................................. 1,408 4,767 -------- -------- 2,996 6,321 -------- -------- Deferred tax liabilities: Property, plant, and equipment ......................................... (11,334) (13,593) -------- -------- (11,334) (13,593) -------- -------- Net deferred tax liabilities .............................................. $ (8,338) $ (7,272) ======== ========
6. EMPLOYEE BENEFITS The Company's United States employees participate in various employee benefit plans of Chemicals. Costs, assets, and liabilities associated with United States employees participating in these various plans are allocated to the Company by Chemicals based on the number of employees. In addition, the Company sponsors various employee benefit plans in Canada. RETIREMENT BENEFIT PLANS Chemicals has non-contributory pension plans in the United States which cover all salaried and wage employees. The benefits under these plans are based primarily on years of service and employees' pay near retirement. Chemicals' funding policy is consistent with the funding requirements of federal law and regulations. Plan assets consist principally of government and corporate securities. The liability relating to United States employees allocated to the Company by Chemicals for the retirement benefit plans and included in Due from Affiliates was $0.6 million and $0.4 million at September 30, 2000 and 1999, respectively. The total pension expense relating to United States employees allocated to the Company was $0.2 million, $0.1 million, and $0.1 million for the years ended September 30, 2000, 1999, and 1998, respectively. 10 11 The Company has employer and employee contributory plans in Canada which cover all salaried and wage employees. Information for Canadian benefit plans concerning the pension obligation, plan assets, amounts recognized in the Company's financial statements, and underlying actuarial assumptions is stated below.
September 30, ---------------------- 2000 1999 -------- -------- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year .................... $ 16,283 $ 14,577 Currency rate conversion ................................... (293) 556 Service cost ............................................... 716 919 Interest cost .............................................. 1,240 1,112 Actuarial loss (gain) ...................................... (31) (124) Benefits paid .............................................. (307) (757) -------- -------- Benefit obligation at end of year .......................... $ 17,608 $ 16,283 ======== ======== Change in plan assets: Fair value at beginning of year ............................ $ 15,330 $ 13,062 Currency rate conversion ................................... (276) 498 Actual return on plan assets ............................... 2,412 1,858 Employer contributions ..................................... 658 669 Benefits paid .............................................. (307) (757) -------- -------- Fair value at end of year .................................. $ 17,817 $ 15,330 ======== ======== Development of net amount recognized: Funded status .............................................. $ 209 $ (953) Unrecognized cost: Actuarial loss (gain) ................................... (1,318) (22) Prior service cost ...................................... 298 333 -------- -------- Net amount recognized ...................................... $ (811) $ (642) ======== ======== Amounts recognized in the statement of financial position: Prepaid pension cost ....................................... $ 418 $ 529 Accrued pension cost ....................................... (1,229) (1,198) Intangible asset ........................................... -- 27 -------- -------- Net amount recognized ...................................... $ (811) $ (642) ======== ========
Net periodic pension costs for the Canadian pension plan consist of the following components:
September 30, ------------------------------------ 2000 1999 1998 -------- -------- -------- (Dollars in Thousands) Components of net pension costs: Service cost-benefits earned during the year ............. $ 716 $ 919 $ 748 Interest on prior year's projected benefit obligation .... 1,240 1,112 1,016 Expected return on plan assets ........................... (1,144) (963) (1,092) Net amortization: Actuarial loss (gain) ................................. 28 68 (130) Prior service cost .................................... (2) 29 15 ------- ------- ------- Net pension costs ........................................ $ 838 $ 1,165 $ 557 ======= ======= ======= Weighted-average assumptions: Discount Rate ............................................ 7.5% 7.5% 7.0% Rates of increase in salary compensation level ........... 4.5% 4.5% 4.0% Expected long-term rate of return on plan assets ......... 7.5% 7.5% 7.0%
11 12 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Chemicals and the Company provide certain health care benefits and life insurance benefits for retired employees. Substantially all employees become eligible for these benefits at normal retirement age. The cost of these benefits is accrued during the period in which the employee renders the necessary service. Health care benefits are provided to employees who retire with ten or more years of service, excluding Canadian employees covered by collective bargaining agreements. All employees are eligible for postretirement life insurance. Postretirement health care benefits for United States plans are non-contributory. Benefit provisions for most hourly and some salaried employees are subject to collective bargaining agreements. In general, the plans stipulate that retiree health care benefits are paid as covered expenses are incurred. The liability relating to United States employees allocated to the Company by Chemicals for the postretirement benefits other than pensions and included in Due from Affiliates was $0.4 million and $0.4 million at September 30, 2000 and 1999, respectively. The total postretirement benefits other than pensions expense for United States employees allocated to the Company was $ 0.1 million, $0.1 million, and $0.1 million for the years ended September 30, 2000, 1999, and 1998, respectively. Information for Canadian benefit plans with respect to the plan obligation, the funded status, amounts recognized in the Company's financial statements, and underlying actuarial assumptions is stated below.
