-----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, GMfQe0xqWcf2LzGtfONNa9Zp2adVuOnRE43uy4zRn8wRciKtyq12QAwNbtUMdNXw ajhS5lGRa5LVNN86SvykOw== 0000950129-97-005260.txt : 19971217 0000950129-97-005260.hdr.sgml : 19971217 ACCESSION NUMBER: 0000950129-97-005260 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971216 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING CHEMICALS HOLDINGS INC /TX/ CENTRAL INDEX KEY: 0000795662 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 760185186 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10059 FILM NUMBER: 97738741 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-K405 SEC ACT: SEC FILE NUMBER: 333-04343-01 FILM NUMBER: 97738742 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-K405 1 STERLING CHEMICALS HOLDINGS, INC. 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, 1997 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 J(1)(a) AND (b) OF FORM 10-K, AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PROVIDED FOR BY GENERAL INSTRUCTION J(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. X --- As of December 8, 1997, Sterling Chemicals Holdings, Inc. had 12,357,191 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 $82 million. As of December 8, 1997, all outstanding equity securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals Holdings, Inc. Portions of the definitive Proxy Statement relating to the 1998 Annual Meeting of Stockholders of Sterling Chemicals Holdings, Inc. are incorporated by reference in Part III of this Form 10-K. ================================================================================ 2 TABLE OF CONTENTS
Page ---- PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Item 4. Submission of Matters to Vote of Security Holders . . . . . . . . . . . . . . . . . . . 17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . 18 Item 6. Selected Financial Data of the Company . . . . . . . . . . . . . . . . . . . . . . . . 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . 21 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 PART III Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . 67 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . 67 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . 67 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K . . . . . 68
NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Form 10-K, including without limitation the statements under "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the cyclicality of the Company's industry, current and future industry conditions and the potential effects of such matters on the Company's business strategy, results of operations and financial position, are forward-looking statements. Although the Company believes that the expectations reflected in the forward-looking statements contained herein are reasonable, no assurance can be given that such expectations will prove to have been correct. Certain important factors that could cause actual results to differ materially from expectations ("Cautionary Statements") are stated herein 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 the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. i 3 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." ITEM 1. BUSINESS The Company was organized as a Delaware corporation in 1986 and has its principal executive offices in Houston, Texas. In connection with the Company's August 1996 merger with STX Acquisition Corp. (the "Merger"), the Company recapitalized and reorganized into a holding company whose only material asset is the capital stock of Chemicals, its wholly owned operating subsidiary (the "1996 Recapitalization"). Through Chemicals and its subsidiaries, the Company manufactures seven commodity petrochemicals at its Texas City, Texas plant (the "Texas City Plant"). Additionally, the Company manufactures chemicals for use primarily in the pulp and paper industry at five plants in Canada and one in Valdosta, Georgia, and manufactures acrylic fibers in a plant near Pensacola, Florida (the "Santa Rosa Plant"). At its Texas City Plant, the Company produces styrene, acrylonitrile, acetic acid, plasticizers, methanol, tertiary butylamine ("TBA"), and sodium cyanide. The Company generally sells its petrochemical 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. The Company produces regular textile fibers, specialty textile fibers, and technical fibers at the Santa Rosa Plant, as well as licensing the acrylic fibers manufacturing technology to producers worldwide. Sodium chlorate is produced at the five plants in Canada and in Valdosta, Georgia. Sodium chlorite is produced at one of the Canadian locations. In addition, chlor-alkali and calcium hypochlorite are produced at one of the Canadian locations. The Company licenses, engineers, and oversees construction of large-scale chlorine dioxide generators for the pulp and paper industry as part of the pulp chemical business. These generators convert sodium chlorate into chlorine dioxide at pulp mills. The Company's business strategy is to capitalize on its market position to take advantage of periods of tight supply and high prices and margins for its primary products, which historically have occurred on a cyclical basis, and to expand its production capacity to capture future growth opportunities in the petrochemical, acrylic fibers, and pulp chemical industries. Key elements of this strategy are to: (i) maintain a competitive cost position by investing in new technology and equipment; (ii) pursue low cost expansions such as its 30% expansion in 1996 of acetic acid capacity and construction of a 150 million gallon per year methanol unit; (iii) pursue growth opportunities through the construction of additional capacity; (iv) continue to build strong industry partnerships through securing long-term supply contracts with key customers; and (v) pursue a focused acquisition strategy, targeting chemical businesses and assets which will strengthen the Company's existing market positions, provide upstream or downstream integration, or produce complementary chemical products. During fiscal 1997, the Company commenced its acquisition strategy, as discussed below. The cyclicality of the markets for the Company's primary products, however, also subjects the Company to periods of overcapacity accompanied by lower prices and profit margins for such products. In addition, the instruments governing the debt incurred by the Company to finance the Merger limit the Company's ability to incur additional debt to finance acquisitions and other expenditures. These and other factors may limit the Company's ability to successfully implement its business strategy. FISCAL 1997 DEVELOPMENTS At the end of fiscal 1996, the Company completed construction of a world-scale, 150 million gallon per year methanol unit at the Texas City Plant. Capital investment in the unit and production capacity are shared by the Company and BP Chemicals Inc. ("BP"). Approximately 44% of the methanol production was used as a raw material in the Company's acetic acid unit during fiscal 1997, replacing methanol that was previously purchased from third parties. The remaining methanol production is available for the merchant market and for BP's worldwide acetic acid business. The unit was constructed at significantly less than normal replacement cost because available equipment already at the Company's Texas City Plant was refurbished and used in the project. The Company finished the construction of a 110,000-ton per year sodium chlorate plant in Valdosta, Georgia (the "Valdosta Plant") in fiscal 1997. The new facility increased the Company's total annual sodium chlorate capacity by more than 30% to nearly 460,000 tons. Valdosta, Georgia was selected because of its proximity to existing customers which were being supplied from the Company's Canadian plants, and its proximity to reliable, competitively priced 1 4 electricity, the most important variable in sodium chlorate production costs. The new facility is intended to meet the growing market demand from the pulp and paper industry in the Southeastern United States. On January 31, 1997, the Company acquired (the "AFB Acquisition") the acrylic fibers business (the "AFB") from Cytec Industries Inc. ("Cytec") for a purchase price of approximately $100 million. The AFB, now owned by two wholly-owned subsidiaries of the Company (collectively "Sterling Fibers"), recorded sales of approximately $92 million during the eight months of operations in fiscal 1997 and consists of the Santa Rosa Plant and several associated marketing and research offices. Sterling Fibers is one of two acrylic fibers manufacturers in the United States. Cytec will supply acrylonitrile to Sterling Fibers through a five-year supply agreement ending in 2002. 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") for a purchase price of approximately $70 million. The acquired assets include a manufacturing plant near Saskatoon, Saskatchewan (the "Saskatoon Plant"), which manufactures sodium chlorate, caustic soda, calcium hypochlorite, chlorine, and hydrochloric acid. SALES AND MARKETING The Company primarily sells its petrochemical products pursuant to multi-year contracts and spot transactions in both the domestic and export markets through its commercial organization and sales force. The Company has certain long- term agreements which provide for the dedication of 100% of the Company's production of acetic acid, plasticizers, TBA, and sodium cyanide, each to one customer. The Company also has various sales and conversion agreements which dedicate significant portions of the Company's production of styrene, acrylonitrile, and methanol, the Company's major petrochemical products, to various customers. These agreements generally provide for cost recovery plus an agreed margin or element of profit based upon market price. This long-term, high volume focus allows the Company to maintain relatively low selling, general and administrative expenses related to the marketing of its petrochemical products. The Company competes on the basis of product price, quality, and deliverability. Prices for the Company's commodity chemicals are determined by market factors that are largely beyond the Company's control and, except with respect to a number of its multi-year contracts, the Company generally sells its products at prevailing market prices. Some of the Company's multi-year contracts for its petrochemical products are structured as conversion agreements, pursuant to which the customer furnishes raw materials that the Company processes into finished products. In exchange, the Company receives a fee typically designed to cover its fixed and variable costs of production and to generally provide an element of profit dependent on the existing market conditions for the product. These conversion agreements allow the Company to maintain lower levels of working capital and, in some cases, to gain access to certain improvements in manufacturing process technology. The Company believes its conversion agreements help insulate the Company to some extent from the effects of declining markets and changes in raw material prices, while allowing it to share in the benefits of favorable market conditions for most of the products sold under these arrangements. The balance of the Company's petrochemical products are sold by its direct sales force. Sterling Fibers currently markets its acrylic fibers to North American customers through internal sales staff and to international customers through non-affiliated agents. The sales effort is closely coordinated with and supported by Sterling Fibers' Technical Support and Customer Service groups. Working in tandem, these groups facilitate sales and product development by strengthening the interface between Sterling Fibers and its customer base. This approach provides Sterling Fibers with insight into customer needs for new and existing products and equipment compatibility issues. Researchers and sales staff work together to develop new specialty applications for acrylic fibers. The sales staff then markets the sample products to the ultimate seller of an acrylic fiber product such as a mass retailer to create a demand for the end product. Once the market demand is established, the textile manufacturers (Sterling Fibers' customers) receive orders for additional specialty fiber products. The Company sells 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 sales contracts contain certain "meet or release" pricing clauses and some contain restrictions on the amount of future price increases. Certain contracts are evergreen and require advance notice before termination. 2 5 CONTRACTS The Company's key multi-year contracts and conversion agreements, which collectively accounted for 21% of the Company's fiscal 1997 revenues are described below: Styrene-Bayer The Company and Bayer Corporation ("Bayer"), a subsidiary of Bayer AG, are currently operating under a conversion agreement effective through December 21, 2000. Under this agreement, the Company provides Bayer, subject to specified minimum and maximum quantities, a major portion of Bayer's styrene requirements for its manufacture of styrene-containing polymers. The agreement permits Bayer to terminate its obligations upon twelve months' notice to the Company should Bayer sell its business that uses styrene or assign the agreement (subject to the Company's consent) to a third-party purchaser of the business. During fiscal 1997, the Company delivered approximately 8% of its styrene production pursuant to this agreement. Styrene-BP Chemicals Effective April 1, 1994, the Company and BP entered into a styrene sales and purchase agreement. The initial term of the agreement expired in December 1996. The Company and BP have negotiated an extension of this agreement on substantially the same terms but at approximately half of the original volume, which extension expires June 30, 1999. During fiscal 1997, the Company delivered approximately 7% of its styrene production to BP pursuant to this agreement. Acrylonitrile-Solutia The Company and Solutia, Inc. ("Solutia", formerly the chemical businesses of Monsanto Company) entered into a multi-year conversion agreement effective January 1, 1994, which superseded a prior agreement that had been in place since 1986. The initial term of this agreement will expire at the end of 1998, at which time the agreement will convert to an "evergreen" contract with successive two-year terms if not terminated. During fiscal 1997, the Company delivered a substantial portion of its acrylonitrile production to Solutia pursuant to this agreement. Acrylonitrile-BP Chemicals In 1988, the Company entered into a long-term conversion agreement with BP, under which BP contributed the majority of the capital expenditures required for starting the third acrylonitrile reactor train at the Texas City Plant and has the option to take up to approximately one-sixth of the Company's total acrylonitrile capacity. BP furnishes the necessary raw materials and pays the Company a conversion fee for the amount of acrylonitrile it takes. During fiscal 1997, the Company delivered approximately 14% of its acrylonitrile production to BP pursuant to this agreement. The acrylonitrile reactor in which BP invested capital incorporates certain BP technological improvements under a separate license agreement. The Company has the right to incorporate these and any future improvements into its other existing acrylonitrile reactors. BP has a first security interest in the third reactor and related equipment and in the first acrylonitrile produced in the three reactor units to the extent of the acrylonitrile which BP is entitled to purchase under the production agreement. These rights are only to be exercised upon an event of default by the Company. Acetic Acid-BP Chemicals An agreement with BP that has been in effect since August 1986 currently gives BP the exclusive right to purchase all of the Company's acetic acid production until August 2016. In exchange for that exclusive right, BP is obligated to make certain unconditional monthly payments to the Company until August 2006. BP reimburses the Company for operating costs. In addition, the Company is entitled to receive annually a portion of the profits earned by BP from the sale of acetic acid produced by the Company. Methanol-BP Chemicals In fiscal 1996, the Company entered into a long-term production and sales agreement with BP, under which BP contributed a significant portion of the capital expenditures required for the reconstruction and capacity increase of the Company's idle methanol production facility and obtained the right to receive a substantial portion of the Company's methanol production. During fiscal 1997, the Company delivered a substantial portion of its methanol production to BP pursuant to this agreement. The initial term of this agreement expires July 31, 2016. The output of the methanol 3 6 facility is marketed by BP to the Company's acetic acid unit, the merchant market, and BP's worldwide acetic acid business. Plasticizers-BASF A product sales agreement has been in effect with BASF Corporation ("BASF") since August 1, 1986, pursuant to which the Company sells all of its plasticizers production to BASF. In November 1997, the Company signed a new 10 year agreement with BASF. The agreement expires at the end of 2007. BASF provides certain raw materials to the Company and markets the plasticizers produced by the Company. BASF is obligated to make certain unconditional quarterly payments to the Company and reimburses the Company monthly for actual production costs. In addition, the Company is entitled to a share of profit earned by BASF attributable to the plasticizers supplied by the Company. Acrylonitrile-Cytec In connection with the AFB Acquisition, the Company assumed an existing supply contract for acrylonitrile pursuant to which Sterling Fibers purchases its requirements for acrylonitrile from Cytec. Upon the expiration of such supply contract on February 28, 2002, the Company may supply all of Sterling Fibers' acrylonitrile requirements from the Texas City Plant. No individual customer of the Company accounted for more than 10% of the Company's revenues in fiscal 1997. For information regarding the Company's export sales and domestic and foreign operations, see Note 9 of Item 8, ''Notes to Consolidated Financial Statements'' which is hereby incorporated by reference. 4 7 PRODUCT SUMMARY The Company's principal products and their primary end uses and raw materials are set forth below.
COMPANY PRODUCT INTERMEDIATE PRODUCTS PRIMARY END PRODUCTS RAW MATERIALS --------------- --------------------- -------------------- ------------- Petrochemicals and Fibers Polystyrene Building products, boat and automotive Ethylene and Benzene Styrene ABS/SAN resins components, disposable cups and trays, Styrene butadiene latex packaging and containers, housewares, Unsaturated polyester tires, audio and video cassettes, luggage, resins children's toys, paper coating, appliance parts, and carpet backing Acrylonitrile Acrylic fibers Apparel, furnishings, upholstery, household Ammonia, Air, and ABS/SAN resins appliances, carpets; plastics for Propylene automotive parts using ABS and SAN polymers Acetic Acid Vinyl acetate monomer Adhesives, cigarette filters, and surface Methanol, Carbon coatings Monoxide Methanol Acetic acid Adhesives, cigarette filters, and surface Natural Gas, Steam, and MTBE coatings; gasoline oxygenate and octane Carbon Dioxide Formaldehyde enhancer; plywood adhesives Plasticizers Polyvinyl chloride Flexible plastics, such as shower curtains Alpha-Olefins, Carbon (PVC) and liners, floor coverings, cable Monoxide, Hydrogen, insulation, upholstery, and plastic molding Orthoxylene, and Air TBA NA Pesticides, solvents, pharmaceuticals, and Isobutylene and the synthetic rubber acrylonitrile by- product Hydrogen Cyanide ("HCN") Sodium Cyanide NA Electroplating and precious metals recovery Sodium Hydroxide and by- product HCN Regular Textile NA Apparel, fleece, hosiery, industrial, and Acrylonitrile, Vinyl sweaters Acetate, Sodium Thiocyanate, Sodium Bisulfate, and Finish Oil Specialty Textile NA High-end hosiery, pile fabrics, and outdoor Acrylonitrile, Vinyl furniture Acetate, Sodium Thiocyanate, Sodium Bisulfate, and Finish Oil Technical NA Friction materials (brake linings), Acrylonitrile, Vinyl gaskets, specialty papers, and non-wovens Acetate, Sodium Thiocyanate, Sodium Bisulfate, and Finish Oil Pulp Chemicals Sodium Chlorate Chlorine dioxide Bleaching agent for pulp production; Electricity, Salt, and Downstream products include high quality Water office and coated papers Chlorine Dioxide NA Chlorine dioxide for use in the bleaching NA Generators of pulp Sodium Chlorite Chlorine dioxide Antimicrobial agent for municipal water Sodium Chlorate and treatment, disinfectant for fresh produce Hydrochloric Acid Chlor-alkali Caustic soda NA Bleaching and digesting agent for pulp and Electricity, Salt, and paper. Water Chlorine NA Widely used in potable water and wastewater treatment programs, as well as swimming pools. Muratic acid NA Stimulation agent in oil and gas extraction operations. Calcium NA Sanitizing agent to control bacteria and Lime,Water, Caustic Hypochlorite algae in swimming pools. Soda, and chlorine
5 8 PRODUCTS Petrochemicals and Fibers Styrene. The Company is the third largest North American producer of styrene. The Company's styrene unit is one of the largest in the world and has an annual rated production capacity of 1.7 billion pounds, following a recent debottlenecking, which represents approximately 12% of total North American capacity. The Company sold approximately 42% of its styrene sales volumes pursuant to conversion contracts during fiscal 1997. Approximately 40% of the Company's styrene sales volumes were exported in fiscal 1997, principally to the Far East, either directly or pursuant to arrangements with large international trading companies. Acrylonitrile. The Company is the second largest global producer of acrylonitrile. The Company's acrylonitrile unit has an annual rated production capacity of 740 million pounds, which represents approximately 21% of total North American capacity. The Company sold approximately 41% of its acrylonitrile sales volumes pursuant to long-term conversion agreements during fiscal 1997. Approximately 51% of the Company's acrylonitrile production in fiscal 1997 was exported, principally to the Far East, either directly or pursuant to arrangements with large international trading companies. Hydrogen cyanide is a by-product of acrylonitrile manufacturing and is used by the Company as a raw material for the production of TBA and sodium cyanide and is also burned as fuel. Acetic Acid. The Company is the third largest North American producer of acetic acid. Following a 200 million pound capacity expansion completed in June 1996, the Company's acetic acid unit has an annual rated production capacity of nearly 800 million pounds, which represents approximately 17% of total North American capacity. All of the Company's acetic acid production is sold to BP pursuant to a long-term contract through 2016. In a project related to the expanded acetic acid capacity, Praxair Hydrogen Supply, Inc. ("Praxair") constructed a new partial oxidation unit at the Company's Texas City Plant that supplies carbon monoxide and hydrogen to the Company for use in the production of acetic acid and plasticizers. The partial oxidation unit began production in June 1996. The Company's synthesis gas reformer, which was previously being used to provide feedstock to the acetic acid and plasticizers units at the Texas City Plant, is currently being used in the methanol unit. Methanol. In August 1996, the Company completed construction of a 150 million gallon per year methanol unit at the Texas City Plant. Capital investment in the unit and production capacity are shared by the Company and BP. Approximately 44% of the methanol production was used as a raw material in the Company's acetic acid unit during fiscal 1997, replacing methanol that was previously purchased from third parties. The remaining methanol is available for the merchant market and for BP's worldwide acetic acid business. The methanol unit was constructed at significantly less than normal replacement cost because available equipment already at the Company's Texas City Plant was refurbished and used in the project. Plasticizers. The Company has an agreement with BASF pursuant to which the Company sells all of its plasticizers production to BASF through 2007. The Company's plasticizers capacity is 280 million pounds per year. TBA. The Company uses a portion of its by-product hydrogen cyanide from acrylonitrile production to produce TBA. The Company sells all of its TBA production to Flexsys America L.P. ("Flexsys") pursuant to a long-term conversion agreement. The Company's capacity for TBA is currently 21 million pounds per year. Sodium Cyanide. At the Texas City Plant, the Company operates a sodium cyanide unit which is owned by E.I. Du Pont de Nemours and Company ("DuPont"). The Company and DuPont have an agreement whereby the Company receives a fee for operating the facility. The facility uses, as a raw material, hydrogen cyanide by-product generated by the Company's acrylonitrile manufacturing process. The capacity of this unit is 100 million pounds per year. Acrylic Fibers. Sterling Fibers is the second largest producer of acrylic fibers in North America. The Santa Rosa Plant has an annual rated production capacity of 184 million pounds, which represents approximately 31% of total North American capacity. Sterling Fibers produces regular textile fibers, specialty textile fibers, and technical fibers. Regular textile fibers are commodity fibers for the general apparel, fleece, hosiery, industrial, and sweater markets, 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 6 9 engineered for industrial, non-textile uses and typically have higher margins than textile fibers. The primary use of technical fibers is as a processing aid in the manufacture of brake pads. Pulp Chemicals Sodium Chlorate. Sodium chlorate is manufactured by passing an electric current through an undivided cell containing a solution of sodium chloride (salt). Sodium chlorate is also used as a raw material to produce sodium chlorite. Upon completion of the Valdosta Plant and the Saskatoon Acquisition the Company solidified its position as the second largest producer of sodium chlorate in North America. The Company's six sodium chlorate plants have an aggregate annual rated production capacity of approximately 500,000 tons. The Company's total annual capacity represents approximately 26% of North American sodium chlorate capacity. Chlorine Dioxide Generators. Through its ERCO Systems Group ("ERCO"), the Company is the largest worldwide supplier of patented technology for the generators which certain pulp mills use to convert sodium chlorate into chlorine dioxide. Each mill that uses chlorine dioxide requires at least one generator. The Company receives revenue when a generator is sold to a mill and also receives royalties from the mill after start-up, generally over the next ten-year period, based on the amount of chlorine dioxide produced by the generator. The Company has 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. Mills may also convert to a newer generator to take advantage of efficiency advances and technological improvements. Each upgrade or conversion results in a licensing agreement which generally provides for payment of an additional ten-year royalty. The Company has a representative office in Beijing, China. This office focuses on the development of opportunities for future sales and licensing of chlorine dioxide generators. The first generator in China to convert sodium chlorate to chlorine dioxide was sold by ERCO and commenced operation in fiscal 1994, and since then several more generators have been sold by ERCO for use in China. Sodium Chlorite. The Company has a rated annual capacity of approximately 3,500 tons, which represents approximately 40% of total North American capacity. Chlor-alkali Products. The Company's chlorine capacity is 33,000 metric tons per year, which is less than 1% of North American elemental chlorine capacity. The Company has caustic soda and hydrochloric acid production capacity of 37,000 and 45,000 metric tons per year, respectively. Calcium Hypochlorite. The Company currently has calcium hypochlorite production capacity of 8,500 metric tons per year. This volume represents 6.5% of current North American capacity. All of the Company's calcium hypochlorite is marketed by BioLab, Inc., a wholly-owned subsidiary of Great Lakes Chemical Corporation, pursuant to a long-term sales and marketing agreement. RAW MATERIALS FOR PRODUCTS AND ENERGY RESOURCES For each of the Company's products, the combined cost of raw materials and utilities is far greater than all other production costs combined. Thus, an adequate supply of these materials at reasonable prices is critical to the success of the Company's business. The only major raw material for the Company's petrochemical and pulp chemical products which is produced by the Company is methanol, which is used in the production of acetic acid. Although the Company believes that it will continue to be able to secure adequate supplies of its raw materials and energy at acceptable prices to meet its requirements, there can be no assurance that it will be able to do so. Petrochemicals and Fibers Styrene. The Company manufactures styrene from ethylene and benzene. The Company's conversion agreements require that other parties furnish the Company with the ethylene and/or benzene necessary to fulfill its conversion obligations. Approximately 19% and 15% of the Company's fiscal 1997 benzene and ethylene requirements, respectively, were furnished by customers pursuant to conversion arrangements. The Company converts benzene and 7 10 ethylene into ethylbenzene which is then processed into styrene. Benzene and ethylene are both commodity petrochemicals and the price for each can fluctuate widely due to significant changes in the availability of these products. The Company has multi-year arrangements with several ethylene suppliers that provide for its estimated requirements for purchased ethylene at generally prevailing and competitive market prices. Acrylonitrile. The Company produces acrylonitrile by reacting propylene and ammonia over a solid-fluidized catalyst at low pressure. The Company's conversion agreements require that other parties furnish to the Company the propylene and/or ammonia necessary to fulfill its conversion obligations. Approximately 42% of the Company's fiscal 1997 propylene and ammonia requirements were furnished by customers pursuant to conversion arrangements. The Company purchases propylene and ammonia for use in the remainder of its production of acrylonitrile for sale to others. Propylene and ammonia are both commodity petrochemicals and the price for each can fluctuate widely due to significant changes in the availability of these products. If various customers for whom the Company now manufactures acrylonitrile under conversion arrangements were to cease furnishing their own raw materials and seek only to purchase acrylonitrile from the Company, the Company's requirements for purchased propylene and ammonia could significantly increase. The Company believes that both ammonia and propylene will, for the foreseeable future, remain in adequate supply to meet demand. Hydrogen cyanide is a by-product of the acrylonitrile manufacturing process and is used by the Company as a raw material for the production of TBA and sodium cyanide and is also burned as fuel. Acetic Acid. Acetic acid is manufactured primarily from carbon monoxide and methanol. The acetic acid unit's methanol needs are supplied by the Company's methanol unit. In a project related to the expanded acetic acid capacity, Praxair constructed a partial oxidation unit at the Company's Texas City Plant in fiscal 1996 that supplies carbon monoxide to the Company for production of acetic acid. Methanol. The Company produces methanol by steam reforming of natural gas to form synthesis gas. The synthesis gas is then converted to methanol under elevated pressures in the presence of a catalyst. The Company obtains its natural gas under various supply contracts and believes that adequate supplies will be available for the Company's needs in the foreseeable future. Plasticizers. Primary raw materials for plasticizers are alpha-olefins and orthoxylene, which are supplied by BASF under its long-term contract with the Company which expires at the end of 2007. The Company believes that adequate supplies of raw materials will be available for the Company's needs in the foreseeable future. TBA. TBA is produced by the addition of hydrogen cyanide to isobutylene in an acid catalyst reaction. The Company uses a portion of its by-product, hydrogen cyanide, in this process. Flexsys supplies the isobutylene, sulfuric acid, and caustic soda under its long-term conversion agreement with the Company. The Company believes that supplies of these raw materials will remain adequate for its needs in the foreseeable future. Sodium Cyanide. Sodium cyanide is manufactured from the Company's by-product, hydrogen cyanide, and caustic soda. DuPont supplies the caustic soda for sodium cyanide under its long-term contract with the Company. 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 its supply agreement with Cytec, Sterling Fibers will purchase all of its acrylonitrile requirements from Cytec until February 28, 2002, after which the Company may supply such acrylonitrile requirements from the Texas City Plant. The Company believes that all raw materials used in the production of acrylic fibers will be readily available for its needs in the foreseeable future. Pulp Chemicals Sodium Chlorate. Electric power costs typically represent approximately 65% of the variable cost of production of sodium chlorate. Electric power is purchased by each of the Company's facilities pursuant to contracts with local electric utilities. Consequently, the rates charged by local electric utilities are an important competitive factor among sodium chlorate producers. On average, the Company's electrical power costs are believed to be competitive with other producers in the areas in which it operates. The Company also purchases sodium chloride (industrial salt) for use in the manufacture of sodium chlorate. Sodium chloride is purchased under requirements contracts with major suppliers. The Company believes that sodium chloride will be available for its needs for the foreseeable future. 8 11 Chlor-alkali. The primary raw materials for the production of chlor-alkali are salt, water, and electricity. The Saskatoon Plant is located on top of a bed of sodium chloride, or raw table salt, and is solution-mined on site, supplying a concentrated brine solution to the chlor-alkali manufacturing operations. The other primary raw material is electrical power, which is supplied by the Saskatchewan Power Corporation under a ten year agreement expiring December 5, 2001. After 2001, the agreement is renewable on a year to year basis. In a secondary process, some of the chlorine reacts with by-product hydrogen to produce hydrochloric acid. Calcium Hypochlorite. The primary raw materials for calcium hypochlorite are lime, water, caustic soda, and chlorine. In the calcium hypochlorite process, fine powdered lime is dissolved in water to produce a slurry. The slurry is then mixed with a caustic soda solution in a batch reactor and chlorine gas is introduced on a carefully controlled basis. From the resulting slurry the solid component, calcium hypochlorite is centrifuged, dried, granulated, and screened to meet specifications. TECHNOLOGY AND LICENSING Petrochemicals and Fibers In 1986, Monsanto Company ("Monsanto") granted the Company a nonexclusive, 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 the Texas City Plant. These licenses are used in the production of styrene, acrylonitrile, methanol, TBA, acetic acid, and plasticizers. During fiscal 1991, BP Chemicals Ltd. ("BPCL") purchased the acetic acid technology from Monsanto (subject to existing licenses). BPCL has granted to the Company a nonexclusive, perpetual, royalty-free license (except in the case of a breach of the related production agreement) to use BPCL's acrylonitrile technology at the Texas City Plant as part of the acrylonitrile expansion project. The Company and BPCL have agreed to cross-license any technology or improvements relating to the manufacture of acrylonitrile at the Texas City Plant. The Company believes that the manufacturing processes that the Company utilizes at the Texas City Plant are cost effective and competitive. Although the Company does not engage in alternative process research with respect to its Texas City Plant, it does monitor new technology developments and, when the Company believes it is necessary, it will seek to obtain licenses for process improvements. Sterling Fibers licenses certain of its acrylic fibers manufacturing technology to producers worldwide. The Company expects to capitalize on increasing demand for this technology as developing countries seek to increase acrylic fibers production capacity. Approximately 17% of the world's current acrylic fibers capacity is based on Sterling Fibers' technology. Sterling Fibers has licensed its acrylic fibers manufacturing technology to a number of producers internationally. The competitiveness of Sterling Fibers with respect to its specialty textiles and technical fibers products (which are its higher margin products) is maintained, to a significant extent, through the exclusive ownership or use of certain product and manufacturing technology. If competitors of Sterling Fibers gain access to the use of similar technology, or render such technology obsolete through the introduction of superior technology, the ability of Sterling Fibers to compete would be materially affected in an adverse manner. Pulp Chemicals The Company produces sodium chlorate using state-of-the-art metal cell technology. The principal technology business of the Company is the design, sale, and technical service of custom-built patented chlorine dioxide generators. The ERCO engineering group is involved in the technical support of the Company's sales and marketing group through joint calling efforts which define the scope of a project, as well as producing technical schedules and cost estimates. The Company performs detailed design of chlorine dioxide generators which are then fabricated by contractors. Plant installation, instrumentation testing, and generator start-up are supervised by a joint engineering/technical service team of the Company. Prior to 1996, the Company was involved in a number of patent disputes with Akzo Nobel, N.V. regarding chlorine dioxide technology. In 1996, the parties reached a settlement of such disputes that allows licensees of both the Company and Akzo Nobel, N.V. to operate their chlorine dioxide generators within the broadest range of operating conditions. The Company's pulp chemical research and development activities are carried out at its Toronto, Ontario, laboratories. Activities include the development of new or improved chlorine dioxide generation processes and research 9 12 in 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 AND INDUSTRY CONDITIONS GENERAL The industries in which the Company operates are highly competitive. Many of the Company's competitors, particularly in the petrochemical industry, are larger and have substantially greater financial resources than the Company. Among the Company's competitors are some of the world's largest chemical companies that have their own raw material resources. In addition, a significant portion of the Company's business is based upon widely available technology. The entrance of new competitors into the industry and the addition by existing competitors of new capacity may reduce the Company's ability to maintain profit margins or its ability to preserve its market share, or both. Such developments could have a negative impact on the Company's ability to obtain higher profit margins, even during periods of increased demand for the Company's products. The Company's primary domestic competitors by product are set forth below: Styrene Dow Chemical Company, ARCO Chemical Company, Amoco Chemical Company (a subsidiary of Amoco Corporation), Chevron Chemical Company (a subsidiary of Chevron Corporation), Cos-Mar (a joint venture of General Electric Company and FINA Inc.), and Huntsman Chemical Corporation Acrylonitrile BP Chemicals Inc., Cytec Industries Inc., E.I. Du Pont de Nemours and Company, and Solutia, Inc. Acetic Acid Celanese Ltd., Eastman Chemical Company, and Millenium Chemicals Methanol Methanex, Bordon Chemicals, and Beaumont Methanol Plasticizers Exxon Corporation, Aristech Chemicals, and Eastman Chemical Company TBA BASF Corporation and Nitto Chemical Industry Co., Ltd. Acrylic Fibers Solutia, Inc. Sodium Chlorate Akzo Nobel N.V., CXY Chemicals Ltd., and Kerr-McGee Corporation Chlorine Dioxide Generators Akzo Nobel, N. V. Sodium Chlorite Vulcan Chemicals (a subsidiary of Vulcan Materials Co.) Chlor-alkali Dow Chemical Company, OxyChem, and Pioneer Companies, Inc. Calcium Hypochlorite Olin Corporation and PPG Industries Historically, petrochemical industry profitability has been affected by vigorous price competition, which may intensify due to, among other things, new domestic and foreign industry capacity. The Company's 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 in the world tend to reduce demand and put pressure on margins. Recent events in the financial markets in various countries in the Far East may impact the demand growth for the Company's products, particularly styrene and acrylonitrile, which may have a negative impact on sales volumes, prices, and margins in fiscal 1998. 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 1997, the Company's export sales were approximately 30% of total revenues. It is not possible to predict accurately how changes in raw material costs, market conditions, or other factors will affect petrochemical industry margins in the future. 10 13 Petrochemicals and Fibers Styrene. According to Chemical Marketing Associates, Inc. ("CMAI"), the total North American capacity for styrene is currently 14.4 billion pounds per year. The Company's rated capacity of 1.7 billion pounds per year represents approximately 12% of the North American capacity. Styrene prices have been cyclical and sensitive to overall supply relative to demand and the level of general business activity. During 1994 and the first half of 1995 the styrene industry ran at high utilization rates resulting from demand growth from worldwide economic expansion resulting in high styrene prices and margins. During the second half of 1995 styrene prices decreased significantly as demand growth weakened, prompting customers to begin utilizing their available inventories. Increased capacity additions, particularly in the Far East, resulted in lower styrene prices and margins in 1996 and 1997. Current global production capacity for styrene is estimated at over 40 billion pounds and the Company believes over 7 billion pounds of capacity will be added by competitors in 1997 and 1998. Average styrene sales prices declined by 41% from fiscal 1995 to 1996 and 2% from fiscal 1996 to fiscal 1997. The Company expects that prices for styrene will continue at current depressed levels until global demand for styrene increases sufficiently to absorb increased production capacity. Acrylonitrile. The acrylonitrile market exhibits characteristics in capacity utilization, selling prices and profit margins similar to those of styrene. Moreover, as a result of the Company's high percentage of export acrylonitrile sales, demand for the Company's acrylonitrile is most significantly influenced by export customers, particularly those that supply acrylic fiber to China. During 1995, strong demand for acrylic fiber and ABS resins particularly in China, increased demand for acrylonitrile resulting in higher prices and margins. However, the Company believes that acrylonitrile demand began to weaken in late 1995 for the same reasons that caused the deterioration in the styrene market. Increased acrylonitrile capacity in the United States and the Far East resulted in lower acrylonitrile prices and margins in 1996 and 1997. Average acrylonitrile sales prices declined by 29% from fiscal 1995 to 1996 and 3% from fiscal 1996 to 1997. The Company believes that during 1997 and 1998, global industry capacity will increase by approximately 940 million pounds or 9%. As a result of the increased global industry capacity industry utilization rates and prices may decline further. Methanol. The methanol facility production capacity is shared by the Company and BP. Approximately 44% of the methanol production was used as a raw material in the Company's acetic acid unit in fiscal 1997. The remaining methanol production is available for the merchant market and for BP's worldwide acetic acid business. Significant capacity additions worldwide are expected during 1998 and 1999, and these additions may cause a decline in prices and margins. Other petrochemical products. The Company sells all of its acetic acid, plasticizers, and TBA production to BP, BASF, and Flexsys, respectively, pursuant to long-term contracts. In addition, the Company operates a sodium cyanide unit which is owned by DuPont. Acrylic Fibers. There are currently only two manufacturers of acrylic fibers in North America, Sterling Fibers and Solutia. In general, Sterling Fibers and Solutia have mostly different customers and focus on different segments of the same markets, with Sterling Fibers focusing on the higher margin niche applications. The United States currently imposes import tariffs on acrylic fibers of 5-9% and are expected to continue at a rate of 4-8% through 2004. Nevertheless Western European shipments of high quality fibers have become an increasingly prominent fixture in total imports due largely to the demand for fibers not produced in the United States. Imports from Mexico, once a significant supplier to the United States, now account for only 5-6% of total imports. The volume of imported acrylic fibers is expected to be around 40-50 million pounds per year over the next few years. Pulp Chemicals Sodium Chlorate. Historically, sodium chlorate has experienced cycles in capacity utilization, selling prices and profit margins. Since the mid-1980s, however, North American demand for sodium chlorate has grown at an average annual rate of approximately 10% as pulp mills have accelerated substitution of chlorine dioxide, sodium chlorate's primary derivative, for elemental chlorine in bleaching applications. Chlorine dioxide is a powerful and highly selective oxidizing agent suitable for pulp bleaching. It has the ability to substantially reduce hazardous substances, including dioxins and furans, in bleach plant effluent, as well as produce high-brightness pulp with little or no damage to the cellulose fiber. 11 14 Substitution of chlorine dioxide for elemental chlorine is driven primarily by environmental concerns. Through the end of 1996, approximately 85% to 90% of Canadian bleach plant capacity and approximately 55% to 60% of United States bleach plant capacity had been converted to elemental chlorine-free ("ECF"). On November 14, 1997, the Environmental Protection Agency ("EPA") enacted regulations that support substitution of chlorine dioxide, which is produced from sodium chlorate, for elemental chlorine in the pulp bleaching process (Pulp and Paper Cluster Rule). This regulation requires increased substitution of chlorine dioxide for elemental chlorine in the pulp bleaching process which significantly reduces the amount of Absorbable Organic Halides (AOX) and chlorine derivatives in bleach plant effluent. Chlor-alkali. Sterling Sask is one of three Western Canadian chlor-alkali production operations. Dow Chemicals, located in Fort Saskatchewan, Alberta, and CXY Chemicals, Ltd. located in North Vancouver, British Columbia, are the others. Sterling Sask competes in the regional Western Canadian market by selling to small volume regional customers who prefer the higher quality product produced by membrane technology. This technology and its proximity to its customers give it a competitive advantage in terms of product quality, product availability, service, and freight costs, and partially mitigate the Sterling Sask business exposure to the severe price swings in the overall North American market. Calcium Hypochlorite. Calcium hypochlorite is manufactured by three North American companies. The largest is Olin Corporation, followed by PPG Industries, Inc. and Sterling Sask, with Sterling Sask representing approximately 6% of North American capacity. World markets are served primarily by production from North America (56%) and Japan (22%). Major consuming countries include the United States, Australia, and South Africa. Demand for calcium hypochlorite is closely correlated with swimming pool starts (linked to economic growth) and summer temperatures (hotter weather leads to increased consumption). Demand from the pool sector is also highly seasonal, concentrated in the spring and summer months. For information regarding revenues for each of the Company's principal products, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." ENVIRONMENTAL MATTERS The Company's operations involve the handling, production, transportation, and disposal of materials classified as hazardous or toxic and are extensively regulated under environmental and health and safety laws. Operating permits required for the Company's operations are subject to periodic renewal and may be revoked or modified for cause or when new or revised environmental laws or requirements are implemented. New laws or permit requirements and conditions may affect the Company's operations, products, or waste disposal. Past or future operations may result in claims, regulatory action, or liabilities. Expenditures could be required to upgrade wastewater collection, pretreatment or disposal systems, or other matters. Some risk of environmental costs and liabilities are inherent in particular operations and products of the Company, as it is with other companies engaged in similar businesses. The Company conducts environmental management programs at all of its facilities and subsidiaries to maintain compliance with applicable environmental laws. As part of these programs, the Company conducts or commissions reviews of its environmental performance and addresses issues identified. The Company routinely conducts inspection and surveillance programs to detect and respond to any leaks or spills of regulated hazardous substances and to correct any identified regulatory deficiency. Changing and increasingly strict environmental laws and regulations might affect the manufacture, handling, processing, distribution or use of chemical products and the release, treatment, storage or disposal of wastes by the Company. Accordingly, the Company could be required from time to time to make expenditures to upgrade its wastewater collection, pretreatment, or disposal systems at all of its facilities. Production of chemical products involves the use, storage, transportation, and disposal of materials that may be classified as hazardous or toxic under applicable laws. The Company believes that its procedures for the use, storage, transportation, and disposal of these materials are consistent with industry standards and applicable laws and that it takes precautions to protect its employees and others from harmful exposure to such materials. However, there can be no assurance that past or future operations will not result in exposure or injury or to claims of injury by employees or the public due to the use, storage, transportation, or disposal of these materials. 12 15 In connection with the Company's acquisitions, certain indemnifications are typically obtained related to environmental liabilities. Certain indemnifications were obtained in the AFB Acquisition and Saskatoon Acquisition in fiscal 1997. In connection with the Company's purchase of the pulp chemical business in 1992, the seller, Tenneco Canada, Inc. ("Tenneco"), contractually retained liability for costs, damages, fines, penalties, and other losses under claims by third parties (including employees and authorities) arising from the ownership or operation of the facilities and businesses prior to the acquisition. The Company is also indemnified against the breach of environmental remediation covenants. These covenants oblige the indemnifying party to do specific remedial work (including decommissioning the old section of the Vancouver facility, which has been completed but is waiting on final approval from the Ministry of the Environment) at the facilities within set time periods, and to do any investigation, monitoring or remedial work required by present or future legislation governing environmental conditions predating the acquisition. The indemnity also protects the Company against losses arising from the remediation of pre-acquisition environmental conditions or from pre-acquisition violations of environmental laws. With the exception of any third-party claims, the losses against which the Company is indemnified do not include consequential damages or lost profits. The Tenneco obligations have been assigned to Albright & Wilson UK Ltd. ("Albright & Wilson") as a result of the sale by Tenneco of certain assets to Albright & Wilson. Groundwater data obtained in the course of the acquisition of the pulp chemical business indicated elevated concentrations of certain chemicals in the soil and groundwater at the four Canadian sites. The Company conducted a focused baseline sampling of groundwater conditions beneath its Canadian facilities in connection with Tenneco's indemnification of the Company for preclosing conditions which confirmed the previous data. The Company from time to time has encountered elevated concentrations of chemicals in soils or groundwater at its Canadian plants which it has addressed or is addressing. During the course of the acquisition of the pulp chemical facilities by the Company, air emissions sources were reviewed, and any available dustfall and vegetation stress studies were considered. This review indicated emission excursion episodes at specific locations in the scrubber systems at the Thunder Bay, Buckingham, and Vancouver facilities. The conditions at Thunder Bay and Vancouver have been addressed and satisfactorily resolved and the conditions at Buckingham are being addressed. The Company believes that it is otherwise in compliance in all material respects with permit requirements under applicable provincial law for operating emissions sources. The Company's pulp chemical business is sensitive to potential environmental regulation. On November 14, 1997, the EPA enacted regulations that support substitution of chlorine dioxide, which is produced from sodium chlorate, for elemental chlorine in the pulp bleaching process. Certain environmental groups are encouraging passage of regulations which restrict the amount of AOX or chlorine derivatives in bleach plant effluent. These regulations will result in increased substitution of chlorine dioxide for elemental chlorine in the pulp bleaching process which significantly reduces the amount of AOX and chlorine derivatives in bleach plant effluent. As long as there is not an outright ban on chlorine containing compounds, regulations restricting AOX or chlorine derivatives in bleach plant effluent should favor the use of chlorine dioxide, thus sodium chlorate. Any significant ban on all chlorine containing compounds could have a material adverse effect on the Company's financial condition and results of operations. British Columbia has a regulation in place that would effectively eliminate the use of chlorine dioxide in the bleaching process by the year 2002. The pulp and paper industry is working to change this regulation and believes that a ban of chlorine dioxide in the bleaching process will yield no measurable environmental or public health benefit. In the event such a regulation was implemented, the Company would seek to sell its products to customers in other markets. The Company is not aware of any other laws or regulations currently in place in North America which would restrict the use of the product. Emissions into the air from the Texas City Plant are subject to certain permit requirements and self-implementing emission limitations and standards under state and federal law. The Texas City Plant is located in an area that is classified by the EPA as not having attained the ambient air quality standards for ozone, which is controlled by direct regulation of volatile organic compounds (VOCs) and nitrogen oxide (NOx). Additional requirements were issued in fiscal 1994 and modified in fiscal 1996 by the Texas Natural Resource Conservation Commission in order to achieve ambient air quality standards for ozone. In addition, the Federal Government in June 1997 passed new National Ambient Air Quality Standards (NAAQS) lowering the ozone and particulate matter ("PM") threshold for attainment. These measures may substantially increase the Company's NOx and PM control costs in the future, although the cost and full impact, if any, cannot be determined at this time. The Sterling Fibers' facility in Santa Rosa County, Florida is currently in Ozone Attainment per the Clean Air Act. The above described new standards would reclassify the Santa Rosa County area into non-attainment. The costs of compliance with regulations that may be imposed by local authorities to meet the new ozone and PM standards cannot be determined at this time. However, the Company believes any costs of compliance will not have a material adverse effect on its financial condition. 13 16 To reduce the risk of offsite consequences from any unanticipated event, the Company acquired a greenbelt buffer zone adjacent to the Texas City Plant in 1991 and also acquired additional greenbelt area for the Santa Rosa Plant. The Company also participates in a regional air monitoring network to monitor ambient air quality in the Texas City community. These programs are part of the Company's commitment to Responsible Care initiatives of the Chemical Manufacturers Association and Canadian Chemical Producers Association. Under the Assets Purchase Agreement for the Company's acquisition of the Texas City Plant from Monsanto, Monsanto agreed to be liable and to indemnify the Company for certain environmental liabilities. The contractual indemnity expires upon certain changes of control of the Company. Monsanto has taken the position that the Merger constitutes such a change of control. Accordingly, any future claims the Company may have against Monsanto may necessarily be based upon statutory laws or common law principles, although there can be no assurance that the Company would prevail against Monsanto with respect to any such claim. Based on information currently available, the Company believes the loss of the contractual indemnity will not have a material adverse effect on its financial condition. Additionally, the Clean Air Act Amendments of 1990 authorize new federal permit requirements and provisions governing toxic and criteria air contaminants. The Company has incurred and will incur additional costs to comply with this law and with requirements issued by the State of Texas to control VOCs and NOx, as will all other similarly situated organic chemical manufacturing facilities. In July 1994, Sterling Fibers submitted a petition for rulemaking for continued use of its onsite nonhazardous landfill to avoid a January 1995 rule prohibiting disposal of industrial waste in other than a Class I landfill. The Florida Department of Environmental Protection, in December 1994, granted a waiver to Sterling Fibers for this prohibition. Should the petition be denied or the waiver be revoked there are certain administrative options available to the Company. Cost impacts of sending all of the Company's waste to an offsite facility do not represent a material impact on the Company. The Company believes that it is in compliance in all material respects with applicable environmental law. However, there can be no assurance that past practices or future operations will not result in material claims or regulatory action or require material environmental expenditures. EMPLOYEES As of September 30, 1997, the Company had approximately 1,700 employees, including approximately 500 at its pulp facilities and approximately 350 employees at Sterling Fibers. Approximately 40% of the employees at the Company's manufacturing facilities are covered by union agreements. The primary union agreement is with the Texas City, Texas Metal Trades Council, AFL-CIO, of Galveston County, Texas, and covers all hourly employees at the Texas City Plant. The Company signed a new labor agreement in May 1996 which is subject to renegotiation in April 1999. The new agreement increases the flexibility of work rules which the Company believes will increase the overall efficiency of the Texas City Plant. Employees at the Vancouver plant are represented by the Pulp, Paper, and Woodworkers Union. The Vancouver agreement was renegotiated in November 1997 and is subject to further renegotiation in November 2000. Employees at the Buckingham plant are represented by either the Energy and Chemicals Workers Union or an office and professional workers union. Both Buckingham agreements were negotiated in November 1994 and are subject to renegotiation in November 1997, which was mutually agreed upon to be extended to December 31, 1997. Approximately 70% of the employees at the Saskatoon Plant are represented by the Communications, Energy, and Paperworks of Canada. The current collective agreement is a four year contract expiring September 30, 2001. The Company believes its relationship with its employees is good. INSURANCE The Company currently maintains full replacement value coverage for property damage to all of its plants and resulting business interruption. Although the Company carries such insurance, it has only one styrene manufacturing facility, one methanol manufacturing facility, and one acrylonitrile manufacturing facility; thus, a significant interruption in the operation of any of these facilities could have a material adverse effect on the Company's financial condition, results of operations or cash flows. The Company also maintains other insurance coverages for various risks associated with its business. There is no assurance that the Company will not incur losses beyond the limits of, or outside the coverage of, it's 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 is no assurance that in the future the Company will be able to maintain its existing coverage or that the premiums will not increase substantially. 14 17 ITEM 2. PROPERTIES The principal executive offices of the Company are located in Houston, Texas, and are subleased through Citicorp, N.A. The Company's Texas City Plant 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. The Company has facilities to load its products in trucks, railcars, barges, and ocean-going tankers for shipment to customers. The site offers room for future expansion and includes a greenbelt around the northern edge of the plant site. The Company owns or leases all of the real property which comprises its Texas City Plant and all of the facilities and equipment located there, other than the sodium cyanide unit which is owned by DuPont, a cogeneration facility owned by a joint venture between the Company and Praxair Energy Resources, Inc., and the new partial oxidation unit constructed at the site by Praxair. The Company also owns storage facilities, approximately 200 rail cars and an acetic acid barge. In addition, the Company leases several storage facilities in the United States and Korea. The Company owns all of the real property which comprises the Santa Rosa Plant and owns or leases all of the facilities and equipment located there. The Santa Rosa Plant is located on 1,100 acres near Pensacola in Santa Rosa County, Florida. The Company's pulp chemical business includes five manufacturing plants in Canada and one in Valdosta, Georgia. The Buckingham, Quebec and Vancouver, British Columbia sites are approximately 20 acres each and are owned by the Company. The plant located near Saskatoon, Saskatchewan is on approximately 270 acres and is owned by the Company. The Thunder Bay, Ontario, and Grande Prairie, Alberta sites are leased by the Company. The Valdosta Plant was constructed in conjunction with, and is leased from, the Valdosta-Lowndes County Industrial Authority. The Company also leases approximately 600 rail cars. Headquarters for the Canadian operations is located in Toronto in an approximately 50,000 square foot single story office building owned by the Company. The building is situated on 6.56 acres owned by the Company and serves as the headquarters for the pulp chemical business and its respective laboratories. The Company believes that these properties and equipment are sufficient to conduct the Company's business. See Item 1. ''Business'' for other information required by this item. ITEM 3. LEGAL PROCEEDINGS AMMONIA RELEASE LAWSUITS: On May 8, 1994, an ammonia release occurred at the Company's 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 more than 5,500 plaintiffs were filed against the Company seeking an unspecified amount of money for alleged damages from the ammonia release. Many of these lawsuits were filed in April and early May 1996. Approximately 2,600 of the plaintiffs agreed to submit their damage claims to binding arbitration. Pursuant to this agreement to arbitrate, a two week evidentiary hearing was conducted in July 1996 before a three judge panel to determine the amount of damages. On May 1, 1997, the three judge panel awarded the plaintiffs an amount of damages which was well within the limits of the Company's insurance coverage. Thirty-nine of the plaintiffs tried their cases to a jury in Harris County District Court. After approximately five months of trial, the jury returned a verdict on September 2, 1997. The total amount awarded for all 39 plaintiffs was well within the limits of the Company's insurance coverage. Neither the May 1, 1997 arbitration award, nor the September 2, 1997 jury award will have a material adverse impact on the financial position, results of operations, or cash flows of the Company. Approximately 1,000 of the plaintiffs have settled their claims against the Company in fiscal 1997 and the Company continues to vigorously defend against the claims of the approximately 1,800 remaining plaintiffs. 15 18 Cases Outstanding: 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 ("Pointer"). 2. Holly Benefiel, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV0246; In the 56th Judicial District Court of Galveston County, Texas. 3. Lilly Gordon, et al. v. Sterling Chemicals, Inc.; Cause No. 95-36592; In the 281st Judicial District Court of Harris County, Texas ("Gordon"). 4. Versell Allums, et al. v. Sterling Chemicals, Inc., Paul Saunders, and an unknown chemical operator; Cause No. 95CV1017; In the 10th Judicial District Court of Galveston County, Texas. 5. Maurice Benson, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1265; In the 56th Judicial District Court of Galveston County, Texas. 6. Rodney Curry, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1263; In the 122nd Judicial District Court of Galveston County, Texas. 7. Jayson Rhodes, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1266; In the 10th Judicial District Court of Galveston County, Texas. 8. Darrell Vick, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1262; In the 122nd Judicial District Court of Galveston County, Texas. 9. Nathaniel Barron, et al. v. Sterling Chemicals, Inc., and Paul Saunders; Cause No. 96CV0103; In the 10th Judicial District Court of Galveston County, Texas. 10. Melton Avie, et al. v. Sterling Chemicals, Inc., BP America, Inc., BP Chemicals America, Inc., n/k/a BP Chemicals, Inc., Allen Bolen,, and Paul Saunders; Cause No. 96CV0377; In the 56th Judicial District Court of Galveston County, Texas. 11. Lee Arvie, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0431; In the 56th Judicial District Court of Galveston County, Texas. 12. Earl Rivas and Rosie Rivas v. Sterling Chemicals, Inc., Sterling Chemical Company, Sterling Chemical Company, Inc., B.P. Chemicals, Inc., B.P. Chemicals America, Inc., Paul Saunders,, and Allan Bolen; Cause No. 96CV0438; In the 10th Judicial District Court of Galveston County, Texas. 13. Bertha L. Anderson, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0440; In the 122nd Judicial District Court of Galveston County, Texas 14. Carl Terry, et al. v. Sterling Chemicals, Inc. and Paul Saunders; Cause No. 96CV0436; In the 212th Judicial District Court of Galveston County, Texas. 15. Phyllis Cormier, et al. v. Sterling Chemicals, Inc.; Cause No. 96-023195; In the 269th Judicial District Court of Harris County, Texas. 16. Nita Moore, et al. v. Sterling Chemicals, Inc.; Cause No. 96-22420; In the 270th Judicial District Court of Harris County, Texas. 17. Mattie Moses, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0458; In the 56th Judicial District Court of Galveston County, Texas. 18. Prince Ella Green and James Green v. Sterling Chemicals, Inc.; Cause No. 96CV0454; In the 212th Judicial District Court of Galveston County, Texas. 19. Jacqueline Lynch, et al. v. Sterling Chemicals, Inc.; Cause No. 43353; In the County Court at Law No. 2 of Galveston County, Texas. 20. Gloria Cotton, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0446; In the 122nd Judicial District Court of Galveston County, Texas. 21. Phyllis Joiner, et al. v. Sterling Chemicals, Inc.; Cause No. 56189; In the Justice of the Precinct No. 1, Galveston County, Texas. 22. Timothy McClurkin, Sr. v. Sterling Chemicals, Inc.; Cause No. 96CV0451; In the 56th Judicial District Court of Galveston County, Texas. 23. Allen E. Kitchens v. Sterling Chemicals, Inc., et al.; Cause No. 43,352; In the Galveston County Court, Galveston County, Texas. 24. Patricia A. Glover v. Sterling Chemicals, Inc., Paul Saunders, Allen Bolen, et al.; Cause No. 96CV0459; In the 212th Judicial District Court of Galveston County, Texas. 25. Wayne R. Lee v. Sterling Chemicals, Inc.; Cause No. 96CV0467; In the 10th Judicial District Court of Galveston County, Texas. 16 19 The following ammonia lawsuits were settled after September 30, 1996: 1. Feliciana Cantu, et al. v. Sterling Chemicals, Inc.; Cause No. 664459; In the County Civil Court at Law No. 4 of Harris County, Texas. 2. Edwin Laday v. Sterling Chemicals, Inc.; Cause No. 96CV0430; In the 212th Judicial District Court of Galveston County, Texas. NICKEL CARBONYL LAWSUITS: On July 30, 1997, as the Company's methanol unit at the 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, the Company 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 Company employees and contractor employees may have been exposed to nickel carbonyl in the methanol unit. Nine contractor employees allegedly exposed to nickel carbonyl have filed a lawsuit (Kurt Bodenshot, et. al. v. Sterling Chemicals, Inc.; Cause No. 97CV0966; In the 212th Judicial District Court of Galveston County, Texas) against the Company seeking unspecified damages for personal injuries. The Company anticipates that additional claims and litigation against the Company asserting similar claims will ensue. The Company believes that its general liability insurance coverage is sufficient to cover all costs and expenses. No employees or other individuals outside the methanol unit were exposed to the nickel carbonyl. OTHER LAWSUITS: The Company is subject to various other claims and legal actions that arise in the ordinary course of its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 17 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for Holdings' common stock, par value $.01 per share ("Common Stock"), although the Common Stock is traded on the OTC Electronic Bulletin Board maintained by the National Association of Securities Dealers, Inc. under the symbol "STXX". Prior to the Merger, the Common Stock was listed on the New York Stock Exchange ("NYSE") under the symbol "STX". The following table sets forth the price range of the Common Stock during the fiscal years ended September 30, 1997 and September 30, 1996. The following table reflects high and low sales prices on the NYSE for the period through August 21, 1996 and high and low bid information as reported on the OTC Electronic Bulletin Board for the period of August 22, 1996 through September 30, 1997.
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1997 High $ 12 3/4 $ 12 1/2 $ 12 1/4 $ 13 Low $ 11 $ 11 $ 11 $ 11 3/8 1996 High $ 9 1/4 $ 13 $ 13 1/8 $ 12 1/2 Low $ 7 1/2 $ 8 $ 11 1/8 $ 10 7/8
As of December 8, 1997, there were approximately 350 record holders of Common Stock. Holdings has not paid dividends on the Common Stock in any of the last three fiscal years and does not anticipate paying dividends in the foreseeable future. Any future determination as to the payment of dividends will be made at the discretion of the Board of Directors of Holdings and will depend upon the Company's operating results, financial condition, capital requirements, general business conditions, and such other factors that the Board of Directors deems relevant. In addition, the payment of dividends on the Common Stock is restricted by the terms of the indenture governing the 13 1/2% Senior Secured Discount Notes Due 2008 ("13 1/2% Notes"), and indirectly restricted by the terms of the Chemicals Credit Facility and the indenture governing the 11 3/4% Senior Subordinated Notes Due 2006 ("11 3/4 Notes") and the 11 1/4% Senior Subordinated Notes Due 2007 ("11 1/4% Notes") which restrict the ability of Chemicals to transfer funds to Holdings. 18 21 ITEM 6. SELECTED FINANCIAL DATA OF THE COMPANY The following table sets forth selected financial data with respect to the Company's 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 the Company's Consolidated Financial Statements and related notes in Item 8 of this Form 10-K.
Year Ended September 30, --------------------------------------------------------------------------- 1997(2) 1996(2) 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- OPERATING DATA: (In Thousands Except Per Share Data) Revenues $ 908,787 $ 790,465 $ 1,030,198 $ 700,840 $ 518,821 Gross profit 95,639 111,426 271,618 93,924 40,919 Net income (loss) attributable to common stockholders (28,965) 31,604 150,049 19,132 (5,420) Net cash provided by operating activities 47,314 63,601 191,838 75,249 48,114 Net cash used in investing activities (196,351) (95,957) (53,962) (9,737) (12,175) Net cash provided by (used in) financing activities 151,610 7,190 (109,017) (64,874) (37,057) EBITDA(1) 107,318 121,200 281,480 108,600 52,477 PER SHARE DATA: Net income (loss) per common share (2.58) 0.62 2.70 0.34 (0.10) Cash dividends -- -- -- -- 0.06 BALANCE SHEET DATA: Working capital $ 120,104 $ 76,933 $ 74,620 $ 20,809 $ 30,952 Total assets 878,971 689,684 609,939 580,925 546,754 Long-term debt (excluding current maturities) 876,281 714,632 103,581 192,621 263,894 Redeemable preferred stock 15,793 -- -- -- -- Stockholders' equity (deficiency in assets) (288,528) (272,439) 239,318 89,734 70,336
(1) EBITDA (Earnings before interest, taxes, depreciation, amortization, stock appreciation rights ("SARs"), and certain merger-related expenses) is presented to further enhance understanding of the Company's results of operations and cash flows. It is not intended as an alternative measure of performance to net income. With certain adjustments, EBITDA is the basis for payments to employees under the Company's profit sharing plans. (2) See Note 1 of Notes to Consolidated Financial Statements for a discussion of merger activities and related financing. 19 22 SELECTED FINANCIAL DATA FOR CHEMICALS The following table sets forth selected financial data with respect to Chemical's 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 Chemical's 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 Year Ended May 14, 1996 (Date of Inception) September 30, 1997 to September 30, 1996 (1) ------------------ -------------------------------- (Dollars in Thousands) OPERATING DATA: Revenues $ 908,787 $ 83,410 Gross profit 95,639 363 Net income (loss) (14,781) 174 BALANCE SHEET DATA: Working capital $ 125,743 $ 77,299 Total assets 881,231 685,451 Long-term debt (excluding current maturities) 768,870 619,875 Stockholders' equity (deficiency in assets) (168,589) (184,302)
(1) See Note 1 of Notes to Consolidated Financial Statements for a discussion of merger activities and related financing. Prior to August 21, 1996, Chemicals had no operating activities, other than those related to merger activities. 20 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Holdings is a holding company whose only material asset is Chemicals. Holdings' only material liability is its obligation to repay the 13 1/2% Notes issued in connection with the Merger and redeem the preferred stock issued in connection with the AFB Acquisition and the Saskatoon Acquisition. Chemicals and its subsidiaries own substantially all of the consolidated operating assets and are obligated for substantially all remaining liabilities of the Company. The Merger that occurred on August 21, 1996 and related financings were accounted for as a recapitalization, with no change in the basis of the assets and liabilities of Chemicals. Other than the additional interest expense associated with the 13 1/2% Notes, results of operations for the Company are essentially the same as those for Chemicals. Accordingly, the discussion that follows is applicable to both entities, except as specifically noted. A separate discussion of the results of operations for Chemicals, would not, in the opinion of the Company, provide any additional meaningful information. The primary markets in which the Company competes, especially styrene and acrylonitrile, are cyclical and are sensitive to changes in the balance between supply and demand, the price of raw materials, and the level of general worldwide economic activity. Historically, these markets have experienced alternating periods of tight supply and rising prices and profit margins, followed by periods of large capacity additions resulting in overcapacity and declining prices and profit margins. Large global capacity additions of styrene and acrylonitrile are projected to be completed during 1997 and 1998. In addition, recent events in the financial markets in various countries in the Far East may impact the demand growth for the Company's products, particularly styrene and acrylonitrile, which may have a negative impact on sales volumes, prices, and margins in fiscal 1998. Styrene prices have been cyclical and sensitive to overall supply relative to demand and the level of general business activity. During 1994 and the first half of 1995 the styrene industry ran at high utilization rates resulting from demand growth from worldwide economic expansion resulting in high styrene prices and margins. During the second half of 1995, styrene prices decreased significantly as demand growth weakened, prompting customers to begin utilizing their available inventories. Increased capacity additions, particularly in the Far East, resulted in lower styrene prices and margins in 1996 and 1997. Current global production capacity for styrene is estimated at over 40 billion pounds and the Company believes over 7 billion pounds of capacity will be added by competitors in 1997 and 1998. Average styrene sales prices declined by 41% from fiscal 1995 to 1996 and 2% from fiscal 1996 to fiscal 1997. The Company expects that prices for styrene will continue at current depressed levels until global demand for styrene increases sufficiently to absorb increased production capacity. The acrylonitrile market exhibits characteristics in capacity utilization, selling prices, and profit margins similar to those of styrene. Moreover, as a result of the Company's high percentage of export acrylonitrile sales, demand for the Company's acrylonitrile is most significantly influenced by export customers, particularly those that supply acrylic fiber to China. During 1995, strong demand for acrylic fiber and ABS resins, particularly in China, increased demand for acrylonitrile resulting in higher prices and margins. However, the Company believes that acrylonitrile demand began to weaken in late 1995 for the same reasons that caused the deterioration in the styrene market. Increased acrylonitrile capacity in the United States and the Far East resulted in lower acrylonitrile prices and margins in 1996 and 1997. Average acrylonitrile sales prices declined by 29% from fiscal 1995 to 1996 and 3% from fiscal 1996 to 1997. The Company believes that during 1997 and 1998, global industry capacity will increase by approximately 940 million pounds or 9%. As a result of the increased global industry capacity in 1997 and 1998, industry utilization rates and prices may decline. The Company primarily sells its petrochemical products pursuant to multi-year contracts and high volume spot transactions in both the domestic and export markets. This long-term, high volume focus allows the Company to maintain relatively low selling, general and administrative expenses relating to product marketing. Prices for the Company's commodity chemicals are determined by global market factors, including changes in the cost of raw materials, that are largely beyond the Company's control and, except with respect to certain of its multi-year contracts, the Company generally sells its products at prevailing market prices. During the past five years, the Company's results of operations have varied significantly from year to year primarily as a result of cyclical changes in the markets for its primary products. The Company has attempted to stabilize these fluctuations by manufacturing two primary product groups, petrochemicals and pulp chemicals, which have historically been subject to different market dynamics, including timing differences in their respective cyclical upturns and downturns. In addition, a goal of the Company is to pursue selected strategic acquisitions, such as the AFB Acquisition and the Saskatoon Acquisition, to further increase the diversity of the Company's product mix and reduce 21 24 the Company's sensitivity to economic cycles. Despite the above-described diversification, however, prolonged or severe softness in the market for any of its principal products, particularly styrene and acrylonitrile, will adversely affect the Company. Although earnings from styrene and acrylonitrile are expected to be significantly impacted by the global petrochemical capacity increases in 1997 and 1998, this impact should be partially offset by the pulp chemical business which is expected to benefit from growing demand for generators and sodium chlorate and the approximately 50% increase in the Company's sodium chlorate capacity as a result of the recent completion of the Valdosta Plant and the Saskatoon Acquisition. There can be no assurance, however, that such favorable results in the pulp chemical business will be realized. In addition, the Company markets substantial volumes of petrochemicals (approximately 50%, 50% and 54% of total sales volumes in fiscal years 1997, 1996, and 1995, respectively) and generates substantial revenues (approximately 32%, 36%, and 30% of total revenues in fiscal years 1997, 1996, and 1995, respectively) under conversion agreements. Under these agreements, the customer furnishes raw materials that the Company processes in exchange for a fee designed to cover its fixed and variable costs of production. The conversion agreements allow the Company to maintain lower levels of working capital and, in some cases, to gain access to certain improvements in manufacturing process technology. The Company believes that its petrochemical conversion agreements help insulate the Company to some extent from the effects of declining markets and increases in raw material prices, while allowing it to share in the benefits of favorable market conditions for most of the products sold under these arrangements. LIQUIDITY AND CAPITAL RESOURCES Debt Structure. As part of the 1996 Recapitalization, Chemicals entered into a Credit Agreement with Texas Commerce Bank National Association, as agent bank for a syndicate of lenders (the "Original Credit Agreement"). The Original Credit Agreement provided for facilities consisting of a six and one-half year revolving credit facility providing for up to $100 million (subject to a monthly borrowing base calculation) in revolving loans (the "Revolver"), a term loan facility consisting of a six and one-half year $200 million Tranche A term loan and an eight-year $150 million Tranche B term loan, and a four-year $6.5 million ESOP term loan (the "Original Term Loans"). In connection with the AFB Acquisition, Chemicals entered into a new credit agreement with Texas Commerce Bank National Association, as agent bank for a syndicate of lenders (the "Fibers Credit Agreement"). The Fibers Credit Agreement provided for a term loan facility consisting of a $31 million Tranche A term loan due March 31, 2003 and a $50 million Tranche B term loan due September 30, 2004 (the "Fibers Term Loans"). On July 10, 1997, Sterling Sask, an indirect wholly owned subsidiary of Holdings and Chemicals acquired substantially all of the assets of Saskatoon Chemicals, a subsidiary of Weyerhauser Canada Ltd. 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 for a syndicate of lenders. 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 Revolving Loan"), a term loan facility consisting of a Cdn. $25.0 million Tranche A term loan due June 30, 2003, and a $36.4 million Tranche B term loan due June 30, 2005 (the "Saskatoon Term Loans"). At the time of the Saskatoon Acquisition, the Company consolidated and combined the Original Credit Agreement and the Fibers Credit Agreement (as consolidated, the "Credit Agreement"), as well as the Original Term Loans and the Fibers Term Loans (as consolidated, the "Term Loans"). The Term Loans consist of a $76,500,000 Tranche A term loan due March 31, 2003, a $199,166,667 Tranche B term loan due September 30, 2004, and a $5,281,250 ESOP term loan due September 30, 2000. For more information concerning the Credit Agreement, see Note 4 to Consolidated Financial Statements. On April 7, 1997, Chemicals completed the offering of the 11 1/4% Notes (the "11 1/4% Notes Offering"). 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. For more information concerning the 11 1/4% Notes, see Note 4 to Consolidated Financial Statements. The Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, and general corporate purposes, should it need to do so, will be affected by the covenants in its various debt agreements and by cash requirements for debt service. The Credit Agreement and the indentures governing the 13 1/2% Notes, 11 3/4% Notes, and 11 1/4% Notes (the "Indentures") contain numerous financial and operational covenants, 22 25 including, without limitation, restrictions on the Company's ability to incur indebtedness, pay dividends, create liens, sell assets, engage in mergers and acquisitions, and refinance existing indebtedness, as well as the obligation of the Company to maintain certain financial ratios. The 11 1/4% Notes Offering was permitted under the pre-existing Indentures as a Refinancing of Debt outstanding under the Credit Agreement. At the time of the AFB Acquisition, the Company negotiated an amendment to the Credit Agreement to permit the AFB Acquisition and to make certain financial covenants somewhat less restrictive. The Company further amended the Credit Agreement in connection with the 11 1/4% Notes Offering and the partial repayment of the Term Loans with the proceeds thereof further relaxing certain of the financial covenants therein, among other things. Such modifications did not, however, lessen the restrictions under the Indentures on the Company's ability to incur additional debt. Based on the Company's pro forma results of operations for the four quarters ended September 30, 1997, these restrictions currently operate to prevent the Company from incurring any additional debt other than debt incurred under the Revolver or pursuant to certain limited "baskets" and other exceptions. Under limited circumstances, the Company may, however, consummate additional acquisitions under the Credit Agreement and the Indentures (i) through the incurrence of debt in Unrestricted Subsidiaries (as defined in the Indentures and Credit Agreement) or (ii) if the pro forma effect of such acquisition has a sufficient positive impact on certain financial ratios. The Company generally will not have access to the cash flows of Unrestricted Subsidiaries, as in the case of Sterling Sask. The Credit Agreement also requires that certain amounts of Excess Cash Flow (as defined therein) be used to prepay amounts outstanding under the Term Loans. No such mandatory prepayment is required in fiscal 1998. The Company intends to meet its liquidity needs for operating activities and capital expenditures (other than acquisitions) through internally generated funds and, to the extent necessary, borrowings under the Revolver. In connection with the 11 1/4% Notes Offering on April 7, 1997, the total commitment under the Revolver was increased by $25 million to $125 million. As of September 30, 1997, the Company had drawn approximately $9.4 million and issued approximately $2.6 million in letters of credit under the Revolver, thereby decreasing the available commitments under the Revolver at such time to $113.0 million (compared to an available commitment thereunder as of September 30, 1996 of $100 million). Available credit under the Revolver for loans and letters of credit is subject to a monthly borrowing base. At September 30, 1997, the borrowing base did not limit such available credit. The Revolver matures at March 31, 2003. The Company believes that such sources of funds will be sufficient to permit the Company to meet its liquidity needs during fiscal 1998. At September 30, 1997, the Company's long-term debt (excluding current maturities) was $876.3 million. The Company's ability to comply with the covenants and other terms of its various debt agreements, meet its debt service obligations, and repay principal when due will depend on the future performance of the Company. The future performance of the Company is subject to a number of uncertainties. See "Certain Known Events, Trends, Uncertainties and Risk Factors." The Company was in compliance with its financial covenants in effect as of September 30, 1997. The Credit Agreement and the Indentures contain provisions which restrict the payment of advances, loans and dividends from Chemicals to Holdings. The most restrictive of those covenants limits such payments during fiscal 1998 to approximately $2.0 million plus any amounts due to Holdings from Chemicals under the intercompany tax sharing agreement. Such restriction is not expected to limit Holdings' ability to meet its obligations in fiscal 1998. Working Capital. Working capital at September 30, 1997 was $120 million, an increase of $43 million from September 30, 1996. This increase was the result of the following changes:
Current Assets Current Liabilities -------------- ------------------- (In Millions) (In Millions) Cash and cash equivalents $ 2 Accounts payable $ (14) Inventories 34 Accrued liabilities (24) Accounts receivable 34 Current portion long-term debt 6 Other 5 ---- ----- $ 75 $ (32)
( ) - Decrease in assets, increase in liabilities. Cash Flow. Net cash provided from operations was $47 million for fiscal 1997, a decrease of $16 million compared to fiscal 1996. This decrease primarily resulted from decreased earnings during fiscal 1997. Net cash flow used in investing activities was $196 million in fiscal 1997 compared to $96 million in fiscal 1996. The increase was 23 26 primarily due to the AFB Acquisition and the Saskatoon Acquisition. Net cash flow provided by financing activities increased to $152 million in fiscal 1997 compared to $7 million in fiscal 1996 primarily due to proceeds from long-term debt associated with the AFB Acquisition and the Saskatoon Acquisition. Capital Expenditures. Capital expenditures for fiscal 1997, 1996, and 1995 were $43 million, $96 million, and $54 million, respectively. The fiscal 1997 capital expenditures were primarily for additional construction costs related to the methanol unit and the Valdosta Plant, along with the distributive control system upgrade at the acrylonitrile unit. In addition, the Company incurred capital expenditures in 1997 for process modernization in styrene and acrylonitrile, and routine safety, environmental, and replacement capital in the Company's petrochemical, pulp chemical, and fibers businesses. The fiscal 1996 capital expenditures were primarily for the expansion of the acetic acid unit, construction of the methanol unit, and construction of the Valdosta Plant. The fiscal 1995 capital expenditures were primarily for plant instrumentation modernization and process improvements, the acetic acid expansion, construction of the methanol unit, and the new sodium chlorate plant. The acetic acid expansion was completed in June 1996, the methanol unit was completed in August 1996, and the Valdosta Plant came on stream in December 1996. Capital expenditures are expected to be approximately $30 to $40 million in fiscal 1998, with about $20 to $25 million dedicated to the petrochemical and fibers businesses and $10 to $15 million dedicated to the pulp chemical business. Capital expenditures will be primarily for process modernization of the styrene and acrylonitrile units and routine safety, environmental, and replacement capital. The Company's capital expenditures for environmentally-related prevention, containment, and process improvements were $3 million and $2 million for fiscal years 1997 and 1996, respectively. The Company does not anticipate a material increase in these types of expenditures during fiscal 1998. During both fiscal years, the Company did not incur any other infrequent or non-recurring material environmental expenditures which were required under existing environmental regulations. See "Certain Known Events, Trends, and Uncertainties - Environmental and Safety Matters." The Company routinely incurs expenses associated with hazardous substance management and pollution prevention in ongoing operations. These operating expenses include items such as depreciation on its waste treatment facilities, outside waste management, fuel, electricity, and salaries. The amounts of these operating expenses were approximately $50 million and $47 million for fiscal years 1997 and 1996, respectively. The Company does not anticipate a material increase in these types of expenses during fiscal 1998. The Company considers these types of environmental expenditures normal operating expenses and includes them in cost of goods sold. Acquisitions. Part of the Company's business strategy is to implement a focused acquisition strategy, targeting chemical businesses and assets which will strengthen the Company's existing market positions, provide upstream or downstream integration, or produce complementary chemical products. As previously discussed, the Company's ability to consummate acquisitions may be limited by restrictions in its debt agreements, results of operations, and industry conditions. The Company currently intends, if such acquisition opportunities arise, to seek any necessary approvals from its existing lenders and/or obtain necessary financing through the use of Unrestricted Subsidiaries or otherwise, to consummate such acquisitions, although there can be no assurance that it will be successful in obtaining such approvals or obtaining such financing. Foreign Exchange. The Company enters into forward foreign exchange contracts to reduce risk due to Canadian dollar exchange rate movements. The Company does not engage in currency speculation. The forward foreign exchange contracts have varying maturities with none exceeding 18 months. The Company makes net settlements of United States dollars for Canadian dollars at rates agreed to at inception of the contracts. The Company had a notional amount of approximately $20 million and $30 million of forward foreign exchange contracts outstanding to buy Canadian dollars at September 30, 1997 and 1996, respectively. The deferred gain (loss) on these forward foreign exchange contracts at September 30, 1997 and 1996 was immaterial. ACCOUNTING CHANGES The Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" which permits companies to either adopt this new standard and record expenses for stock options and other stock-based employee compensation plans based on their fair value at date of grant, or continue to apply its current accounting policy under Accounting Principles Board ("APB") Opinion No. 25 and increase its footnote disclosure. The Company will continue to apply APB Opinion No. 25, and has 24 27 increased its footnote disclosure to include the pro forma impact on net income and earnings per share of the application of the fair value based method of accounting. The Company adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in the first quarter of fiscal 1997. SFAS No. 121 sets forth guidance on how to measure an impairment of long-lived assets and when to recognize such an impairment. The adoption of this Statement did not have a material adverse effect on the Company's financial position, results of operations, or cash flows. SFAS No 128, "Earning Per Share" establishes standards for computing and presenting earnings per share ("EPS"). SFAS No. 128 replaces the presentation of primary EPS previously prescribed by APB No. 15 with a presentation of basic EPS which is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. The Statement also requires dual presentation of basic and diluted EPS. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB No. 15. Pro forma basic and diluted EPS for all historical periods presented, assuming that SFAS No. 128 was effective at the beginning of each such historical period, would not be materially different from what has been presented using APB No. 15. The Company will adopt SFAS No. 128 for fiscal 1998. SFAS No. 130, "Reporting Comprehensive Income," establishes standards for reporting and displaying of comprehensive income and its components. SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information" establishes standards for the way that public business enterprises report information about segments in interim and annual financial statements. The Company is currently evaluating what, if any, additional disclosures may be required when these two statements are adopted in the first quarter of fiscal 1999. CERTAIN KNOWN EVENTS, TRENDS, UNCERTAINTIES AND RISK FACTORS Raw Material Prices and Availability. For each of the Company's products, the cost of raw materials and utilities is far greater than all other costs of production combined. Therefore, an adequate supply of raw materials at reasonable prices is critical to the success of the Company's business. The only major raw materials for the Company's petrochemical and pulp chemical products which is produced by the Company is methanol, which is used in the production of acetic acid. The major raw materials used by the Company in the production of its petrochemical products are all commodity chemicals and the price for each can fluctuate widely for a variety of reasons, including changes in the availability of these products because of major capacity additions or significant plant operating problems. Although no assurances can be given, the Company believes that it will continue to secure adequate supplies of all its raw materials at acceptable prices. The primary raw material for acrylic fibers is acrylonitrile, which is currently produced by the Company. However, as part of the AFB Acquisition, the Company assumed an existing acrylonitrile supply agreement, which expires February 28, 2002, pursuant to which Sterling Fibers will purchase all of the Santa Rosa Plant's requirements for acrylonitrile from Cytec. Upon the expiration of such supply contract, the Company may supply all of Sterling Fibers' acrylonitrile requirements from the Texas City Plant. Cyclical Markets for Products; Capacity Increases on Key Petrochemical Products. The prices of the Company's petrochemical and pulp chemical products have been cyclical and sensitive to overall supply relative to demand and the level of general business activity. Large global capacity additions of styrene and acrylonitrile are projected to be completed in 1997 and 1998. For styrene, approximately 7.2 billion pounds of new capacity is expected, and for acrylonitrile, approximately 940 million pounds of new capacity is expected. The Company believes that these announced global capacity additions in styrene and acrylonitrile will result in overcapacity for these markets in fiscal year 1998. The resulting impact on prices and margins negatively impacted the Company's results in fiscal 1997. Environmental and Safety Matters. The Company's operations involve the handling, production, transportation, and disposal of materials classified as hazardous or toxic and are subject to extensive federal, state, and local regulatory requirements relating to environmental affairs, waste management, health and safety, and chemical products. Operating permits are or may be required for the operation of some of the Company's operating units and chemical waste disposal operations, and these permits are subject to revocation, modification, and renewal. Governmental authorities have the power to enforce compliance with these regulations and permits, and violators are subject to fines, injunctions, or both. Third parties may also have the right to sue to enforce compliance. The Company believes that its operations are in compliance in all material respects with applicable environmental laws. However, the operations of a chemical manufacturing facility entail some risk of environmental damage, and there can be no assurance that material costs or liabilities will not be incurred. Moreover, it is possible that other developments, such as increasingly strict requirements or environmental laws and enforcement policies, could bring into question the handling, manufacture, use, emission or on-site or off-site disposal of substances or chemicals by the Company. There can be no assurance that past or future operations will not result in exposure to injury or claims of injury by employees, vendors, contractors, or the public due 25 28 to toxic or hazardous materials. In addition, a catastrophic event at the Company's facilities could result in liabilities to the Company substantially in excess of its insurance coverages. The Company's pulp chemical business is sensitive to potential environmental regulation. On November 14, 1997, the EPA enacted regulations that support substitution of chlorine dioxide, which is produced from sodium chlorate, for elemental chlorine in the pulp bleaching process (Pulp and Paper Cluster Rule). Certain environmental groups are encouraging passage of regulations which restrict the amount of AOX or chlorine derivatives in bleach plant effluent. This regulation will result in increased substitution of chlorine dioxide for elemental chlorine in the pulp bleaching process which significantly reduces the amount of AOX and chlorine derivatives in bleach plant effluent. As long as there is not an outright ban on chlorine containing compounds, regulations restricting AOX or chlorine derivatives in bleach plant effluent should favor the use of chlorine dioxide, thus sodium chlorate. Any significant ban on all chlorine containing compounds could have a material adverse effect on the Company's financial condition and results of operations. British Columbia has a regulation in place that would effectively eliminate the use of chlorine dioxide in the bleaching process by the year 2002. The pulp and paper industry is working to change this regulation and believes that a ban of chlorine dioxide in the bleaching process will yield no measurable environmental or public health benefit. In the event such a regulation was implemented, the Company would seek to sell its products to customers in other markets. The Company is not aware of any other laws or regulations currently in place in North America which would restrict the use of the product. Legal Proceedings. The information under "Legal Proceedings" in Note 7 to Consolidated Financial Statements herein is incorporated by reference. High Financial Leverage, Substantial Restrictions and Covenants. As a result of the 1996 Recapitalization, the AFB Acquisition, and the Saskatoon Acquisition, the Company had consolidated indebtedness of $882 million and deficiency in assets of $289 million at September 30, 1997. The Company's high degree of leverage could have important consequences, including the following: (i) the ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes, and other purposes, if needed, may be restricted; (ii) a substantial portion of cash flow from operations will be dedicated to cover cash interest requirements, thereby limiting the funds available for operations and any future business opportunities; and (iii) the degree of leverage may make the Company more vulnerable to a downturn in its businesses or the economy generally. The Company's debt instruments contain numerous financial and operating covenants, including, but not limited to, restrictions on the Company's ability to incur indebtedness, pay dividends, create liens, sell assets, engage in certain mergers and acquisitions, and refinance existing indebtedness. These covenants may limit the Company's ability to pursue its acquisition strategy. In the event of a change of control and under certain other circumstances, Holdings will be required to offer to purchase all of its outstanding 13 1/2% Notes and Chemicals will be required to offer to purchase all of its outstanding 11 1/4% Notes and 11 3/4% Notes, in each case subject to certain conditions, at a price equal to 101% of the Accreted Value with respect to the 13 1/2% Notes, and 101% of the principal amount thereof, with respect to the 11 1/4% Notes and 11 3/4% Notes, plus accrued and unpaid interest, if any. The ability of the Company to comply with such covenants and other terms of its debt instruments and to satisfy its other debt obligations will depend on the future performance of the Company, which is subject to the risks and uncertainties discussed herein. The markets for many of the Company's products are cyclical and sensitive to the level of general business activity. See "Overview" and "Cyclical Markets for Products; Capacity Increases on Key Petrochemical Products." Weakness in the level of worldwide economic activity or in the market for one or more of the Company's major products could have a material adverse effect on the Company's ability to meet its debt service obligations and comply with the restrictions imposed by its debt instruments. 26 29 Highly Competitive Industry. The industry in which the Company operates is highly competitive. Many of the Company's competitors, particularly in the petrochemical industry, are larger and have substantially greater financial resources than the Company. Among the Company's competitors are some of the world's largest chemical companies that have their own raw material resources. In addition, a significant portion of the Company's business is based upon widely available technology. The entrance of new competitors into the industry and the addition by existing competitors of new capacity may reduce the Company's ability to maintain profit margins or its ability to preserve its market share, or both. Such developments could have a negative impact on the Company's ability to obtain higher profit margins, even during periods of increased demand for the Company's products. The competitiveness of Sterling Fibers with respect to its specialty textiles and technical fibers products (which are its higher margin products) is maintained, to a significant extent, through the exclusive ownership or use of certain product and manufacturing technology. If competitors of Sterling Fibers gain access to the use of similar technology, or render such technology obsolete through the introduction of superior technology, the financial condition of Sterling Fibers would be materially affected in an adverse manner. Dependence on Texas City Plant. All of the Company's petrochemicals, including all of its styrene and acrylonitrile, are produced at the Texas City Plant. Significant unscheduled downtime at the Texas City Plant due to equipment breakdowns, interruptions in the supply of raw materials, power failures, natural forces or any other cause, including the normal hazards associated with the production of petrochemicals, could have a material adverse effect on the Company. Although the Company maintains insurance, including business interruption insurance, that it considers to be adequate under the circumstances, there can be no assurance that a significant interruption in the operation of the Texas City Plant would not have a material adverse effect on the Company's financial condition and results of operations. Ability to Complete Acquisitions. A significant element of the Company's business strategy is to pursue strategic acquisitions that either expand or complement the Company's products. The financing for such acquisitions will likely affect the Company's capitalization. There can be no assurance that the Company will be able to identify and make acquisitions on terms favorable to it or that the Company will be able to obtain financing for such acquisitions on terms the Company finds acceptable. As of September 30, 1997, the restrictions contained in the Indentures currently operate to prevent the company from incurring any additional debt other than debt incurred under the Revolver or pursuant to certain limited "baskets", and other exceptions. Under limited circumstances the Company may, however, consummate additional acquisitions under the Credit Agreement and the Indentures (i) through the incurrence of debt in Unrestricted Subsidiaries or (ii) if the pro forma effect of such acquisition has a sufficient positive impact on certain financial ratios. Long-Term Contracts and Significant Customers. The Company sells substantial portions of its styrene and acrylonitrile production under long-term contracts, and sells all of its acetic acid and plasticizers production under long-term contracts with single customers. These contracts are intended to provide some stability if demand for or prices of these products decline significantly, but also limit the Company's ability to take full advantage of attractive market conditions during periods of higher prices for these products. During fiscal 1997, a significant portion of the Company's production from the Texas City Plant was dedicated to multi-year contracts with Solutia, Bayer, BP, and BASF. Under certain market conditions, 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 the Company. Foreign Operations, Country Risks, and Exchange Rate Fluctuations. Approximately 18% of the Company's fiscal 1997 revenues were derived from its Canadian-based pulp chemical business and approximately 30% were derived from export sales. International operations and exports to foreign markets are subject to a number of special risks, including currency exchange rate fluctuations, trade barriers, exchange controls, national and regional labor strikes, political risks, and risks of increases in duties, taxes, and governmental royalties, as well as changes in laws and policies governing operations of foreign-based companies. In addition, earnings of foreign subsidiaries and intercompany payments are subject to foreign income tax rules that may reduce cash flow available to meet required debt service and other obligations of the Company. Since the Company derives most of its pulp chemical revenues from production and sales by subsidiaries within Canada, the Company has organized its subsidiary structure and its operations in part based on certain assumptions about various Canadian tax laws, currency exchange, and capital repatriation laws and other relevant laws. While the Company believes that such assumptions are correct, there can be no assurance that Canadian taxing or other authorities will reach the same conclusion. If such assumptions are incorrect, or if Canada were to change or modify such laws or the current interpretation thereof, the Company may suffer adverse tax and financial consequences. A portion of the Company's expenses and sales are denominated in Canadian dollars, and accordingly, the Company's 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 adverse tax consequences. In addition, because a portion of the Company's sales, cost of goods sold, and other expenses are denominated in Canadian dollars, the Company has a translation exposure 27 30 to fluctuations in the Canadian dollar against the United States dollar. These currency fluctuations could have a material impact on the Company as increases in the value of the Canadian dollar have the effect of increasing the United States dollar equivalent of cost of goods sold and other expenses with respect to the Company's Canadian production facilities. The Company enters into forward foreign exchange contracts to hedge such exposure for periods consistent with its committed exposure, but does not engage in currency speculation. 28 31 RESULTS OF OPERATIONS The following table sets forth revenues, gross profit, and operating income for the Company's primary segments for the years ended September 30, 1997, 1996, and 1995.
Year Ended September 30, -------------------------- 1997 1996 1995 ------ ------ ------ (Dollars in millions) REVENUES: Petrochemicals and Fibers . . . . . . . . . . . . . . . . $ 728 $ 633 $ 886 Pulp Chemicals . . . . . . . . . . . . . . . . . . . . . 181 157 144 ------ ------ ------ $ 909 $ 790 $1,030 ====== ====== ====== GROSS PROFIT: Petrochemicals and Fibers . . . . . . . . . . . . . . . . $ 33 $ 53 $ 225 Pulp Chemicals . . . . . . . . . . . . . . . . . . . . . 63 58 47 ------ ------ ------ $ 96 $ 111 $ 272 ====== ====== ====== OPERATING INCOME: Petrochemicals and Fibers . . . . . . . . . . . . . . . . $ 11 $ 31 $ 212 Pulp Chemicals . . . . . . . . . . . . . . . . . . . . . 46 36 31 ------ ------ ------ $ 57 $ 67 $ 243 ====== ====== ======
COMPARISON OF FISCAL 1997 TO FISCAL 1996 Revenues. Revenues for fiscal 1997 were $909 million compared to revenues of $790 million for fiscal 1996, an increase of 15%. The increase in revenues resulted primarily from eight months of operations from the newly acquired Sterling Fibers, three months of operations from the recent Saskatoon Acquisition, the startup of the new Valdosta Plant, and the new methanol unit. Petrochemicals and Fibers For fiscal 1997, the Company's revenues from its petrochemical and fibers businesses increased to $728 million when compared to fiscal 1996 revenues of $633 million. The AFB Acquisition and the new methanol unit had a positive impact on revenues in fiscal 1997, partially offset by reduced styrene and acrylonitrile average sales prices and sales volumes. Styrene. Styrene revenues for fiscal 1997 decreased 4% due to average sales prices decreasing by approximately 2% primarily as a result of weaker market conditions, particularly in the export market. In addition, fiscal 1997 sales volumes decreased by approximately 5% as compared to fiscal 1996. The prices of styrene's major raw materials, benzene and ethylene, were substantially higher during fiscal 1997 compared to fiscal 1996. Benzene prices were approximately 10% higher while ethylene prices were approximately 18% higher. These price escalations contributed significantly to the decline in styrene margins as market conditions did not allow for sufficient styrene price increases to compensate for these rising costs. Acrylonitrile. Acrylonitrile revenues for fiscal 1997 decreased 9% as a result of a decline of approximately 6% in sales volumes and approximately 3% in average sales prices. The 6% reduction in volumes in fiscal 1997 were primarily due to a partial shutdown during the third quarter as a result of operating difficulties following the completion of a capital project. The prices of propylene and ammonia, which are the major raw materials used to make acrylonitrile, were approximately 14% and 13% higher, respectively, in fiscal 1997 than in fiscal 1996. The combination of lower average sales prices and higher raw materials costs resulted in lower acrylonitrile margins in fiscal 1997 as compared to fiscal 1996. Methanol. Methanol revenues for fiscal 1997 were $68 million. The methanol unit construction was completed in August 1996 and, therefore, recorded minimal revenues in fiscal 1996. The methanol unit was negatively impacted during the fourth quarter of fiscal 1997 due to a shutdown resulting from operating problems. 29 32 Fibers. Sterling Fibers recorded eight months of revenues of approximately $92 million since its acquisition in early fiscal 1997. Other Petrochemical Products. Revenues during fiscal 1997 from the Company's other petrochemical products (including acetic acid, plasticizers, TBA, and sodium cyanide) decreased approximately 23% when compared to fiscal 1996 revenues primarily due to a decline in acetic acid revenues resulting from a procedural change in the billings under the Company's production contract with BP and the recording of related revenues. Prior to the startup of the Company's methanol unit, the Company purchased the methanol used in the production of acetic acid. Under the BP contract, such purchases were ultimately re-billed to BP and included in acetic acid revenues. Methanol for acetic acid production is now supplied by the Company's methanol facility and is included in methanol revenues. Pulp Chemicals Revenues from the Company's pulp chemical business for fiscal 1997 increased by approximately 15% to $181 million compared to fiscal 1996. The increase in revenues was primarily due to an increase in sales revenues from sodium chlorate of 17% compared to fiscal 1996, as a result of the startup of the Valdosta Plant in fiscal 1997, and the additional revenues of the recent Saskatoon Acquisition. Average sales prices for sodium chlorate declined 5% in fiscal 1997 compared to fiscal 1996. Revenues from the sale of generators and royalty income decreased 5% in fiscal 1997 compared to fiscal 1996. This 5% decrease was primarily due to reduced project work related to generators. Operating earnings for the pulp chemicals business were $46 million for fiscal 1997 compared to $36 million in fiscal 1996. The increase was primarily due to increased sales volumes of sodium chlorate. Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses for fiscal 1997 totaled $38 million, compared to $40 million in fiscal 1996. This decrease was related to $3.9 million in SAR expenses which were paid as a part of the Merger in fiscal 1996. Income from Operations. Income from operations for fiscal 1997 was $57 million, consisting of $11 million from petrochemical and fibers operations and $46 million from pulp chemical operations. This amount represented a decrease of approximately 15% from fiscal 1996, primarily as a result of weakness in the markets for styrene and acrylonitrile discussed above, which resulted in significantly lower margins during fiscal 1997 as compared to fiscal 1996. This weakness was partially offset by higher operating income from the pulp chemical business, the fibers operations acquired in fiscal 1997, and the new methanol facility. In addition, the Company incurred approximately $4 million in merger related expenses in fiscal 1996. Interest and Debt Related Expenses. Interest and debt related expense for fiscal 1997 increased $76 million compared to fiscal 1996 primarily due to the additional debt incurred in the 1996 Recapitalization, the AFB Acquisition, and the Saskatoon Acquisition. Provision (Benefit) for Income Taxes. Provision (benefit) for income taxes for fiscal 1997 was $(7) million, with an effective tax rate of 23%, compared to $17 million, with an effective tax rate of 34% for fiscal 1996. The decrease in the provision was primarily the result of the Company's pre-tax loss of approximately $31 million for fiscal 1997 compared to pre-tax income of $50 million in fiscal 1996. Extraordinary Item. The $3.9 million after-tax ($6.0 million pre-tax) extraordinary item in fiscal 1997 related to unamortized debt issue costs which were expensed in April 1997 as a result of the partial prepayment of the Term Loans. The extraordinary item in fiscal 1996 of $1.9 million after-tax ($3.0 million pre-tax) related to the loss on early extinguishment of debt resulting from the 1996 Recapitalization. Net Income (Loss). Due to the factors described above, net loss for fiscal 1997 was $28 million compared to net income of $32 million for fiscal 1996. COMPARISON OF FISCAL 1996 TO FISCAL 1995 Revenues. Revenues for fiscal 1996 were $790 million compared to revenues of $1.03 billion for fiscal 1995, a decrease of 23%. The decrease in revenues resulted primarily from lower average sales prices for styrene and acrylonitrile, and lower acrylonitrile and acetic acid sales volumes, which were partially offset by increased revenues in the pulp chemical business as a result of higher average sodium chlorate sales prices. 30 33 Petrochemicals For fiscal 1996, the Company's revenues from its petrochemical business decreased 29% to $633 million when compared to fiscal 1995, primarily as a result of decreases in styrene and acrylonitrile average sales prices and lower acrylonitrile and acetic acid sales volumes. Styrene. Styrene revenues for fiscal 1996 decreased due to average sales prices decreasing by approximately 41% primarily as a result of weaker market conditions in the Far East. Fiscal 1996 sales volumes increased by approximately 18% over fiscal 1995 when two planned shutdowns for scheduled maintenance restricted production. The second planned shutdown also included modernization of the styrene unit's control instrumentation with state-of-the-art distributive control systems. The modernization project completed in fiscal 1995 increased the Company's annual styrene production capacity to 1.7 billion pounds. The prices of styrene's major raw materials, benzene and ethylene, were substantially lower during fiscal 1996 compared to fiscal 1995. Benzene prices were approximately 17% lower while ethylene prices were approximately 25% lower. These decreases offset some of the decrease in selling prices discussed above, but styrene margins still declined substantially. Acrylonitrile. Acrylonitrile revenues for fiscal 1996 decreased as a result of a decline of approximately 29% in average sales prices and approximately 11% in sales volumes. Reduced imports of acrylonitrile derivatives by the Far East market (primarily acrylic fiber and ABS resins) resulted in lower acrylonitrile average sales prices and sales volumes. The Company's acrylonitrile unit operated at a reduced rate in 1996 due to an extended shutdown for most of March 1996 for scheduled maintenance and installation of the first phase of state-of-the-art distributive control systems. A second phase of distributive controls was installed in October 1996. The new distributive control systems are expected to result in increased efficiencies and stronger operating fundamentals in the future. The prices of propylene and ammonia, which are the major raw materials used to make acrylonitrile, were approximately 23% and 22% lower, respectively, in fiscal 1996 than in fiscal 1995. These decreases helped to offset some of the lower average selling prices discussed above, but margins still declined substantially. Acetic Acid. Acetic acid revenues in fiscal 1996 decreased primarily as a result of a 19% decrease in sales volumes related to a shutdown of the acetic acid unit to expand the unit by nearly 200 million pounds annually and for installation of new distributive control systems. The expansion of the acetic acid unit and the related construction of the partial oxidation unit by Praxair at the Texas City Plant were completed in June 1996. The partial oxidation unit supplies raw materials to the Company's acetic acid unit. Other Petrochemical Products. Revenues during fiscal 1996 from the Company's other petrochemical products (excluding lactic acid revenues) increased approximately 30% primarily as a result of increases in revenues from plasticizers. The Company ceased production of lactic acid in May 1996. In the second and third quarters of fiscal 1996, the Company wrote off the remaining net book value of the lactic acid unit assets and expensed other related costs resulting in a $3.7 million charge against earnings before taxes. Pulp Chemicals Revenues from the Company's pulp chemical business for fiscal 1996 increased by approximately 9% to $157 million compared to fiscal 1995 primarily as a result of an increase in sodium chlorate average sales prices of approximately 8%, partially offset by an approximately 2% decrease in sales volumes. Sodium chlorate experienced higher sales prices as a result of improved demand due to increased chlorine dioxide utilization in pulp bleaching. Royalty revenues in fiscal 1996 from installed generator technology were $19 million, the same as fiscal 1995. In addition, the Company received ten generator contracts including all eight contracts that were awarded in North America during fiscal 1996. Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses for fiscal 1996 totaled $40 million, compared to $29 million in fiscal 1995. This increase was related to an increase in SAR expense which was paid as a part of the Merger. Income from Operations. Income from operations for fiscal 1996 was $67 million (including merger-related expenses of $3.6 million), consisting of $31 million from petrochemical operations and $36 million from pulp chemical operations. This amount represented an approximately 72% decrease from fiscal 1995, primarily as a result of weakness in the markets for styrene and acrylonitrile discussed above, which resulted in significantly lower margins during fiscal 1996 compared to the 1995 fiscal year. This weakness was partially offset by higher operating income 31 34 from the pulp chemical business and other petrochemical products. In addition, the Company incurred approximately $2 million in start-up expenses during fiscal 1996 in connection with construction of the methanol unit. Other Expenses. Other expenses in fiscal 1996 consist of the $3.7 million pre-tax charge against earnings related to the write-off of the Company's lactic acid unit assets. Interest and Debt Related Expenses. Interest expense for fiscal 1996 decreased $1 million compared to fiscal 1995 primarily due to lower outstanding debt for most of fiscal 1996. The Company's average interest rate per annum increased to 10% on September 30, 1996 from 7% on September 30, 1995, primarily due to the financing in August 1996 related to the 1996 Recapitalization. Provision for Income Taxes. Provision for income taxes for fiscal 1996 was $17 million, with an effective tax rate of 34%, compared to $75 million, with an effective tax rate of 33% for fiscal 1995. The decrease in the provision was primarily the result of the significant decrease in the Company's pre-tax income to $50 million for fiscal 1996 from $228 million in fiscal 1995. Extraordinary Item. The extraordinary item in fiscal 1996 of $1.9 million relates to the loss on early extinguishment of debt of $3.0 million (net of taxes of $1.1 million) resulting from the 1996 Recapitalization. Net Income. Due to the factors described above, net income for fiscal 1996 was $32 million compared to $150 million for fiscal 1995. 32 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30, ------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 908,787 790,465 $ 1,030,198 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . 813,148 679,039 758,580 ----------- ----------- ----------- Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,639 111,426 271,618 Selling, general and administrative expenses . . . . . . . . . . . . . 38,170 40,305 28,856 Merger related expenses . . . . . . . . . . . . . . . . . . . . . . . . -- 3,633 -- Write-off of assets . . . . . . . . . . . . . . . . . . . . . . . . . . -- 3,706 -- Interest and debt related expenses, net of interest income . . . . . . 88,901 13,380 14,604 ----------- ----------- ----------- Income (loss) before taxes and extraordinary item . . . . . . . . . . . (31,432) 50,402 228,158 Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . (7,296) 16,898 75,005 ----------- ----------- ----------- Income (loss) before extraordinary item . . . . . . . . . . . . . . . . (24,136) 33,504 153,153 Extraordinary item, loss on early extinguishment of debt, net of tax (Note 4) . . . . . . . . . . . . . . . . . . . . . . . 3,924 1,900 3,104 ----------- ----------- ----------- Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . (28,060) 31,604 150,049 Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . 905 -- -- ----------- ----------- ----------- Net income (loss) attributable to common stockholders . . . . . . . . . $ (28,965) $ 31,604 $ 150,049 =========== =========== =========== Per share data: Income (loss) before extraordinary item . . . . . . . . . . . . . . . . $ (2.23) $ .66 $ 2.76 Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . (0.35) (.04) (.06) ----------- ----------- ----------- Net income (loss) per common share . . . . . . . . . . . . . . . . . . $ (2.58) $ .62 $ 2.70 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 33 36 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30, ----------------------- 1997 1996 --------- --------- ASSETS Current assets: Cash and cash equivalents .......................................................... $ 7,958 $ 5,609 Accounts receivable ................................................................ 167,248 133,399 Inventories ........................................................................ 87,870 53,720 Prepaid expenses ................................................................... 10,956 9,076 Deferred income tax benefit ........................................................ 10,005 7,214 --------- --------- Total current assets ............................................................... 284,037 209,018 Property, plant and equipment, net ..................................................... 492,036 365,765 Other assets ........................................................................... 102,898 114,901 --------- --------- Total assets ....................................................................... $ 878,971 $ 689,684 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) Current liabilities: Accounts payable ................................................................... $ 80,658 $ 66,562 Accrued liabilities ................................................................ 77,565 53,898 Current portion of long-term debt .................................................. 5,710 11,625 --------- --------- Total current liabilities .......................................................... 163,933 132,085 Long-term debt ......................................................................... 876,281 714,632 Deferred income tax liability .......................................................... 36,038 46,933 Deferred credits and other liabilities ................................................. 73,336 68,473 Common stock held by ESOP .............................................................. 7,688 6,500 Less: unearned compensation ........................................................... (5,570) (6,500) Redeemable preferred stock ............................................................. 15,793 -- Commitments and contingencies (Note 7) Stockholders' equity (deficiency in assets): Common stock, $.01 par value, 20,000,000 shares authorized, 11,942,000 shares issued and 11,714,000 outstanding at September 30, 1997; and 10,599,000 shares issued and outstanding at September 30, 1996 ................................................. 120 106 Additional paid-in capital ......................................................... (542,485) (560,077) Retained earnings .................................................................. 277,691 306,656 Pension adjustment ................................................................. (31) -- Accumulated translation adjustment ................................................. (21,093) (19,124) --------- --------- (285,798) (272,439) Treasury stock, at cost, 228,000 shares at September 30, 1997 ...................... (2,730) -- --------- --------- Total stockholders' equity (deficiency in assets) ................................. (288,528) (272,439) --------- --------- Total liabilities and stockholders' equity (deficiency in assets) .................. $ 878,971 $ 689,684 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 34 37 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) (AMOUNTS IN THOUSANDS)
COMMON STOCK ADDITIONAL ACCUMULATED ---------------- PAID-IN RETAINED PENSION TRANSLATION DEFERRED TREASURY SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ADJUSTMENT COMPENSATION STOCK ------ ------ --------- -------- ---------- ---------- ------------ -------- Balance, September 30, 1994 ..... 60,327 $ 603 $ 33,232 125,003 $ (950) (17,322) $ (68) $ (50,764) Net income ...................... -- -- -- 150,049 -- -- -- -- Translation adjustment .......... -- -- -- -- -- 15 -- -- Treasury stock transactions ..... -- -- 37 -- -- -- -- 150 Amortization of deferred compensation .................. -- -- -- -- -- -- (61) -- Pension adjustment .............. -- -- -- -- (606) -- -- -- ------ ------ --------- ------- ------- ------- ------ --------- Balance, September 30, 1995 ..... 60,327 603 33,269 275,052 (1,556) (17,307) (129) (50,614) Net income ...................... -- -- -- 31,604 -- -- -- -- Redemption of common stock ...... (50,690) (507) (616,892) -- -- -- -- -- Common stock issued in the 1996 Recapitalization ... 5,349 54 64,084 -- -- -- -- -- Employee stock purchase ......... 250 2 3,000 -- -- -- -- -- Stock warrants .................. -- -- 6,900 -- -- -- -- -- Translation adjustment .......... -- -- -- -- -- (1,817) -- -- Treasury stock transactions ..... (4,637) (46) (50,438) -- -- -- -- 50,614 Amortization of deferred compensation ................. -- -- -- -- -- -- 129 -- Pension adjustment .............. -- -- -- -- 1,556 -- -- -- ------ ------ --------- ------- ------- ------- ------ --------- Balance, September 30, 1996 ..... 10,599 106 (560,077) 306,656 -- (19,124) -- -- Net loss ........................ -- -- -- (28,060) -- -- -- -- Common stock issued in connection with AFB Acquisition, net ............. 778 8 9,331 -- -- -- -- -- Preferred stock dividends ....... -- -- -- (905) -- -- -- -- Translation adjustment .......... -- -- -- -- -- (1,969) -- -- Employee stock purchase ......... (44) -- (531) -- -- -- -- -- Treasury stock transactions ..... (228) -- -- -- -- -- -- (2,730) Common stock issued in connection with the Saskatoon Acquisition, net ... 609 6 6,379 -- -- -- -- -- Stock warrants ................. -- -- 2,413 -- -- -- -- -- Pension adjustment .............. -- -- -- -- (31) -- -- -- ------ ------ --------- ------- ------- ------- ------ --------- Balance, September 30, 1997 ..... 11,714 $ 120 $(542,485) $ 277,691 $ (31) $ (21,093) $ -- $ (2,730) ====== ====== ========= ========= ======= ========= ====== =========
The accompanying notes are an integral part of the consolidated financial statements. 35 38 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Year Ended September 30, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Cash flows from operating activities: Cash received from customers .......................................... $ 935,886 $ 874,253 $ 1,159,192 Miscellaneous cash receipts ........................................... 21,833 17,758 14,007 Cash paid to suppliers and employees .................................. (853,134) (804,414) (893,324) Interest paid ......................................................... (60,747) (9,492) (14,811) Interest received ..................................................... 360 1,114 2,540 Income taxes received (paid) .......................................... 3,116 (15,618) (75,766) ----------- ----------- ----------- Net cash provided by operating activities ................................. 47,314 63,601 191,838 Cash flows from investing activities: Capital expenditures .................................................. (43,428) (95,957) (53,962) Business acquisitions ................................................. (152,923) -- -- ----------- ----------- ----------- Net cash used in investing activities ..................................... (196,351) (95,957) (53,962) Cash flows from financing activities: Proceeds from long-term debt .......................................... 375,260 800,350 217,000 Repayment of long-term debt ........................................... (236,104) (196,285) (322,282) Redemption of common stock ............................................ -- (616,160) -- Purchase of other equity interests .................................... -- (14,587) -- Issuance of common stock, net ......................................... 18,721 64,040 -- Sale of warrants ...................................................... 2,413 6,900 -- Debt issuance costs ................................................... (9,684) (33,070) -- Other merger fees ..................................................... -- (3,709) -- Issuance of preferred stock ............................................... 4,887 -- -- Purchase of treasury stock ............................................ (3,256) -- -- Other ................................................................. (627) (289) (3,735) ----------- ----------- ----------- Net cash provided by (used in) financing activities ....................... 151,610 7,190 (109,017) Effect of United States /Canadian exchange rate on cash .................. (224) (107) 10 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents ...................... 2,349 (25,273) 28,869 Cash and cash equivalents - beginning of year ............................. 5,609 30,882 2,013 ----------- ----------- ----------- Cash and cash equivalents - end of year ................................... $ 7,958 $ 5,609 $ 30,882 =========== =========== =========== Reconciliation of net income to cash provided by operating activities: Net income (loss) ......................................................... $ (28,060) 31,604 $ 150,049 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ......................................... 54,012 42,702 43,033 Loss on disposal/write off of assets .................................. 241 3,706 -- Extraordinary item .................................................... 3,924 1,900 3,104 Deferred tax expense .................................................. 2,866 4,172 4,280 Accrued compensation including SARs ................................... -- 8,984 (2,638) Merger related expenses ............................................... -- 3,633 -- Discount notes amortization ........................................... 15,499 1,656 -- Other ................................................................. 2,087 (3,766) 1,058 Change in assets/liabilities: Accounts receivable ................................................... (8,985) (18,297) 22,540 Inventories ........................................................... (6,674) 14,147 1,921 Prepaid expenses ...................................................... (7,767) (5,173) (1,183) Other assets .......................................................... (1,754) (8,900) (4,075) Accounts payable ...................................................... (1,424) (5,454) (4,117) Accrued liabilities ................................................... 27,305 (7,018) (21,447) Other liabilities ..................................................... (3,956) (295) (687) ----------- ----------- ----------- Net cash provided by operating activities ................................. $ 47,314 $ 63,601 $ 191,838 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 36 39 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
MAY 14, 1996 YEAR ENDED (DATE OF INCEPTION) SEPTEMBER 30, 1997 TO SEPTEMBER 30, 1996 (1) ------------------ ------------------------- Revenues ........................................ $ 908,787 $ 83,410 Cost of goods sold .............................. 813,148 83,047 --------- --------- Gross profit .................................... 95,639 363 Selling, general and administrative expenses .... 37,475 3,426 Interest and debt related expenses .............. 72,931 1,615 Interest income from parent ..................... (1,692) (5,236) --------- --------- Income (loss) before taxes and extraordinary item .............................. (13,075) 558 Provision (benefit) for income taxes ............ (2,148) 384 --------- --------- Income (loss) before extraordinary item ......... (10,927) 174 Extraordinary item, loss on early extinguishment of debt, net of tax (Note 4) .................. 3,924 -- --------- --------- Net income (loss) ............................... $ (14,851) $ 174 ========= =========
(1) See Note 1 of Notes to Consolidated Financial Statements for a discussion of merger activities and related financing. Prior to August 21, 1996, Chemicals had no operating activities, other than those related to merger activities. The accompanying notes are an integral part of the consolidated financial statements. 37 40 STERLING CHEMICALS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30, ---------------------- 1997 1996 --------- --------- ASSETS Current assets: Cash and cash equivalents ....................................................... $ 7,958 $ 5,581 Accounts receivable ............................................................. 167,898 135,635 Inventories ..................................................................... 87,870 53,720 Prepaid expenses ................................................................ 10,031 9,076 Deferred income tax benefit ..................................................... 10,005 7,214 --------- --------- Total current assets ......................................................... 283,762 211,226 Property, plant and equipment, net .................................................. 492,036 365,765 Other assets ........................................................................ 99,519 108,460 --------- --------- Total assets .................................................................. $ 875,317 $ 685,451 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) Current liabilities: Accounts payable ................................................................ $ 80,658 $ 66,562 Accrued liabilities ............................................................. 77,565 55,740 Current portion of long-term debt ............................................... 5,710 11,625 --------- --------- Total current liabilities ....................................................... 163,933 133,927 Long-term debt ...................................................................... 768,870 619,875 Deferred income tax liability ....................................................... 42,646 47,478 Deferred credits and other liabilities .............................................. 73,337 68,473 Common stock held by ESOP ........................................................... 7,688 6,500 Less: unearned compensation ......................................................... (5,570) (6,500) Commitments and contingencies Stockholders' equity (deficiency in assets): Common stock, $.01 par value .................................................... -- -- Additional paid-in capital ...................................................... (139,786) (165,352) Retained earnings ............................................................... (14,677) 174 Pension adjustment .............................................................. (31) -- Accumulated translation adjustment .............................................. (21,093) (19,124) --------- --------- Total stockholders' equity (deficiency in assets) .............................. (175,587) (184,302) --------- --------- Total liabilities and stockholders' equity (deficiency in assets) ........... $ 875,317 $ 685,451 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 38 41 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) (DOLLARS IN THOUSANDS)
COMMON STOCK ADDITIONAL ACCUMULATED ---------------------- PAID-IN RETAINED PENSION TRANSLATION SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ADJUSTMENT --------- --------- --------- --------- --------- --------- Balance, May 14, 1996 ..... -- $ -- $ -- $ -- $ -- $ -- Common stock issued ....... 1 -- 1 -- -- -- Capital transfer, net ..... -- -- (165,353) -- (1,556) (20,194) Net income ................ -- -- -- 174 -- -- Pension adjustment ........ -- -- -- -- 1,556 -- Translation adjustment .... -- -- -- -- -- 1,070 --------- --------- --------- --------- --------- --------- Balance, September 30, 1996 1 $ -- (165,352) $ 174 $ -- (19,124) Contribution from parent .. -- -- 27,684 -- -- -- Net loss .................. -- -- -- (14,851) -- -- Pension adjustment ........ -- -- -- -- (31) -- Earned ESOP Shares ........ -- -- (2,118) -- -- -- Translation adjustment .... -- -- -- -- -- (1,969) --------- --------- --------- --------- --------- --------- Balance, September 30, 1997 1 $ -- $(139,786) $ (14,677) $ (31) $ (21,093) ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 39 42 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
MAY 14, 1996 YEAR ENDED (DATE OF INCEPTION) SEPTEMBER 30, 1997 TO SEPTEMBER 30, 1996(1) ------------------ ------------------------ Cash flows from operating activities: Cash received from customers ...................................... $ 935,886 $ 102,900 Miscellaneous cash receipts ....................................... 21,970 1,749 Cash paid to suppliers and employees .............................. (853,996) (92,800) Interest paid ..................................................... (60,747) (3,129) Interest received ................................................. 345 474 Income taxes received (paid) ...................................... 3,116 (4,950) --------- --------- Net cash provided by operating activities ............................. 46,574 4,244 Cash flows from investing activities: Capital expenditures .............................................. (43,428) (6,398) Business acquisitions ............................................. (152,923) -- --------- --------- Net cash used in investing activities ................................. (196,351) (6,398) Cash flows from financing activities: Proceeds from long-term debt ...................................... 375,260 637,900 Repayment of long-term debt ....................................... (236,104) (6,400) Debt issuance costs ............................................... (9,684) (27,939) Intercompany financing ............................................ 3,000 -- Distribution to parent ............................................ -- (609,961) Contribution from parent .......................................... 22,286 14,165 Other ............................................................. (2,380) -- --------- --------- Net cash provided by financing activities ............................. 152,378 7,765 Effect of United States /Canadian exchange rate on cash ............... (224) (30) --------- --------- Net increase in cash and cash equivalents ............................. 2,377 5,581 Cash and cash equivalents - beginning of period ....................... 5,581 -- --------- --------- Cash and cash equivalents - end of year ............................... $ 7,958 $ 5,581 ========= ========= Reconciliation of Net Income to Cash Provided by Operating Activities Net income (loss) ..................................................... $ (14,851) $ 174 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ..................................... 53,680 4,801 Deferred tax expense .............................................. 7,847 1,457 Extraordinary item ................................................ 3,924 -- Other ............................................................. 2,173 (511) Change in assets/liabilities: Accounts receivable ............................................... (13,510) 164 Inventories ....................................................... (6,674) (468) Prepaid expenses .................................................. (5,733) (2,428) Other assets ...................................................... (2,271) 784 Accounts payable .................................................. (1,288) 7,025 Accrued liabilities ............................................... 27,218 (4,460) Other liabilities ................................................. (3,941) (2,294) --------- --------- Net cash provided by operating activities ............................. $ 46,574 $ 4,244 ========= =========
(1) See Note 1 of Notes to Consolidated Financial Statements for a discussion of merger activities and related financing. Prior to August 21, 1996, Chemicals had no operating activities, other than those related to merger activities. The accompanying notes are an integral part of the consolidated financial statements. 40 43 STERLING CHEMICALS HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. MERGER ACTIVITIES Sterling Chemicals, Inc. (prior to the Merger, "Sterling") and STX Acquisition Corp. ("STX Acquisition"), a Delaware corporation formed in April 1996 by an investor group led by The Sterling Group, Inc. ("TSG") and The Unicorn Group L.L.C. ("Unicorn"), entered into an Amended and Restated Agreement and Plan of Merger dated April 24, 1996 (the "Merger Agreement"). On August 20, 1996, the Merger Agreement was approved by a majority of the shares outstanding, and on August 21, 1996, STX Acquisition merged with and into Sterling, changing its name to Sterling Chemicals Holdings, Inc. ("Holdings"), and continuing as the surviving corporation (the "Merger"). In connection with the Merger, Holdings transferred all of its operating assets and liabilities excluding its 13 1/2% Senior Discount Notes due 2008 (the "13 1/2% Notes") to a wholly owned subsidiary, STX Chemicals Corp., which at the time of the Merger, changed its name to Sterling Chemicals, Inc. (after the Merger, "Chemicals"). Holdings has no direct subsidiaries other than Chemicals. As used in these notes, the term "Company" refers to Sterling and its subsidiaries prior to the consummation of the Merger and, following the Merger, to Holdings and its subsidiaries, including Chemicals. Each share of the Company's common stock outstanding immediately prior to the Merger was converted (at the election of the holder thereof) into either $12.00 cash or the right to retain such shares ("Rollover Shares"), with the aggregate number of Rollover Shares limited to 5.0 million. As a result of the Merger, on August 21, 1996, the former STX Acquisition stockholders held approximately 5.3 million shares (49%), stockholders with Rollover Shares held approximately 5.0 million shares (46%), and the Company's newly formed Employee Stock Option Plan (the "ESOP") held approximately 542,000 shares (5%) of the outstanding common shares of Holdings' common stock, par value $0.01 per share ("Holdings Common Stock"). The Merger was financed by the proceeds of bank term loans of $356.5 million, including an ESOP term loan of $6.5 million, amounts drawn against a revolving credit facility of $6.4 million each pursuant to a new credit agreement (the "Original Credit Agreement"), an offering by Chemicals of $275.0 million of Chemicals' 11 3/4% Senior Subordinated Notes Due 2006 (the "11 3/4% Notes"), an offering of $191.8 million (initial proceeds of $100 million) representing 191,751 Units, with each unit consisting of one 13 1/2% Note and one warrant to purchase three shares of Holdings Common Stock for $0.01 per share beginning in August 1997, equity raised by STX Acquisition of approximately $70.7 million, and cash on hand of $10.3 million. These proceeds were used to redeem Sterling's common stock other than Rollover Shares ($608.3 million), purchase other equity interests (primarily stock appreciation rights ("SARs")) ($14.6 million), repay debt outstanding prior to the Merger ($142.7 million), loan monies to the new ESOP ($6.5 million), and pay fees and expenses ($46.8 million). The Company has accounted for the Merger and related financing (collectively the "1996 Recapitalization") as a series of debt and equity transactions representing a recapitalization. Accordingly, the historical basis of the Company's assets and liabilities have not been impacted by the 1996 Recapitalization. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company manufactures seven commodity petrochemicals at its Texas City, Texas plant (the "Texas City Plant"). Additionally, the Company manufactures chemicals for use primarily in the pulp and paper industry at five plants in Canada and one in Valdosta, Georgia, and manufactures acrylic fibers in a plant near Pensacola, Florida (the "Santa Rosa Plant"). At its Texas City Plant, the Company produces styrene, acrylonitrile, acetic acid, plasticizers, methanol, tertiary butylamine ("TBA"), and sodium cyanide. The Company generally sells its petrochemical 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. The Company produces regular textiles, specialty textiles, and technical fibers at the Santa Rosa Plant, as well as licensing the acrylic fibers manufacturing technology to producers worldwide. Sodium chlorate is produced at the five plants in Canada and in Valdosta, Georgia. Sodium chlorite is produced at one of the Canadian locations. In addition, chlor-alkali and calcium hypochlorite are produced at one of the Canadian locations. The company licenses, engineers, and overseas construction of large-scale chlorine dioxide generators for the pulp and paper industry as part of the pulp chemical business. These generators convert sodium chlorate into chlorine dioxide at pulp mills. 41 44 The significant accounting policies of the Company are described below. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of all wholly owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company's investment in a cogeneration joint venture of a 50% equity interest is accounted for under the equity method with the Company's share of earnings from the joint venture recorded as a reduction of cost of goods sold. CASH EQUIVALENTS The Company considers all investments purchased 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 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 the 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. The Company capitalizes interest costs which are incurred as part of the cost of constructing major facilities and equipment. The amount of interest capitalized for the fiscal years 1997, 1996, and 1995 was $3.8 million, $4.1 million and $1.0 million, respectively. IMPAIRMENT OF LONG-LIVED ASSETS Impairment tests of long lived assets are made when conditions indicate their carrying cost may not be recoverable. Such impairment tests are based on a comparison of future cash flows (undiscounted) 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 cost of patents is amortized on a straight-line basis over their estimated useful lives which approximates ten years. The Company 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 the technology. The resulting intangible amount is included in other assets and is amortized over an average life for these royalty payments of ten years. DEBT ISSUE COSTS Debt issue costs relating to long-term debt are amortized 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 the Company's assets and liabilities at enacted rates. 42 45 REVENUE RECOGNITION The Company generates revenues through sales in the open market, raw material conversion agreements, and long-term supply contracts. In addition, the Company has entered into shared profit arrangements with respect to certain petrochemical products. The Company recognizes revenue from sales in the open market, raw material conversion agreements, and long-term supply contracts as the products are shipped. Revenues from shared profit arrangements are estimated and accrued monthly. Deferred credits are amortized over the life of the contract which gave rise to them. The Company also generates revenues from the construction and sale of chlorine dioxide generators which are recognized using the percentage of completion method. The Company also receives prepaid royalties which are recognized over a period which is typically ten years. In addition, the Company generates revenues from the sale of acrylic fibers manufacturing technology to producers worldwide, which are recognized as earned. 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 reported as a separate component of stockholders' equity, while transaction gains and losses are included in operations when incurred. The Company's Canadian subsidiaries enter into forward foreign exchange contracts to minimize the short-term impact of Canadian dollar fluctuations on certain 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. EARNINGS PER SHARE Income (loss) per share for fiscal years 1997, 1996, and 1995 has been computed using a weighted average shares outstanding of 11,237,000, 50,700,000, and 55,674,000, respectively. The weighted average shares outstanding used in the computation of earnings (loss) per share are net of 490,000, 542,000, and zero shares held by the ESOP that are not allocated to the employees as of September 30, 1997, 1996, and 1995, respectively. Primary earnings (loss) per share were computed using the average number of shares of common stock and dilutive warrants in fiscal 1996 and using average number of shares of common stock outstanding for fiscal 1997 and 1995. Additionally, the effect of options and warrants were anti-dilutive for fiscal 1997. ENVIRONMENTAL COSTS Environmental costs are expensed unless the expenditures extend the economic useful life of the assets. Costs that extend the economic life of the assets are capitalized and depreciated over the remaining life of such assets. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In preparing disclosures about the fair value of financial instruments, the Company has assumed that the carrying amount approximates fair value for cash and cash equivalents, receivables, short-term borrowings, accounts payable and certain accrued expenses because of the short maturities of those 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 the Company 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 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. 43 46 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. 3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
SEPTEMBER 30, ----------------------- 1997 1996 --------- --------- (Dollars in Thousands) Inventories: Finished products ............................................................ $ 47,572 $ 31,868 Raw materials ................................................................ 17,800 9,499 --------- --------- Inventories at FIFO cost ......................................................... 65,372 41,367 --------- --------- Inventories under exchange agreements ........................................ 2,179 722 Stores and supplies .......................................................... 20,319 11,631 --------- --------- $ 87,870 $ 53,720 ========= ========= Property, plant and equipment: Land ......................................................................... $ 12,766 $ 11,720 Buildings .................................................................... 51,032 27,448 Plant and equipment .......................................................... 634,772 468,647 Construction in progress ..................................................... 43,856 85,490 Less: accumulated depreciation .............................................. (250,390) (227,540) --------- --------- $ 492,036 $ 365,765 ========= ========= Other assets: Patents and technology, net .................................................. $ 32,918 $ 34,902 Debt issue costs ............................................................. 32,472 34,025 Other ........................................................................ 37,508 45,974 --------- --------- $ 102,898 $ 114,901 ========= ========= Accrued liabilities:, Repairs ...................................................................... $ 19,205 $ 11,417 Interest ..................................................................... 14,661 3,869 Property taxes ............................................................... 8,255 6,772 Other ........................................................................ 35,444 31,840 --------- --------- $ 77,565 $ 53,898 ========= ========= Deferred credits and other liabilities: Deferred revenue ............................................................. $ 19,963 $ 17,720 Accrued postretirement benefits .............................................. 36,448 27,143 Other ........................................................................ 16,925 23,610 --------- --------- $ 73,336 $ 68,473 ========= =========
44 47 4. LONG-TERM DEBT: Long-term debt consisted of the following:
SEPTEMBER 30, ----------------------- 1997 1996 --------- --------- (Dollars in Thousands) Revolving credit facilities ....................................................... $ 9,400 $ -- Term loans ........................................................................ 275,334 350,000 Saskatoon term loans .............................................................. 53,822 -- ESOP term loan .................................................................... 4,875 6,500 11 1/4% notes ..................................................................... 153,148 -- 11 3/4% notes ..................................................................... 275,000 275,000 13 1/2% notes ..................................................................... 110,412 94,757 --------- --------- Total debt outstanding ........................................................ 881,991 726,257 ========= ========= Less: Current maturities ............................................................ (5,710) (11,625) --------- --------- Total long-term debt .............................................................. $ 876,281 $ 714,632 ========= =========
TERM LOANS, REVOLVER AND ESOP LOANS As part of the 1996 Recapitalization, Chemicals entered into the Original Credit Agreement with Texas Commerce Bank National Association, as agent bank for a syndicate of lenders. Funding under the Original Credit Agreement occurred August 21, 1996, upon the consummation of the Merger. The Original Credit Agreement provided for facilities consisting of a six and one-half year revolving credit facility providing for up to $100 million (subject to a monthly borrowing base calculation) in revolving loans (the "Revolver"), a term loan facility consisting of a six and one-half year $200 million Tranche A term loan and an eight-year $150 million Tranche B term loan (the "Original Term Loans"), and a four-year $6.5 million ESOP Term Loan (the "ESOP Loan"). On January 31, 1997, the Company acquired (the "AFB Acquisition") the acrylic fibers business (the "AFB") of Cytec Industries Inc. ("Cytec") (see Note 8). In connection with the AFB Acquisition, Chemicals entered into a credit agreement (the "Fibers Credit Agreement") with Texas Commerce Bank National Association, as agent bank for a syndicate of lenders. Funding under the Fibers Credit Agreement occurred January 31, 1997, upon consummation of the AFB Acquisition. The Fibers Credit Agreement provided for a term loan facility consisting of a $31 million Tranche A term loan due June 30, 2003, and a $50 million Tranche B term loan due September 30, 2004 (the "Fibers Term Loans"). On April 7, 1997, Chemicals completed a private offering (the "11 1/4% Notes Offering") of $150,000,000 of 11 1/4% Senior Subordinated Notes Due 2007 (the "11 1/4% Notes"). 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. On July 7, 1997, Chemicals completed a registered exchange offer, pursuant to which all of the 11 1/4% Notes were exchanged for publicly registered 11 1/4% Notes with substantially similar terms. The proceeds of the 11 1/4% Notes Offering were used to prepay outstanding indebtedness under the Term Loans. In connection with such prepayments, Chemicals and the requisite lenders under the Original Credit Agreement and the Fibers Credit Agreement effected amendments to such agreements ("the Amendments"). Among other things, the Amendments: (i) permitted and provided for the issuance of the 11 1/4% Notes, (ii) adjusted the method of the application of voluntary prepayments to allow the proceeds of the 11 1/4% Notes Offering to be applied in a manner that significantly reduced required principal payments, particularly over the next three years, (iii) amended certain financial covenants to make them somewhat less restrictive, (iv) increased the commitment under the Revolver by $25 million to $125 million, and (v) included a new financial covenant with respect to the maintenance of a specified Senior Debt Leverage Ratio (as defined in the Amendments). Unamortized debt issue costs related to the Term Loans of approximately $6.0 million pre-tax, $3.9 million after-tax, were expensed in April 1997, and recorded as an extraordinary loss from early extinguishment of debt. In connection with the acquisition of substantially all of the assets of Saskatoon Chemicals Ltd., a subsidiary of Weyerhauser Canada Ltd., the Company consolidated and combined the Original Credit Agreement and the Fibers Credit Agreement (as consolidated, the "Credit Agreement"), as well as the Original Term Loans and the Fibers Term Loans (as consolidated, the "Term Loans"). 45 48 The Term Loans, the ESOP Loan, and the Revolver borrowings bear interest, at Chemicals' option, at an annual rate of either the Eurodollar Rate or the Base Rate plus an Applicable Margin ranging from 0% to 3% depending upon the Company's Leverage Ratio (as defined in the Credit Agreement). The "Base Rate" 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 Credit Agreement). The Credit Agreement also requires Chemicals to pay a commitment fee in the amounts of 3/8% or 2% of the unused commitment under the Revolver depending on the Company's Leverage Ratio. The Credit Agreement requires the principal amount of the Term Loans to be amortized in quarterly installments of $333,333 beginning with the fiscal quarter ending September 30, 1997, increasing in March 2000. The ESOP Loan will be amortized in 12 equal quarterly installments of $406,250, with the last payment in September 2000. Chemicals' obligations under the Credit Agreement are secured by a first priority lien on the capital stock of Chemicals' domestic subsidiaries, 65% of the capital stock of its foreign subsidiaries and substantially all of the domestic assets of Chemicals and its subsidiaries, including without limitation, accounts receivable, inventory, intangibles and fixed assets, and assignments of certain material leases, licenses, and contracts. In addition, the Credit Agreement is secured by a pledge by Holdings of all of the capital stock of Chemicals. The Credit Agreement contains numerous financial and operating covenants, including, but not limited to, restrictions on Chemicals' ability to incur indebtedness, pay dividends, create liens, sell assets, engage in mergers and acquisitions, and refinance existing indebtedness. The Credit Agreement also requires Chemicals to satisfy certain financial covenants and tests. In addition, the Credit Agreement includes various circumstances that will constitute, upon occurrence and subject in certain cases to notice and grace periods, an event of default thereunder. 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 Weyerhauser 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 Revolving Loan"), and a term loan facility consisting of Cdn. $25.0 million Tranche A term loan due June 30, 2003, and $36.4 million Tranche B term loan due June 30, 2005 (the "Saskatoon Term Loans"). Advances under the Saskatoon Revolving Loan 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, 1997, the borrowing base did not limit such available credit and there were no borrowings outstanding under the Saskatoon Revolving Loan. Sterling Sasks' obligations under the Saskatoon Credit Agreement are secured by substantially all assets of Sterling Sask. The Saskatoon Credit Agreement requires Sterling Sask to satisfy certain financial covenants and tests. At September 30, 1997, Chemicals had indebtedness of $275.3 million under the Term Loans, $53.8 million under the Saskatoon Term Loans, and $4.9 million under the ESOP Loan. Additionally, as of September 30, 1997, the Company had drawn approximately $9.4 million and issued $2.6 million in letters of credit under the Revolver, thereby reducing the available commitment to $113.0 million. Advances under the 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, 1997, the borrowing base did not limit such available credit. DISCOUNT NOTES AND SUBORDINATED NOTES As part of the Merger financing, Chemicals also issued the 11 3/4% Notes and Holdings issued $191.8 million ($100 million initial proceeds) representing 191,751 Units, with each Unit consisting of one 13 1/2% senior subordinated discount note due 2008 (the "13 1/2% Notes") and one warrant to purchase three shares of Holdings Common Stock for $.01 per share. 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 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%. Commencing in 2002, interest will be payable semi-annually on February 15 and August 15 of each year until maturity. 46 49 The 11 3/4% Notes may not be redeemed by Chemicals prior to August 15, 2001, and from thereon through August 15, 2004, the 11 3/4% Notes may be redeemed at a premium varying between 105.875% and 101.958%. Subsequent to August 15, 2004, Chemicals may redeem the 11 3/4% Notes at their face value plus accrued interest. Prior to August 15, 1999, Chemicals may redeem in the aggregate up to 35% of the original principal amount of the 11 3/4% Notes with the proceeds of one or more public equity offerings, as defined. Such redemptions may be made at a redemption price of 111.75% of the face value plus accrued interest to the redemption date. After such redemption, at least $178.8 million aggregate principal amount of the 11 3/4% Notes must remain outstanding. The 13 1/2% Notes may not be redeemed by Holdings prior to August 15, 2001, and from thereon through August 15, 2006, the 13 1/2% Notes may be redeemed at a premium varying between 106.75% and 101.35%. Subsequent to August 15, 2006, the Company may redeem the 13 1/2% Notes at their Accreted Value (as defined in the indenture) plus accrued interest. Prior to August 15, 1999, Holdings may redeem in the aggregate up to 35% of the Accreted Value of the 13 1/2% Notes with the proceeds of one or more public equity offerings, as defined. Such redemptions may be made at a redemption price of 113.5% of the face value plus accrued interest to the redemption date. After such redemption, at least $124.6 million aggregate principal amount of the 13 1/2% Notes must remain outstanding. On April 7, 1997, Chemicals completed the 11 1/4% Notes Offering of $150,000,000 of 11 1/4% Senior Subordinated Notes Due 2007 (the "11 1/4% Notes"). 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. On July 7, 1997, Chemicals completed a registered exchange offer, pursuant to which all of the 11 1/4% Notes were exchanged for publicly registered 11 1/4% Notes with substantially similar terms. 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, and from thereon through April 1, 2004, the 11 1/4% Notes may be redeemed at a premium varying between 105.625% and 101.875%. Subsequent to April 1, 2005, Chemicals may redeem the 11 1/4% Notes at their face value plus accrued interest. Prior to April 1, 2000, Chemicals may redeem in the aggregate up to 35% of the original principal amount of the 11 1/4% Notes with the proceeds of one or more public equity offerings, as defined. Such redemptions may be made at a redemption price of 111.25% of the face value plus accrued interest to the redemption date. After such redemption, at least $97.5 million aggregate principal amount of the 11 1/4% Notes must remain outstanding. The indentures governing the 11 1/4% Notes, 11 3/4% Notes, and 13 1/2% Notes (the "Indentures") 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, the Indentures include various circumstances that will constitute, upon occurrence and subject in certain cases to notice and grace periods, an event of default thereunder. The Credit Agreement and the indenture for the 11 1/4% Notes and the 11 3/4% Notes contain provisions which restrict the payment of advances, loans, and dividends from Chemicals to Holdings. The most restrictive of the covenants limits such payments during fiscal 1998 to approximately $2.0 million, plus any amounts due to Holdings from Chemicals under the intercompany tax sharing agreement. DEBT MATURITIES The estimated remaining principal payments on the outstanding Term Loans, Saskatoon Term Loans, Revolver, and ESOP Loan are as follows:
Year ending Principal September 30, Payments ------------- ---------- (Dollars in Thousands) 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,710 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,710 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,371 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,831 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,845 Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254,964 -------- Total Term Loans, Saskatoon Term Loans, Revolver and ESOP Loan . . . $343,431 ========
47 50 5. INCOME TAXES A reconciliation of federal statutory income taxes to the Company's effective tax provision (benefit) before extraordinary item follows:
YEAR ENDED SEPTEMBER 30, ---------------------------------- 1997 1996 1995 -------- -------- -------- (Dollars in Thousands) Provision for federal income tax at the statutory rate .............. $(11,001) $ 17,641 $ 79,855 Foreign sales corporation ........................................... -- (700) (7,991) State and foreign income taxes ...................................... 3,782 1,529 2,862 Other ............................................................... (77) (1,572) 279 -------- -------- -------- Effective tax provision (benefit) ................................... $ (7,296) $ 16,898 $ 75,005 ======== ======== ========
The provision (benefit) for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30, ---------------------------------- 1997 1996 1995 -------- -------- -------- (Dollars in Thousands) From operations: Current federal ................................................. $ (6,131) $ 12,084 $ 67,393 Deferred federal ................................................ (9,211) (3,249) 1,075 Deferred foreign ................................................ 6,104 7,421 3,489 Current state ................................................... 1,942 642 2,947 Deferred state .................................................. -- -- 101 -------- -------- -------- Total tax provision (benefit) ....................................... $ (7,296) $ 16,898 $ 75,005 ======== ======== ========
The components of the Company's deferred income tax assets and liabilities are summarized below:
SEPTEMBER 30, ------------------ 1997 1996 ------- ------- (Dollars in Thousands) Deferred tax assets: Accrued liabilities ................................................................... $18,225 $10,348 Accrued postretirement cost ........................................................... 12,350 9,544 Tax loss and credit carryforward and other ............................................ 13,889 5,817 ------- ------- Total deferred tax assets ............................................................. 44,464 25,709 ------- ------- Less: current deferred income tax assets ............................................. 10,005 7,214 ------- ------- Noncurrent deferred tax assets ........................................................ $34,459 $18,495 ======= ======= Deferred tax liabilities: Property, plant and equipment ......................................................... $67,996 $61,304 Accrued pension cost .................................................................. 1,665 2,525 Other ................................................................................. 836 1,599 ------- ------- Total deferred tax liabilities ........................................................ 70,497 65,428 ------- ------- Net deferred tax liability ............................................................ $36,038 $46,933 ======= =======
In fiscal 1997, the Company generated approximately $17.0 million in United States net operating losses which will be carried back and utilized in a prior fiscal year. The Company also has approximately Cdn. $14.0 million in Canadian tax credit carryforwards which will expire from 1999 through 2004. 6. EMPLOYEE BENEFITS The Company has established the following benefit plans: Retirement Benefit Plans The Company has 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 those Company employees who were employed by the Company as of September 30, 1986 and were previously employed by Monsanto, the Company recognizes their Monsanto pension years of service for purposes of determining benefits under the Company's plans. For those 48 51 Company employees who were employed by the Company on August 21, 1992, and were previously employed by Tenneco Inc., the Company recognizes their Tenneco Inc. pension years of service for purposes of determining benefits under the Company's plans. The Company's 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. For those Company employees as of January 31, 1997 who: (i) were previously employed by Cytec and (ii) elect to retire from the Company on or before January 31, 1999, the Company supplements the standard pension payable such that the employee's total combined pension from the Company 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. In accordance with generally accepted accounting principles the Company has recorded its additional minimum liability. In recognizing the additional pension liability at September 30, 1997, the Company recorded a net reduction to stockholders' equity of $31,000. There were no additional pension liabilities to recognize at September 30, 1996. The components of pension expense for the years ended September 30, 1997, 1996, and 1995 were as follows:
1997 1996 1995 -------- -------- -------- (Dollars in Thousands) Service cost (for benefits earned during the period) .................... $ 4,857 $ 3,664 $ 3,288 Interest cost on projected benefit obligation ........................... 5,941 5,044 4,471 Actual return on plan assets and contributions .......................... (16,116) (6,001) (5,825) Deferral of asset gain .................................................. 10,107 1,050 1,909 Net amortization of unrecognized amounts ................................ 831 926 871 -------- -------- -------- Pension expense ......................................................... $ 5,620 $ 4,683 $ 4,714 ======== ======== ========
Assumptions used in determining the projected benefit obligation and pension cost for the periods were as follows:
FISCAL YEAR ------------------------------- 1997 1996 1995 ------ ------ ------ Discount rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.75% 7.75% 7.5% Rates of increase in salary compensation level . . . . . . . . . . . . . . 5.25% 5.5% 5.5% Expected long-term rate of return on assets . . . . . . . . . . . . . . . . 8.5% 9.0% 9.0%
The funded status of the Company's pension plans as of the actuarial valuation dates of August 31, 1997 and 1996 were as follows:
1997 1996 ---------------------------- ---------------------------- ASSETS ACCUMULATED ASSETS ACCUMULATED EXCEED BENEFITS EXCEED BENEFITS ACCUMULATED EXCEED ACCUMULATED EXCEED BENEFITS ASSETS BENEFITS ASSETS ------------- ------------- ------------- ------------- (Dollars in Thousands) Actuarial present value of benefits based on service to date and present pay levels: Vested benefit obligation .......................... $ 62,396 $ 771 $ 52,053 $ 525 Non-vested benefit obligation ...................... 1,685 5 2,064 2 Accumulated benefit obligation ..................... 64,081 776 54,117 527 Plan assets at fair value .......................... 84,598 -- 65,443 -- Plan assets in excess of (less than) accumulated benefit obligation ............................... 20,517 (776) 11,326 (527) Additional amounts related to projected salary increases ........................................ 18,017 98 16,568 177 Plan assets more (less) than total projected benefit obligation ....................................... 2,500 (874) (5,242) (704) Unrecognized net (gain) loss resulting from plan experience and changes in actuarial assumptions .. (6,913) 40 3,688 (107) Unrecognized prior service cost .................... 6,370 3 3,376 -- Unrecognized transition obligation ................. 2,110 5 2,486 7 Total prepaid (accrued) pension obligation ......... $ 4,067 $ (826) $ 4,308 $ (804) ======== ======== ======== ========
49 52 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides certain health care benefits and life insurance benefits for retired employees. Substantially all of the Company's employees become eligible for these benefits at normal retirement age. The Company accrues 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 the Company with ten or more years of service except for Canadian employees covered by collective bargaining agreements. All of the Company's 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. The components of postretirement benefits cost other than pensions for the years ended September 30, 1997, 1996, and 1995 were as follows:
1997 1995 1996 ------ ------ ------ (Dollars in Thousands) Service cost (for benefits earned during the period) .... $1,343 $1,155 $1,084 Interest cost on projected benefit obligation ........... 2,494 1,985 1,835 Amortization of plan amendments ......................... 29 243 29 ------ ------ ------ $3,866 $3,383 $2,948 ====== ====== ======
Actuarial assumptions used to determine costs and benefit obligations for postretirement benefit plans other than pensions include an average discount rate of 7.5% and an average rate of future increases in benefit compensation of 5.5%. The assumed composite rate of future increases in per capita cost of health care benefits (health care cost trend rate) was 7.5% for fiscal 1997, exclusive of demographic changes, decreasing gradually to 5.5% by the year 2027. These trend rates reflect current cost performance and the Company's expectation that future rates will decline. Increasing the health care cost trend rate by one percentage point would increase the accumulated postretirement benefit obligation by $1.7 million and would increase annual aggregate service and interest costs by $199,000. The following sets forth the plans funded status reconciled with amounts reported in the Company's consolidated balance sheet at September 30, 1997 and 1996. Accumulated postretirement benefit obligation (APBO):
1997 1996 --------- -------- (Dollars in Thousands) Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,723 $ 7,896 Fully eligible active plan participants . . . . . . . . . . . . . . . . . . . . . . . . 11,421 8,301 Other active plan participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,473 12,906 --------- -------- Total APBO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,617 29,103 Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- Unrecognized loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,975) (1,737) Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . (194) (223) --------- -------- Accrued postretirement benefit liability . . . . . . . . . . . . . . . . . . . . . . . $ 36,448 $ 27,143 ========= ========
EMPLOYEE STOCK PURCHASE PLAN In fiscal 1996, the Company established the 1996 Employee Stock Purchase Plan. This plan authorized up to 250,000 shares of common stock to be issued to key employees and management at an issue price of $12 per share. This plan became effective as of September 19, 1996 and terminated on September 30, 1996. All authorized shares were issued by the end of fiscal 1996. EMPLOYEE STOCK OWNERSHIP TRUST The original Employee Stock Ownership Trust ("old ESOT") was formed to invest primarily in the Company's common stock and included only participants contributing to the Company's Savings and Investment Plan (the "Savings Plan"). The Company's contribution to the old ESOT was 60% of the participant's Savings Plan contributions to the extent that such participant's contributions did not exceed 7.5% of the employee's eligible earnings. The Company's contributions were subject to a 20% per year vesting schedule commencing after one year of service. The Company's contributions to the old ESOT for the years ended September 30, 1996 and 1995 were $1.7 million per year. 50 53 An application for determination was filed with the Internal Revenue Service terminating the old ESOT and assets were distributed to participants during fiscal 1997. In connection with the Merger, a new Employee Stock Ownership Trust ("new ESOT") was established which covers substantially all United States employees. Allocations of shares of common stock will be made annually to participants. The new ESOT primarily invests in shares of Holdings Common Stock and borrowed $6.5 million from Chemicals pursuant to the Chemicals ESOP Loan to purchase approximately 542,000 shares of Holdings Common Stock. As more fully described in Note 4, the ESOP Loan is payable in 16 quarterly installments during the period beginning December 31, 1996, and ending September 30, 2000. The shares of Holdings Common Stock purchased by the new ESOT have been pledged as security for the ESOP Loan and such shares will be released and allocated to the new ESOT participants' account as the ESOP Loan is discharged. Until the ESOP Loan is paid in full, contributions to the new ESOT will be used to pay the outstanding principal and interest on the ESOP Loan. In addition, during fiscal 1997 the New ESOT purchased 99,000 shares of Holdings Common Stock. As of September 30, 1997, 151,000 ESOT shares had been allocated to employees. The Company recorded $1.6 million of expense related to the New ESOT in fiscal 1997. SAVINGS AND INVESTMENT PLAN The Savings Plan covers substantially all United States employees, including executive officers. The Savings Plan is qualified under Section 401(k) of the Internal Revenue Code (the "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 the Savings Plan. A participant may direct up to a maximum of 15% of eligible earnings to the Savings Plan, subject to certain limitations set forth in the Code for "highly compensated" participants, as defined in Section 414(q) of the Code. A participant's contributions become distributable upon the termination of his or her employment. The Company does not make any contribution to the Savings Plan. PROFIT SHARING AND BONUS PLANS In January 1997, the Board of Directors, upon recommendation of the Compensation Committee, approved the establishment of a Profit Sharing Plan that is designed to benefit all qualified employees, and a Bonus Plan that will provide for bonuses to exempt salaried employees based on the Company's annual financial performance. Under the Company's previous profit sharing plans, expense for the years ended September 30, 1996 and 1995 was $2.8 million and $13.0 million, respectively. No expenses for profit sharing or bonuses were incurred in fiscal 1997. OMNIBUS STOCK AND INCENTIVE PLAN The Company had an Omnibus Stock and Incentive Plan ("Original Omnibus Plan"), under which the Company could grant to key employees incentive and nonincentive stock options, stock appreciation rights, restricted stock, performance units and performance shares. The terms and amounts of all awards were determined by the Compensation Committee of the Board of Directors. Upon a change of control of the Company, all awards granted under the plan were to become fully vested and all performance based awards were to be paid at the higher of performance goals or actual performance to date. In fiscal 1993, the Company granted SARs to certain key employees and directors. Total expense (benefit) determined based on 3.6 million SARs granted, the vesting period (five years beginning September 1992) and the appreciation of the Company's stock price above the fair market value of the Company's common stock on the date of grant of the SARs. In October 1994, the Company amended the SAR program by modifying the vesting periods and limiting the amount of appreciation for each SAR during each vesting period, thereby limiting the Company's aggregate future expenses. The Company recorded expense (benefit) for the years ended September 30, 1996 and 1995 of $8.5 million and $(2.8) million, respectively, and paid $5.8 million in September 1995, and $13.8 million in August 1996, pursuant to the SARs, as amended. The expense (benefit) for the SARs is included in selling, general and administrative expenses in the Company's income statement. In fiscal 1995, the Company granted 82,500 stock options to certain officers of the Company with an exercise price of $13.50 per share. All existing stock options were terminated in connection with the Merger. Upon consummation of the Merger, the Original Omnibus Plan was terminated. 51 54 OMNIBUS STOCK AWARDS AND INCENTIVE PLAN In April 1997, the Board of Directors, upon recommendation of the Compensation Committee, but subject to shareholder approval at the next stockholders meeting, approved the establishment of the Omnibus Stock Awards and Incentive Plan (the "Omnibus Plan"). Under the Omnibus Plan, the Company may grant to key employees, incentive and nonqualified stock options, stock appreciation rights, restricted stock awards, performance awards, and phantom stock awards. The terms and amounts of the awards will be determined by the Compensation Committee of the Board of Directors. One million shares of the Company's stock are reserved for issuance under the Omnibus Plan. In the event of a change of control of the Company or a qualified public offering of Holdings Common Stock, all awards will immediately vest and become exercisable. In July 1997, the Company granted approximately 260,000 nonqualified stock options to key employees of the Company with an exercise price of $12.00 per share. During 1997, 33,000 stock options were cancelled, and as of September 30, 1997, 227,000 stock options were outstanding. The options vest 20% per year beginning on January 1, 1998, and are exercisable through January 1, 2007. NONQUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS Also in April 1997, the Board of Directors, upon recommendation of the Compensation Committee, approved the establishment of the Nonqualified Stock Option Plan for Non-Employee Directors (the "Nonqualified Plan"). Each non- employee director of the Company is eligible to participate in the Nonqualified Plan. Each eligible director on the date of adoption of the Nonqualified 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 is serving on the Broad of Directors on each subsequent October 1st will automatically be granted an option to acquire 1,000 shares of Holdings Common Stock (2,000 shares for the Vice-Chairman). All options will expire ten years from date of grant. All options will be granted at the fair market value on the date of grant and vest immediately. A total of 160,000 shares of Holdings Common Stock are reserved for issuance under the Nonqualified Plan. Effective April 1997, the Company granted 14,000 stock options to non-employee directors of the Company with an exercise price of $12.00 per share. The options are exercisable immediately and expire on the tenth anniversary of the date of grant. In the first quarter of fiscal 1997, the Company elected to continue to apply the intrinsic value method of accounting for stock-based compensation and increase its footnote disclosure, as permitted by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". All stock options are granted at fair market value of the Holdings Common Stock at the grant date. The weighted average fair value of the stock options granted during 1997 was $0.5 million. 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 1997: risk free interest rate of 6.1%; expected dividend yield of 0.0%; expected life of ten years; and expected volatility of 44%. Stock options generally expire ten years from the date of grant and fully vest after five years. The outstanding stock options at September 30, 1997 have a weighted average contractual life of approximately 9 years. There were 14,000 stock options exercisable at September 30, 1997. In accordance with the intrinsic value method of stock-based compensation 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 the Company's pro forma net loss and loss per share for 1997. 7. COMMITMENTS AND CONTINGENCIES PRODUCT CONTRACTS The Company has certain long-term agreements which provide for the dedication of 100% of the Company's production of acetic acid, plasticizers, TBA, sodium cyanide, and calcium hypochlorite each to one customer. The Company also has various sales and conversion agreements which dedicate significant portions of the Company's production of styrene, acrylonitrile, and methanol to various customers. These agreements generally provide for cost recovery plus an agreed margin or element of profit based upon market price. 52 55 LEASE COMMITMENTS The Company has entered into various long-term noncancellable operating leases. Future minimum lease commitments at September 30, 1997, are as follows: fiscal 1998 -- $4.3 million; fiscal 1999 -- $3.7 million; fiscal 2000 - -- $3.5 million; fiscal 2001 -- $3.1 million; fiscal 2002 -- $3.1 million; and $8.7 million thereafter. Rent expense for fiscal years 1997, 1996, and 1995 was not material. ENVIRONMENTAL AND SAFETY MATTERS The Company's operations involve the handling, production, transportation, and disposal of materials classified as hazardous or toxic and are extensively regulated under environmental and health and safety laws. Operating permits which are required for the Company's operations are subject to periodic renewal and may be revoked or modified for cause. New laws or permit requirements and conditions may affect the Company's operations, products, or waste disposal. Past or future operations may result in claims or liabilities. Expenditures could be required to upgrade wastewater collection, pretreatment or disposal systems, or other matters. Additionally, the Company will initiate appropriate actions or preventive projects necessary to insure that the facility continues to operate in a safe and environmentally responsible manner. No assurances can be given that the Company will not incur material environmental expenditures associated with its facilities, operations or products. The Company routinely incurs expenses associated with hazardous substance management and pollution prevention in ongoing operations. These operating expenses include items such as depreciation on its waste treatment facilities, outside waste management, fuel, electricity, and salaries. The amounts of these operating expenses were approximately $50 million, $47 million, and $45 million for fiscal years 1997, 1996, and 1995, respectively. The Company does not anticipate a material increase in these types of expenses during fiscal 1998. The Company considers these types of environmental expenditures normal operating expenses and includes them in cost of goods sold. At its Texas City Plant, the Company has reduced emissions of targeted chemicals 71% from 1987 levels well ahead of the EPA's voluntary 33/50 program. These reductions included a 95% reduction in hydrogen cyanide emissions and an 83% reduction in benzene emissions. The Company's sodium chlorate market is sensitive to potential environmental regulations. On November 14, 1997, the Environmental Protection Agency enacted regulations that support substitution of chlorine dioxide, which is produced from sodium chlorate, for elemental chlorine in the pulp bleaching process (Pulp and Paper Cluster Rule). Certain environmental groups are encouraging passage of regulations which restrict the amount of Absorbable Organic Halides (AOX) or chlorine derivatives in bleach plant effluent. This regulation will result in increased substitution of chlorine dioxide for elemental chlorine in the pulp bleaching process, which significantly reduces the amount of AOX and chlorine derivatives in bleach plant effluent. As long as there is not an outright ban on chlorine-containing compounds, regulations restricting AOX or chlorine derivatives in bleach plant effluent should favor the use of chlorine dioxide, thus sodium chlorate. Any significant ban on all chlorine-containing compounds could have a material adverse effect on the Company's financial condition and results of operations. British Columbia has a regulation in place that would effectively eliminate the use of chlorine dioxide in the bleaching process by the year 2002. The pulp and paper industry is working to change this regulation and believes that the ban of chlorine dioxide in the bleaching process will yield no measurable environmental or public health benefit. The Company is not aware of any other laws or regulations currently in place which would restrict the use of the product. LEGAL PROCEEDINGS AMMONIA RELEASE LAWSUITS: On May 8, 1994, an ammonia release occurred at the Company's 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 more than 5,500 plaintiffs were filed against the Company seeking an unspecified amount of money for alleged damages from the ammonia release. Approximately 2,600 of the plaintiffs agreed to submit their damage claims to binding arbitration. Pursuant to this agreement to arbitrate, a two week evidentiary hearing was conducted in July 1996 before a three judge panel to 53 56 determine the amount of damages. On May 1, 1997, the three judge panel awarded the plaintiffs an amount of damages which was well within the limits of the Company's insurance coverage. Thirty-nine of the plaintiffs tried their cases to a jury in Harris County District Court. After approximately five months of trial, the jury returned a verdict on September 2, 1997. The total amount awarded for all 39 plaintiffs was well within the limits of the Company's insurance coverage. Neither the May 1, 1997 arbitration award, nor the September 2, 1997 jury award will have a material adverse impact on the financial position, results of operations, or cash flows of the Company. Approximately 1,000 of the plaintiffs have settled their claims against the Company in fiscal 1997 and the Company continues to vigorously defend against the claims of the approximately 1,800 remaining plaintiffs. NICKEL CARBONYL LAWSUIT: On July 30, 1997, as the Company's methanol unit at the 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, the Company 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 Company employees and contractor employees may have been exposed to nickel carbonyl in the methanol unit. Nine contractor employees allegedly exposed to nickel carbonyl have filed a lawsuit against the Company seeking unspecified damages for personal injuries. The Company anticipates that additional claims and litigation against the Company asserting similar claims will ensue. The Company believes that its general liability insurance coverage is sufficient to cover all costs and expenses. No employees or other individuals outside the methanol unit were exposed to the nickel carbonyl. OTHER LAWSUITS. The Company is subject to various other claims and legal actions that arise in the ordinary course of its business. LITIGATION CONTINGENCY The Company has made estimates of the reasonably possible range of liability with regard to its outstanding litigation for which it may incur liability. These estimates are based on the Company's judgments using currently available information as well as consultation with the Company's insurance carriers and outside legal counsel. A number of the claims in these litigation matters are covered by the Company's insurance policies or by third-party indemnification of the Company. The Company, therefore, has also made estimates of its probable recoveries under insurance policies or from third-party indemnitors based on its understanding of its insurance policies and indemnifications, discussions with its insurers and indemnitors, and consultation with outside legal counsel, in addition to the Company's judgments. Based on the foregoing as of September 30, 1997, the Company has accrued approximately $6.5 million as its estimate of aggregate contingent liability for these matters, and has also recorded aggregate receivables from its insurers and third-party indemnitors of approximately $6.0 million. At September 30, 1997, management estimates that the aggregate reasonably possible range of loss for all litigation combined, in addition to the amount accrued, is from $0 to $12 million. The Company believes that this additional reasonably possible loss is substantially covered by insurance. While the Company has based its estimates on its 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. The Company will adjust its estimates as necessary as additional information is developed and evaluated. However, the Company believes that the final resolution of these contingencies will not have a material adverse impact on the financial position, results of operations, or cash flows of the Company. The timing of probable insurance and indemnity recoveries, and payment of liabilities, if any, is not expected to have a material adverse effect on the financial position, results of operations, or cash flows of the Company. 54 57 8. BUSINESS ACQUISITIONS On January 31, 1997, the Company acquired the AFB from Cytec. The AFB, now owned by two wholly owned subsidiaries of the Company (collectively "Sterling Fibers"), recorded sales of approximately $92 million during the eight months of operations in fiscal 1997 and consists of an acrylic fibers plant located near Pensacola, Florida, and several associated marketing and research offices. Sterling Fibers is one of two acrylic fibers manufacturers in the United States. Cytec will supply acrylonitrile to Sterling Fibers through a five-year supply agreement ending in 2002. The acquisition was financed through the incurence of $81 million of term debt under the Fibers Credit Agreement with substantially the same lenders as those under the Original Credit Agreement, the issuance of $10 million (liquidation value) of Series A "pay in kind" mandatory redeemable preferred stock ("Series A Preferred') to Cytec, and the sale of $10 million of Holdings Common Stock in a private placement. The Company used the purchase method to account for the acquisition, and operating results of Sterling Fibers beginning February 1, 1997 are included with those of the Company. On July 10, 1997, Sterling Sask, an indirect wholly owned subsidiary of Holdings and Chemicals, acquired substantially all of the assets of Saskatoon Chemicals, a subsidiary of Weyerhaeuser Canada Ltd. The acquired assets include a manufacturing plant near Saskatoon, Saskatchewan, which manufactures sodium chlorate, caustic soda, calcium hypochlorite, chlorine, and hydrochloric acid. Total consideration of $69.2 million was financed with: (i) approximately $54.6 million under a new credit facility established by Sterling Sask with a group of lenders, (ii) approximately $7.3 million pursuant to a private placement of Holdings Common Stock, and (iii) approximately $7.3 million pursuant to a private placement of Units, each Unit consisting of shares of Holdings' mandatory Cumulative Redeemable Preferred Stock, Series B "pay in kind" ("Series B Preferred") and warrants to purchase shares of Holdings Common Stock. The Saskatoon Acquisition was accounted for under the purchase method and operating results of Sterling Sask beginning July 10, 1997 are included with those of the Company. The following table presents the unaudited pro forma results of operations of the Company as if the AFB Acquistion and the Saskatoon Acquisition had occurred on October 1, 1995. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the AFB Acquistion and the Saskatoon Acquisition been made at the beginning of the fiscal year 1996 or of results which may occur in the future (in thousands, except per share amounts).