September 30, --------------------- 2000 1999 -------- -------- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year .... $ 4,886 $ 4,306 Service cost ............................... 314 307 Interest cost .............................. 329 299 Actuarial loss (gain) ...................... (754) -- Benefits paid .............................. (24) (26) ------- ------- Benefit obligation at end of year .......... $ 4,751 $ 4,886 ======= ======= Development of net amount recognized: Funded status .............................. $(4,751) $(4,886) Unrecognized cost: Actuarial loss (gain) ................... (91) 637 ------- ------- Net amount recognized ...................... $(4,842) $(4,249) ======= =======
Net periodic plan costs for the Canadian postretirement benefit consist of the following components:
September 30, ------------------------ 2000 1999 1998 ---- ---- ---- (Dollars in Thousands) Components of net plan costs: Service cost .................................. 314 $307 $264 Interest cost ................................. 329 299 286 Net amortization of actuarial loss ............ 16 32 -- ---- ---- ---- Net plan costs ................................ 659 $638 $550 ==== ==== ==== Weighted-average assumptions: Discount rate ................................. 7.50% 6.75% 7.50%
The weighted average annual assumed health care trend rate is assumed to be 7.3% for 2000. The rate is assumed to decrease gradually to 5.6% in 2027 and remain level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care trend rates would have the following effects:
1% 1% Increase Decrease -------- -------- (Dollars in Thousands) Effect on total of service and interest cost components..... $ 36 $ (31) Effect on post-retirement benefit obligation................ 229 (199)
12 13 SAVINGS AND INVESTMENT PLAN Chemicals' Sixth Amended and Restated Savings and Investment Plan covers substantially all United States employees of the Company, including executive officers. This Plan is qualified under Section 401(k) of the Internal Revenue Code. Each participant has the option to defer taxation of a portion of his or her earnings by directing the Company to contribute a percentage of such earnings to this Plan. A participant may direct up to a maximum of 20% of eligible earnings to this Plan, subject to certain limitations set forth in the Internal Revenue Code for "highly compensated" participants. A participant's contributions become distributable upon the termination of his or her employment. The Company did not make any contribution to this Plan in fiscal 2000. Beginning October 1, 2000, the Company began matching 50% of a participant's contributions, to the extent such contributions do not exceed 7% of such participant's cash compensation (excluding bonuses, profit sharing, and similar types of compensation). EMPLOYEE SAVINGS PLAN The Company introduced an employee savings plan for all eligible full-time Canadian employees with an effective date of October 1, 2000. Each participant has the option to contribute a percentage of his or her earnings to the Canadian savings plan, with no limit on the maximum percentage contributed. The Company will match 100% of a participant's contributions, to the extent such contributions do not exceed 3.5% of such participant's cash compensation (excluding bonuses, profit sharing, and similar types of compensation). PROFIT SHARING AND BONUS PLANS In January of 1997, the Board of Directors of Holdings, upon recommendation of its Compensation Committee, approved the establishment of a Profit Sharing Plan that is designed to benefit all qualified employees, and a Bonus Plan that is designed to provide certain exempt salaried employees of the Company with the opportunity to earn bonuses, depending, among other things, on the annual financial performance of Holdings. The Company incurred $1.3 million and $1.1 million of expenses related to the Profit Sharing Plan and Bonus Plan, respectively, in fiscal 2000. No expenses for profit sharing or bonuses were incurred by Holdings or allocated to the Company in fiscal 1999 or 1998. PHANTOM STOCK PLAN The Company has a phantom stock plan for all eligible full-time Canadian employees. The effective date of this Plan was August 21, 1996 and the expiration date is December 31, 2000. At the end of each plan year, the plan administrator establishes a "determined percentage" for the preceding plan year. This percentage is then multiplied by each participant's compensation for the plan year to determine the award amount. The award amount is then divided by the fair market value of one share of the common stock of Holdings, as of December 31 of that plan year, to determine the number of rights to be credited to the participant. Upon termination of employment, the benefit amount becomes payable to the participant. The benefit amount is the number of vested rights in the participant's account, multiplied by the fair market value of one share of common stock of Holdings as of the most recent valuation date. The Company has recorded expense of $0.2 million, $0.2 million, and $0.2 million related to the phantom stock plan for the fiscal years ended September 30, 2000, 1999, and 1998, respectively. 7. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company has entered into various long-term noncancelable operating leases, some of which have been allocated to commonly controlled companies. Future minimum lease commitments at September 30, 2000 are as follows: fiscal 2001 - $5.0 million; fiscal 2002 - $4.1 million; fiscal 2003 - $4.0 million; fiscal 2004 - $3.8 million; fiscal 2005 - $3.1 million; and thereafter - $6.4 million. ENVIRONMENTAL AND SAFETY MATTERS The Company's operations involve the handling, production, transportation, treatment, and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental and health and safety 13 14 laws, regulations, and permit requirements. Environmental permits required for the Company's operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacture, handling, processing, distribution, and use of the Company's chemical products and, if so affected, the Company's business and operations may be materially and adversely affected. In addition, changes in environmental requirements can cause the Company to incur substantial costs in upgrading or redesigning its facilities and processes, including our waste treatment, storage, disposal, and other waste handling practices and equipment. The Company conducts environmental management programs designed to maintain compliance with applicable environmental requirements at all of its facilities. The Company routinely conducts inspection and surveillance programs designed to detect and respond to leaks or spills of regulated hazardous substances and to correct identified regulatory deficiencies. The Company believes that its procedures for waste handling are consistent with industry standards and applicable requirements. In addition, the Company believes that its operations are consistent with good industry practice. However, a business risk inherent with chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees, and nearby landowners and occupants. While the Company believes its business operations and facilities generally are operated in compliance in all material respects with all applicable environmental and health and safety requirements, the