Pro Forma Pro Forma Twelve Months Twelve Months Ended Ended September 30, September 30, 1997 1996 -------- ------ Revenues $ 988,000 $975,600 Income (loss) before extraordinary items $ (27,300) $ 39,400 Net income (loss) attributable to common stockholders $ (34,200) $ 34,400 Net income (loss) per common share $ ( 2.85) $ 0.66
55 58 9. SEGMENT AND GEOGRAPHIC INFORMATION: Sales to individual customers constituting 10% or more of total revenues and sales by segment were as follows (there were no sales to individual customers constituting 10% or more of total revenues in fiscal 1997 and 1996):
YEAR ENDED SEPTEMBER 30, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (Dollars in Thousands) Major Customers: British Petroleum plc and subsidiaries . . . . . . . . . . . . . * * $ 169,944 Mitsubishi International Corporation . . . . . . . . . . . . . . * * $ 129,812 Export Sales: Export revenues . . . . . . . . . . . . . . . . . . . . . . . . . $274,139 $267,153 $ 534,067 Percentage of total revenues . . . . . . . . . . . . . . . . . . 30% 34% 52% Export revenues (as a percent of total exports) by geographical area: Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56% 66% 64% Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41% 34% 36% Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3% - -
*DOES NOT COMPRISE 10% OF TOTAL REVENUE FOR 1997 AND 1996, THEREFORE NOT REPORTED.
YEAR ENDED SEPTEMBER 30, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (Dollars in Thousands) Segment Information (1) Revenues: Petrochemical and Fibers . . . . . . . . . . . . . . . . . . $ 728,215 $ 633,754 $ 886,247 Pulp . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,572 156,711 143,951 ----------- ----------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 908,787 $ 790,465 $1,030,198 Operating income: Petrochemical and Fibers . . . . . . . . . . . . . . . . . $ 11,524 $ 31,891 $ 211,752 Pulp . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,945 35,597 31,010 ----------- ----------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,469 $ 67,488 $ 242,762 Depreciation and amortization expenses: Petrochemical and Fibers . . . . . . . . . . . . . . . . . . $ 32,762 $ 28,125 $ 28,386 Pulp . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,250 14,577 14,647 ----------- ----------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,012 $ 42,702 $ 43,033 Capital expenditures: Petrochemical and Fibers . . . . . . . . . . . . . . . . . . $ 22,664 $ 50,033 $ 45,759 Pulp . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,764 45,924 8,203 ----------- ----------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,428 $ 95,957 $ 53,962 Identifiable assets: Petrochemicals and Fibers . . . . . . . . . . . . . . . . . $ 554,474 $ 457,273 $ 405,324 Pulp . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324,497 232,411 204,615 ----------- ----------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 878,971 $ 689,684 $ 609,939
(1) The petrochemical and fibers segment is based in the United States. The pulp segment is primarily based in Canada. 10. FINANCIAL INSTRUMENTS FOREIGN EXCHANGE The Company enters into forward foreign exchange contracts to hedge Canadian dollar currency transactions on a continuing basis for periods consistent with its committed exposures. The forward foreign exchange contracts have varying maturities with none exceeding 18 months. The Company makes net settlements of United States dollars for Canadian dollars at rates agreed to at inception of the contracts. The Company enters into forward foreign exchange contracts to reduce risk due to Canadian dollar exchange rate movements. The Company does not engage in currency speculation. The Company had a notional amount of approximately $20 million and $30 million of forward foreign exchange contracts outstanding to buy Canadian dollars 56 59 at September 30, 1997 and 1996, respectively. The deferred gain (loss) on these forward foreign exchange contracts at September 30, 1997 and 1996 was immaterial. GAS HEDGE The Company hedged a portion of its natural gas to be used in the production of styrene and methanol during the first half of fiscal 1998. At September 30, 1997, the Company had natural gas collar contracts on 700,000 MMbtu's of natural gas per month for November 1997 through March 1998 with an average "floor" price of $2.13 per MMbtu and an average "cap" price of $2.54 per MMbtu. The Company's current hedging agreements are settled on a monthly basis. All of the Company's current contracts specify the third-party index to be the inside FERC Houston Ship Channel First of the Month Index Price. The Company had a net loss of $0.1 million due to natural gas hedging contracts in fiscal 1997 and an unrealized gain of $1.2 million at September 30, 1997. CONCENTRATION OF RISK The Company sells its products primarily to companies involved in the petrochemical, fiber, and pulp and paper manufacturing industries. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. However, letters of credit are required by the Company on many of its export sales. The Company's credit losses have been minimal. 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 the institutions and believes that any possible loss is minimal. Approximately 40% of the Company's employees are covered by union agreements. Approximately 4% 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 will be invested with any single bank, financial institution, or United States corporation. FAIR VALUE OF FINANCIAL INSTRUMENTS At September 30, 1997, the fair market value of all of the Company's financial instruments approximated the book value, except as stated below.
Book Value Fair Value ---------- ---------- (Dollars in Thousands) 13 1/2% Notes $ 110,412 $135,184 11 3/4% Notes 275,000 303,875 11 1/4% Notes 153,148 163,875
The fair values of the 13 1/2% Notes, 11 1/4% Notes, and 11 3/4% Notes are based on quoted market prices. 11. RELATED PARTY TRANSACTIONS In connection with the 1996 Recapitalization, the Company paid TSG and Unicorn one-time transaction fees of approximately $8.4 million and $4.4 million, respectively. In addition, the Company paid TSG a one-time transaction fee of approximately $1.1 million in connection with the AFB Acquisition, and a fee of approximately $0.7 million in connection with the Saskatoon Acquisition. Investment banking fees of approximately $3.3 million were paid as part of the 1996 Recapitalization to Lazard Freres & Company ("Lazard"). A member of the former Board of Directors is a Limited Managing Director of Lazard. However, the Board member agreed not to receive any compensation from Lazard related to the Merger. 57 60 Also in connection with the 1996 Recapitalization, Credit Suisse First Boston Corporation ("CFSB") served as managing underwriter for the public offering of the 13 1/2% Notes and 11 3/4% Notes and provided certain financial advisory services to STX Acquisition and Chemicals, for which such firm received underwriting discounts and commissions and financial advisory fees totaling approximately $17 million. In addition, CSFB received net compensation of approximately $1.0 million related to the 11 1/4% Notes Offering. John L. Garcia, a director and stockholder of the Company, is a Managing Director of CSFB. Since October 1, 1991, the Company and certain affiliates of Koch Industries have had ongoing commercial relationships in the ordinary course of business, including, from time to time, supply of raw materials or sales of petrochemicals and transportation of natural gas. For the fiscal year ended September 30, 1997, (i) product sales to and raw material purchases from Koch Chemical, an indirect wholly-owned subsidiary of Koch Industries, (ii) payments to John Zink Company, an indirect wholly-owned subsidiary of Koch Industries, in consideration for certain contracting and construction services performed at the Texas City Plant, and (iii) services for the transportation of natural gas by Koch Gateway Pipeline Company to the Santa Rosa Plant, each represented less than 1% of the Company's revenues. In connection with the Saskatoon Acquisition, the Company paid a fee to Clipper Capital Associates, Inc. ("Clipper") and Olympus Partners ("Olympus") of $0.1 million to act as placement agents for the Series B Preferred Stock. Robert Calhoun, a director of the Company, is President of Clipper. Affiliates of Clipper and Olympus are significant stockholders of the Company. 12. CAPITAL STOCK The authorized shares of Holdings Common Stock at September 30, 1997 and 1996 was 20,000,000. On January 31, 1997, the Company issued 778,232 additional shares of Holdings Common Stock in connection with the AFB Acquisition. In addition, the Company issued 608,334 shares of Holdings Common Stock in connection with the Saskatoon Acquisition. In connection with the issuance of the 13 1/2% Notes (see Note 4), Holdings issued 191,751 warrants to purchase three shares of Holdings Common Stock for $0.01, exercisable beginning in August 1997 until August 2008. In connection with the Saskatoon Acquisition, Holdings also issued to holders of the Series B Preferred Stock 201,048 warrants to purchase one share of Holdings Common Stock for $0.01, exercisable beginning in July 1997 until December 2007. At September 30, 1997, all 392,799 warrants to purchase Holdings Common Stock were outstanding. 13. MANDATORY REDEEMABLE PREFERRED STOCK In connection with the AFB Acquisition, the Company 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. The Company 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 dividends. The holders of Series A Preferred Stock may have the Company redeem shares on any dividend payment date after June 30, 2009 with proper written notice at a price of $100 per share plus accrued dividends. The carrying value of the Series A Preferred Stock at September 30, 1997 was $10.7 million (liquidation value of $100 per share). In connection with the Saskatoon Acquisition, the Company 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 (as defined) 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. The Company 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 dividends. The holders of Series B Preferred Stock may have the Company 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 dividends. The carrying value of the Series B Preferred Stock at September 30, 1997 was $5.1 million (liquidation value of $1,000 per share). The difference in the carrying value and the redemption amount will be accreted as a charge to retained earnings over the holding period using the effective interest rate method. 58 61 14. NEW ACCOUNTING STANDARDS SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" establishes new accounting standards for measuring the impairment of long-lived assets. The Company adopted this Statement in the first quarter of fiscal 1997. The adoption of this Statement did not have a material adverse effect on the Company's financial position, results of operations, or cash flows. SFAS No 123, "Accounting for Stock-Based Compensation" permits companies to either adopt this new standard and record expenses for stock options and other stock-based employee compensation plans based on their fair value at date of grant, or continue to apply its current accounting policy and increase its footnote disclosure. In the first quarter of fiscal 1997, the Company elected to continue to apply APB Opinion No. 25, and will increase its footnote disclosure to include the pro forma impact on net income and earnings per share of the application of the fair value based method of accounting. SFAS No. 128, "Earnings Per Share" establishes standards for computing and presenting earnings per share ("EPS"). SFAS No. 128 replaces the presentation of primary EPS previously prescribed with a presentation of basic EPS, which is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. The statement also requires presentation of diluted EPS. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB No. 15. Pro forma basic and diluted EPS for all historical periods presented, assuming that SFAS No. 128 was effective at the beginning of each such historical period, would not be materially different from what has been presented. The Company will adopt SFAS No. 128 for fiscal 1998. SFAS No. 130 "Reporting Comprehensive Income" establishes standards for reporting and displaying of comprehensive income and its components. SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information establishes standards for the way that public business enterprises report information about operating segments in interim and annual financial statements. Management is currently evaluating the disclosures required when these two statements are adopted in the first quarter of fiscal 1999. 59 62 STERLING CHEMICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Except as modified below, the Notes to the Company's Consolidated Financial Statements are incorporated herein by reference insofar as they relate to Chemicals. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH FLOWS On August 21, 1996, Holdings transferred all of its operating assets and liabilities (net $422.8 million) to Chemicals. At the same time, Chemicals transferred $610 million in cash to Holdings. 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 PERIOD FROM MAY 14, 1996 SEPTEMBER 30, 1997 TO SEPTEMBER 30, 1996 ------------------ ------------------------ (Dollars in Thousands) Provision for federal income tax at the statutory rate .............. $(4,576) $ 195 Foreign sales corporation ........................................... -- (116) State and foreign income taxes ...................................... 3,782 115 Tax settlements and other ........................................... (1,354) 190 ------- ------- Effective tax provision (benefit) ................................... $(2,148) $ 384 ======= =======
The provision (benefit) for income taxes is composed of the following:
YEAR ENDED PERIOD FROM MAY 14, 1996 SEPTEMBER 30, 1997 TO SEPTEMBER 30, 1996 ------------------ ------------------------ (Dollars in Thousands) From operations: Current federal . . . . . . . . . . . . . . . . . . . . . . . . $ (5,959) $ (1,001) Deferred federal . . . . . . . . . . . . . . . . . . . . . . . . (4,235) 1,457 Deferred foreign . . . . . . . . . . . . . . . . . . . . . . . . 6,104 90 Current state . . . . . . . . . . . . . . . . . . . . . . . . . 1,942 (162) --------- -------- Total tax provision (benefit) . . . . . . . . . . . . . . . . . $ (2,148) $ 384 ========= ========
60 63 The components of Chemicals' deferred income tax assets and liabilities are summarized below:
SEPTEMBER 30, ------------------ (DOLLARS IN THOUSANDS) 1997 1996 ------- ------- Deferred tax assets: Accrued liabilities ................................................................... $17,131 $ 9,803 Accrued postretirement cost ........................................................... 12,350 9,544 Tax loss and credit carryforward and other ............................................ 8,375 5,817 ------- ------- Total deferred tax assets ............................................................. 37,856 25,164 ------- ------- Less: current deferred income tax asset .............................................. 10,005 7,214 ------- ------- Noncurrent deferred tax assets ........................................................ $27,851 $17,950 ======= ======= Deferred tax liabilities: Property, plant and equipment ......................................................... $67,996 $61,304 Accrued pension cost .................................................................. 1,665 2,525 Other ................................................................................. 836 1,599 ------- ------- Total deferred tax liabilities ........................................................ 70,497 65,428 ------- ------- Net deferred tax liability ............................................................ $42,646 $47,478 ======= =======
In fiscal 1997, Chemicals generated approximately $14.4 million in United States net operating losses which will be carried back and utilized in a prior fiscal year. Chemicals also has approximately Cdn. $14.0 million in Canadian tax credit carryforwards which will expire from 1999 through 2004. 61 64 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Sterling Chemicals Holdings, Inc. We have audited the consolidated balance sheets of Sterling Chemicals Holdings, Inc. and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity (deficiency in assets) and cash flows for the years then ended. 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 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. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sterling Chemicals Holdings, Inc. and subsidiaries as of September 30, 1997 and 1996 and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP December 3, 1997 Houston, Texas 62 65 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholder of Sterling Chemicals, Inc. We have audited the consolidated balance sheets of Sterling Chemicals, Inc. and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity (deficiency in assets) and cash flows and for the year ended September 30, 1997 and for the period from May 14, 1996 (date of incorporation) to September 30, 1996. 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 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. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sterling Chemicals, Inc. and subsidiaries as of September 30, 1997 and 1996 and the consolidated results of their operations and their cash flows for the year ended September 30, 1997 and for the period from May 14, 1996 (date of incorporation) to September 30, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP December 3, 1997 Houston, Texas 63 66 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Sterling Chemicals Holdings, Inc. We have audited the consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended September 30, 1995 of Sterling Chemicals Holdings, Inc. (formerly Sterling Chemicals, Inc.) and subsidiaries. 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 audit. We conducted our audit in accordance with 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. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Sterling Chemicals Holdings, Inc. and subsidiaries (formerly Sterling Chemicals, Inc.) for the year ended September 30, 1995, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. October 25, 1995 Houston, Texas 64 67 REPORT OF MANAGEMENT Management is responsible for the preparation and content of the financial statements and other information included in 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. Internal audits have been conducted to test compliance with internal controls. Results of audit efforts and actions are communicated to appropriate members of management and to the Audit Committee of the Board of Directors. Deloitte & Touche LLP performed an independent audit of the Company's financial statements for fiscal years 1997 and 1996, 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 Committee of the Board. The Audit Committee of the Board of Directors is composed solely of outside directors. The Audit Committee meets periodically with the Company's senior officers and independent accountants to review the adequacy and reliability of the Company's accounting, financial reporting and internal controls. Robert W. Roten President and Chief Executive Officer Paul G. Vanderhoven Controller - Principal Accounting Officer December 3, 1997 65 68 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 1997 $ 186,926 $ 239,763 $ 239,244 $ 242,854 1996 191,542 190,879 218,371 189,673 Gross Profit 1997 15,083 16,827 28,995 34,734 1996 29,395 29,398 33,250 19,383 Income (loss) before extraordinary items 1997 (7,198) (7,811) (5,453) (3,674) 1996 12,787 6,427 16,420 (2,130) Net income (loss) (1) 1997 (7,198) (7,811) (9,377) (3,674) 1996 12,787 6,427 16,420 (4,030) Per Share Data: Income (loss) before extraordinary item 1997 $ (0.68) $ (0.72) $ (0.48) $ (0.35) 1996 0.23 0.12 0.29 (0.06) Net income (loss) attributable to common 1997 (0.68) (0.72) (0.84) (0.35) stockholders 1996 .23 .12 .29 (.11)
- ------------ (1) During the third quarter of fiscal 1997, the Company recorded a $3.9 million after-tax ($6.0 million pre-tax) extraordinary item related to unamortized debt issue costs as a result of the partial prepayment of the Term Loans. In addition, during the fourth quarter of fiscal 1996, the Company recorded a $1.9 million after-tax ($3.0 million pre-tax) extraordinary item related to the early extinguishment of debt from the 1996 Recapitalization. 66 69 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 Proxy Statement for the Company's 1998 Annual Meeting of Stockholders is incorporated herein by reference in response to this item. ITEM 11. EXECUTIVE COMPENSATION The Proxy Statement for the Company's 1998 Annual Meeting of Stockholders is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Proxy Statement for the Company's 1998 Annual Meeting of Stockholders is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Proxy Statement for the Company's 1998 Annual Meeting of Stockholders is incorporated herein by reference in response to this item. 67 70 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
PAGE OF THIS 10-K --------- Sterling Chemicals Holdings, Inc. Consolidated Statements of Operations for the fiscal years ended September 30, 1997, 1996 and 1995 ......................................... 33 Sterling Chemicals Holdings, Inc. Consolidated Balance Sheets as of September 30, 1997 and 1996 ............................................................................. 34 Sterling Chemicals Holdings, Inc. Consolidated Statements of Changes in Stockholders' Equity (Deficiency in Assets) for the fiscal years ended September 30, 1997, 1996 and 1995 ........................................................................... 35 Sterling Chemicals Holdings, Inc. Consolidated Statements of Cash Flows for the fiscal years ended September 30, 1997, 1996 and 1995 ......................................... 36 Sterling Chemicals, Inc. Consolidated Statements of Operations for the period from May 14, 1996 to September 30, 1996 and the fiscal year ended September 30, 1997 ........... 37 Sterling Chemicals, Inc. Consolidated Balance Sheets as of September 30, 1997 and 1996 ... 38 Sterling Chemicals, Inc. Consolidated Statements of Changes in Stockholders' Equity (Deficiency in Assets) for the period from May 14, 1996 to September 30, 1996 and the fiscal year ended September 30, 1997 ....................................... 39 Sterling Chemicals, Inc. Consolidated Statements of Cash Flows for the period from May 14, 1996 to September 30, 1996 and the fiscal year ended September 30, 1997 ............... 40 Notes to Consolidated Financial Statements ............................................... 41 Reports of Independent Accountants ....................................................... 62 Report of Management ..................................................................... 65
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. 68 71 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 --Bylaws of Sterling Chemicals, Inc., incorporated by reference from Exhibit 3.4 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 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 --Indenture governing the 13 1/2 % Senior Secured Discount Notes Due 2008 of the Company, 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). 4.4 --Indenture governing the 11 3/4% Senior Subordinated Notes Due 2006 of Sterling Chemicals, Inc. (formerly known as STX Chemicals Corp.), 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). 4.5 --Indenture 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. ** 4.6 --Amended and Restated Credit Agreement, dated July 10, 1997, among Sterling Chemicals, Inc. and Texas Commerce Bank, individually and as Administrative Agent, Credit Suisse First Boston, individually and as Documentation Agent, and the other lenders named therein. 4.7 --Stockholders Agreement, 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). 4.8 --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). 4.9 --Amended and Restated Voting Agreement, dated as of January 22, 1997, incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 4.10 --Tag-Along Agreement, 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). 4.11 --Intercreditor Agreement, 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). 4.12 --Security Agreement (Pledge) between STX Acquisition Corp. and Texas Commerce Bank, incorporated by reference from Exhibit 4.15 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.12 (a) --Second Amendment and Supplement to Security Agreement (Pledge) between Sterling Chemicals Holdings, Inc. and Texas Commerce Bank N.A.
69 72
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- +10.1 --Assets Purchase Agreement dated August 1, 1986, between Monsanto Company and the Company, incorporated by reference from Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992. 10.2 --Sterling Chemicals, Inc. Salaried Employees' Pension Plan (Restated as of October 1, 1993), incorporated by reference from Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. 10.2(a) --Supplement to the Sterling Chemicals, Inc. Salaried Employee's Pension Plan (Restated as of January 1, 1994), incorporated by reference from Exhibit 10.6(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.2(b) --First and Second Amendments to the Sterling Chemicals, Inc. Salaried Employees' Pension Plan dated April 27, 1994 and September 23, 1994, respectively, incorporated by reference from Exhibit 10.6(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.3 --Sterling Chemicals, Inc. Hourly Paid Employees' Pension Plan (Restated as of October 1, 1993), incorporated by reference from Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. 10.3(a) --Supplement to the Sterling Chemicals, Inc. Hourly Paid Employee's Pension Plan (Restated as of January 1, 1994), incorporated by reference from Exhibit 10.8(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.3(b) --First Amendment to the Sterling Chemicals, Inc. Hourly Paid Employees' Pension Plan dated April 27, 1994, incorporated by reference from Exhibit 10.8(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.3(c) --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. 10.4 --Sterling Chemicals, Inc. Amended and Restated Savings and Investment Plan, incorporated by reference from Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. 10.4(a) --Supplements to the Sterling Chemicals, Inc. Savings and Investment Plan for Hourly Paid Employees and Salaried Employees, incorporated by reference from Exhibit 10.10(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.4(b) --First and Second Amendments to the Sterling Chemicals, Inc. Amended and Restated Savings and Investment Plan dated April 27, 1994 and October 26, 1994, respectively, incorporated by reference from Exhibit 10.10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 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). 10.6 --Sterling Chemicals Employee Stock Ownership Plan (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. +10.7 --Styrene Monomer Conversion Contract dated November 3, 1995, between Monsanto Company (subsequently assigned to Bayer Corporation, a subsidiary of Bayer AG) and the Company, incorporated by reference from Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995. +10.8 --Acrylonitrile Exchange Contract dated January 1, 1994, between the Company and Monsanto Company, incorporated by reference from Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. +10.9 --Production Agreement dated April 15, 1988 between BP Chemicals Americas Inc. and the Company and First and Second Amendment thereto, incorporated by reference from Exhibit 10.21 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020). +10.10 --Agreement dated May 2, 1988, between E.I. du Pont de Nemours and Company and the Company, incorporated by reference from Exhibit 10.22 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020). ++10.11 --Amended and Restated Product Sales Agreement dated January 1, 1998, between BASF Corporation and the Company. 10.12 --License Agreement dated August 1, 1986, between Monsanto Company and the Company, incorporated by reference from Exhibit 10.25 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020).
70 73
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- +10.13 --Amended Lease and Production Agreement dated August 8, 1994, between BP Chemicals Americas Inc. 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, 1994. 10.14 --Form of Indemnity Agreement executed between the Company and each of its officers and directors prior to the Merger, 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. 10.15 --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. 10.16 --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). 10.17 --Sterling Chemicals, Inc. Deferred Compensation Plan, incorporated by reference from Exhibit 10.35 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1989 (Commission File Number 1-10059). 10.18 --Articles of Agreement between the Company, its successors and assigns, and Texas City, Texas Metal Trades Council, AFL-CIO Texas City, Texas, May 1, 1996 to May 1, 1999, incorporated by reference from Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.19 --Conditional Performance Guaranty dated as of August 20, 1992, by Albright & Wilson, Ltd. in favor of Sterling Pulp Chemicals, Ltd., Sterling Canada, Inc. and the Indemnities identified in Section 10.2 of the Purchase Agreement, incorporated by reference from Exhibit 10.38 to the Company's Current Report on Form 8-K dated September 3, 1992. 10.20 --Performance Guaranty dated as of August 20, 1992, by the Company in favor of Tenneco Canada Inc., Rio Linda Chemical Co., Albright & Wilson Americas, Inc. and the Indemnities identified in Section 10.3 of the Purchase Agreement, incorporated by reference from Exhibit 10.39 to the Company's Current Report on Form 8-K dated September 3, 1992. +10.21 --Sales and Purchase Agreement dated April 1, 1994, between BP Chemicals Ltd. and the Company, incorporated by reference from Exhibit 10.48 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.22 --Agreement between Sterling Pulp Chemicals Ltd. North Vancouver British Columbia and Pulp, Paper and Woodworkers of Canada Local 5 British Columbia effective December 1, 1994 to November 30, 1997, incorporated by reference from Exhibit 10.50 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. +10.23 --Methanol Production Agreement between BP Chemicals Inc. and the Company dated September 26, 1996, incorporated by reference from Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.24 --Consulting Agreement dated April 23, 1996, among The Sterling Group, Inc., STX Acquisition Corp., and STX Chemicals Corp, incorporated by reference from Exhibit __ to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.25 --Asset Purchase Agreement, dated December 23, 1996, among Sterling Fibers, Inc., Sterling Chemicals, Inc., Sterling Chemicals Holdings, Inc., Cytec Acrylic Fibers Inc., Cytec Technology Corp. and Cytec Industries Inc., incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1996. **21.1 --Subsidiaries of Sterling Chemicals Holdings, Inc. **23.1 --Consent of Deloitte & Touche LLP **23.2 --Consent of Coopers & Lybrand L.L.P. **27.1 --Financial Data Schedule - Sterling Chemicals Holdings, Inc. **27.2 --Financial Data Schedule - Sterling Chemicals, Inc.
** Filed herewith. + Confidential treatment has been requested with respect to portions of this Exhibit, and such request has been granted. ++ Filed herewith and confidential treatment has been requested with respect to portions of this exhibit. (b) Reports on Form 8-K. On July 25, 1997, the Company filed a Current Report on Form 8-K reporting under Items 2 and 7 of such Form; such Form was amended by Form 8-K/A filed September 22, 1997. 71 74 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/ ROBERT W. ROTEN ------------------------------------------ (Robert W. Roten) President and Chief Executive Officer DATE: DECEMBER 15, 1997 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, 1997 - ------------------------------- Directors (Frank P. Diassi) /s/ ROBERT W. ROTEN President, Chief Executive December 15, 1997 - ------------------------------- Officer and Director (Robert W. Roten) (principal executive officer) /s/ PAUL G. VANDERHOVEN Controller December 15, 1997 - ------------------------------- (principal accounting officer) (Paul G. Vanderhoven) /s/ J. VIRGIL WAGGONER Vice Chairman of the Board of December 15, 1997 - ------------------------------- Directors (J. Virgil Waggoner) /s/ FRANK J. HEVRDEJS Director December 15, 1997 - ------------------------------- (Frank J. Hevrdejs) /s/ T. HUNTER NELSON Director December 15, 1997 - ------------------------------- (T. Hunter Nelson) /s/ JOHN L. GARCIA Director December 15, 1997 - ------------------------------- (John L. Garcia) /s/ ALLAN R. DRAGONE Director December 15, 1997 - ------------------------------- (Allan R. Dragone) /s/ GEORGE J. DAMIRIS Director December 15, 1997 - ------------------------------- (George J. Damiris) /s/ ROBERT B. CALHOUN Director December 15, 1997 - ------------------------------- (Robert B. Calhoun)
72 75 INDEX TO EXHIBITS
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 --Bylaws of Sterling Chemicals, Inc., incorporated by reference from Exhibit 3.4 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 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 --Indenture governing the 13 1/2 % Senior Secured Discount Notes Due 2008 of the Company, 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). 4.4 --Indenture governing the 11 3/4% Senior Subordinated Notes Due 2006 of Sterling Chemicals, Inc.(formerly known as STX Chemicals Corp.), 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). 4.5 --Indenture 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. ** 4.6 --Amended and Restated Credit Agreement, dated July 10, 1997, among Sterling Chemicals, Inc. and Texas Commerce Bank, individually and as Administrative Agent, Credit Suisse First Boston, individually and as Documentation Agent, and the other lenders named therein. 4.7 --Stockholders Agreement, 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). 4.8 --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). 4.9 --Amended and Restated Voting Agreement, dated as of January 22, 1997, incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. 4.10 --Tag-Along Agreement, 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). 4.11 --Intercreditor Agreement, 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). 4.12 --Security Agreement (Pledge) between STX Acquisition Corp. and Texas Commerce Bank, incorporated by reference from Exhibit 4.15 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.12 (a) --Second Amendment and Supplement to Security Agreement (Pledge) between Sterling Chemicals Holdings, Inc. and Texas Commerce Bank N.A.
76
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- +10.1 --Assets Purchase Agreement dated August 1, 1986, between Monsanto Company and the Company, incorporated by reference from Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992. 10.2 --Sterling Chemicals, Inc. Salaried Employees' Pension Plan (Restated as of October 1, 1993), incorporated by reference from Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. 10.2(a) --Supplement to the Sterling Chemicals, Inc. Salaried Employee's Pension Plan (Restated as of January 1, 1994), incorporated by reference from Exhibit 10.6(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.2(b) --First and Second Amendments to the Sterling Chemicals, Inc. Salaried Employees' Pension Plan dated April 27, 1994 and September 23, 1994, respectively, incorporated by reference from Exhibit 10.6(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.3 --Sterling Chemicals, Inc. Hourly Paid Employees' Pension Plan (Restated as of October 1, 1993), incorporated by reference from Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. 10.3(a) --Supplement to the Sterling Chemicals, Inc. Hourly Paid Employee's Pension Plan (Restated as of January 1, 1994), incorporated by reference from Exhibit 10.8(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.3(b) --First Amendment to the Sterling Chemicals, Inc. Hourly Paid Employees' Pension Plan dated April 27, 1994, incorporated by reference from Exhibit 10.8(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.3(c) --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. 10.4 --Sterling Chemicals, Inc. Amended and Restated Savings and Investment Plan, incorporated by reference from Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. 10.4(a) --Supplements to the Sterling Chemicals, Inc. Savings and Investment Plan for Hourly Paid Employees and Salaried Employees, incorporated by reference from Exhibit 10.10(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.4(b) --First and Second Amendments to the Sterling Chemicals, Inc. Amended and Restated Savings and Investment Plan dated April 27, 1994 and October 26, 1994, respectively, incorporated by reference from Exhibit 10.10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 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). 10.6 --Sterling Chemicals Employee Stock Ownership Plan (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. +10.7 --Styrene Monomer Conversion Contract dated November 3, 1995, between Monsanto Company (subsequently assigned to Bayer Corporation, a subsidiary of Bayer AG) and the Company, incorporated by reference from Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995. +10.8 --Acrylonitrile Exchange Contract dated January 1, 1994, between the Company and Monsanto Company, incorporated by reference from Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. +10.9 --Production Agreement dated April 15, 1988 between BP Chemicals Americas Inc. and the Company and First and Second Amendment thereto, incorporated by reference from Exhibit 10.21 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020). +10.10 --Agreement dated May 2, 1988, between E.I. du Pont de Nemours and Company and the Company, incorporated by reference from Exhibit 10.22 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020). ++10.11 --Amended and Restated Product Sales Agreement dated January 1, 1998, between BASF Corporation and the Company. 10.12 --License Agreement dated August 1, 1986, between Monsanto Company and the Company, incorporated by reference from Exhibit 10.25 to the Company's Registration Statement on Form S-1 (Registration No. 33-24020).
77
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- +10.13 --Amended Lease and Production Agreement dated August 8, 1994, between BP Chemicals Americas Inc. 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, 1994. 10.14 --Form of Indemnity Agreement executed between the Company and each of its officers and directors prior to the Merger, 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. 10.15 --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. 10.16 --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). 10.17 --Sterling Chemicals, Inc. Deferred Compensation Plan, incorporated by reference from Exhibit 10.35 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1989 (Commission File Number 1-10059). 10.18 --Articles of Agreement between the Company, its successors and assigns, and Texas City, Texas Metal Trades Council, AFL-CIO Texas City, Texas, May 1, 1996 to May 1, 1999, incorporated by reference from Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.19 --Conditional Performance Guaranty dated as of August 20, 1992, by Albright & Wilson, Ltd. in favor of Sterling Pulp Chemicals, Ltd., Sterling Canada, Inc. and the Indemnities identified in Section 10.2 of the Purchase Agreement, incorporated by reference from Exhibit 10.38 to the Company's Current Report on Form 8-K dated September 3, 1992. 10.20 --Performance Guaranty dated as of August 20, 1992, by the Company in favor of Tenneco Canada Inc., Rio Linda Chemical Co., Albright & Wilson Americas, Inc. and the Indemnities identified in Section 10.3 of the Purchase Agreement, incorporated by reference from Exhibit 10.39 to the Company's Current Report on Form 8-K dated September 3, 1992. +10.21 --Sales and Purchase Agreement dated April 1, 1994, between BP Chemicals Ltd. and the Company, incorporated by reference from Exhibit 10.48 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.22 --Agreement between Sterling Pulp Chemicals Ltd. North Vancouver British Columbia and Pulp, Paper and Woodworkers of Canada Local 5 British Columbia effective December 1, 1994 to November 30, 1997, incorporated by reference from Exhibit 10.50 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. +10.23 --Methanol Production Agreement between BP Chemicals Inc. and the Company dated September 26, 1996, incorporated by reference from Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.24 --Consulting Agreement dated April 23, 1996, among The Sterling Group, Inc., STX Acquisition Corp., and STX Chemicals Corp, incorporated by reference from Exhibit_ to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.25 --Asset Purchase Agreement, dated December 23, 1996, among Sterling Fibers, Inc., Sterling Chemicals, Inc., Sterling Chemicals Holdings, Inc., Cytec Acrylic Fibers Inc., Cytec Technology Corp. and Cytec Industries Inc., incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1996. **21.1 --Subsidiaries of Sterling Chemicals Holdings, Inc. **23.1 --Consent of Deloitte & Touche LLP **23.2 --Consent of Coopers & Lybrand L.L.P. **27.1 --Financial Data Schedule - Sterling Chemicals Holdings, Inc. **27.2 --Financial Data Schedule - Sterling Chemicals, Inc.
** Filed herewith. + Confidential treatment has been requested with respect to portions of this Exhibit, and such request has been granted. ++ Filed herewith and confidential treatment has been requested with respect to portions of this exhibit. EX-4.6 2 AMENDED & RESTATED CREDIT AGREEMENT 1 EXHIBIT 4.6 EXECUTION COPY AMENDED AND RESTATED CREDIT AGREEMENT Among STERLING CHEMICALS, INC. as the Company and TEXAS COMMERCE BANK NATIONAL ASSOCIATION Individually, as an Issuing Bank and as Administrative Agent, CREDIT SUISSE FIRST BOSTON Individually, as an Issuing Bank, and as Documentation Agent and FINANCIAL INSTITUTIONS NOW OR HEREAFTER PARTIES HERETO $125,000,000 Revolving Credit Facility $76,500,000 Tranche A Term Loans $199,166,667 Tranche B Term Loans $5,281,250 ESOP Term Loans July 10, 1997 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS; CONSTRUCTION Section 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 1.02 Accounting Terms and Determinations . . . . . . . . . . . . . . . . . . . . . . . 39 Section 1.03 Other Definitional Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 1.04 Definition Cross References in Financing Documents . . . . . . . . . . . . . . . 40 ARTICLE II AMOUNT AND TERMS OF LOANS Section 2.01 Loans and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 2.02 Borrowing Requests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 2.03 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 2.04 Disbursement of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 2.05 Notes and Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 2.06 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 2.07 Interest Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 2.08 Repayment of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 2.09 Termination or Reduction of Revolving Credit Commitments . . . . . . . . . . . . 52 Section 2.10 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 2.11 Continuation and Conversion Options . . . . . . . . . . . . . . . . . . . . . . . 56 Section 2.12 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 2.13 Payments, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Section 2.14 Interest Rate Not Ascertainable, etc. . . . . . . . . . . . . . . . . . . . . . . 59 Section 2.15 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Section 2.16 Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Section 2.17 Change of Lending Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 2.18 Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 2.19 Sharing of Payments, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 2.20 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 2.21 Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 2.22 Replacement of Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 ARTICLE III CONDITIONS TO BORROWINGS AND TO PURCHASE, RENEWAL AND REARRANGEMENT Section 3.01 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
i 3 Section 3.02 Conditions Precedent to Initial STX Loan . . . . . . . . . . . . . . . . . . . . 70 Section 3.03 Conditions Precedent to AFB Loans . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 3.04 Conditions Precedent to Each Loan . . . . . . . . . . . . . . . . . . . . . . . . 81 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01 Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 4.02 Corporate Power and Authorization . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 4.03 Binding Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 4.04 No Legal Bar or Resultant Lien . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 4.05 No Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 4.06 Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 4.07 Investments and Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Section 4.08 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Section 4.09 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Section 4.10 Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Section 4.11 Taxes; Governmental Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 4.12 Titles, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Section 4.13 Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 4.14 Casualties; Taking of Properties . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 4.15 Compliance with the Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 4.16 No Material Misstatements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 4.17 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Section 4.18 Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . 87 Section 4.19 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Section 4.20 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Section 4.21 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Section 4.22 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Section 4.23 Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Section 4.24 Employee Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Section 4.25 Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Section 4.26 Unrestricted Subsidiary Qualification . . . . . . . . . . . . . . . . . . . . . . 89 ARTICLE V COVENANTS Section 5.01 Certain Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . 89 (a) Maintenance and Compliance, etc. . . . . . . . . . . . . . . . . . . . . . . . . 90 (b) Payment of Taxes and Claims, etc. . . . . . . . . . . . . . . . . . . . . . . . . 90 (c) Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 (d) Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
ii 4 (e) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 (f) Accounts and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 (g) Right of Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 (h) Operation and Maintenance of Property . . . . . . . . . . . . . . . . . . . . . . 91 (i) Additional Subsidiaries; Permitted Acquisitions; Additional Liens . . . . . . . . 91 (j) Non-Consolidation of Unrestricted Subsidiaries . . . . . . . . . . . . . . . . . 92 Section 5.02 Reporting Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 (a) Annual Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 (b) Quarterly Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 94 (c) Monthly Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 94 (d) No Default/Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . 95 (e) Management Letters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 (f) Title Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 (g) Events or Circumstances with respect to Collateral . . . . . . . . . . . . . . . 95 (h) Borrowing Base Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 (i) Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 (j) Shareholder Communications, Filings . . . . . . . . . . . . . . . . . . . . . . . 96 (k) Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 (l) ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 (m) Borrowing Base Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 (n) Insurance Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 (o) Annual Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 (p) Excess Cash Flow Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . 97 (q) Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Section 5.03 Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 (a) Interest Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 (b) Current Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 (c) Fixed Charge Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 (d) Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 (e) Senior Debt Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Section 5.04 Certain Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 (a) Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 (b) Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 (c) Mergers, Sales, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 (d) Dividends, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 (e) Investments, Loans, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 (f) Lease Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 (g) Sales and Leasebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 (h) Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 (i) ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 (j) Sale or Discount of Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 109 (k) Negative Pledge Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 (l) Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 110 (m) Unconditional Purchase Obligations . . . . . . . . . . . . . . . . . . . . . . . 111
iii 5 (n) Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 (o) Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 (p) Modifications to Senior Subordinated Notes; No Voluntary Prepayments . . . . . 112 (q) Intercompany Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 (r) Modification or Amendment of the AFB Earnout Agreement . . . . . . . . . . . . 112 (s) Reverse Designation of Unrestricted Subsidiaries . . . . . . . . . . . . . . . 112 ARTICLE VI EVENTS OF DEFAULT Section 6.01 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Section 6.02 Covenants Without Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Section 6.03 Other Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Section 6.04 Other Financing Document Obligations . . . . . . . . . . . . . . . . . . . . . 113 Section 6.05 Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 Section 6.06 Non-Payments of Other Indebtedness . . . . . . . . . . . . . . . . . . . . . . 114 Section 6.07 Defaults Under Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . 114 Section 6.08 Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 Section 6.09 Money Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 Section 6.10 Discontinuance of Business . . . . . . . . . . . . . . . . . . . . . . . . . . 115 Section 6.11 Financing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 Section 6.12 Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 Section 6.13 Merger Agreement Representations and Warranties . . . . . . . . . . . . . . . . 115 Section 6.14 Albright Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 Section 6.15 Default Under Senior Secured Discount Notes . . . . . . . . . . . . . . . . . . 116 Section 6.16 Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 Section 6.17 Equity Notes Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 Section 6.18 Cytec Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 ARTICLE VII THE AGENTS Section 7.01 Appointment of Administrative Agent . . . . . . . . . . . . . . . . . . . . . . 117 Section 7.02 Limitation of Duties of Administrative Agent . . . . . . . . . . . . . . . . . 117 Section 7.03 Lack of Reliance on the Administrative Agent and the Documentation Agent . . . 117 Section 7.04 Certain Rights of the Administrative Agent . . . . . . . . . . . . . . . . . . 118 Section 7.05 Reliance by Administrative Agent . . . . . . . . . . . . . . . . . . . . . . . 118 Section 7.06 INDEMNIFICATION OF ADMINISTRATIVE AGENT AND DOCUMENTATION AGENT . . . . . . . . 118 Section 7.07 The Administrative Agent and Documentation Agent in their Individual Capacity . 119 Section 7.08 May Treat Lender as Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Section 7.09 Successor Administrative Agent . . . . . . . . . . . . . . . . . . . . . . . . 119
iv 6 Section 7.10 Documentation Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Section 7.11 Assumption of Administrative Agent . . . . . . . . . . . . . . . . . . . . . . 120 ARTICLE VIII MISCELLANEOUS Section 8.01 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Section 8.02 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Section 8.03 No Waiver; Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . 121 Section 8.04 Payment of Expenses, Indemnities, etc. . . . . . . . . . . . . . . . . . . . . 122 Section 8.05 Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 Section 8.06 Benefit of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 Section 8.07 Successors and Assigns; Participations and Assignments . . . . . . . . . . . . 124 Section 8.08 Governing Law; Submission to Jurisdiction; Etc. . . . . . . . . . . . . . . . . 127 Section 8.09 Independent Nature of Lenders' Rights . . . . . . . . . . . . . . . . . . . . . 129 Section 8.10 Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 Section 8.11 Renewal, Extension or Rearrangement . . . . . . . . . . . . . . . . . . . . . . 129 Section 8.12 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 Section 8.13 Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 Section 8.14 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 Section 8.15 Attachments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 Section 8.16 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 Section 8.17 Survival of Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 Section 8.18 Headings Descriptive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 Section 8.19 Satisfaction Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 Section 8.20 EXCULPATION PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 Section 8.21 Secured Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 Section 8.22 Ratification of Security Instruments . . . . . . . . . . . . . . . . . . . . . 132
v 7 ANNEXES Annex I - Loans and Commitments SCHEDULES Schedule 1.01-A - Outstanding Letters of Credit Schedule 1.01-B - Principal Account Obligors Schedule 4.07 - Investments and Guaranties Schedule 4.08 - Litigation Schedule 4.12 - Titles Schedule 4.13 - Defaults Schedule 4.19 - Subsidiaries/Guarantors Schedule 4.19-A - Subsidiaries/Guarantors Schedule 4.19-B - Subsidiaries/Guarantors Schedule 4.23 - Material Contracts Schedule 4.24 - Employment Contracts Schedule 5.04(a) - Existing Indebtedness Schedule 5.04(b) - Liens EXHIBITS Exhibit A - Form of Revolving Note Exhibit B-1 - Form of Tranche A Term Note Exhibit B-2 - Form of Tranche B Term Note Exhibit B-3 - Form of ESOP Term Note Exhibit C - Form of Tax Sharing Agreement Exhibit D - Form of Borrowing Request Exhibit E-1 - Form of Opinion of Andrews & Kurth, L.L.P. dated as of the Restated Closing Date Exhibit E-2 - Form of Opinion of Canadian counsel to the Company dated as of the Restated Closing Date Exhibit E-3 - Form of Opinion of Georgia counsel to the Company dated as of the Restated Closing Date Exhibit E-4 - Form of Opinion of Florida Counsel to the Company dated as of the Restated Closing Date Exhibit F-1-A - Form of Ratification of Guaranty Agreement and Security Instruments Exhibit F-1-B - Form of Ratification of Limited Guaranty Agreement and Security Instruments (Santa Rosa) Exhibit F-2 - Form of Amended and Restated Deed of Trust Exhibit F-3 - Form of Security Agreement of the Company Exhibit F-4 - Form of Security Agreement of Subsidiary Guarantors Exhibit F-5 - Form of Holdco Security Agreement (Pledge) Exhibit F-6 - Form of Company Security Agreement (Pledge) Exhibit F-7 - Form of Subsidiary Security Agreement (Pledge) Exhibit F-8 - Form of Deed of Trust Exhibit F-9 - Form of Leasehold Deed of Trust Exhibit F-10 - Form of Second Lien Deed of Trust vi 8 Exhibit F-11 - Form of Collateral Assignment (Intercompany Loans and Accounts) the Company Exhibit F-12 - Form of Collateral Assignments (Intercompany Loans and Accounts) Subsidiary Guarantors Exhibit F-13 - Form of Cash Collateral Account Agreement Exhibit F-14 - Form of Security Agreement of Sterling Fibers Exhibit F-15 - Form of Santa Rosa Deed of Trust Exhibit F-16 - Form of Limited Guaranty Agreement (Santa Rosa) Exhibit F-17 - Form of Collateral Assignment (Intercompany Loans and Accounts by Sterling Fibers) Exhibit F-18 - Form of Third Amendment and Supplement to Security Agreement (Pledge) of the Company Exhibit G - Form of Assignment and Acceptance Exhibit H - Form of Borrowing Base Report Exhibit I - Form of U.S. Tax Compliance Certificate Exhibit J - Form of Notice of Designated Retained Cash Flow Usage Exhibit K-1 - Form of Guaranty Agreement dated as of the AFB Effective Date Exhibit K-2 - Form of Subrogation and Contribution Agreement dated as of AFB Effective Date Exhibit L-1 - Description of Terms, Limitations, Rights and Preferences of Preferred Stock Exhibit L-2 - Description of Terms, Limitations, Rights and Preferences of Series B Preferred Stock vii 9 AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement") is made and entered into as of this 10th day of July, 1997, among STERLING CHEMICALS, INC., a Delaware corporation (the "Company"), TEXAS COMMERCE BANK NATIONAL ASSOCIATION, individually, as a Lender, as an Issuing Bank and as Administrative Agent, CREDIT SUISSE FIRST BOSTON, individually, as a Lender, as an Issuing Bank and as Documentation Agent, each additional Issuing Bank hereunder from time to time, and each of the lenders that is a signatory hereto or which becomes a party hereto as provided in Section 8.07 (individually, a "Lender" and, collectively, the "Lenders"). INTRODUCTORY STATEMENT STX Acquisition Corp., a Delaware corporation, acquired Sterling Chemicals, Inc. ("SCI"), a Delaware corporation (the "SCI Acquisition") pursuant to the Merger Agreement (defined below) between STX Acquisition Corp. and SCI. Upon the terms and subject to the conditions set forth in the Merger Agreement, STX Acquisition Corp. merged with and into SCI (the "Merger"). From and after the time that the Merger occurred, the separate corporate existence of STX Acquisition Corp. ceased and SCI continued as the surviving corporation and succeeded to and assumed all the rights and obligations of STX Acquisition Corp. in accordance with the General Corporation Law of the State of Delaware. STX Acquisition Corp. formed STX Chemicals Corp. for purposes of acquiring all of the assets and liabilities of SCI (the "SCI Asset Conveyance") simultaneously with the time that the Merger occurred. Substantially contemporaneously with the SCI Asset Conveyance and Merger, STX Chemicals Corp. was renamed "Sterling Chemicals, Inc." and SCI was renamed Sterling Chemicals Holdings, Inc. ("Holdco"). STX Chemicals Corp. entered into that certain Credit Agreement dated as of the STX Closing Date (defined below) (as amended, the "Original Credit Agreement"), by and among STX Chemicals Corp., as borrower, Texas Commerce Bank National Association, individually, as a lender, as an issuing bank, and as administrative agent, Credit Suisse, individually, as a lender, as an issuing bank and as documentation agent, each additional issuing bank under such credit agreement and each of the lenders that were or became a signatory thereto (individually, an "Original Lender" and, collectively, the "Original Lenders"), pursuant to which the Original Lenders agreed to provide credit facilities to the Company in the amount of up to $456,500,000 (the "STX Facilities"), consisting of $100,000,000 of Revolving Credit Loans, $200,000,000 of Tranche A Term Loans (the "Original Tranche A Term Loans"), $150,000,000 of Tranche B Term Loans (the "Original Tranche B Term Loans") and $6,500,000 of ESOP Term Loans. Proceeds of the Original Tranche A Term Loans and Original Tranche B Term Loans were used solely (i) to finance a portion of the SCI Acquisition, (ii) to refinance existing indebtedness and to assume the obligations under the Outstanding Letters of Credit of SCI, and (iii) to finance fees and expenses relating to the financing of the SCI Acquisition. Proceeds of the Revolving Credit Loans have been and will be used solely to finance ongoing working capital requirements and for general corporate purposes of the Company and were used to finance a portion of the SCI Acquisition. Proceeds of the ESOP Term Loans were used solely to fund the Secondary ESOP Loan (as defined herein), and will be used by the ESOP solely for the purchase of Holdco Common Stock. 10 On January 31, 1997, the Company entered into an additional Credit Agreement dated as of January 31, 1997 (as amended, the "AFB Acquisition Credit Agreement"), by and among the Company, Texas Commerce Bank National Association, individually, as a lender, and as administrative agent under the AFB Acquisition Credit Agreement, Credit Suisse First Boston, individually, as a lender, and as documentation agent under the AFB Acquisition Credit Agreement, and each of the lenders that were or became a signatory thereto (individually, an "AFB Lender" and, collectively, the "AFB Lenders"), pursuant to which the AFB Lenders agreed to provide credit facilities to the Company in the amount of up to $81,000,000 (the "AFB Facilities"), consisting of $31,000,000 of Tranche A Term Loans (the "AFB Tranche A Term Loans") and $50,000,000 of Tranche B Term Loans (the "AFB Tranche B Term Loans"). Proceeds of the AFB Tranche A Term Loans and AFB Tranche B Term Loans were used solely (i) to finance a portion of the AFB Acquisition (as defined below), (ii) to finance fees and expenses relating to the financing of the AFB Acquisition and (iii) fund up to $1,000,000 of the Secondary ESOP Loan. The Company entered into that certain First Amendment to Credit Agreement ("STX First Amendment") dated as of January 31, 1997, by and among the Company, Texas Commerce Bank National Association, individually, as an issuing bank and as administrative agent under the Original Credit Agreement and Credit Suisse First Boston (formerly known as Credit Suisse), individually, as an issuing bank and as documentation agent under the Original Credit Agreement and the Original Lenders, amending the Original Credit Agreement to permit the AFB Acquisition and to permit the Company to enter into the AFB Acquisition Credit Agreement. In connection with the AFB Acquisition Credit Agreement and the STX First Amendment, the Original Lenders and the AFB Lenders agreed pursuant to an Intercreditor Agreement dated as of January 31, 1997 (the "Intercreditor Agreement"), by and among the Original Lenders, Texas Commerce Bank National Association, as administrative agent under the Original Credit Agreement (the "Original Administrative Agent"), the AFB Lenders, Texas Commerce Bank National Association, as administrative agent under the AFB Acquisition Credit Agreement (the "AFB Administrative Agent") and the Company, that they would rank pari passu with one another in respect of certain payments, recoveries, collateral or security under the Original Credit Agreement and the AFB Acquisition Credit Agreement and that such payments, recoveries, collateral and security would be made on a pro rata basis. In connection with SCI Acquisition, Holdco funded a portion of the SCI Acquisition price through the issuance of its $191,751,000 Senior Secured Discount Notes (the "Senior Secured Discount Notes") under the terms of that certain $191,751,000 13 1/2% Senior Secured Discount Notes due 2008 Indenture dated as of August 15, 1996, with Fleet National Bank, as trustee (the "Senior Secured Discount Notes Indenture"), and the Company funded a portion of the SCI Acquisition price through the issuance of its $275,000,000 Senior Subordinated Notes (the "Senior Subordinated Notes") under the terms of that certain $275,000,000 11 3/4% Senior Subordinated Notes due 2006 Indenture dated as of August 15, 1996, with Fleet National Bank, as trustee (the "Senior Subordinated Notes Indenture"). On April 7, 1997, the Company issued its Senior Subordinated Notes in an aggregate principal amount of $150,000,000 (the "Additional Senior Subordinated Notes") under the terms of that certain $150,000,000 Senior Subordinated Notes Due 2007 Indenture dated as of April 7, 1997, with Fleet National Bank, as trustee (the "Additional Senior Subordinated Notes Indenture") and used a portion of the proceeds thereof to 2 11 voluntarily prepay a portion of the Original Tranche A Term Loans, the Original Tranche B Term Loans, the AFB Tranche A Term Loans and the AFB Tranche B Term Loans pursuant to the terms of the Original Credit Agreement, the AFB Acquisition Credit Agreement and the Intercreditor Agreement. In connection with the issuance of the Additional Senior Subordinated Notes, the Company entered into that certain First Amendment to Credit Agreement ("AFB First Amendment") dated as of March 31, 1997, by and among the Company, Texas Commerce Bank National Association, individually and as administrative agent under the AFB Acquisition Credit Agreement, Credit Suisse First Boston, individually, and as documentation agent under the AFB Acquisition Credit Agreement and the AFB Lenders and that certain Second Amendment to Credit Agreement (the "STX Second Amendment") dated as of March 31, 1997, by and among the Company, Texas Commerce Bank National Association, individually, as an issuing bank, and as administrative agent under the Original Credit Agreement, Credit Suisse First Boston (formerly known as Credit Suisse), individually, as an issuing bank and as documentation agent under the Original Credit Agreement and the Original Lenders, pursuant to which the Original Lenders and the AFB Lenders consented to the issuance by the Company of its Additional Senior Subordinated Notes, the modification of the order of application of proceeds of such notes upon voluntary prepayment by the Company of the Original Tranche A Term Loans, the Original Tranche B Term Loans, the AFB Tranche A Term Loans and the AFB Tranche B Term Loans, and consented to an increase of $25,000,000 in the Revolving Credit Commitments relating to the Revolving Credit Loans under the STX Facilities. The amendments contained in Section 2 of each of the STX Second Amendment and the AFB First Amendment became effective upon receipt by the Original Administrative Agent of the voluntary prepayment by the Company comprising the proceeds of the Additional Senior Subordinated Notes. The Company made such voluntary prepayment in an aggregate amount of $150,000,000 on April 7, 1997. In connection with such voluntary prepayment, applied pursuant to the provisions of the Original Credit Agreement as amended by the STX Second Amendment and the AFB Acquisition Credit Agreement as amended by the AFB First Amendment, the Original Tranche B Term Loan Lenders and the AFB Tranche B Term Loan Lenders declined to receive such voluntary prepayment and consequently, no Tranche B Term Loans were prepaid. The application of such voluntary prepayment also resulted in the modification of the amortization schedule for the Original Tranche A Term Loans and the AFB Tranche A Term Loans. Concurrently with the STX Second Amendment and the AFB First Amendment, the Company entered into that certain First Amendment to Intercreditor Agreement dated as of March 31, 1997, by and among the Original Lenders, the Original Administrative Agent, the AFB Lenders, the AFB Administrative Agent and the Company, whereby the parties to the Intercreditor Agreement acknowledged the changes permitted under the STX Second Amendment and the AFB First Amendment and reaffirmed the intent of the parties that the Original Lenders and the AFB Lenders would rank pari passu with one another in respect of certain payments, recoveries, collateral or security under the Original Credit Agreement and the AFB Acquisition Credit Agreement and that such payments, recoveries, collateral and security would be made on a pro rata basis. The Company desired that the permitted aggregate amount of the Secondary ESOP Loan be reduced by $2,500,000 and a new investment basket be created to permit the Company to purchase up to $2,500,000 in the aggregate of Holdco Common Stock from certain employees of the Company that elected to take cash instead of stock in connection with the termination of the employee stock ownership plan of SCI existing prior to the SCI Acquisition (the "Old ESOP"). 3 12 In connection with the reduction in the Secondary ESOP Loan amount, the Company entered into that certain Second Amendment to Credit Agreement ("AFB Second Amendment") dated as of July 3, 1997, by and among the Company, Texas Commerce Bank National Association, individually and as administrative agent under the AFB Acquisition Credit Agreement, Credit Suisse First Boston, individually, and as documentation agent under the AFB Acquisition Credit Agreement and the AFB Lenders and that certain Third Amendment to Credit Agreement (the "STX Third Amendment") dated as of July 3, 1997, by and among the Company, Texas Commerce Bank National Association, individually, as an issuing bank, and as administrative agent under the Original Credit Agreement, Credit Suisse First Boston (formerly known as Credit Suisse), individually, as an issuing bank and as documentation agent under the Original Credit Agreement and the Original Lenders, pursuant to which the Original Lenders and the AFB Lenders consented to the reduction of the Secondary ESOP Loan by an amount equal to $2,500,000 and created a corresponding permitted investment in Holdco Common Stock purchased from certain employees of the Company electing to take cash instead of stock in connection with the termination of the Old ESOP. The Company has requested, and the Original Lenders, the administrative agent, documentation agent and issuing banks under the Original Credit Agreement have agreed, that the Original Credit Agreement, as amended by the STX First Amendment, the STX Second Amendment and the STX Third Amendment, be amended and restated and the STX Facilities be evidenced, contained and governed by the terms of such amended and restated Original Credit Agreement. The Company has requested, and the AFB Lenders, the administrative agent and documentation agent under the AFB Acquisition Credit Agreement have agreed, that the AFB Acquisition Credit Agreement, as amended by the AFB First Amendment and the AFB Second Amendment be amended and restated and the AFB Facilities be evidenced, contained and governed by the terms of such amended and restated AFB Acquisition Credit Agreement. The Company desires and has requested that such amended and restated Original Credit Agreement, such amended and restated AFB Acquisition Credit Agreement and such amended Intercreditor Agreement be combined and set forth in this Agreement. The Company desires and has requested that the Original Tranche A Term Loans and the AFB Tranche A Term Loans be consolidated, combined and continued pursuant to the terms of this Agreement and that the Original Tranche B Term Loans and the AFB Tranche B Term Loans be consolidated, combined and continued pursuant to the terms of this Agreement and that all other Obligations owing or to be owing under the Original Credit Agreement and the AFB Acquisition Credit Agreement, respectively, be consolidated, combined and continued pursuant to the terms and conditions of this Agreement. The Company, the Original Lenders and the AFB Lenders desire and have agreed that the collateral and security under each of the Original Credit Agreement and the AFB Acquisition Credit Agreement will continue to secure the STX Facilities, the AFB Facilities, all Obligations under the Original Credit Agreement and all Obligations under the AFB Acquisition Credit Agreement, all as consolidated, combined, continued, amended and restated in this Agreement, and as intended by the Intercreditor Agreement. The Company, the Original Lenders and the AFB Lenders have agreed that the terms of the Intercreditor Agreement, as amended by the First Amendment to Intercreditor Agreement, be consolidated, combined and continued in this Agreement. 4 13 It is the intent of the parties hereto that this Agreement not constitute a novation of the obligations and liabilities existing under the Original Credit Agreement and the AFB Acquisition Credit Agreement or evidence the repayment of any of such obligations and liabilities and that this Agreement amend and restate in its entirety the Original Credit Agreement and the AFB Acquisition Credit Agreement and re-evidence the obligations of the Company outstanding thereunder. The Company desires, through Sterling Pulp Chemicals (Sask) Ltd., an Ontario corporation and an indirect wholly owned Subsidiary of the Company ("Sterling Sask"), to acquire substantially all of the assets of Saskatoon Chemicals, Limited, a subsidiary of Weyerhaeuser Canada, Ltd. (the "Saskatoon Acquisition"), pursuant to a Purchase Agreement dated as of May 21, 1997, as amended, by and among the Company and Weyerhaeuser Canada, Ltd. (the "Saskatoon Purchase Agreement"). In connection with the Saskatoon Acquisition, the Company will create (i) Sterling Chemicals Acquisitions, Inc., a Delaware corporation ("Sterling CAI"), which will be a wholly owned Subsidiary of the Company, (ii) Sterling (Sask) Holdings Ltd., an Ontario corporation ("Sask Holdings"), which will be a wholly owned Subsidiary of Sterling CAI, and (iii) Sterling Sask, which will be a wholly owned Subsidiary of Sask Holdings. To accomplish the Saskatoon Acquisition, the Company has requested that it be permitted to initially create Sterling Sask as an Unrestricted Subsidiary (as defined herein) under this Agreement and to provide for the creation of additional Unrestricted Subsidiaries pursuant to certain terms, conditions and restrictions and that this Agreement provide for additional modifications to covenants and provisions to permit the Company to effect the Saskatoon Acquisition. AGREEMENT In consideration of the mutual covenants and agreements herein contained, the Company, the Agents (as defined below), the Issuing Banks (as defined below) and the Lenders agree that the Original Credit Agreement, the AFB Acquisition Credit Agreement and the Intercreditor Agreement shall be amended and restated in their entirety as follows: ARTICLE I DEFINITIONS; CONSTRUCTION Section 1.01 Definitions. As used herein, the following terms shall have the meanings herein specified (to be equally applicable to both the singular and plural forms of the terms defined). Reference to any party to a Financing Document means that party and its successors and assigns. "Additional Senior Subordinated Notes" shall mean the additional senior subordinated notes issued pursuant to the Additional Senior Subordinated Notes Indenture, as amended, in an amount of at least $150,000,000 issued by the Company. "Additional Senior Subordinated Notes Indenture" shall mean that certain Sterling Chemicals, 5 14 Inc. $150,000,000 Senior Subordinated Notes Due 2007 Indenture with Fleet National Bank, as Trustee, as amended, modified or supplemented from time to time. "Administrative Agent" shall mean Texas Commerce Bank National Association, acting in the manner and to the extent described in Article VII. "Advance Notice" shall mean written or telecopy notice (with telephonic confirmation in the case of telecopy notice), which in each case shall be irrevocable, from the Company to be received by the Administrative Agent before 11:00 a.m. (Houston time), by the number of Business Days in advance of any Borrowing, conversion, continuation or prepayment of any Loan or Loans pursuant to this Agreement as respectively indicated below: (a) Eurodollar Loans - 3 Business Days; and (b) Base Rate Loans - Same Business Day. For the purpose of determining the respectively applicable Loans in the case of the conversion from one Type of Loan into another, the Loans into which there is to be a conversion shall control. The Administrative Agent, each Issuing Bank and each Lender are entitled to rely upon and act upon telecopy notice made or purportedly made by the Company, and the Company hereby waives the right to dispute the authenticity and validity of any such transaction once the Administrative Agent or any Lender has advanced funds or any Issuing Bank has issued Letters of Credit, absent manifest error. "AFB Acquisition" shall mean the purchase by Sterling Fibers of the acrylic fibers business of the Cytec Parties pursuant to the Purchase Agreement. "AFB Acquisition Credit Agreement" shall mean the $81,000,000 credit agreement dated as of January 31, 1997, among the Company, TCB, individually and as administrative agent, Credit Suisse First Boston, individually and as documentation agent, and the financial institutions parties thereto in connection with the financing of the AFB Acquisition, as amended by the AFB First Amendment and the AFB Second Amendment. "AFB Adjusted Historical EBITDA" shall mean (i) for the Rolling Period ending March 31, 1997, $15,000,000, (ii) for the Rolling Period ending June 30, 1997, $10,200,000, (iii) for the Rolling Period ending September 30, 1997, $3,900,000, and (iv) for the Rolling Period ending December 31, 1997, $1,000,000. "AFB Earnout Agreement" shall mean the earnout agreement dated as of December 23, 1996 among Sterling Fibers, Holdco, and Cytec Industries in the form attached as Exhibit C to the Purchase Agreement. "AFB Effective Date" shall mean January 31, 1997. "AFB Facilities" shall have the meaning provided in the Introductory Statement. 6 15 "AFB Fee Letter" shall mean the letter agreement dated December 23, 1996, regarding fees, executed by TCB, and Chase Securities Inc. and accepted and agreed to by the Company as of December 23, 1996. "AFB First Amendment" shall have the meaning provided in the Introductory Statement. "AFB Lenders" shall have the meaning provided in the Introductory Statement. "AFB Loans" shall mean the AFB Tranche A Term Loans and the AFB Tranche B Term Loans. "AFB Pilko Report" shall mean the Environmental, Health & Safety Review dated November 13, 1996 relating to Cytec Industries, Inc., Santa Rosa Plant--Pace, Florida, prepared by Pilko & Associates, Inc., and the Investigation of Environmental Impacts dated January 17, 1997, relating to Cytec Industries's Acrylic Fiber Manufacturing Facility, Santa Rosa County, Florida, prepared by Pilko & Associates, Inc., each of which has been delivered to the Lenders. "AFB Second Amendment" shall have the meaning provided in the Introductory Statement. "AFB Tranche A Term Loans" shall have the meaning provided in the Introductory Statement. "AFB Tranche B Term Loans" shall have the meaning provided in the Introductory Statement. "Affiliate" shall mean any Person controlling, controlled by or under common control with any other Person. For purposes of this definition, "control" (including "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to either (a) vote 10% or more of the securities having ordinary voting power for election of directors of such Person or (b) direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or otherwise. Notwithstanding the foregoing, no individual shall be deemed to be an Affiliate of a corporation solely by reason of his or her being an officer or director of such corporation. "Agents" shall mean, collectively, the Administrative Agent and the Documentation Agent. "Aggregate Revolving Credit Exposure" shall mean the sum of all of the Revolving Credit Lenders' Revolving Credit Exposures. "Agreement" shall mean this Amended and Restated Credit Agreement, as further amended, modified or supplemented from time to time. "Albright" shall mean Albright and Wilson U.K., Ltd., a corporation incorporated under the laws of England and Wales. 7 16 "Albright Indemnity" shall mean the indemnification obligations of Albright in favor of Sterling Canada and Sterling Pulp as set forth in the Purchase Agreement dated as of August 20, 1992, between Sterling Canada, Sterling Pulp, and Tenneco Canada, Inc., as amended pursuant to an Amending Agreement dated January 24, 1996, which obligations were assigned by Tenneco Canada, Inc. to, and assumed by, Albright pursuant to an Assignment and Consent Agreement dated as of May 30, 1996. "Amended and Restated Deed of Trust" shall mean the Amended, Restated and Consolidated Mortgage, Deed of Trust, Assignment, Security Agreement and Financing Statement dated as of the Restated Closing Date, executed by the Company in favor of the Agents, the Issuing Banks and the Lenders consolidating, combining, amending and restating the Deed of Trust and the Second Lien Deed of Trust as security for the payment of Lender Indebtedness. "Applicable Commitment Fee Percentage" shall mean, on any day, the applicable per annum percentage set forth at the appropriate intersection in the table shown below, based on the Leverage Ratio for the Rolling Period ending on the most recent Quarterly Date with respect to which the Company is required to deliver the Current Information (said calculation to be made by the Administrative Agent as soon as practicable after receipt by the Administrative Agent of all required Current Information for the applicable period); provided that, for purposes of this definition, "Rolling Period" shall mean (a) for the second full Fiscal Quarter after the STX Effective Date, such quarter and the preceding Fiscal Quarter, (b) for the third full Fiscal Quarter after the STX Effective Date, such quarter and the two preceding Fiscal Quarters (in the case of each of clauses (a) and (b) determined on an annualized basis) and (c) for each Fiscal Quarter thereafter, such quarter and the three preceding Fiscal Quarters:
================================================================================ LEVERAGE RATIO COMMITMENT FEE PERCENTAGE - -------------------------------------------------------------------------------- Greater than or equal to 3.00 .50% - -------------------------------------------------------------------------------- Less than 3.00 .375% ================================================================================
Each change in the Applicable Commitment Fee Percentage based on a change in the Current Information (or the Company's failure to deliver the Current Information) shall be effective as of the first day of the third month of each applicable Fiscal Quarter (but based upon Current Information for the immediately preceding Rolling Period), or if such day is not a Business Day, then the first Business Day thereafter. Notwithstanding the foregoing, (a) the initial Applicable Commitment Fee Percentage will be (i) subject to the provisions of Section 2.12(a), .375% for the period from the STX Closing Date through the STX Effective Date and (ii) .50% from the STX Effective Date through the first day of the third month of the third full Fiscal Quarter after the STX Effective Date (but based upon Current Information for the immediately preceding Rolling Period) and (b) if at any time the Company fails to deliver Current Information on or before the date required pursuant to Section 5.02 (without regard to grace periods), the Applicable Commitment Fee Percentage will be .50% from the date such Current Information is due pursuant to Section 5.02 (without regard to grace periods) through the date the Administrative Agent receives all Current Information then due pursuant to Section 5.02. 8 17 "Applicable Lender" shall mean, with respect to any Borrowing of Revolving Credit Loans, each Revolving Credit Lender, with respect to any Borrowing of Tranche A Term Loans, each Tranche A Term Loan Lender, with respect to any Borrowing of Tranche B Term Loans, each Tranche B Term Loan Lender, and with respect to any Borrowing of ESOP Term Loans, each ESOP Term Loan Lender. "Applicable Margin" shall mean, on any day and with respect to any (a) Tranche B Term Loan, for Base Rate Loans, 2.00% per annum and for Eurodollar Loans, 3.00% per annum, and (b) Revolving Credit Loan, Tranche A Term Loan or ESOP Term Loan, the applicable per annum percentage set forth at the appropriate intersection in the table shown below, based on the Leverage Ratio for the Rolling Period ending on the most recent Quarterly Date with respect to which the Company is required to deliver the Current Information (said calculation to be made by the Administrative Agent as soon as practicable after receipt by the Administrative Agent of all required Current Information for the applicable period); provided that, for purposes of this definition, "Rolling Period" shall mean (a) for the second full Fiscal Quarter after the STX Effective Date, such quarter and the preceding Fiscal Quarter, (b) for the third full Fiscal Quarter after the STX Effective Date, such quarter and the two preceding Fiscal Quarters (in the case of each of clauses (a) and (b) determined on an annualized basis) and (c) for each Fiscal Quarter thereafter, such quarter and the three preceding Fiscal Quarters: 9 18
================================================================================ LEVERAGE RATIO EURODOLLAR LOAN APPLICABLE BASE RATE LOAN APPLICABLE MARGIN PERCENTAGE MARGIN PERCENTAGE - -------------------------------------------------------------------------------- Greater than or equal to 2.50% 1.50% 4.00 - -------------------------------------------------------------------------------- Greater than or equal to 2.25% 1.25% 3.75 but less than 4.00 - -------------------------------------------------------------------------------- Greater than or equal to 2.00% 1.00% 3.50 but less than 3.75 - -------------------------------------------------------------------------------- Greater than or equal to 1.75% .75% 3.25 but less than 3.50 - -------------------------------------------------------------------------------- Greater than or equal to 1.50% .50% 3.00 but less than 3.25 - -------------------------------------------------------------------------------- Greater than or equal to 1.25% .25% 2.75 but less than 3.00 - -------------------------------------------------------------------------------- Less than 2.75 1.00% 0% ================================================================================