Company cannot be sure that past practices or future operations will not result in material claims or regulatory action, require material environmental expenditures, or result in exposure or injury claims by employees, contractors and their employees, and the public. Some risk of environmental costs and liabilities is inherent in the Company's operations and products, as it is with other companies engaged in similar businesses. In addition, a catastrophic event at any of the Company's facilities could result in the incurrence of liabilities substantially in excess of its insurance coverages. The Company's operating expenditures for environmental matters, mostly waste management and compliance, were approximately $2.5 million for fiscal 2000 and $2.6 million for fiscal 1999. The Company also spent approximately $0.7 million for environmentally related capital projects in fiscal 2000 and $1.4 million for these types of capital projects in fiscal 1999. In fiscal 2001, the Company anticipates spending approximately $0.9 million for capital projects related to waste management and environmental compliance. There are no capital expenditures related to remediation of environmental conditions projected for fiscal 2001. Any significant ban on all chlorine containing compounds could have a materially adverse effect on the Company's financial condition and results of operations. British Columbia has a regulation in place requiring elimination of the use of all chlorine products, including chlorine dioxide, in the bleaching process by the year 2002. Chlorine dioxide is produced from sodium chlorate, which is the Company's primary pulp chemicals product. 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 but there can be no assurance that the regulation will be changed. In the event such a regulation is implemented, the Company would seek to sell the products it manufactures at its British Columbia facility to customers in other markets. The Company is not aware of any other laws or regulations in place in North America which would restrict the use of such products for other purposes. LEGAL PROCEEDINGS The Company is subject to claims and legal actions that arise in the ordinary course of its business. The Company believes that the ultimate liability, if any, with respect to these claims and legal actions will not have a material adverse effect on its financial position, results of operations, or cash flows, although the Company cannot give any assurances to that effect. PLEDGE OF COMMON STOCK In order to secure the repayment of indebtedness under the Fixed Assets Revolver, a first priority pledge of 100% of the common stock of Sterling Canada, Inc., Sterling Pulp Chemicals, Inc., and Sterling Pulp Chemicals US, Inc. was granted by the holders of such stock. In order to secure the repayment of the 12 3/8% Notes, a second priority pledge of 100% of the common stock of Sterling Canada, Inc., Sterling Pulp Chemicals, Inc., and Sterling Pulp Chemicals US, Inc. was granted by the holders of such stock. In addition, a first priority pledge of 65% of the common stock of Sterling Pulp and Sterling NRO, Ltd. was given by the holders of such stock. 14 15 8. RELATED PARTY TRANSACTIONS In the normal course of operations of the Company, the following represents significant transactions with related parties for the fiscal years ended September 30, 2000, 1999, and 1998:
YEAR ENDED SEPTEMBER 30, ---------------------------- 2000 1999 1998 ------ ------ ------ (Dollars in Thousands) Commonly controlled companies: Sale of goods ................ $3,500 $6,661 $3,725 Purchase of goods ............ 6,087 6,401 4,580 Administration fee revenue.... 340 335 323
9. FINANCIAL INSTRUMENTS FOREIGN EXCHANGE The Company has entered into forward foreign exchange contracts to reduce risk due to Canadian dollar exchange rate movements. The forward foreign exchange contracts had varying maturities with none exceeding 18 months. The Company made net settlements of United States dollars for Canadian dollars at rates agreed to at inception of the contracts. The Company does not engage in currency speculation. The last of the Company's existing forward exchange contracts expired in March of 2000, and it does not currently intend to enter into any additional forward exchange contracts. CONCENTRATIONS OF RISK The Company sells its products primarily to companies involved in the pulp and paper manufacturing industries. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. The Company maintains cash deposits with major banks, which from time to time may exceed federally insured limits. The Company periodically assesses the financial condition of these institutions and believes that the possibility of any loss is minimal. Approximately 36% of the Company's employees are covered by union agreements. Approximately 23% of the Company's employees are covered by union agreements which could expire within one year. INVESTMENTS It is the policy of the Company to invest its excess cash in investment instruments or securities whose value is not subject to market fluctuations, such as certificates of deposit, repurchase agreements, or Eurodollar deposits with domestic or foreign banks or other financial institutions. Other permitted investments include commercial paper of major United States corporations with ratings of A1 by Standard & Poor's Ratings Group or P1 by Moody's Investor Services, Inc., loan participations of major United States corporations with a short term credit rating of A1/P1, and direct obligations of the United States Government or its agencies. In addition, not more than $5 million may be invested by the Company with any single bank, financial institution, or United States corporation. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reflected in the consolidated balance sheet for cash and cash equivalents, receivables, payables, and certain accrued expenses approximate fair value due to the short maturities of these instruments. Based on the Company's allocated portion of Chemicals' debt at September 30, 2000, the carrying value was $244.0 million and the fair value was $210.2 million. 15 16 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of Sterling Canada, Inc. We have audited the accompanying consolidated balance sheets of Sterling Canada, Inc. (the "Company") as of September 30, 2000 and 1999, and the related consolidated statements of operations, changes in stockholder's equity, and cash flows for each of the three years in the period ended September 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2000, in conformity with United States of America generally accepted accounting principles. DELOITTE & TOUCHE LLP Chartered Accountants Mississauga, Canada December 12, 2000 16 EX-99.2 27 h82651ex99-2.txt STERLING PULP CHEMICALS, LTD. CONSOLIDATED FIN. 1 EXHIBIT 99.2 STERLING PULP CHEMICALS, LTD. STATEMENTS OF OPERATIONS (U.S. DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ----------------------------------- 2000 1999 1998 ---------- ---------- ----------- Revenues........................................ $ 123,331 $ 109,510 $ 112,750 Cost of goods sold.............................. 101,766 90,656 86,403 ---------- ---------- ----------- Gross profit.................................... 21,565 18,854 26,347 Selling, general, and administrative expenses... 9,496 12,740 16,650 Interest and debt related expenses, net......... 4,550 5,548 4,997 ---------- ---------- ----------- Net income before income taxes.................. 7,519 566 4,700 Provision for income taxes ..................... 2,945 313 1,800 ---------- ---------- ----------- Net income...................................... $ 4,574 $ 253 $ 2,900 ========== ========== ===========
The accompanying notes are an integral part of these financial statements. 2 STERLING PULP CHEMICALS, LTD. BALANCE SHEETS (U.S. DOLLARS IN THOUSANDS)
SEPTEMBER 30, ----------------------- 2000 1999 ---------- ---------- ASSETS Current assets: Cash and cash equivalents ......................... $ -- $ 8,481 Accounts receivable, net .......................... 17,165 16,840 Due from related parties .......................... 1,832 1,369 Other receivables ................................. 1,821 2,254 Inventories ....................................... 6,035 5,146 Prepaid expenses .................................. 568 633 --------- --------- Total current assets ........................... 27,421 34,723 Property, plant, and equipment, net .................... 69,297 75,531 Other assets ........................................... 293 440 --------- --------- Total assets ...................................... $ 97,011 $ 110,694 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable .................................. $ 10,634 $ 8,978 Accrued generator construction costs .............. 508 2,967 Other accrued liabilities ......................... 8,465 7,093 Due to related parties ............................ 1,407 1,241 --------- --------- Total current liabilities ...................... 21,014 20,279 Note payable ........................................... 34,546 56,667 Deferred income taxes .................................. 8,338 7,272 Deferred credits and other liabilities ................. 4,335 3,972 Commitments and contingencies (Note 7) ................. -- -- Stockholder's equity: Common stock ...................................... 1 1 Additional paid-in capital ........................ 24,585 16,871 Retained earnings ................................. 13,366 14,470 Accumulated other comprehensive income ............ (9,174) (8,838) --------- --------- Total stockholder's equity ..................... 28,778 22,504 --------- --------- Total liabilities and stockholder's equity ... $ 97,011 $ 110,694 ========= =========
The accompanying notes are an integral part of these financial statements. 2 3 STERLING PULP CHEMICALS, LTD. STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (U.S. DOLLARS IN THOUSANDS)
ACCUMULATED COMMON STOCK ADDITIONAL OTHER -------------------- PAID-IN RETAINED COMPREHENSIVE SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL -------- -------- ---------- -------- ------------- --------- Balance, September 30, 1997 .... 1 $ 1 $ 7,338 $ 33,062 $ (5,992) $ 34,409 Net capital distributions ...... -- -- (7,338) -- -- (7,338) Dividends ...................... -- -- -- (10,666) -- (10,666) Comprehensive income: Net income .................. -- -- -- 2,900 -- Translation adjustment ...... -- -- -- -- (2,998) Comprehensive loss ....... (98) -------- -------- -------- -------- -------- -------- Balance, September 30, 1998 .... 1 1 -- 25,296 (8,990) 16,307 Net capital contributions ...... -- -- 16,871 -- -- 16,871 Dividends ...................... -- -- -- (11,079) -- (11,079) Comprehensive income: Net income .................. -- -- -- 253 -- Translation adjustment ...... -- -- -- -- 152 Comprehensive income ..... 405 -------- -------- -------- -------- -------- -------- Balance, September 30, 1999 .... 1 1 16,871 14,470 (8,838) 22,504 Net capital contributions ...... -- -- 7,714 -- -- 7,714 Dividends ...................... -- -- -- (5,678) -- (5,678) Comprehensive income: Net income .................. -- -- -- 4,574 Translation adjustment ...... -- -- -- -- (336) Comprehensive income ..... 4,238 -------- -------- -------- -------- -------- -------- Balance, September 30, 2000 .... 1 $ 1 $ 24,585 $ 13,366 $ (9,174) $ 28,778 ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. 3 4 STERLING PULP CHEMICALS, LTD. STATEMENTS OF CASH FLOWS (U.S. DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, -------------------------------- 2000 1999 1998 -------- -------- -------- Cash flows from operating activities: Net income ..................................................... $ 4,574 $ 253 $ 2,900 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................. 8,532 7,757 7,700 Loss on disposal/write off of assets ...................... 333 50 70 Deferred tax expense/(benefit) ............................ 1,247 (539) (2,479) Other ..................................................... (31) (31) 505 Changes in assets/liabilities: Accounts receivable ....................................... (788) (2,156) 6,036 Due from related parties .................................. (475) (377) 2,216 Other receivables ......................................... 382 (436) 4,136 Inventories ............................................... (1,026) 1,791 (1,113) Prepaid expenses .......................................... 51 (21) 117 Other assets--net ......................................... 142 4,530 846 Accounts payable .......................................... 1,936 (607) 5,496 Accrued generator construction costs ...................... (2,448) 2,450 (4,414) Other accrued liabilities ................................. 1,581 (2,467) (1,252) Due to related parties .................................... 204 (6,505) 3,702 Other liabilities ......................................... 503 299 (4,240) -------- -------- -------- Net cash provided by operating activities ........................... 14,717 3,991 20,226 -------- -------- -------- Cash flows from investing activities: Proceeds on disposal of fixed assets ........................... -- 3,578 -- Capital expenditures ........................................... (4,325) (3,465) (4,381) -------- -------- -------- Net cash provided by (used in) investing activities ................. (4,325) 113 (4,381) -------- -------- -------- Cash flows from financing activities: Repayment of note payable ...................................... (20,987) (4,527) -- Contribution from parent ....................................... 7,714 16,871 -- Distribution to parent ......................................... -- -- (7,338) Dividends ...................................................... (5,678) (11,079) (10,666) -------- -------- -------- Net cash provided by (used in) financing activities ................. (18,951) 1,265 (18,004) Effect of exchange rate on cash ..................................... 78 (314) 405 -------- -------- -------- Net increase (decrease) in cash and cash equivalents ................ (8,481) 5,055 (1,754) Cash and cash equivalents, beginning of year ........................ 8,481 3,426 5,180 -------- -------- -------- Cash and cash equivalents, end of year .............................. $ -- $ 8,481 $ 3,426 ======== ======== ======== Supplemental disclosures of cash flow information: Interest paid, net of interest income received ................. $ (4,663) $(11,608) $ (92) Income taxes paid .............................................. (696) (749) (541)