Each change in the Applicable Margin based on a change in the Current Information (or the Company's failure to deliver the Current Information) shall be effective as of the first day of the third month of each applicable Fiscal Quarter (but based upon Current Information for the immediately preceding Rolling Period), or if such day is not a Business Day, then the first Business Day thereafter. Notwithstanding the foregoing, (a) for the period from the STX Effective Date through the first day of the third month of the third full Fiscal Quarter after the STX Effective Date, the initial Eurodollar Loan Applicable Margin for the Revolving Credit Loans, Tranche A Term Loans and ESOP Term Loans will be 2.50% and the initial Base Rate Loan Applicable Margin for the Revolving Credit Loans, Tranche A Term Loans and ESOP Term Loans will be 1.50% and (b) if at any time the Company fails to deliver Current Information on or before the date required pursuant to Section 5.02 (without regard to grace periods), the Eurodollar Loan Applicable Margin for the Revolving Credit Loans, the Tranche A Term Loans and the ESOP Term Loans will be 2.50% and the Base Rate Loan Applicable Margin for the Revolving Credit Loans, the Tranche A Term Loans, and the ESOP Term Loans will be 1.50% from the date such Current Information is due pursuant to Section 5.02 (without regard to grace periods) through the date the Administrative Agent receives all Current Information then due pursuant to Section 5.02. "Applicable Percentage" shall mean, with respect to any Revolving Credit Lender, such Lender's Revolving Credit Percentage, with respect to any Tranche A Term Loan Lender, such Lender's Tranche A Term Loan Percentage, with respect to any Tranche B Term Loan Lender, such Lender's Tranche B Term Loan Percentage, and with respect to any ESOP Term Loan Lender, such Lender's ESOP Term Loan Percentage. 10 19 "Application" shall mean an "Application and Agreement for Letters of Credit," or similar instruments or agreements, entered into between the Company and an Issuing Bank in connection with any Letter of Credit. "Assignment and Acceptance" shall have the meaning provided in Section 8.07(c). "Bankruptcy Code" shall have the meaning provided in Section 6.08. "Base CD Rate" shall mean the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) a fraction, whose numerator is one and whose denominator is one minus the C\D Reserve Percentage and (b) the C\D Assessment Rate. "Base Rate" shall have the meaning provided in Section 2.06(a). "Base Rate Loan" shall mean a Revolving Credit Loan, a Tranche A Term Loan, a Tranche B Term Loan or an ESOP Term Loan bearing interest at the rate provided in Section 2.06(a). "Borrowing" shall mean a borrowing pursuant to a Borrowing Request or a continuation or a conversion pursuant to Section 2.11 consisting, in each case, of the same Type of Loans having, in the case of Eurodollar Loans, the same Interest Period (except as otherwise provided in Sections 2.14 and 2.15) and made previously or being made concurrently, with respect to Revolving Credit Loans, by all of the Revolving Credit Lenders, with respect to Tranche A Term Loans, by all of the Tranche A Term Loan Lenders, with respect to Tranche B Term Loans, by all of the Tranche B Term Loan Lenders, and with respect to ESOP Term Loans, by all of the ESOP Term Loan Lenders. "Borrowing Base" shall mean at any time the amount equal to the sum of (i) 85% of Eligible Accounts plus(ii) 65% of Eligible Inventory; provided, however, if 65% of Eligible Inventory shall at any time exceed 85% of Eligible Accounts, then the Borrowing Base shall be reduced by such excess amount. "Borrowing Base Report" shall mean the report of the Company concerning the amount of the Borrowing Base, to be delivered pursuant to Section 5.02(h), substantially in the form attached as Exhibit H. "Borrowing Request" shall mean a request for a Borrowing pursuant to Section 2.02, substantially in the form attached as Exhibit D. "BP Facility Fee" shall mean the periodic fee payable to the Company by BP Chemicals, Inc., an Ohio Corporation, pursuant to Section 3.1(c) of that certain Lease and Production Agreement between BP Chemicals Inc., and the Company dated August 8, 1994. "Business Day" shall mean any day excluding Saturday, Sunday and any other day on which banks are required or authorized to close in New York, New York or Houston, Texas and, if the 11 20 applicable Business Day relates to Eurodollar Loans, on which trading is carried on by and between banks in Dollar deposits in the applicable interbank Eurodollar market. "Canadian Facility" shall mean a revolving loan and letter of credit facility for loans and letters of credit in Canadian or U.S. dollars to or for the account of Sterling Pulp. "Canadian Facility Administrative Agent" shall mean the "Administrative Agent," or the Person performing such functions if called by a different title, under the Canadian Facility. "Canadian Subsidiary" shall mean any Subsidiary of the Company that is organized under the laws of Canada or any province thereof, and that is not an Unrestricted Subsidiary. "Capital Expenditures" shall mean, for any period, all expenditures (whether paid in cash or accrued as a liability, including the portion of Capital Lease Obligations originally incurred during such period that are capitalized for the consolidated balance sheet of the Company) by the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) during such period, that, in conformity with GAAP, are included in "capital expenditures," "additions to property, plant or equipment" or comparable items in the consolidated financial statements of the Company, but excluding (a) increases in the consolidated fixed or capital assets of the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) resulting solely from Permitted Acquisitions (other than expenditures made after the date of any such Permitted Acquisition), (b) expenditures for the restoration, repair or replacement of any fixed or capital asset that was destroyed or damaged, in whole or in part, in an amount equal to any insurance proceeds received in connection with such destruction or damage, (c) increases in the capital assets of the Company or its Subsidiaries (excluding Unrestricted Subsidiaries) resulting from expenditures in respect of fixed or capital assets made by a Person other than the Company or its Subsidiaries (excluding Unrestricted Subsidiaries) so long as they have no obligation to reimburse such other Person for such expenditures, and (d) expenditures made to acquire the Properties in connection with the AFB Acquisition. "Capital Expenditures from Retained Cash Flow" shall mean Capital Expenditures permitted for any Fiscal Year pursuant to Section 5.04(o)(iii). "Capital Lease Obligations" shall mean, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property (excluding the Valdosta Lease but only to the extent that the Company or any Subsidiary owns Valdosta Bonds) which obligations are required to be classified and accounted for as a liability for a capital lease on a balance sheet of such Person and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof. "Carry-Forward Capital Expenditures" shall mean Capital Expenditures permitted for any Fiscal Year pursuant to Section 5.04(o)(ii). "C\D Assessment Rate" shall mean for any day as applied to any Base Rate Loan, the annual assessment rate determined by the Administrative Agent to be payable on such day to the Federal 12 21 Deposit Insurance Corporation (the "FDIC") for the FDIC (or any successor thereto) to insure time deposits at offices of the Administrative Agent in the United States. "C\D Reserve Percentage" shall mean for any day as applied to any Base Rate Loan, that percentage (expressed as a decimal) that is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the then current reserve requirement for the Administrative Agent in respect of new non-personal time deposits in Dollars having a maturity of 30 days or more. "Change of Control" shall mean either a "Change in Control", as defined in the Senior Subordinated Notes Indenture or the Additional Senior Subordinated Notes Indenture or a change resulting when any Unrelated Person or any Unrelated Persons, other than the Designated Shareholders, acting together, which would constitute a Group together with any Affiliates or Related Persons thereof (in each case also constituting Unrelated Persons) shall at any time either (i) Beneficially Own more than 30% of the aggregate voting power of all classes of Voting Stock of Holdco or (ii) succeed in having sufficient of its or their nominees elected to the Board of Directors of Holdco such that such nominees, when added to any existing director remaining on the Board of Directors of Holdco after such election who is an Affiliate or Related Person of such Person or Group, shall constitute a majority of the Board of Directors of Holdco; provided, however, no Change of Control shall have occurred so long as the Designated Shareholders (or any combination thereof) shall retain more than 50% of the aggregate voting power of all classes of Voting Stock of Holdco. As used herein (a) "Beneficially Own" shall mean "beneficially own" as defined in Rule 13d3 of the Securities Exchange Act of 1934, as amended, or any successor provision thereto; provided, however, that, for purposes of this definition, a Person shall not be deemed to Beneficially Own securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates until such tendered securities are accepted for purchase or exchange; (b) "Group" shall mean a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended; (c) "Unrelated Person" shall mean at any time any Person other than Holdco or any of its Subsidiaries and other than any trust for any employee benefit plan of Holdco or any of its Subsidiaries; (d) "Related Person" of any Person shall mean any other Person owning (1) 5% or more of the outstanding common stock of such Person or (2) 5% or more of the Voting Stock of such Person; and (e) "Designated Shareholders" shall mean the Persons who are, as of the Restated Closing Date, parties to the shareholder agreement among certain shareholders of Holdco, delivered to the Administrative Agent on the Restated Closing Date. "Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor statute. "Collateral" shall mean the Company's, Holdco's and the Subsidiary Guarantors' Properties described in and subject to the Liens, privileges, priorities and security interests purported to be created by any Security Instrument. "Commitments" shall mean, for any Lender, such Lender's Revolving Credit Commitment. 13 22 "Commodity Swap Agreement" shall mean any contract for sale for future delivery of commodities (whether or not the subject commodities are to be delivered), hedging contract, forward contract, swap agreement, futures contract or other commodity pricing protection agreement or option with respect to any such transaction, designed to hedge against fluctuations in prices of the subject commodities. "Company" shall mean Sterling Chemicals, Inc., a Delaware corporation, formerly known as STX Chemicals Corp. "Cover", when required by this Agreement for Letter of Credit Liabilities, shall be effected by paying to the Administrative Agent in immediately available funds, to be held by the Administrative Agent in a collateral account maintained by the Administrative Agent at its Payment Office and collaterally assigned as security pursuant to the Cash Collateral Account Agreement substantially in the form of Exhibit F-13 dated as of the STX Effective Date between the Company and the Administrative Agent, an amount equal to the maximum amount of each applicable Letter of Credit available for drawing at any time. Such amount shall be retained by the Administrative Agent in such collateral account until such time as the applicable Letter of Credit shall have expired and Reimbursement Obligations, if any, with respect thereto shall have been fully satisfied. "Credit Suisse First Boston" shall mean Credit Suisse First Boston (formerly known as Credit Suisse), in its individual capacity or as an Issuing Bank, as the case may be, and not as Documentation Agent. "Cumulative Retained Cash Flow" shall mean an amount equal to the difference of (a) Retained Cash Flow for all then previous Fiscal Years, on a cumulative basis, minus (b) Designated Retained Cash Flow Usage, on a cumulative basis, in each case from April 1, 2000. For the period beginning on August 22, 1996 and ending on April 1, 2000, the Cumulative Retained Cash Flow shall equal zero. "Current Assets" shall mean all assets of a Person which under GAAP would be classified as current assets (excluding any cash or cash equivalents). "Current Information" shall mean, as of any day, the financial statements and other related information for any applicable period most recently required to be delivered to the Administrative Agent pursuant to Sections 5.02(a), (b), and (d). "Current Liabilities" shall mean all liabilities of a Person which under GAAP would be classified as current liabilities, other than current maturities of long term debt and the obligation to repay the Revolving Credit Loans. "Current Ratio" shall mean, on any day, the ratio of Current Assets to Current Liabilities. "Cytec Indemnity" shall mean the indemnification obligations of the Cytec Parties in favor of the Company, Sterling Fibers and Holdco as set forth in the Purchase Agreement. 14 23 "Cytec Industries" shall mean Cytec Industries Inc., a Delaware corporation. "Cytec Parties" shall mean collectively Cytec Industries, Cytec Acrylic Fibers Inc., a Delaware corporation, and Cytec Technology Corp., a Delaware corporation. "Deed of Trust" shall mean the Mortgage, Deed of Trust, Assignment, Security Agreement and Financing Statement dated as of the STX Effective Date, and delivered by the Company pursuant to Section 3.02(d)(viii) originally as security for the payment and performance of the Lender Indebtedness under the Original Credit Agreement and now as security for all Lender Indebtedness. "Default" shall mean an Event of Default or any condition or event which, with notice or lapse of time or both, would constitute an Event of Default. "Designated Retained Cash Flow Usage" shall be an amount designated in writing by a Responsible Officer of the Company to the Administrative Agent, which designation shall be in the form of Exhibit J, to be a usage of Retained Cash Flow for either a Permitted Acquisition or a Capital Expenditure. "Documentary Letter of Credit" shall mean a letter of credit issued pursuant to this Credit Agreement that supports payment or performance for a single identified purchase or exchange of products in the ordinary course of business of the Company or its Subsidiaries. "Documentation Agent" shall mean Credit Suisse First Boston, acting in the manner and to the extent described in Article VII. "Dollar" and the sign "$" shall mean lawful money of the United States of America. "EBITDA" shall mean, as to the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) on a consolidated basis and for any period, without duplication, the amount equal to net income less any noncash income included in net income, plus (a) to the extent deducted from net income, interest expense, depreciation, depletion and impairment, amortization of leasehold and intangibles, expenses incurred on or prior to the STX Effective Date relating to SAR's, non-capitalized expenses incurred on or prior to the STX Effective Date relating to the Merger not to exceed $3,633,000, other noncash expenses, and income tax expenses, (b) prepaid royalty income (including the BP Facility Fee) to the extent actually received in cash; provided, that, extraordinary gains or losses, including but not limited to gains or losses on the disposition of assets, shall not be included in EBITDA, in each case for such period, and (c) for the Rolling Periods ending on March 31, 1997, June 30, 1997, September 30, 1997, and December 31, 1997, the AFB Adjusted Historical EBITDA for such Rolling Period. "Eligible Account" shall mean at any time the invoice or ledger amount owing on each account (which shall mean (i) any "account" as such term is defined in Section 9106 of the UCC, (ii) any receivable arising out of the licensing of chlorine dioxide generator technology or other technology relating thereto, (iii) receivables arising out of the profit sharing component of conversion 15 24 contracts to the extent the parties thereto have agreed in writing as to the amount thereof that is subject to no further adjustment and payable within 90 days, and (iv) any "chattel paper" as such term is defined in Section 9105(1)(b) of the UCC) of the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) (net of any credit balance, returns, trade discounts, or unbilled amounts or retention) for which each of the following statements is accurate and complete (and the Company by including such account in any computation of the Borrowing Base shall be deemed to represent and warrant to the Administrative Agent, the Issuing Banks and the Lenders the accuracy and completeness of such statements): (a) Said account is a binding and valid obligation of the obligor thereon in full force and effect; (b) Said account is genuine as appearing on its face or as represented in the books and records of Company or any of its Subsidiaries, as applicable; (c) Said account is free from plausibly valid claims regarding rescission, cancellation or avoidance, whether by operation of law or otherwise; (d) Payment of said account is less than 90 days past due as determined by the due date stated on the invoice therefor (or if said account is not paid by reference to an invoice in the ordinary course of business but instead by reference to the terms of the agreements creating said account, said account has not remained unpaid beyond 90 days after the due date therefor); (e) Said account is net of concessions, offset (excluding any accounts payable offset supported by a Letter of Credit) or understandings with the obligor thereon that in any way could reasonably be expected to adversely affect the payment of said account; (f) In the case of an account owing to the Company or any U.S. Subsidiary, the Administrative Agent, on behalf of the Lenders, has a first-priority perfected Lien covering said account, and, in the case of an account owing to any Canadian Subsidiary, the Administrative Agent, on behalf of the Lenders, has a first-priority perfected Lien in and to 65% of the issued and outstanding equity interests of Sterling Pulp and Sterling NRO and any other direct Canadian Subsidiary of the Company or any U.S. Subsidiary, in each case to the extent required by and in accordance with the applicable Security Instrument. Other than the Liens described in the preceding sentence of this Subsection (f), said account is, and at all times will be, free and clear of all Liens, except that accounts owing to the Canadian Subsidiaries may be pledged to secure the Canadian Facility. (g) Said account arose in the ordinary course of business of the Company or any of its Subsidiaries, as applicable; 16 25 (h) Said account is not payable by an obligor who is more than 90 days past due with regard to 20% or more of the total accounts owed to the Company or its Subsidiaries by such obligor or any of its Affiliates; (i) All consents, licenses, approvals or authorizations of, or registrations or declarations with, any Governmental Authority required to be obtained, effected or given in connection with the execution, delivery and performance of said account by each party obligated thereunder have been duly obtained, effected or given and are in full force and effect; (j) The obligor on said account is not the subject of any bankruptcy or insolvency proceeding, has not had a trustee or receiver appointed for all or a substantial part of its property, has not made an assignment for the benefit of creditors, admitted its inability to pay its debts as they mature or suspended its business; (k) The obligor of said account is subject to the jurisdiction of federal, state or provincial courts in the United States of America or Canada, unless (i) said account is backed by a letter of credit in form acceptable to the Administrative Agent and that is issued or confirmed by an issuer, having ratings of at least A2 or P2 by Standard & Poor's Ratings Group and Moody's Investors Service, Inc., respectively or a rating of at least A2 by International Bank Credit Analysis, Ltd. or at least LC1 by Thomson Bank Watch; provided that if such issuer is rated by more than one such Person, no such ratings shall be lower than the applicable level set forth in this Subsection (k), or (ii) the obligor on said account has longterm debt ratings, or is a wholly-owned Subsidiary of a Person having longterm debt ratings of at least A and A3 or shortterm debt ratings of at least A2 and P2, in each case by Standard & Poor's Ratings Group and Moody's Investors Service, Inc., respectively; (l) In the case of the sale of goods, the subject goods have been sold to an obligor on a true sale basis on open account, or subject to contract, and not on consignment, on approval or on a "sale or return" basis or subject to any other repurchase or return agreement, no material part of the subject goods has been returned, rejected, lost or damaged, and said account is not, evidenced by chattel paper or an instrument of any kind; and (m) Each of the representations and warranties set forth in the Security Instruments with respect to said account is true and correct in all material respects on such date; provided that, (1) if any Eligible Account, when added to all other accounts that are obligations of the same obligor and its Affiliates, results in a total sum that exceeds 15% (or 25% in the case of any obligor listed on Schedule 1.01B) of the total balance then due on all Eligible Accounts (without giving effect to any reduction in Eligible Accounts pursuant to this clause (1)), the amount of said account in excess of 15% (or 25% in the case of any obligor listed on Schedule 1.01B) of such total balance then due shall be excluded from Eligible Accounts, (2) if any account which is either a Canadian Account or an Other Foreign Account, when added to the total of all other Canadian 17 26 Accounts and Other Foreign Accounts included in Eligible Accounts, results in a sum that exceeds 70% of the total balance then due on all Domestic Accounts, the amount of said account in excess of such total shall be excluded from Eligible Accounts, (3) if any account which is an Other Foreign Account, when added to the total of all Other Foreign Accounts included in Eligible Accounts, results in a sum that exceeds 40% of the total balance then due on all Domestic Accounts, the amount of said account in excess of such total shall be excluded from Eligible Accounts, and (4) any Other Foreign Account that would, but for the effect of Subsection (k) of this definition be included in Eligible Accounts, shall be included in Eligible Accounts up to an aggregate amount not to exceed, at any one time, 10% of the total balance then due on all Domestic Accounts. As used herein, the term "Canadian Account" shall mean any account owing to a Canadian Subsidiary and that otherwise meets the requirements to be an Eligible Account. As used herein, the term "Domestic Account" shall mean any Eligible Account other than a Canadian Account or an Other Foreign Account. As used herein, the term "Other Foreign Account" shall mean any account the obligor of which is not subject to the jurisdiction of federal, state or provincial courts in the United States of America or Canada, whether or not the Administrative Agent, on behalf of the Lenders, has a first-priority, perfected Lien covering said account, but which account otherwise meets the requirements to be an Eligible Account. "Eligible Inventory"" shall mean, at any time, all inventory (as such term is defined in Section 9109(4) of the UCC) of the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) for which each of the following statements is accurate and complete (and the Company by including such inventory in any computation of the Borrowing Base shall be deemed to represent and warrant to the Administrative Agent, each Issuing Bank and each Lender the accuracy and completeness of such statements): (a) Said inventory shall be valued in accordance with GAAP and (i) shall include raw materials and finished goods but (ii) shall not include goods that are classified as "work-in-progress"; (b) Said inventory is in good condition, meets all standards imposed by any Governmental Authority having regulatory authority over it, its use and/or sale and is either currently usable or currently salable in the normal course of business of the Company and its Subsidiaries; (c) Said inventory is in possession of the Company or its Subsidiaries, or is in transit in the ordinary course of business but in respect of which title remains in the Company or its applicable Subsidiary and which is fully insured (subject to deductibles consistent with prudent industry standards for similarly situated companies) and is not (i) located outside the United States of America or Canada or (ii) in the possession or control of any warehouseman, bailee, or any agent or processor for or customer of the Company or its Subsidiaries or, if it is in any such Person's possession, the Company or its applicable Subsidiaries shall have notified (in a manner that effectively under applicable law creates a valid and first-priority perfected Lien in favor of the Administrative Agent, on behalf of the Lenders, in such inventory) such warehouseman, bailee, agent, processor or customer of the Administrative Agent's Lien and such warehouseman, bailee, agent, processor or customer has subordinated 18 27 or waived any Lien it may claim therein and agreed to hold all such inventory for the Administrative Agent's account subject to the Administrative Agent's instructions; (d) Each of the representations and warranties set forth in the Security Instruments with respect to said inventory is true and correct in all material respects on such date; (e) In the case of inventory of any U.S. Subsidiaries, the Administrative Agent, on behalf of the Lenders, has a first-priority perfected Lien covering said inventory and, in the case of the inventory of any of the Canadian Subsidiaries, the Administrative Agent, on behalf of the Lenders, has a first-priority perfected Lien in and to 65% of the issued and outstanding equity interests of Sterling Pulp and Sterling NRO and any other direct Canadian Subsidiary of the Company or any U.S. Subsidiary, in each case to the extent required by and in accordance with the applicable Security Instrument. Other than the Liens described in the preceding sentence of this Subsection (e), said inventory is, and at all time will be, free and clear of all Liens (or with respect to which all rights of the holder of such Liens have been waived or subordinated to the satisfaction of the Administrative Agent), except that inventory owned by the Canadian Subsidiaries may be pledged to secure the Canadian Facility; and (f) Said inventory does not include goods that are not owned by the Company or its Subsidiaries or that are held by the Company or its Subsidiaries pursuant to a consignment agreement. "Environmental Laws" shall mean any and all laws, statutes, ordinances, rules, regulations, orders, or determinations of any Governmental Authority pertaining to health or the environment in effect in any and all jurisdictions in which the Company or its Subsidiaries are conducting or at any time have conducted business, or where any Property of the Company or its Subsidiaries is located, or where any hazardous substances generated by or disposed of by the Company or its Subsidiaries are located, including but not limited to the Oil Pollution Act of 1990 ("OPA"), the Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, and other environmental conservation or protection laws. The term "oil" shall have the meaning specified in OPA; the terms "hazardous substance," "release" and "threatened release" have the meanings specified in CERCLA, and the terms "solid waste" and "disposal" (or "disposed") have the meanings specified in RCRA; provided, however, in the event either CERCLA or RCRA is amended so as to change the meaning of any term defined thereby, such changed meaning shall apply subsequent to the effective date of such amendment, and provided, further, that, to the extent the laws of the state in which any Property of the Company or its Subsidiaries is located establish a meaning for "oil," "hazardous substance," "release," "solid waste" or "disposal" which is broader than that specified in either OPA, CERCLA or RCRA, such broader meaning shall apply. 19 28 "Equity Notes" shall mean the notes (constituting a portion of up to $300,000 of the new common equity of Holdco issued at the time of the AFB Acquisition) from former employees of the Cytec Parties. "Equity Plans" shall mean the Omnibus Stock Plan and all other contracts, commitments, plans, programs or arrangements providing for the issuance or grant of any Stock Acquisition Rights or any capital stock (restricted or otherwise), stock appreciation rights, phantom stock or other equity interests (i) prior to the Merger and SCI Asset Conveyance, in SCI or any of its Subsidiaries, and (ii) after the Merger and Asset Conveyance, in Holdco, including stock purchase plans. As used herein, "Omnibus Stock Plan" shall mean (i) prior to the Merger and SCI Asset Conveyance, the Omnibus Stock and Incentive Plan of SCI or any of its Subsidiaries, and (ii) after the Merger and SCI Asset Conveyance, the Omnibus Stock and Incentive Plan of Holdco, and "Stock Acquisition Rights" shall mean (i) all options, warrants, calls, subscriptions or other rights of any nature to acquire any shares of capital stock of, or any other equity interests in, Holdco and (ii) all securities convertible into or exchangeable for such shares or equity interests or obligating Holdco to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement or commitment; provided, however, that the term "Stock Acquisition Rights" shall not include SARs, phantom stock or restricted stock grants. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and any successor statute. "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) which together with the Company or a Subsidiary of the Company would be deemed to be a "single employer" within the meaning of Section 4001(b)(1) of ERISA or Subsections 414(b), (c), (m) or (o) of the Code. "ERISA Termination Event" shall mean (i) a "Reportable Event" described in Section 4043 of ERISA and the regulations issued thereunder (other than a "Reportable Event" not subject to the provision for 30day notice to the PBGC under Subsections .14, .18, .19 or .20 of Part 2615 of the PBGC regulations), (ii) the withdrawal of the Company, a Subsidiary of the Company or any ERISA Affiliate from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041(c) of ERISA, (iv) the institution of proceedings to terminate a Plan by the PBGC, or (v) any other event or condition which could reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "ESOP" shall mean the new employee stock ownership plan of the Company and its related trust, as in effect on the STX Effective Date. "ESOP Security Agreement" shall mean that certain Security Agreement dated as of the STX Effective Date, executed by the ESOP in favor of the Company, and any and all amendments, modifications, supplements, renewals and restatements thereof. 20 29 "ESOP Term Loan" shall have the meaning provided in Section 2.01(a)(iii). "ESOP Term Loan Lender" shall mean any Lender having an ESOP Term Loan outstanding hereunder. "ESOP Term Loan Maturity Date" shall mean September 30, 2000. "ESOP Term Loan Percentage" shall mean as to any ESOP Term Loan Lender, the percentage which such Lender's ESOP Term Loans then outstanding constitutes of the aggregate ESOP Term Loans then outstanding. "ESOP Term Note" shall mean a promissory note of the Company described in Section 2.05(d) payable to an ESOP Term Loan Lender and being substantially in the form of Exhibit B-3 evidencing the aggregate indebtedness of the Company to such Lender for ESOP Term Loans. "Eurodollar Loan" shall mean a Revolving Credit Loan, a Tranche A Term Loan, a Tranche B Term Loan or an ESOP Term Loan bearing interest at the rate provided in Subsection 2.06(b). "Eurodollar Rate" shall mean, with respect to any Borrowing of Eurodollar Loans for any Interest Period, the product of (a) (i) the interest rate per annum shown on page 3750 of the Dow Jones & Company Telerate screen or any successor page as the composite offered rate for London interbank deposits with a period comparable to the Interest Period for such Eurodollar Loan, as shown under the heading "USD" at 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period or (ii) if the rate in clause (i) of this definition is not shown for any particular day, the average interest rate per annum (rounded upwards, if necessary, to the next 1/16th of 1%) offered to the Reference Banks in the interbank Eurodollar market for Dollar deposits of amounts in funds comparable to the principal amount of the Eurodollar Loan to which such Eurodollar Rate is to be applicable with maturities comparable to the Interest Period for which such Eurodollar Rate will apply as of approximately 10:00 a.m. (Houston time) two Business Days prior to the commencement of such Interest Period, times (b) Statutory Reserves. "Event of Default" shall have the meaning provided in Article VI. "Excess Cash Flow" shall mean (a) EBITDA for any Fiscal Year, minus (b) for each such Fiscal Year and for the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) on a consolidated basis, the sum of (i) scheduled payments of principal pursuant to Sections 2.05(b) and (c), (ii) the principal portion of scheduled payments under Capital Lease Obligations, (iii) cash interest, (iv) cash taxes applicable to such Fiscal Year and paid prior to the date of determination, by or on behalf of the Company and its Subsidiaries (excluding Unrestricted Subsidiaries), (v) any Permitted Holdco Dividends actually paid, (vi) the amount paid to Cytec Industries pursuant to Section 2.03 of the AFB Earnout Agreement attributable to such Fiscal Year, (vii) for the Fiscal Year ending September 30, 1997, the AFB Adjusted Historical EBITDA for the Rolling Period ending on September 30, 1997, and (viii) the amount equal to (A) actual Capital Expenditures (exclusive of Capital Lease Obligations incurred during such Fiscal Year and Capital Expenditures for such Fiscal 21 30 Year that were designated as Capital Expenditures from Retained Cash Flow), plus (B) the amount of Carry Forward Capital Expenditures permitted to be made in the next succeeding Fiscal Year, minus (C) the amount of Carry-Forward Capital Expenditures permitted to be made in the current Fiscal Year. "Exchange Rate Swap Agreement" shall mean any contract for sale, purchase, or exchange or for future delivery of foreign currency (whether or not the subject currency is to be delivered or exchanged), hedging contract, forward contract, swap agreement, futures contract, or other foreign exchange protection agreement or option with respect to any such transaction, designed to hedge against fluctuations in foreign exchange rates. "Federal Funds Effective Rate" shall mean, for any day, the per annum rate equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Fee Letter" shall mean the letter agreement dated April 24, 1996, regarding fees, executed by TCB, Credit Suisse and Chase Securities Inc. and accepted and agreed to by TSG as of April 24, 1996. "Financial Statements" shall mean the audited consolidated financial statements of SCI for the Fiscal Year ended September 30, 1995, the unaudited consolidated financial statements of SCI for the Fiscal Quarter ended March 31, 1996 and the audited consolidated financial statements of the Company for the Fiscal Year ended September 30, 1996. "Financing Documents" shall mean this Agreement, the Notes, the Guaranty Agreements, the Security Instruments, the Stock Intercreditor Agreement, the Applications, Borrowing Requests, Borrowing Base Reports, the Fee Letter, the AFB Fee Letter, and the other documents, instruments or agreements described in Subsections 3.02(d) and 3.03(d), together with any other document, instrument or agreement (other than participation, agency or similar agreements among the Lenders or between any Lender and any other bank or creditor with respect to any indebtedness or obligations of Holdco or the Company or its Subsidiaries hereunder or thereunder) now or hereafter entered into in connection with the Loans, the Lender Indebtedness or the Collateral, as such documents, instruments or agreements may be amended, modified or supplemented from time to time. "Fiscal Quarter" shall mean the fiscal quarter of the Company, ending on the last day of each December, March, June and September in each year. "Fiscal Year" shall mean the fiscal year of the Company, ending on September 30th of each year. 22 31 "Fixed Charge Coverage Ratio" shall mean, for any day: (a) from January 1, 1997, through March 31, 1997, the ratio of (i) EBITDA for the Rolling Period ending on December 31, 1996 less cash income taxes actually paid during the Fiscal Quarter ending on December 31, 1996, times four, plus cash income tax refunds actually received by the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) on a consolidated basis for the Rolling Period ending on December 31, 1996, to (ii) the sum of (A) Scheduled Principal Payments made during the Fiscal Quarter ending on December 31, 1996, times four, plus (B) the amount of cash interest paid during the Fiscal Quarter ending on December 31, 1996 (including the interest component of Capital Lease Obligations), times four, plus (C) actual Capital Expenditures (excluding Project Capital Expenditures and Capital Lease Obligations incurred during such period) made during the Rolling Period ending on December 31, 1996, plus (D) all Permitted Holdco Dividends paid during the Rolling Period ending on December 31, 1996; (b) from April 1, 1997, through June 30, 1997, the ratio of (i) EBITDA for the Rolling Period ending on March 31, 1997, less cash income taxes actually paid during the two Fiscal Quarters ending on December 31, 1996 and March 31, 1997, respectively, times two, plus cash income tax refunds actually received by the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) on a consolidated basis for the Rolling Period ending on March 31, 1997, to (ii) the sum of (A) Scheduled Principal Payments made during the two Fiscal Quarters ending on December 31, 1996, and March 31, 1997, times two, plus (B) the amount of cash interest paid during the two Fiscal Quarters ending on December 31, 1996, and March 31, 1997 (including the interest component of Capital Lease Obligations), respectively, times two, plus (C) actual Capital Expenditures (excluding Project Capital Expenditures and Capital Lease Obligations incurred during such period) made during the Rolling Period ending on March 31, 1997, plus (D) all Permitted Holdco Dividends paid during the Rolling Period ending on March 31, 1997; (c) from July 1, 1997, through September 30, 1997, the ratio of (i) EBITDA for the Rolling Period ending on June 30, 1997, less cash income taxes actually paid for the three Fiscal Quarters ending on December 31, 1996, March 31, 1997 and June 30, 1997, respectively, times 1.33, plus cash income tax refunds actually received by the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) on a consolidated basis for the Rolling Period ending on June 30, 1997, to (ii) the sum of (A) Scheduled Principal Payments made during the three Fiscal Quarters ending on December 31, 1996, March 31, 1997, June 30, 1997, respectively, times 1.33, plus (B) the amount of cash interest paid during the three Fiscal Quarters ending on December 31, 1996, March 31, 1997, and June 30, 1997 (including the interest component of Capital Lease Obligations), respectively, times 1.33, plus (C) actual Capital Expenditures (excluding Project Capital Expenditures and Capital Lease Obligations incurred during such period) made during the Rolling Period ending on June 30, 1997, plus (D) all Permitted Holdco Dividends paid during the Rolling Period ending on June 30, 1997; and 23 32 (d) from October 1, 1997, through December 31, 1997, the ratio of (i) EBITDA less cash income taxes actually paid plus cash income tax refunds actually received by the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) on a consolidated basis in each case for the Rolling Period ending on September 30, 1997, to (ii) the sum of (A) Scheduled Principal Payments made during such period, plus (B) the amount of cash interest paid during such period (including the interest component of Capital Lease Obligations), plus (C) the greater of (1) actual Capital Expenditures (exclusive of Capital Lease Obligations incurred during such period, Capital Expenditures made during such period that were designated by the Company to be Capital Expenditures from Retained Cash Flow, and Project Capital Expenditures made during such period) and (2) $15,000,000, plus (D) all Permitted Holdco Dividends paid during such period, all without duplication and as to the Company and its Subsidiaries on a consolidated basis. (e) after December 31, 1997, the ratio of (i) EBITDA less cash income taxes actually paid plus cash income tax refunds actually received by the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) on a consolidated basis to (ii) the Fixed Charges, in each case for the Rolling Period ending on the most recent Quarterly Date. "Fixed Charges" shall mean without duplication, as to the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) on a consolidated basis and for each Rolling Period, (a) Scheduled Principal Payments made during such period, plus (b) the amount of cash interest paid during such period (including the interest component of Capital Lease Obligations), plus (c) the greater of (i) actual Capital Expenditures (exclusive of Capital Lease Obligations incurred during such period and Capital Expenditures made during such period that were designated by the Company to be Capital Expenditures from Retained Cash Flow) and (ii) $15,000,000, plus (d) all Permitted Holdco Dividends paid during such period. "Form 1001 Certification" shall have the meaning provided in Section 2.20(f). "Form 4224 Certification" shall have the meaning provided in Section 2.20(f). "Funded Indebtedness" shall mean, as to any Person, without duplication, all Indebtedness for borrowed money, all obligations evidenced by bonds, debentures, notes, or other similar instruments, all Capital Lease Obligations, and all guaranties of Funded Indebtedness of other Persons. "GAAP" shall mean generally accepted accounting principles as applied in accordance with Section 1.02. "Governmental Authority" shall mean any (domestic or foreign) federal, state, province, county, city, municipal or other political subdivision or government, department, commission, board, bureau, court, agency or any other instrumentality of any of them, which exercises jurisdiction over the Company or any of its Property, or any Subsidiary of the Company or any of such Subsidiary's Property or any Plan. 24 33 "Governmental Requirement" shall mean any law, statute, code, ordinance, order, rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license, authorization or other direction or requirement (including but not limited to any of the foregoing which relate to Environmental Laws, energy regulations and occupational, safety and health standards or controls) of any Governmental Authority. "Guaranty Agreements" shall mean, collectively the Subsidiary Guaranty and the Limited Guaranty. "Hedge Agreement" shall mean (i) any Commodity Swap Agreement, (ii) any Interest Rate Swap Agreement, or (iii) any Exchange Rate Swap Agreement. "Highest Lawful Rate" shall mean, with respect to each Lender, the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the Notes or on other Lender Indebtedness, as the case may be, owed to it under the law of any jurisdiction whose laws may be mandatorily applicable to such Lender notwithstanding other provisions of this Agreement, or law of the United States of America applicable to such Lender and the Transactions, which would permit such Lender to contract for, charge, take, reserve or receive a greater amount of interest than under such jurisdiction's law. "Holdco" shall have the meaning provided in the Introductory Statement. "Holdco Common Stock" shall mean the common stock of Holdco, par value $0.01 per share. "Indebtedness" of any Person shall mean: (i) all obligations of such Person for borrowed money and obligations evidenced by bonds, debentures, notes or other similar instruments; (ii) all obligations of such Person (whether contingent or otherwise) in respect of bankers' acceptances, letters of credit, surety or other bonds and similar instruments; (iii) all obligations of such Person to pay the deferred purchase price of Property or services (other than for borrowed money); (iv) all Capital Lease Obligations in respect of which such Person is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which obligations such Person otherwise assures a creditor against loss; (v) all guaranties (direct or indirect), and other contingent obligations of such Person in respect of, or obligations to purchase or otherwise acquire or to assure payment of, Indebtedness of other Persons; 25 34 (vi) Indebtedness of others secured by any Lien upon Property owned by such Person, whether or not assumed; (vii) all obligations or undertakings of such Person to maintain or cause to be maintained the financial position or financial covenants of other Persons; (viii) obligations to deliver goods or services in consideration of advance payments, excluding such obligations incurred in the ordinary course of business as conducted by the Company and its Subsidiaries as of the Restated Closing Date; and (ix) the net amount of obligations of such Person under agreements of the types described in the definitions of Commodity Swap Agreements, Exchange Rate Swap Agreements and Interest Rate Swap Agreements; provided, that the term "Indebtedness" shall not mean or include any indebtedness of the type described in clause (i) of this definition in respect of which monies sufficient to pay and discharge the same in full (either on the expressed date of maturity thereof or on such earlier date as such indebtedness may be duly called for redemption and payment) shall be deposited (in accordance with the terms of such indebtedness) with a depository, agency or trustee, acceptable to the Administrative Agent, in trust for the payment of such indebtedness with the effect that the obligor of such indebtedness has no further obligation to comply with the covenants and other applicable terms of the documentation existing in connection therewith. "Intercreditor Agreement" shall have the meaning provided in the Introductory Statement. "Interest Coverage Ratio" shall mean, on any day, the ratio of (a) EBITDA for the Rolling Period ending on the then most recent Quarterly Date to (b) cash interest payments made by the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) on a consolidated basis during such Rolling Period. "Interest Period" shall mean, with respect to each Borrowing of Eurodollar Loans, an interest period complying with the terms and provisions of Section 2.07. "Interest Rate Swap Agreement" shall mean any rate swap, rate cap, rate floor, rate collar, forward rate agreement, futures or other rate protection agreement or option with respect to any such transaction, designed to hedge against fluctuations in interest rates. "Issuing Bank" shall mean, for each Letter of Credit, TCB, Credit Suisse First Boston (or any other Lender designated by the Company and approved in writing by the Administrative Agent such approval not to be unreasonably withheld), as the issuing bank for such Letter of Credit, at the option of the Company. "Leasehold Deed of Trust" shall mean the Leasehold Deed to Secure Debt and Security Agreement dated as of the STX Effective Date, as amended by the First Amendment and Supplement 26 35 to Leasehold Deed of Trust to Secure Debt and Security Agreement dated as of the AFB Effective Date, and delivered by the Company pursuant to Section 3.02(d)(ix) and Section 3.03(d)(xiv), respectively, as security for the Lender Indebtedness. "Lender" shall have the meaning assigned such term in the opening paragraph of this Agreement and shall include any and all of the Original Lenders and the AFB Lenders. "Lender Indebtedness" shall mean any and all amounts owing or to be owing by the Company to the Agents, the Issuing Banks or the Lenders with respect to or in connection with the Loans, any Letter of Credit Liabilities, the Notes, any Hedge Agreement, this Agreement, or any other Financing Document and, as to Hedge Agreements, any and all amounts owing or to be owing by the Company thereunder to any Secured Affiliate and comprising all of the Lender Indebtedness under the Original Credit Agreement and the Lender Indebtedness under the AFB Acquisition Credit Agreement. "Lending Office" shall mean for each Lender the office specified opposite such Lender's name on the signature pages hereof, or in the Assignment and Acceptance pursuant to which it became a Lender, with respect to each Type of Loan, or such other office as such Lender may designate in writing from time to time to the Company and the Administrative Agent with respect to such Type of Loan. "Letters of Credit" shall have the meaning assigned such term in Section 2.03(a) and shall include the Outstanding Letters of Credit, which are hereby deemed to be issued under this Agreement. "Letter of Credit Liabilities" shall mean, at any time and in respect of any Letter of Credit, the sum of (i) the amount available for drawings under such Letter of Credit as of the date of determination plus (ii) the aggregate unpaid amount of all Reimbursement Obligations due and payable as of the date of determination in respect of previous drawings made under such Letter of Credit. "Leverage Ratio" shall mean, on any day, the ratio of (a) Funded Indebtedness of the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) on a consolidated basis as of the date of determination to (b) EBITDA for the Rolling Period ending on the most recent Quarterly Date as of the date of determination. "Lien" shall mean any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on contract or constitutional common law, or statutory law, and including but not limited to the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights of way, covenants, conditions, restrictions, liens and other statutory, constitutional, or common law rights of landlords, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Company or any Subsidiary of the Company shall be deemed to be the owner of any Property which it has 27 36 acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. "Limited Guaranty" shall mean the Limited Guaranty Agreement (Santa Rosa) dated as of the AFB Effective Date, executed by Sterling Fibers in favor of the Agents, the Issuing Banks and the Lenders. "Limited Liability Interests" shall mean any ownership interest in capital stock of a corporation, any equity interest in another entity, or any indebtedness of a corporation or other entity, the ownership of which stock, other interest or indebtedness, as a matter of applicable law, can impose no personal liability on the owner thereof for any debts, obligations or liabilities whatsoever of such corporation or entity. "Loan" shall mean a Revolving Credit Loan or a Term Loan and "Loans" shall mean collectively the Revolving Credit Loans or the Term Loans or one or more of them as provided herein. "Margin Stock" shall have the meaning provided in Regulations G, U and X. "Material Adverse Effect" shall mean any material and adverse effect on (i) the business operations, assets, liabilities, condition (financial or otherwise), or results of operations of the Company, on an individual basis, or the Company and its Subsidiaries taken as a whole, (ii) the ability of the Company on an individual basis to carry out its business or of the Company and its Subsidiaries taken as a whole to carry out their business, or (iii) the ability of the Company and its Subsidiaries, taken as a whole, to perform the obligations under the Notes, this Agreement or the other Financing Documents in accordance with their respective terms. "Material Contract" shall mean each contract, license, and agreement listed on Schedule 4.23. "Maximum Available Amount" shall mean, at any date, an amount equal to the lesser of (a) the amount by which (i) the aggregate Revolving Credit Commitments as of such date exceeds (ii) the aggregate principal amount of Indebtedness outstanding under the Canadian Facility as of such date, and (b) the amount by which (i) the Borrowing Base as of such date exceeds (ii) the aggregate principal amount of Indebtedness outstanding under the Canadian Facility as of such date. "Merger" shall have the meaning provided in Introductory Statement. "Merger Agreement" shall mean the Agreement and Plan of Merger, between STX Acquisition Corp. and SCI, as amended by that certain letter agreement dated as of June 11, 1996 and in effect on the STX Closing Date. "Net Proceeds" shall mean, with respect to any sale, transfer, or disposition of Property permitted by Section 5.04(c) ("Permitted Disposition"), the gross amount received by the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) from such Permitted Disposition, 28 37 minus the sum of (i) the amount, if any, of all taxes paid or payable by the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) directly resulting from such Permitted Disposition (including the amount, if any, estimated by the Company in good faith at the time of such Permitted Disposition for taxes payable by the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) on or measured by net income or gain resulting from such Permitted Disposition), and (ii) the reasonable outofpocket costs and expenses incurred by the Company or such Subsidiary in connection with such Permitted Disposition (including reasonable brokerage fees paid to a Person other than an Affiliate of the Company, but excluding any fees or expenses paid to an Affiliate of the Company). "NonRecourse Debt" shall mean Indebtedness or that portion of Indebtedness as to which neither the Company nor any of its Subsidiaries (other than an Unrestricted Subsidiary), (i) provides credit support pursuant to any undertaking, agreement or instrument that would constitute Indebtedness, (ii) is directly or indirectly liable, or (iii) constitutes the lender. "Notes" shall mean the Revolving Credit Notes and the Term Notes. "Notice of Designated Retained Cash Flow Usage" shall mean a notice in the form attached as Exhibit J. "Old ESOP " shall mean the employee stock ownership plan of SCI in existence prior to the SCI Acquisition, and its related trust, as in effect on the STX Closing Date. "Original Credit Agreement" shall mean the $456,500,000 principal amount credit agreement dated as of the STX Closing Date among STX Chemicals Corp., TCB, individually, as an issuing bank and as administrative agent, Credit Suisse, individually, as an issuing bank and as documentation agent, and the lenders party thereto, as amended by the STX First Amendment, the STX Second Amendment and the STX Third Amendment. "Original Lenders" shall have the meaning provided in the Introductory Statement. "Original Loans" shall mean, collectively, the Revolving Credit Loans, the Original Tranche A Term Loans, the Original Tranche B Term Loans and the ESOP Term Loans. "Original Tranche A Term Loans" shall have the meaning provided in the Introductory Statement. "Original Tranche B Term Loans" shall have the meaning provided in the Introductory Statement. "Other Taxes" shall have the meaning provided in Subsection 2.20(b). "Outstanding Letter of Credit" shall mean any of the outstanding letters of credit issued for the account of the Company or Sterling Pulp, and identified on Scheduled 1.01A. 29 38 "Payment Office" shall mean the Administrative Agent's office located at 1111 Fannin Street, Houston, Texas 77002; Attention: Gale Manning (or such other office or individual as the Administrative Agent may hereafter designate in writing to the other parties hereto). "PBGC" shall mean the Pension Benefit Guaranty Corporation, or any successor thereto. "Permitted Acquisition" shall mean any non-hostile acquisition by the Company or its Subsidiaries (excluding Unrestricted Subsidiaries) of the voting securities (other than publicly traded securities) or other equity interests, or all or substantially all of the assets, of any Person other than Holdco or an Unrestricted Subsidiary (or any division or product line of such Person), but only so long as no Default shall have occurred and be continuing at the time of (or would result from) such acquisition, and only to the extent permitted pursuant to Section 5.04(e)(x). "Permitted Holdco Dividend" shall mean any of the following, to the extent permitted pursuant to Section 5.04(d)(iv): (a) cash dividends to Holdco in any Fiscal Year not to exceed (A) $500,000 for the period from the STX Effective Date through September 30, 1996 and (B) $2,000,000 for Fiscal Year ended September 30, 1997, and for each succeeding Fiscal Year; and (b) cash dividends to Holdco so long as Holdco promptly, and in any event within five Business Days, utilizes the full amount of such cash dividends for the sole purpose of paying interest as and when due with respect to the Senior Secured Discount Notes then outstanding to the extent required to be made in accordance with the terms of the Senior Secured Discount Notes as in effect on the STX Effective Date and without giving effect to any amendment or modification thereof unless agreed to in writing by the Lenders; provided that (i) the amount of such cash dividends paid pursuant to this clause (b) shall not exceed the amount necessary to make such required interest payment in accordance with the terms of the Senior Secured Discount Notes, (ii) no such payment shall be made at any time when the payment of cash interest on the Senior Secured Discount Notes is not required to be made pursuant to the provisions thereof, and (iii) no such payment shall be made at any time prior to the fifth anniversary of the STX Effective Date. "Person" shall mean any individual, partnership, firm, corporation (including, but not limited to the Company), association, joint venture, trust or other entity, or any government or political subdivision or agency, department or instrumentality thereof; provided, however, for the purpose of the definition of "Change of Control," "Person" shall mean a "person" or group of persons within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended. "Plan" shall mean any employee pension benefit plan, as defined in Section 3(2) of ERISA (including, but not limited to, an employee pension benefit plan, such as a foreign plan, which is not subject to the provisions of ERISA), which (i) is currently or hereafter sponsored, maintained or contributed to by the Company, a Subsidiary of the Company or an ERISA Affiliate, or (ii) was at any 30 39 time during the six preceding Fiscal Years sponsored, maintained or contributed to by the Company, a Subsidiary of the Company or an ERISA Affiliate. "Preferred Stock" shall mean the redeemable Series A Preferred Stock issued by Holdco with terms, limitations, rights and preferences as set forth in Exhibit L-1. "Prime Rate" shall mean the rate which the Administrative Agent announces from time to time as its prime rate, effective as of the date announced as the effective date of any change in such prime rate. Without notice to the Company or any other Person, the Prime Rate shall change automatically from time to time as and in the amount by which such prime rate shall fluctuate. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. The Administrative Agent may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. "Project Capital Expenditures" shall mean all Capital Expenditures made by the Company and its Subsidiaries through December 31, 1996, for the construction of the Valdosta, Georgia facility and the methanol facility located in Texas City, Texas. "Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Purchase Agreement" shall mean the Asset Purchase Agreement dated as of December 23, 1996, among Sterling Fibers, the Company, Holdco and the Cytec Parties. "Quarterly Dates" shall mean the last day of each December, March, June, and September, in each year. "Reference Banks" shall mean the Agents. "Register" shall have the meaning assigned in Section 8.07(d). "Regulation D", "Regulations G, U and X" shall mean, respectively, Regulation D under the Securities Act of 1933, as amended or modified from time to time, and Regulation G, Regulation U and Regulation X of the Board of Governors of the Federal Reserve System, as such regulations are from time to time in effect and any successor regulations thereto. "Reimbursement Obligations" shall mean, at any date, the obligations of the Company then outstanding in respect of the Letters of Credit, to reimburse the Administrative Agent for the account of the Issuing Bank for the amount paid by the Issuing Bank in respect of any drawings under the Letters of Credit. "Required Lenders" shall mean at any time, Lenders the Total Credit Percentages of which aggregate at least 51%. 31 40 "Responsible Officer" shall mean, with respect to any corporation, the chairman of the board, the president, any vice president, the chief executive officer or the chief operating officer, or any equivalent officer (regardless of his or her title), and, in respect of financial or accounting matters, the chief financial officer, the vice president of finance, the treasurer, the controller, or any equivalent officer (regardless of his or her title). Unless otherwise specified, all references to a Responsible Officer herein shall mean a Responsible Officer of the Company. "Restated Closing Date" shall mean the "as of" date of this Agreement set forth in the first paragraph hereof. "Retained Cash Flow" shall mean, in any Fiscal Year, the amount of Excess Cash Flow that exceeds the amount of the prepayment of Term Loans required pursuant to Section 2.10(b)(i) for such Fiscal Year. "Revolving Credit Commitment" shall have the meaning assigned such term in Subsection 2.01(c). "Revolving Credit Exposure" shall mean, at any time and as to each Lender, the sum of (a) the aggregate principal amount of the Revolving Credit Loans made by such Lender outstanding as of such date plus (b) such Lender's Revolving Credit Percentage of the aggregate amount of all Letter of Credit Liabilities as of such date. "Revolving Credit Lender" shall mean any Lender having a Revolving Credit Commitment or Revolving Credit Exposure hereunder. "Revolving Credit Loan" shall have the meaning provided in Subsection 2.01(a)(iv); the Revolving Credit Loans shall not include any Letter of Credit Liabilities. "Revolving Credit Maturity Date" shall mean March 31, 2003. "Revolving Credit Note" shall mean a promissory note of the Company described in Section 2.05(a) payable to any Lender and being substantially in the form of Exhibit A, evidencing the aggregate Indebtedness of the Company to such Lender resulting from Revolving Credit Loans made by such Lender. "Revolving Credit Percentage" shall mean as to any Revolving Credit Lender, the percentage of the aggregate Revolving Credit Commitments constituted by its Revolving Credit Commitment (or, if the Revolving Credit Commitments have terminated or expired, the percentage which such Lender's Revolving Credit Exposure at such time constitutes of the Aggregate Revolving Credit Exposure at such time). "Rolling Period" shall mean for each Fiscal Quarter commencing with the first full Fiscal Quarter after the STX Effective Date, such quarter and the three preceding Fiscal Quarters. 32 41 "Santa Rosa Deed of Trust" shall mean the Mortgage, Assignment and Security Agreement dated as of the AFB Effective Date, delivered by Sterling Fibers pursuant to Section 3.03(d)(ii) as security for the payment and performance of Sterling Fibers' obligations under the Limited Guaranty Agreement (Santa Rosa) dated as of the AFB Effective Date, delivered by Sterling Fibers pursuant to Section 3.03(d)(iii). "SAR" shall mean each stock appreciation right outstanding under any Equity Plan. "Saskatoon Acquisition" shall have the meaning provided in the Introductory Statement. "Sask Holdings" shall mean Sterling (Sask) Holdings Ltd., an Ontario (Canada) corporation and a wholly owned Subsidiary of Sterling CAI. "Scheduled Capital Expenditures" shall mean Capital Expenditures permitted for any Fiscal Year pursuant to Section 5.04(o)(i). "Scheduled Principal Payments" shall mean, for any period, the amounts of scheduled principal payments made during such period with respect to Funded Indebtedness (including the principal portion of all Capital Lease Obligations) not including any principal payments of (a) the ESOP Term Loan, but only to the extent that net income for the applicable period was reduced for the expense incurred by the Company for contributions to the ESOP, and (b) Revolving Credit Loans. "SCI" shall mean, prior to the SCI Acquisition, Sterling Chemicals, Inc., a Delaware corporation, which merged with STX Acquisition Corp. and pursuant to the terms of the Merger became the surviving corporation, simultaneously changing its name to Sterling Chemicals Holdings, Inc. "SCI Acquisition" shall have the meaning provided in the Introductory Statement. "SCI Asset Conveyance" shall have the meaning provided in the Introductory Statement. "Second Lien Deed of Trust" shall mean the Second Lien Mortgage, Deed of Trust, Assignment, Security Agreement and Financing Statement dated as of the AFB Effective Date, delivered by the Company pursuant to Section 3.03(d)(v) as security for the payment and performance of the Lender Indebtedness. "Secondary ESOP Loan" shall mean the loan or loans made by the Company to the ESOP to allow the ESOP to purchase Holdco Common Stock. "Secondary ESOP Loan Documents" shall mean the Secondary ESOP Note, the ESOP Security Agreement, and all documents, instruments and agreements now or hereafter executed by the ESOP and delivered to the Company as the lender under the Secondary ESOP Loan, and any and all amendments, modifications, supplements, renewals or restatements thereof. 33 42 "Secondary ESOP Note" shall mean the promissory note or notes from the ESOP to the Company evidencing the Secondary ESOP Loan, and any and all amendments, modifications, supplements, renewals and restatements thereof. "Secured Affiliate" shall mean any Affiliate of any Lender that has entered into a Hedge Agreement with the Company or any of its Subsidiaries with the obligations of the Company or such Subsidiary thereunder being secured by one or more Security Instruments. "Security Instruments" shall mean the agreements or instruments described or referred to in Subsections 3.02(d)(iii) through (xii), (xv) and (xvi) and in Subsections 3.03(d)(i) through (xviii), including, to the extent such Subsections describe an amendment, the agreement or instrument amended thereby, and any and all other agreements or instruments now or hereafter executed and delivered by the Company, any Subsidiary of the Company or any other Person as security for the payment or performance of the Lender Indebtedness, as any of the foregoing may have been, or may hereafter be, amended, modified or supplemented. "Senior Debt" shall mean, as to any Person, all Funded Indebtedness of such Person, less any subordinated Indebtedness with terms of subordination substantially similar to the terms of subordination of the Senior Subordinated Notes and the Additional Senior Subordinated Notes. "Senior Debt Leverage Ratio" shall mean, on any day, the ratio of (a) Senior Debt of the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) on a consolidated basis as of the date of determination to (b) EBITDA for the Rolling Period ending on the most recent Quarterly Date as of the date of determination. "Senior Secured Discount Notes" shall mean the senior secured discount notes issued pursuant to the Senior Secured Discount Notes Indenture with initial proceeds in an amount of up to $100,000,000 issued by Holdco in connection with the debt financing for the SCI Acquisition. "Senior Secured Discount Notes Indenture" shall mean the Sterling Chemicals Holdings, Inc. $191,751,000 13 1/2% Senior Secured Discount Notes due 2008 Indenture dated as of August 15, 1996, with Fleet National Bank, as Trustee. "Senior Subordinated Notes" shall mean the senior subordinated notes issued pursuant to the Senior Subordinated Notes Indenture in an amount of up to $275,000,000 issued by the Company in connection with the debt financing for the SCI Acquisition. "Senior Subordinated Notes Indenture" shall mean the Sterling Chemicals, Inc. $275,000,000 11 3/4% Senior Subordinated Notes Due 2006 Indenture dated as of August 15, 1996, with Fleet National Bank, as Trustee. "Series B Preferred Stock" shall mean the redeemable Series B Preferred Stock issued by Holdco with terms, limitations, rights and preferences as set forth in Exhibit L-2. 34 43 "Solvent" shall mean with respect to any Person on a particular date, the condition that, on such date, (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, and (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute an unreasonably small amount of capital. "Standby Letter of Credit" shall mean a letter of credit that (i) is used in lieu or in support of performance guarantees or performance, surety or other similar bonds (but expressly excluding stay and appeal bonds) arising in the ordinary course of business, (ii) is used in lieu or in support of stay or appeal bonds, (iii) supports the payment of insurance premiums for reasonably necessary casualty insurance carried by the Company or any of its consolidated Subsidiaries, or (iv) supports payment or performance for identified purchases or exchanges of products in the ordinary course of business. "Statutory Reserves" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum applicable reserve percentages, including any marginal, special, emergency or supplemental reserves (expressed as a decimal) established by the Board of Governors of the Federal Reserve System and any other banking authority to which the Lenders are subject for Eurocurrency Liabilities (as defined in Regulation D) or any other category of deposits or liabilities by reference to which the Eurodollar Rate is determined. Such reserve percentages shall include those imposed pursuant to Regulation D. Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Sterling CAI" shall mean Sterling Chemicals Acquisitions, Inc., a Delaware corporation and a wholly-owned Subsidiary of the Company. "Sterling Canada" shall mean Sterling Canada, Inc., a Delaware corporation and a wholly-owned Subsidiary of the Company. "Sterling Fibers" shall mean Sterling Fibers, Inc., a Delaware corporation and a wholly-owned Subsidiary of the Company. "Sterling NRO" shall mean Sterling NRO, Ltd., an Ontario (Canada) corporation. "Sterling Pulp" shall mean Sterling Pulp Chemicals, Ltd., an Ontario (Canada) corporation and a wholly-owned subsidiary of Sterling Canada. 35 44 "Sterling (Sask)" shall mean Sterling Pulp Chemicals (Sask) Ltd., an Ontario (Canada) corporation and a wholly-owned Subsidiary of Sask Holdings. "Stock Intercreditor Agreement" shall mean the intercreditor agreement between the Administrative Agent, on behalf of the Lenders, and Fleet National Bank of Connecticut, as Trustee on behalf of the holders of the Senior Secured Discount Notes, and dated as of the STX Effective Date. "STX Closing Date" shall mean June 21, 1996. "STX Effective Date" shall mean August 21, 1996. "STX Facilities" shall have the meaning provided in the Introductory Statement. "STX First Amendment" shall have the meaning provided in the Introductory Statement. "STX Pilko Report" shall mean the environmental assessment letter of Pilko & Associates, Inc. dated April 18, 1996, and the accompanying Environmental Assessment of Sterling Chemicals, Inc. each of which has been delivered to the Lenders. "STX Second Amendment" shall have the meaning provided in the Introductory Statement. "STX Third Amendment" shall have the meaning provided in the Introductory Statement. "Subsidiary" of any Person shall mean a corporation, limited liability company, partnership or other entity of which a majority of the outstanding shares of stock of each class having ordinary voting power or other equity interests is owned by such Person, by one or more Subsidiaries of such Person, or by such Person and one or more of its Subsidiaries. "Subsidiary Guaranty" shall mean the Guaranty Agreement dated as of the AFB Effective Date executed by the then existing Subsidiary Guarantors. "Subsidiary Guarantors" shall mean those Subsidiaries designated as Subsidiary Guarantors on Schedule 4.19 as of the STX Effective Date, on Schedule 4.19-A as of the AFB Effective Date and on Schedule 4.19-B as of the Restated Closing Date, and any other Subsidiaries that become Subsidiary Guarantors pursuant to Section 5.01(i). "Tax Sharing Agreement" shall mean the Tax Sharing Agreement substantially in the form of Exhibit C, dated as of the STX Effective Date, executed between the Company and Holdco. "Taxes" shall have the meaning provided in Subsection 2.20(a). "TCB" shall mean Texas Commerce Bank National Association, in its individual capacity or as an Issuing Bank, as the case may be, and not as Administrative Agent. 36 45 "Term Loan" shall mean a Tranche A Term Loan, a Tranche B Term Loan or an ESOP Term Loan, as the context shall require; collectively, the "Term Loans". "Term Loan Lender" shall mean any Tranche A Term Loan Lender, Tranche B Term Loan Lender or ESOP Term Loan Lender. "Term Note" shall mean a Tranche A Term Note, a Tranche B Term Note or an ESOP Term Note, as the context shall require; collectively the "Term Notes". "Three-Month Secondary CD Rate" shall mean, for any day, the secondary rate (adjusted to the basis of a year of 365 or 366 days, as the case may be) for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board of Governors of the Federal Reserve System (the "Board") through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in the Federal Reserve Statistical Release H.15(519) during the week following such day), or if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 A.M., New York City time on such day (or, if such day shall not be a Business Day, on the next preceding Day) by the Administrative Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by the Administrative Agent. "Total Credit Percentage" shall mean as to any Lender at any time, (i) the percentage of the aggregate Revolving Credit Commitments, then constituted by such Lender's Revolving Credit Commitment; (ii) in the case of the termination or expiration of the Revolving Credit Commitments, by reference to the Aggregate Revolving Credit Exposure of the Revolving Credit Lenders and such Lender's Revolving Credit Exposure; and (iii) as to the Tranche A Term Loans, the Tranche B Term Loans or the ESOP Term Loans, by reference to the aggregate principal amount of the Tranche A Term Loans, the Tranche B Term Loans or the ESOP Term Loans of the Lenders, as the case may be, and the aggregate principal amount of such Lender's Tranche A Term Loans, Tranche B Term Loans or ESOP Term Loans, as the case may be. "Tranche A Term Loan" shall have the meaning provided in Subsection 2.01(a)(i) and includes the Original Tranche A Term Loans and the AFB Tranche A Term Loans. "Tranche A Term Loan Lender" shall mean any Lender having a Tranche A Term Loan outstanding hereunder. "Tranche A Term Loan Maturity Date" shall mean March 31, 2003. "Tranche A Term Loan Percentage" shall mean as to any Tranche A Term Loan Lender, at any time after the Restated Closing Date, the percentage which such Lender's Tranche A Term Loans then outstanding constitutes of the aggregate Tranche A Term Loans then outstanding. 37 46 "Tranche A Term Note" shall mean a promissory note of the Company described in Section 2.05(b) payable to a Tranche A Term Loan Lender and being substantially in the form of Exhibit B-1, evidencing the aggregate indebtedness of the Company to such Lender for Tranche A Term Loans. "Tranche B Term Loan" shall have the meaning provided in Subsection 2.01(a)(ii) and includes the Original Tranche B Term Loans and the AFB Tranche B Term Loans. "Tranche B Term Loan Lender" shall mean any Lender having a Tranche B Term Loan outstanding hereunder. "Tranche B Term Loan Maturity Date" shall mean September 30, 2004. "Tranche B Term Loan Percentage" shall mean as to any Tranche B Term Loan Lender, at any time after the Restated Closing Date, the percentage which such Lender's Tranche B Term Loans then outstanding constitutes of the aggregate Tranche B Term Loans then outstanding. "Tranche B Term Note" shall mean a promissory note of the Company described in Section 2.05(c) payable to a Tranche B Term Loan Lender and being substantially in the form of Exhibit B-2, evidencing the aggregate indebtedness of the Company to such Lender for Tranche B Term Loans. "Transactions" shall mean the transactions provided for in and contemplated by this Agreement and the other Financing Documents. "TSG" shall mean The Sterling Group, Inc., a Texas corporation. "Type" of Loan shall mean a Base Rate Loan or Eurodollar Loan. "UCC" shall mean the Uniform Commercial Code as from time to time in effect in the State of New York or, where applicable as to specific Collateral, any other relevant state. "Unrestricted Subsidiary" shall mean (a) Sterling Sask, Sask Holdings and Sterling CAI and (b) (i) any other wholly-owned Subsidiary of the Company that at the time of creation is designated as an Unrestricted Subsidiary by the Company (which designation is approved by its Board of Directors) and (ii) any Subsidiary created or acquired by another Unrestricted Subsidiary, provided that, in each case, such Unrestricted Subsidiary (x) has not acquired any Property from the Company or any of its Subsidiaries, except as specifically permitted by this Agreement, (y) has no Indebtedness other than Non-Recourse Debt and (z) does not own any capital stock, or any warrants, options or other rights to acquire capital stock, of the Company or any Subsidiary (other than an Unrestricted Subsidiary) and at the time of such designation, (A) the Company is unable to meet the incurrence test for debt set forth in the Senior Subordinated Notes Indenture or the Additional Senior Subordinated Notes Indenture or (B) Holdco is unable to meet the incurrence test for debt set forth in the Senior Secured Discount Notes Indenture. Notice of any such 38 47 designation by the Company shall be delivered by the Company to the Administrative Agent by promptly filing with the Administrative Agent a copy of the resolutions of the Board of Directors of the Company approving such designation and a certificate of a Responsible Officer certifying that such designation complies with the requirements of this definition. Such designation shall become effective upon receipt by the Administrative Agent of the foregoing. Each Unrestricted Subsidiary designated hereunder shall continue to be treated as an Unrestricted Subsidiary for purposes of this Agreement until the Company shall deliver notice to the Administrative Agent pursuant to and in compliance with Section 5.04(s). "U.S. Subsidiary" shall mean all Subsidiaries of the Company organized under the laws of any state, territory or subdivision of the United States. "U.S. Tax Compliance Certificate" shall have the meaning provided in Section 2.20(f)(y). "Valdosta Bonds" shall mean any of the Valdosta-Lowndes County Industrial Authority Industrial Development Revenue Bonds (Sterling Pulp Chemicals US, Inc. Project) Series 1995, issued and outstanding under that certain Indenture of Trust dated as of October 1, 1995 between Valdosta-Lowndes County Industrial Authority and Synovus Trust Company, as amended as of the STX Closing Date, and thereafter, as amended from time to time to the extent permitted by the Financing Documents. "Valdosta Lease" shall mean that certain Indenture of Lease dated as of October 1, 1995 by and between the Valdosta-Lowndes County Industrial Authority and Sterling Pulp Chemicals US, Inc., a Delaware corporation. "Voting Stock" of any Person shall mean capital stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person, whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency. Section 1.02 Accounting Terms and Determinations. Unless otherwise defined or specified herein, all accounting terms shall be construed herein, all accounting determinations hereunder shall be made, all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP applied on a basis consistent with the Financial Statements, except for changes concurred with by the Company's independent public accountants; provided that, if such changes affect the results of the calculations of the financial ratios required under Section 5.03 (as compared to the results obtained by applying GAAP in effect on the Restated Closing Date), the Company and the Administrative Agent (acting on behalf and at the direction of the Required Lenders) agree to negotiate in good faith to adjust such financial ratios in order to make them comparable after giving effect to such change in GAAP. Section 1.03 Other Definitional Terms. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, schedule, exhibit and like references are to this Agreement unless otherwise specified. 39 48 Section 1.04 Definition Cross References in Financing Documents. To the extent any Financing Document, including without limitation, the Security Documents, makes reference to, or incorporates by reference the defined terms of, either of the Original Credit Agreement or the AFB Acquisition Credit Agreement, such reference or incorporation by reference shall be deemed to refer to this Agreement, and, as applicable, to incorporate the definitions amended and restated herein. ARTICLE II AMOUNT AND TERMS OF LOANS Section 2.01 Loans and Commitments. (a) Loans. Subject to the terms and conditions and relying on the representations and warranties contained herein, (i) each Tranche A Term Loan Lender severally agrees to maintain outstanding, on the Restated Closing Date, term loans (each a "Tranche A Term Loan") to the Company; (ii) each Tranche B Term Loan Lender severally agrees to maintain outstanding, on the Restated Closing Date, term loans (each a "Tranche B Term Loan") to the Company; (iii) each ESOP Term Loan Lender severally agrees to maintain outstanding, on the Restated Closing Date, term loans (each an "ESOP Term Loan") to the Company; and (iv) on any Business Day from and after the Restated Closing Date, but prior to the Revolving Credit Maturity Date, each Revolving Credit Lender severally agrees to make revolving credit loans (each a "Revolving Credit Loan") to the Company. Any Term Loan that is repaid or prepaid may not be reborrowed. (b) Types of Loans. The Revolving Credit Loans and the Term Loans made pursuant hereto by each Lender shall, at the option of the Company, be either Base Rate Loans or Eurodollar Loans and may be continued or converted pursuant to Section 2.11, provided that, except as otherwise specifically provided herein, all Loans made pursuant to the same Borrowing shall be of the same Type. (c) Revolving Credit Commitments. Each Revolving Credit Lender's Revolving Credit Exposure shall not exceed at any one time the amount set forth opposite such Lender's name on Annex I under the caption "Revolving Credit Commitment" (as the same may be reduced pursuant to Section 2.09 or otherwise from time to time modified pursuant to Section 8.07(b), its "Revolving Credit Commitment," and collectively for all Revolving Credit Lenders, the "Revolving Credit Commitments"); provided, however, that the Aggregate Revolving Credit Exposure at any one time outstanding shall not exceed the Maximum Available Amount in effect at such time; and, provided, further, the aggregate principal amount of all Revolving Credit Loans at any one time outstanding shall not exceed the difference between (i) the Maximum Available Amount in effect at such time and (ii) the aggregate amount of all Letter of Credit Liabilities at such time. There may be more than one Borrowing with respect to Revolving Credit Loans on any day. Within the foregoing limits and subject to the conditions set out in Article III, the Company 40 49 may obtain Borrowings of Revolving Credit Loans, repay or prepay such Revolving Credit Loans, and reborrow such Revolving Credit Loans. (d) Amounts of Borrowings, etc. The aggregate principal amount of each Borrowing (i) of Eurodollar Loans shall be not less than $3,000,000 and shall be in an integral multiple of $100,000, and (ii) of Base Rate Loans hereunder shall be not less than $1,000,000 and shall be in an integral multiple of $100,000, except that any Borrowing of Revolving Credit Loans that are Base Rate Loans may be in the aggregate amount of the unused Maximum Revolving Credit Loan Amount in effect at such time. Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Company shall not be entitled to request any Borrowing that, if made, would result in an aggregate of more than fourteen separate Borrowings of Eurodollar Loans being outstanding at any one time. For purposes of the foregoing, Borrowings having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Borrowings. Section 2.02 Borrowing Requests. (a) Borrowing Requests. Whenever the Company desires to make a Borrowing hereunder, it shall give Advance Notice in the form of a Borrowing Request, specifying, subject to the provisions hereof, (i) the aggregate principal amount of the Revolving Credit Loans to be made pursuant to such Borrowing, (ii) the date of Borrowing (which shall be a Business Day), (iii) whether the Revolving Credit Loans being made pursuant to such Borrowing are to be Base Rate Loans or Eurodollar Loans, and (vi) in the case of Eurodollar Loans, the Interest Period to be applicable thereto. (b) Notice by Administrative Agent. The Administrative Agent shall promptly give each Applicable Lender telecopy or telephonic notice (and, in the case of telephonic notices, confirmed by telecopy or otherwise in writing) of the proposed Borrowing, of such Lender's Applicable Percentage thereof and of the other matters covered by the Advance Notice. The Company hereby waives the right to dispute the Administrative Agent's record of the terms of such telephonic notice, absent manifest error. Section 2.03 Letters of Credit. (a) Issuance of Letters of Credit. Subject to the terms and conditions hereof, the Company shall have the right, in addition to Revolving Credit Loans provided for in Section 2.01, to utilize the Revolving Credit Commitments from time to time prior to the Revolving Credit Maturity Date by obtaining the issuance of either Documentary Letters of Credit or Standby Letters of Credit for the account of the Company by an Issuing Bank if the Company shall so request in the notice referred to in Subsection 2.03(b)(i) (such letters of credit being collectively referred to as the "Letters of Credit"); provided, however, that the Aggregate Revolving Credit Exposure at any one time outstanding shall not exceed the Maximum Available Amount in effect at such time and the aggregate of all Letter of Credit Liabilities at any one time outstanding shall not exceed $25,000,000. The Letters of Credit shall be denominated in Dollars and may be issued 41 50 to support the obligations of the Company or any of its Subsidiaries. Upon the date of the issuance of a Letter of Credit, the applicable Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Revolving Credit Lender, and each Revolving Credit Lender shall be deemed, without further action by any party hereto, to have purchased from such Issuing Bank, a participation, to the extent of such Lender's Revolving Credit Percentage, in such Letter of Credit and the related Letter of Credit Liabilities. No Letter of Credit issued pursuant to this Agreement shall have an expiry date that exceeds the Revolving Credit Maturity Date. Any Letter of Credit may give the beneficiary thereof either the right to draw upon the Letter of Credit upon its expiry date or the right to automatically extend the expiry date thereof for periods of up to one year per extension; provided that no such extension shall extend the expiry date beyond the Revolving Credit Maturity Date. The Company and the Lenders agree that, as of the STX Effective Date, the Outstanding Letters of Credit shall for all purposes of this Agreement be deemed to be Letters of Credit issued under and pursuant to the terms of this Agreement. (b) Additional Letter of Credit Provisions. The following additional provisions shall apply to each Letter of Credit: (i) The Company shall give the Administrative Agent and the Issuing Bank at least three Business Days' prior notice (effective upon receipt), or in each case, such shorter period as may be agreed to by the Administrative Agent and such Issuing Bank, specifying the date such Letter of Credit is to be issued (which shall be a Business Day) and the Issuing Bank and describing: (A) the face amount of the Letter of Credit, (B) the expiration date of the Letter of Credit, (C) the name and address of the beneficiary, (D) information concerning the transaction proposed to be supported by such Letter of Credit as the Administrative Agent or such Issuing Bank may reasonably request, (E) such other information and documents relating to the Letter of Credit as the Administrative Agent or such Issuing Bank may reasonably request, and (F) a precise description of documents and the verbatim text of any certificate to be presented by the beneficiary, which, if presented prior to the expiry date of the Letter of Credit, would require such Issuing Bank to make payment under the Letter of Credit; provided that such Issuing Bank, in its reasonable judgment, may require changes in such documents and certificates; and provided further that no Issuing Bank shall be required to issue any Letter of Credit that on its terms requires payment thereunder prior to the next Business Day following receipt by such Issuing Bank of such documents and certificates. Each such notice shall be accompanied by the applicable Issuing Bank's Application and by a certificate executed by a Responsible Officer setting forth calculations evidencing availability for such Letter of Credit pursuant to Subsection 2.03(b)(ii) and stating that all conditions precedent to such issuance have been satisfied. Each Letter of Credit shall, to the extent not inconsistent with the express terms hereof or the applicable Application, be subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (together with any subsequent revisions thereof approved by a Congress of the International Chamber of Commerce, the "UCP"), and shall, as to matters not governed by the UCP, be governed by, and construed and interpreted in accordance with, the laws of the State of New York. 42 51 (ii) No Letter of Credit may be issued if after giving effect thereto the Aggregate Revolving Credit Exposure would exceed the Maximum Available Amount. On each day during the period commencing with the issuance of any Letter of Credit and until such Letter of Credit shall have expired or have been terminated, the Revolving Credit Commitment of each Revolving Credit Lender shall be deemed to be utilized for all purposes hereof in an amount equal to such Lender's Revolving Credit Percentage of the amount of the Letter of Credit Liabilities related to such Letter of Credit. (iii) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment thereunder, the Issuing Bank shall promptly notify the Company and the Administrative Agent of such demand (provided that the failure of an Issuing Bank to give such notice shall not affect the Reimbursement Obligations of the Company hereunder) and the Company shall immediately, and in any event no later than 10:00 a.m. (Houston, Texas time) on the date of such drawing, reimburse the Administrative Agent for the account of the applicable Issuing Bank for any amount paid by the Issuing Bank upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind in an amount, in same day funds, equal to the amount of such drawing. Unless prior to 10:00 a.m. (Houston, Texas time) on the date of such drawing, the Company shall have either notified the Issuing Bank and the Administrative Agent that the Company intends to reimburse the Administrative Agent for the account of the applicable Issuing Bank for the amount of such drawing with funds other than the proceeds of Revolving Credit Loans or delivered to the Administrative Agent a Borrowing Request for Revolving Credit Loans in an amount equal to such drawing, the Company will be deemed to have given a Borrowing Request to the Administrative Agent requesting that the Revolving Credit Lenders make Revolving Credit Loans which shall be Base Rate Loans on the date on which such drawing is honored in an amount equal to the amount of such drawing; provided that such Loans shall be subject to (i) the satisfaction of the conditions in Article III and (ii) the existence of Revolving Credit Loan availability pursuant to Section 2.01(c) hereof (after giving effect to repayment of the applicable Reimbursement Obligations with the proceeds of the proposed Revolving Credit Loans). Subject to the preceding sentence, if so requested by the Administrative Agent, each of the Revolving Credit Lenders shall, on the date of such drawing, make such Revolving Credit Loans in an amount equal to such Lender's Revolving Credit Percentage of such drawing or the full amount of the unused Revolving Credit Loan available pursuant to Section 2.01(c), as applicable, the proceeds of which shall be applied directly by the Administrative Agent to reimburse the applicable Issuing Bank to the extent of such proceeds. (iv) If the Company fails to reimburse the applicable Issuing Bank as provided in clause (iii) above for any reason, including, but not limited to, failure to satisfy the conditions in Article III or insufficient unused Revolving Credit Loan availability pursuant to Section 2.01(c), such Issuing Bank shall promptly notify the Administrative Agent and the Administrative Agent shall notify each Revolving Credit Lender of the unreimbursed amount of such drawing and of such Lender's respective participation therein based on 43 52 such Lender's Revolving Credit Percentage. Each Revolving Credit Lender will pay to the Administrative Agent for the account of the applicable Issuing Bank on the date of such notice an amount equal to such Lender's Revolving Credit Percentage of such unreimbursed drawing (or, if such notice is made after 1:00 p.m. (Houston, Texas time) on such date, on the next succeeding Business Day). If any Revolving Credit Lender fails to make available to such Issuing Bank the amount of such Lender's participation in such Letter of Credit as provided in this clause (iv), such Issuing Bank shall be entitled to recover such amount on demand from such Lender together with interest at the Federal Funds Effective Rate for one Business Day and thereafter at the Base Rate. Nothing in this clause (iv) shall be deemed to prejudice the right of any Revolving Credit Lender to recover from such Issuing Bank any amounts made available by such Lender to such Issuing Bank pursuant to this clause (iv) if it is determined by a court of competent jurisdiction that the payment with respect to a Letter of Credit by such Issuing Bank was wrongful and such wrongful payment was the result of gross negligence or willful misconduct on the part of such Issuing Bank. The applicable Issuing Bank shall pay to the Administrative Agent and the Administrative Agent to each Revolving Credit Lender such Lender's Revolving Credit Percentage of all amounts received from the Company for payment, in whole or in part, of the Reimbursement Obligation in respect of any Letter of Credit, but only to the extent such Lender has made payment to such Issuing Bank in respect of such Letter of Credit pursuant to this clause (iv). (v) The issuance by the applicable Issuing Bank of each Letter of Credit shall, in addition to the conditions precedent set forth in Article III, be subject to the conditions precedent that such Letter of Credit shall be in such form and contain such terms as shall be reasonably satisfactory to such Issuing Bank, and that the Company shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as such Issuing Bank shall have reasonably requested and that are not inconsistent with the terms of this Agreement including the applicable Issuing Bank's Application therefor. In the event of a conflict between the terms of this Agreement and the terms of any Application, the terms of this Agreement shall control. (vi) AS BETWEEN THE COMPANY AND ANY ISSUING BANK, THE COMPANY ASSUMES ALL RISKS OF THE ACTS AND OMISSIONS OF OR MISUSE OF THE LETTERS OF CREDIT ISSUED BY SUCH ISSUING BANK BY THE RESPECTIVE BENEFICIARIES OF SUCH LETTERS OF CREDIT. IN FURTHERANCE AND NOT IN LIMITATION OF THE FOREGOING, SUCH ISSUING BANK SHALL NOT BE RESPONSIBLE: (A) FOR THE FORM, VALIDITY, SUFFICIENCY, ACCURACY, GENUINENESS OR LEGAL EFFECT OF ANY DOCUMENT SUBMITTED BY ANY PERSON IN CONNECTION WITH THE APPLICATION FOR OR ISSUANCE OF SUCH LETTERS OF CREDIT, EVEN IF IT SHOULD IN FACT PROVE TO BE IN ANY OR ALL RESPECTS INVALID, INSUFFICIENT, INACCURATE, FRAUDULENT OR FORGED; (B) FOR THE VALIDITY OR SUFFICIENCY OF ANY INSTRUMENT TRANSFERRING OR ASSIGNING OR PURPORTING TO TRANSFER OR ASSIGN ANY SUCH LETTER OF CREDIT OR THE RIGHTS OR BENEFITS THEREUNDER OR PROCEEDS THEREOF, IN WHOLE OR IN PART, WHICH MAY PROVE TO BE INVALID OR INEFFECTIVE FOR ANY REASON; (C) FOR ERRORS, OMISSIONS, 44 53 INTERRUPTIONS OR DELAYS IN TRANSMISSION OR DELIVERY OF ANY MESSAGES, BY MAIL, CABLE, TELEGRAPH, TELEX OR OTHERWISE, WHETHER OR NOT THEY ARE IN CIPHER; (D) FOR ERRORS IN INTERPRETATION OF TECHNICAL TERMS; (E) FOR ANY LOSS OR DELAY IN THE TRANSMISSION OR OTHERWISE OF ANY DOCUMENT REQUIRED IN ORDER TO MAKE A DRAWING UNDER ANY SUCH LETTER OF CREDIT OR OF THE PROCEEDS THEREOF; (F) FOR THE MISAPPLICATION BY THE BENEFICIARY OF ANY SUCH LETTER OF CREDIT OF THE PROCEEDS OF ANY DRAWING UNDER SUCH LETTER OF CREDIT; AND (G) FOR ANY CONSEQUENCES ARISING FROM CAUSES BEYOND THE CONTROL OF SUCH ISSUING BANK, INCLUDING, WITHOUT LIMITATION, THE ACTIONS OF ANY GOVERNMENTAL AUTHORITY. NONE OF THE ABOVE SHALL AFFECT, IMPAIR, OR PREVENT THE VESTING OF ANY OF SUCH ISSUING BANK'S RIGHTS OR POWERS HEREUNDER. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS CLAUSE (VI), THE COMPANY SHALL NOT ASSUME ANY RISK, AND SHALL HAVE NO OBLIGATION TO INDEMNIFY AN ISSUING BANK, IN RESPECT OF ANY LIABILITY INCURRED BY SUCH ISSUING BANK ARISING PRIMARILY OUT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH ISSUING BANK, AS DETERMINED BY A COURT OF COMPETENT JURISDICTION. (vii) Each Issuing Bank will send to the Company and the Administrative Agent immediately upon issuance of any Letter of Credit, or an amendment thereto, a true and complete copy of such Letter of Credit, or such amendment thereto. Upon issuance of any Letter of Credit or an amendment thereto, the Administrative Agent shall promptly notify each Revolving Credit Lender of the terms of such Letter of Credit or amendment thereto, the Issuing Bank for such Letter of Credit or amendment thereto, and of such Lender's Revolving Credit Percentage of the amount of such Letter of Credit or amendment thereto, and the Administrative Agent shall provide to each Revolving Credit Lender a copy of such Letter of Credit or such amendment thereto. Upon cancellation or termination of any Letter of Credit, the Issuing Bank shall promptly notify the Administrative Agent and the Company, and the Administrative Agent will then promptly notify each Revolving Credit Lender, of such cancellation or termination. (viii) The obligation of the Company to reimburse each Issuing Bank for Reimbursement Obligations with regard to the Letters of Credit issued by it and the obligations of the Revolving Credit Lenders under clause (iv) shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement and under all circumstances including, without limitation, the following circumstances: (A) any lack of validity or enforceability of any Letter of Credit; (B) the existence of any claim, setoff, defense or other right that the Company may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), any Lender or any other Person, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any 45 54 underlying transaction between the Company or one of its Subsidiaries and the beneficiary for which the Letter of Credit was procured) other than a defense based on the gross negligence(AS OPPOSED TO ORDINARY NEGLIGENCE)or willful misconduct of such Issuing Bank, as determined by a court of competent jurisdiction; (C) any draft, demand, certificate or any other document presented under any Letter of Credit is proved to be forged, fraudulent, invalid or insufficient in any respect or any statement therein is untrue or inaccurate in any respect; (D) any adverse change in the condition (financial or otherwise) of the Company; (E) any breach of this Agreement or any other Financing Document by the Company, Administrative Agent or any Lender (other than the applicable Issuing Bank); (F) any other circumstance or happening whatsoever which is similar to any of the foregoing; provided that such other occurrence or happening is not the result of the gross negligence (AS OPPOSED TO ORDINARY NEGLIGENCE) or willful misconduct of such Issuing Bank, as determined by a court of competent jurisdiction; or (G) the fact that a Default shall have occurred and be continuing. (c) Upon the request of the Company, the Administrative Agent, the Issuing Banks, the Lenders and the Company agree to negotiate in good faith to allow or to provide for the issuance of letters of credit denominated in Canadian dollars. Section 2.04 Disbursement of Funds. (a) Availability. No later than 11:00 a.m. (Houston time) on the date of each Borrowing, each Lender will make available to the Administrative Agent such Lender's Applicable Percentage of the amount (if any) by which the principal amount of the Borrowing requested to be made on such date by such Lender exceeds the principal amount of Loans (if any) of such Lender maturing on such date, in Dollars and in immediately available funds at the Payment Office. The Administrative Agent will make available to the Company at the Payment Office the aggregate of the amounts (if any) so made available by the Lenders by depositing such amounts, in immediately available funds, to an account of the Company at the Administrative Agent designated by the Company for such purpose. To the extent that Revolving Credit Loans mature or Reimbursement Obligations are due and owing on the date of a requested Borrowing of Revolving Credit Loans, the Revolving Credit Lenders shall apply the proceeds of the Revolving Credit Loans then being made, to the extent thereof, to the repayment of such maturing Revolving Credit Loans or Reimbursement Obligations, such Revolving Credit Loans or 46 55 Reimbursement Obligations and repayments intended to be a contemporaneous exchange. (b) Funds to the Administrative Agent. Unless the Administrative Agent shall have been notified by any Applicable Lender prior to the date of a Borrowing that such Lender does not intend to make available to the Administrative Agent such Lender's Applicable Percentage of the Borrowing to be made on such date, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on such date, and the Administrative Agent may make available to the Company a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent by such Lender on the date of a Borrowing, the Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest at the Federal Funds Effective Rate. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent shall promptly notify the Company, and the Company shall immediately pay such corresponding amount to the Administrative Agent together with interest at the rate specified for the Borrowing which includes such amount paid. Nothing in this Section shall be deemed to relieve any Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights which the Company may have against any Lender as a result of any default by such Lender hereunder. (c) Lenders' Responsibilities. No Lender shall be responsible for any default by any other Lender in its obligation to make Loans hereunder, and each Lender shall be obligated to make only such Loans provided to be made by it hereunder, regardless of the failure of any other Lender to fulfill its Commitment hereunder. Section 2.05 Notes and Amortization. (a) Revolving Credit Notes. The Company's obligation to pay the principal of, and interest on, the Revolving Credit Loans made by each Revolving Credit Lender shall be further evidenced by the Company's issuance, execution and delivery of a Revolving Credit Note payable to the order of each such Lender in the amount of such Lender's Revolving Credit Commitment and shall be dated as of the date of issuance of such Revolving Credit Note. The principal amount of each Revolving Credit Note shall be payable on or before the Revolving Credit Maturity Date. (b) Tranche A Term Notes and Amortization. The Company's obligation to pay the principal of, and interest on, the Tranche A Term Loans maintained outstanding by each Tranche A Term Loan Lender shall be further evidenced by the Company's issuance, execution and delivery of a Tranche A Term Note payable to the order of each such Lender in the principal amount of such Lender's Tranche A Term Loans, and dated as of the date of issuance of such Tranche A Term Note. The aggregate principal amount of the Tranche A Term Notes applicable to the aggregate Tranche A Term Loans of all Tranche A Term Loan Lenders shall be payable in quarterly installments of the amounts set forth below (in each case, as reduced by the application of any prepayments pursuant to Section 2.10): 47 56 QUARTERLY DATE AMOUNT March 31, 2000 $1,204,306.93 June 30, 2000 $4,228,329.21 September 30, 2000 $4,228,329.21 December 31, 2000 $5,686,373.77 March 31, 2001 $5,686,373.77 June 30, 2001 $5,686,373.77 September 30, 2001 $5,686,373.77 December 31, 2001 $7,144,418.31 March 31, 2002 $7,144,418.31 June 30, 2002 $7,144,418.31 September 30, 2002 $7,144,418.31 December 31, 2002 $7,757,933.17 March 31, 2003 $7,757,933.17 The first such quarterly installment shall be payable on March 31, 2000, and the remaining quarterly installments shall be payable on each Quarterly Date thereafter, with the final installment in the amount of the aggregate unpaid principal balance then owing being payable on or before the Tranche A Term Loan Maturity Date. (c) Tranche B Term Notes and Amortization. The Company's obligation to pay the principal of, and interest on, the Tranche B Term Loans maintained outstanding by each Tranche B Term Loan Lender shall be further evidenced by the Company's issuance, execution and delivery of a Tranche B Term Note payable to the order of each such Lender in the principal amount of such Lender's Tranche B Term Loans, and dated as of the date of issuance of such Tranche B Term Note. The aggregate principal amount of the Tranche B Term Notes applicable to the aggregate Tranche B Term Loans of all Tranche B Term Loan Lenders shall be payable in quarterly installments in the amounts set forth below (in each case, as reduced by the application of any prepayments pursuant to Section 2.10): 48 57
QUARTERLY DATE AMOUNT QUARTERLY DATE AMOUNT ------------------ -------- ------------------- ------------ September 30, 1997 $333,333 March 31, 2001 $333,333 December 31, 1997 $333,333 June 30, 2001 $333,333 March 30, 1998 $333,333 September 30, 2001 $333,333 June 30, 1998 $333,333 December 31, 2001 $333,333 September 30, 1998 $333,333 March 31, 2002 $333,333 December 31, 1998 $333,333 June 30, 2002 $333,333 March 31, 1999 $333,333 September 30, 2002 $333,333 June 30, 1999 $333,333 December 31, 2002 $333,333 September 30, 1999 $333,333 March 31, 2003 $333,333 December 31, 1999 $333,333 June 30, 2003 $30,750,004 March 30, 2000 $333,333 September 30, 2003 $30,750,004 June 30, 2000 $333,333 December 31, 2003 $32,500,000 September 30, 2000 $333,333 March 30, 2004 $32,500,000 December 31, 2000 $333,333 June 30, 2004 $32,500,000 September 30, 2004 $32,500,000
The first such quarterly installment shall be payable on September 30, 1997, and the remaining quarterly installments shall be payable on each Quarterly Date thereafter, with the final installment in the amount of the aggregate unpaid principal balance then owing being payable on or before the Tranche B Term Loan Maturity Date. (d) ESOP Term Notes and Amortization. The Company's obligation to pay the principal of, and interest on, the ESOP Term Loans maintained outstanding by each ESOP Term Loan Lender is further evidenced by the Company's issuance, execution and delivery of an ESOP Term Note payable to the order of each such Lender in the principal amount of such Lender's ESOP Term Loans and dated as of the date of issuance of such ESOP Term Note. The principal amount of the aggregate ESOP Term Notes shall be payable in 13 quarterly installments (in each case as reduced by the application of any prepayments pursuant to Section 2.10), the first 12 of which will be equal installments of $406,250. The first such quarterly installment shall be payable on September 30, 1997, and the remainder shall be payable on each Quarterly Date thereafter, with the final installment in the amount of the aggregate unpaid principal balance then owing being payable on or before the ESOP Term Loan Maturity Date. Section 2.06 Interest. In all cases subject to Section 8.12: (a) Base Rate Loans. Subject to Section 2.06(c), the Company agrees to pay interest in respect of the unpaid principal amount of each Base Rate Loan from the date thereof until payment in full thereof at a rate per annum which shall be, for any day, equal to the sum of the Applicable Margin plus the Base Rate in effect on such day, but in no event to exceed the Highest Lawful Rate. The term "Base Rate" shall mean, for any day, the highest of (i) the Prime Rate in effect on such day, (ii) one-half of one percent ( 1/2%) plus the Federal Funds Effective Rate in effect for such day (rounded upwards, if necessary, to the nearest 1/16th of 1%), and (iii) one 49 58 percent (1%) plus the Base CD Rate in effect on such day, but in no event to exceed the Highest Lawful Rate. For purposes of this Agreement, any change in the Base Rate due to a change in the Three-Month Secondary CD Rate, the Federal Funds Effective Rate, or the Prime Rate shall be effective as of the opening of business on the effective date of such change in the Three-Month Secondary CD Rate, the Federal Funds Effective Rate, or the Prime Rate, as the case may be. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive and binding, absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate and the Three-Month Secondary CD Rate for any reason, including but not limited to the inability of the Administrative Agent to obtain sufficient bids or publications in accordance with the terms hereof, the Base Rate shall be the Prime Rate until the circumstances giving rise to such inability no longer exist. (b) Eurodollar Loans. Subject to Section 2.06(c), the Company agrees to pay interest in respect of the unpaid principal amount of each Eurodollar Loan from the date thereof until payment in full thereof at a rate per annum which shall be the sum of the relevant Applicable Margin plus the Eurodollar Rate, but in no event to exceed the Highest Lawful Rate. (c) Default Interest. If the Company shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder or under any Financing Document, by acceleration or otherwise, the Company shall on demand from time to time pay interest, to the extent permitted by law, on such defaulted amount to but excluding the date of actual payment (after as well as before judgment) at a rate per annum equal to (a) in the case of any Eurodollar Loan, the rate that would be applicable under Section 2.06(b) to such Eurodollar Loan, plus 2% per annum, and (b) in the case of any other amount, the rate that would be applicable under Section 2.06(a) to a Base Rate Loan, plus 2% per annum. (d) Interest Payment Dates. Interest on each Loan shall accrue from and including the date of such Loan to but excluding the date of payment in full thereof. Interest on each Eurodollar Loan shall be payable on the last day of each Interest Period applicable thereto and, in the case of an Interest Period in excess of three months, on each day which occurs every three months after the initial date of such Interest Period, and on any prepayment (on the amount prepaid), at maturity (whether by acceleration or otherwise) and, after maturity, on demand. Interest on each Base Rate Loan shall be payable on each Quarterly Date, commencing on the first of such days to occur after such Loan is made, at maturity (whether by acceleration or otherwise) and, after maturity, on demand. (e) Notice by the Administrative Agent. The Administrative Agent, upon determining the Eurodollar Rate for any Interest Period, shall promptly notify by telecopy or telephone (in the case of telephonic notices, confirmed by telecopy or otherwise in writing) or in writing the Company and the Applicable Lenders. Section 2.07 Interest Periods. In connection with each Borrowing of Eurodollar Loans, the Company shall elect an Interest Period to be applicable to such Borrowing, which Interest Period shall begin on and include, as the case may be, the date selected by the Company pursuant to Section 2.02(a), 50 59 the conversion date or the date of expiration of the then current Interest Period applicable thereto, and end on but exclude the date which is either one, two, three, six or (subject to availability by each Applicable Lender) twelve months thereafter, as selected by the Company; provided that: (a) Business Days. If any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided, further, that if any Interest Period (other than in respect of a Borrowing of Eurodollar Loans the Interest Period of which is expiring pursuant to Section 2.15(b) hereof) would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (b) Month End. Any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to Subsection (c) below, end on the last Business Day of a calendar month; (c) Payment Limitations. No Interest Period shall extend beyond any date that any principal payment or prepayment is scheduled to be due unless the aggregate principal amount of Borrowings which are Borrowings of Base Rate Loans or which have Interest Periods which will expire on or before such date, less the aggregate amount of any other principal payments or prepayments due during such Interest Period, is equal to or in excess of the amount of such principal payment or prepayment; and (d) Maturity Dates. No Interest Period with regard to Revolving Credit Loans shall extend beyond the Revolving Credit Maturity Date, no Interest Period with regard to Tranche A Loans shall extend beyond the Tranche A Term Loan Maturity Date, no Interest Period with regard to Tranche B Term Loans shall extend beyond the Tranche B Term Loan Maturity Date and no Interest Period with regard to ESOP Term Loans shall extend beyond the ESOP Term Loan Maturity Date. Section 2.08 Repayment of Loans. (a) The Company hereby unconditionally promises to pay to the Administrative Agent for the account of (i) each Revolving Credit Lender, the then unpaid principal amount of each Revolving Credit Loan of such Lender on the Revolving Credit Maturity Date (or such earlier date on which the Revolving Credit Loans become due and payable which the Tranche B Term Loans become due and payable pursuant to pursuant to Article VI); (ii) each Tranche A Term Loan Lender the amounts specified in Section 2.05(b), on the dates specified in Section 2.05(b) (or such earlier date on which the Tranche A Term Loans become due and payable pursuant to Article VI); (iii) each Tranche B Term Loan Lender, the amounts specified in Section 2.05(c), on the dates specified in Section 2.05(c) (or such earlier date on which the Tranche B Term Loans become due and payable 51 60 pursuant to Article VI); and (iv) each ESOP Term Loan Lender, the amounts specified in Section 2.05(d), on the dates specified in Section 2.05(d) (or such earlier date on which the ESOP Term Loans become due and payable pursuant to Article VI). The Company hereby further agrees to pay interest on the unpaid principal amount of the Loans from time to time outstanding from the date hereof until payment in full thereof at the rates per annum, and on the dates, set forth in Section 2.06. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Company to such Lender resulting from each Loan of such Lender from time to time, including, without limitation, the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. (c) The Administrative Agent shall maintain the Register pursuant to Section 8.07(d), and a subaccount therein for each Lender, in which shall be recorded (i) the amount of each Loan made hereunder, the Type thereof and each Interest Period, if any, applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Company to each Lender hereunder and (iii) both the amount of any sum received by the Administrative Agent hereunder from the Company and each Lender's Applicable Percentage thereof. (d) The entries made in the Register and the accounts of each Lender maintained pursuant to Section 2.08(b) shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations of the Company therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain the Register or any such account, or any error therein, shall not in any manner affect the obligation of the Company to repay (with applicable interest) the Loans made to the Company by such Lender in accordance with the terms of this Agreement. Section 2.09 Termination or Reduction of Revolving Credit Commitments. The Company may, upon at least three Business Days' notice to the Administrative Agent, terminate entirely at any time, or partially reduce from time to time by an aggregate amount of $5,000,000 or any larger multiple of $1,000,000, the unused portions of the Revolving Credit Commitments, provided that any such reduction shall apply proportionately to the Revolving Credit Commitment of each Revolving Credit Lender. If the Revolving Credit Commitments are terminated in their entirety, all accrued commitment fees with respect thereto shall be payable on the effective date of such termination. Section 2.10 Prepayments. (a) Mandatory Borrowing Base Prepayments. If at any time the Aggregate Revolving Credit Exposure is in excess of the Maximum Available Amount, the Company shall immediately pay to the Administrative Agent, for the account of the Revolving Credit Lenders, the amount of such excess to be applied (i) as a prepayment of the Revolving Credit Loans and Reimbursement Obligations outstanding and (ii) after payment in full of the Revolving Credit Loans and Reimbursement Obligations outstanding, as Cover for the Letter of Credit Liabilities in an amount of such remaining excess. Any such prepayment or Cover shall be payable or provided in full on the date on which the reduction or termination of the Commitments pursuant to Section 2.09 becomes effective. 52 61 (b) Mandatory Term Loan Prepayments. (i) On or before the 105th day after each September 30th, commencing on September 30, 1997, the Company shall deliver to each Lender the Company's calculation of its Excess Cash Flow for the Fiscal Year ended on such September 30th; provided that for purposes of this Section 2.10(b), the period ending on September 30, 1997, shall begin on August 22, 1996 and end on September 30, 1997. On the third day after delivery of the notice provided above, but in no event later than the 108th day after each September 30th, commencing September 30, 1997, the Company shall prepay (by payment to the Administrative Agent for distribution to the Term Loan Lenders as provided below) an aggregate principal amount of Term Loans equal to (A) 75% of Excess Cash Flow for any Fiscal Year (or other applicable period as provided above) if, as of the last day of the applicable Fiscal Year, the aggregate principal amount of the Tranche A Term Loans and the Tranche B Term Loans is equal to or greater than $203,000,000, and (B) 50% of Excess Cash Flow for any Fiscal Year thereafter (provided that, other Indebtedness of the Company and its Subsidiaries has not been used to effect such repayment of Term Loans); and, in the case of (A) and (B) above, less the amount of any voluntary prepayments of Term Loans made by the Company as permitted in Subsection 2.10(c) during such Fiscal Year (or other applicable period). (ii) At any time the Company becomes obligated to prepay all or part of the Senior Subordinated Notes or the Additional Senior Subordinated Notes, the Company shall, prior to any prepayment of the Senior Subordinated Notes or the Additional Senior Subordinated Notes, prepay the Term Loans in full. (iii) At any time that the Company and its Subsidiaries sell, lease, or otherwise dispose of any of their Property, the Company shall promptly prepay an aggregate principal amount of Term Loans equal to the amount of Net Proceeds in excess of $5,000,000 in the aggregate in any Fiscal Year, received from such sale, lease or disposal of Property, less the amount reinvested pursuant to Subsection 5.04(c)(i)(C)(2). (iv) Prepayments of the Term Loans pursuant to this Section 2.10(b) shall be applied (i), so long as no Default has occurred and is continuing, to the Tranche A Term Loans and the Tranche B Term Loans (A) pro rata based on outstanding principal amount thereof at the time of such prepayment and (B) pro rata to the respective installments of principal thereof, and (ii), if a Default has occurred and is continuing, (A) pro rata (based on outstanding principal amount thereof at the time of such prepayment) to the Tranche A Term Loans, the Tranche B Term Loans and the ESOP Term Loans and (B) pro rata to the respective installments of principal thereof. Notwithstanding the foregoing, in respect of any partial prepayment of Term Loans (until such time as the Tranche A Term Loans have been repaid in full) pursuant to this Section 2.10(b), any Tranche B Term Loan Lender may, at its option, irrevocably decline receipt of its Tranche B Term Loan share of any such prepayment, and, if such lender so declines, such share shall be applied as an additional prepayment of the Tranche A Term Loans, the other Tranche B Term Loans, 53 62 and ESOP Term Loans in accordance with the immediately preceding sentence, as further adjusted pursuant to the balance of this Section 2.10(b). In the case of any prepayment pursuant to clauses (i,) (ii), or (iii), the Company shall provide to the Administrative Agent written notice of such prepayment at least five Business Days prior to the date such prepayment is to be made. Any Tranche B Term Loan Lender may notify the Administrative Agent and the Company of its election to decline its Tranche B Term Loan share of all such prepayments, in which event such notice shall be effective until such Lender notifies the Administrative Agent and the Company to the contrary. Any Tranche B Term Loan Lender that wishes to decline receipt of its share of any given prepayment pursuant to this Section 2.10(b), shall promptly, and in any event no later than 10:00 a.m. (Houston, Texas time) on the date following its receipt of the notice of such prepayment, notify the Company and the Administrative Agent of such election. Any Tranche B Term Loan Lender that has not provided notice pursuant to one of the two preceding sentences prior to such 10:00 a.m. deadline shall be deemed to have elected to accept such prepayment. The Administrative Agent shall promptly provide, to all such accepting Tranche B Term Loan Lenders, notice of the principal amount of the Tranche B Term Loans that such lenders have elected to decline. Any such accepting Lender may, at its option, irrevocably decline receipt of its share of any such declined shares of such prepayment (and shall indicate in such notice whether it elects to accept or decline receipt of its share of such prepayment declined by other Lenders pursuant to this sentence), and, if such Lender so declines, such share shall be applied as an additional prepayment of the Tranche A Term Loans, the other Tranche B Term Loans and the ESOP Term Loans in accordance with this Section 2.10(b). Any Tranche B Term Loan Lender that wishes to decline receipt of its share of such declined shares, shall promptly, and in any event no later than 10:00 a.m. (Houston, Texas time) on the date following receipt of the notice from the Administrative Agent regarding such declined shares, notify the Company and the Administrative Agent of such election. Any such accepting Lender that has not provided such notice prior to such 10:00 a.m. deadline shall be deemed to have elected to accept the full amount of its share of such prepayment. (v) Prior to April 1, 2000, the Company shall use its Retained Cash Flow to prepay or repay first the outstanding Revolving Credit Loans and second to prepay the Term Loans, such prepayments to be applied as provided in Section 2.10(b)(iv). (c) Voluntary Prepayments. The Company may, at its option, at any time and from time to time, prepay the Loans and the Reimbursement Obligations, in whole or in part, upon giving, in the case of any Revolving Credit Loan that is a Eurodollar Loan, or any Term Loan, three Business Days' prior written notice to the Administrative Agent, and, in the case of any Revolving Credit Loan that is a Base Rate Loan, prior written notice on the same Business Day to the Administrative Agent. Such notice shall specify (i) in the case of any prepayment of Loans, the date and amount of prepayment and whether the prepayment is (A) of Term Loans or Revolving Credit Loans, or a combination thereof and (B) of Eurodollar Loans, Base Rate Loans or a combination thereof, and, in each case if a combination thereof, the principal amount allocable to each; (ii) in the case of any prepayment of Reimbursement Obligations, the date and amount of 54 63 prepayment, the identity of the applicable Letter of Credit or Letters of Credit and the amount allocable to each of such Reimbursement Obligations; and (iii) in the case of the prepayment of Term Loans, whether the Company shall approve the election, if any, of the Tranche B Term Loan Lenders to decline their share of any such prepayment as further provided in this Section 2.10(c). Upon receipt of such notice, the Administrative Agent shall promptly notify each Applicable Lender of the contents thereof and of such Lender's Applicable Percentage of such prepayment and, in the case of any Tranche B Term Loan Lender, whether or not the Company has elected to permit each Tranche B Term Loan Lender to, at its option, decline its Tranche B Term Loan share of such prepayment. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with (if a Eurodollar Loan is prepaid other than at the end of the Interest Period applicable thereto) any amounts payable pursuant to Section 2.18 and, in the case of prepayments of the Term Loans only, accrued interest to such date on the amount prepaid. Prepayments of (i) the Term Loans pursuant to this Section 2.10(c) shall be applied (A) so long as no Default has occurred and is continuing, first, to the Tranche A Term Loans and the Tranche B Term Loans (x) pro rata based on outstanding principal amount thereof at the time of such prepayment and (y) pro rata to the respective installments of principal thereof, and (B) if a Default has occurred and is continuing, (x) pro rata (based on outstanding principal amount thereof at the time of such prepayment) to the Tranche A Term Loans, the Tranche B Term Loans and the ESOP Term Loans and (y) pro rata to the respective installments of principal thereof, and (ii) the Revolving Credit Loans and the Reimbursement Obligations pursuant this Section shall (unless the Company otherwise directs) be applied, first, to payment of the Revolving Credit Loans then outstanding, second, to payment of any Reimbursement Obligations then outstanding and, last, to Cover any outstanding Letter of Credit Liability. Notwithstanding the foregoing and subject to the Company's approval described above, in respect of any partial prepayment of Term Loans (until such time as the Tranche A Term Loans have been repaid in full) pursuant to this Section 2.10(c), any Tranche B Term Loan Lender may, at its option, irrevocably decline receipt of its Tranche B Term Loan share of any such prepayment, and, if such lender so declines, such share shall be applied as an additional prepayment of the Tranche A Term Loans, the other Tranche B Term Loans, and the ESOP Term Loans in accordance with the immediately preceding sentence, as further adjusted pursuant to balance of this Section 2.10(c). Any Tranche B Term Loan Lender may notify the Administrative Agent and the Company of its election to decline its Tranche B Term Loan share of all such prepayments, in which event such notice shall be effective until such Lender notifies the Administrative Agent and the Company to the contrary. Any Tranche B Term Loan Lender that wishes to decline receipt of its share of any given prepayment pursuant to this Section 2.10(c), shall promptly, and in any event no later than 10:00 a.m. (Houston, Texas time) on the date following receipt of its notice of such prepayment, notify the Company and the Administrative Agent of such election. Any Tranche B Term Loan Lender that has not provided notice pursuant to one of the two preceding sentences prior to such 10:00 a.m. deadline shall be deemed to have elected to accept such prepayment. The Administrative Agent shall promptly provide, to all such accepting Tranche B Term Loan Lenders, notice of the principal amount of the Tranche B Term Loans that such lenders have elected to decline. Any such accepting Lender may, at its option, irrevocably decline receipt of its share of any such declined shares of such prepayment (and shall indicate in such notice whether it elects to accept or decline receipt of its share of such prepayment declined by such other lenders pursuant to 55 64 this sentence), and, if such Lender so declines, such share shall be applied as an additional prepayment of the Tranche A Term Loans, the other Tranche B Term Loans and the ESOP Term Loans in accordance with this Section 2.10(c). Any Tranche B Term Loan Lender that wishes to decline receipt of its share of the reallocation of such declined shares, shall promptly, and in any event no later than 10:00 a.m. (Houston, Texas time) on the date following receipt of the notice from the Administrative Agent regarding such declined shares, notify the Company and the Administrative Agent of such election. Any such accepting Lender that has not provided such notice prior to such 10:00 a.m. deadline shall be deemed to have elected to accept the full amount of its share of such prepayment. Each prepayment of Base Rate Loans shall be in the minimum principal amount of $1,000,000 and in integral multiples of $100,000 and each prepayment of Eurodollar Loans shall be in the minimum principal amount of $3,000,000 and in integral multiples of $100,000 or, in the case of either Base Rate Loans or Eurodollar Loans, the aggregate principal balance outstanding on the Term Loans or on the Revolving Credit Loans and the Reimbursement Obligations, as applicable. (d) Notice by Administrative Agent. Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly notify each Applicable Lender of the contents thereof and of such Lender's ratable share of such prepayment. Section 2.11 Continuation and Conversion Options. (a) Continuation. The Company may elect to continue all or any part of any Borrowing of Eurodollar Loans beyond the expiration of the then current Interest Period relating thereto by giving Advance Notice (which shall be irrevocable) to the Administrative Agent of such election, specifying the Eurodollar Loans or portion thereof to be continued and the Interest Period therefor. In the absence of such a timely and proper election with regard to Eurodollar Loans, the Company shall be deemed to have elected to convert such Eurodollar Loans to Base Rate Loans pursuant to Subsection 2.11(d). (b) Amounts of Continuations. All or part of any Eurodollar Loans may be continued as provided herein, provided that any continuation of such Loans shall not be (as to each Borrowing of such Loans as continued for an applicable Interest Period) less than $3,000,000 and shall be in an integral multiple of $100,000. (c) Continuation or Conversion Upon Default. If no Default shall have occurred and be continuing, each Eurodollar Loan may be continued or converted as provided in this Section. If a Default shall have occurred and be continuing, the Company shall not have the option to elect to continue any such Eurodollar Loan pursuant to Subsection 2.11(a) or to convert Base Rate Loans to Eurodollar Loans pursuant to Subsection 2.11(e). (d) Conversion to Base Rate. The Company may elect to convert any Eurodollar Loan on the last day of the then current Interest Period relating thereto to a Base Rate Loan by giving Advance Notice to the Administrative Agent of such election. 56 65 (e) Conversion to Eurodollar Rate. The Company may elect to convert any Base Rate Loan at any time or from time to time to a Eurodollar Loan by giving Advance Notice (which shall be irrevocable) to the Administrative Agent of such election, specifying each Interest Period therefor. (f) Amounts of Conversions. All or any part of the outstanding Loans may be converted as provided herein, provided that any conversion of such Loans shall not result in a Borrowing of Eurodollar Loans in an amount less than $3,000,000 and in integral multiples of $100,000. Section 2.12 Fees. (a) Revolving Credit Commitments. The Company shall pay to the Administrative Agent for the account of and distribution to each Revolving Credit Lender in accordance with its Revolving Credit Percentage a commitment fee for the period commencing on the STX Closing Date, to and including the Revolving Credit Maturity Date (or such earlier date as the Revolving Credit Commitments shall have been terminated entirely) computed at the rate per annum equal to the Applicable Commitment Fee Percentage on the average daily excess amount of the Revolving Credit Commitments over the Revolving Credit Exposure. The commitment fees on the Revolving Credit Commitments earned from and after the STX Effective Date shall be payable in arrears on each Quarterly Date, commencing on the first Quarterly Date to occur after the STX Closing Date. (b) Letters of Credit. (i) As consideration for acting as the Issuing Bank with respect to any Letter of Credit, the Company will pay to the applicable Issuing Bank a fee to be agreed upon between the Company and the applicable Issuing Bank not to exceed .25% per annum on the daily average amount available for drawing on the applicable Letter of Credit, payable in arrears on each Quarterly Date. The Company shall also pay to the Issuing Bank, with respect to any issuance, amendment, transfer, or cancellation prior to expiration of any Letter of Credit and for each drawing made thereunder, documentary and processing charges in accordance with the Issuing Bank's standard schedule for such charges in effect at the time of, and payable at the time of, such issuance, amendment, transfer, cancellation or drawing, as the case may be. All fees payable pursuant to this clause (i) shall be retained by the applicable Issuing Bank. (ii) The Company will pay to the Administrative Agent for the account of and pro rata distribution to each Revolving Credit Lender a fee on the daily average amount available for drawings under each Letter of Credit, in each case for the period from and including the date of issuance of such Letter of Credit to and excluding the date of expiration or termination thereof computed at a per annum rate for each day equal to the Applicable Margin for Revolving Credit Loans that are Eurodollar Loans in effect on such day, payable in arrears on each Quarterly Date. 57 66 (c) Administrative Agent and Documentation Agent Fees. The Company shall pay to the Agents such fees as are set forth in the Fee Letter and the AFB Fee Letter, as the same has been or may be hereafter amended or supplemented, on the dates and in the manner specified therein. Section 2.13 Payments, etc. (a) Without Setoff, etc. Except as otherwise specifically provided herein, all payments under this Agreement shall be made to the Administrative Agent on behalf of the Applicable Lenders without defense, setoff or counterclaim to the Administrative Agent not later than 11:00 a.m. Houston time on the date when due and shall be made in Dollars in immediately available funds at the Payment Office; provided, that, to the extent that the Company has provided Advance Notice with respect to a Borrowing of Revolving Credit Loans and has instructed that the proceeds of such Borrowing is to be used to repay installments of Term Loans due on the date of such Borrowing, then so long as all conditions for such Borrowing have been met, any such installments shall, to the extent of such Borrowing, be considered repaid by 11:00 a.m. on the date of such Borrowing regardless of when the Administrative Agent actually receives such funds from the Lenders; provided, further, that the foregoing proviso shall not modify the obligations of the Company provided in Section 2.04(b). The Administrative Agent will promptly thereafter distribute funds in the form received relating to the payment of principal or interest or commitment fees ratably to the Applicable Lenders for the account of their respective Lending Offices, and funds in the form received relating to the payment of any other amount payable to any Lender to such Lender for the account of its Lending Office. (b) Non-Business Days. Whenever any payment to be made hereunder or under any Note shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day (except as otherwise provided in Section 2.07 hereof) and, with respect to payments of principal, interest thereon shall be payable at the applicable rate during such extension. (c) Computations. All computations of interest shall be made on the basis of a year of 360 days (unless such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be) in the case of Eurodollar Loans or Base Rate Loans that are based upon the Federal Funds Effective Rate or the Base CD Rate, and 365 or 366 days (as the case may be) in the case of Base Rate Loans that are based upon the Prime Rate, and all computations of fees shall be made on the basis of a year of 360 days (unless such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be), in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by the Administrative Agent of an interest rate or fee hereunder shall, except for manifest error, be final, conclusive and binding for all purposes, provided that such determination shall be made in good faith in a manner generally consistent with the Administrative Agent's standard practice. If the Administrative Agent and the Company 58 67 determine that manifest error exists, said parties shall correct such error by way of an adjustment to the payment due on the next Quarterly Date. Section 2.14 Interest Rate Not Ascertainable, etc. In the event that the Administrative Agent shall have determined (which determination shall be reasonably exercised and shall, absent manifest error, be final, conclusive and binding upon all parties) that on any date for determining the Eurodollar Rate for any Interest Period, by reason of any changes arising after the date of this Agreement affecting the interbank Eurodollar market, or any Lender's position in such market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Eurodollar Rate, then, and in any such event, the Administrative Agent shall forthwith give notice (by telephone confirmed in writing) to the Company and to the Lenders of such determination. Until the Administrative Agent notifies the Company that the circumstances giving rise to the suspension described herein no longer exist, the obligations of the Lenders to make Eurodollar Loans shall be immediately suspended; any Borrowing of Eurodollar Loans that is requested (by continuation, conversion or otherwise) shall instead be made as a Borrowing of Base Rate Loans, and any outstanding Eurodollar Loan shall be converted, on the last day of the then current Interest Period applicable thereto, to a Base Rate Loan. Section 2.15 Illegality. (a) Determinations of Illegality. In the event that any Lender shall have determined (which determination shall be reasonably exercised and shall, absent manifest error, be final, conclusive and binding upon all parties) at any time that the making or continuance of any Eurodollar Loan has become unlawful as a result of compliance by such Lender in good faith with any applicable law, governmental rule, regulation, guideline or order (whether or not having the force of law and whether or not failure to comply therewith would be unlawful), then, in any such event, the Lender shall give prompt notice (by telephone confirmed in writing) to the Company and to the Administrative Agent of such determination (which notice the Administrative Agent shall promptly transmit to the other Lenders). (b) Eurodollar Loans Suspended. Upon the giving of the notice to the Company referred to in Subsection (a) above, (i) the Company's right to request (by continuation, conversion or otherwise) and such Lender's obligation to make Eurodollar Loans shall be immediately suspended, and thereafter, any requested Borrowing of Eurodollar Loans shall, as to such Lender only, be deemed to be a request for a Base Rate Loan, and (ii) if the affected Eurodollar Loan or Loans are then outstanding, the Company shall immediately, or if permitted by applicable law, no later than the date permitted thereby, upon at least one Business Day's written notice to the Administrative Agent and the affected Lender, convert each such Eurodollar Loan into a Base Rate Loan, provided that if more than one Lender is affected at any time, then all affected Lenders must be treated the same pursuant to this Subsection. 59 68 Section 2.16 Increased Costs. (a) Eurodollar Regulations, etc. If, by reason of (x) after the date hereof, the introduction of or any change (including, but not limited to, any change by way of imposition or increase of reserve requirements) in or in the interpretation of any law or regulation, or (y) the compliance with any guideline or request issued by any central bank or other governmental authority or quasi-governmental authority exercising control over banks or financial institutions generally that becomes effective after the STX Closing Date (whether or not having the force of law): (i) any Lender (or its applicable Lending Office) shall be subject to any tax, duty or other charge with respect to its Eurodollar Loans or its obligation to make Eurodollar Loans, or shall change the basis of taxation of payments to any Lender of the principal of or interest on its Eurodollar Loans or its obligation to make Eurodollar Loans (except for changes in the rate of tax on the overall net income or gross receipts of such Lender or its applicable Lending Office imposed by the jurisdiction in which such Lender's principal executive office or applicable Lending Office is located); or (ii) any reserve (including, but not limited to, any imposed by the Board of Governors of the Federal Reserve System, but excluding any such reserve requirement that is reflected in the Eurodollar Rate), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or its applicable Lending Office shall be imposed or deemed applicable or any other condition affecting its Eurodollar Loans or its obligations to make Eurodollar Loans shall be imposed on any Lender or its applicable Lending Office or the interbank Eurodollar market or the secondary certificate of deposit market; and as a result thereof there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining Eurodollar Loans (except to the extent already included in the determination of the applicable Eurodollar Rate) or there shall be a reduction in the amount received or receivable by such Lender or its applicable Lending Office, then the Company shall from time to time, upon written notice from and demand by such Lender (with a copy of such notice and demand to the Administrative Agent), pay to such Lender, within 30 days after the date specified in such notice and demand, additional amounts determined by such Lender in a reasonable manner to be sufficient to indemnify such Lender against such increased cost. A certificate as to the amount of such increased cost and the calculation thereof, submitted to the Company and the Administrative Agent by such Lender, shall, except for manifest error, be final, conclusive and binding for all purposes, provided that the determination of such amount shall be made in good faith in a manner generally consistent with such Lender's standard practice. (b) Costs. If any Lender shall advise the Administrative Agent that at any time, because of the circumstances described in clauses (x) or (y) in Subsection 2.16(a) or any other circumstances arising after the STX Effective Date affecting such Lender or the interbank Eurodollar market or such Lender's position in such market, the Eurodollar Rate, as determined in 60 69 good faith by the Administrative Agent, will not adequately and fairly reflect the cost to such Lender of funding its Eurodollar Loans, then, and in any such event: (i) the Administrative Agent shall forthwith give notice (by telephone confirmed in writing) to the Company and to the Lenders of such advice; (ii) the Company's right to request a Borrowing of Eurodollar Loans from such Lender and such Lender's obligation to make Eurodollar Loans shall be immediately suspended, any such Borrowing of Eurodollar Loans that is requested (by continuation, conversion or otherwise) shall, as to such Lender only, be deemed to be a request for a Base Rate Loan, and any such outstanding Eurodollar Loan from such Lender shall be converted, on the last day of the then current Interest Period applicable thereto, to a Base Rate Loan. (c) Capital Adequacy. If, by reason of (i) after the date hereof, the introduction of or any change (including, but not limited to, any change by way of imposition or increase of reserve requirements) in or in the interpretation of any law or regulation, or (ii) the compliance with any guideline or request issued by any central bank or other governmental authority or quasi-governmental authority exercising control over banks or financial institutions generally that becomes effective after the STX Closing Date (whether or not having the force of law), affects or would affect the amount of capital required to be maintained by any Lender or any corporation controlling such Lender, and the amount of such capital is increased by or based upon the existence of such Lender's Loans or such Lender's Commitment to lend hereunder and other commitments of this type or of the Letters of Credit (or similar contingent obligations), then, within 30 days after written request therefor by such Lender (with a copy of such request to the Administrative Agent), the Company shall pay to such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender for the increased cost of such additional capital in light of such circumstances, to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender's Loans or such Lender's Commitment to lend hereunder or to the issuance or maintenance of the Letters of Credit. A certificate as to such amounts and the calculation thereof, submitted to the Company and the Administrative Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error, provided that the determination of such amount shall be made in good faith in a manner generally consistent with such Lender's standard practice. (d) Issuing Bank. The rights and benefits of the Lenders under this Section 2.16 shall also apply to any Issuing Bank in its capacity as such. (e) Notice. The Company shall not be obligated to compensate any Lender pursuant to this Section 2.16 for any amounts attributable to a period more than one year prior to the giving of notice by such Lender to the Company of its intention to seek compensation under this Section 2.16. 61 70 Section 2.17 Change of Lending Office. Each Lender agrees that it will use reasonable efforts to designate an alternate Lending Office with respect to any of its Eurodollar Loans affected by the matters or circumstances described in Sections 2.14, 2.15 or 2.16 to reduce the liability of the Company or avoid the results provided thereunder, so long as such designation is not disadvantageous to such Lender as determined by such Lender in its sole discretion; provided that such Lender shall have no obligation to so designate an alternate Lending Office located in the United States. Section 2.18 Funding Losses. The Company shall compensate each Lender, upon its written request (which request shall set forth the basis for requesting such amounts and shall, absent manifest error, be final, conclusive and binding upon all of the parties hereto), for all losses, expenses and liabilities (including, but not limited to, any interest paid by such Lender to lenders of funds borrowed by it to make or carry its Eurodollar Loans to the extent not recovered by the Lender in connection with the re-employment of such funds and excluding loss of anticipated profits), which the Lender may sustain: (i) if for any reason (other than a default by such Lender) a Borrowing of Eurodollar Loans does not occur on the date specified therefor in a Borrowing Request (whether or not withdrawn), including, but not limited to a failure by the Company to fulfill on the date of any Borrowing of Eurodollar Loans the conditions set forth in Article III, or to convert or continue any Eurodollar Loan hereunder after irrevocable notice of such conversion or continuation has been given pursuant to Section 2.11 (ii), if any payment, prepayment or conversion of any of its Eurodollar Loans required or permitted by any other provision of this Agreement or otherwise, or any assignment of a Eurodollar Loan pursuant to Section 2.22, in each case is made or deemed made on a date which is not the last day of the Interest Period applicable thereto, or (iii) if, for any reason, the Company defaults in its obligation to repay its Eurodollar Loans or interest accrued thereon as and when due and payable (at the due date thereof, whether at scheduled maturity, by acceleration, irrevocable notice of prepayment or otherwise). Section 2.19 Sharing of Payments, etc. If any Lender shall obtain any payment or reduction (including, but not limited to, any amounts received as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code) of any obligation of the Company hereunder (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its ratable share of payments or reductions on account of such obligations obtained by all the Lenders, such Lender shall forthwith (i) notify each of the other Lenders and the Administrative Agent of such receipt, and (ii) purchase from the other Lenders such participations in the affected obligations as shall be necessary to cause such purchasing Lender to share the excess payment or reduction, net of costs incurred in connection therewith, ratably with each of them, provided that if all or any portion of such excess payment or reduction is thereafter recovered from such purchasing Lender or additional costs are incurred, the purchase shall be rescinded and the purchase price restored to the extent of such recovery or such additional costs, but without interest. The Company agrees that any Lender so purchasing a participation from another Lender pursuant to this Section may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Company in the amount of such participation. 62 71 Section 2.20 Taxes. (a) Payments Free and Clear. Any and all payments by the Company under this Agreement or any other Financing Document shall be made, in accordance with Section 2.13, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender, the Administrative Agent and each Issuing Bank, taxes imposed on its income, and franchise or similar taxes imposed on it, by (i) any jurisdiction (or political subdivision thereof) of which the Administrative Agent, such Issuing Bank or such Lender, as the case may be, is a citizen or resident or in which such Lender has a permanent establishment (or is otherwise engaged in the active conduct of its banking business through an office or a branch) which is such Lender's applicable Lending Office, (ii) the jurisdiction (or any political subdivision thereof) in which the Administrative Agent, such Issuing Bank or such Lender is organized, or (iii) any jurisdiction (or political subdivision thereof) in which such Lender, such Issuing Bank or the Administrative Agent is presently doing business which taxes are imposed solely as a result of doing business in such jurisdiction (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities so arising out of payments by the Company being hereinafter referred to as "Taxes"). If the Company shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Lenders, the Issuing Banks or the Administrative Agent (i) the sum payable shall be increased by the amount necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.20) such Lender, such Issuing Bank or the Administrative Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions and (iii) the Company shall pay the full amount deducted to the relevant taxing authority or other Governmental Authority in accordance with applicable law. (b) Other Taxes. In addition, the Company agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, any Assignment and Acceptance or any other Financing Document (hereinafter referred to as "Other Taxes"). (c) Indemnification. The Company will indemnify each Lender, each Issuing Bank and the Administrative Agent for the full amount of Taxes and Other Taxes (including, but not limited to, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.20) paid by such Lender or such Issuing Bank or the Administrative Agent (on their behalf or on behalf of any Lender), as the case may be, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Any payment pursuant to such indemnification shall be made within 30 days after the date any Lender, any Issuing Bank or the Administrative Agent, as the case may be, makes written demand therefor. If a Lender, an Issuing Bank or the Administrative Agent shall become aware that it is entitled to claim a refund from a Governmental Authority in respect of Taxes or Other Taxes as to which it has been indemnified by the Company, 63 72 or with respect to which the Company has paid additional amounts, pursuant to this Section 2.20, it shall promptly notify the Company of the availability of such claim and shall, within 30 days after receipt of a request by the Company, make a claim to such Governmental Authority for such refund at the Company's expense. If a Lender, an Issuing Bank or the Administrative Agent receives a refund in respect of any Taxes or Other Taxes with respect to which the Company has paid additional amounts pursuant to this Section 2.20, it shall within 30 days from the date of such receipt pay over such refund to the Company (but only to the extent of indemnity payments made, or additional amounts paid, by the Company under this Section 2.20 with respect to the Taxes or Other Taxes giving rise to such refund), net of all outofpocket expenses of such Lender, such Issuing Bank or the Administrative Agent and without interest (other than interest paid by the relevant Governmental Authority with respect to such refund); provided, however, that the Company, upon the request of such Lender, such Issuing Bank or the Administrative Agent, agrees to repay the amount paid over to the Company (plus penalties, interest or other charges payable to the relevant Governmental Authority) to such Lender, such Issuing Bank or the Administrative Agent in the event such Lender, such Issuing Bank or the Administrative Agent is required to repay such refund to such Governmental Authority. (d) Receipts. Within 30 days after the date of any payment of Taxes or Other Taxes withheld by the Company in respect of any payment to any Lender, any Issuing Bank or the Administrative Agent, the Company will furnish to the Administrative Agent the original or a certified copy of a receipt evidencing payment thereof. (e) Survival. Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section 2.20 shall survive the payment in full of principal and interest hereunder. (f) Lender Representations and Agreements. As of the date on which any Lender becomes a party hereto, such Lender represents that it is either (i) a corporation organized under the laws of the United States of America or any state thereof (ii) entitled to complete exemption from United States withholding tax imposed on or with respect to any payments, including fees, to be made to it pursuant to this Agreement or (iii) entitled to complete exemption from United States withholding tax on interest imposed on or with respect to any payments of interest to be made pursuant to this Agreement (A) under an applicable provision of a tax convention to which the United States of America is a party (B) because it is acting through a branch, agency or office in the United States of America and any payment to be received by it hereunder is effectively connected with a trade or business in the United States of America or (C) because it is a recipient of portfolio interest within the meaning of Section 871(h) or 881(c) of the Code. Each Lender that is not a corporation organized under the laws of the United States of America or any state thereof shall: (x) provide to the Company and the Administrative Agent on or before the date of any payment by the Company hereunder, or on the date of its delivery of the Assignment and Acceptance pursuant to which it becomes a Lender, and at such other times as required by United States law or as the Company or the Administrative Agent shall 64 73 reasonably request, two accurate and complete original signed copies of either (A) Internal Revenue Service Form 4224 (or successor form) certifying that all payments to be made to it hereunder will be effectively connected to a United States trade or business (the "Form 4224 Certification"), or (B) Internal Revenue Service Form 1001 (or successor form) certifying that it is entitled to the benefit of a provision of a tax convention to which the United States of America is a party which completely exempts from United States withholding tax all payments to be made to it hereunder (the "Form 1001 Certification"). In addition, each Lender agrees that if it previously filed a Form 4224 Certification it will deliver to the Company and the Administrative Agent a new Form 4224 Certification prior to the first payment date occurring in each of its subsequent taxable years (or such other date as may be required in compliance with applicable law); and if it previously filed a Form 1001 Certification, it will deliver to the Company and the Administrative Agent a new certification prior to the first payment date falling in the third year following the previous filing of such certification (or such other date as may be required in compliance with applicable law); or (y) in the case of any such Lender that is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code, (i) furnish to the Company on or before the date of any payment by the Company, with a copy to the Administrative Agent, (A) a certificate substantially in the form of Exhibit I (any such certificate a "U.S. Tax Compliance Certificate") and (B) two accurate and complete original signed copies of Internal Revenue Service Form W-8, or successor applicable form certifying to such Lender's legal entitlement at the date of such certificate to an exemption from U.S. withholding tax under the provisions of Section 881(c) of the Code with respect to payments of interest to be made under this Agreement, any Notes or other Financing Documents (and to deliver to the Company and the Administrative Agent two further copies of such form on or before the date it expires or becomes obsolete and after the occurrence of any event requiring a change in the most recently provided form and, if necessary, obtain any extensions of time reasonably requested by the Company or the Administrative Agent for filing and completing such forms) and (ii) agree, to the extent legally entitled to do so, upon reasonable request by the Company, to provide to the Company (for the benefit of the Company and the Administrative Agent) such other forms as may be reasonably required in order to establish the legal entitlement of such Lender to an exemption from withholding with respect to payments of interest under this Agreement, any Notes or other Financing Documents, provided that in determining the reasonableness of a request under this clause (iii) such Lender shall be entitled to consider the cost (to the extent unreimbursed by the Company) which would be imposed on such Lender of complying with such request. Each Lender also agrees to deliver to the Company and the Administrative Agent such other or supplemental forms as may at any time be required as a result of changes in applicable law or regulation in order to confirm or maintain in effect its entitlement to exemption from United States withholding tax on any payments hereunder, provided that the circumstances of the Lender at the relevant time and applicable laws permit it to do so. Except as provided immediately below, if a 65 74 Lender is organized under the laws of a jurisdiction outside the United States of America, unless the Company and the Administrative Agent have received a Form 1001 Certification, Form 4224 Certification, or an Internal Revenue Service Form W-8 and a U.S. Tax Compliance Certificate, as applicable, satisfactory to them indicating that all payments, or in the case of a Lender providing such forms as are required under Section 2.20(f)(y) hereof, all payments of interest, to be made to such Lender hereunder are not subject to United States withholding tax, the Company shall be entitled to withhold taxes from such payments at the applicable statutory rate, provided that such withholding shall not increase the amount of payments for the account of such Lender to be made by the Company pursuant to Subsection 2.20(a). If a Lender determines, as a result of any change in either (i) applicable law, regulation or treaty, or in any official application thereof or (ii) its circumstances, that it is unable to submit any form or certificate that it is obligated to submit pursuant to this Section, or that it is required to withdraw or cancel any such form or certificate previously submitted, it shall promptly notify the Company and the Administrative Agent of such fact and the Company shall be entitled to withhold taxes from such payments at the applicable statutory rate, it being understood that such withholding shall increase the amount of payments for the account of such Lender to be made by the Company pursuant to Section 2.20(a). Each Lender agrees to indemnify and hold the Administrative Agent harmless from any United States taxes, penalties, interest and other expenses, costs and losses incurred or payable by the Administrative Agent (i) as a result of such Lender's failure to submit any form or certificate that it is required to provide pursuant to this Section or (ii) as a result of the Administrative Agent's reliance on any such form or certificate which such Lender has provided to it pursuant to this Section. Each Person that shall become a Lender or a Participant pursuant to Section 8.07 shall, upon the effectiveness of the related transfer, be required to provide all of the forms, certifications and statements required pursuant to this Section, provided that in the case of a Participant the obligations of such Participant were it a Lender except that such Participant shall furnish all such required forms, certifications and statements to the Lender from which the related participation shall have been purchased. (g) Efforts to Avoid or Reduce. Any Lender claiming any additional amounts payable pursuant to this Section 2.20 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Company or the Administrative Agent or to change the jurisdiction of its applicable Lending Office or to contest any tax imposed if the making of such a filing or change or contesting such tax would avoid the need for or reduce the amount of any such additional amounts that may thereafter accrue and would not, in the sole determination of such Lender, be otherwise disadvantageous to such Lender. Section 2.21 Pro Rata Treatment. Subject to Section 2.04(b), each Borrowing of Revolving Credit Loans shall be made, each payment on account of any commitment fee in respect of the Revolving Credit Commitments hereunder shall be allocated by the Administrative Agent, and any reduction of the Revolving Credit Commitments of the Lenders shall be allocated by the Administrative Agent, pro rata according to the relevant Revolving Credit Percentages of the Lenders. Subject to Section 2.04(b), each payment (including each prepayment) on account of principal of and interest on any Revolving Credit Loans shall be allocated by the Administrative Agent pro rata according to the respective outstanding principal amounts of such Revolving Credit Loans then held by the Revolving Credit Lenders. Except as 66 75 otherwise provided in Sections 2.10(b) and (c), each payment on account of principal of and interest on any Term Loans shall be allocated by the Administrative Agent pro rata according to the respective outstanding principal amounts of such Term Loans then held by the Term Loan Lenders. All proceeds (including proceeds from the realization upon the Collateral) received after acceleration of the maturity of the Loans, shall be applied first to reimbursement of expenses and indemnities provided for in this Agreement and the Financing Documents; second, to other Lender Indebtedness (including, without limitation, Letter of Credit Liabilities) until repaid in full pro rata to each Lender in accordance with its Total Credit Percentage; and, third, to any other Person entitled to receive such proceeds in accordance with applicable law. Section 2.22 Replacement of Lenders. If any Lender does not make a Eurodollar Loan pursuant to Section 2.15, is subject to increased costs pursuant to Section 2.16, fails to designate an alternate Lending Office pursuant to Section 2.17, or is owed or reasonably anticipates being owed additional amounts pursuant to Section 2.20 and fails to take action required under Subsection 2.20(g) to avoid or reduce any such additional amounts, the Company shall have the right, if no Default then exists, to replace such Lender with another bank or financial institution with the consent of the Administrative Agent, which consent shall not be unreasonably withheld, provided that (i) the obligations of the Company owing to the Lender being replaced (including such increased costs) that are not being assigned to the replacement lender shall be paid in full to the Lender being replaced concurrently with such replacement lender, (ii) the replacement lender shall execute an Assignment and Acceptance pursuant to which it shall become a party hereto as provided in Section 8.07(c), and (iii) upon compliance with the provisions for assignment provided in Section 8.07(c) and the payment of amounts referred to in clause (i), the replacement lender shall constitute a "Lender" hereunder and the Lender being so replaced shall no longer constitute a "Lender" hereunder. ARTICLE III CONDITIONS TO BORROWINGS AND TO PURCHASE, RENEWAL AND REARRANGEMENT The obligation of each Applicable Lender to make a Revolving Credit Loan, each Applicable Lender to maintain its Term Loans or an Issuing Bank to issue a Letter of Credit hereunder is subject to the satisfaction of the following conditions: Section 3.01 Closing. (a) With respect to the prior closings of the Original Credit Agreement and the AFB Acquisition Credit Agreement, the Company delivered to the Administrative Agent (unless waived by the Administrative Agent) all instruments, certificates and opinions referred to in Section 3.02 not theretofore delivered and the Company delivered to the Administrative Agent (unless waived by the Administrative Agent) on the same day as the closing of the AFB Acquisition Credit Agreement, all instruments, certificates and opinions referred to in Section 3.03 not theretofore delivered; and (b) With respect to the closing of this Agreement, the Company shall have delivered to the Administrative Agent (unless waived by the Administrative Agent) on the Restated Closing Date, which 67 76 shall be a Business Day, all instruments, certificates and opinions referred to in this Section 3.01(b) not theretofore delivered: (i) Term Notes- A duly completed and executed Term Note for each Applicable Lender and in each case dated as of the Restated Closing Date, and payable to the order of such Applicable Lender; (ii) Resolutions and Incumbency Certificates- (A) certified copies of the resolutions of the Boards of Directors of the Company dated as of the Restated Closing Date and approving, as appropriate, the Loans, the Notes, this Agreement and the other Financing Documents, and all other documents, if any, to which the Company is a party and evidencing corporate authorization with respect to such documents; and (B) a certificate of the Secretary or an Assistant Secretary of the Company dated as of the Restated Closing Date and certifying (1) the name, title and true signature of each officer of such Person authorized to execute the Notes, this Agreement, Applications and the other Financing Documents to which it is a party, (2) the name, title and true signature of each officer of such Person authorized to provide the certifications required pursuant to this Agreement including, but not limited to, certifications required pursuant to Section 5.02, Borrowing Requests, and Borrowing Base Reports, and (3) that attached thereto is a true and complete copy of the articles of incorporation and bylaws of the Company, as amended to date, and a recent good standing certificate. (iii) Opinions of Counsel- The following opinions of counsel, in each case addressed to each of the Agents, the Issuing Banks and the Lenders and covering such other matters as any Administrative Agent, any Issuing Bank or the Lenders may reasonably request: (A) Andrews & Kurth L.L.P., counsel to Holdco, the Company and the Subsidiary Guarantors dated as of the Restated Closing Date and substantially in the form of Exhibit E-1 hereto; and (B) Local counsel to the Company dated as of the Restated Closing Date and substantially in the form of Exhibits E-2 through E-4 as to the laws of Canada, the State of Florida and the State of Georgia. (iv) The Security Instruments and Guaranties (A) Ratification of Guaranty Agreement and Security Instruments, executed by each Subsidiary Guarantor, substantially in the form of Exhibit F-1-A hereto, dated as of the Restated Closing Date; 68 77 (B) Ratification of Limited Guaranty Agreement and Security Instruments (Santa Rosa), executed by Sterling Fibers, substantially in the form of Exhibit F-1-B hereto, dated as of the Restated Closing Date; (C) Amended and Restated Deed of Trust, substantially in the form of Exhibit F-2 hereto, dated as of the Restated Closing Date. (D) Third Amendment and Supplement to Security Agreement (Pledge), substantially in the form of Exhibit F-18, dated as of the Restated Closing Date, and executed by the Company granting to the Administrative Agent a first priority security interest in 100% of the Capital Stock of the Company's directly owned U.S. Subsidiaries, as security for the Lender Indebtedness; (E) Financing Statements or amendments to Financing Statements previously filed, as appropriate, to perfect the security interests created by the instruments delivered under clauses (C) and (D) above; (F) Stock certificates and corresponding stock powers to perfect the Administrative Agent's security in the stock pledged by the instrument delivered under clause (D) above; and (G) all Property in which the Administrative Agent shall, at such time, be entitled to have a Lien pursuant to this Agreement or any other Financing Document shall have been physically delivered to the possession of the Administrative Agent to the extent that such possession is necessary for the purpose of perfecting the Administrative Agent's Lien in such Collateral. (v) The Consummation of the Saskatoon Acquisition. The Saskatoon Acquisition shall have been consummated in accordance with the terms thereof. The proceeds of the sale of new Holdco Common Stock and the Series B Preferred Stock in an amount equal to approximately Cdn $20,000,000 shall have been received by Sterling CAI, Sask Holdings, or Sterling Sask in amounts and under terms reasonably satisfactory to the Agents and the Lenders. (vi) Insurance. A certificate of insurance coverage, dated as of the Restated Closing Date evidencing that the Company and its Subsidiaries are carrying insurance in accordance with Section 5.01(e) hereof. (vii) Financial Statements and Projections. The financial condition of the Company reflected in the financial information of the Company that was delivered to the Lenders prior to the Restated Closing Date by the Company has not changed in such a way as to materially and adversely affect the prospects of the Company or otherwise cause or result in a Material Adverse Effect. 69 78 (viii) Title Insurance. Mortgagee's Policy of Title Insurance, dated as of the Restated Closing Date, in form and substance satisfactory to the Agents insuring the Lien on the Company's chemical plant in Texas City, Texas granted pursuant to the Amended and Restated Deed of Trust in the amount of $9,000,000. Section 3.02 Conditions Precedent to Initial STX Loan. At the time of the making by such Original Lender of its initial Original Loan under the Original Credit Agreement or the issuance by such Issuing Bank of the initial Letter of Credit (including, but not limited to, the assumption by the Original Lenders of the Outstanding Letters of Credit), all obligations of the Company under the Original Credit Agreement to the Original Administrative Agent or any Original Lender incurred prior to such initial Loan or Letter of Credit, shall have been paid in full, and the Original Administrative Agent shall have received the following, each in form and substance reasonably satisfactory to the Agents under the Original Credit Agreement and the Original Lenders, with an original thereof for the Original Administrative Agent and with sufficient copies thereof for each Original Lender (except that in the case of the Notes, the originals thereof will be delivered to the respective Original Lenders): (a) Notes-A duly completed and executed Note for each Original Lender and in each case dated as of the STX Closing Date, and payable to the order of such Original Lender. (b) Resolutions and Incumbency Certificates- (i) certified copies of the resolutions of the Boards of Directors of the Company, Holdco, and any of the Company's Subsidiaries that are parties to any Financing Document, dated, as to the Company, as of the STX Closing Date, and as to Holdco and the Company's Subsidiaries, as of the STX Effective Date, and approving, as appropriate, the Original Loans, the Notes, the Original Credit Agreement and the other Financing Documents, and all other documents, if any, to which the Company, Holdco or such Subsidiary is a party and evidencing corporate authorization with respect to such documents; (ii) a certificate of the Secretary or an Assistant Secretary of the Company dated as of the STX Closing Date, and certifying (A) the name, title and true signature of each officer of such Person authorized to execute the Notes, the Original Credit Agreement, Applications and the other Financing Documents to which it is a party, (B) the name, title and true signature of each officer of such Person authorized to provide the certifications required pursuant to this Agreement including, but not limited to, certifications required pursuant to Section 5.02, Borrowing Requests, and Borrowing Base Reports, and (C) that attached thereto is a true and complete copy of the articles of incorporation and bylaws of the Company, as amended to date, and a recent good standing certificate; and (iii) a certificate of the Secretary or an Assistant Secretary of Holdco and of each Subsidiary that is a party to any Financing Document, in each case, dated as of the STX Effective Date and certifying (x) the name, title and true signature of each officer of 70 79 Holdco or such Subsidiary, as the case may be, authorized to execute each such Financing Document to which it is a party, and (y) that attached thereto is a true and complete copy of the articles of incorporation and bylaws of Holdco or such Subsidiary, as the case may be, as amended to date, and a recent good standing certificate for Holdco or such Subsidiary, as the case may be. (c) Opinions of Counsel- The following opinions of counsel, in each case addressed to each of the Agents under the Original Credit Agreement, the Issuing Banks and the Original Lenders and covering such other matters as any Original Administrative Agent, any Issuing Bank or the Original Lenders may reasonably request: (i) Andrews & Kurth L.L.P., counsel to Holdco, the Company and the Subsidiary Guarantors dated as of the STX Closing Date and substantially in the form of Exhibit E-5 hereto; and (ii) Andrews & Kurth L.L.P., counsel to Holdco, the Company and the Subsidiary Guarantors, dated as of the STX Effective Date; and (iii) Local counsel to the Company dated as of the STX Closing Date, and substantially in the form of Exhibits E-6 through E-7 as to the laws of Canada and the State of Georgia. (d) The Security Instruments and Guaranties- (i) guaranty agreement dated as of the STX Effective Date and executed by the then existing Subsidiary Guarantors; (ii) subrogation and contribution agreement dated as of the STX Effective Date and executed by the then existing Subsidiary Guarantors; (iii) Security Agreement dated as of the STX Effective Date executed by the Company, granting to the Original Administrative Agent a first priority security interest in all personal Property described therein, as security for the indebtedness defined therein as the "Obligations", substantially in the form of Exhibit F-3; (iv) Security Agreements dated as of the STX Effective Date executed by each of the then existing Subsidiary Guarantors, granting to the Original Administrative Agent a first priority security interest in all personal Property described therein of each such Person, as security for the indebtedness respectively defined therein as the "Obligations", substantially in the form of Exhibit F-4; (v) Security Agreement (Pledge) dated as of the STX Effective Date executed by Holdco granting to the Original Administrative Agent a first priority security interest in 71 80 100% of the capital stock of the Company, as security for the Lender Indebtedness under the Original Credit Agreement, substantially in the form of Exhibit F-5; (vi) Security Agreement (Pledge) dated as of the STX Effective Date executed by the Company granting to the Original Administrative Agent a first priority security interest in 100% of the Capital Stock of the Company's directly owned U.S. Subsidiaries, as security for the Lender Indebtedness under the Original Credit Agreement, substantially in the form of Exhibit F-6; (vii) Security Agreements (Pledge) dated as of the STX Effective Date executed by each of the Subsidiary Guarantors granting to the Original Administrative Agent a first priority security interest in 65% of the capital stock of Sterling Pulp and Sterling NRO, as security for the Lender Indebtedness under the Original Credit Agreement, substantially in the form of Exhibit F-7;. (viii) the Deed of Trust substantially in the form of Exhibit F-8 hereto and dated as of the STX Effective Date; (ix) The Leasehold Deed of Trust covering the leasehold estate under the Valdosta Lease substantially in the form of Exhibit F-9 and dated as of the STX Effective Date; (x) Collateral Assignment (Intercompany Loans and Accounts) dated as of the STX Effective Date executed by the Company, assigning to the Original Administrative Agent the Company's rights, titles and interests in and to all intercompany loans and accounts owing to the Company by any of its Subsidiaries, whether or not evidenced by promissory notes or other instruments, as security for the Lender Indebtedness under the Original Credit Agreement, substantially in the form of Exhibit F-11; (xi) Collateral Assignments (Intercompany Loans and Accounts) dated as of the STX Effective Date executed by each then existing Subsidiary Guarantor, assigning to the Original Administrative Agent such Subsidiary Guarantor's rights, titles and interests in and to all intercompany loans and accounts owing to such Subsidiary Guarantor by the Company or any of its other Subsidiaries, whether or not evidenced by promissory notes or other instruments, as security for the Lender Indebtedness under the Original Credit Agreement, substantially in the form of Exhibit F-12; (xii) Financing Statements, as appropriate, to perfect the security interests created by the instruments delivered under clauses (iii) through (xii) above; (xiii) Stock certificates and corresponding stock powers to perfect the Original Administrative Agent's security in the stock pledged by the instruments delivered under clauses (v) and (vii) above; 72 81 (xiv) all Property in which the Original Administrative Agent shall, at such time, be entitled to have a Lien pursuant to the Original Credit Agreement or any other Financing Document shall have been physically delivered to the possession of the Original Administrative Agent to the extent that such possession is necessary for the purpose of perfecting the Original Administrative Agent's Lien in such Collateral; (xv) the Stock Intercreditor Agreement dated as of the STX Effective Date; and (xvi) the Cash Collateral Agreement substantially in the form of Exhibit F-13 dated as of the STX Effective Date. (e) Insurance. A certificate of insurance coverage, dated as of the STX Effective Date evidencing that the Company and its Subsidiaries are carrying insurance in accordance with Section 5.01(e) hereof. In addition, the Original Administrative Agent shall have received evidence satisfactory to the Original Administrative Agent that none of the improved real estate Collateral is situated in an area that has been identified by the Director of the Federal Emergency Management Agency (as to such Collateral located in the United States of America) or any other Governmental Authority as an area having special flood hazards. Should it be determined, however, that any of the real estate Collateral is situated in an area identified as having special flood hazards, the Original Administrative Agent shall have received a copy of the applicable flood insurance policies (or policy applications), in form and substance satisfactory to the Required Original Lenders, indicating that the maximum limits of coverage have been obtained and that the full premium therefor has been paid in full. (f) Title Insurance; Survey. Mortgagee's Policies of Title Insurance, dated as of the STX Effective Date, in form and substance satisfactory to the Agents under the Original Credit Agreement insuring (i) the Lien on the Company's chemical plant in Texas City, Texas granted pursuant to the Deed of Trust in the amount of $9,000,000 (and a current survey covering such chemical plant) and (ii) the Lien granted pursuant to the Leasehold Deed of Trust on the leasehold estate under the Valdosta Lease, in the amount of $168,000. (g) Consummation of SCI Acquisition, Merger and SCI Asset Conveyance. The SCI Acquisition, the Merger and SCI Asset Conveyance consummated in accordance with the terms of the Merger Agreement and the Merger Agreement was not amended or modified other than with express written consent of the Required Original Lenders (except for amendments that did not materially change the structure of the Merger, Acquisition or SCI Asset Conveyance as contemplated in the Merger Agreement as of the STX Closing Date), subject only to the funding of the Original Loans. The proceeds of the new common equity and retained equity in Holdco equal to approximately $131,000,000 (assuming the retained equity is valued at $12.00 per share), the Senior Subordinated Notes and the Senior Secured Discount Notes necessary to consummate the SCI Acquisition and Merger were received by the Company or Holdco in amounts and under terms reasonably satisfactory to the Agents under the Original Credit Agreement and the Original Lenders. All conditions precedent to the SCI Acquisition, Merger and SCI Asset Conveyance set 73 82 forth in the Merger Agreement were satisfied and were not amended, modified or waived since the STX Closing Date, without the express written consent of the Required Original Lenders. All representations and warranties made by SCI in the Merger Agreement shall be true and correct as of the STX Effective Date in all material respects (and SCI so certified in writing, to the Original Administrative Agent, the Issuing Banks and the Original Lenders) and were not amended, modified or waived since the STX Closing Date, without the express written consent of the Required Original Lenders. All documents, instruments, agreements, transfers, conveyances and bills of sale necessary for the SCI Asset Conveyance were in form reasonably satisfactory to the Original Administrative Agent. (h) Appraisals. Appraisals shall have been completed, at the expense of the Company, determining the valueinuse of (i) the Company's real and personal Property, located at the Texas City, Texas facility, and (ii) designated personal Property of Sterling Pulp. (i) Solvency Opinion. A solvency opinion by Houlihan, Lokey, Howard and Zukin, Inc., dated as of the STX Effective Date, addressed to the Original Administrative Agent, the Issuing Banks and the Original Lenders, stating that the Company is Solvent, before and after giving effect to the SCI Acquisition, Merger and SCI Asset Conveyance. (j) Lien Searches. Lien searches reflecting no prior Liens on the Collateral other than Liens set forth on Schedule 5.04(b). (k) Repayment of Debt and Release of Liens. Provision satisfactory to the Agents under the Original Credit Agreement having been made for the prepayment and refinancing of all Indebtedness of the Company and its Subsidiaries and termination of commitments described on Schedule 5.04(a), subject only to making available the proceeds of the Loans for such prepayment and refinancing and all Liens identified on Schedule 5.04(b) have been released or documentation providing for the release of all such Liens shall have been duly executed by all necessary Persons and provision satisfactory to the Agents under the Original Credit Agreement shall have been made for delivery thereof to the Original Administrative Agent upon repayment of the Indebtedness of the Company and its Subsidiaries described on Schedule 5.04(a); (l) Secondary ESOP Loan Documents. Duly completed and executed copies of the Secondary ESOP Note and the ESOP Security Agreement. (m) Financial Statements and Projections. The financial condition of the Company and SCI reflected in the financial information and projections of the Company and SCI that were delivered to the Original Lenders as of the STX Closing Date by the Company, have not changed as of the STX Effective Date in such a way as to materially and adversely affect the prospects of the Company or otherwise cause or result in a Material Adverse Effect (after giving effect to the Merger and SCI Asset Conveyance). (n) STX Pilko Report. A certificate of the Company, dated as of the STX Effective Date, to the effect that to the Company's best knowledge, no relevant facts, conditions or 74 83 circumstances pertaining to environmental claims or liabilities shall have arisen that would cause the STX Pilko Report, if deemed to have been delivered on the STX Effective Date, to contain any material misstatement of fact, or any omission of any material fact necessary to make the STX Pilko Report accurate, complete and not misleading, except to the extent that any such fact, condition, or circumstance could not reasonably be expected to have a Material Adverse Effect. (o) Albright Indemnity. The Albright Indemnity shall remain legal, valid and binding in all respects as of the STX Effective Date. (p) Tax Sharing Agreement. The Tax Sharing Agreement dated as of the STX Effective Date. Section 3.03 Conditions Precedent to AFB Loans. At the time of the making by such AFB Lender of its AFB Loans under the AFB Acquisition Credit Agreement, all obligations of the Company hereunder to the AFB Administrative Agent or any AFB Lender incurred prior to such AFB Loans, shall have been paid in full, and the AFB Administrative Agent shall have received the following, each in form and substance reasonably satisfactory to the Agents under the AFB Acquisition Credit Agreement and the AFB Lenders, with an original thereof for the AFB Administrative Agent and with sufficient copies thereof for each AFB Lender (except that in the case of the Notes, the originals thereof will be delivered to the respective AFB Lenders): (a) Notes- A duly completed and executed Note for each AFB Lender and in each case dated as of the AFB Effective Date, and payable to the order of such AFB Lender. (b) Resolutions and Incumbency Certificates- (i) certified copies of the resolutions of the Boards of Directors of the Company, Holdco, and any of the Company's Subsidiaries that are parties to any Financing Document, dated, as to the Company, as of the AFB Effective Date, and as to Holdco and the Company's Subsidiaries, as of the AFB Effective Date, and approving, as appropriate, the AFB Loans, the Notes, the AFB Acquisition Credit Agreement and the other Financing Documents, and all other documents, if any, to which the Company, Holdco or such Subsidiary is a party and evidencing corporate authorization with respect to such documents; (ii) a certificate of the Secretary or an Assistant Secretary of the Company dated as of the AFB Effective Date, and certifying (A) the name, title and true signature of each officer of such Person authorized to execute the Notes, the AFB Acquisition Credit Agreement, and the other Financing Documents to which it is a party, (B) the name, title and true signature of each officer of such Person authorized to provide the certifications required pursuant to the AFB Acquisition Credit Agreement including, but not limited to, certifications required pursuant to Section 5.02, the Borrowing Request and (C) that attached thereto is a true and complete copy of the articles of incorporation and bylaws of the Company, as amended to date, and a recent good standing certificate; and 75 84 (iii) a certificate of the Secretary or an Assistant Secretary of Holdco and of each Subsidiary that is a party to any Financing Document, in each case, dated as of the AFB Effective Date and certifying (x) the name, title and true signature of each officer of Holdco or such Subsidiary, as the case may be, authorized to execute each such Financing Document to which it is a party, and (y) that attached thereto is a true and complete copy of the articles of incorporation and bylaws of Holdco or such Subsidiary, as the case may be, as amended to date, and a recent good standing certificate for Holdco or such Subsidiary, as the case may be. (c) Opinions of Counsel-The following opinions of counsel, in each case addressed to each of the Agents under the AFB Acquisition Credit Agreement and the AFB Lenders and covering such other matters as any AFB Administrative Agent or the AFB Lenders may reasonably request: (i) Andrews & Kurth L.L.P., counsel to Holdco, the Company and the Subsidiary Guarantors substantially in the form of Exhibit E-9 hereto; and (ii) Local counsel to the Company dated as of the AFB Effective Date and substantially in the form of Exhibits E-10 through E-12 as to the laws of Canada and the States of Georgia and Florida. (d) The Security Instruments and Guaranties- (i) Security Agreement executed by Sterling Fibers substantially in the Form of Exhibit F-14 and dated as of the AFB Effective Date; (ii) Santa Rosa Deed of Trust executed by Sterling Fibers substantially in the form of Exhibit F-15 and dated as of the AFB Effective Date; (iii) Limited Guaranty Agreement (Santa Rosa) executed by Sterling Fibers substantially in the form of Exhibit F-16 and dated as of the AFB Effective Date; (iv) Collateral Assignment (Intercompany Loans and Accounts) executed by Sterling Fibers substantially in the form of Exhibit F-17 dated as of the AFB Effective Date; (v) Second Lien Deed of Trust executed by the Company substantially in the form of Exhibit F-10 dated as of the AFB Effective Date; (vi) Guaranty Agreement dated as of the AFB Effective Date substantially in the form of Exhibit K-1 hereto, and executed by the then existing Subsidiary Guarantors in favor of the Agents under the Original Credit Agreement and the AFB Acquisition Credit Agreement, the Issuing Banks, the Original Lenders and the AFB Lenders; 76 85 (vii) Subrogation and Contribution Agreement substantially in the form of Exhibit K-2 hereto, and dated as of the AFB Effective Date executed by the Company and the then existing Subsidiary Guarantors; (viii) Second Amendment and Supplement to Security Agreement dated as of the AFB Effective Date executed by the Company, granting to the Original Administrative Agent a first priority security interest in all personal Property described therein, as security for the indebtedness defined therein as the "Obligations"; (ix) First Amendment and Supplement to Security Agreements dated as of the AFB Effective Date executed by each of the then existing Subsidiary Guarantors, granting to the Original Administrative Agent a first priority security interest in all personal Property described therein of each such Person, as security for the indebtedness respectively defined therein as the "Obligations"; (x) Second Amendment and Supplement to Security Agreement (Pledge) dated as of the AFB Effective Date executed by Holdco granting to the Original Administrative Agent a first priority security interest in 100% of the capital stock of the Company, as security for the Lender Indebtedness under the Original Credit Agreement and the AFB Acquisition Credit Agreement; (xi) Second Amendment and Supplement to Security Agreement (Pledge) dated as of the AFB Effective Date executed by the Company granting to the Original Administrative Agent a first priority security interest in 100% of the Capital Stock of the Company's directly owned U.S. Subsidiaries, as security for the Lender Indebtedness under the Original Credit Agreement and the AFB Acquisition Credit Agreement; (xii) First Amendment and Supplement to Security Agreement (Pledge) dated as of the AFB Effective Date executed by Sterling Canada granting to the Original Administrative Agent a first priority security interest in 65% of the capital stock of Sterling Pulp and Sterling NRO and 100% of the capital stock of Sterling Pulp Chemicals US, Inc., as security for the Lender Indebtedness under the Original Credit Agreement and the AFB Acquisition Credit Agreement; (xiii) First Amendment and Supplement to Security Agreement (Pledge) dated as of the AFB Effective Date executed by Sterling Pulp Chemicals US, Inc. granting to the Original Administrative Agent a first priority security interest in 100% of the capital stock of Sterling Pulp Chemicals, Inc., as security for the Lender Indebtedness under the Original Credit Agreement and the AFB Acquisition Credit Agreement; (xiv) First Amendment and Supplement to the Leasehold Deed to Secure Debt and Security Agreement covering the leasehold estate under the Valdosta Lease and dated as of the AFB Effective Date; 77 86 (xv) Second Amendment and Supplement to Collateral Assignment (Intercompany Loans and Accounts) dated as of the AFB Effective Date executed by the Company, assigning to the Original Administrative Agent the Company's rights, titles and interests in and to all intercompany loans and accounts owing to the Company by any of its Subsidiaries, whether or not evidenced by promissory notes or other instruments, as security for the Lender Indebtedness under the Original Credit Agreement and the AFB Acquisition Credit Agreement; (xvi) First Amendment and Supplement to Collateral Assignments (Intercompany Loans and Accounts) dated as of the AFB Effective Date executed by each Subsidiary Guarantor, assigning to the Original Administrative Agent such Subsidiary Guarantor's rights, titles and interests in and to all intercompany loans and accounts owing to such Subsidiary Guarantor by the Company or any of its other Subsidiaries, whether or not evidenced by promissory notes or other instruments, as security for the Lender Indebtedness under the Original Credit Agreement and the AFB Acquisition Credit Agreement; (xvii) First Amendment and Supplement to Security Agreement (Pledge-Bonds) dated as of the AFB Effective Date executed by Sterling Canada granting to the Original Administrative Agent a first priority security interest in the Valdosta Bonds; (xviii) Second Amendment and Supplement to Collateral Assignment (ESOP) dated as of the AFB Effective Date executed by the Company in favor of the Original Administrative Agent; (xix) Security Agreement (ESOP) dated as of the AFB Effective Date; (xx) Financing Statements, as appropriate, or other filings with Governmental Authorities to perfect the security interests created by the instruments delivered under clauses (i) through (xix) above; (xxi) Stock certificates and corresponding stock powers to perfect the Original Administrative Agent's security in the capital stock pledged by the Company pursuant to the instrument delivered under clauses (xi), (xii), (xiii) and (xiv) above; (xxii) all Property in which the Administrative Agent shall, at such time, be entitled to have a Lien pursuant to this Agreement or any other Financing Document shall have been physically delivered to the possession of the Administrative Agent to the extent that such possession is necessary for the purpose of perfecting such Lien in such Collateral; and (xxiii) the Intercreditor Agreement dated as of the AFB Effective Date. 78 87 (e) Insurance. A certificate of insurance coverage, dated as of the AFB Effective Date evidencing that the Company and its Subsidiaries are carrying insurance in accordance with Section 5.01(e) hereof. In addition, the AFB Administrative Agent shall have received evidence satisfactory to the AFB Administrative Agent that none of the improved real estate Collateral is situated in an area that has been identified by the Director of the Federal Emergency Management Agency (as to such Collateral located in the United States of America) or any other Governmental Authority as an area having special flood hazards. Should it be determined, however, that any of the real estate Collateral is situated in an area identified as having special flood hazards, the AFB Administrative Agent shall have received a copy of the applicable flood insurance policies (or policy applications), in form and substance satisfactory to the Required Lenders, indicating that the maximum limits of coverage have been obtained and that the full premium therefor has been paid in full. (f) Title Insurance; Survey. Mortgagee's Policy of Title Insurance in form and substance satisfactory to the Original Administrative Agent insuring the Lien on the Santa Rosa Plant in Santa Rosa County, Florida granted pursuant to the Santa Rosa Deed of Trust in the amount of $14,500,000 and a current survey covering the Santa Rosa Plant. (g) Consummation of AFB Acquisition. The AFB Acquisition shall have been consummated in accordance with the terms of the Purchase Agreement and the Purchase Agreement shall not have been amended or modified other than with express written consent of the Required AFB Lenders (except for amendments that do not materially change the terms of the AFB Acquisition as contemplated in the Purchase Agreement as of December 23, 1996), subject only to the funding of the AFB Loans. All conditions precedent to the AFB Acquisition set forth in the Purchase Agreement shall have been satisfied and shall not have been amended, modified or waived since December 23, 1996 without the express written consent of the AFB Lenders. All representations and warranties made by the Cytec Parties in the Purchase Agreement shall be true and correct as of the AFB Effective Date in all material respects and shall not have been amended, modified or waived since the AFB Effective Date, without the express written consent of the AFB Lenders. All documents, instruments, agreements, transfers, conveyances and bills of sale necessary for the AFB Acquisition shall be in form reasonably satisfactory to the AFB Administrative Agent. (h) Appraisals. Appraisals shall have been completed, at the expense of the Company, determining the value-in-use of the real and personal Property to be acquired in the AFB Acquisition. (i) Lien Searches. Lien searches reflecting no prior Liens on the Collateral other than Liens set forth on Schedule 5.04(b). (j) Financial Statements and Projections. The financial condition of the Company reflected in the financial information and projections of the Company that were delivered to the Lenders on or before January 6, 1997, by the Company have not changed in such a way as to 79 88 materially and adversely affect the prospects of the Company or otherwise cause or result in a Material Adverse Effect (after giving effect to the AFB Acquisition). (k) AFB Pilko Report. A copy of the AFB Pilko Report and a certificate of the Company, dated as of the AFB Effective Date, to the effect that to the Company's best knowledge, no relevant facts, conditions or circumstances pertaining to environmental claims or liabilities shall have arisen that would cause the AFB Pilko Report, if deemed to have been delivered on the AFB Effective Date, to contain any material misstatement of fact, or any omission of any material fact necessary to make the AFB Pilko Report accurate, complete and not misleading, except to the extent that any such fact, condition, or circumstance could not reasonably be expected to have a Material Adverse Effect. (l) Albright Indemnity. The Albright Indemnity shall remain legal, valid and binding in all respects as of the AFB Effective Date. (m) Additional Equity. Evidence of the receipt by Holdco of at least $10,000,000 of new common equity comprised of (i) at least $9,700,000 of additional cash equity (and contributed by Holdco to the Company and contributed or loaned by the Company to Sterling Fibers of such cash equity) and (ii) up to $300,000 of Equity Notes, in each case on terms and conditions satisfactory to the AFB Administrative Agent. (n) Issuance of Preferred Stock. Evidence satisfactory to the AFB Administrative Agent of the issuance by Holdco of 100,000 shares of Preferred Stock to Cytec Industries on terms and conditions as set forth in Exhibit L-1. (o) STX First Amendment An executed copy of the STX First Amendment in form and substance satisfactory to the AFB Administrative Agent. (p) Conditions to Funding Under the Original Credit Agreement. A certificate from the Company certifying that the conditions precedent set forth in Section 3.04(a), (b) and (c) of the Original Credit Agreement are satisfied as of the AFB Effective Date. (q) Annual Budget. A copy of the annual budget of the Company and its Subsidiaries (consolidating on the basis of the principal lines of business of the Company and its Subsidiaries) setting forth in reasonable detail the projected revenues and expenses of the Company for the Fiscal Year ending on September 30, 1997 (which budget does not include provision for the AFB Acquisition). (r) No Default. Both before and after giving effect to the AFB Loans and the proposed use of proceeds thereof, there shall exist no Default; (s) Representations and Warranties. Both before and after giving effect to the AFB Loans and the proposed use of proceeds thereof, all representations and warranties contained herein and in the other Financing Documents executed and delivered on or after the date hereof 80 89 shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of such AFB Loan (unless such representation and warranty is expressly limited to an earlier date or is no longer true and correct solely as a result of transactions not prohibited by the Financing Documents); and (t) Documentation. The AFB Administrative Agent shall have received such other documents as the AFB Administrative Agent (or any AFB Lender acting through the AFB Administrative Agent) may reasonably request, all in form and substance reasonably satisfactory to the Administrative Agent. Section 3.04 Conditions Precedent to Each Loan. At the time of the making by such Lender of each Loan, including the initial Loan but not including continuations or conversions pursuant to Section 2.11 (before as well as after giving effect to such Loan and to the proposed use of the proceeds thereof): (a) No Default. There shall exist no Default; (b) Representations and Warranties. All representations and warranties contained herein and in the other Financing Documents executed and delivered on or after the date hereof shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of such Loan (unless such representation and warranty is expressly limited to an earlier date or is no longer true and correct solely as a result of transactions not prohibited by the Financing Documents); and (c) Documentation. The Administrative Agent shall have received such other documents as the Administrative Agent (or any Lender acting through the Administrative Agent) may reasonably request, all in form and substance reasonably satisfactory to the Administrative Agent. Each Borrowing Request submitted by the Company, and the acceptance by the Company of the proceeds of such Borrowing (but not including continuations or conversions pursuant to Section 2.11), shall constitute a representation and warranty by the Company, as of the date of such Borrowing, that the conditions specified in Subsections 3.04(a) and (b) have been satisfied. ARTICLE IV REPRESENTATIONS AND WARRANTIES In order to induce the Lenders to enter into this Agreement, the Company represents and warrants to the Lenders (which representations and warranties (i) will survive the delivery of the Notes, (ii) made by the Company as of the STX Closing Date, were made assuming that the SCI Acquisition, Merger, and SCI Asset Conveyance had occurred on or before the STX Closing Date and (iii) made by the Company as of 81 90 the AFB Effective Date, were made assuming that the AFB Acquisition had occurred on or before the AFB Effective Date) that: Section 4.01 Corporate Existence. The Company and each of its Subsidiaries are corporations duly organized, legally existing and in good standing under the laws of the jurisdictions in which they are incorporated and are duly qualified as foreign corporations in all jurisdictions wherein the Property owned or the business transacted by them makes such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect. Section 4.02 Corporate Power and Authorization. The Company is authorized and empowered to create and issue the Notes; the Company and each of its Subsidiaries are duly authorized and empowered to execute, deliver and perform the Financing Documents, including this Agreement, to which they respectively are parties; and all corporate action on the Company's part requisite for the due creation and issuance of the Notes on the Company's and each of its Subsidiaries' respective part requisite for the due execution, delivery and performance of the Financing Documents, including this Agreement, to which the Company and each of its Subsidiaries respectively are parties has been duly and effectively taken. Section 4.03 Binding Obligations. This Agreement does, and the Notes and other material Financing Documents to which the Company and each of its Subsidiaries respectively are parties upon their creation, issuance, execution and delivery will, when issued and delivered under this Agreement, constitute legal, valid and binding obligations of the Company and each such Subsidiary that is a party thereto, respectively, and will be enforceable in accordance with their respective terms (except that enforcement may be subject to any applicable bankruptcy, insolvency or similar laws generally affecting the enforcement of creditors' rights and subject to the availability of equitable remedies). Section 4.04 No Legal Bar or Resultant Lien. The execution, delivery and performance of the Notes and the other Financing Documents, including this Agreement, to which the Company or any of its Subsidiaries is a party do not and will not violate or create a default under any provisions of the articles or certificate of incorporation or bylaws of the Company or any of its Subsidiaries, or any contract, agreement, instrument or Governmental Requirement to which the Company or any of its Subsidiaries is subject, or result in the creation or imposition of any Lien upon any Properties of the Company or any of its Subsidiaries, other than those violations and defaults that would not have a Material Adverse Effect upon the Company's or such Subsidiaries' use of such Properties or those permitted by this Agreement. Section 4.05 No Consent. The Company's and each of its Subsidiaries' respective execution, delivery and performance of the Notes and the other Financing Documents, including this Agreement, to which the Company and each such Subsidiary respectively are parties, and the consummation of the Merger, the SCI Acquisition, the AFB Acquisition, and the Saskatoon Acquisition do not require notice to or filing or registration with, or the authorization, consent or approval of or other action by any other Person, including, but not limited to, any Governmental Authority, except those obtained or made or where the failure to do so could not reasonably be expected to have a Material Adverse Effect. 