The accompanying notes are an integral part of these financial statements. 4 5 STERLING PULP CHEMICALS, LTD. NOTES TO FINANCIAL STATEMENTS (U.S. DOLLARS) 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS Sterling Pulp Chemicals, Ltd. ("Sterling Pulp") is a Canadian company which operates four pulp chemical facilities in Canada. These plants primarily produce sodium chlorate, a chemical used primarily to make chlorine dioxide, which in turn is used by pulp mills in the pulp bleaching process. Sterling Pulp sells sodium chlorate to customers in Canada and the United States. Sterling Pulp also produces sodium chlorite at one of its' facilities and oversees construction of large-scale chlorine dioxide generators for the pulp and paper industry. Sterling Pulp is a wholly owned subsidiary of Sterling Canada, Inc. ("Parent"), which is a wholly-owned subsidiary of Sterling Chemicals, Inc. ("Chemicals"). On July 23, 1999, Chemicals completed a private offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006. On November 5, 1999, Chemicals completed a registered exchange offer, pursuant to which all of these notes were exchanged for publicly registered 12 3/8% Notes with substantially similar terms (the "12 3/8% Notes"). The 12 3/8% Notes are guaranteed by all of Chemicals' existing direct and indirect subsidiaries incorporated in the United States (other than Sterling Chemicals Acquisitions, Inc.) on a joint and several basis and are secured by, among other things, a second priority pledge of 100% of the stock of these subsidiaries. The 12 3/8% Notes are also secured by 65% of the stock of certain of Chemicals' subsidiaries incorporated outside of the United States, including Sterling Pulp. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies of Sterling Pulp are described below. The financial statements of Sterling Pulp are presented in accordance with generally accepted accounting principles in the United States of America ("U.S.") and have been translated from Canadian dollars, Sterling Pulp's functional currency, to U.S. dollars, the reporting currency of the Parent, following the guidelines established by Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." CASH EQUIVALENTS Sterling Pulp considers all investments with a remaining maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost and market. Cost is primarily determined on the first-in, first-out basis, except for stores and supplies which are valued at average cost. Sterling Pulp enters into agreements with other companies to exchange chemical inventories in order to minimize working capital requirements and to facilitate distribution logistics. Balances related to quantities due to or payable by Sterling Pulp are included in inventory. IMPAIRMENT OF LONG-LIVED ASSETS Impairment tests of long-lived assets are made when conditions indicate their carrying costs may not be recoverable. Such impairment tests are based on a comparison of undiscounted future cash flows or the market value of similar assets to the carrying cost of the asset. If an impairment is indicated, the asset value is written down to its estimated fair value. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost. Major renewals and improvements which extend the useful lives of equipment are capitalized, while repair and maintenance expenses are charged to operations as incurred. Disposals are removed at carrying costs less accumulated depreciation with any resulting gain or loss reflected in 5 6 operations. Depreciation is provided using the straight-line method over estimated useful lives ranging from 5 to 25 years, with the predominant life of plant and equipment being 15 years. PATENTS The costs of patents are amortized on a straight-line basis over their estimated useful lives, which approximate ten years. INCOME TAXES Sterling Pulp files a federal Canadian tax return as well as returns in the provinces in which it operates. Deferred income taxes are recorded to reflect the tax effect of the temporary differences between the tax basis of Sterling Pulp's assets and liabilities and the financial reporting basis. REVENUE RECOGNITION Sterling Pulp generates revenues through sales in the open market pursuant to short-term and long-term contracts with its customers. Sterling Pulp recognizes revenue from sales as the products are shipped. Revenues associated with the constructing of chlorine dioxide generators are recognized using the percentage of completion method based on cost incurred compared to total estimated costs. Sterling Pulp classifies amounts billed to customers for shipping and handling as revenues, with the related shipping and handling costs included in cost of good sold. FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE Sterling Pulp's functional currency is the Canadian dollar. The Parent's reporting currency is the U.S. dollar. For financial reporting purposes, assets and liabilities denominated in Canadian dollars are translated into U.S. dollars at year-end rates of exchange and revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are included in accumulated other comprehensive income, while transaction gains and losses are included in operations. EARNINGS PER SHARE All issued and outstanding shares of Sterling Pulp are held by the Parent. Accordingly, earnings per share information is not presented. ENVIRONMENTAL COSTS Environmental costs are expensed as incurred unless the expenditures extend the economic useful life of the relevant assets. Costs that extend the economic life of assets are capitalized and depreciated over the remaining life of those assets. Liabilities are recorded when environmental assessments or remedial efforts are probable and the cost can be reasonably estimated. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In preparing disclosures about the fair value of financial instruments, Sterling Pulp has assumed that the carrying amount approximates fair value for cash and cash equivalents, receivables, accounts payable, and certain accrued expenses due to the short maturities of these instruments. The fair values of long-term debt instruments are estimated based upon quoted market values (if applicable) or on the current interest rates available to Sterling Pulp for debt with similar terms and remaining maturities. Considerable judgment is required in developing these estimates, and, accordingly, no assurances can be given that the estimated values presented herein are indicative of the amounts that would be realized in a free market exchange. ACCOUNTING ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. 6 7 NEW ACCOUNTING STANDARDS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. We adopted these standards on October 1, 2000. The transition adjustment relating to the adoption of these statements was not material. 3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
SEPTEMBER 30, ----------------------- 2000 1999 ---------- ---------- (Dollars in Thousands) Inventories: Finished products ....................... $ 2,967 $ 1,872 Raw materials ........................... 199 209 --------- --------- Inventories at cost .......................... 3,166 2,081 Inventories under exchange agreements......... 278 77 Stores and supplies .......................... 2,591 2,988 --------- --------- $ 6,035 $ 5,146 ========= =========