82 91 Section 4.06 Financial Information. (a) Financial Statements. The March 31, 1996 pro forma consolidated financial statements of the Company heretofore delivered to the Lenders were prepared consistent with GAAP and present the estimated consolidated financial condition and operations of the Company at such date and the results of its operations for the six-month period then ended on a pro forma basis. (b) Audited Financial Statements. The audited consolidated balance sheets of the Company and its Subsidiaries as of September 30, 1995 and 1996, and the related audited consolidated statements of income, retained earnings and cash flows for the years then ended, including in each case the related schedules and notes, reported on by, in the case of the 1995 financial statements, Arthur Andersen LLP, and in the case of the 1996 financial statements, Deloitte & Touche LLP, true copies of which have been previously delivered to each of the Lenders, fairly present the consolidated financial condition of the Company and its Subsidiaries as of the dates thereof and the consolidated results of operations for such periods, in accordance with GAAP applied on a consistent basis. (c) No Material Adverse Effect. Since September 30, 1995, there has been no event or occurrence that could reasonably be expected to have a Material Adverse Effect. Section 4.07 Investments and Guaranties. Neither the Company nor any of its Subsidiaries has made investments in or advances to any Person or guaranties of the obligations of any Person that is not a Subsidiary of the Company, except those permitted by Section 5.04, reflected in the Financial Statements or described in Schedule 4.07. Section 4.08 Litigation. Except as set forth in Schedule 4.08, there is no material action, suit or proceeding, or any material governmental investigation or any arbitration, in each case pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) or any material Property of any thereof before any court or arbitrator or any Governmental Authority. There is no material action, suit or proceeding, or any material governmental investigation or any arbitration, in each case pending or, to the knowledge of the Company, threatened against any Unrestricted Subsidiary or any material Property of any Unrestricted Subsidiary before any court or arbitrator or any Governmental Authority that could reasonably be expected to have a Material Adverse Effect. There is no action, suit or proceeding, or any governmental investigation or any arbitration, in each case pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries or any material Property of any thereof before any court or arbitrator or any Governmental Authority which (i) challenges the validity of this Agreement, any Note, any Application, the Subsidiary Guaranty or any of the other Financing Documents or (ii) could reasonably be expected to have a Material Adverse Effect. Section 4.09 Use of Proceeds. The Company will use the proceeds of the Loans only for the purposes specified in the Introductory Statement to this Agreement. The Letters of Credit will be used only for the purposes provided in Section 2.03. Neither the Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock (within the 83 92 meaning of Regulations, G, U or X) and no part of the proceeds of any Loan hereunder will be used to buy or carry any Margin Stock in violation of Regulation G, U, or X. Neither the Company nor any Person acting on behalf of the Company has taken or will take any action which could reasonably be expected to cause the Notes or any of the Financing Documents, including this Agreement, to violate Regulations G, U or X or any other regulation of the Board of Governors of the Federal Reserve System, in each case as now in effect or as the same may hereinafter be in effect. Section 4.10 Employee Benefits. (a) Except as could not reasonably be expected to have a Material Adverse Effect (i) the Company, its Subsidiaries and each ERISA Affiliate have complied in all material respects with all applicable laws regarding each Plan (including, where applicable, ERISA, the Code, the Pension Benefits Act (Ontario), and the Income Tax Act (Canada)); (ii) each Plan is, and has been, maintained and administered in substantial compliance with its terms, applicable collective bargaining agreements, and all applicable laws (including, where applicable, ERISA, the Code, the Pension Benefits Act (Ontario), and the Income Tax Act (Canada)); and (iii) no act, omission or transaction has occurred which could result in imposition on the Company, any Subsidiary of the Company or any ERISA Affiliate (whether directly or indirectly) of (A) either a civil penalty assessed pursuant to Subsections (c), (i) or (l) of Section 502 of ERISA or a tax imposed pursuant to Chapter 43 of Subtitle D of the Code or (B) breach of fiduciary duty liability damages under Section 409 of ERISA. (b) There exists no material outstanding liability of the Company, any of its Subsidiaries or any ERISA Affiliate with respect to any Plan that has been terminated. No material liability to the PBGC (other than for the payment of current premiums which are not past due) by the Company, any Subsidiary of the Company or any ERISA Affiliate has been or is expected by the Company, any Subsidiary of the Company or any ERISA Affiliate to be incurred with respect to any Plan. No ERISA Termination Event with respect to any Plan has occurred or is reasonably expected to occur (other than an event described in clause (i) or (ii) of the definition of "ERISA Termination Event" that could not reasonably be expected to have a Material Adverse Effect). (c) Full payment when due has been made of all amounts which the Company, any of its Subsidiaries or any ERISA Affiliate is required under the terms of each Plan or applicable law to have paid as contributions to such Plan (excluding any nonpayment involving an amount that is not material), and no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any Plan. (d) With respect to any Plan that is a pension plan subject to the Pension Benefits Act (Ontario), such Plan is fully funded, on a going concern basis, in accordance with its terms and regulatory requirements as outlined by the Pension Benefits Act (Ontario), administrative requirements of the Pension Commission of Ontario and the most recent actuarial report filed with the Pension Commission of Ontario in respect of such Plan except to the extent any failure to do so could not reasonably be expected to have a Material Adverse Effect. 84 93 (e) The actuarial present value of the benefit liabilities (computed on an accumulated benefit obligation basis in accordance with GAAP) under all Plans in the aggregate that are subject to Title IV of ERISA does not, as of the end of the most recently ended fiscal year of such Plans, exceed the current value of the assets of all Plans in the aggregate that are allocable to such benefit liabilities by (i) an amount that could reasonably be expected to cause a Material Adverse Effect, if such excess is the result of a change in market conditions, and (ii) more than $10,000,000 if such excess is for any other reason. The term "actuarial present value of the benefit liabilities" shall have the meaning specified in Section 4041 of ERISA. (f) Except as expressly permitted pursuant to Sections 5.04(i)(v) and (vi), neither the Company, any Subsidiary of the Company nor any ERISA Affiliate sponsors, maintains or contributes to, or has at any time in the preceding six-year period sponsored, maintained or contributed to, (i) any "multiemployer plan" (as defined in Section 3(37) or 4001(a)(3) of ERISA) or (ii) any "multiemployer pension plan" (as defined in the Pension Benefits Act (Ontario)). (g) Neither the Company, any Subsidiary of the Company nor any ERISA Affiliate is required to provide security to a Plan pursuant to Section 401(a)(29) of the Code. (h) The execution and delivery of the Financing Documents and the Secondary ESOP Loan Documents, the consummation of the Transactions and the transactions provided for in and contemplated by the Secondary ESOP Loan Documents, and the lending of funds pursuant to the provisions of the Financing Documents and the Secondary ESOP Loan Documents will not involve or give rise to any nonexempt prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code. Section 4.11 Taxes; Governmental Charges. The Company and its Subsidiaries have filed all tax returns and reports required to be filed and have paid all taxes, assessments, fees and other governmental charges levied upon any of them or upon any of their respective Properties or income which are due and payable, including interest and penalties, except where failure to so pay or file would not have a Material Adverse Effect, or have provided adequate reserves for the payment thereof if required in accordance with GAAP for the payment thereof, except such interest and penalties as are being contested in good faith by appropriate actions or proceedings and for which adequate reserves for the payment thereof as required by GAAP have been provided. Section 4.12 Titles, etc. The Company and its Subsidiaries have indefeasible title to their respective material (individually or in the aggregate) Properties, and with respect to leased Properties, indefeasible title to the leasehold estate with respect thereto, pursuant to valid and enforceable leases, free and clear of all Liens except (i) Liens disclosed to the Lenders in Schedule 4.12, (ii) in addition to the Liens disclosed in Schedule 4.12, other Liens and minor irregularities in title which do not materially interfere with the occupation, use and enjoyment by the Company or any Subsidiary of the Company of any of their respective Properties in the normal course of business as presently conducted or materially impair the value thereof for such business, (iii) Liens otherwise permitted or contemplated by this Agreement or the other Financing Documents and (iv) where the failure of an Unrestricted Subsidiary to hold indefeasible title to its Properties would not have a Material Adverse Effect. 85 94 Section 4.13 Defaults. Neither the Company nor any of its Subsidiaries is in default nor has any event or circumstance occurred which, but for the passage of time or the giving of notice, or both, would constitute a default (in any respect that would have a Material Adverse Effect) under any loan or credit agreement, indenture, mortgage, deed of trust, security agreement or other instrument or agreement evidencing or pertaining to any Indebtedness of the Company or any of its Subsidiaries, or under any material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound, except as disclosed to the Lenders in Schedule 4.13. No Default hereunder has occurred and is continuing. Section 4.14 Casualties; Taking of Properties. Since September 30, 1995, neither the business nor the Properties of the Company or any of its Subsidiaries have been affected in a manner that has had or would have a Material Adverse Effect as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of Property or cancellation of contracts, permits or concessions by any domestic or foreign government or any agency thereof, riot, activities of armed forces or acts of God or of any public enemy. Section 4.15 Compliance with the Law. Neither the Company nor any of its Subsidiaries: (a) is in violation of any Governmental Requirement; and (b) has failed to obtain any license, permit, right-of-way, franchise or other right or governmental authorization necessary to the ownership of any of their respective Properties or the conduct of their respective business; which violation or failure would have (in the event that such a violation or failure were asserted by any Person through appropriate action) a Material Adverse Effect. Section 4.16 No Material Misstatements. No written information, exhibit, schedule or report prepared by or on behalf of the Company and furnished to the Agent or the Lenders by or at the direction of the Company or any of its Subsidiaries in connection with the negotiation of this Agreement contained any material misstatement of fact or, when such statement is considered with all other written statements furnished to the Lenders in that connection, omitted to state a material fact or any fact necessary to make the statement contained therein not misleading; provided, that, the financial information with respect to the Company's projections, copies of which have been furnished to each Lender prior to the Restated Closing Date, were prepared in good faith on the basis of the assumptions stated therein, which assumptions were believed by the Company to be reasonable in all material respects at the time made. Section 4.17 Investment Company Act. The Company is not an "investment company" or a company "controlled" by an "investment company" that is incorporated in or organized under the laws of the United States or any "State," as those terms are defined in the Investment Company Act of 1940, as amended. The execution and delivery by the Company and its Subsidiaries of this Agreement and the other Financing Documents to which they respectively are parties and their respective performance of the obligations provided for therein, will not result in a violation of the Investment Company Act of 1940, as amended. 86 95 Section 4.18 Public Utility Holding Company Act. The Company is not a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 4.19 Subsidiaries. As of the STX Closing Date, the Company has no Subsidiaries except those shown in Schedule 4.19 hereto, which schedule was complete and accurate on such date. As of the AFB Effective Date, the Company has no Subsidiaries except those shown in Schedule 4.19-A hereto, which schedule was complete and accurate on such date. As of the Restated Closing Date, the Company has no Subsidiaries except those shown in Schedule 4.19-B hereto, which schedule is complete and accurate. The Company owns, either directly or indirectly, 100% of all stock of the Subsidiaries listed in such Schedules. Section 4.20 Insurance. All policies of fire, liability, workmen's compensation, casualty, flood, business interruption and other forms of insurance owned or held by the Company, and each of its Subsidiaries are sufficient for compliance with all requirements of law and of all agreements to which the Company or any of its Subsidiaries is a party; are valid, outstanding and enforceable policies; provide adequate insurance coverage in at least such amounts and against at least such risks (but including in any event public liability) as are usually insured against in the same general area by companies engaged in the same or a similar business for the assets and operations of the Company and each of its Subsidiaries; and will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this Agreement. All such material policies are in full force and effect, all premiums with respect thereto have been paid in accordance with their respective terms, and no notice of cancellation or termination has been received with respect to any such policy. Neither the Company nor any of its Subsidiaries maintains any formalized self insurance program with respect to its assets or operations or material risks with respect thereto in excess of $5,000,000 in the aggregate. The certificate of insurance delivered to the Lenders pursuant to Section 3.01(b)(vi) contains an accurate and complete description of all material policies of insurance owned or held by the Company and each of its Subsidiaries on the Restated Closing Date. Section 4.21 Environmental Matters. Except as disclosed to the Lenders in the STX Pilko Report or the AFB Pilko Report: (a) Environmental Laws, etc. Neither any Property of the Company or its Subsidiaries nor the operations conducted thereon violate any applicable order of any court or Governmental Authority or Environmental Laws, which violation could reasonably be expected to have a Material Adverse Effect or which could reasonably be expected to result in remedial obligations having a Material Adverse Effect assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to the relevant Property. (b) No Litigation. Without limitation of Subsection (a) above, no Property of the Company or its Subsidiaries nor the operations currently conducted thereon or by any prior owner or operator of such Property or operation, are in violation of or subject to any existing, pending or threatened action, suit, investigation, inquiry or proceeding by or before any court or 87 96 Governmental Authority or to any remedial obligations under Environmental Laws, which violation, action, suit, investigation, inquiry or proceeding could reasonably be expected to have a Material Adverse Effect or which could reasonably be expected to result in remedial obligations having a Material Adverse Effect assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to the relevant Property. (c) Notices, Permits, etc. All notices, permits, licenses or similar authorizations, if any, required to be obtained or filed by the Company or its Subsidiaries in connection with the operation or use of any and all Property of the Company or its Subsidiaries, including but not limited to past or present treatment, storage, disposal or release of a hazardous substance or solid waste into the environment, have been duly obtained or filed except to the extent the failure to obtain or file such notices, permits, licenses or similar authorizations could not reasonably be expected to have a Material Adverse Effect or which could reasonably be expected to result in remedial obligations having a Material Adverse Effect assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to the relevant Property. (d) Hazardous Substances Carriers. All hazardous substances or solid waste generated at any and all Property of the Company or its Subsidiaries have in the past been transported, treated and disposed of only by carriers maintaining valid permits under RCRA and any other Environmental Law, except to the extent the failure to have such substances or waste transported, treated or disposed by such carriers could not reasonably be expected to have a Material Adverse Effect, and only at treatment, storage and disposal facilities maintaining valid permits under RCRA and any other Environmental Law, which carriers and facilities have been and are operating in compliance with such permits, except to the extent the failure to have such substances or waste treated, stored or disposed at such facilities, or the failure of such carriers or facilities to so operate, could not reasonably be expected to have a Material Adverse Effect or which could reasonably be expected to result in remedial obligations having a Material Adverse Effect assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to the relevant Property. (e) Hazardous Substances Disposal. The Company and its Subsidiaries have taken all reasonable steps necessary to determine and have determined that no hazardous substances or solid waste have been disposed of or otherwise released and there has been no threatened release of any hazardous substances on or to any Property of the Company or its Subsidiaries except in compliance with Environmental Laws, except to the extent the failure to do so could not reasonably be expected to have a Material Adverse Effect or which could reasonably be expected to result in remedial obligations having a Material Adverse Effect assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to the relevant Property. (f) No Contingent Liability. The Company and its Subsidiaries have no material contingent liability in connection with any release or threatened release of any hazardous substance or solid waste into the environment other than such contingent liabilities at any one time and from 88 97 time to time which could reasonably be expected to exceed $10,000,000 in excess of applicable insurance coverage and for which adequate reserves for the payment thereof as required by GAAP have not been provided, or which could reasonably be expected to result in remedial obligations having a Material Adverse Effect assuming disclosure to the applicable Governmental Authority of all relevant facts, conditions and circumstances, if any, pertaining to such release or threatened release. Section 4.22 Solvency. The Company and its Subsidiaries, taken as a whole, and the Company and each of its material Subsidiaries (excluding Unrestricted Subsidiaries) are Solvent, both before and after taking into account the SCI Acquisition, the Merger, the AFB Acquisition and the Saskatoon Acquisition. Section 4.23 Material Contracts. As of the Restated Closing Date, each of the Material Contracts is in full force and effect. Neither the Company nor any of its Subsidiaries is in default under or in breach of any term or condition of any Material Contract that would have a Material Adverse Effect, nor is it aware of any default under or breach of any term or condition of any Material Contract by any other party thereto that would have a Material Adverse Effect. Section 4.24 Employee Matters. Except as set forth on Schedule 4.24, as of the Restated Closing Date, none of the Company or its Subsidiaries (excluding Unrestricted Subsidiaries), or any of their respective employees, is subject to any collective bargaining agreement. There are no strikes, slowdowns, work stoppages or controversies pending or, to the best knowledge of the Company, threatened against the Company or its Subsidiaries, or their respective employees, which could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. Except as set forth in Schedule 4.24, none of the Company nor any of its Subsidiaries (excluding Unrestricted Subsidiaries) is subject to an employment contract. Section 4.25 Senior Indebtedness. The Lender Indebtedness constitutes "Senior Debt" of the Company under and as defined in the Senior Subordinated Notes Indenture and the Additional Senior Subordinated Notes Indenture. Section 4.26 Unrestricted Subsidiary Qualification. Each of Sterling CAI, Sask Holdings and Sterling Sask complies with the requirements of a Subsidiary to be designated as an Unrestricted Subsidiary as set forth in clause (b) of the definition of Unrestricted Subsidiary set forth in Section 1.01. ARTICLE V COVENANTS Section 5.01 Certain Affirmative Covenants. So long as any Lender has any Commitment hereunder or any Loan remains unpaid or any Revolving Credit Exposure remains outstanding, the Company will at all times comply with the following covenants: 89 98 (a) Maintenance and Compliance, etc. The Company will and will cause each of its Subsidiaries to (i) except as permitted by Section 5.04(c) and except with respect to Unrestricted Subsidiaries, preserve and maintain its corporate existence, and (ii) except where failure to do so could not reasonably be expected to have a Material Adverse Effect, observe and comply with all Governmental Requirements. (b) Payment of Taxes and Claims, etc. The Company will pay, and cause each of its Subsidiaries to pay, (i) all material taxes, assessments and governmental charges imposed upon it or upon its Property, and (ii) all material claims (including, but not limited to, claims for labor, materials, supplies or services) which could reasonably be expected, if unpaid, to become a Lien upon its Property, unless, in each case, the validity or amount thereof is being contested in good faith by appropriate action or proceedings and the Company has established adequate reserves in accordance with GAAP with respect thereto. (c) Further Assurances. The Company will and will cause each of its Subsidiaries to cure promptly any defects in the creation and issuance of the Notes, and the execution and delivery of the Financing Documents, including this Agreement. The Company at its expense will, as promptly as practical, execute and deliver to the Administrative Agent or the applicable Issuing Bank upon request all such other and further documents, agreements and instruments (or cause any of its Subsidiaries to take such action) in compliance with or performance of the covenants and agreements of the Company or any of its Subsidiaries in the Financing Documents, including this Agreement, or to further evidence and more fully describe the Collateral, or to correct any omissions in the Financing Documents, or more fully to state the security obligations set out herein or in any of the Financing Documents, or to perfect, protect or preserve any Liens created pursuant to any of the Financing Documents, or to make any recordings, to file any notices, or obtain any consents, all as may be necessary or appropriate in connection therewith. (d) Performance of Obligations. The Company will pay the Notes according to the reading, tenor and effect thereof; and the Company will do and perform every act and discharge all of the obligations provided to be performed and discharged by the Company under the Financing Documents, including this Agreement, at the time or times and in the manner specified, and cause each of its Subsidiaries to take such action with respect to their obligations to be performed and discharged under the Financing Documents to which they respectively are parties. (e) Insurance. The Company will and will cause each of its Subsidiaries to maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to their respective Properties and business against such liabilities, casualties, risks and contingencies and in such types (including business interruption insurance and flood insurance) and amounts as is customary in the case of Persons engaged in the same or similar businesses and similarly situated and in accordance with any Governmental Requirement. In the case of any fire, accident or other casualty causing loss or damage to any Properties of the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) used in generating cash flow or required by applicable law, the proceeds of such policies in excess of $100,000 per occurrence shall be used to promptly repair or replace any such damaged Properties as required by applicable law, and otherwise shall be used 90 99 in the Company's sole discretion, (i) to reasonably promptly repair or replace the damaged Property, (ii) to prepay the Term Loans in accordance with Section 2.10(c), or (iii) to reinvest in other Properties that, in the good faith judgment of the Company, meet the Company's capital investment criteria. The Company will obtain endorsements to the policies pertaining to all physical Properties in which the Administrative Agent or the Lenders shall have a Lien under the Financing Documents, naming the Administrative Agent as a loss payee and containing provisions that such policies will not be cancelled without 30 days prior written notice having been given by the insurance company to the Administrative Agent. (f) Accounts and Records. The Company will keep and will cause each of its Subsidiaries to keep proper books of record and account in accordance with GAAP. (g) Right of Inspection. The Company will permit and will cause each of its Subsidiaries to permit any officer, employee or agent of the Administrative Agent (and during the continuance of any Default, any of the Lenders) to visit and inspect any of the Properties of the Company or any of its Subsidiaries, examine the Company's or any such Subsidiary's books of record and accounts, take copies and extracts therefrom, and discuss the affairs, finances and accounts of the Company or any of its Subsidiaries with the Company's or such Subsidiary's officers, accountants and auditors, as often and all at such reasonable times during normal business hours as may be reasonably requested by the Administrative Agent or any of the Lenders. (h) Operation and Maintenance of Property. The Company will, and will cause each of its Subsidiaries to, operate its Properties or cause its Properties to be operated and maintained (i) in accordance with prudent industry practice in all material respects and in compliance in all material respects with the terms and provisions of all applicable leases, contracts and agreements and (ii) except where the noncompliance therewith could not reasonably be expected to cause or result in a Material Adverse Effect, in compliance with all applicable laws of the jurisdiction in which such Properties may be situated, and all applicable laws, rules and regulations of every other Governmental Authority from time to time constituted to regulate the ownership and operation of such Properties. (i) Additional Subsidiaries; Permitted Acquisitions; Additional Liens. (i) If at any time after the Restated Closing Date the Company or its Subsidiaries create or acquire any one or more additional Subsidiaries (except for Unrestricted Subsidiaries): (A) the Company shall, and shall cause its U.S. Subsidiaries, to execute and deliver to the Administrative Agent, at the time of such new Subsidiary's creation or acquisition, additional pledge agreements granting a security interest in, (1) if such new Subsidiary is a U.S. Subsidiary, 100% of the capital stock of, and other equity interest in, such Subsidiary owned by the Company or any such U.S. Subsidiary, respectively, or (2) if such new Subsidiary is not a U.S. Subsidiary, 65% or the capital stock of, and other equity interest in, such Subsidiary owned by the Company or any such U.S. Subsidiary, respectively, in each case in substantially the same form as the Pledge Agreement 91 100 executed by the Company or its U.S. Subsidiaries, as applicable, in connection with this Agreement; and (B) if such new Subsidiary is a wholly-owned (directly or indirectly) U.S. Subsidiary, the Company shall cause such new Subsidiary to execute and deliver to the Administrative Agent, at the time of such Subsidiary's creation or acquisition, (1) a guaranty agreement in substantially the same form as the Guaranty Agreement executed by the Subsidiary Guarantors in connection with this Agreement, and (2) appropriate mortgages and security agreements and the like covering such Subsidiary's Property; provided that, if such new Subsidiary does not have, but only for so long as such new Subsidiary does not have, assets of more than $50,000, the Company shall not be required to comply with this Section 5.01(i) with respect to such Subsidiary. (ii) If at any time after the Restated Closing Date the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) makes a Permitted Acquisition with respect to a Person that is not a Subsidiary, the Company shall, and shall cause its U.S. Subsidiaries, to execute and deliver to the Administrative Agent at the time of such Permitted Acquisition, additional pledge agreements granting a security interest in 100% of the capital stock of, or other equity interest in, such Person owned by the Company or any such U.S. Subsidiary, respectively, in each case in substantially the same form as the Pledge Agreement executed by the Company or its U.S. Subsidiaries, as applicable, in connection with this Agreement. (iii) In connection with the execution and delivery of any guaranty agreement, pledge agreement, mortgage, security agreement or similar agreement pursuant to this Section 5.01(i), the Company shall, or shall cause the relevant Subsidiary to, deliver to the Lenders such corporate resolutions, certificates, legal opinions and such other related documents as shall be reasonably requested by the Required Lenders and consistent with the relevant forms and types thereof delivered on the STX Effective Date or the AFB Effective Date or as shall be otherwise reasonably acceptable to the Required Lenders. Each guaranty agreement, pledge agreement, mortgage, security agreement and the like delivered pursuant to this Section 5.01(i) shall be deemed to be a Security Instrument from and after the date of execution thereof. (j) Non-Consolidation of Unrestricted Subsidiaries The Company will, and shall cause each of its Subsidiaries (excluding Unrestricted Subsidiaries) to, be operated at all times in such a manner that its assets and liabilities may not be substantively consolidated with those of any Unrestricted Subsidiary in the event of the bankruptcy or insolvency of such Unrestricted Subsidiary. In this regard, the Company shall, and shall cause that each of its Subsidiaries (excluding Unrestricted Subsidiaries) shall: (i) not (A) consolidate or merge with or into any Unrestricted Subsidiary or (B) sell, lease or otherwise transfer, directly or indirectly, all or substantially all of its assets to any Unrestricted Subsidiary; 92 101 (ii) subject to Section 5.04 (e), engage only in investments in Limited Liability Interests and matters necessarily incident thereto; (iii) maintain corporate records and books of account separate from each Unrestricted Subsidiary; (iv) maintain its assets separately from the assets of any Unrestricted Subsidiary (including through maintenance of a separate bank account); (v) not guarantee the obligations of any Unrestricted Subsidiary, or advance funds (other than through purchases of Limited Liability Interests as permitted by Section 5.04(e)), for the payment of expenses or otherwise, to any Unrestricted Subsidiary; (vi) conduct all of its business correspondence and other communications in its own name and on its own stationery; (vii) maintain separate financial statements; (viii) maintain a board of directors that is separate from the boards of directors of all Unrestricted Subsidiaries; (ix) maintain the requisite legal formalities in order that the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) may each be treated as a legally separate entity from any Unrestricted Subsidiary; and (x) cause each Unrestricted Subsidiary, at the time of its creation or acquisition, to be adequately capitalized. Section 5.02 Reporting Covenants. So long as any Lender has any Commitment hereunder or any Loan remains unpaid or any Revolving Credit Exposure remains outstanding, the Company will furnish the following to the Administrative Agent (which shall provide copies to each Lender) and, in the case of Sections 5.02(a), (b), (d), (e), (g), (i), (j), (k) and (l) to each of the Lenders: (a) Annual Financial Statements. As soon as available and in any event within 90 days after the end of each Fiscal Year of the Company, a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such Fiscal Year, setting forth in each case in comparative form the figures for the previous Fiscal Year, all in reasonable detail and accompanied by a report thereon of independent public accountants of recognized national standing, which such report shall state that such consolidated financial statements present fairly the consolidated financial condition as at the end of such Fiscal Year, and the consolidated results of operations and cash flows for such Fiscal Year, of the Company and its Subsidiaries in accordance with GAAP, applied on a consistent basis. At the same time, a consolidating balance sheet of the Company and its Subsidiaries as at the end of such year and 93 102 related consolidating statements of income and cash flows for such Fiscal Year (in each case consolidating on the basis of principal lines of business of the Company and its Subsidiaries), accompanied by a certification thereon of a Responsible Officer, stating that such consolidating financial statements form the basis of the Company's consolidated financial statements and are fairly stated in all material respects when considered in relation thereto. (b) Quarterly Financial Statements. As soon as available and in any event within 45 days after the end of each Fiscal Quarter of the Company, a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter and the related consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such Fiscal Quarter and for the portion of the Company's Fiscal Year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Company's previous Fiscal Year, all in reasonable detail and certified by a Responsible Officer that such financial statements are complete and correct and fairly present the consolidated financial condition as at the end of such Fiscal Quarter, and the consolidated results of operations and cash flows for such Fiscal Quarter and such portion of the Company's Fiscal Year, of the Company and its Subsidiaries in accordance with GAAP (subject to normal, year-end adjustments). At the same time, a consolidating balance sheet of the Company and its Subsidiaries at the end of such Fiscal Quarter and related consolidating statements of income and cash flows, for the portion of the Company's Fiscal Year ended at such quarter (in each case consolidating on the basis of principal lines of business of the Company and its Subsidiaries), accompanied by a certification from a Responsible Officer that such consolidating financial statements form the basis of the Company's consolidated financial statements and are fairly stated in all material respects when considered in relation thereto. (c) Monthly Financial Statements. As soon as available and in any event within 30 days after the end of each calendar month of the Company, a consolidated balance sheet of the Company and its Subsidiaries as at the end of such month and the related consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such calendar month and for the portion of the Company's Fiscal Year ended at the end of such month, setting forth in each case in comparative form the figures for the corresponding month and the corresponding portion of the Company's previous Fiscal Year, all in reasonable detail and certified by a Responsible Officer that such financial statements are complete and correct and fairly present the consolidated financial condition as at the end of such calendar month, and the consolidated results of operations and cash flows for such calendar month and such portion of the Company's Fiscal Year, of the Company and its Subsidiaries in accordance with GAAP (subject to normal, yearend adjustments). At the same time, a consolidating balance sheet of the Company and its Subsidiaries at the end of such calendar month and related consolidating statements of income and cash flows, for the portion of the Company's Fiscal Year ended at such month (in each case consolidating on the basis of principal lines of business of the Company and its Subsidiaries), accompanied by a certification from a Responsible Officer that such consolidating financial statements form the basis of the Company's consolidated financial statements and are fairly stated in all material respects when considered in relation thereto. 94 103 (d) No Default/Compliance Certificate. Together with the financial statements required pursuant to subsections (a) and (b) above, a certificate of the Company, signed by a Responsible Officer (i) stating that a review of such financial statements during the period covered thereby and of the activities of the Company and its Subsidiaries has been made under such Responsible Officer's supervision with a view to determining whether the Company and its Subsidiaries have fulfilled all of their obligations under this Agreement, the other Financing Documents, and the Notes; (ii) stating that the Company and its Subsidiaries have fulfilled their obligations under such instruments and that all representations made in this Agreement continue to be true and correct (or specifying the nature of any change), or if there shall be a Default or Event of Default, specifying the nature and status thereof and the Company's proposed response thereto; (iii) demonstrating in reasonable detail compliance (including, but not limited to, showing all material calculations) as at the end of such Fiscal Year or such Fiscal Quarter with Subsections 5.03(a), 5.03(b), 5.03(c), and 5.03(d); (iv) demonstrating in reasonable detail compliance (including, but not limited to, showing all material calculations) as at the end of the Fiscal Year with Sections 5.04(o) and 5.04(e)(x), describing by category (utilizing the same categories as are used by the Company in its internal financial reports) any Permitted Acquisitions and any Capital Expenditures made by the Company or any Subsidiary as of the end of such Fiscal Year and attaching thereto a Notice of Designation of Retained Cash Flow Usage dated as of the end of the preceding Fiscal Quarter; and (v) containing or accompanied by such financial or other details, information and material as the Administrative Agent may reasonably request to evidence such compliance. (e) Management Letters. Together with the financial statements required pursuant to subsection (a) above, copies of each management letter issued to the Company by such accountants promptly following consideration or review by the Board of Directors of the Company, or any committee thereof (together with any response thereto prepared by the Company). (f) Title Information. Within a reasonable time after a request by the Administrative Agent, additional title information in form and substance acceptable to the Required Lenders as is reasonably necessary covering the Collateral so that the Lenders shall have received, together with the title information previously received by the Lenders, satisfactory title information covering all of the Collateral . (g) Events or Circumstances with respect to Collateral. Promptly after the occurrence of any event or circumstance concerning or changing any of the Collateral that would have a Material Adverse Effect, notice of such event or circumstance in reasonable detail. (h) Borrowing Base Reports. As soon as available and in any event by the 20th day following the close of each calendar month, a Borrowing Base Report dated and reflecting amounts as of the close of business on the last day of the preceding calendar month. (i) Notice of Certain Events. Promptly after the Company learns of the receipt or occurrence of any of the following, a certificate of the Company, signed by a Responsible Officer 95 104 specifying (i) any official notice of any violation, possible violation, non-compliance or possible non compliance, or claim made by any Governmental Authority pertaining to all or any part of the Properties of the Company or any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect; (ii) any event which constitutes a Default or Event of Default, together with a detailed statement specifying the nature thereof and the steps being taken to cure such Default or Event of Default; (iii) the receipt of any notice from, or the taking of any other action by, the holder of any promissory note, debenture or other evidence of indebtedness in excess of $5,000,000 of the Company or any of its Subsidiaries with respect to a claimed default, together with a detailed statement specifying the notice given or other action taken by such holder and the nature of the claimed default and what action the Company or its Subsidiary is taking or proposes to take with respect thereto; (iv) any default or noncompliance of any party to any of the Financing Documents with any of the terms and conditions thereof or any notice of termination or other proceedings or actions which could reasonably be expected to adversely affect any of the Financing Documents; (v) the creation, dissolution, merger or acquisition of any Subsidiary of the Company with material operations; (vi) any event or condition not previously disclosed to the Administrative Agent, which violates any Environmental Law and which could potentially, in the Company's reasonable judgment, have a Material Adverse Effect; (vii) any material amendment to, termination of, or material default under a Material Contract or any execution of, or material amendment to, termination of, or material default under, any material collective bargaining agreement, except collective bargaining agreements of Unrestricted Subsidiaries; (viii) any event or condition which may reasonably be expected to have a Material Adverse Effect; (ix) the occurrence, with respect to Albright, of any of the events described in Section 6.08 or the failure of the Albright Indemnity to continue to be in full force and effect; or (x) the occurrence, with respect to any of the Cytec Parties, of any of the events described in Section 6.08 or the failure of the Cytec Indemnity to continue to be in full force and effect. (j) Shareholder Communications, Filings. Promptly upon the mailing, filing, or making thereof, copies of all registration statements, periodic reports and other documents (excluding the related exhibits except to the extent expressly requested by the Administrative Agent) filed by the Company with the Securities and Exchange Commission (or any successor thereto) or any national securities exchange. (k) Litigation. Promptly after the occurrence thereof, notice of the institution of or any material adverse development in any action, suit or proceeding or any governmental investigation or any arbitration, before any court or arbitrator or any governmental or administrative body, agency or official, against the Company, Holdco, or any Subsidiary Guarantor or any material Property of any thereof, in which the amount involved is material and is not covered by insurance or which could reasonably be expected to have a Material Adverse Effect. (l) ERISA. Promptly after (i) the Company's obtaining knowledge of the occurrence thereof, notice that an ERISA Termination Event or a "prohibited transaction," as such term is defined in Section 406 of ERISA or Section 4975 of the Code, with respect to any Plan has occurred, which such notice shall specify the nature thereof, the Company's proposed response thereto (and, if applicable, the proposed response thereto of any Subsidiary of the Company and of 96 105 any ERISA Affiliate) and, where known, any action taken or proposed by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto, (ii) the Company's obtaining knowledge thereof, copies of any notice of the PBGC's intention to terminate or to have a trustee appointed to administer any Plan, and (iii) the filing thereof with any Governmental Authority (if requested by the Administrative Agent), copies of each annual and other report (including applicable schedules) with respect to each Plan or any trust created thereunder. (m) Borrowing Base Audit. At the cost of the Company, a report or reports of an independent collateral field examiner approved (i) by the Company, whose approval shall not be unreasonably withheld and (ii) by the Administrative Agent (and which collateral field examiner may be the Administrative Agent or an affiliate thereof) with respect to the Eligible Accounts and Eligible Inventory components included in the Borrowing Base. The Administrative Agent may (and, at the direction of the Required Lenders, shall) request such reports or additional reports as it (or the Required Lenders) shall reasonably deem necessary; provided, however, that so long as no Default has occurred and is continuing, the Company shall not be required to reimburse the cost of more than one such report per Fiscal Year. (n) Insurance Coverage. (i) Upon request, a summary of the insurance coverages of the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) in form and substance reasonably satisfactory to the Administrative Agent; upon renewal of any such insurance policy, a copy of an insurance certificate summarizing the terms of such policy; and upon request of the Administrative Agent, copies of the applicable policies; and (ii) Upon request, a summary of the insurance coverages of Unrestricted Subsidiaries in form and substance reasonably satisfactory to the Administrative Agent, a copy of an insurance certificate summarizing the terms of such policies and copies of the applicable policies. (o) Annual Budget. Not later than the 90th day after the Fiscal Year ended September 30, 1996, and not later than the 60th day after each Fiscal Year end thereafter, an annual budget of the Company and it Subsidiaries (consolidating on the basis of principal lines of business of the Company and its Subsidiaries), reviewed by the Board of Directors of the Company, setting forth in reasonable detail, the projected revenues and expenses of the Company for the following Fiscal Year. (p) Excess Cash Flow Certificate. On or before the 100th day after each September 30th, commencing on September 30, 1997, the Company's preliminary calculation of its Excess Cash Flow for the Fiscal Year ended on such September 30th, in accordance with Section 2.10(b). 97 106 (q) Other Information. With reasonable promptness, such other information about the business and affairs and financial condition of the Company or its Subsidiaries as the Administrative Agent may reasonably request from time to time. Section 5.03 Financial Covenants. So long as any Lender has any Commitment hereunder or any Loan remains unpaid or any Revolving Credit Exposure remains outstanding, the Company will, at all times on or after December 31, 1996: (a) Interest Coverage Ratio. Maintain an Interest Coverage Ratio of not less than the ratio for each Rolling Period indicated below: Each Rolling Period ending Ratio December 31, 1996 1.75 March 31, 1997 1.75 June 30, 1997 1.75 September 30, 1997 1.50 Each Rolling Period during the Fiscal Year ending Ratio September 30, 1998 1.35 Each Rolling Period ending Ratio December 31, 1998 1.50 March 31, 1999 1.50 June 30, 1999 2.25 September 30, 1999 2.25 Each Rolling Period Ratio thereafter 1.05 (b) Current Ratio. Maintain a Current Ratio of not less than (i) 1.20 to 1.00, from January 1, 1997, through September 30, 1998, and (ii) 1.25 to 1.00 at all times after October 1, 1998. (c) Fixed Charge Coverage Ratio. Maintain a Fixed Charge Coverage Ratio of not less than the ratio for each Rolling Period indicated below: Each Rolling Period during the period beginning January 1, Ratio 1997 through September 30, 1997 1.05 98 107 The Rolling Period ending Ratio December 31, 1997 1.00 Each Rolling Period during the period beginning January 1, Ratio 1998 through September 30, 1998 1.05 Each Rolling Period during the period beginning October 1, Ratio 1998 through September 30, 1999 1.10 Each Rolling Period during the Fiscal Years ending Ratio September 30, 2000 1.15 September 30, 2001 1.20 Each Rolling Period Ratio thereafter 1.20 (d) Leverage Ratio. Maintain a Leverage Ratio of not greater than the ratio for each Rolling Period indicated below: Each Rolling Period ending Ratio December 31, 1996 5.25 March 31, 1997 6.35 June 30, 1997 7.00 September 30, 1997 7.00 December 31, 1997 7 00 March 31, 1998 7.00 June 30, 1998 7.00 September 30, 1998 7.00 December 31, 1998 6.50 March 31, 1999 6.00 June 30, 1999 4.50 September 30, 1999 4.50 Each Rolling Period during the Fiscal Years ending Ratio September 30, 2000 4.00 September 30, 2001 3.50 September 30, 2002 3.00 99 108 (e) Senior Debt Leverage Ratio. Maintain a Senior Debt Leverage Ratio of not greater than the ratio for each Rolling Period indicated below: Each Rolling Period ending Ratio March 31, 1997 3.50 June 30, 1997 3.50 September 30, 1997 3.50 December 31, 1997 3.50 March 31, 1998 3.25 June 30, 1998 3.25 September 30, 1998 3.25 Each Rolling Period during the Fiscal Years ending Ratio September 30, 1999 3.00 September 30, 2000 3.00 September 30, 2001 3.00 September 30, 2002 3.00 Each Rolling Period Ratio thereafter 3.00 The Company shall be deemed to be in compliance with the covenants contained in this Section 5.03 at any time so long as the then most recent financial statements prepared by the Company (for internal use or otherwise) and made available to the Lenders show, or provide a basis for ascertaining, such compliance and no Responsible Officer has obtained any information that causes such Responsible Officer to reasonably conclude that the Company is not in compliance with the covenants contained in this Section 5.03. Section 5.04 Certain Negative Covenants. So long as any Lender has any Commitment hereunder or any Loan remains unpaid or any Revolving Credit Exposure remains outstanding, the Company will not: (a) Indebtedness. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Indebtedness, other than: (i) the Lender Indebtedness in the principal amount not to exceed the outstanding Term Loans and the Revolving Credit Commitments less the aggregate 100 109 amount of permanent reductions of the Revolving Credit Commitments and payments or prepayments of the Term Loans; (ii) Indebtedness outstanding on the date hereof which is set forth on Schedule 5.04(a)-1, provided that any Indebtedness indicated on Schedule 5.04(a) as "Indebtedness to be Repaid" shall have been repaid on or before the STX Effective Date or the AFB Effective Date, as applicable; (iii) accounts payable (for the deferred purchase price of Property or services) from time to time incurred in the ordinary course of business and guaranties by the Company or any Subsidiary in the ordinary course of business of any such obligations incurred by any other Subsidiary; (iv) Indebtedness owing by (A) the Company or a Subsidiary Guarantor to Canadian Subsidiaries not to exceed $5,000,000 in the aggregate, (B) Canadian Subsidiaries to the Company or a Subsidiary Guarantor not to exceed (1) $120,000,000 in the aggregate provided that such Indebtedness may only arise from a transfer to one or more U.S. Subsidiaries or the Company of existing Indebtedness owing as of the AFB Effective Date to one or more Canadian Subsidiaries and which does not under any circumstances involve consideration for such transfer other than an exchange of such Indebtedness for equity, plus (2) Indebtedness permitted pursuant to Section 5.04(e)(vii); (C) any Subsidiary Guarantor to the Company or any other Subsidiary Guarantor, (D) the Company to any Subsidiary Guarantor; and (E) any Canadian Subsidiary to any other Canadian Subsidiary; (v) obligations for current taxes, assessments and other governmental charges and taxes, assessments or other governmental charges which are not yet due or are being contested in good faith by appropriate action or proceeding promptly initiated and diligently conducted, if such reserve as shall be required by GAAP shall have been made therefor; (vi) Capital Lease Obligations not to exceed $1,000,000 at any one time; (vii) Indebtedness not exceeding U.S. $15,000,000 under the Canadian Facility (and the "Bankers' Acceptances" provided for therein) so long as the documentation with respect thereto is reasonably satisfactory to the Administrative Agent. (viii) Indebtedness evidenced by the Senior Subordinated Notes; (ix) Indebtedness owing pursuant to Hedge Agreements entered into in the ordinary course of business for the purpose of hedging against fluctuations in interest rates (on money borrowed by the Company), commodity prices and foreign exchange rates; 101 110 (x) Indebtedness (other than short-term Indebtedness for borrowed money) created, incurred, assumed or guaranteed after the date hereof not otherwise permitted pursuant to this Subsection 5.04(a), provided that the aggregate outstanding principal amount of such Indebtedness, together with obligations (calculated based upon the net present value of all future lease payments at an assumed discount rate of 12%) in respect of the transactions described in Section 5.04(g), shall not exceed $20,000,000 at any one time outstanding; (xi) Non-Recourse Debt of an Unrestricted Subsidiary; and (xii) Indebtedness evidenced by the Additional Senior Subordinated Notes. (b) Liens. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Lien on any of its Property now owned or hereafter acquired to secure any Indebtedness of the Company, any Subsidiary or any other Person, other than: (i) Liens existing on the date hereof and set forth on Schedule 5.04(b)-1; provided that any Liens indicated on Schedule 5.04(b) as "Liens to be Released" shall have been released of record within 10 days after the STX Effective Date or the AFB Effective Date, as applicable; (ii) Liens securing the Lender Indebtedness and Liens on Property of the Canadian Subsidiaries securing Indebtedness under the Canadian Facility to the extent permitted pursuant to Section 5.04(a); (iii) Liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by appropriate action or proceedings and with respect to which adequate reserves are being maintained; (iv) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen, repairmen, workmen, and other Liens imposed by law created in the ordinary course of business for amounts which are not past due for more than 30 days or which are being contested in good faith by appropriate action or proceedings and with respect to which adequate reserves in accordance with GAAP are being maintained; (v) Liens incurred or deposits or pledges made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, old age or other similar obligations, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and returnofmoney bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); 102 111 (vi) minor irregularities in title, easements, rights-of-way, restrictions, servitudes, permits, reservations, exceptions, conditions, covenants and other similar charges or encumbrances not materially interfering with the occupation, use and enjoyment by the Company or any of its Subsidiaries of any of their respective Properties in the normal course of business or materially impairing the value thereof ; (vii) any obligations or duties affecting any of the Property of the Company or its Subsidiaries to any municipality or public authority with respect to any franchise, grant, license or permit which do not materially impair the use of such Property for the purposes for which it is held; (viii) Liens upon Property acquired by the Company, other than as a Permitted Acquisition, after the Restated Closing Date with the proceeds of no greater than $10,000,000 of Indebtedness permitted pursuant to Section 5.04(a)(x); provided that (A) such Lien was created solely for the purpose of securing such Indebtedness, (B) and the principal amount of such Indebtedness does not exceed the fair value of such Property at the time of its acquisition; (ix) Liens securing not more than $1,000,000 in the aggregate existing on any real or personal property of any Person at the time it becomes a Subsidiary after the Restated Closing Date pursuant to a Permitted Acquisition; (x) extensions, renewals or replacements of any Lien referred to in Subsections 5.04(b)(i), (ii) and (ix), provided that the principal amount of the Indebtedness or obligation secured thereby is not increased and that any such extension, renewal or replacement is limited to the Property originally encumbered thereby; (xi) with respect to Property located in Canada, reservations, limitations, provisos and conditions in any original grant from the Crown or any freehold lessor of any of the properties of the Company or its Subsidiaries; (xii) Liens resulting from operation of law with respect to any judgments or orders not constituting a Default; and (xiii) Liens on Property of Unrestricted Subsidiaries to secure Indebtedness of Unrestricted Subsidiaries permitted under Section 5.04(a). (c) Mergers, Sales, etc. Merge into or with or consolidate with, or permit any of its Subsidiaries to merge into or with or consolidate with, any other Person, or sell, lease or otherwise dispose of, or permit any of its Subsidiaries to sell, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or any part of its Property to any other Person. Notwithstanding the foregoing limitations: 103 112 (i) the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) may (A) sell inventory, and other similar assets in the ordinary course of business, (B) sell, transfer or otherwise dispose of personal property (including, but not limited to, pipe, equipment, machinery and vehicles) in the ordinary course of business or when, in the reasonable judgment of the Company, such property is no longer used or useful in the conduct of its business or the business of its Subsidiaries, and (C) in addition to clauses (A) and (B), sell, lease, or otherwise dispose of (1) up to $5,000,000 in fair-market value of their Property in the aggregate during any Fiscal Year, and (2) more than $5,000,000, but less than $10,000,000 in fair-market value of their Property in the aggregate during any Fiscal Year, provided that the Company shall either prepay the Term Loans pursuant to Section 2.10(b)(iii) or promptly reinvest the Net Proceeds (in excess of $5,000,000) from such sale in Properties that, in the good-faith judgment of the Company, meet the Company's capital investment criteria; (ii) (A) any Subsidiary Guarantor may merge into or with or consolidate with any other Subsidiary Guarantor or the Company (and, in the case of the Company, so long as the Company is the surviving entity), (B) any Canadian Subsidiary may merge into or with or consolidate with any other Canadian Subsidiary, (C) Sterling NRO may be liquidated into Sterling Canada, (D) any Canadian Subsidiary may merge with or into or consolidate with any Subsidiary Guarantor so long as (1) the Subsidiary Guarantor is the surviving entity and (2) the Canadian Subsidiary was Solvent immediately prior to the time of such merger or consolidation, and (E) any Unrestricted Subsidiary may merge into or with or consolidate with any other Unrestricted Subsidiary; (iii) any Subsidiary Guarantor may transfer Property to any other Subsidiary Guarantor or to the Company, and any Canadian Subsidiary may transfer Property to the Company, any Subsidiary Guarantor, or any other Canadian Subsidiary; and (iv) any Unrestricted Subsidiary may sell, lease or otherwise dispose of all or any of its Property to any Person. (d) Dividends, etc. Declare or pay any dividend on its capital stock, make any payment to purchase, redeem, retire or otherwise acquire any of its capital stock or any option, warrant, or other right to acquire such capital stock, now or hereafter outstanding, return any capital to its stockholders, make any distribution of its assets, capital stock, warrants, rights, options, obligations or securities to its stockholders, or permit any of its Subsidiaries to do so, except that: (i) the Company may declare and deliver dividends payable solely in shares of its capital stock or in options, warrants or rights to purchase shares of capital stock; (ii) the Company may make contributions to the ESOP on behalf of the employees of the Company or its Subsidiaries in the aggregate amount in any Fiscal Year 104 113 not to exceed 8% of payroll expense during such Fiscal Year attributable to employees of the Company and its Subsidiaries who are eligible to participate in the ESOP; (iii) any Subsidiary of the Company other than any U.S. Subsidiary of a Canadian Subsidiary may declare and deliver dividends to the Company or any wholly-owned Subsidiary of the Company, and any Canadian Subsidiary or any Unrestricted Subsidiary organized under the laws of Canada may redeem shares of its own capital stock; (iv) the Company may declare and deliver in any Fiscal Year Permitted Holdco Dividends so long as, at the time of payment of such dividend (both before and after giving effect to the payment thereof), the Company satisfies the conditions precedent to the making of Loans set forth in Section 3.04; and (v) the Company may declare and make a noncash dividend or make a return of capital to Holdco in the form of cancellation by the Company of the Indebtedness of Holdco referred to in Section 5.04(e)(viii). (e) Investments, Loans, etc. Make or permit any loans to or investments in any Person, or permit any of its Subsidiaries (excluding Unrestricted Subsidiaries) to make or permit any loans to or investments in any Person, other than: (i) investments, loans or advances, the material details of which have been set forth in either the Financial Statements or Schedule 4.07 hereto; (ii) investments in direct obligations of the United States of America or any agency thereof or, in the case of Canadian Subsidiaries, investments in direct obligations of Canada, in each case with maturities of one year or less from the date of acquisition; (iii) investments in certificates of deposit of maturities less than one year, issued by commercial banks in the United States having capital and surplus in excess of $500,000,000 and having short-term credit ratings of at least A1 and P1 by Standard & Poor's Ratings Group and Moody's Investors Service, Inc., respectively; (iv) investments in commercial paper of maturities of not more than 270 days rated at least A1 and P1 by Standard & Poor's Ratings Group and Moody's Investors Service, Inc., respectively; and (v) investments in securities that are obligations of the United States government purchased by the Company or any Subsidiary of the Company under repurchase agreements pursuant to which arrangements are made with selling financial institutions (being a financial institution having unimpaired capital and surplus of not less than $500,000,000 and with short-term credit ratings of at least A1 and P1 by Standard & Poor's Ratings Group and Moody's Investors Service, Inc., respectively) for such financial 105 114 institutions to repurchase such securities within 30 days from the date of purchase by the Company or such Subsidiary, and other similar short-term investments made in connection with the Company's or any of its Subsidiary's cash management practices; provided that the Company shall take possession of all securities purchased by the Company or any Subsidiary under repurchase agreements and shall adhere to customary margin and mark-to-market procedures with respect to fluctuations in value; (vi) investments in any security issued by an investment company registered under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8) that is a money market fund in compliance with all applicable requirements of SEC Rule 2a-7 (17 CFR 270.2a-7); (vii) (A) investments in or loans or advances to Canadian Subsidiaries or Unrestricted Subsidiaries made after the STX Effective Date not to exceed $10,000,000 in the aggregate, and (B) loans or advances to, or investments in, Guarantor Subsidiaries; (viii) a loan by the Company to Holdco approximately in the amount of $450,000,000 on the STX Effective Date to be used by Holdco solely for consummation of the SCI Acquisition and related transaction costs; (ix) the Secondary ESOP Loan and any renewals or replacements thereof or reborrowing thereunder in a total principal amount not to exceed $6,000,000 at any time; (x) Permitted Acquisitions in an amount not to exceed (after giving effect thereto) Cumulative Retained Cash Flow as of the date any such Permitted Acquisition is made; (xi) routine loans or advances to employees in the ordinary course of business not to exceed $25,000 at any time outstanding to any one employee and $500,000 in the aggregate; (xii) loans in an aggregate amount not to exceed $500,000 to finance the purchase of homes by employees who have been relocated by the Company or any Subsidiary; and (xiii) investments, after the STX Effective Date, in additional Valdosta Bonds issued to finance the completion of the Company's plant in Valdosta, Georgia, so long as the Administrative Agent (on behalf of the Lenders) has a first priority, perfected Lien thereon to secure the Lender Indebtedness; (xiv) participations (for a tenor of not more than 90 days) in loans to Persons having short-term credit ratings of at least A1 and P1 by Standard & Poor's Ratings Group and Moody's Investors Service, Inc., respectively; 106 115 (xv) the AFB Acquisition; (xvi) other investments, loans, or advances in an aggregate amount not to exceed $1,000,000 outstanding at any one time.; (xvii) investments, after July 3, 1997, in Holdco Common Stock, purchased from certain employees of the Company that have elected to take cash in lieu of stock in connection with the termination of the Old ESOP, not to exceed in the aggregate $2,500,000; (xviii) investments in Limited Liability Interests in Sterling CAI, Sask Holdings and Sterling Sask to the extent necessary to consummate the Saskatoon Acquisition, all such investments in an aggregate amount not to exceed Cdn $20,000,000 and provided that such investments are solely from equity contributions of new Holdco Common Stock and the Series B Preferred Stock from Holdco to Sterling CAI and Sterling CAI sells such new Holdco Common Stock and Series B Preferred Stock and contributes the proceeds from such sale to Sask Holdings and Sterling Sask; and (xix) investments made after the Restated Closing Date in Limited Liability Interests in Unrestricted Subsidiaries; provided that such investments are solely from equity contributions from Holdco comprising either (i) new Holdco Common Stock or new preferred stock of Holdco or (ii) the proceeds of an issuance of either new Holdco Common Stock or new preferred stock of Holdco, that in each case such Holdco Common Stock or preferred stock of Holdco does not provide the holder thereof any right to cash payments (other than, in the case of preferred stock, cash payments resulting solely from a right to put such preferred stock to Holdco upon the occurrence of a Change of Control as defined in the Senior Secured Discount Notes Indenture) or cash dividends at any time that any Lender Indebtedness is outstanding; and provided, further, that the total consideration, including transaction costs, paid by any Unrestricted Subsidiary for Property or capital stock acquired by such Unrestricted Subsidiaries after the Restated Closing Date shall not exceed $100,000,000 in the aggregate. (f) Lease Payments. Create, incur, assume or suffer to exist, nor permit any of its Subsidiaries (excluding Unrestricted Subsidiaries) to create, incur, assume or suffer to exist, any obligation for the payment of rent or hire of Property of any kind whatsoever (real or personal), whether directly or as a guarantor, if, after giving effect thereto, the aggregate amount of all payments required to be made by the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) on a consolidated basis pursuant to such leases or lease agreements (excluding payments in respect of Capital Lease Obligations and obligations described in Section 5.04(g) to the extent permitted by this Agreement) would exceed $5,000,000 in any Fiscal Year. (g) Sales and Leasebacks. Except as permitted by Section 5.04(a)(x), enter into, or permit any of its Subsidiaries (excluding Unrestricted Subsidiaries) to enter into, any arrangement, 107 116 directly or indirectly, with any Person whereby the Company or any such Subsidiary shall sell or transfer any Property, whether now owned or hereafter acquired, and whereby the Company or any such Subsidiary shall then or thereafter rent or lease as lessee such Property or any part thereof or other Property which the Company or any such Subsidiary intends to use for substantially the same purpose or purposes as the Property sold or transferred. (h) Nature of Business. Permit any material change to be made in the character of its business or the business of any Subsidiary as carried on at the date hereof, except as may be permitted pursuant to this Agreement. (i) ERISA Compliance. (i) Engage in, or permit a Subsidiary of the Company or any ERISA Affiliate to engage in, any transaction in connection with which the Company, a Subsidiary of the Company or any ERISA Affiliate could be subjected to either a civil penalty assessed pursuant to Sections 502(c), (i) or (l) of ERISA or a tax imposed by Chapter 43 of Subtitle D of the Code, except where such assessment or imposition could not reasonably be expected to have Material Adverse Effect; (ii) Terminate, or permit a Subsidiary of the Company or any ERISA Affiliate to terminate, any Plan in a manner, or take any other action with respect to any Plan, which could reasonably be expected to result in any material liability of the Company, a Subsidiary of the Company or any ERISA Affiliate to the PBGC or any other Governmental Authority; (iii) Fail to make, or permit a Subsidiary of the Company or any ERISA Affiliate to fail to make, full payment when due of all amounts which, under the provisions of any Plan, agreement relating thereto or applicable law, the Company, a Subsidiary of the Company or any ERISA Affiliate is required to pay as contributions thereto, except where the failure to make such payments could not reasonably be expected to have Material Adverse Effect; (iv) Permit to exist, or allow a Subsidiary of the Company or any ERISA Affiliate to permit to exist, any accumulated funding deficiency within the meaning of Section 302 of ERISA or Section 412 of the Code, whether or not waived, with respect to any Plan; (v) Contribute to or assume an obligation to contribute to, or permit a Subsidiary of the Company (other than a Subsidiary acquired as permitted pursuant to Section 5.04(i)(vi)) or any ERISA Affiliate to contribute to or assume an obligation to contribute to, any "multiemployer plan" as such term is defined in Section 3(37) or 4001(a)(3) of ERISA or any "multi-employer pension plan" as such term is defined in the Pension Benefits Act (Ontario); 108 117 (vi) Acquire, or permit a Subsidiary of the Company or any ERISA Affiliate to acquire, an interest in any Person that causes such Person to become an ERISA Affiliate with respect to the Company or a Subsidiary of the Company or with respect to any ERISA Affiliate of the Company or a Subsidiary of the Company if such Person sponsors, maintains or contributes to, or at any time in the sixyear period preceding such acquisition has sponsored, maintained, or contributed to, (A) any "multiemployer plan" as such term is defined in Section 3(37) or 4001(a)(3) of ERISA, or (B) any "multi-employer pension plan" as such term is defined in the Pension Benefits Act (Ontario); provided that, the Company may acquire any such Person if (1) such Person is acquired as a Permitted Acquisition, (2) such Person would not become an ERISA Affiliate, and (3) neither the Company nor any of its other Subsidiaries has any legal liability to perform such Person's obligations or assume such Person's liabilities. (vii) Fail to pay, or cause to be paid, to the PBGC in a timely manner, and without incurring any late payment or underpayment charge or penalty, all premiums required pursuant to Sections 4006 and 4007 of ERISA, except where such failure could not reasonably be expected to have a Material Adverse Effect; (viii) Amend, or permit a Subsidiary of the Company or any ERISA Affiliate to amend, a Plan resulting in an increase in current liability such that the Company, a Subsidiary of the Company or any ERISA Affiliate is required to provide security to such Plan under Section 401(a)(29) of the Code; (ix) Incur, or permit a Subsidiary of the Company or any ERISA Affiliate to incur, a material liability to or on account of a Plan under Sections 515, 4062, 4063, 4064, 4201 or 4204 of ERISA; or (x) Permit, or allow a Subsidiary of the Company or any ERISA Affiliate to permit, the actuarial present value of the benefit liabilities (computed on an accumulated benefit obligation basis in accordance with GAAP) under all Plans in the aggregate to exceed the current value of the assets of all Plans in the aggregate that are allocable to such benefit liabilities by (A) an amount that could reasonably be expected to cause a Material Adverse Effect, if such excess is the result of a change in market conditions, and (B) more than $10,000,000 if such excess is for any other reason. (j) Sale or Discount of Receivables. Discount or sell (with or without recourse), or permit any of its Subsidiaries (excluding Unrestricted Subsidiaries) to discount or sell (with or without recourse), any of its or its Subsidiaries' (excluding Unrestricted Subsidiaries) notes receivable or accounts receivable, other than notes receivable and accounts receivable discounted or sold without recourse and in the ordinary course of business of the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) (as conducted as of the Restated Closing Date) in an aggregate amount not to exceed $15,000,000 in any Fiscal Year. 109 118 (k) Negative Pledge Agreements. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries (excluding Unrestricted Subsidiaries) to create, incur, assume or suffer to exist, any contract, agreement or understanding (other than this Agreement, the other Financing Documents, or as set forth on Schedule I to the respective Security Agreements delivered by the Company and its Subsidiaries) which in any way prohibits or restricts the granting, conveying, creation or imposition of any Lien on any Property of the Company or its Subsidiaries (excluding Unrestricted Subsidiaries), or which requires the consent of or notice to other Persons in connection therewith, other than agreements (that do not provide for borrowed money Indebtedness) entered into in the ordinary course of business that restrict assignment by the Company of its rights thereunder; provided that the Company shall use its best efforts to negotiate such restrictions so as not to limit the right of the Company to grant a Lien on the Company's rights thereunder in favor of the Administrative Agent on behalf of the Lenders as security for the Lender Indebtedness. (l) Transactions with Affiliates. Enter into any transaction or series of transactions, or permit any of its Subsidiaries to enter into any transaction or series of transactions, with Affiliates of the Company or its Subsidiaries which involve an outflow of money or other Property from the Company or its Subsidiaries to an Affiliate of the Company or its Subsidiaries, including but not limited to repayment of Indebtedness, management fees, compensation, salaries, asset purchase payments or any other type of fees or payments similar in nature, other than on terms and conditions substantially as favorable to the Company and its Subsidiaries as would be obtainable by the Company and its Subsidiaries in a reasonably comparable arm's-length transaction with a Person other than an Affiliate of the Company or its Subsidiaries. Notwithstanding the foregoing, the restrictions set forth in this Section 5.04(l) shall not apply to: (i) the payment of reasonable and customary fees to directors of the Company who are not employees of the Company, (ii) any other transaction with any employee, officer or director of the Company or any of its Subsidiaries pursuant to employee benefit plans and compensation arrangements in amounts customary for corporations similarly situated to the Company or any such Subsidiary and entered into the ordinary course of business and approved by the Board of Directors of the Company or any committee thereof or the Board of Directors of such Subsidiary, (iii) the payment of fees to TSG in connection with the SCI Acquisition which have been disclosed prior to the STX Effective Date to the Administrative Agent in writing, (iv) the SCI Asset Conveyance, (v) the cancellation of Indebtedness described in Section 5.04(e)(viii), (vi) the payment of fees to TSG in connection with the AFB Acquisition which have been disclosed prior to the AFB Effective Date to the Administrative Agent in writing, (vii) the payment of fees to TSG in connection with the Saskatoon Acquisition which have been disclosed prior to the Restated Closing Date to the Administrative Agent in writing, (viii) any transaction or series of transactions with the Company or the Subsidiary Guarantors which involve an outflow of money or other Property from an Unrestricted Subsidiary to the Company or a Subsidiary Guarantor, (ix) any transaction or series of transactions which involve an outflow of money or other Property from an Unrestricted Subsidiary to another Unrestricted Subsidiary, or (x) any other transactions with Affiliates that do not in the aggregate involve the payment of more than $1,000,000 during any twelve-month period. 110 119 (m) Unconditional Purchase Obligations. Enter into or be a party to, or permit any of its Subsidiaries (excluding Unrestricted Subsidiaries) to enter into or be a party to, any material contract for the purchase of materials, supplies or other property or services, if such contract requires that payment be made by it regardless of whether or not delivery is ever made of such materials, supplies or other property or services, except any such contract for the purchase of power entered into by the Company or any Subsidiary in the ordinary course of its business. (n) Stock. Authorize or issue (i) any Voting Stock to any Person other than Holdco or (ii) any preferred stock or other equity securities having a mandatory redemption right existing with regard thereto. (o) Capital Expenditures. Make, or permit any of its Subsidiaries (excluding Unrestricted Subsidiaries) to make, Capital Expenditures in any Fiscal Year in excess of the sum of (i), (ii) and (iii) below: (i) Capital Expenditures in any Fiscal Year pursuant to the following schedule: Maximum Scheduled Fiscal Year Ending Capital Expenditures ------------------ -------------------- September 30, 1997 $50,000,000 September 30, 1998 $45,000,000 September 30, 1999 and $35,000,000 each Fiscal Year thereafter (ii) Up to 50% of the amount listed above for any Fiscal Year but not expended in such Fiscal Year may be carried forward and expended during the next Fiscal Year (but not any other Fiscal Year). (iii) In addition to Capital Expenditures permitted by Sections 5.04(o)(i) and (ii), Capital Expenditures in an amount (after giving effect thereto) not to exceed Cumulative Retained Cash Flow, as of the date any such Capital Expenditure is made. (iv) In addition to Capital Expenditures permitted by Sections 5.04(o)(i), (ii) and (iii), for the period from the STX Effective Date through September 30, 1996, the Company and its Subsidiaries may make Capital Expenditures in an amount not to exceed $18,000,000. Capital Expenditures that are not designated as Capital Expenditures from Retained Cash Flow pursuant to a Notice of Designated Retained Cash Flow Usage, are deemed to apply first to Carry-Forward Capital Expenditures and last to Scheduled Capital Expenditures. 111 120 (p) Modifications to Senior Subordinated Notes; No Voluntary Prepayments. (i) Amend, modify, or waive any covenant contained in the Senior Subordinated Notes, the Additional Senior Subordinated Notes, the Senior Subordinated Notes Indenture or the Additional Senior Subordinated Notes Indenture if the effect of such amendment, modification, or waiver would be to make the terms of the Senior Subordinated Notes, the Additional Senior Subordinated Notes, the Senior Subordinated Notes Indenture or the Additional Senior Subordinated Notes Indenture materially more onerous to the Company; (ii) Amend, modify, or waive any provision of the Senior Subordinated Notes, the Additional Senior Subordinated Notes, the Senior Subordinated Notes Indenture or the Additional Senior Subordinated Notes Indenture which (A) subjects the Company to any additional material obligation, (B) increases the principal of or rate of interest on any Senior Subordinated Note or any Additional Senior Subordinated Note, (C) accelerates the date fixed for any payment of principal or interest on any Senior Subordinated Note or any Additional Senior Subordinated Note, (D) would change the percentage of holders of such Senior Subordinated Notes or such Additional Senior Subordinated Notes required for any such amendment, modification, or waiver from the percentage required on the Restated Closing Date, or (E) relates to the subordination provisions thereof; or (iii) Make any voluntary prepayment of, or optionally redeem, or make any payment in defeasance of, any part of the Senior Subordinated Notes or the Additional Senior Subordinated Notes. (q) Intercompany Transactions. Create and will not permit any of its Subsidiaries (excluding Unrestricted Subsidiaries) to, create or otherwise cause or permit to exist or become effective, except as may be expressly permitted or required by the Financing Documents, any consensual encumbrance or restriction of any kind on the ability of any such Subsidiary to (i) pay dividends or make any other distribution to the Company or any of its Subsidiaries in respect of such Subsidiary's capital stock or with respect to any other interest or participation in, or measured by, its profits, (ii) pay any indebtedness owed to the Company or any of its Subsidiaries, (iii) make any loan or advance to the Company or any of its Subsidiaries, or (iv) sell, lease or transfer any of its Property to the Company or any of its Subsidiaries. (r) Modification or Amendment of the AFB Earnout Agreement. Amend, modify or waive any provision of the AFB Earnout Agreement if the effect of such amendment, modification or waiver would be to increase any amount payable thereunder. (s) Reverse Designation of Unrestricted Subsidiaries. Designate (which designation is approved by the Board of Directors of the Company) an Unrestricted Subsidiary as a Subsidiary that is no longer an Unrestricted Subsidiary for purposes of this Agreement unless both before and after giving effect to such reverse designation (i) no Default or Event of Default shall exist, 112 121 including, without limitation, a breach of Section 5.04(a) or Section 5.04(b), (ii) no default or event of default shall exist or be continuing under any agreement, mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by such Unrestricted Subsidiary, and (iii) no default or event of default shall exist or be continuing under any of the Senior Secured Discount Notes Indenture, the Senior Subordinated Notes Indenture and the Additional Senior Subordinated Notes Indenture. Notice of any such reverse designation by the Company shall be delivered by the Company to the Administrative Agent together with a copy of the resolutions of the Board of Directors of the Company approving such reverse designation and a certificate of a Responsible Officer certifying that such reverse designation complies with the requirements of this Section 5.04(s). Such reverse designation shall become effective upon receipt by the Administrative Agent of the foregoing. Any reverse designation that fails to comply with the terms of this Section 5.04(s) shall be null and void and of no effect whatsoever. ARTICLE VI EVENTS OF DEFAULT Upon the occurrence and during the continuance of any of the following specified events (each an "Event of Default"): Section 6.01 Payments. (a) The Company shall fail to pay when due (including, but not limited to, by mandatory prepayment required pursuant to Section 2.10) any principal of any Loan or any Note, or any Reimbursement Obligation; or (b) the Company shall fail to pay when due any interest on any Loan or Note or any fee or any other amount payable hereunder or under the Fee Letter or the AFB Fee Letter or any other Financing Document, and such failure to pay shall continue unremedied for a period of five days; Section 6.02 Covenants Without Notice. The Company shall fail to observe or perform any covenant or agreement contained in Subsections 5.01(e), (g) and (i), Section 5.03 or Section 5.04 (other than Subsections 5.04(b)(iii)(v) hereof). Section 6.03 Other Covenants. The Company shall fail to observe or perform any covenant or agreement contained in (a) Subsections 5.02(a), (b), (c), (d), (f), (g), (h), (j), (k) or (m) or Subsections 5.04(b)(iii)(v), and, if capable of being remedied, such failure shall remain unremedied for 10 days after the earlier of (i) the Company's obtaining knowledge thereof, or (ii) written notice thereof shall have been given to the Company by any Lender, any Issuing Bank or the Administrative Agent; and (b) this Agreement, other than those referred to in Sections 6.01, 6.02, or clause (a) of this Section 6.03, and, if capable of being remedied, such failure shall remain unremedied for 30 days after the earlier of (i) the Company's obtaining knowledge thereof, or (ii) written notice thereof shall have been given to the Company by any Lender, any Issuing Bank or the Administrative Agent; Section 6.04 Other Financing Document Obligations. Default is made in the due observance or performance by Holdco, the Company or any Subsidiary of the Company of any of the covenants or agreements contained in any Financing Document other than this Agreement, and such default continues 113 122 unremedied beyond the expiration of any applicable grace period which may be expressly allowed under such Financing Document; Section 6.05 Representations. Any representation, warranty or statement made or deemed to be made by Holdco, the Company or any Subsidiary of the Company or any of Holdco's, such Company's, or Subsidiary's officers herein or in any other Financing Document, or in any certificate, request or other document furnished pursuant to or under this Agreement or any other Financing Document, shall have been incorrect in any material respect as of the date when made or deemed to be made; Section 6.06 Non-Payments of Other Indebtedness. The Company or any of its Subsidiaries shall fail to make any payment or payments of principal of or interest on any Indebtedness of the Company or such Subsidiary (other than (i) the Lender Indebtedness and (ii) any trade account subject to a bona fide dispute and the trade creditor has neither filed a lawsuit nor caused a Lien to be placed upon any Property of the Company or such Subsidiary) in excess of $10,000,000 in the aggregate when due (whether at stated maturity, by acceleration, on demand or otherwise) after giving effect to any applicable grace period; Section 6.07 Defaults Under Other Agreements. The Company or any of its Subsidiaries shall fail to observe or perform any covenant or agreement contained in any agreement(s) or instrument(s) relating to Indebtedness of the Company or such Subsidiary of $10,000,000 or more in the aggregate within any applicable grace period, or any other event shall occur, if the effect of such failure or other event is to accelerate, or, with respect to the Company and its Subsidiaries (excluding Unrestricted Subsidiaries), to permit the holder of such Indebtedness or any other Person to accelerate, the maturity of $10,000,000 or more in the aggregate of such Indebtedness; or $10,000,000 or more in the aggregate of any such Indebtedness shall be, or if as a result of such failure or other event may be, required to be prepaid (other than prepayments resulting from excess cash flow or the sale of assets) in whole or in part prior to its stated maturity; Section 6.08 Bankruptcy. Holdco, the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) shall commence a voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy" as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against Holdco, the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) and the petition is not controverted within 10 days, or is not stayed or dismissed within 60 days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or any substantial part of the property of Holdco, the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries); or Holdco, the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to Holdco, the Company or such Subsidiary or there is commenced against Holdco, the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) any such proceeding which remains unstayed or undismissed for a period of 60 days; or Holdco, the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or Holdco, the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) suffers any appointment of any custodian or the like for it or any substantial part of its 114 123 Property to continue undischarged or unstayed for a period of 60 days; or Holdco, the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) makes a general assignment for the benefit of creditors; or Holdco, the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) shall fail to pay, or shall state in writing that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or Holdco, the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) shall by any act or failure to act indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate action is taken by Holdco, the Company or any of its Subsidiaries (excluding Unrestricted Subsidiaries) for the purpose of effecting any of the foregoing; Section 6.09 Money Judgment. Judgments or orders for the payment of money involving in the aggregate at any time a liability (net of any insurance proceeds or indemnity payments actually received in respect thereof prior to or within 60 days from the entry thereof, or to be received in respect thereof in the event any appeal thereof shall be unsuccessful) of more than $10,000,000, or that would otherwise have a Material Adverse Effect shall be rendered against the Company or any of it Subsidiaries (excluding Unrestricted Subsidiaries) and such judgment or order shall continue unsatisfied in accordance with the terms of such judgment or order (in the case of a money judgment) and in effect for a period of 60 days during which execution shall not be effectively stayed or deferred (whether by action of a court, by agreement or otherwise); Section 6.10 Discontinuance of Business. Except as a result of any merger permitted by Section 5.04(c), the Company or any material Subsidiary shall cease to be principally engaged in the businesses and operations in which the Company and its then existing Subsidiaries were principally engaged on the Restated Closing Date; Section 6.11 Financing Documents. Any Material Provision of any of the Financing Documents after delivery thereof shall for any reason, except to the extent permitted by the terms thereof, cease to be in full force and effect and valid, binding and enforceable (except as enforceability may be limited as stated in Section 4.03) in accordance with its terms, or, in the case of any of the Security Instruments, cease to create a valid and perfected Lien of the priority contemplated thereby on any of the collateral purported to be covered thereby, or the Company or any of its Subsidiaries (or any other Person who may have granted or purported to grant such Lien) shall so state in writing. As used in this Section 6.11, "Material Provision" shall mean (i) with respect to this Agreement, the Notes, or any Subsidiary Guaranty, any material term, covenant, or agreement set forth therein, and (ii) with respect to any other Financing Document, any provision if the validity and enforceability thereof is necessary for such Financing Document to accomplish its stated, or clearly intended, purpose or otherwise necessary in order for any Lender to enforce any material right or remedy under any Financing Document; Section 6.12 Change of Control. The occurrence of a Change of Control; Section 6.13 Merger Agreement Representations and Warranties. Any representation or warranty made or deemed made by SCI in the Merger Agreement shall be or have been incorrect in any material respect as of the STX Effective Date; 115 124 Section 6.14 Albright Indemnity. (a) The occurrence, with respect to Albright, of any of the events described in Section 6.08 or the failure of the Albright Indemnity to continue to be in full force and effect, (b) the occurrence of any event or the existence of any condition that would have been covered by the Albright Indemnity, and (c) the existence of (a) and (b), collectively, could reasonably be expected to have a Material Adverse Effect; Section 6.15 Default Under Senior Secured Discount Notes. Holdco shall fail to observe or perform any covenant or agreement contained in the Senior Secured Discount Notes or the Senior Secured Discount Notes Indenture within any applicable grace period, if the effect of such failure or other event is to accelerate, or to permit the holders of the Senior Secured Discount Notes or any other Person to accelerate, the maturity thereof; Section 6.16 Senior Indebtedness. The Senior Subordinated Notes or the Additional Senior Subordinated Notes shall cease, for any reason, to be validly subordinated to the Lender Indebtedness, as provided in the Senior Subordinated Notes Indenture and the Additional Senior Subordinated Indenture or the Company, any Affiliate of the Company, the trustee in respect of the Senior Subordinated Notes or the Additional Senior Subordinated Notes or the holders of at least 25% in aggregate principal amount of the Senior Subordinated Notes or the Additional Senior Subordinated Notes shall so assert in writing; Section 6.17 Equity Notes Contribution. Failure of Holdco to contribute to the Company and the Company to contribute or loan to Sterling Fibers at least $300,000 of additional cash equity within 90 days of the AFB Effective Date, irrespective of the amount collected on the Equity Notes during such period; or Section 6.18 Cytec Indemnity. (a) The occurrence, with respect to any of the Cytec Parties, of any of the events described in Section 6.08 or the failure of the Cytec Indemnity to continue to be in full force and effect, (b) the occurrence of any event or the existence of any condition that would have been covered by the Cytec Indemnity, and (c) the existence of (a) and (b), collectively, could reasonably be expected to have a Material Adverse Effect; then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Administrative Agent, upon the written or telex request of the Required Lenders, shall, by written notice to the Company, take any or all of the following actions, without prejudice to the rights of the Administrative Agent, any Lender or the holder of any Note, to enforce its claims against the Company: (i) declare the Revolving Credit Commitment and other lending obligations, if any, terminated, whereupon the Revolving Credit Commitment and other lending obligations, if any, of each Lender shall terminate immediately; or (ii) declare the entire principal amount of and all accrued interest on all Lender Indebtedness then outstanding to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest, notice of protest or dishonor, notice of acceleration, notice of intent to accelerate or other notice of any kind, all of which are hereby expressly waived by the Company, and thereupon take such action as it may deem desirable under and pursuant to the Financing Documents; provided, that, if an Event of Default specified in Section 6.08 shall occur, the result which would occur upon the giving of written notice by the Administrative Agent to the Company, as specified in clauses (i) and (ii) above, shall occur automatically without the giving of any such notice. 