SEPTEMBER 30, ----------------------- 2000 1999 ---------- ---------- (Dollars in Thousands) Property, plant, and equipment: Land .................................... $ 1,413 $ 1,448 Buildings ............................... 13,635 13,808 Plant and equipment ..................... 111,650 110,711 --------- --------- Property, plant, and equipment at cost .. 126,698 125,967 Less accumulated depreciation ........... (57,401) (50,436) --------- --------- $ 69,297 $ 75,531 ========= =========
4. NOTE PAYABLE On August 20, 1992, Sterling Pulp entered into an agreement for a $109.1 million demand note facility with Sterling NRO, Ltd. ("Sterling NRO"). Sterling NRO is also owned by the Parent and is therefore related by virtue of common control. The note has no scheduled terms of repayment and interest is calculated and payable monthly in arrears at 1.5% above the Bank of Nova Scotia prime rate. Interest expensed for the years ended September 30, 2000, 1999, and 1998 were $4.5 million, $5.5 million and $4.9 million, respectively. Principal repayments for the years ended September 30, 2000 and 1999 were $21.0 million and $4.5 million, respectively. 5. INCOME TAXES Canadian deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and the financial reporting amounts at each year-end. A reconciliation of federal statutory income taxes to Sterling Pulp's effective tax provision follows:
YEAR ENDED SEPTEMBER 30, ------------------------------ 2000 1999 1998 -------- -------- -------- (Dollars in Thousands) Provision for federal income tax at the statutory rate ............. $ 2,308 $ 259 $ 1,367 Provincial income taxes at the statutory rate ...................... 1,114 88 563 Federal and provincial manufacturing and processing tax credits .... (477) (50) (286) Other .............................................................. -- 16 156 ------- ------- ------- $ 2,945 $ 313 $ 1,800 ======= ======= =======
7 8 The provision for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30, ------------------------------ 2000 1999 1998 -------- -------- -------- (Dollars in Thousands) Current federal ............. $ 3,328 $ 2,098 $ 2,852 Deferred federal ............ (1,380) (1,859) (1,611) Current provincial .......... 1,702 619 1,427 Deferred provincial ......... (705) (545) (868) ------- ------- ------- Total tax provision .... $ 2,945 $ 313 $ 1,800 ======= ======= =======
The components of Sterling Pulp's deferred income tax assets and liabilities are summarized below:
SEPTEMBER 30, -------------------- 2000 1999 -------- -------- (Dollars in Thousands) Deferred tax assets: Accrued liabilities .............. $ 249 $ 318 Accrued postretirement cost ...... 1,339 1,236 Investment tax credits ........... 1,408 4,767 -------- -------- $ 2,996 $ 6,321 -------- -------- Deferred tax liabilities: Property, plant and equipment .... (11,334) (13,593) Other ............................ -- -- -------- -------- (11,334) (13,593) -------- -------- Net deferred tax liabilities .......... $ (8,338) $ (7,272) ======== ========
6. EMPLOYEE BENEFITS Sterling Pulp has established the following benefit plans: RETIREMENT BENEFIT PLANS Sterling Pulp has employer and employee contributory plans which cover all salaried and wage employees. The benefits under these plans are based primarily on years of service and/or employee's pay near retirement. Sterling Pulp's funding policy is consistent with the funding requirements of Canadian federal and provincial laws and regulations. Plan assets consist principally of common stocks and government and corporate securities. 8 9 Information concerning the pension obligation, plan assets, amounts recognized in Sterling Pulp's financial statements, and underlying actuarial assumptions is stated below.
SEPTEMBER 30, -------------------- 2000 1999 -------- -------- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year .................... $ 16,283 $ 14,577 Currency rate conversion ................................... (293) 556 Service cost ............................................... 716 919 Interest cost .............................................. 1,240 1,112 Actuarial loss (gain) ...................................... (31) (124) Benefits paid .............................................. (307) (757) -------- -------- Benefit obligation at end of year .......................... $ 17,608 $ 16,283 ======== ======== Change in plan assets: Fair value at beginning of year ............................ $ 15,330 $ 13,062 Currency rate conversion ................................... (276) 498 Actual return on plan assets ............................... 2,412 1,858 Employer contributions ..................................... 658 669 Benefits paid .............................................. (307) (757) -------- -------- Fair value at end of year .................................. $ 17,817 $ 15,330 ======== ======== Development of net amount recognized: Funded status .............................................. $ 209 $ (953) Unrecognized cost: Actuarial gain .......................................... (1,318) (22) Prior service cost ...................................... 298 333 -------- -------- Net amount recognized ...................................... $ (811) $ (642) ======== ======== Amounts recognized in the statement of financial position: Prepaid pension cost ....................................... $ 418 $ 529 Accrued pension cost ....................................... (1,229) (1,198) Intangible asset ........................................... -- 27 -------- -------- Net amount recognized ...................................... $ (811) $ (642) ======== ========
Net periodic pension costs consist of the following components:
SEPTEMBER 30, --------------------------------- 2000 1999 1998 -------- -------- -------- (Dollars in Thousands) Components of net pension costs: Service cost-benefits earned during the year ............. $ 716 $ 919 $ 748 Interest on prior year's projected benefit obligation .... 1,240 1,112 1,016 Expected return on plan assets ........................... (1,144) (963) (1,092) Net amortization: Actuarial loss (gain) ................................. 28 68 (130) Prior service cost .................................... (2) 29 15 ------- ------- ------- Net pension costs ........................................ $ 838 $ 1,165 $ 557 ======= ======= ======= Weighted-average assumptions: Discount Rate ............................................ 7.5% 7.5% 7.0% Rates of increase in salary compensation level ........... 4.5% 4.5% 4.0% Expected long-term rate of return on plan assets ......... 7.5% 7.5% 7.0%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Sterling Pulp provides certain health care and life insurance benefits for retired employees. Employees become eligible for these benefits at normal retirement age. Retiree insurance plans provide health and life insurance benefits to employees who retire from Sterling Pulp with ten or more years of service. All of Sterling Pulp's employees are eligible for postretirement life insurance and, except 9 10 for collectively bargained employees, are eligible for postretirement medical insurance. Postretirement medical insurance is a non-contributory plan. Benefit provisions for most hourly and some salaried employees are subject to collective bargaining. Information concerning the plan obligation, the funded status, amounts recognized in Sterling Pulp's financial statements, and underlying actuarial assumptions is stated below.