116 125 ARTICLE VII THE AGENTS Section 7.01 Appointment of Administrative Agent. Each Lender (and each Secured Affiliate by and through its affiliated Lender), the Documentation Agent and each Issuing Bank hereby designates Texas Commerce Bank National Association, as Administrative Agent to act as herein specified and as specified in the other Financing Documents. Each Lender (and each Secured Affiliate by and through its affiliated Lender), the Documentation Agent and each Issuing Bank hereby irrevocably authorizes the Administrative Agent to take such action on its behalf under the provisions of this Agreement, the Notes, and the other Financing Documents and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Administrative Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Administrative Agent may perform any of its duties hereunder by or through its agents or employees. Section 7.02 Limitation of Duties of Administrative Agent. The Administrative Agent shall have no duties or responsibilities except those expressly set forth with respect to the Administrative Agent in this Agreement and as specified in the other Financing Documents. Neither the Administrative Agent nor any of its officers, directors, employees or agents shall be liable for any action taken or omitted by it as such hereunder or in connection herewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Administrative Agent shall be mechanical and administrative in nature; the Administrative Agent shall not have by reason of this Agreement a fiduciary relationship in respect of any Lender; and nothing in this Agreement, expressed or implied, is intended to or shall be so construed as to impose upon the Administrative Agent any obligations in respect of this Agreement except as expressly set forth herein. Section 7.03 Lack of Reliance on the Administrative Agent and the Documentation Agent. (a) Independent Investigation. Independently and without reliance upon the Administrative Agent or the Documentation Agent, each Lender, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Company in connection with the taking or not taking of any action in connection herewith, and (ii) its own appraisal of the creditworthiness of the Company, and, except as expressly provided in this Agreement, and the other Financing Documents the Administrative Agent and the Documentation Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the consummation of the transactions contemplated herein or at any time or times thereafter. (b) Agents Not Responsible. The Administrative Agent and the Documentation Agent shall not be responsible to any Lender or any Issuing Bank for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, 117 126 enforceability, collectibility, priority or sufficiency of this Agreement, the Notes, the Letters of Credit or the other Financing Documents or the financial condition of the Company or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement, the Notes or the other Financing Documents, or the financial condition of the Company, or the existence or possible existence of any Default or Event of Default. Section 7.04 Certain Rights of the Administrative Agent. If the Administrative Agent shall request instructions from the Required Lenders with respect to any act or action (including the failure to act) in connection with this Agreement, the Notes and the other Financing Documents, the Administrative Agent shall be entitled to refrain from such act or taking such action unless and until the Administrative Agent shall have received instructions from the Required Lenders; and the Administrative Agent shall not incur liability to any Person by reason of so refraining. Without limiting the foregoing, no Lender shall have any right of action whatsoever against the Administrative Agent as a result of the Administrative Agent acting or refraining from acting under this Agreement, the Notes and the other Financing Documents in accordance with the instructions of the Required Lenders, or to the extent required by Section 8.02, all of the Lenders. Section 7.05 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other documentary teletransmission or telephone message believed by it to be genuine and correct and to have been signed, sent or made by the proper Person. The Administrative Agent may consult with legal counsel (including counsel for the Company), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 7.06 INDEMNIFICATION OF ADMINISTRATIVE AGENT AND DOCUMENTATION AGENT. TO THE EXTENT THE ADMINISTRATIVE AGENT OR THE DOCUMENTATION AGENT IS NOT REIMBURSED AND INDEMNIFIED BY THE COMPANY, EACH LENDER WILL REIMBURSE AND INDEMNIFY THE ADMINISTRATIVE AGENT OR THE DOCUMENTATION AGENT, AS APPLICABLE, IN PROPORTION TO ITS TOTAL CREDIT PERCENTAGE, FOR AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES (INCLUDING REASONABLE COUNSEL FEES AND DISBURSEMENTS) OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE ADMINISTRATIVE AGENT OR THE DOCUMENTATION AGENT IN PERFORMING ITS DUTIES HEREUNDER, IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT AND BY REASON OF THE ORDINARY NEGLIGENCE OF THE ADMINISTRATIVE AGENT AND THE DOCUMENTATION AGENT; PROVIDED THAT NO LENDER SHALL BE LIABLE TO THE ADMINISTRATIVE AGENT OR THE DOCUMENTATION AGENT FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING FROM, AS TO THE ADMINISTRATIVE AGENT, THE ADMINISTRATIVE AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OR, AS TO THE DOCUMENTATION AGENT, THE DOCUMENTATION AGENT'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. 118 127 Section 7.07 The Administrative Agent and Documentation Agent in their Individual Capacity. With respect to their obligations under this Agreement, the Loans made by it and the Notes issued to it, the Administrative Agent and Documentation Agent shall have the same rights and powers hereunder as any other Lender or holder of a Note and may exercise the same as though it were not performing the duties, if any, specified herein; and the terms "Lenders," "Required Lenders," "ESOP Term Loan Lenders," "Revolving Credit Lenders," "Tranche A Term Loan Lenders," "Tranche B Term Loan Lenders," "holders of Notes" or any similar terms shall, unless the context clearly otherwise indicates, include the Administrative Agent and Documentation Agent in their individual capacity. The Administrative Agent and Documentation Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust, financial advisory or other business with the Company or any affiliate of the Company as if it were not performing the duties, if any, specified herein, and may accept fees and other consideration from the Company for services in connection with this Agreement and otherwise without having to account for the same to the Lenders. Section 7.08 May Treat Lender as Owner. The Company, the Administrative Agent and the Issuing Banks may deem and treat each Lender as the owner of such Lender's Note for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been filed with the Administrative Agent. Any request, authority or consent of any Person who at the time of making such request or giving such authority or consent is the owner of a Note shall be conclusive and binding on any subsequent owner, transferee or assignee of such Note or any promissory note or notes issued in exchange therefor. Section 7.09 Successor Administrative Agent. (a) Administrative Agent Resignation. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders, the Issuing Banks and the Company and may be removed at any time with or without cause by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right, upon five days' notice to the Company, to appoint a successor Administrative Agent, subject to the approval of the Company, such approval not to be unreasonably withheld. If no successor Administrative Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Required Lenders' removal of the retiring Administrative Agent, then, upon five days' notice to the Company, the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent (subject to approval of the Company, such approval not to be unreasonably withheld), which shall be a bank which maintains an office in the United States, or a commercial bank organized under the laws of the United States of America or of any State thereof, or any Affiliate of such bank, having a combined capital and surplus of at least $250,000,000. (b) Rights, Powers, etc. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation 119 128 or removal hereunder as Administrative Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. Section 7.10 Documentation Agent. The Documentation Agent has no duties hereunder in its capacity as Documentation Agent. Section 7.11 Assumption of Administrative Agent. The Administrative Agent under this Agreement hereby agrees to and assumes the rights, privileges and obligations of each of the Original Administrative Agent and the AFB Administrative Agent and is hereby deemed for all purposes under any Financing Document to be such Original Administrative Agent or AFB Administrative Agent to the extent such Financing Document continues to make reference to such agents. ARTICLE VIII MISCELLANEOUS Section 8.01 Notices. All notices, requests and other communications to any party hereunder shall be in writing (including, telecopy or similar teletransmission or writing) and shall be given to such party at its address or telecopy number set forth on the signature pages hereof or such other address or telecopy number as such party may hereafter specify by notice to the Administrative Agent and the Company. Each such notice, request or other communication shall be effective (i) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (ii) if given by any other means (including, but not limited to, by air courier), when delivered at the address specified in this Section; provided that notices to the Administrative Agent shall not be effective until actually and physically received. Section 8.02 Amendments and Waivers. Neither this Agreement nor any other Financing Document, nor any terms hereof or thereof, may be amended, supplemented or modified except in accordance with the provisions of this Section. The Required Lenders may, or, with the written consent of the Required Lenders, the Administrative Agent shall, from time to time, (x) enter into with the Company, written amendments, supplements or modifications hereto and to the other Financing Documents for the purpose of adding any provisions to this Agreement or to the other Financing Documents or changing in any manner the rights or obligations of the Lenders or the Company hereunder or thereunder or (y) waive at the Company's request, on such terms and conditions as the Required Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Financing Documents or any Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall: (a) reduce the amount or extend the scheduled date of maturity of any Loan or any Reimbursement Obligation or of any scheduled installment thereof or reduce the stated rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof or modify any provision that provides for the ratable sharing by the Lenders of any payment or prepayment of 120 129 Lender Indebtedness to provide for a non-ratable sharing thereof or the right of the Term Lenders to decline acceptance of prepayment or increase the amount or extend the expiration date of any Lender's Revolving Credit Commitment or amend, modify or waive any provision of Section 2.19, in each case without the prior written consent of each Lender directly affected thereby; (b) change the currency in which any Loan or Reimbursement Obligation is payable or amend, modify or waive any provision of this Section 8.02 or reduce the percentage specified in the definition of Required Lenders, in each case without the written consent of all of the Lenders; (c) release (i) any Subsidiary Guarantor from its obligations under the Subsidiary Guaranty or (ii) any of the Collateral, without the written consent of all of the Lenders, except as expressly permitted hereby, provided that the Administrative Agent shall release (without consent from the Lenders) any Collateral sold, transferred or otherwise disposed of as permitted by Section 5.04(c); (d) amend, modify or waive any provision of Article VII without the written consent of the Administrative Agent, and of the Documentation Agent, if affected thereby; or (e) amend, modify or waive (i) any Letter of Credit Liability without the written consent of the Issuing Bank or (ii) any Letter of Credit without the consent of each Revolving Credit Lender if such Letter of Credit, after giving effect to such amendment, modification or waiver, would no longer satisfy the requirements hereof if such Letter of Credit was being issued ab initio at such time, provided that in all cases other than clauses (i) or (ii), only the consent of the Issuing Bank shall be required to amend, modify or waive any Letter of Credit. Any waiver and any amendment, supplement or modification pursuant to this Section 8.02 shall apply to each of the Lenders and shall be binding upon the Company, the Lenders, the Administrative Agent and all future holders of the Loans. In the case of any waiver, the Company, the Lenders and the Administrative Agent shall be restored to their former position and rights hereunder and under the other Financing Documents, and any Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default, or impair any right consequent thereon. Section 8.03 No Waiver; Remedies Cumulative. No failure or delay on the part of the Company or the Administrative Agent or any Lender or any holder of any Note in exercising any right or remedy under this Agreement or any other Financing Document and no course of dealing between the Company and the Administrative Agent or any Lender or any holder of any Note shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy under the Notes, this Agreement or any other Financing Document preclude any other or further exercise thereof or the exercise of any other right or remedy under the Notes, this Agreement or any other Financing Document. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Company, the Administrative Agent or any Lender would otherwise have. No notice to or demand on the Company not required under the Notes, this Agreement or any other Financing Document in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances or constitute 121 130 a waiver of the rights of the Administrative Agent or the Lenders to any other or further action in any circumstances without notice or demand. Section 8.04 Payment of Expenses, Indemnities, etc. The Company agrees to (and shall be liable for): (a) Expenses. Whether or not the transactions hereby contemplated are consummated, pay all reasonable out-of-pocket costs and expenses of the Administrative Agent, the Documentation Agent and each Issuing Bank in the administration (both before and after the execution hereof and including advice of counsel for the Administrative Agent as to the rights and duties of the Administrative Agent and the Lenders with respect thereto) of, and in connection with the preparation, execution and delivery of, recording or filing of, preservation of rights under, enforcement of, and, after a Default, refinancing, renegotiation or restructuring of, this Agreement, the Notes, and the other Financing Documents and any amendment, waiver or consent relating thereto (including, but not limited to, the reasonable fees and disbursements of counsel for the Administrative Agent and in the case of enforcement for any of the Lenders) and promptly reimburse the Administrative Agent for all amounts expended, advanced, or incurred by the Administrative Agent or the Lenders to satisfy any obligation of the Company, Holdco, or the Subsidiary Guarantors under this Agreement or any other Financing Document; (b) INDEMNIFICATION. INDEMNIFY THE ADMINISTRATIVE AGENT, THE DOCUMENTATION AGENT, THE ISSUING BANKS AND EACH LENDER, EACH OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS AND AFFILIATES FROM, HOLD EACH OF THEM HARMLESS AGAINST, AND PROMPTLY UPON DEMAND PAY OR REIMBURSE EACH OF THEM FOR, ANY AND ALL ACTIONS, SUITS, PROCEEDINGS (INCLUDING ANY INVESTIGATIONS, LITIGATION OR INQUIRIES), CLAIMS, COSTS, LOSSES, LIABILITIES, DAMAGES OR EXPENSES OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR INVOLVE ANY OF THEM (WHETHER OR NOT ANY OF THEM IS DESIGNATED A PARTY THERETO) AS A RESULT OF, ARISING OUT OF OR IN ANY WAY RELATED TO (I) ANY ACTUAL OR PROPOSED USE BY THE COMPANY OR ANY SUBSIDIARY OF THE COMPANY OF THE PROCEEDS OF ANY OF THE LOANS; OR (II) ANY OTHER ASPECT OF THIS AGREEMENT, THE NOTES, AND THE FINANCING DOCUMENTS, INCLUDING BUT NOT LIMITED TO THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL (INCLUDING ALLOCATED COSTS OF INTERNAL COUNSEL) AND ALL OTHER EXPENSES INCURRED IN CONNECTION WITH INVESTIGATING, DEFENDING OR PREPARING TO DEFEND ANY SUCH ACTION, SUIT, PROCEEDING (INCLUDING ANY INVESTIGATIONS, LITIGATION OR INQUIRIES) OR CLAIM, AND INCLUDING ALL ACTIONS, SUITS, PROCEEDINGS (INCLUDING ANY INVESTIGATIONS, LITIGATION OR INQUIRIES), CLAIMS, COSTS, LOSSES, LIABILITIES, DAMAGES OR EXPENSES ARISING BY REASON OF ORDINARY NEGLIGENCE OF ANY OF THE ADMINISTRATIVE AGENT, THE DOCUMENTATION AGENT, THE ISSUING BANKS AND EACH LENDER, EACH OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS AND AFFILIATES; PROVIDED, HOWEVER, THE PROVISIONS OF THIS SECTION 8.04(B) SHALL NOT APPLY TO ANY ACTION, SUITS, PROCEEDINGS, CLAIMS, COSTS, LOSSES, LIABILITIES, DAMAGES, OR EXPENSES TO THE EXTENT, BUT ONLY TO THE EXTENT, CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY SEEKING INDEMNIFICATION; 122 131 (c) ENVIRONMENTAL INDEMNIFICATION. INDEMNIFY AND HOLD HARMLESS FROM TIME TO TIME THE ADMINISTRATIVE AGENT, THE DOCUMENTATION AGENT, THE ISSUING BANKS AND THE LENDERS, EACH PERSON CLAIMING BY, THROUGH, UNDER OR ON ACCOUNT OF ANY OF THE FOREGOING AND THE RESPECTIVE DIRECTORS, OFFICERS, COUNSEL, EMPLOYEE, AGENTS, AFFILIATES, SUCCESSORS AND ASSIGNS OF EACH OF THE FOREGOING FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS, COST RECOVERY ACTIONS, ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES AND LIABILITIES (WHICH RELATE TO OR ARISE AS A RESULT OF THE LOANS, THE LETTERS OF CREDIT OR ANY FINANCING DOCUMENT) TO WHICH ANY SUCH PERSON MAY BECOME SUBJECT AND INCLUDING ANY AND ALL LOSSES, CLAIMS, COST RECOVERY ACTIONS, ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES AND LIABILITIES (WHICH RELATE TO OR ARISE AS A RESULT OF THE LOANS, THE LETTERS OF CREDIT OR ANY FINANCING DOCUMENT) ARISING BY REASON OF THE ORDINARY NEGLIGENCE OF THE ADMINISTRATIVE AGENT, THE DOCUMENTATION AGENT, THE ISSUING BANKS AND THE LENDERS, EACH PERSON CLAIMING BY, THROUGH, UNDER OR ON ACCOUNT OF ANY OF THE FOREGOING AND THE RESPECTIVE DIRECTORS, OFFICERS, COUNSEL, EMPLOYEES, AGENTS, AFFILIATES, SUCCESSORS AND ASSIGNS OF EACH OF THE FOREGOING (1) UNDER ANY ENVIRONMENTAL LAW APPLICABLE TO THE COMPANY OR ANY OF ITS SUBSIDIARIES OR ANY OF THEIR RESPECTIVE PROPERTIES, INCLUDING WITHOUT LIMITATION, THE TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON ANY OF THEIR RESPECTIVE PROPERTIES, (2) AS A RESULT OF THE BREACH OR NON COMPLIANCE BY THE COMPANY OR ANY OF ITS SUBSIDIARIES WITH ANY ENVIRONMENTAL LAW APPLICABLE TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (3) DUE TO PAST OWNERSHIP BY THE COMPANY OR ANY OF ITS SUBSIDIARIES OF ANY OF THEIR RESPECTIVE PROPERTIES OR PAST ACTIVITY ON ANY OF THEIR RESPECTIVE PROPERTIES OR PAST ACTIVITY ON ANY OF THEIR RESPECTIVE PROPERTIES WHICH, THOUGH LAWFUL AND FULLY PERMISSIBLE AT THE TIME, COULD RESULT IN PRESENT LIABILIT, (4) THE PRESENCE, USE, RELEASE, STORAGE, TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON OR AT ANY OF THE PROPERTIES OWNED OR OPERATED BY THE COMPANY OR ANY OF ITS SUBSIDIARIES, OR (5) ANY OTHER ENVIRONMENTAL, HEALTH OR SAFETY CONDITION IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OTHER FINANCING DOCUMENT; PROVIDED, HOWEVER, NO INDEMNITY SHALL BE AFFORDED UNDER THIS SECTION 8.04(C) IN RESPECT OF ANY PROPERTY FOR ANY OCCURRENCE ARISING PRIMARILY FROM THE ACTS OR OMISSIONS OF THE ADMINISTRATIVE AGENT OR ANY LENDER DURING THE PERIOD AFTER WHICH SUCH PERSON, ITS SUCCESSORS OR ASSIGNS SHALL HAVE OBTAINED ACTUAL PHYSICAL POSSESSION OF SUCH PROPERTY (WHETHER BY FORECLOSURE OR DEED IN LIEU OF FORECLOSURE, AS MORTGAGEE-IN-POSSESSION OR OTHERWISE); AND (d) ENVIRONMENTAL WAIVER. WITHOUT LIMITING THE FOREGOING PROVISIONS, THE COMPANY HEREBY DOES WAIVE, RELEASE AND COVENANT NOT TO BRING AGAINST ANY OF THE PERSONS INDEMNIFIED IN THIS SECTION 8.04 ANY DEMAND, CLAIM, COST RECOVERY ACTION OR LAWSUIT THEY MAY NOW OR HEREAFTER HAVE OR ACCRUE (WHICH RELATE TO OR ARISE AS A RESULT OF THE LOANS, THE LETTERS OF CREDIT OR ANY FINANCING DOCUMENT) ARISING FROM (1) ANY ENVIRONMENTAL LAW NOW OR HEREAFTER ENACTED (INCLUDING THOSE APPLICABLE TO THE COMPANY OR ANY OF ITS SUBSIDIARIES) UNLESS THE ACTS OR 123 132 OMISSIONS OF ANY SUCH PERSON OR THEIR RESPECTIVE SUCCESSORS AND ASSIGNS ARE THE PRIMARY CAUSE OF THE CIRCUMSTANCES GIVING RISE TO SUCH DEMAND, COST RECOVERY ACTION OR LAWSUIT, (2) THE PRESENCE, USE, RELEASE, STORAGE, TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON OR AT ANY OF THE PROPERTIES OWNED OR OPERATED BY THE COMPANY OR ANY OF ITS SUBSIDIARIES, OR (3) THE BREACH OR NON-COMPLIANCE BY THE COMPANY WITH ANY ENVIRONMENTAL LAW OR ENVIRONMENTAL COVENANT APPLICABLE TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, UNLESS THE ACTS OR OMISSIONS OF SUCH PERSON, ITS SUCCESSORS AND ASSIGNS ARE THE PRIMARY CAUSE OF THE CIRCUMSTANCES GIVING RISE TO SUCH DEMAND, CLAIM, COST RECOVERY ACTION OR LAWSUIT. If and to the extent that the obligations of the Company under this Section are unenforceable for any reason, the Company hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. The Company's obligations under this Section shall survive any termination of this Agreement and the payment of the Notes. Section 8.05 Right of Setoff. In addition to and not in limitation of all rights of offset that any Lender or Issuing Bank may have under applicable law, each Lender or other holder of a Note, or any other Lender Indebtedness shall, upon the occurrence of any Event of Default and at any time during the continuance thereof and whether or not such Lender, such Issuing Bank or such holder has made any demand or the Company's obligations are matured, have the right at any time and from time to time, without notice to the Company (any such notice being expressly waived by the Company) to set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by any Lender or Issuing Bank to or for the credit or the account of the Company against any and all of the Lender Indebtedness owing to such Lender or Issuing Bank then outstanding, subject to the provisions of Section 2.19. Section 8.06 Benefit of Agreement. The Notes, this Agreement and the other Financing Documents shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that the Company may not assign or transfer any of its interest hereunder or thereunder without the prior written consent of the Lenders. Section 8.07 Successors and Assigns; Participations and Assignments. (a) Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks, financial institutions, or investment funds ("Participants") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Revolving Credit Commitment of such Lender or any other interest of such Lender hereunder and under the other Financing Documents. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Loan (and any Note evidencing such Loan) for all purposes under this Agreement and the other Financing Documents and the Company and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this 124 133 Agreement and the other Financing Documents. Any agreement pursuant to which any Lender shall sell any such participating interest shall provide that such Lender shall retain the sole right and responsibility to exercise such Lender's rights and enforce the Company's obligations hereunder, including the right to consent to any amendment, supplement, modification or waiver of any provision of this Agreement or any of the other Financing Documents, provided that such participation agreement may provide that such Lender will not agree to any amendment, supplement, modification or waiver described in clause (i) or (ii) of the proviso to the second sentence of Section 8.02(a) without the consent of the Participant. The Company agrees that each Lender shall be entitled to the benefits of Sections 2.15, 2.16, 2.18, 2.20 and 8.04 without regard to whether it has granted any participating interests, and that all amounts payable to a Lender under such Sections shall be determined as if such Lender had not granted any such participating interests. Each Participant shall have the rights of set-off against the Lender Indebtedness and similar rights or Liens to the same extent as may be available to the Administrative Agent or the Lenders. (b) Branch Offices, Affiliates, Any Lender may make, carry or transfer Loans at, to or for the account of, any of its branch offices or the office of an Affiliate of such Lender. (c) Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time and from time to time assign to any Lender or any Affiliate thereof, or, with the prior written consent of the Company and the Administrative Agent (which in each case shall not be unreasonably withheld), to an additional bank, financial institution or investment fund (an "Assignee") all or any part of its rights and obligations under this Agreement and any Notes, including, without limitation, its Revolving Credit Commitment, Loans, and Letter of Credit Liabilities pursuant to an Assignment and Acceptance, substantially in the form of Exhibit G (each an "Assignment and Acceptance"), executed by such Assignee, such assigning Lender (and, in the case of any Assignee that is not then a Lender or an Affiliate thereof, by the Company and the Administrative Agent) and delivered to the Administrative Agent for its acceptance and recording in the Register; provided that (i) (unless the Company and the Administrative Agent otherwise consent in writing) no such transfer to an Assignee (other than a Lender or any Affiliate thereof) shall be in a principal amount less than (A) $5,000,000 for a transfer by any Tranche B Term Loan Lender, and (B) $10,000,000 in the aggregate for a transfer by any other Lender (or, if less than the applicable amount required by clause (A) or (B), the full amount of such assigning Lender's Term Loans, Revolving Credit Loans, Letter of Credit Liabilities, and Revolving Credit Commitment) and (ii) if any Lender assigns all or any part of its rights and obligations under this Agreement to one of its Affiliates in connection with or in contemplation of the sale or other disposition of its interest in such Affiliate, the Company's and the Administrative Agent's prior written consent shall be required for such assignment. Upon such execution, delivery, acceptance and recording, from and after the effective date determined pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Revolving Credit Commitment, Revolving Credit Exposure, and Term Loans, as set forth therein, and (y) the assigning Lender thereunder shall be released from its obligations under this Agreement to the extent that such obligations shall have been expressly assumed by the Assignee 125 134 pursuant to such Assignment and Acceptance (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such assigning Lender shall cease to be a party hereto but shall nevertheless continue to be entitled to the benefits of Sections 2.16, 2.18, 2.20 and 8.04). Notwithstanding the foregoing, no Assignee, which as of the date of any assignment to it pursuant to this Section 8.07(c) would be entitled to receive any greater payment under Section 2.16 or 2.20 than the assigning Lender would have been entitled to receive as of such date under such Sections with respect to the rights assigned, shall be entitled to receive such payments unless the Company has expressly consented in writing to waive the benefit of this provision at the time of the Assignment. (d) The Administrative Agent, on behalf of the Company, shall maintain at its address referred to in Section 8.01 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders and the Revolving Credit Commitment and of, and the principal amount of the Loans and Letter of Credit Liabilities owing to, and any Notes evidencing such Loans owned by, each Lender from time to time. Notwithstanding anything in this Agreement to the contrary, the Company, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register as the owner of any Loan, any Notes and the Revolving Credit Commitments and recorded therein for all purposes of this Agreement. The Register shall be available for inspection by the Company or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Notwithstanding anything in this Agreement to the contrary, no assignment under Section 8.07(c) of any rights or obligations under or in respect of the Loans, Reimbursement Obligations or the Notes evidencing such Loans shall be effective unless and until the Administrative Agent shall have recorded the assignment in the Register pursuant to this Section 8.07(e). Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Assignee (and, in the case of an Assignee that is not then a Lender or an Affiliate thereof, by the Company and the Administrative Agent), together with payment to the Administrative Agent of a registration and processing fee of $3,500 (which fee need not be paid in the case of any assignment to an Affiliate of the assigning Lender and which shall not be a cost subject to reimbursement under Section 8.04 or otherwise hereunder), the Administrative Agent shall (i) promptly accept such Assignment and Acceptance and (ii) on the effective date determined pursuant thereto record the information contained therein in the Register and give prompt notice of such acceptance and recordation to the Lenders and the Company. On or prior to such effective date, the assigning Lender shall surrender any outstanding Notes held by it, all or a portion of which are being assigned, and the Company, shall, upon the request to the Administrative Agent by the assigning Lender or the Assignee, as applicable, execute and deliver to the Administrative Agent (in exchange for the outstanding Notes of the assigning Lender) a new Revolving Credit Note, Tranche A Term Note, Tranche B Term Note and/or ESOP Term Note, as the case may be, to the order of such Assignee in an amount equal to (i) in the case of a Revolving Credit Note, the greater of (A) the amount of such Assignee's Revolving Credit Commitment and (B) the aggregate principal amount of the Revolving Credit Exposure of such Assignee, (ii) in the case of a Tranche A Term Note, the amount of such Assignee's Tranche A Term Loans, (iii) in the case of a Tranche B Term Note, the amount of such Assignee's Tranche B Term Loans, and (iv) in the case 126 135 of an ESOP Term Note, the amount of such Assignee's ESOP Term Loans, in each case with respect to the relevant Loan, Letter of Credit Liability or Revolving Credit Commitment after giving effect to such Assignment and Acceptance and, if the assigning Lender has retained a Revolving Credit Commitment, Revolving Credit Exposure, or Term Loan hereunder, a new Revolving Credit Note, Tranche A Term Note, Tranche B Term Note and/or ESOP Term Note, as the case may be, to the order of the assigning Lender in an amount equal to (i) in the case of a Revolving Credit Note, the greater of (A) the amount of such Lender's Revolving Credit Commitment and (B) the aggregate principal amount of all Revolving Credit Exposure of such Lender, (ii) in the case of a Tranche A Term Note, the amount of such Lender's Tranche A Term Loans, (iii) in the case of a Tranche B Term Note, the amount of such Assignee's Tranche B Term Loans, and (iv) in the case of an ESOP Term Note, the amount of such Assignee's ESOP Term Loans, in each case with respect to the relevant Loan, Revolving Credit Exposure or Revolving Credit Commitment after giving effect to such Assignment and Acceptance. Any such new Notes shall be dated such effective date and shall otherwise be in the form of the Note replaced thereby. Any Notes surrendered by the assigning Lender shall be returned by the Administrative Agent to the Company marked "canceled". (f) The Company authorizes each Lender to disclose to any participant or Assignee (each, a "Transferee") and any prospective Transferee, provided, that, any such Transferee or potential Transferee has signed a confidentiality agreement substantially similar to the provisions of Section 8.13, any and all information in such Lender's possession concerning the Company and its Affiliates which has been delivered to such Lender by or on behalf of the Company pursuant to this Agreement or which has been delivered to such Lender by or on behalf of the Company in connection with such Lender's credit evaluation of the Company and its Affiliates prior to becoming a party to this Agreement. No assignment or participation made or purported to be made to any Transferee shall be effective without the prior written consent of the Company if it would require it to make any filing with any Governmental Authority or qualify any Loan or Note under the laws of any jurisdiction, and the Company shall be entitled to request and receive such information and assurances as it may reasonably request from any Lender or any Transferee to determine whether any such filing or qualification is required or whether any assignment or participation is otherwise in accordance with applicable law. (g) Any Lender may at any time grant, pledge or assign a security interest in all or a portion of its rights under this Agreement to secure obligations of such Lender, including any such grant, pledge or assignment to a Federal Reserve Bank, and this Section 8.07 shall not apply to any such grant, pledge or assignment of a security interest; provided that no such grant, pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such assignee for such Lender as a party hereto. Section 8.08 Governing Law; Submission to Jurisdiction; Etc. (a) GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND UNDER THE NOTES SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF 127 136 THE NEW YORK GENERAL OBLIGATIONS LAW, OR ANY SIMILAR SUCCESSOR PROVISION THERETO, BUT EXCLUDING ALL OTHER CONFLICT-OF-LAWS RULES)AND TO THE EXTENT CONTROLLING, LAWS OF THE UNITED STATES OF AMERICA. (b) SUBMISSION TO JURISDICTION. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT, THE NOTES OR THE OTHER FINANCING DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE COMPANY HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, BUT NOT LIMITED TO, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. (c) WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT ALLOWED BY APPLICABLE LAW, EACH OF THE COMPANY, THE AGENTS, THE ISSUING BANKS AND THE LENDERS (I) IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO ANY FINANCING DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN; (II) IRREVOCABLY WAIVE ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (III) CERTIFY THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS; AND (IV) ACKNOWLEDGE THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER FINANCING DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BASED UPON, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION. (d) Designation of Process Agent. The Company hereby irrevocably designates CT Corporation System, with an office on the date hereof at 1633 Broadway, New York, New York, 10019, as the designee, appointee and process agent of the Company to receive, for and on behalf of the Company, service of process in such respective jurisdictions in any legal action or proceeding with respect to this Agreement, the Notes, or the other Financing Documents. It is understood that a copy of such process served on such agent will be promptly forwarded by mail to the Company at its address set forth opposite its signature below, but the failure of the Company to receive such copy shall not affect in any way the service of such process. The Company further irrevocably consents to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Company at its said address, such service to become effective 30 days after such mailing. (e) Service of Process. Nothing herein shall affect the right of the Administrative Agent or any Lender or any holder of a Note to serve process in any other manner permitted by 128 137 law or to commence legal proceedings or otherwise proceed against the Company in any other jurisdiction. Section 8.09 Independent Nature of Lenders' Rights. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights arising out of this Agreement, and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose. Section 8.10 Invalidity. In the event that any one or more of the provisions contained in the Notes, this Agreement or in any other Financing Document shall, for any reason, be held invalid, illegal or unenforceable in any respect, (i) the Company agrees that such invalidity, illegality or unenforceability shall not affect any other provision of the Notes, this Agreement or any other Financing Document and (ii) the Company and the Administrative Agent (acting on behalf and at the direction of the Lenders) will negotiate in good faith to amend such provision so as to be legal, valid, and enforceable. Section 8.11 Renewal, Extension or Rearrangement. All provisions of this Agreement and of any other Financing Documents relating to the Notes or other Lender Indebtedness shall apply with equal force and effect to each and all promissory notes hereafter executed which in whole or in part represent a renewal, extension for any period, increase or rearrangement of any part of the Lender Indebtedness originally represented by the Notes, or of any part of such other Lender Indebtedness. Section 8.12 Interest. It is the intention of the parties hereto to conform strictly to usury laws applicable to the Administrative Agent, the Documentation Agent, the Issuing Banks and the Lenders (collectively, the "Financing Parties") and the Transactions. Accordingly, if the Transactions would be usurious as to any Financing Party under laws applicable to it, then, notwithstanding anything to the contrary in the Notes, this Agreement or in any other Financing Document or agreement entered into in connection with the Transactions or as security for the Notes, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under law applicable to any Financing Party that is contracted for, taken, reserved, charged or received by such Financing Party under the Notes, this Agreement or under any of such other Financing Documents or agreements or otherwise in connection with the Transactions shall under no circumstances exceed the maximum amount allowed by such applicable law, (ii) in the event that the maturity of the Notes is accelerated for any reason, or in the event of any required or permitted prepayment, then such consideration that constitutes interest under law applicable to any Financing Party may never include more than the maximum amount allowed by such applicable law, and (iii) excess interest, if any, provided for in this Agreement or otherwise in connection with the Transactions shall be cancelled automatically by such Financing Party and, if theretofore paid, shall be credited by such Financing Party on the principal amount of the Company's Indebtedness to such Financing Party (or, to the extent that the principal amount of the Company's Indebtedness to such Financing Party shall have been or would thereby be paid in full, refunded by such Financing Party to the Company). The right to accelerate the maturity of the Notes does not include the right to accelerate any interest which has not otherwise accrued on the date of such acceleration, and the Financing Parties do not intend to collect any unearned interest in the event of acceleration. All sums paid or agreed to be paid to the Financing Parties for the use, forbearance or detention of sums included in the Lender Indebtedness shall, to the extent permitted by law applicable to such Financing Party, be amortized, prorated, allocated and spread throughout the full term of 129 138 the Notes until payment in full so that the rate or amount of interest on account of the Lender Indebtedness does not exceed the applicable usury ceiling, if any. As used in this Section, the terms "applicable law" or "laws applicable to any Financing Party" shall mean the law of any jurisdiction whose laws may be mandatorily applicable notwithstanding other provisions of this Agreement, or law of the United States of America applicable to any Financing Party and the Transactions which would permit such Financing Party to contract for, charge, take, reserve or receive a greater amount of interest than under such jurisdiction's law. To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is relevant to any Financing Party for the purpose of determining the Highest Lawful Rate, such Financing Party hereby elects to determine the applicable rate ceiling under such Article by the indicated (weekly) rate ceiling from time to time in effect, subject to such Financing Party's right subsequently to change such method in accordance with applicable law. Section 8.13 Confidential Information. The Administrative Agent and each Lender agree that all documentation and other information made available by the Company to the Administrative Agent or such Lender under the terms of this Agreement shall (except to the extent such documentation or other information is publicly available or hereafter becomes publicly available other than by action of the Administrative Agent or such Lender, or was theretofore known or hereinafter becomes known to the Administrative Agent or such Lender independent of any disclosure thereto by the Company) be held in the strictest confidence by the Administrative Agent or such Lender and used solely in the administration and enforcement of the Loans from time to time outstanding from such Lender to the Company and in the prosecution of defense of legal proceedings arising in connection herewith; provided that (i) the Administrative Agent or such Lender may disclose documentation and information to the Administrative Agent and/or to any other Lender which is a party to this Agreement or any Affiliates thereof, and (ii) the Administrative Agent or such Lender may disclose such documentation or other information to any other bank or other Person to which such Lender sells or proposes to make an assignment or sell a participation in its Loans hereunder if such other bank or Person, prior to such disclosure, agrees in writing to be bound by the terms of a confidentiality agreement substantially similar to the provisions of this Section 8.13. Notwithstanding the foregoing, nothing contained herein shall be construed to prevent the Administrative Agent or a Lender from (a) making disclosure of any information (i) if required to do so by applicable law or regulation, (ii) to any governmental agency or regulatory body (including any self-regulatory agency or body) having or claiming to have authority to regulate or oversee any aspect of such Lender's business or that of such Lender's corporate parent or affiliates in connection with the exercise of such authority or claimed authority, (iii) pursuant to any subpoena or if otherwise compelled in connection with any litigation or administrative proceeding, (iv) to correct any false or misleading information which may become public concerning such Person's relationship to the Company, or (v) to the extent the Administrative Agent or such Lender or its counsel deems necessary or appropriate to effect or preserve its security for any Lender Indebtedness or to enforce any remedy provided in the Financing Documents, the Notes or this Agreement or otherwise available by law; or (b) making, on a confidential basis, such disclosures as such Lender reasonably deems necessary or appropriate to its legal counsel or accountants (including outside auditors). If the Administrative Agent or such Lender is compelled to disclose such confidential information in a proceeding requesting such disclosure, the Administrative Agent or such Lender shall seek to obtain assurance that such confidential treatment will be accorded such information; provided, however, that the Lender shall have no liability for the failure to obtain such treatment. 130 139 Section 8.14 ENTIRE AGREEMENT. THE NOTES, THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE AGENTS, THE ISSUING BANKS OR THE LENDERS AND THE OTHER RESPECTIVE PARTIES HERETO AND THERETO AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Section 8.15 Attachments. The exhibits, schedules and annexes attached to this Agreement are incorporated herein and shall be considered a part of this Agreement for the purposes stated herein, except that in the event of any conflict between any of the provisions of such exhibits and the provisions of this Agreement, the provisions of this Agreement shall prevail. Section 8.16 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original but all of which shall together constitute one and the same instrument. Section 8.17 Survival of Indemnities. The Company's obligations under Sections 2.16, 2.18, 2.20 and 8.04 shall survive the payment in full of the Loans and the Letter of Credit Liabilities. Section 8.18 Headings Descriptive. The headings of the several sections and subsections of this Agreement, and the Table of Contents, are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. Section 8.19 Satisfaction Requirement. If any agreement, certificate, instrument or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to any party, the determination of such satisfaction shall be made by such party in its sole and exclusive judgment exercised reasonably and in good faith. SECTION 8.20 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS; THAT IT HAS IN FACT READ THIS AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS BEEN REPRESENTED BY LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS; AND HAS RECEIVED THE ADVICE OF ITS ATTORNEYS IN ENTERING INTO THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS." 131 140 Section 8.21 Secured Affiliate. For purposes of this Agreement and all other Financing Documents (other than applicable Hedge Agreements), if a Secured Affiliate of a Lender has entered into one or more Hedge Agreements with the Company or any its Subsidiaries, then to the extent that such Secured Affiliate has rights or obligations (or if the affiliated Lender, rather than the Secured Affiliate, were the counter-party to the applicable Hedge Agreement, such rights or obligations that such Lender has) hereunder or under any other Financing Document (other than applicable Hedge Agreements), such affiliated Lender shall be the agent and attorney-in-fact for such Secured Affiliate with regard to any such rights and obligations, or deemed rights and obligations, as if such Lender were the counter-party to the applicable Hedge Agreement including, but not limited to, the following: (a) all distributions or payments in respect of Collateral owing to such Secured Affiliate shall be distributed or paid to such Lender, (b) all representations, statements or disclaimers made herein or in any Financing Document by or to such Lender shall be deemed to have been made by or to such Secured Affiliate, (c) all obligations incurred by such Lender that would have been incurred by the Secured Affiliate if it were a party hereto (including, but not limited to, obligations under Section 7.06) shall be the obligations of such Lender, and such Lender, as the agent and attorney-in-fact of its Secured Affiliate, will make any and all payments owing to the Administrative Agent with respect to such obligations or deemed obligations of its Secured Affiliate. Each such Lender represents, warrants and covenants to and with the Administrative Agent that such Lender has, or at all applicable times will have, full power and authority to act as agent and attorney-in-fact for its Secured Affiliates. Under no circumstance shall any Secured Affiliate have any voting rights hereunder and the voting rights of any affiliated Lender shall not be increased by virtue of the obligations owing to any such Secured Affiliate. Section 8.22 Ratification of Security Instruments. The Company hereby expressly (i) acknowledges, ratifies and affirms all of its indebtedness, obligations and liabilities under the Original Credit Agreement, the AFB Acquisition Credit Agreement and the Intercreditor Agreement all as amended, amended and consolidated by the terms of this Agreement, (ii) acknowledges and agrees that (a) all liens and security interests created by and existing under any and all instruments and documents executed by the Company, including, without limitation, the Security Instruments, as security for its obligations under the Original Credit Agreement, the AFB Acquisition Agreement and the Intercreditor Agreement are and shall continue to be valid and subsisting liens and security interests securing its obligations thereunder as amended, restated and consolidated by this Agreement, (b) none of the rights, titles, interests, liens and security interests created by and existing under any such instrument or document shall be released or impaired hereby and shall be and remain in full force and effect, and (c) all rights, titles, interests, liens and security interests existing under such instruments and documents are renewed, extended, carried forward and conveyed hereby to secure all of obligations the Company under this Agreement, without the necessity to formally amend any such instrument or document. 132 141 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed as of the date first above written. COMPANY: STERLING CHEMICALS, INC. BY: /s/ JIM P. WISE --------------------------------------------- Jim P. Wise Vice President and Chief Financial Officer Address: 1200 Smith Street Suite 1900 Houston, Texas 77002 Attention: Mr. Jim P. Wise Telephone: (713) 654-9599 Telecopy: (713) 654-9552 ADMINISTRATIVE AGENT, TEXAS COMMERCE BANK DOCUMENTATION AGENT, NATIONAL ASSOCIATION ISSUING BANKS Individually, as an issuing bank and as AND THE LENDERS: Administrative Agent BY: /s/ D. G. MILLS ------------------------------------------ D. G. Mills Vice President Address: c/o Chase Securities Inc. 712 Main Street Houston, Texas 77002 Attention: Ms. Martha Gurwit Telephone: (713) 216-6387 Telecopy: (713) 216-4986 With Copy To: 712 Main Street Houston, Texas 77002 Attention: Ms. Debra Harris Telephone: (713) 216-4117 Telecopy: (713) 216-5733 133 142 CREDIT SUISSE FIRST BOSTON, As Documentation Agent BY: /s/ JAMES P. MORAN ------------------------------------------- James P. Moran ------------------------------------------- Director ------------------------------------------- BY: /s/ IRA LUBINSKY ------------------------------------------- Ira Lubinsky ------------------------------------------- Vice President ------------------------------------------- Address: 11 Madison Avenue, 19th Floor New York, New York 100103629 Attention: Mr. James P. Moran Telephone: (212) 325-9176 Telecopy: (212) 325-8350 CREDIT SUISSE FIRST BOSTON, Individually, As An Issuing Bank And As A Lender BY: /s/ JAMES P. MORAN ------------------------------------------- James P. Moran ------------------------------------------- Director ------------------------------------------- BY: /s/ IRA LUBINSKY ------------------------------------------- Ira Lubinsky ------------------------------------------- Vice President ------------------------------------------- Address: 11 Madison Avenue, 19th Floor New York, New York 100103629 Attention: Ms. Yvette Mcqueen Telephone: (213) 325-9096 Telecopy: (213) 325-8319 [Signature Page - 1] 143 ABN AMRO BANK N.V. Houston Agency BY: ABN AMRO NORTH AMERICA, INC., As Agent BY: /s/ GORDAN CHANG ---------------------------------------- Gordon Chang Vice President & Director BY: /s/ MICHAEL W. DEPRIEST ---------------------------------------- Michael W. Depriest Vice President & Director Address: Three Riverway, Suite 1700 Houston, Texas 77056 Attention: Mr. Gordon Chang Telephone: (713) 964-3322 Telecopy: (713) 629-7533 [Signature Page - 2] 144 THE BANK OF NOVA SCOTIA BY: /s/ A.S. NORSWORTHY --------------------------------------- A.S. NORSWORTHY --------------------------------------- SR. TEAM LEADER-LOAN OPERATIONS --------------------------------------- Address: Atlanta Agency 600 Peachtree Street Northeast Suite 2700 Atlanta, Georgia 30308 Attention: Mr. F.C.H. Ashby Telephone: (404) 877-1500 Telecopy: (404) 888-8998 With Copy To: 1100 Louisiana Street, Suite 3000 Houston, Texas 77002 Attention: Mr. Bryan Bulawa Telephone: (713) 759-3427 Telecopy: (713) 752-2425 [Signature Page - 3] 145 BANK OF SCOTLAND BY: /s/ ANNIE CHIN TAT ------------------------------------------- ANNIE CHIN TAT ------------------------------------------- VICE PRESIDENT ------------------------------------------- Address: 565 Fifth Avenue, 5th Floor New York, New York 10017 Attention: Mr. John Kelly Telephone: (212) 450-0830 Telecopy: (212) 682-5720 [Signature Page - 4] 146 BHF - BANK AKTIENGESELLSCHAFT BY: /s/ LINDA PACE ---------------------------------------- Linda Pace ---------------------------------------- Vice President ---------------------------------------- BY: /s/ PERRY FORMAN ---------------------------------------- Perry Forman ---------------------------------------- Vice President ---------------------------------------- Address: 590 Madison Avenue New York , New York 10022-2540 Attention: Ms. Linda Pace Telephone: (212) 756-5915 Telecopy: (212) 756-5536 [Signature Page - 6] 147 CIBC INC. BY: /s/ ALEKSANDRA K. DYMANUS ------------------------------------------ Aleksandra K. Dymanus ------------------------------------------ Authorized Signatory ------------------------------------------ Address: 2 Houston Center 909 Fannin Street, Suite 1200 Houston, Texas 77010 Attention: Mr. David Balderach Telephone: (713) 658-8400 Telecopy: (713) 650-3727 With Copy To: Two Paces West 2727 Paces Ferry Road Suite 1200 Atlanta, Georgia 30339 Attention: Ms. Kathryn McGovern Telephone: (770) 319-4821 Telecopy: (770) 319-4950 [Signature Page - 7] 148 CREDIT LYONNAIS NEW YORK BRANCH BY: /s/ ATHLA LOC ----------------------------------------- Athla Loc ----------------------------------------- 1st Vice President ----------------------------------------- Address: 1000 Louisiana Street, Suite 5360 Houston, Texas 77002 Attention: Mr. Page Dillehunt Telephone: (713) 751-0500 Telecopy: (713) 751-0307 With Copy To: Address: Credit Lyonnais Chicago Branch 227 West Monroe, 38th Floor Chicago, Illinois 60606 Attention: Mr. Matthew Kirst Telephone: (312) 220-7332 Telecopy: (312) 220-7333 [Signature Page - 8] 149 FIRST SOURCE FINANCIAL LLP BY: FIRST SOURCE FINANCIAL, INC. AS ITS AGENT/MANAGER BY: /s/ DAVID C. WAGNER --------------------------------------- David C. Wagner --------------------------------------- Vice President --------------------------------------- Address: 2850 West Golf Road, 5th Floor Rolling Meadows, Illinois 60008 Attention: Mr. Dave Wagner Telephone: (847) 734-2043 Telecopy: (847) 734-7910 [Signature Page - 9] 150 THE FIRST NATIONAL BANK OF CHICAGO BY: /s/ DIXON P. SCHULTZ ----------------------------------------- Dixon P. Schultz ----------------------------------------- Vice President ----------------------------------------- Address: One First National Plaza, MS 0634, 1-10 Chicago, Illinois 60670 Attention: Mr. Mike Lorenzi Telephone: (312) 732-8573 Telecopy: (312) 732-4840 With Copy To: 1100 Louisiana Street, Suite 3200 Houston, Texas 77002 Attention: Ms. Dixon Schultz Telephone: (713) 654-7329 Telecopy: (713) 654-7370 [Signature Page - 10] 151 THE CIT GROUP/BUSINESS CREDIT, INC. BY: /s/ DAN HUGHES ----------------------------------------- Dan Hughes ----------------------------------------- Vice President ----------------------------------------- Address: Two Lincoln Center 5420 LBJ Freeway, Suite 200 Dallas, Texas 75240 Attention: Mr. Dan Hughes Telephone: (214) 455-1665 Telecopy: (214) 455-1690 [Signature Page - 11] 152 COMERICA BANK BY: /s/ REGINALD M. GOLDSMITH, III -------------------------------------------- Reginald M. Goldsmith, III -------------------------------------------- Vice President -------------------------------------------- Address: 4100 Spring Valley, Suite 900 Dallas, Texas 75244 Attention: Mr. Reggie Goldsmith Telephone: (214) 818-2548 Telecopy: (214) 818-2550 [Signature Page - 12] 153 CREDITANSTALT CORPORATE FINANCE, INC. By: /s/ SCOTT KREY --------------------------------------------- Scott Krey --------------------------------------------- Vice President --------------------------------------------- By: /s/ CARL G. DRAKE --------------------------------------------- Carl G. Drake --------------------------------------------- Sr. Associate --------------------------------------------- Address: Two Greenwich Plaza 2nd Floor Greenwich, Connecticut 06830 Attention: Ms. Lisa Bruno Telephone: (203) 861-6464 Telecopy: (203) 861-6594 With Copy To: Two Ravinia Drive, Suite 1680 Atlanta, Georgia 30346 Attention: Mr. Joseph Longosz Telephone: (770) 390-1850 Telecopy: (770) 390-1851 [Signature Page - 13] 154 HIBERNIA NATIONAL BANK BY: /s/ TRUDY W. NELSON ------------------------------------------- Trudy W. Nelson ------------------------------------------- Vice President ------------------------------------------- Address: 313 Carondelet Street, 13th Floor New Orleans, Louisiana 70130 Attention: Ms. Trudy Nelson Telephone: (504) 533-3213 Telecopy: (504) 533-5434 [Signature Page - 14] 155 MERITA BANK LTD New York Branch BY: /s/ CLIFFORD ABRAMSKY -------------------------------------------- Clifford Abramsky -------------------------------------------- Vice President -------------------------------------------- BY: /s/ FRANK MAFFEI -------------------------------------------- Frank Maffei -------------------------------------------- Vice President -------------------------------------------- Address: 437 Madison Avenue, 21st Floor New York, New York 10022 Attention: Mr. Clifford Abramsky Telephone: (212) 318-9564 Telecopy: (212) 318-7318 [Signature Page - 15] 156 NATIONAL BANK OF CANADA BY: /s/ DOUG CLARK ------------------------------------------ Doug Clark ------------------------------------------ Vice President ------------------------------------------ BY: /s/ JOHN DIXON ------------------------------------------ John Dixon ------------------------------------------ Vice President ------------------------------------------ Address: 125 West 55th Street 23rd Floor New York, New York 10019 Attention: Ms. Eleanor Valentine Telephone: (212) 632-8820 Telecopy: (212) 632-8736 With Copy To: 2121 San Jacinto, Suite 1850 Dallas, Texas 75201 Attention: Mr. Douglas Clark Telephone: (214) 871-1265 Telecopy: (214) 871-2015 [Signature Page - 16] 157 THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED NEW YORK BRANCH BY: /s/ JOHN J. SULLIVAN ------------------------------------------- John J. Sullivan ------------------------------------------- Joint General Manager ------------------------------------------- Address: 165 Broadway, 49th Floor New York, New York 10006 Attention : Ms. Maria Araujo Telephone: (212) 335-4553 Telecopy: (212) 608-2371 With Copy To: 2200 Ross Avenue Texas Commerce Tower, Suite 4700W Dallas, Texas 75201 Attention: Mr. Robert Nelson Telephone: (214) 969-5352 Telecopy: (214) 969-5357 [Signature Page - 19] 158 OCTAGON CREDIT INVESTORS LOAN PORTFOLIO (a unit of The Chase Manhattan Bank), (formerly known as CHL HIGH YIELD LOAN PORTFOLIO (a unit of Chemical Bank)) BY: /s/ JOYCE C. DELUCCA --------------------------------------------- JOYCE C. DELUCCA --------------------------------------------- MANAGING DIRECTOR --------------------------------------------- Address: 380 Madison Avenue, 12th Floor New York, New York 10017 Attention: Ms. Joyce Delucca Telephone: (212) 622-3104 Telecopy: (212) 622-3797 With Copy To: One Chase Manhattan Plaza New York, New York 10081 Attention: Mr. Joseph Nerich Telephone: (212) 552-7247 Telecopy: (212) 552-5642 [Signature Page - 20] 159 MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: /s/ THOMAS J. FINNEY JR. -------------------------------------------- Thomas J. Finney Jr. -------------------------------------------- Vice President -------------------------------------------- Address: 1295 State Street Springfield, Massachusetts 01111-0001 Attention: Mr. John Wheeler Telephone: (413) 744-6228 Telecopy: (413) 744-6127 With Copy To: 1295 State Street Springfield, Massachusetts 01111-0001 Attention: Ms. Laura Hamel Phone: (413) 744-3878 Telecopy: (413) 744-7922 [Signature Page - 21] 160 MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By: /s/ ANTHONY R. CLEMENTE ---------------------------------- Anthony R. Clemente ---------------------------------- Authorized Signatory ---------------------------------- Address: 800 Scudders Mill Road - Area 2C Plainsboro, New Jersey 08536 Attention: Ms. Jill Montanye Telephone: (609) 282-3102 Telecopy: (609) 282-2550 With Copy To: Custodian Bank: Bank of New York 90 Washington Street, 12th Floor New York, New York 10286 Attention: Mr. Nick Ruggiero Telephone: (212) 495-2929 Telecopy: (212) 495-2935/2936/2937 MLAM Accounting 500 College Road - 4E Plainsboro, New Jersey 08536 Attention: Mr. John Dugan Telephone: (212) 282-7705 Telecopy: (212) 282-7612 [Signature Page - 22] 161 ML CBO IV (CAYMAN) LTD. By: PROTECTIVE ASSET MANAGNT L.L.C. AS COLLATERAL MANAGER By: /s/ JAMES DONDERO, CPA, CPA ------------------------------------ President ------------------------------------ Protective Asset Management, L.L.C. ------------------------------------ Address: Protective Asset Management Company 13455 Noel Road-LB #45 Dallas, Texas 75240 Attention: Todd Travers Telephone: (972) 233-4300 Telecopy: (972) 233-4334 [Signature Page - 23] 162 VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST By: /s/ KATHLEEN A. ZARE -------------------------------------- Kathleen A. Zare -------------------------------------- Vice President -------------------------------------- Address: One Parkview Plaza Oakbrook Terrace, Illinois 60181 Attention: Mr. Jeffrey Maillet Telephone: (630) 684-6438 Telecopy: (630) 684-6740 [Signature Page - 24] 163 PARIBAS CAPITAL FUNDING LLC By: /s/ [ILLEGIBLE] --------------------------------------- --------------------------------------- --------------------------------------- Address: 787 Seventh Avenue New York, New York 10019 Attention: Francois Gauvin Telephone: (212) 841-2548 Telecopy: (212) 841-2144 [Signature Page - 25] 164 RESTRUCTURED OBLIGATIONS BACKED BY SENIOR ASSETS B.V. By its Managing Director ABN TRUSTCOMPANY (NEDERLAND) B.V. By: /s/ [ILLELGIBLE] ------------------------------------- [ILLEGIBLE] ------------------------------------- ------------------------------------- By: /s/ [ILLELGIBLE] ------------------------------------- [ILLEGIBLE] ------------------------------------- ------------------------------------- Address: Chancellor Capital Management, Inc. 1166 Avenue of the Americas New York, New York 10036 Attention: Steve Alfieri Telephone: (212) 278-9563 Telecopy: (212) 278-9619 [Signature Page - 27] 165 AERIES FINANCE LTD. By: /s/ ANDREW IAN WIGNALL ------------------------------------ Andrew Ian Wignall ------------------------------------ Director ------------------------------------ Address: c/o Moore Management Services Limited Elizabeth House, Castle Street St. Helier, Jersey Channel Islands JE4 2YQ Attention: Director Telephone: 011-441-534-613900 Telecopy: 011-441-534-616900 With A Copy To: Chancellor LGT Senior Secured Management 1166 Avenue of the Americas New York, New York 10036 Attention: Christopher Jansen Telephone: (212) 278-9669 Telecopy: (212) 278-9619 [Signature Page - 28] 166 CAPTIVA FINANCE LTD. By: /s/ JOHN H. CULLINANE --------------------------------------- John H. Cullinane --------------------------------------- Director --------------------------------------- Address: c/o Deutsche Morgan Grenfell (Cayman) Limited P.O. Box 1984 GT, Elizabethan Square Grand Cayman, Cayman Islands Attention: Director Telephone: (809) 949-8244 Telecopy: (809) 949-8178 With A Copy To: Chancellor LGT Senior Secured Management 1166 Avenue of the Americas New York, New York 10036 Attention: Christopher Jansen Telephone: (212) 278-9669 Telecopy: (212) 278-9619 [Signature Page - 29] 167 CAPTIVA II FINANCE LTD. By: /s/ JOHN H. CULLINANE ----------------------------------------- John H. Cullinane ----------------------------------------- Director ----------------------------------------- Address: c/o Deutsche Morgan Grenfell (Cayman) Limited P.O. Box 1984 GT, Elizabethan Square Grand Cayman, Cayman Islands Attention: Director Telephone: (809) 949-8244 Telecopy: (809) 949-8178 With A Copy To: Chancellor LGT Senior Secured Management 1166 Avenue of the Americas New York, New York 10036 Attention: Christopher Jansen Telephone: (212) 278-9669 Telecopy: (212) 278-9619 [Signature Page - 30] 168 CERES FINANCE LTD. By: /s/ JOHN H. CULLINANE --------------------------------------- John H. Cullinane --------------------------------------- Director --------------------------------------- Address: c/o Deutsche Morgan Grenfell (Cayman) Limited P.O. Box 1984 GT, Elizabethan Square Grand Cayman, Cayman Islands Attention: Director Telephone: (809) 949-8244 Telecopy: (809) 949-8178 With A Copy To: Chancellor LGT Senior Secured Management 1166 Avenue of the Americas New York, New York 10036 Attention: Christopher Jansen Telephone: (212) 278-9669 Telecopy: (212) 278-9619 [Signature Page - 31] 169 MERRILL LYNCH PRIME RATE PORTFOLIO By: MERRILL LYNCH ASSET MANAGEMENT, L.P. AS INVESTMENT ADVISOR By: /s/ ANTHONY R. CLEMENTE ------------------------------------- Anthony R. Clemente ------------------------------------- Authorized Signatory ------------------------------------- Address: 800 Scudders Mill Road - Area 2C Plainsboro, New Jersey 08536 Attention: Ms. Jill Montanye Telephone: (609) 282-3102 Telecopy: (609) 282-2550 With Copy To: Custodian Bank: Bank Of New York 90 Washington Street, 12th Floor New York, New York 10286 Attention: Mr. Nick Ruggiero Telephone: (212) 495-2929 Telecopy: (212) 495-2935/2936/2937 MLAM Accounting 500 College Road - 4E Plainsboro, New Jersey 08536 Attention: Mr. John Dugan Telephone: (212) 282-7705 Telecopy: (212) 282-7612 [Signature Page - 32] 170 SKANDINAVISKA ENSKILDA BANKEN CORPORATION By: /s/ SVERKER JOHANSSON --------------------------------------- Sverjer Johansson --------------------------------------- Vice President --------------------------------------- Address: 245 Park Avenue New York, New York 10167 Attention: Sverker Johansson Telephone: (212) 907-4835 Telecopy: (212) 697-5188 [Signature Page - 35] 171 THE CHASE MANHATTAN BANK By: /s/ R. DANIEL ROUSE ---------------------------------- R. Daniel Rouse ---------------------------------- Vice President ---------------------------------- Address: Attention: Telephone: ( ) - --- --- ---- Telecopy: ( ) - --- --- ---- [Signature Page - 36] EX-10.11 3 AMENDED AND RESTATED PRODUCT SALES AGMT - 1/1/98 1 EXHIBIT 10.11 CERTAIN PORTIONS OF THIS DOCUMENT HAVE BEEN OMITTED AND CONFIDENTIAL TREATMENT HAS BEEN REQUESTED IN RELATION THERETO. A COMPLETE COPY OF THIS DOCUMENT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ================================================================================ AMENDED AND RESTATED PRODUCT SALES AGREEMENT between BASF CORPORATION and STERLING CHEMICALS, INC. effective as of January 1, 1998 ================================================================================ *** = CONFIDENTIAL TREATMENT REQUESTED 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE II INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.1 Purchase and Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE III DELIVERY AND PURCHASE OF AGREEMENT PRODUCTS; DELIVERIES AND SHIPMENTS; INSPECTION; OTHER RELATED MATTERS . . 10 3.1 Delivery and Purchase Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.2 Capacity Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.3 Production and Delivery Scheduling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.4 Changes in Specifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.5 Purchase Price and Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.6 Deliveries and Shipments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.7 Production, Maintenance and Capital Expenditure Reports . . . . . . . . . . . . . . . . . . . . . . 16 3.8 Testing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.9 Measurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.10 Storage of Agreement Product and Raw Material by Sterling . . . . . . . . . . . . . . . . . . . . . 22 3.11 Failure to Take Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 3.12 Failure to Maintain Contract Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 3.13 Furnishing of Raw Material and Other Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 3.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 3.15 Title; Covenant Not to Encumber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 3.16 Hazards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ARTICLE IV OPERATION OF UNIT AND RELATED MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 4.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 4.2 Production Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.3 Damage or Destruction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.4 Office Space . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.5 Plant Visits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.7 Capital Expenditures and Expansion Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.8 Maintenance Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4.9 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3 4.10 Standard of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 4.11 Warranties; BASF's Duties; Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 4.12 Heel Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE V REPRESENTATIONS AND WARRANTIES OF STERLING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 5.1 Organization, Good Standing and Corporate Power . . . . . . . . . . . . . . . . . . . . . . . . . . 34 5.2 Authority Relative to Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 5.3 No Conflict with Other Instruments or Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 35 5.4 No Litigation or Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BASF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 6.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 6.2 Authority Relative to Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 6.3 No Conflict with Other Instruments or Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 36 6.4 No Litigation or Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE VII ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 7.1 Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 7.2 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 7.3 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 7.4 Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 7.5 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 7.6 Restriction on Transfer of Company Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 7.7 Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 7.8 Sterling Financial Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 7.9 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 7.10 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 7.11 Sale or Transfer of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 7.12 Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 7.13 Expansion of Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 7.14 Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 7.15 Technical Advice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 ARTICLE VIII GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 8.1 Relation of Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 8.2 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 8.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 8.4 Controlling Law and Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 8.5 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
-ii- 4 8.6 Modifications and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 8.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 8.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 8.9 Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 8.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 8.11 Binding on Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 8.12 Public Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 8.13 Specific Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 8.14 No Transfer of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 8.15 Wire Transfer, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 8.16 Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 8.17 Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 8.18 Limitation on Consequential Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
-iii- 5 EXHIBITS A Agreement Product; Monthly Contract Capacity; Raw Material * B BASF Actual Costs * C Sterling Actual Costs * D Profit * E Insurance F Intentionally Deleted G Testing Procedure H Specifications I Intentionally Deleted J Unit K Security Agreement L Railcars M Delivery, Shipment and Storage Instructions N Storage Tanks O Weights P Switch Condenser Project * * = Indicates that portions of the Exhibit have been omitted and confidential treatment has been requested. -iv- 6 AMENDED AND RESTATED PRODUCT SALES AGREEMENT THIS AMENDED AND RESTATED PRODUCT SALES AGREEMENT ("Agreement"), made and entered into this 4th day of November, 1997, by and between BASF CORPORATION, a Delaware corporation with offices at 3000 Continental Drive North, Mt. Olive, New Jersey 07828 ("BASF") and Sterling Chemicals, Inc., a Delaware corporation with an address at 1200 Smith Street, Suite 1900, Houston, Texas 77002 ("Sterling") W I T N E S S E T H WHEREAS, BASF and Sterling are parties to a Product Sales Agreement dated August 1, 1986, as amended on February 8, 1988, June 4, 1990, January 1, 1993 and January 24, 1996 (collectively, the "Original Agreement"); and WHEREAS, BASF and Sterling desire to amend and restate the Original Agreement in its entirety; and WHEREAS, Sterling owns and operates a facility in Texas City, Texas at which it is engaged in the manufacture of chemicals and desires to manufacture and sell certain plasticizers and related products to BASF all in accordance with the terms and conditions of this Agreement; and WHEREAS, BASF is willing to purchase such plasticizers and related products from Sterling all in accordance with the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants contained in this Agreement, the parties hereto have agreed and do hereby agree that as of the Effective Date the Original Agreement is amended and restated in its entirety as follows: 7 ARTICLE I DEFINITIONS 1.1 Unless otherwise stated in this Agreement, the following terms shall have the following meanings, the following definitions to be equally applicable to both the singular and plural forms of any of the terms herein defined. Agreement Product: The products set forth in Exhibit A and meeting the Specifications for the Agreement Product in effect from time to time pursuant to this Agreement. Additional Term: The period of time beginning on the date of expiration of the Initial Term and ending at 5:00 p.m. Houston, Texas time on December 31, 2012. Agreement: This Amended and Restated Product Sales Agreement, as the same may be further amended from time to time pursuant to the provisions hereof. Ancillary Raw Material: Any materials other than Raw Material including utilities and all other services required in the manufacture of Agreement Product, which are to be provided by Sterling. Bad Debts: Any outstanding account receivable which is determined to be non-collectible applying generally accepted accounting principals. BASF: BASF Corporation, a Delaware corporation. BASF Actual Costs: All actual costs incurred, sustained or paid by BASF in connection with the sale or delivery of Agreement Product, including but not limited to the items listed on Exhibit B attached hereto. -2- 8 Business Day: A day in the City of Houston, Harris County, Texas, that is not a Saturday, Sunday or legal holiday or a day on which banking institutions in Houston, Texas or New York, New York are obligated by law to close. Capital Expenditures: Any expenditures with respect to the Unit which Sterling makes to replace capital equipment that has served its useful life or to install capital equipment and such expenditure is required and necessary to be made to permit Sterling to comply with its obligations under this Agreement, or to improve the operation of the Unit. Capital Project: A project which requires Capital Expenditures. Claim: As defined in Section 7.10. Company Information: As defined in Section 7.5. Contract Year: A period of twelve (12) consecutive months beginning on the Effective Date, and beginning on the first Day of January of each subsequent year during the Initial Term and, if applicable, any Additional Term. The period of time from the first day of January last occurring during the Initial Term or, if applicable, any Additional Term, until the end of the Initial Term, or, if applicable, the Additional Term, shall each be considered to be a Contract Year. Costs and Expenses: The sum of the BASF Actual Costs and the Sterling Actual Costs. Day: The 24-hour period commencing at 7:00 a.m. Houston, Texas time on one calendar day and ending at 7:00 a.m. Houston, Texas time on the following calendar day. The date of a Day shall be that of its beginning. Damages: Any and all damages, cash payments, expenses, obligations, claims, liabilities, fines, penalties, clean-up or remedial costs, shut-down costs, repairs or reconstruction costs, costs of investigation, attorney's fees, court costs, and operating, extraordinary or business interruption -3- 9 losses (including any such matters arising from Spills or Releases Requiring Response Action) excluding consequential, incidental and indirect damages unless otherwise expressly included herein. Delivery, Shipment and Storage Instructions: As defined in Exhibit M. Dispute Notice: As defined in Section 7.4. Effective Date: The date shall be January 1, 1998. Estimated Delivery, Shipment and Storage Instructions: as defined on Exhibit M. Expansion Capital: Any expenditure with respect to the Unit which Sterling makes that is directly intended to expand the production capacity of the Unit by at least five percent (5%), as agreed pursuant to Section 7.13. Expansion Projects: A project which requires Expansion Capital. Facility Fee: The fee payable by BASF to Sterling pursuant to Section 2.1(d). Fixed Costs: The Sterling Actual Costs designated as Fixed Costs on Exhibit C attached hereto. Imputed Interest Expense: An amount calculated, as shown on Exhibit B, on the prime rate of interest announced by The Chase Manhattan Bank (National Association) during the preceding calendar quarter applied quarterly to the average balance of inventories and trade receivables, less the average balance of trade payables. Incidental Services: Services to be provided by Sterling which shall include: providing BASF with any and all toxicological and ecological data regarding the Agreement Products and any and all technology acquired by Sterling regarding the manufacture of plasticizers or plasticizer oxo-alcohols received from Monsanto Company other than information licensed from a party other than -4- 10 BASF or Monsanto Company, arranging for transportation and proper documentation of shipments, whether into or out of the Plant, of Raw Materials or Agreement Products, affixing labels supplied by BASF to the Agreement Products, providing a reasonable number of samples to BASF customers according to BASF's instructions, and all such other services generally performed by a manufacturer of Agreement Products for its customers. Initial Term: The period from the Effective Date to 5:00 p.m. Houston, Texas time on December 31, 2007. Measuring Equipment: Shore tanks located at the Plant for measuring deliveries and receipt of Agreement Product and Raw Material to be loaded and off-loaded, respectively, into or from barges or ships and scales located at the Plant for measuring deliveries of Agreement Product and Raw Material to be loaded and off-loaded, respectively, into or from trucks and rail cars. All Measuring Equipment, including but not limited to scales, meters, thermometers, etc., shall be certified for accuracy at least every calendar quarter by an independent service. Month: The period beginning at 7:00 a.m. on the first day of a calendar month and ending at 7:00 a.m. on the first day of the next succeeding calendar month. Monthly Contract Capacity: As provided in Exhibit A, as such amounts may be changed from time to time by agreement of the parties or as otherwise permitted hereby. Net Sales: Total gross revenue derived from the sale of Agreement Products less returns and all applicable commissions, discounts and allowances. Notice of Extension: Written notice delivered to the other party by the party electing to extend the Agreement by the date specified in Section 7.2. -5- 11 Notice of Termination: Written notice delivered to the other party by the terminating party within the period specified in Section 7.3 exercising the right of termination. Plant: The petrochemical plant located in Texas City, Texas owned by Sterling. Points of Delivery: As defined in Section 3.6. Profit: An amount equal to Net Sales less Costs and Expenses, which may be positive or negative. Capital Expenditures and Expansion Capital shall not be included in the calculation of Profit. Quarterly Meetings: The Meetings of representatives of Sterling and BASF on the fifth Business Day of each January, April, July and October of each Contract Year, commencing January, 1998 or as otherwise agreed to by the parties. Raw Material: The material as provided in Exhibit A used in the production of the Agreement Product to be provided by BASF meeting the Specifications for Raw Materials in effect from time to time pursuant to this Agreement. Rail Cars: Those certain railroad tank cars owned or leased by Sterling or BASF for the Initial Term and Additional Term, if any, as provided on Exhibit L. Specifications: The Agreement Product, Raw Material and Ancillary Raw Material Specifications, attached hereto as Exhibit H, as the same may be changed from time to time by agreement of BASF and Sterling. Spills or Releases Requiring Response Action: Any emission, discharge, release or threatened release of pollutants, contaminants, or hazardous substances or toxic materials or wastes into or upon ambient air, surface water, ground water or land, or subsurface strata or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or -6- 12 handling of pollutants, contaminants or hazardous substances or toxic materials or wastes, as any of the same relate to or affect or arise in connection with the ownership or operation of the Unit, the Rail Cars or barges, or the production, delivery, storage, shipment, sale, resale or use, disposal or transportation of Agreement Product or feedstocks, raw materials, waste or other materials used in or resulting from the production of Agreement Product or other products of the Unit. Sterling: Sterling Chemicals, Inc., a Delaware corporation. Sterling Actual Costs: All actual costs incurred, sustained or paid by Sterling in connection with the production, sale or delivery of Agreement Product, including but not limited to the items listed on Exhibit C attached hereto. Third Party Action: As defined in Section 7.10. Unit: The machinery, equipment, other property and their production capacities, and other property described on Exhibit J attached hereto and generally known as the Plant's Plasticizer Complex, including the Oxo Alcohol Plant, Phthalic Anhydride Plant and Phthalate Ester Plant, storage tanks, loading and unloading facilities, Agreement Product, Raw Material and Ancillary Raw Material and all replacements, substitutions, deletions, additions or other changes thereto from time to time as permitted by this Agreement. Unit of Measurement: As defined in section 3.9. Variable Costs: The Sterling Actual Costs designated as Variable Costs on Exhibit C attached hereto. -7- 13 ARTICLE II INTRODUCTION 2.1 Purchase and Supply. (a) Subject to the terms and conditions of this Agreement Sterling agrees to manufacture the Agreement Product for BASF and hold available any Unit excess capacity for BASF during the term hereof, and to receive Raw Material, store Raw Material, store and ship Agreement Product in bulk, drums or other containers, and to provide other Incidental Services in connection therewith. (b) Sterling agrees to arrange for carriers to deliver the Agreement Product to BASF terminals and customers around the clock as may be specified by BASF in accordance with the terms hereof. (c) Should BASF wish to add or substitute other products for the Agreement Product, Sterling will be obliged to produce such other products so long as no modification of the Unit is required and such production does not unreasonably affect the operations of the Plant. (d) In consideration of the capacity of the Unit provided by Sterling to BASF pursuant to this Agreement, BASF shall pay to Sterling the Facility Fee, payable initially in equal monthly installments of *** per month due on the first day of each month beginning July 1, 1997 through December 1, 1997 and thereafter in equal quarterly installments of *** per calendar quarter payable on the first day of each calendar quarter beginning January 1, 1998 and ending upon the termination of this Agreement, by expiration of the Initial Term or the Additional Term, if any, or otherwise. -8- 14 ARTICLE III DELIVERY AND PURCHASE OF AGREEMENT PRODUCTS; DELIVERIES AND SHIPMENTS; INSPECTION; OTHER RELATED MATTERS 3.1 Delivery and Purchase Obligations. (a) On the terms and subject to the conditions of this Agreement, commencing on the Effective Date, BASF hereby agrees to receive and purchase, and Sterling agrees to deliver to BASF during each Month, a quantity of Agreement Product equal to the quantities ordered by BASF pursuant to the Delivery Shipment and Storage Instructions or the Estimated Delivery, Shipment and Storage Instructions and additional instructions. (b) Delivery of Agreement Product shall be as requested by BASF in accordance with the terms hereof. Sterling agrees to sell and deliver to BASF, and BASF shall purchase, Monthly volumes of Agreement Product as so requested by BASF in accordance with the terms hereof. (c) BASF shall take deliveries of Agreement Product, and Sterling shall deliver Agreement Product to BASF hereunder, at the amounts specified by BASF in accordance with the terms hereof throughout the term of this Agreement. BASF and Sterling agree to give the other reasonable notice of such party's desire at any time to materially increase or decrease the quantity of Agreement Product deliverable at any particular time hereunder. 3.2 Capacity Limitations. Sterling shall be obligated to manufacture for BASF hereunder during any Month during any Contract Year up to the Monthly Contract Capacity, as requested BASF in accordance with the terms hereof. Prior to any material expansion, upgrade, or changes in design, layout, configuration or capacity including a change in catalyst of the Unit during the -9- 15 Initial Term or any Additional Term Sterling shall provide notice of such to BASF. Any increase in Unit production or capacity resulting from any expansion, upgrade or changes in design, layout or configuration, including a change in catalyst, shall increase the Monthly Contract Capacity hereunder in an amount equal to one-twelfth of the increase in annual Unit production of any one or all Agreement Product expected from such expansion, upgrade or change. Sterling shall not be required to purchase Agreement Product from other sources in order to supply Agreement Product to BASF. 3.3 Production and Delivery Scheduling. Production and Delivery Scheduling shall be conducted in accordance with the procedures described on Exhibit M. 3.4 Changes in Specifications. Sterling shall supply Agreement Product which meets the Specifications for Agreement Product. The Specifications shall not be changed unless agreed to in writing by BASF and Sterling prior to such change excepting other products produced by Sterling for BASF pursuant to Section 2.1(c). 