SEPTEMBER 30, ---------------------- 2000 1999 --------- ---------- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year .... $ 4,886 $ 4,306 Service cost ............................... 314 307 Interest cost .............................. 329 299 Actuarial gain ............................. (754) -- Benefits paid .............................. (24) (26) -------- --------- Benefit obligation at end of year .......... $ 4,751 $ 4,886 ======== ========= Development of net amount recognized: Funded status .............................. $ (4,751) $ (4,886) Unrecognized cost: Actuarial loss (gain) ................... (91) 637 -------- --------- Net amount recognized ...................... $ (4,842) $ (4,249) ======== =========
Net periodic plan costs consist of the following components:
SEPTEMBER 30, ---------------------- 2000 1999 1998 ----- ---- ----- (Dollars in Thousands) Components of net plan costs: Service cost .................. $314 $307 $264 Interest cost ................. 329 299 286 Net amortization: Actuarial loss ............. 16 32 -- ----- ----- ----- Net plan costs ................ $659 $638 $550 ===== ===== ===== Weighted-average assumptions: Discount Rate ................. 7.50% 6.75% 7.50%
The weighted average annual assumed health care trend rate is assumed to be 7.3% for 2000. The rate is assumed to decrease gradually to 5.6% in 2027 and remain level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care trend rates would have the following effects:
1% INCREASE 1% DECREASE ----------- ------------- (Dollars in Thousands) Effect on total of service and interest cost components... $ 36 $ (31) Effect on post-retirement benefit obligation.............. 229 (199)
PROFIT SHARING AND BONUS PLANS Sterling Pulp established a Profit Sharing Plan for the benefit of salaried and hourly employees meeting certain eligibility requirements and a Bonus Plan that is designed to provide certain exempt salaried employees of Sterling Pulp with the opportunity to earn bonuses, depending, among other things, on the annual financial performance of Sterling Chemicals Holdings, Inc. Sterling Pulp incurred $0.9 million and $1.1 million of expenses related to the Profit Sharing Plan and Bonus Plan, respectively, in fiscal 2000. No expenses for profit sharing and bonuses were incurred by Sterling Pulp in fiscal 1999 or 1998. EMPLOYEE SAVINGS PLAN Sterling Pulp introduced an employee savings plan for all eligible full-time Canadian employees with an effective date of October 1, 2000. Each 10 11 participant has the option to contribute a percentage of his or her earnings to the Canadian savings plan, with no limit on the maximum percentage contributed. Sterling Pulp will match 100% of a participant's contributions to the extent such contributions do not exceed 3.5% of such participant's cash compensation (excluding bonuses, profit sharing, and similar types of compensation). PHANTOM STOCK PLAN Sterling Pulp has a phantom stock plan for all eligible full-time Canadian employees. The effective date of this Plan was August 21, 1996 and the expiration date is December 31, 2000. At the end of each plan year, the plan administrator establishes a "determined percentage" for the preceding plan year. This percentage is then multiplied by each participant's compensation for the plan year to determine the award amount. The award amount is then divided by the fair market value of one share of the common stock of Sterling Chemicals Holdings, Inc. ("Holdings"), as of December 31 of that plan year, to determine the number of rights to be credited to the participant. Upon termination of employment, the benefit amount becomes payable to the participant. The benefit amount is the number of vested rights in the participant's account, multiplied by the fair market value of one share of common stock of Holdings as of the most recent valuation date. Sterling Pulp has recorded expense of $0.2 million, $0.2 million, and $0.2 million related to the phantom stock plan for the fiscal years ended September 30, 2000, 1999, and 1998, respectively. 7. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS Sterling Pulp has entered into various long-term noncancelable rail car and other operating leases, some of which have been allocated to commonly controlled companies. Future minimum lease commitments are as follows: fiscal 2001--$3.6 million, fiscal 2002--$3.1 million, fiscal 2003--$2.9 million, fiscal 2004--$2.8 million, fiscal 2005--$2.3 million, and thereafter--$5.1 million. ENVIRONMENTAL AND SAFETY MATTERS Sterling Pulp's operations involve the handling, production, transportation, treatment, and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental, health, and safety laws, regulations, and permit requirements. Environmental permits required for Sterling Pulp's operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental requirements are implemented. Changing and increasingly strict environmental requirements can affect the manufacture, handling, processing, distribution, and use of Sterling Pulp's chemical products and, if so affected, Sterling Pulp's business and operations may be materially and adversely affected. In addition, changes in environmental requirements can cause the Company to incur substantial costs in upgrading or redesigning its facilities and processes, including its waste treatment, storage, disposal, and other waste handling practices and equipment. Sterling Pulp conducts environmental management programs designed to maintain compliance with applicable environmental requirements at all of its facilities. Sterling Pulp routinely conducts inspection and surveillance programs designed to detect and respond to leaks or spills of regulated hazardous substances and to correct identified regulatory deficiencies. Sterling Pulp believes that its procedures for waste handling are consistent with industry standards and applicable requirements. In addition, Sterling Pulp believes that its operations are consistent with good industry practice. However, a business risk inherent with chemical operations is the potential for personal injury and property damage claims from employees, contractors and their employees, and nearby landowners and occupants. While Sterling Pulp believes its business operations and facilities generally are operated in compliance in all material respects with all applicable environmental and health and safety requirements, Sterling Pulp cannot be sure that past practices or future operations will not result in material claims or regulatory action, require material environmental expenditures, or result in exposure or injury claims by employees, contractors and their employees, and the public. Some risk of environmental costs and liabilities is inherent in our operations and products, as it is with other companies engaged in similar businesses. In addition, a catastrophic event at any of the Sterling Pulp's facilities could result in the incurrence of liabilities substantially in excess of their insurance coverages. Sterling Pulp's operating expenditures for environmental matters, mostly waste management and compliance, were approximately $1.9 million for fiscal 2000 and $2.0 million for fiscal 1999. Sterling Pulp also spent approximately $0.4 11 12 million for environmentally related capital projects in fiscal 2000 and $1.1 million for these types of capital projects in fiscal 1999. In fiscal 2001, Sterling Pulp anticipates spending approximately $0.7 million for capital projects related to waste management and environmental compliance. There are no capital expenditures related to remediation of environmental conditions projected for fiscal 2001. Any significant ban on all chlorine containing compounds could have a materially adverse effect on Sterling Pulp's financial condition and results of operations. British Columbia has a regulation in place requiring elimination of the use of all chlorine products, including chlorine dioxide, in the bleaching process by the year 2002. Chlorine dioxide is produced from sodium chlorate, which is Sterling Pulp's primary pulp chemicals product. 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 but there can be no assurance that the regulation will be changed. In the event such a regulation is implemented, Sterling Pulp would seek to sell the products it manufactures at its British Columbia facility to customers in other markets. Sterling Pulp is not aware of any other laws or regulations in place in North America which would restrict the use of such products for other purposes. LEGAL PROCEEDINGS Sterling Pulp is subject to claims and legal actions that arise in the ordinary course of its business. Sterling Pulp believes that the ultimate liability, if any, with respect to these claims and legal actions will not have a material adverse effect on its financial position, results of operations, or cash flows, although Sterling Pulp cannot give any assurances to that effect. PLEDGE OF COMMON STOCK In order to secure the repayment of a 1999 issuance of $295,000,000 of 12 3/8% Senior Secured Notes due 2006 by Chemicals, Parent granted the note holders a first priority pledge of 65% of Sterling Pulp's common stock. 8. RELATED PARTY TRANSACTIONS In the normal course of operations of Sterling Pulp, the following represents significant transactions with related parties for the fiscal years ended September 30, 2000, 1999, and 1998:
YEAR ENDED SEPTEMBER 30, ------------------------ 2000 1999 1998 ------ ------ ------ (Dollars in Thousands) Chemicals: Management fees ......................... $ 853 $ 869 $ 795 Parent: Services, marketing, and R&D revenue .... $ 878 $ 921 $ 833 Commonly controlled companies: Sale of goods ........................... $7,334 $9,295 $4,867 Purchase of goods ....................... 6,087 6,401 4,580 Administration fee revenue .............. 340 335 323 Interest expense ........................ 4,663 5,630 4,860
The amounts due from and to related parties for the years ended September 30, 2000 and 1999 are as follows:
SEPTEMBER 30, ---------------------- 2000 1999 -------- -------- (Dollars in Thousands) Due from related parties: Parent ........................... $ -- $ 12 Commonly controlled companies .... 1,832 1,357 -------- -------- $ 1,832 $ 1,369 ======== ======== Due to related parties: Parent ........................... $ 125 $ 132 Commonly controlled companies .... 1,282 1,109 -------- -------- $ 1,407 $ 1,241 ======== ========
12 13 9. EXPORT SALES Sterling Pulp is engaged in the sale of products for export into the United States. These were primarily sodium chlorate sales and represented 50%, 47%, and 46% of revenues for fiscal 2000, 1999, and 1998, respectively. 10. FINANCIAL INSTRUMENTS FORWARD EXCHANGE CONTRACTS Sterling Pulp has entered into forward exchange contracts to reduce risk due to Canadian dollar exchange rate movements. The foreign exchange contracts had varying maturities with none exceeding 18 months. Sterling Pulp made net settlements of United States dollars for Canadian dollars at rates agreed to at inception of the contracts. Sterling Pulp does not engage in currency speculation. The last of Sterling Pulp's forward exchange contracts expired in March of 2000, and it does not currently intend to enter into any additional forward exchange contracts. CONCENTRATIONS OF RISK Sterling Pulp sells its products primarily to companies involved in the pulp and paper industry. Sterling Pulp performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. Sterling Pulp maintains cash deposits with major banks which from time to time may exceed federally insured limits. Management periodically assesses the financial condition of these institutions and believes that any possible credit loss is minimal. Approximately 45% of Sterling Pulp's employees are covered by union agreements. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value approximated the carrying value of financial instruments included in current assets and current liabilities on the balance sheet at September 30, 2000 due to the short maturities of these instruments. The fair value of the note payable on the balance sheet at September 30, 2000 approximated its carrying value, as the interest rate fluctuates with changes in market rates. 13 14 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of Sterling Pulp Chemicals, Ltd. We have audited the accompanying balance sheets of Sterling Pulp Chemicals, Ltd. (an indirect wholly-owned subsidiary of Sterling Chemicals, Inc.) as at September 30, 2000 and 1999 and the related statements of operations, changes in stockholder's equity and cash flows for each of the three years in the period ended September 30, 2000. These financial statements are the responsibility of Sterling Pulp's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial positions of Sterling Pulp Chemicals, Ltd. as at September 30, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2000, in conformity with United States of America generally accepted accounting principles. Since the accompanying financial statements have not been prepared in accordance with Canadian generally accepted accounting principles, they will not satisfy the reporting requirements of Canadian statutes and regulations. Since the financial statements have been prepared in accordance with United States of America generally accepted accounting principles, the financial position, results of operations and cash flows might be significantly different than if the financial statements had been prepared in accordance with Canadian generally accepted accounting principles. DELOITTE & TOUCHE LLP Chartered Accountants Mississauga, Canada December 12, 2000 14 -----END PRIVACY-ENHANCED MESSAGE-----