3.5 Purchase Price and Payment. (a) The purchase price for all Agreement Product produced for BASF hereunder during each Month during each Contract Year shall be the sum of the Sterling Actual Costs for such Month. (b) Sterling shall during each Month render to BASF invoices showing (i) the quantity of Agreement Product produced during the preceding calendar Month, and the Fixed Costs and Variable Costs, relating thereto to be paid to Sterling by BASF pursuant to the terms hereof, and (ii) the Capital Expenditures or Expansion Capital for which payment is due. BASF shall pay each -10- 16 such invoice on or before the 15th Day after receipt thereof (or if such Day is not a Business Day, then on the Business day next occurring). In the event that there is no Agreement Product delivered to BASF during the preceding calendar Month, BASF shall nonetheless pay any Sterling Actual Costs relating to such time period. In such event Sterling will use reasonable effort to minimize Sterling Actual Costs. (c) Sterling and BASF shall cooperate in investigating, evaluating, and implementing mutually agreeable methods to reduce the Costs and Expenses. (d) On or before March 31 of each year, commencing March 31, 1998, BASF shall pay to Sterling as additional consideration for the Agreement Product produced hereunder, a cash amount representing a portion of the Profit allocated pursuant to Exhibits D and D-1, for the preceding Contract Year that has not been prepaid as estimated Profit, as provided below. Notwithstanding the aforementioned, when the Profit is negative, no allocations under Exhibit D-1 shall be made and Sterling shall pay to BASF a cash amount equal to *** of the negative Profit. BASF shall determine the Profit hereunder in accordance with BASF Accounting Guidelines and key allocations under generally accepted accounting principles. Within 30 days after the end of each calendar quarter of each Contract Year, BASF shall notify Sterling in writing of the estimated Profit as of the end of such calendar quarter, such estimate to be calculated in accordance with this Agreement and allocated in accordance with Exhibits D and D-1. BASF will distribute to Sterling or Sterling shall pay to BASF, whichever applies, the other party's portion of the estimated Profit or negative Profit for the preceding calendar quarter within 15 days of such notification, subject to adjustment at the end of such Contract Year. BASF shall render a statement to Sterling at least annually showing the calculation of Profit hereunder and the allocation of Profit under Exhibit D and -11- 17 D-1 for purposes hereof. Sterling may, if it shall so desire, in good faith contest the validity or amount of any matter shown in such annual statement. Sterling shall give notice to BASF of any such contest within a reasonable time. Should it be determined that any additional amount of Profit calculated hereunder or allocated under Exhibit D and D-1, as applicable, is due and owing to Sterling, BASF shall immediately pay such part to Sterling, with interest thereon to date of payment at the rate of 2% over the prime rate of interest announced by The Chase Manhattan Bank (National Association) in effect from time to time from the original due date to date of payment. Payment or acceptance of any payment by Sterling shall not prejudice the right of Sterling to dispute or question the correctness thereof. To the extent permitted by applicable law, and subject to Section 8.16(e) hereof, Sterling will include its share of such Profit estimates or distributions, whichever the case may be, in calculating the reported revenue for the calendar quarter to which such Profit estimates or distributions, whichever the case may be, relate; provided, that such calculations shall be subject to adjustment for each Contract Year in accordance with final Profit calculations done by BASF in accordance with this Section 3.5(d). (e) Notwithstanding anything to the contrary contained herein, BASF may, if it shall so desire, in good faith contest the validity or amount of any fee, cost or other imposition and may defer the payment of any contested portion thereof during the pendency of such contest without defaulting under the Agreement. BASF shall give notice to Sterling of any deferral within a reasonable time. Should it be determined that any part of such contested portion is due and owing to Sterling, BASF shall pay such part to Sterling immediately upon such determination, with interest thereon to date of payment at the rate of 2% over the prime rate of interest announced by The Chase Manhattan Bank (National Association) in effect from time to time during the period from the -12- 18 original due date to date of payment. Payment of any fee, cost or other imposition shall not prejudice the right of BASF to dispute or question the correctness thereof. 3.6 Deliveries and Shipments. (a) Sterling will make arrangements with carriers designated by BASF for the shipment of Agreement Product. BASF will be responsible for transportation charges imposed by such carriers. (b) The Point(s) of Delivery of all Agreement Product shall be the point of transfer of custody of such Agreement Product from Sterling to BASF, and shall be at the Plant's loading-arm flange from which such Agreement Product is loaded into the rail car, barge, vessel, truck or other conveyance for shipment. Risk of loss shall pass to BASF at such flange (irrespective of whether Sterling owns or has provided any tank, Rail Car, or other conveyance into which such Agreement Product are stored or loaded). As between Sterling and BASF, except as otherwise provided herein, Sterling shall be in control and possession of the Agreement Product sold and purchased hereunder and responsible for any damage or injury caused thereby until risk of loss with respect thereto has passed to BASF. In addition to its other obligations hereunder, BASF shall be in control and possession of the Agreement Product sold and purchased hereunder and responsible for any damage or injury caused thereby after risk of loss with respect thereto has passed to BASF. (c) The Point(s) of Delivery for all Raw Material shall be the point of transfer of custody of such Raw Material from BASF to Sterling, and shall be at the Plant's loading-arm flange from which such Raw Material is received by Sterling. Risk of loss shall pass to Sterling at such flange (irrespective of whether BASF owns or has provided any Rail Car or other conveyance from which such Raw Material are transferred). As between Sterling and BASF, except as otherwise -13- 19 provided herein, BASF shall be in control and possession of the Raw Material sold and purchased hereunder and responsible for any damage or injury caused thereby until risk of loss with respect thereto has passed to Sterling. In addition to its other obligations hereunder, Sterling shall be in control and possession of the Raw Material received hereunder and responsible for any damage or injury caused thereby after risk of loss with respect thereto has passed to Sterling. (d) Sterling shall make available to BASF pursuant to a "Car Service Contract" substantially in the same form as Appendix 1, attached hereto and hereby made a part hereof, those Rail Cars identified in Exhibit L hereof as "Owned Railcars", except for those Owned Railcars which BASF does not want made available to it. (e) At such time as may be requested in writing by BASF to Sterling, Sterling agrees, with the prior written consent or consents of the respective Rail Car owners, (i) to assign to BASF all of the leases relating to those Rail Cars identified in Exhibit L as "Leased Rail Cars", and to request permission from the respective owners of said Leased Rail Cars by means of a letter or letters substantially in the form set forth in Appendix 4, attached hereto and hereby made a part hereof. (f) In addition to the Estimated Delivery, Shipping and Storage Instructions and the Delivery, Shipping and Storage Instructions, BASF may deliver to Sterling from time to time additional shipping instructions for the Agreement Product. All such instructions with respect to any particular shipment shall be given as early as practicable prior the requested shipment date. Subject to the terms and conditions of this Agreement Sterling shall use its best efforts to deliver such Agreement Product to the carrier at the times specified in such instructions. Except as provided in this Section 3.6(f) with respect to the rail cars and barges, if such shipping instructions cause Sterling -14- 20 to incur unusual expenses in order to deliver Agreement Product for such shipment, Sterling will inform BASF whether unusual expenses will be incurred and provide an estimate of such expense. Sterling shall not incur such unusual expenses without the approval of BASF. An unusual expense shall be limited to additional demurrage charges and special rail car switching charges. Sterling shall invoice BASF for such unusual expenses as provided in Section 3.5 3.7 Production, Maintenance and Capital Expenditure Reports. Sterling shall maintain accurate records and books of account and furnish monthly reports to BASF within twenty-one (21) days following the end of the monthly period reported with regard to the operation of the Unit in a form reasonably acceptable to BASF. 3.8 Testing. Each lot of Agreement Product, Raw Material and all Ancillary Raw Materials used in the manufacture of the Agreement Product shall be inspected, sampled, coded to identify Raw Material and Ancillary Raw Materials to Agreement Product produced and Agreement Product shipped, and tested under testing procedures set forth in Exhibit G. The cost of all testing shall be included with the Fixed Costs. Any such records or certifications shall be kept for a period of not less than one (1) year (or for the duration of any contest with respect thereto, if longer). Retained samples of Testing shall be kept for a period of not less than ninety (90) days (or for the duration of any contest with respect thereto, if longer). All such records, certifications and retained samples shall be made available to BASF on request. Notwithstanding the above, Sterling agrees to perform all reasonable Agreement Product testing, statistical process control and statistical quality control as specified by BASF. In addition, BASF shall have the right to have the Agreement Product further tested prior to shipment as Agreement Product hereunder. Sterling shall cooperate in any -15- 21 such test and shall have the right to be represented and to participate in any such test and to inspect any equipment used in determining the nature or quality of the Agreement Product. Subject to the terms of this Agreement, BASF shall have the obligation to accept any and all deliveries of Agreement Product. However, BASF, may reject any such delivery if BASF notifies Sterling within forty-five (45) Business Days of delivery or within forty-five (45) Business Days of delivery to a BASF customer, whichever is the later, of the Agreement Product failure to meet the Specification as of the date of shipment. However, should Sterling object in writing to such notice within five (5) Business Days after receipt thereof, the parties will meet within three (3) Business Days after delivery of such notice to resolve the question of whether such Agreement Product meets the Specifications. The cost of reworking or disposing of material that does not meet the applicable Specifications for Agreement Products shall be included within the Sterling Actual Costs. The procedure for taking such retained samples, as of the date of shipment, shall be agreed upon by the parties. The Agreement Product retained sample shall be conclusive as to whether such Agreement Product meets the Specifications. If the parties fail to resolve the matter during such meeting, either party may refer the matter to an independent surveyor or chemical laboratory mutually agreeable to the parties, such agreement will not be unreasonably withheld, for testing under the agreed upon procedure of a sample of the Agreement Product in question. The findings of the independent surveyor or chemical laboratory will be conclusive and binding upon the parties. If a dispute arises regarding the analysis of the Raw Material, the parties will meet to resolve the question of whether such Raw Material meet the Specifications. However, Sterling, may reject any such delivery if Sterling notifies BASF within ten (10) Business Days of delivery of Raw Material failure to meet the Specifications. However, should BASF object in writing to such notice within five (5) Business -16- 22 Days after receipt thereof, the parties will meet within three (3) Business Days after delivery of such notice to resolve the question of whether such Raw Materials meet the Specifications. The proper Raw Material retained sample shall be conclusive as to whether such Raw Material meets the Specifications. The procedure for taking the retained sample at the unloading flange shall be mutually agreed upon by the parties. If the parties fail to resolve the matter during such meeting, either party may refer the matter to an independent surveyor or chemical laboratory, mutually agreeable to the parties, such agreement will not be unreasonably withheld, for testing under the agreed upon procedure of a sample of the Raw Material in question. The findings of the independent surveyor or chemical laboratory will be conclusive and binding upon the parties. If such Raw Materials fail to meet Specifications and BASF does not timely make available other Raw Materials meeting Specifications to allow Sterling to meet its manufacturing obligations hereunder, Sterling's manufacturing and delivering obligations shall be reduced accordingly. 3.9 Measurement. (a) The Unit of Measurement of the Agreement Product and Raw Materials shall be one pound (avoirdupois). All quantities given herein, unless otherwise expressly stated, are in terms of such Unit of Measurement. (b) Sterling shall maintain and operate the Measuring Equipment in accordance with customary practice in the industry. Measuring Equipment shall be certified at least once every three (3) months, starting as of the Effective Date. (c) BASF may, at its option and expense, install measuring equipment for checking Sterling's Measuring Equipment so long as such installation does not unreasonably interfere with the operation of the Unit or the Plant. -17- 23 (d) The determination of the quantity of Agreement Product or Raw Materials deliveries hereunder for inland water and marine vessel transport shall be made by taking the opening and closing inventory of Sterling's properly calibrated shore tank before and after each shipment, unless otherwise provided hereunder. (e) The determination of the quantity of Agreement Product and Raw Materials deliveries hereunder for transport by rail car or tank truck shall be made by weighing the rail cars or tank trucks on certified scales before and after loading. The receiving party shall gauge or weigh the rail cars or tank trucks upon arrival and, if the amount gauged or weighed is different than the weight obtained prior to shipment by more than one-half percent ( 1/2%), the receiving party shall notify BASF, and BASF will in turn notify Sterling, and the procedures set forth in clause (g) below shall apply. (f) Each party shall have the right to be present at the time any calibrating, installing, reading, cleaning, changing, repairing, inspecting, testing or adjusting is done in connection with the other's Measuring Equipment used in measuring deliveries hereunder. The records from such Measuring Equipment shall remain the property of their owner, but, upon request, each party will submit to the other its records, charts and weigh tickets, together with calculations therefrom, subject to return within fifteen (15) days after receipt thereof. Such records, charts and weigh tickets shall be kept on file for a period of one (1) year (or for the duration of any contest with respect thereto, if longer). (g) If upon any test the Measuring Equipment is found to be inaccurate in the aggregate by one-half percent ( 1/2%) or more, any payment based upon such measurements shall be corrected at the rate of such inaccuracy for any period of inaccuracy which is definitely known or -18- 24 agreed upon, or if not known or agreed upon, then for a period extending back one-half ( 1/2) of the time elapsed since the last successful test. Following any test, any Measuring Equipment found to be inaccurate to any degree shall be repaired, calibrated and certified to measure accurately as provided below. If for any reason any Measuring Equipment is out of service or out of repair so that the quantity of Agreement Product or Raw Material delivered cannot be ascertained or computed from the readings thereof, the quantity of Agreement Product or Raw Material so delivered during the period the Measuring Equipment is out of service or out of repair shall be estimated and agreed upon by the parties upon the basis of the best available data, using the first of the following methods which is feasible: (i) By using the results of any check Measuring Equipment or other measuring device of BASF, if installed and measuring accurately; (ii) By using the services of a public scale facility; or (iii) By using the results of any check Measuring Equipment or other measuring device, including ship's records of tank measurements, of BASF or its customer, if measuring accurately; or (iv) By correcting the error if the percentage of error is readily ascertainable by test or mathematical calculation; or (v) By estimating the quantity of deliveries during preceding periods under similar conditions when the Measuring Equipment was measuring accurately. However, it is expressly understood that where Sterling has, direct or indirect, knowledge or reasonable cause to know or suspect that any Measuring Equipment is inaccurate by one-half -19- 25 percent ( 1/2%) or more, Sterling shall have such Measuring Equipment repairs, calibrated and certified for accuracy within ten (10) days of the time at which Sterling had knowledge or reasonable cause to know. (h) Notwithstanding the foregoing, Sterling's measurements shall be deemed to be accurate for purposes of all deliveries made hereunder unless as to any particular delivery, BASF objects thereto in writing delivered to Sterling within thirty (30) days after such delivery. 3.10 Storage of Agreement Product and Raw Material by Sterling. (a) The Unit presently contains the bulk storage tanks described on Exhibit N. Sterling shall use such bulk storage tanks for the storage of Agreement Product and Raw Material as designated by BASF in the Estimated Delivery, Shipment and Storage Instructions and the Delivery, Shipment and Storage Instructions or as otherwise determined by Sterling. Should any such bulk storage tank be taken out of service by Sterling for repair service, Sterling will repair the same and place it back in service as soon as practicable. In such a case, Sterling shall make available for storage of Agreement Product or Raw Material any such suitable bulk storage tank it then has available at the Plant. (b) Sterling agrees that all Raw Material furnished by BASF and all Agreement Product produced by Sterling for BASF shall be physically segregated in Sterling's plant or storage facilities from chemicals, packaging materials and products owned by Sterling or third parties. 3.11 Failure to Take Delivery. If BASF fails to accept an uncontested delivery of any Agreement Product tendered to it by Sterling produced pursuant to the Estimated Delivery, Shipping, and Storage Instructions, the Delivery, Shipping and Storage Instructions or additional shipping -20- 26 instructions, unless such failure is otherwise excused under the Agreement, Sterling shall have the option to cut back production of Agreement Product only if: (a) BASF's failure to take delivery will result in the exceedance of Storage Facility capacity and BASF does not provide for or agree to outside storage which expense shall be borne by BASF, or (b) BASF's failure to take delivery will require the shut-down of the Unit. Any failure to accept delivery by BASF shall not limit its payment obligations hereunder unless otherwise provided under the Agreement. Acceptance of delivery shall not prejudice the right of BASF to dispute or question such delivery. 3.12 Failure to Maintain Contract Capacity. In the event that (a) the Unit or any part thereof is damaged or destroyed by fire or other casualty and Sterling has either (i) delivered notice to BASF pursuant to Section 4.3(a) hereof of its election not to rebuild the Unit or (ii) not begun to repair, alter, restore, replace or rebuild the Unit within six (6) months following such damage to the Unit or at any time thereafter fails to use reasonable efforts to continue to repair, alter, restore, replace or rebuild the Unit or (b) Sterling fails, unless such failure is excused under Section 7.12 or otherwise hereunder, to maintain the production capacity of the Unit over any period of at least ninety (90) consecutive Days at a level of at least ninety-five percent (95%) of the Monthly Contract Capacity for one or more Agreement Products, and, in either case, BASF requires production in excess of the available capacity; then the Facility Fee shall be reduced for each calendar quarter, or portion thereof during which Sterling fails to maintain the Monthly Contract Capacity. In such cases, the Facility Fee shall be determined on a daily basis and for the days during which Sterling fails to maintain the Monthly Contract Capacity, the Facility Fee shall be reduced by multiplying -21- 27 it by the Reduction Factor. The Reduction Factor shall be an amount equal to the sum of the reduced monthly capacities for each of the three Agreement Product groups (PA, Oxo and Esters) divided by the sum of the Monthly Contract Capacities for each of the three Agreement Product groups (PA, Oxo and Esters). For purposes of the calculation of the Reduction Factor, any reduction in the monthly capacity of Oxo will result in a proportional reduction in the monthly capacity of Esters, unless otherwise agreed. Sterling shall reimburse BASF within fifteen (15) days of the end of any Month during which the Facility Fee has been so reduced an amount equal to the difference between the Facility Fee paid by BASF for such period and the Facility Fee for such period reduced in accordance with this Section 3.12. 3.13 Furnishing of Raw Material and Other Materials. (a) BASF agrees to furnish, or cause to be furnished, to Sterling the Raw Material for use in production of the Agreement Product in such quantities and at such times as necessary in order to enable Sterling to perform its production and delivery obligations to BASF. Sterling shall be responsible to call forward any of the Raw Materials provided by BASF. Failure of Sterling to properly call forward such Raw Materials shall not relieve Sterling of its obligations hereunder. (b) Sterling agrees to furnish catalyst, the Ancillary Raw Materials, and any other materials (other than Raw Material), used in the production of the Agreement Product. The cost of same is incorporated in the Sterling Actual Costs. (c) BASF shall have the right, at the beginning of any Contract Year, if it gives Sterling at least four (4) months' prior written notice thereof, to supply natural gas, used either directly or indirectly to produce the Agreement Products under this Agreement provided, that (i) the exercise of such right does not interfere with or cause a breach of any contract to which Sterling is -22- 28 a party, for natural gas or otherwise; (ii) does not increase Sterling's costs or expenses, (iii) does not interrupt the operation of the Unit or the Plant, and (iv) BASF warrants to Sterling that such natural gas shall be of the quality and quantity and shall be deliverable in such manner as is reasonably satisfactory to Sterling and (v) any discontinuance of such supply under clause (d) below will not have any of the effects described in the preceding clauses (i) through (iii). In such event, Sterling shall have no obligation to supply such natural gas related to the Unit. The cost of such natural gas furnished by BASF shall be considered a BASF Actual Cost. Where the natural gas is supplied by BASF through an affiliate of BASF, Sterling shall remit payment for the natural gas directly to such BASF affiliate and Sterling shall reflect the cost of such natural gas in the Variable Cost. (d) If BASF has been supplying natural gas to the Unit for a period of at least twelve (12) consecutive months, then BASF shall have the right, at any time, if it gives Sterling at least four (4) months' prior written notice thereof, to discontinue the supply of such natural gas related to the Unit subject to the conditions in clause (c) above. Upon such discontinuance, Sterling's cost of natural gas to replace the volumes so discontinued shall be reflected in the Variable Cost. (e) Sterling shall supply all drums and sample packaging to be specified by BASF for shipment of Agreement Products, in such quantities and at such times as are necessary in order to enable Sterling to discharge its manufacturing and delivery obligations under this Agreement. BASF may at its option elect to supply any one or all packaging materials for shipment of Agreement Products. 3.14 Taxes. All Federal, State, local and municipal taxes including Superfund taxes (except taxes levied on net income or net worth) which are directly attributable to the receipt by Sterling of Raw Material, the production of the Agreement Product or deliveries of Agreement -23- 29 Product made pursuant to this Agreement, shall be included within Costs and Expenses. Income, franchise, gross receipts, occupational and other similar taxes are not to be included within Costs and Expenses. 3.15 Title; Covenant Not to Encumber. Title to all the Raw Material and Agreement Product shall at all times remain in BASF. Title to the Agreement Product shall be in BASF as of the time of production. Sterling shall not impose or permit to be imposed upon any of the Raw Material or Agreement Product within the custody and control of Sterling any liens or encumbrances whatsoever other than those created by or through or in favor of BASF, and Sterling warrants to BASF with respect to all Agreement Product manufactured and delivered by it hereunder, that such Agreement Product shall be delivered free from any lawful security interest or lien or other encumbrance other than those created by or through or in favor of BASF. Sterling agrees to execute the Security Agreement provided in Exhibit K. 3.16 Hazards. Sterling warrants that it is completely familiar with the toxic nature and hazards of the Raw Material, Ancillary Raw Material, and Agreement Product. Sterling shall warn all persons at the Plant, including, but not limited to, employees of Sterling, its agents and invitees of the health and environmental hazards associated with the Raw Material, containers for Raw Material, (including proper disposal methods), and Agreement Product. Sterling further agrees to advise all persons at the Plant who handle or might otherwise come into contact with Raw Material, containers for Raw Material, and Agreement Product of all applicable precautions and safety measures to be employed at the Plant when handling or storing same and to require that such precautions and safety measures be employed at the Plant in full accordance with all safety, health and environmental regulations. -24- 30 ARTICLE IV OPERATION OF UNIT AND RELATED MATTERS 4.1 General. Sterling shall operate the Unit subject to the terms and conditions of this Agreement. Unless otherwise provided herein, Sterling shall operate the Unit in a manner to fulfill BASF's delivery instructions and its obligation to BASF under this Agreement provided, that operations in accordance with such obligations are not in violation of this Agreement, prudent operation and maintenance procedures or applicable laws and will not cause non- compliance with the Specifications. 4.2 Production Schedule. Sterling shall produce Agreement Product as needed to meet BASF's Estimated Delivery, Shipping and Storage Instructions and the Delivery, Shipping and Storage Instructions or other shipping instructions subject to limitations in Section 3.1(c). 4.3 Damage or Destruction. (a) If at any time during the Term of this Agreement the Unit or any part thereof shall be damaged or destroyed by fire or other casualty (including any insured or uninsured casualty) of any kind or nature, ordinary or extraordinary, foreseen or unforeseen, Sterling shall either (i) at its sole cost and expense and whether or not the insurance proceeds, if any, shall be sufficient for the purpose, proceed with reasonable diligence, but no later than 90 days from the date of such damage or destruction, to begin to repair, alter, restore, replace or rebuild the same as nearly as possible to its value, condition and character which existed immediately prior to such damage or destruction or (ii) elect, by written notice to BASF within 90 days from the date of such damage or destruction, not to repair, alter, restore, replace or rebuild the same. -25- 31 (b) In the event of total destruction or total damage of the Unit, BASF shall have the following options: (1) Terminate the Agreement upon written notice to Sterling; or (2) Replace or rebuild the Unit if Sterling elects not to replace or rebuild the Unit. (c) If Sterling elects not to repair, alter, restore, replace or rebuild, as provided above, BASF may elect to pay the cost to repair, alter, restore or rebuild the Unit. BASF shall exercise such election within one hundred twenty (120) days following receipt of written notice of Sterling's election. If BASF exercises such election, Sterling shall (i) use its best efforts to obtain the release of any insurance proceeds held by any other person or entity with respect to such fire or other casualty, and if such proceeds are so released, shall use the same to reimburse BASF for its costs incurred in such repair, alteration, restoration, replacement or rebuilding within 15 days from receipt of invoice therefor and (ii) use its best efforts to obtain releases or consents of the holders of all liens on or security interests the Unit, as specified by BASF and, upon receipt of all releases or consents necessary to permit Sterling to grant to BASF a lien on or security interest in the repairs or restorations paid for by BASF without creating a default by Sterling under any agreement, note, deed of trust, mortgage or security agreement to which it is a party, Sterling shall grant to BASF a lien on or security interest in such repairs or restorations, in the form reasonably specified by BASF. Such lien or security interest shall secure BASF for the repayment of such costs. Upon the completion of such rebuilding or restoration, the Facility Fee shall be adjusted appropriately over the remaining term hereof until such costs (net of insurance proceeds paid to BASF) are repaid to -26- 32 BASF, and thereupon such lien or security interest shall be released. BASF recognizes that Texas Commerce Bank National Association, as administrative agent, has a lien on and security interest in the Unit. If neither BASF nor Sterling elect to rebuild or restore, either party may terminate this Agreement on thirty (30) days prior written notice to the other and BASF may cease paying the Facility Fee after the occurrence of the above described damage or destruction. 4.4 Office Space. Sterling agrees that upon written request by BASF, to provide to BASF suitable temporary reasonable office accommodations at the Plant for a limited number of BASF personnel or its representatives to audit or review records maintained by Sterling pursuant to this Agreement. 4.5 Plant Visits. Sterling agrees to permit BASF personnel to have access to the Unit at reasonable times and on reasonable notice and consistent with Sterling's contractual obligations under licenses or sublicense to which it is a party. Any such personnel shall be required to comply with Sterling's safety and reasonable confidentiality procedures and policies. 4.6 Insurance. As of the Effective Date, Sterling will obtain the insurance coverage as described on Exhibit E. 4.7 Capital Expenditures and Expansion Capital. (a) Procedure to Obtain Reimbursement for Capital Expenditures - For any expenditure to qualify as a Capital Expenditure or Expansion Capital and to obtain reimbursement, Sterling must inform BASF in writing prior to initiating the expenditure and BASF must agree in writing whether the expenditure is a Capital Expenditure or Expansion Capital. (b) Sterling will invoice BASF monthly on a project-by-project basis after the expenses of the projects are incurred for *** of the actual cost of all Capital Expenditures and *** -27- 33 of the actual cost of all Expansion Capital projects. BASF shall pay all such invoices within fifteen (15) days of receipt. Notwithstanding the foregoing, BASF shall entirely fund the Switch Condenser Project, as approved under 4.7(d), and Sterling shall repay to BASF its *** share of the Capital Expenditures for such Capital Project in accordance with the example described on Exhibit P. (c) After termination of this Agreement, BASF shall pay to Sterling or Sterling shall pay to BASF, whichever applies, an amount sufficient to (i) *** (ii) share the cumulative Expansion Capital expenditures so that *** is paid by Sterling and *** is paid by BASF. In addition, Sterling will pay to BASF a reimbursement on the unamortized portion of the payments made by BASF for Capital Expenditures and Expansion Capital. The reimbursement shall be calculated using a straight line, 10 year life, mid-year convention depreciation as defined by the U.S. Federal Income Tax Code, and applied to the year of the payment by BASF. This applies to both the Expansion Capital and Capital Expenditure payments made by BASF. If Sterling does not pay the reimbursement to BASF within thirty (30) days after such reimbursement, if any, becomes due, Sterling will pay interest on the unpaid reimbursement from the due date at the rate of 2% over the prime rate of interest announced by Chase Manhattan Bank (National Association) in effect from time to time during the period from the due date to the date of payment. (d) Sterling will annually submit to BASF for its consent a twelve month budget of Capital Expenditures at the October Quarterly Meeting. Further proposed Capital Projects may be added to the capital budget described above by Sterling at any time during a Contract Year, provided that the approval of BASF has first been obtained. (e) In an emergency Sterling may establish any Capital Project and make any Capital Expenditure, without the prior approval of BASF, necessary to maintain the Unit during the -28- 34 term of this Agreement in a manner to allow Sterling to meet its obligations hereunder. Sterling must then inform BASF via fax or telex of the nature of the emergency and the expected project cost and reimbursement within 72 hours and follow up with a project request within two weeks. 4.8 Maintenance Expenditures. Sterling agrees to develop a maintenance expense budget for the Unit which will enable Sterling to maintain the Unit in accordance with the standard of care described in Section 4.10. Sterling shall provide BASF with monthly reports regarding maintenance expenses as mutually agreed upon by the parties. Any maintenance expense shall be deemed to be included in the Fixed Costs for purposes of the Agreement except as otherwise agreed upon by the parties. 4.9 Compliance with Laws. Nothing in this Agreement is intended to, or shall be construed as authorizing or requiring, Sterling to violate any laws (including environmental laws). Sterling hereby warrants that it shall comply in all material respects with the requirements of the following, to the extent applicable to Sterling: Occupational Safety and Health Act of 1970, Executive Order 11246, the Rehabilitation Act of 1973, the Vietnam Era Veterans Readjustment Assistance Act of 1974, the Fair Labor Standards Act of 1930, Toxic Substances Control Act, and all applicable amendments, standards, rules, regulations, and orders issued pursuant to or related to said Acts and Order and any similar state law. Sterling shall be responsible for appropriately labeling and placarding all shipments of Agreement Products. Sterling agrees to hold BASF harmless against any public or private claim, demand, cause of action or judgment for damages, of any kind, arising from or attributable to Sterling's failure, in any respect, whether material or immaterial, to comply with said Acts, standards, rules, regulations, orders, or similar state law. -29- 35 4.10 Standard of Care. Sterling shall operate and maintain the Unit and perform its other obligations including material handling and distribution hereunder using good operating procedures at least equivalent to or better than the same standard of care (i) as it would use in operating and manufacturing at the Plant and performing such obligations for its own account and (ii) as a prudent operator would use in operating and manufacturing at a unit similar to the Unit. Notwithstanding the above, Sterling shall operate and maintain the Unit at least equivalent to or better than the standard of care used by the previous owner of the Plant in operating the Unit. 4.11 Warranties; BASF's Duties; Remedies. Sterling warrants that the Agreement Product when delivered to BASF, Raw Materials after acceptance and Ancillary Raw Materials at the time they are used by Sterling will conform to the Specifications. Sterling shall be responsible for all personal injury and property damage resulting from any breach of the above warranties and Sterling shall indemnify BASF against any such injury or damage. Sterling shall be responsible for all personal injury and property damages after delivery of Raw Material to Sterling and prior to its use. BASF shall be responsible for all personal injury and property damages from the Raw Material prior to delivery to Sterling and for Agreement Product after delivery to BASF. 4.12 Heel Credits. BASF shall receive a credit for residual Agreement Product transported as bulk liquid by barge or other means of marine transportation returned directly to Sterling from a BASF terminal, customer or storage facility equivalent to one-half ( 1/2) percent of the gross weight on the first shipment of Agreement Product on such barge or other means of marine transportation. An independent surveyor shall be used for measuring the weight of all Agreement Products shipped by means of marine transportation. The cost of such independent surveyor shall be paid by Sterling -30- 36 and considered a Sterling Actual Cost. The weights of truck and railcar shipment shall be determined according to the procedures on Exhibit O. ARTICLE V REPRESENTATIONS AND WARRANTIES OF STERLING Sterling represents and warrants to BASF as follows: 5.1 Organization, Good Standing and Corporate Power. Sterling is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware, is duly qualified as a foreign corporation in the State of Texas, and has all requisite corporate power and authority to carry on its business as presently conducted, to enter into this Agreement and perform its obligations hereunder. 5.2 Authority Relative to Agreement. The execution, delivery and performance by Sterling of this Agreement have been duly and effectively authorized by all necessary corporate action. This Agreement has been duly executed and delivered by Sterling and is a legal, valid and binding obligation of Sterling enforceable in accordance with its terms, except insofar as enforcement may be limited by (i) bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally, and (ii) general principles of equity. 5.3 No Conflict with Other Instruments or Proceedings. Neither the execution and delivery of this Agreement, nor the performance or compliance with the terms and conditions hereof conflict with, or will result in a breach by Sterling of, or constitute a default under, or result in the creation of any lien, charge or encumbrance upon, any asset of Sterling pursuant to any of the terms, conditions or provisions of (i) the Certificate of Incorporation or Bylaws of Sterling, (ii) any mortgage, deed of trust, lease, contract, agreement or other instrument to which Sterling is a party -31- 37 or by which Sterling may be bound or affected, or (iii) any writ, order, judgment, decree, statute, ordinance, regulation or any other restriction of any kind or character, to which Sterling is subject, or by which Sterling may be bound or affected. 5.4 No Litigation or Proceedings. As of the date hereof, there are no actions, suits, investigations or proceedings pending or to Sterling's knowledge threatened against Sterling at law or in equity or before or by any federal, state, municipal or other governmental or non-governmental department, commission, board, bureau, agency or instrumentality seeking to enjoin, restrain or otherwise prevent the execution and delivery of this Agreement by Sterling. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BASF BASF represents and warrants to Sterling as follows: 6.1 Organization. BASF is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as currently conducted, to own and operate the properties owned by it and to enter into this Agreement and perform its obligations hereunder. 6.2 Authority Relative to Agreement. The execution, delivery and performance by BASF of this Agreement have been duly and effectively authorized by all necessary corporate action. This Agreement has been duly executed by BASF and is a legal, valid and binding obligation of BASF enforceable in accordance with its terms, except insofar as enforcement may be limited by (i) bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally, and (ii) general principles of equity. -32- 38 6.3 No Conflict with Other Instruments or Proceedings. Neither the execution and delivery of this Agreement, nor the performance or compliance with the terms and conditions hereof conflict with, or will result in a breach by BASF of, or constitute a default under, or result in the creation of any lien, charge or encumbrance upon, any of its assets pursuant to any of the terms, conditions or provisions of (i) the constituent corporate documents of BASF, (ii) any mortgage, deed of trust, lease, contract, agreement or other instrument to which BASF is a party or by which BASF may be bound or affected, or (iii) any writ, order, judgment, decree, statute, ordinance, regulation or any other restriction of any kind or character, to which BASF is subject, or by which BASF may be bound or affected. 6.4 No Litigation or Proceedings. As of the date hereof, there are no actions, suits, investigations or proceedings pending or to BASF's knowledge threatened against or affecting BASF at law or in equity or before or by any federal, state, municipal or other governmental or non-governmental department, commission, board, bureau, agency or instrumentality, seeking to enjoin, restrain or otherwise prevent the execution and delivery of this Agreement by BASF. ARTICLE VII ADDITIONAL AGREEMENTS 7.1 Meetings. (a) At the Quarterly Meetings, the representatives of BASF and Sterling shall review the operations of the Unit, and such other matters as may be determined as appropriate by the parties. At least 30 days prior to the October Quarterly Meeting in each Contract Year, Sterling shall submit to BASF a proposed budget for Capital Projects and Capital Expenditures for the following twelve month period for approval. Additionally, Sterling shall concurrently deliver to -33- 39 BASF its budget for Maintenance Expenditures for the Unit and the other equipment and property used in connection therewith, prepared by Sterling in good faith and upon realistic assumptions, for the following twelve month period for review. BASF shall inform Sterling of its decision regarding approval of Capital Project and Capital Expenditures within 30 days after the October Quarterly Meeting. (b) At the October Quarterly Meeting in each Contract Year, the representatives of BASF and Sterling shall review the Costs and Expenses for the prior twelve month period and negotiate in good faith the budget for the next twelve month period. (c) Sterling shall make its employees and other representatives available to BASF on reasonable request to discuss the present or proposed operations of the Unit so long as such availability does not disrupt the operation of the Unit. (d) The parties shall be obliged to meet upon the reasonable request of either party by giving prior written notice to the other party. 7.2 Term. The term of this Agreement shall be the Initial Term unless earlier terminated as provided herein. However, this Agreement may be extended upon terms and conditions to be mutually agreed upon by the parties for a period of five (5) years (the "Additional Term") at the end of the Initial Term if either party has delivered a Notice of Extension to the other and the parties have reached agreement on the terms and conditions of such extended agreement on or prior to December 31, 2004. 7.3 Termination. Either of the parties may at its election terminate this Agreement by written notice to the other: -34- 40 (a) at any time if the other party discontinues business or is adjudicated as bankrupt, or files a petition in bankruptcy or reorganization under any of the chapters of the Bankruptcy Code or for a receiver be filed by or against the other party or a creditor files an involuntary petition for bankruptcy, or enters into an agreement with its creditors to compromise an indebtedness or makes an assignment for the benefit of creditors, or is unable to meet its obligations as they become due, or (b) at any time if the other party shall fail to make any payment or credit when due hereunder or suffer to exist any default on its part of any material provision of this Agreement, and fails to make such payment or to cure such default within thirty (30) days after written notice thereof given by the other party hereto. Upon the occurrence of a contingency provided in Section 7.3(a), BASF may in its sole option upon written notice to Sterling, and subject to the rights of the holder(s) of any liens on or security interests in the Unit, including Texas Commerce Bank National Association, as administrative agent, elect to operate the Unit. BASF shall then have full power and authority to perform such actions and things as it may deem advisable or expedient in connection with the operation, repair, governmental compliance, safety, maintenance, protection, expansion, modification, reconstruction and use of the Unit. BASF's actual costs to operate the Unit under such circumstances shall be included within Costs and Expenses in the calculation of Profit. BASF shall conduct the operations contemplated hereunder in accordance with BASF's own good operating practices. BASF shall indemnify, save and hold harmless Sterling from and against any and all liabilities, costs, expenses or damages arising from, out of or in any manner connected with the operation of the Unit by BASF, save and except only those matters arising directly or indirectly prior -35- 41 to the date BASF assumes operations or resulting either directly or indirectly from conditions existing prior to the date BASF assumes operations. If any event, default or failure of the nature described in Sections 7.3(a) or (b) occurs with respect to a party hereto, the performance of the obligations of the other party hereto by such other party shall be excused to the extent such performance is affected by such event, default or failure. The rights granted to the parties in this Section 7.3 are without prejudice to any and all other remedies the parties may have. 7.4 Dispute Resolution. All disputes, differences or questions arising out of or relating to the Agreement (including without limitation, those as to the validity, interpretation, breach, violation, or termination) shall at the written request of either party, be determined and settled, if possible, pursuant to the following procedure before proceeding with any action in court. Any such procedure may be initiated by a party by written notice ("Dispute Notice") to the other party specifying the subject of the dispute. Upon dispatch or receipt of the Dispute Notice each party shall appoint two (2) representatives who shall be empowered with all authority necessary to take any or all actions to resolve the dispute. The representatives of the parties shall meet within ten (10) Business Days after delivery of the Dispute Notice to resolve the dispute. If the representatives fail to resolve the matter within three (3) Business Days, after the expiration of such third Business Day period the parties may agree to mediation or arbitration of the dispute or pursue a remedy by any means provided under law. 7.5 Confidentiality. During the term of this Agreement and thereafter, all information relating to the business, products, assets, and finances of the parties, including but not limited to financial statements and related books and records, minute books, personnel records, lists of -36- 42 customers and potential customers, lists of suppliers and potential suppliers, price and cost data, computer programs, computer hardware, patents, patent applications, apparatus, equipment, drawings, reports, processes, methods and techniques of manufacture, know-how, trade secrets, specifications of materials, manuals, technical information plans, drawings and other data and similar information and records ("Company Information"), shall be treated as proprietary to disclosing party and as confidential by the receiving party and shall not be disclosed by the receiving party or its officers, employees, agents, affiliates or representatives to, or used for the benefit of, the receiving party or any other person other than for purposes under this Agreement for a period of ten years from the date of disclosure; provided however, that nothing herein shall prohibit Sterling from disclosing any Sterling Company Information to its investment bankers or lenders or permitting such lenders access of such Sterling Company Information for purposes of loan administration and nothing herein shall diminish Sterling's obligation to supply Sterling Company Information required under any credit or loan agreement. At the termination of the Initial Term or Additional Term (if the term hereof is extended for the Additional Term as provided hereby), the receiving party shall promptly return to the disclosing party all copies of any documents or other written information (including notes and internal memoranda) comprising the Company Information or destroy the Company Information and certify in writing to the disclosing party of such destruction. Such obligations of confidentiality and non-use shall not apply to Company Information, or portions thereof, which: (a) is or becomes generally available to the public in published literature through no breach of this Agreement by receiving party, or (b) receiving party can show was known prior to disclosure hereunder, or -37- 43 (c) is disclosed to receiving party by a third party having the lawful right to make such disclosure and owing no confidential obligation to the disclosing party with respect to such information, or (d) receiving party is required by applicable law or regulation to disclose; provided that the receiving party provides reasonable prior notice of the disclosure to the other party. Each party undertakes, as far as is legally possible, to require its representatives or employees with access to said Company Information to keep said Company Information secret and confidential, both during and after the period of their employment by either party, to the same extent that and for so long as said party shall be obligated to do. The foregoing secrecy obligation shall terminate ten (10) years after disclosure of such Company Information. 7.6 Restriction on Transfer of Company Information. Except pursuant to the sale, assignment, foreclosure or other transfer of the Unit, the Plant or this Agreement as otherwise permitted hereby, Sterling agrees not to sell, assign or otherwise transfer any right, title or interest in or to use, except for production of Agreement Products at the Plant, Sterling's Company Information regarding the manufacture, sales or marketing of the Agreement Products during the Initial Term or any Additional Term of this Agreement without the prior written consent of BASF. 7.7 Notice of Certain Events. (a) In the event that Sterling has failed to make any principal or interest payment on any of its indebtedness for borrowed money of $1,000,000 or more when same shall have become due and payable and such failure has not been waived by the holder(s) of such indebtedness prior to the date such indebtedness became due and payable, Sterling agrees to give written notice thereof to BASF. In such event, Sterling shall discuss with BASF such failure to make any such payment -38- 44 and the effects thereof on the operations of Sterling, and afford BASF the opportunity, for a reasonable period of time under the then existing circumstances, to assist Sterling in resolving any financial difficulties Sterling might then have. (b) In the event Sterling enters negotiations with a third party with respect to the sale or transfer of the Unit (whether directly or indirectly) or as part of the sale or exchange of all or substantially all of the assets of Sterling, the sale or exchange of a majority or more of the outstanding voting securities of Sterling in a transaction requiring approval by Sterling the merger or consolidation of Sterling with or into another corporation or otherwise, the Company agrees to inform BASF at least 60 days prior to the scheduled closing, unless Sterling is prohibited from doing so by applicable law. (c) In the event that Sterling receives notice that the holders of a majority of the outstanding voting securities of Sterling have entered negotiations to sell, exchange or otherwise transfer such voting securities in a transaction not requiring approval of Sterling or its security holders as such, Sterling agrees to inform BASF of such negotiations at least 60 days prior to the scheduled closing, unless Sterling is prohibited from doing so by applicable law. 7.8 Sterling Financial Statement. Upon the reasonable request of BASF Sterling shall provide BASF from time to time but not more often than quarterly with a statement signed by Sterling's chief financial officer certifying to: Sterling's financial position, results of operation and cash flow and to pending or existing litigation, claims or liens that will affect Sterling's ability to perform its obligations under this Agreement and BASF agrees to keep such information confidential. Nonetheless, Sterling shall annually provide BASF with the report on its annual -39- 45 financial statements prepared and executed by Deloitte & Touche L.L.P. or such other accountants agreeable to parties. 7.9 Survival. The representations, warranties, covenants and agreements contained in this Agreement shall survive the execution and delivery of this Agreement, and any payment obligation of any party hereto owing to the other party on the date of termination hereof or arising thereafter based on events or occurrences prior to such termination shall survive the termination of this Agreement and for the period of the applicable statute of limitations (or, if there is no such statute, for the longest period permitted by law) with respect to such obligations. 7.10 Indemnification. (a) Except as otherwise provided herein, Sterling, from and after the Effective Date, shall indemnify and hold BASF harmless from and against any and all Damages suffered or incurred by BASF on account of or arising from or related to the breach of, or the failure to perform or satisfy any of, the representations, warranties, covenants or agreements made by Sterling in or under this Agreement, or any liability to any person or entity whether incurred under statute or in tort arising directly or indirectly from operations carried on by or on behalf of Sterling at or in connection with the Unit or arising out of Spills or Releases Requiring Response Action occurring before, during or after the term of this Agreement unless such Spills or Releases Requiring Response Action are caused by the wrongful acts, omissions or default of BASF. Sterling will hold BASF harmless and indemnify BASF and secure BASF against any and all losses, costs, expenses, fees, damages, etc. deriving from environmentally related claims of any kind against BASF arising out of this and any related agreement. -40- 46 (b) Except as otherwise provided herein, BASF, from and after the Effective Date, shall indemnify and hold Sterling harmless from and against any and all Damages suffered or incurred by Sterling on account of or arising from or related to the breach of, or the failure to perform or satisfy any of, the representations, warranties, covenants or agreements made by BASF in or under this Agreement, or any liability to any person or entity whether incurred under statute or in tort arising directly or indirectly from the actions of BASF carried out at or in connection with the Plant (excepting any Damages arising out of Spills or Releases Requiring Response Action as to which Section 7.10 (a) applies), or any Spills or Releases Requiring Response Action attributable to the acts, omissions or default of BASF, or any liability arising from the Rail Cars, or any liability for damages to persons or property or to BASF personnel or invitees or caused by them, or on account of any product liabilities for Agreement Product or other Unit products delivered by BASF. (c) Each party agrees that promptly after any of its officers becomes aware of the discovery of facts giving rise to a claim by it for indemnification hereunder ("Claim"), such party will provide notice thereof in writing to the other party. Any notice pursuant to this clause (c) shall contain a statement to the effect that such party is making a Claim pursuant to and formal demand for indemnification under this Agreement. Any demand, assertion, claim, action or proceedings by or from any person or entity (other than a party to this Agreement) or governmental authority which may give rise to a Claim is referred to herein as a "Third Party Action". For purposes of this Section 7.10, the term "Indemnifying Party" as to a particular Claim or Third Party Action shall mean the party having or which is held to have an obligation to indemnify the other party with respect to such Claim or Third Party Action pursuant to this Section 7.10 and the term "Indemnified Party" as to a particular Claim or Third Party Action shall mean the party having or which is held to have the right -41- 47 to be indemnified with respect to such Claim or Third Party Action by the other party pursuant to this Section 7.10. (d) Except as otherwise expressly provided herein, the Indemnifying Party shall be entitled at its sole cost and expense to contest and defend by all appropriate legal proceedings any Third Party Action with respect to which it is called upon to indemnify the Indemnified Party under the provisions of this Agreement; provided, however, that with respect to any Claim arising from the assertion of any Third Party Action, notice of the intention so to contest shall be delivered by Indemnifying Party to Indemnified Party within 20 days from the date of mailing to Indemnifying Party of notice by Indemnified Party of the assertion of the Third Party Action. Any such contest with respect to a Third Party Action may be conducted in the name and on behalf of Indemnifying Party or Indemnified Party as may be appropriate. If after notice as provided for herein, Indemnifying Party does not elect to contest any Third Party Action as provided in this clause (d), Indemnifying Party shall be bound by the result obtained with respect thereto by Indemnified Party and Indemnified Party may (but shall have no obligation to) contest any such Third Party Action or settle or admit liability with respect thereto, all for the account of Indemnifying Party. At any time after the commencement of defense of any such Third Party Action, Indemnifying Party may request Indemnified Party to agree in writing to the abandonment of such contest or to the payment or compromise by Indemnifying Party of the asserted Third Party Action whereupon such action shall be taken unless Indemnified Party so determines that the contest should be continued, and so notifies Indemnifying Party in writing within 15 days of such request from Indemnifying Party. In the event that Indemnified Party determines that the contest should be continued, Indemnifying Party shall be liable with respect to such Third Party Action only to the extent of the lesser of (i) the amount which -42- 48 the third party taking the Third Party Action had agreed to accept in payment or compromise as of the time Indemnifying Party made its request therefor to Indemnified Party or (ii) such amount for which Indemnifying Party may be liable with respect to such Claim by reason of the provisions hereof. (e) If requested by Indemnifying Party, Indemnified Party agrees to cooperate with Indemnifying Party and its counsel in contesting any Third Party Action which Indemnifying Party elects to contest or, if appropriate, in making any counterclaim against the third party taking the Third Party Action, or any cross-complaint against any other person or entity not a party hereto, but Indemnifying Party will reimburse Indemnified Party for any expenses incurred by it in so cooperating. (f) Indemnifying Party agrees to afford Indemnified Party and its counsel the opportunity to be present at, and to participate in, conferences with all persons or entities, including governmental authorities, taking Third Party Action against Indemnified Party or conferences with representatives of counsel for such persons or entities. (g) Indemnifying Party shall pay to Indemnified Party, upon demand, the amount of any Damages to which Indemnified Party may become entitled by reason of the provisions of this Section 7.10. 7.11 Sale or Transfer of Interest. Sterling may not sell or transfer an interest in all or any part of the Unit singly, or on a stand-alone basis to a "Competitor" as defined below, without the prior written consent of BASF, which consent will not be unreasonably withheld. Notwithstanding the foregoing (i) Sterling may sell or otherwise dispose of the Unit as part of the sale, transfer or other disposition of all or substantially all of the Plant's assets, directly or indirectly or as a part of -43- 49 the merger, consolidation, sale of substantially all of the assets or corporate reorganization of Sterling (any of the foregoing being hereafter referred to as a "Plant Disposition") to a Competitor subject to the terms set forth below and (ii) Sterling may grant mortgages, deeds of trust, security interests in and liens on the Unit to any financial institution, including without limitation Texas Commerce Bank National Association, administrative agent to secure any and all indebtedness of Sterling now existing or hereafter arising, and any such financial institution may foreclose upon any of the assets of Sterling, including the Unit, sell such assets or the Unit in lieu of foreclosure, and otherwise exercise all rights or remedies they may have with respect thereto, without restriction hereunder, and any purchaser, on foreclosure or sale in lieu of foreclosure, may take such assets or the Unit free from such restrictions. The term "Competitor" shall mean: (i) a manufacturer and/or marketer of phthalate esters and plasticizer range oxo-alcohols, ("Class I Competitor") or (ii) a manufacturer and/or marketer of phthalic anhydride plasticizer range oxo- alcohols or phthalate esters ("Class II Competitor"). If a Plant Disposition is proposed to be made to a Competitor, Sterling shall give BASF at least 120 days prior written notice of the name of such Competitor and of the terms and conditions of such Plant Disposition. If such Plant Disposition is to a Class I Competitor, BASF shall have the right to acquire the Unit by written notice to Sterling within such 120 day period containing an irrevocable obligation to purchase the Unit for a purchase price equal to the Allocable Portion (as defined below) of consideration to be paid by the Class I Competitor for the Plant's assets to be disposed of to the Class I Competitor. The term "Allocable Portion" means a cash amount equal to the portion of the total consideration to be received by Sterling (or its security holders) as a result of such Plant -44- 50 Disposition allocable, in the opinion of a third party mutually agreeable to the parties with such agreement not to be unreasonably withheld, to the Unit. If a Plant Disposition is to be made to a Class II Competitor, Sterling shall provide, as a condition to such Plant Disposition, that such Class II Competitor agrees to (a) assume this Agreement (b) amend this Agreement at the option of BASF to extend the term hereof for up to four additional years and delete Section 3.5(d) hereof and (c) enter into secrecy and non-disclosure agreements with BASF in form reasonably satisfactory to BASF. In case of any such proposed Plant Disposition to a Competitor, BASF shall also have the right to terminate this Agreement on written notice to Sterling within 120 days from receipt of Sterling's notice respecting the Plant Disposition. 7.12 Force Majeure. (a) In the event of either party being rendered unable, wholly or in part, by force majeure to carry out its obligations under this Agreement (other than any obligation to make payment of any amount when due and payable hereunder), it is agreed that upon such party's giving notice and reasonably full particulars of such force majeure in writing as provided in Section 8.3 to the other party as soon as practicable after the occurrence of the cause relied on, then the obligations of the party giving such notice, so far as they are affected by such force majeure, shall be suspended during the continuance of any inability so caused, but for no longer period, and such cause shall so far as possible be remedied with all reasonable dispatch. Notwithstanding anything contained herein to the contrary, a force majeure of Sterling which materially affects delivery of Agreement Products will immediately suspend BASF's obligation to pay the pro rata portion of Sterling's Fixed Costs relating to the Agreement Products whose delivery was affected by the force majeure until Sterling resumes its contractual obligations. Similarly, if a -45- 51 force majeure event affects BASF's performance of its obligations hereunder, the pro rata portion of the BASF Actual Costs relating to the Agreement Products affected by the force majeure shall not be deducted from Profit calculated for the period during which the force majeure remains in effect. Any such adjustment shall be pro rated on a daily basis to reflect the number of days the force majeure remains in effect. (b) The term "force majeure," as employed herein, shall mean acts of God, strikes, lockouts or other industrial disturbances, acts of the public enemy, blockades, embargoes, insurrections, riots, epidemics, landslides, lightning, earthquakes, fires, storms, floods, high water, washouts, arrests, and restraints of government and people, civil disturbances, explosions, breakage or accident to machinery, equipment, lines of pipe or property, freezing of wells, machines, equipment, lines of pipe, or property, partial or entire failure of any machinery, equipment, lines of pipe or other property, the occurrence of any Spill or Releases Requiring Response Action and any regulatory, civil or criminal action with respect thereto and any other causes, whether of the kind herein enumerated or otherwise, not reasonably within the control of the party claiming suspension; such term shall likewise include (i), in those instances where any party hereto is required to obtain servitudes, rights-of-way grants, permits or licenses (including permits relating to any Spill or Release Requiring Response Action) to enable such party to fulfill its obligations hereunder, the inability of such party to acquire, or delays on the part of such party in acquiring, after the exercise of due diligence, such servitudes, rights-of-way grants, permits or licenses, (ii), in those instances where any party hereto is required to furnish materials and supplies or is required to secure permits or permissions from any governmental agency to enable such party to fulfill its obligations hereunder, the inability of such party to acquire, or delays on the part of such party in acquiring, at -46- 52 reasonable cost and after the exercise of reasonable diligence, such materials and supplies, permits and permissions; and (iii) findings regarding the toxological properties or ecological effects of the Agreement Product which materially affect the marketability of such Product. (c) It is understood and agreed that the settlement of strikes or lockouts shall be entirely within the discretion of the party having the difficulty, and that the above requirement that any force majeure shall be remedied with all reasonable dispatch shall not require the settlement of strikes or lockouts by acceding to the demands of the opposing party when such course is inadvisable in the discretion of the party having the difficulty. (d) As soon as either party has reason to believe an event of force majeure has occurred or will occur, the affected party will inform the other party immediately. Both parties will then consult how these circumstances influence this Agreement and which measures will have to be taken. Both parties will reasonably use their best efforts to avoid or reduce as much as possible the detrimental effect of such occurrences. (e) If there shall be threatened, instituted, or pending any action, proceeding, or application before any court or governmental authority or other regulatory or administrative agency or commission, domestic or foreign, by any government or governmental authority or other regulatory or administrative agency or commission, domestic or foreign, or by any other person, domestic or foreign challenging the Agreement, contemplating any such challenge, seeking to restrain or prohibit its consummation or continuation of performance, or contemplating the seeking of any such restraint or prohibition, either party shall have the right to withdraw from the Agreement without liability of any kind (except as to amounts accrued but unpaid), in the exercise of its sole discretion with respect to any of the described events. -47- 53 (f) Notwithstanding the provisions of this Section 7.12, any omission or circumstances by any cause whatsoever, including but not limited to failure to deliver as a result of any environmental rule, regulation or order, or a breakage or accident to machinery, equipment, lines of pipe or other property or the partial or entire failure thereof or the necessity to make repairs or alterations, which omissions or circumstances are within the affected party's sole control and which could, by reasonable diligence and without undue costs or expense, have foreseen or avoided shall not be deemed an event of force majeure. Excepting Section 7.12(c), the occurrence of force majeure shall not relieve a party of liability in the event of its failure to use reasonable diligence to remedy the situation and remove the cause in an adequate manner and with all reasonable dispatch. (g) In the event BASF gives three months' prior written notice to Sterling certifying that a "Hardship" exists, and therefore it will not require the Agreement Product for an indefinite period of not less than six months (Delivery Reduction Period), Sterling shall use its best efforts to reduce the Sterling Actual Costs as soon as practicable and consistent with good operating procedures and shall reduce deliveries in accordance with such written notice. Notwithstanding such reduction, BASF shall remain obligated to pay the Sterling Actual Costs, Facility Fee, Capital Expenditure and Expansion Capital payments and all other payments required hereunder (as such are reduced during the Delivery Reduction Period). On written notice from BASF after any such reduction, Sterling shall use its best efforts to recommence operations as soon as practicable after the Delivery Reduction Period. For purposes of this Section 7.12(g), the term "Hardship" means a cash loss suffered for twelve months from marketing of the Agreement Product and a good faith determination by BASF that such cash loss will continue for an indefinite period. Notwithstanding -48- 54 the foregoing, no such reduction shall be required hereunder prior to the third anniversary date of the Effective Date. 7.13 Expansion of Capacity. Should additional production capacities be required by BASF, the parties hereto shall negotiate in good faith the financial and other conditions under which Sterling is willing to construct or allow BASF to construct additional capacity. If both parties agree to an Expansion Project, expenses for Expansion Capital shall be paid *** by Sterling and *** by BASF. 7.14 Disclaimer. STERLING HEREBY EXPRESSLY DISCLAIMS AND NEGATES ANY REPRESENTATION OR WARRANTY (EXPRESS, IMPLIED, COMMON LAW, STATUTORY OR OTHERWISE) RELATING TO THE RAW MATERIALS, THE AGREEMENT PRODUCT, THE ANCILLARY RAW MATERIALS INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE except as expressly set forth herein. 7.15 Technical Advice (a) BASF or its representatives shall advise Sterling regarding technical questions arising in connection with the operation of the Unit, and shall be of assistance to Sterling in the event of disturbances of the Unit. (b) The advice to be given by BASF pursuant to Section 7.15(a) hereof shall embrace BASF's technical knowledge and experience, to the extent that they are suitable for the operation of the Unit. However, BASF shall not be obliged to provide Sterling with technical knowledge and experience acquired by BASF during the term of the Agreement and which BASF, in its reasonable judgement, considers to be a considerable improvement and/or in respect of which -49- 55 BASF has filed a patent application. Notwithstanding anything to the contrary contained in this Section 7.15, BASF shall be under no obligation to provide technical advice which would require in-house work by BASF or its representatives, including, but not limited to, laboratory or pilot plant tests, unless BASF and Sterling agree on a mutually acceptable fee for such services. (c) BASF shall be available to discuss important technical questions at a meeting between technical experts of BASF and Sterling, either in Ludwigshafen or in Texas City, by mutual agreement and at suitable intervals. In the event that BASF or its representatives' personnel are, by mutual agreement, assigned to Sterling, the reasonable travel and living expenses shall be borne by Sterling and considered a Sterling Actual Cost pursuant to Section 7.15(g) hereof. Assignments of BASF or its representatives shall not exceed 25 man-days in any contract year. (d) In the event that BASF develops and commercially manufactures new PA catalysts which can be used without the addition of SO2 , BASF shall offer such catalysts to Sterling for evaluation and use in Sterling's phthalic anhydride plant in Texas City, Texas on terms and conditions to be agreed upon. (e) BASF shall render the services to be rendered hereunder in the best interest of Sterling and shall apply the same care in rendering such services as it is accustomed to apply in its own affairs. In the event that BASF fails to fulfill its obligation with such care, it shall be obligated to render the service concerned again free of charge. The foregoing obligation to render the service again shall be Sterling's exclusive remedy for BASF's breach of its obligation under this Section 7.15 and BASF shall incur no further liability whatsoever related to such matters. (f) In the event that engineering services of BASF are required in connection with Capital Projects or Expansion Projects, BASF shall, at its sole option, provide such engineering -50- 56 services and Sterling shall pay for each engineering hour a certain amount agreed upon in a separate agreement relating to engineering services of BASF if BASF and Sterling cannot agree upon a lump-sum price for such services, in either case to be invoiced as Capital Expenditures or Expansion Capital, as defined herein. ARTICLE VIII GENERAL PROVISIONS 8.1 Relation of Parties. Sterling shall perform all of its obligations hereunder as an independent contractor, and nothing contained in this Agreement shall be deemed to constitute Sterling as an agent of BASF for any purpose whatsoever. It is not the intention of the parties hereto to create a partnership, association, joint venture, trust or other character of business entity. The duties and obligations are intended and declared to be several and not joint or collective, and nothing contained in this Agreement or made pursuant hereto shall ever be construed to create a partnership, association, joint venture, trust or other character of business entity recognizable in law for any purpose, or to impose a partnership duty, obligation or liability with respect to any of the parties hereto. 8.2 Exhibits. The Exhibits to this Agreement are incorporated herein and made a part of this Agreement. 8.3 Notices. Any notice provided for by this Agreement and any other, demand or communication which any party may wish to send to another shall be in writing and either delivered in person or sent by registered or certified United States mail, return receipt requested in a properly sealed envelope, and addressed to the party for which such notice, demand or communication is intended at such party's address as set forth below: -51- 57 Sterling: STERLING CHEMICALS, INC. General Manager Plasticizers 1200 Smith Street Suite 1900 Houston, Texas 77002 Copy to: Mr. John L. Bland Bracewell & Patterson, L.L.P. 2900 South Tower Pennzoil Place Houston, Texas 77002 BASF: Business Director, Plasticizers BASF CORPORATION 3000 Continental Drive-North Mt. Olive, New Jersey 07828-1234 Copy to: General Counsel BASF CORPORATION 3000 Continental Drive-North Mt. Olive, New Jersey 07828-1234 Any address or name specified above may be changed by a notice given by the addressee to the other parties in accordance with this Section 8.3. Any notice, demand or other communication shall be deemed given and effective as of the date of delivery in person or upon receipt as set forth on the return receipt. The inability to deliver because of changed address of which no notice was given, or the rejection or other refusal to accept any notice, demand or other communication, shall be deemed to be the receipt of the notice, demand or other communication as of the date of such inability to deliver or the rejection or refusal to accept. 8.4 Controlling Law and Jurisdiction. All questions concerning the validity, operation and interpretation of this Agreement and the performance of the obligations imposed upon the parties hereunder shall be governed by the laws of the State of New Jersey. The parties consent to submit to the jurisdiction of the State of New Jersey. -52- 58 8.5 Headings. The headings and titles to the Sections and Subsections of this Agreement are inserted for convenience only and shall not be deemed a part hereof or affect the construction or interpretation of any provision hereof. 8.6 Modifications and Waivers. No termination, cancellation, modification, amendment, deletion, addition or other change in this Agreement or any provision hereof, or waiver of any right or remedy herein provided, shall be effective for any purpose unless specifically set forth in a writing signed by the party or parties to be bound thereby. The waiver of any right or remedy in respect of any occurrence or event on one occasion shall not be deemed a waiver of such right or remedy in respect of such occurrence or event on any other occasion. 8.7 Entire Agreement. This Agreement, including the other instruments herein provided for or referred to supersedes all other agreements, oral or written, heretofore made with respect to the subject matter hereof and the transactions contemplated hereby, and contains the entire agreement of the parties. 8.8 Severability. Any provisions hereof which are invalid, unlawful or unenforceable under any applicable law of any jurisdiction shall be ineffective as to such jurisdiction, without affecting any other provision of this Agreement, or shall be deemed to be severed or modified to conform with such law, and the remaining provisions of this Agreement shall remain in force, provided that the purpose of this Agreement can be effected. To the full extent, however, that the provisions of such applicable law may be waived, they are hereby waived, to the end that this Agreement be deemed to be a valid and binding agreement enforceable in accordance with its terms. Both parties shall in such a case be obliged to substitute the invalid, unlawful, or unenforceable -53- 59 provisions by valid, lawful or enforceable provisions which have as much as possible equivalent economic effects. 8.9 Assignments. Neither this Agreement nor any of the rights, benefits or obligations hereunder may be assigned, by operation of law or otherwise, by any party hereto without the prior written consent of the other party; provided, that either party may assign its rights under this Agreement to any United States corporation, a majority of the outstanding voting securities of which is owned by such party or by a corporation which owns a majority of the outstanding voting securities of such party, or to a corporation which owns a majority of the outstanding voting securities of such party, but no such assignment shall relieve such party of its obligations under this Agreement. The assignor does hereby unconditionally guarantee the timely payment of all sums due hereunder and the timely performance of all obligations of assignor hereunder by any such assignee. On default by any such assignee, Sterling may, at its option, proceed directly and at once against BASF to enforce BASF's obligations hereunder, without notice to such assignee or the necessity for proceeding or taking any action against such assignee. Sterling may assign its rights hereunder to banks or other financial institutions, including, without limitation, Texas Commerce Bank National Association, as administrative agent, or to any person or entity which acquires the Unit or the Plant, subject only to Section 7.11 with respect to assignments to a Competitor. Any attempted assignment by either party hereto not otherwise permitted hereby shall be ineffective and void for all purposes. -54- 60 8.10 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original, and all of such counterparts together shall constitute but one and the same instrument. 8.11 Binding on Successors. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and permitted assigns. 8.12 Public Statements. Neither party hereto shall issue any public announcement or statement with respect to the transactions contemplated herein without the prior written consent of the other party, excepting such announcements or statements required by a governmental regulation or agency. 8.13 Specific Performance. In the event of any breach or failure to perform by BASF or Sterling hereunder, the other party hereto shall be entitled to all legal and equitable remedies for such breach or failure (including specific performance, whether or not such remedy is otherwise normally available). 8.14 No Transfer of Title. Sterling expressly does not by the terms of this Agreement, sell, transfer, or assign to BASF any title or interest in the Unit or the Plant or any of Sterling's assets or properties. 8.15 Wire Transfer, Etc. All sums and amounts payable or to be payable pursuant to this Agreement shall be payable in immediately available funds and in coin or currency of the United States of America that, at the time of payment, is legal tender for the payment of public and private debts in the United States of America and shall be made by wire transfer or electronic funds transfer of immediately available funds to such bank and/or account in the continental United States for the account of the payee as from time to time the payee shall have directed to the payor in writing, or, -55- 61 if no such direction shall have been given, by check of the payor payable to the order of the payee and mailed to the payee in the manner and at the address set forth in Section 8.3 hereof. Whenever in this Agreement BASF is required to pay or reimburse Sterling upon receipt of invoice or otherwise when no due date for payment is specifically provided, payment shall be due as provided in Section 3.5 and shall be made in the manner set forth above. 8.16 Accounting. (a) The parties shall keep accurate and systematic records and accounts relating to matters under this Agreement to which shall be charged costs and expenses properly chargeable thereto under the terms hereof and to which shall be credited all items of income or revenue from whatever source derived, and the same shall be supported by purchase orders, invoice, payrolls or other normal, customary and necessary records pertaining thereto. (b) Upon a reasonable request, either party shall provide the other with copies of all purchase orders, invoices, and other backup data pertaining to BASF Actual Costs and Sterling Actual Costs and the party receiving such information shall maintain the confidentiality of all such documents and information in accordance with the provisions of Article VII hereof. (c) Upon the request of a party all records pertaining to the operation of the Unit and the utilities including records of inventory or pertaining to net sales, Costs and Expenses under Profit shall be subject to audit by an independent certified public accounting firm mutually acceptable to the parties at any reasonable time during, or within the two (2) years following, the year being audited. The audit will be at auditing party's expense. In no event, however, shall either party initiate such audits more often than once each year. Such auditing firm will maintain the confidentiality of the other party's accounts and records, but will either verify the correctness thereof -56- 62 or advise both parties of the composite adjustment required to correct discrepancies for the period audited. Any discrepancies shall be corrected by appropriate payments or credits, as the case may be, at the earliest practicable time, in the amount thereof. Interest shall be paid on the total amount of such discrepancies at the rate of 2% over prime rate of interest announced by The Chase Manhattan Bank (National Association) in effect from time to time during the period from the original due date to date of payment, if the amount during one Contract Year exceeds $100,000.00 (d) Sterling shall pay, as they become due, all costs and expenses incurred to trade creditors in the operation of the Unit which, if remaining unpaid, might become a lien on the Unit and any and all other operations under the terms of this Agreement except such amounts as are being contested in good faith. (e) The parties agree that all accounting and reporting for the operation of the Unit or factors relating to Profit will be in accordance with generally accepted accounting principles in the United States consistently applied. 8.17 Patents. Sterling agrees to indemnify BASF, its successors, customers and users, and hold them harmless from and against all liability, loss, damage and expense, including reasonable counsel fees, resulting from any actual or claimed trademark, patent or copyright infringement, or any litigation based thereon, with respect to any part of the goods or services covered by this Agreement, and such obligation shall survive acceptance of such goods or services and payment therefor by Sterling provided, however, that Sterling's liability under such indemnity shall be limited to $2,000,000 with respect to claimed infringements with respect to technology licensed by Sterling on the Effective Date from Monsanto Company shall have no liability for infringement with respect to BASF technology licensed to Sterling. -57- 63 8.18 Limitation on Consequential Damages. Notwithstanding any other provision of this Agreement, (i) the liability of the parties under this Agreement shall be limited to actual damages (excluding special damages) and shall not include incidental, consequential, indirect or punitive damages (provided, however, that any such special, incidental, consequential, indirect or punitive damages recovered by a third party against a party entitled to indemnity hereunder from the other party shall be included in the damages recoverable under such indemnity). IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. WITNESS: BASF CORPORATION /s/ John J. Klein By /s/ Carl Jennings - -------------------------- ---------------------------- WITNESS: STERLING CHEMICALS, INC. /s/ Frank A. Vandiver /s/ Robert W. Roten - -------------------------- ------------------------------- -58- 64 *** = INDICATES THAT PORTIONS OF THE EXHIBIT HAVE BEEN OEXHIBITAAD CONFIDENTIAL TREATMENT REQUESTED. LIST OF AGREEMENT PRODUCTS, MONTHLY CONTRACT CAPACITIES AND RAW MATERIAL The Agreement Products and their respective Monthly Contract Capacity under this Agreement are:
Monthly Contract Agreement Product Capacity (lbs/mo) ----------------- ----------------- Phthalic anhydride (pure) *** Undecyl Alcohol *** (C11 Alcohol, Undeconol) *** 79 Alcohol (C7-9 Alcohol, Oxo Alcohol 7900) 711 Alcohol (C711 Alcohol, Oxo Alcohol 7911) 9 Alcohol 7 Alcohol PALATINOL 711P *** (C7-11 Phthalate, 711P, *** formerly Santicizer 711) PALATINOL 79P, (C7-9 Phthalate, 790P, formerly Santicizer 790P) PALATINOL 11P (C11 Phthalate, DUP) PALATINOL 9P PALATINOL 11-9P
65 PALATINOL 345P (formerly Santicizer 345P) PALATINOL 398P (formerly Santicizer 398P) Experimental Product 591P (formerly Santicizer 591P) Experimental Product 2015 (formerly Santicizer 2015) . . . . . . . . . . . . . . *** PALATINOL 2030P-E (formerly Santicizer 2030E) PALATINOL 802A (DUP 802A) PALATINOL 11P-E (DUP T-CA) PALATINOL 711P-E (formerly Santicizer 711E)
United States tolled products using Sterling alcohol and PA Raw Material - ------------ Orthoxylene Olefins C 6, 8, 10 Olefin C 6, 8 Olefin C8 66 EXHIBIT B BASF Actual Costs The following categories of expenses as illustrated on the attached example: *** 67 EXHIBIT B EXAMPLE PLASTICIZERS COSTS JUNE 1997 CYTD ANNUALIZED IN $K *** 68 STERLING CHEMICALS *** 69 PLASTICIZER CHEMICALS VARIABLE DISTRIBUTION ANALYSIS AS OF JUNE 1997 YTD $K *** 70 *** PLASTICIZER CHEMICALS SHIPPING ANALYSIS AS OF JUNE 1997 YTD $K *** 71 PLASTICIZER CHEMICAL SELLING EXPENSE ANALYSIS AS OF JUNE 1997 YTD $K *** 72 PLASTICIZER CHEMICALS DIRECT GROUP SUPPORT EXPENSE ANALYSIS AS OF JUNE 1997 YTD $K *** 73 PLASTICIZER CHEMICALS DIRECT IS SUPPORT EXPENSE ANALYSIS AS OF JUNE 1997 YTD $K *** 74 IMPUTED INTEREST CALCULATION BASED ON 1997 YTD ACTIVITY K$ *** 75 EXHIBIT C STERLING ACTUAL COSTS The following categories of expenses, as illustrated on the attached example: *** One page following this page has been entirely omitted and confidential treatment requested therefor. 76 EXHIBIT C EXAMPLE PLASTICIZERS COSTS JUNE 1997 YTD ANNUALIZED IN $K PA OXO Esters Total -- --- ------ ----- *** 77 JUNE 1997 (9 MONTHS) ANNUALIZED *** Six pages following this page have been entirely omitted and confidential treatment requested therefor. 78 EXHIBIT D Profit related to sales of all Agreement Product (excluding those P.A. profits for expanded capacity defined in Exhibit D-1) shall be allocated between BASF and Sterling as follows: 1. Any amount of negative profit, or Profit up to and including *** per Calendar Year shall be allocated *** to BASF and *** to Sterling. 2. Any amount of Profit in excess of *** per calendar year shall be allocated *** to BASF and *** to Sterling. 3. *** 79 EXHIBIT D-1 PROFIT DIVISION OF EXPANDED CAPACITY In those years where the annual Profit as calculated under Exhibit D is positive, the parties agree to account for the incremental profits attributable to the Phthalic Anhydride (PAA) expansion as follows: For each quarter, subtract from (1) the weighted average Phthalic Anhydride F.O.B. selling price per pound to third parties (2) the weighted average orthoxylene delivered price per pound. The remainder is the per pound "Contribution Margin" for PA. In case of toll conversion of orthoxylene to PA for certain customers, the tolling fee shall be the Contribution Margin for the pounds involved. For quarterly volumes above ***, multiply that volume by the per pound Contribution Margin. The result is Profit C, which is split between BASF ***, and SC ***. For quarterly volumes above ***, but at or below ***, multiply that volume by the per pound Contribution Margin. The result is Profit B, which split between BASF *** and SC ***. The above calculations account for the agreed profit allocation for the incremental profits attributable to the PAA expansion. Remaining Profit ("Profit A") which is the Profit figure obtained from the calculations set forth in Exhibit D, minus Profit B as calculate above, and minus Profit C as calculated above, is divided ***. EXAMPLE Facts Assumed: (1) SC produced *** pounds of PAA during the quarter (2) Average PAA Molten Sales Price for quarter was ***. (3) Average Orthoxylene Price for quarter was ***. (4) Profit from calculations of Exhibit D = ***. Calculation of Contribution Margin *** minus *** = *** Contribution Margin 80 Calculation of Profits - ---------------------- Profit C (Volume Above ***/quarter) ----------------------------------- *** volume above *** times *** = *** (Profit C) BASF Shares = *** times *** = *** SC Share = *** times *** = *** Profit B (Volume Between *** and ***/quarter) --------------------------------------------- *** volume times *** = *** (Profit B) BASF Share = *** times *** = *** SC Share = *** times *** = *** Profit A (Volume up to ***) --------------------------- Profit from Exhibit D = *** less Profit C = (***) less Profit B = (***) --- Profit A = *** BASF Share = *** times *** = *** SC Share = *** times *** = *** Total Profit ------------ BASF Profit A *** SC Profit A *** Profit B *** Profit B *** Profit C *** Profit C *** -------- -------- Total *** Total *** NOTE: Profits under Exhibit D-1 are calculated on a quarterly basis, and aggregated as the year progresses. 81 EXHIBIT P PA - SWITCH CONDENSER PROJECT EXAMPLE OF HOW PAYBACK WOULD WORK (AMOUNT AND TIMING OF SPENDING IS FOR EXAMPLE ONLY. PAYBACK WILL BE BASED ON ACTUAL TIMING AND SPENDING)
TIMING/K$ COST 1997 1998 1999 2000 2001 2002 TOTAL -------------- ---- ---- ---- ---- ---- ---- ----- TOTAL *** *** *** *** *** *** *** --- --- --- --- --- --- --- STERLING PORTION *** *** *** *** *** *** *** --- --- --- --- --- --- ---
PAYBACK SCHEDULE K$ EXPENDED ----------- A) 1997 - *** B) 1998 - *** C) 1999 - *** D) 2000 - *** E) 2001 - *** F) 2002 - *** --- ***
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- A) *** *** *** *** *** *** *** *** *** *** *** B) *** *** *** *** *** *** *** *** *** *** *** C) *** *** *** *** *** *** *** *** *** *** *** D) *** *** *** *** *** *** *** *** *** *** *** E) *** *** *** *** *** *** *** *** *** *** *** F) *** *** *** *** *** *** *** *** *** *** *** ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- *** *** *** *** *** *** *** *** *** *** *** ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
82 EXHIBITS E, F, G, H, J, K, L, M, N AND O ARE IMMATERIAL TO THIS FORM 10-K FILING AND WERE INTENTIONALLY OMITTED EX-21.1 4 SUBSIDIARIES OF STERLING CHEMICALS HOLDINGS, INC. 1 Exhibit 21.1 Subsidiaries of STERLING CHEMICALS HOLDINGS, INC. As of September 30, 1997 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 (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 Virgin Islands corporation Sterling Canada, Inc., a Delaware corporation Owns 100% of: Sterling Pulp Chemicals U S, 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 5 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 of our report dated December 3, 1997, appearing in this Annual Report on Form 10-K of Sterling Chemicals Holdings, Inc. for the year ended September 30, 1997. DELOITTE & TOUCHE LLP December 15, 1997 Houston, Texas EX-23.2 6 CONSENT OF COOPERS & LYBRAND L.L.P. 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Sterling Chemicals Holdings, Inc. (formerly Sterling Chemicals, Inc.) on Form S-3 (File No. 333-30917) of our report dated October 25, 1995, on our audit of the consolidated statements of operations, changes in stockholders' equity and cash flows of Sterling Chemicals Holdings, Inc. for the year ended September 30, 1995, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Houston, Texas December 15, 1997 EX-27.1 7 FDS - STERLING CHEMICALS HOLDING, INC.
5 0000795662 STERLING CHEMICALS HOLDINGS, INC. 1,000 YEAR SEP-30-1997 OCT-01-1996 SEP-30-1997 7,958 0 169,077 1,829 87,870 284,037 742,426 250,390 878,971 163,933 876,281 15,793 0 120 (288,648) 878,971 908,787 908,787 813,148 813,148 38,170 0 88,901 (31,432) (7,296) (24,136) 0 (3,924) 0 (28,060) (2.58) (2.58)
EX-27.2 8 FDS - STERLING CHEMICALS, INC.
5 0001014669 STERLING CHEMICALS, INC. 1,000 YEAR SEP-30-1997 OCT-01-1996 SEP-30-1997 7,958 0 169,727 1,829 87,870 283,762 742,426 250,390 875,317 163,933 768,870 0 0 0 (175,587) 875,317 908,787 908,787 813,148 813,148 37,475 0 71,239 (13,075) (2,148) (10,927) 0 (3,924) 0 (14,851) 0 0
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