-----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, AA5OWrf3aQ5H6YVIMM8N80XuT9KEc//+Qoz2MjHWpdVvro1t0pg/GyU7cVE9sQlI 5IiMpxjmD4zqatJx+WIWTQ== 0000950129-98-005067.txt : 19981218 0000950129-98-005067.hdr.sgml : 19981218 ACCESSION NUMBER: 0000950129-98-005067 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981217 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-K SEC ACT: SEC FILE NUMBER: 001-10059 FILM NUMBER: 98771073 BUSINESS ADDRESS: STREET 1: 1200 SMITH ST, SUITE 1900 CITY: HOUSTON STATE: TX ZIP: 77002-4312 BUSINESS PHONE: 7136503700 MAIL ADDRESS: STREET 1: 1200 SMITH ST SUITE 1900 CITY: HOUSTON STATE: TX ZIP: 77002-4312 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS INC /TX/ DATE OF NAME CHANGE: 19961218 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS HOLDINGS INC DATE OF NAME CHANGE: 19960828 FORMER COMPANY: FORMER CONFORMED NAME: STERLING CHEMICALS INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STERLING CHEMICAL INC CENTRAL INDEX KEY: 0001014669 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 760502785 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-04343-01 FILM NUMBER: 98771074 BUSINESS ADDRESS: STREET 1: 1200 SMITH STREET STREET 2: SUITE 1900 CITY: HOUSTON STATE: TX ZIP: 77002-4312 BUSINESS PHONE: 7136503700 MAIL ADDRESS: STREET 1: C/O STERLING GROUP INC STREET 2: EIGHT GREENWAY PLAZA, SUITE 702 CITY: HOUSTON STATE: TX ZIP: 77046 FORMER COMPANY: FORMER CONFORMED NAME: STX CHEMICALS CORP DATE OF NAME CHANGE: 19960516 10-K 1 STERLING CHEMICALS HOLDING, INC. - DATED 9/30/98 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, 1998 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. [ ] As of December 7, 1998, Sterling Chemicals Holdings, Inc. had 12,728,842 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 $39 million. As of December 7, 1998, all outstanding equity securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals Holdings, Inc. Portions of the definitive Proxy Statement relating to the 1999 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 Important Information Regarding this Form 10-K............................................. 1 Item 1. Business................................................................................... 2 Item 2. Properties................................................................................. 16 Item 3. Legal Proceedings.......................................................................... 16 Item 4. Submission of Matters to Vote of Security Holders.......................................... 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 19 Item 6. Selected Financial Data of the Company..................................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 22 Item 7A. Qualitative and Quantitative Disclosure about Market Risk.................................. 36 Item 8. Financial Statements and Supplementary Data................................................ 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................................. 72 PART III Item 10. Directors and Executive Officers of the Registrant......................................... 72 Item 11. Executive Compensation..................................................................... 72 Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 72 Item 13. Certain Relationships and Related Transactions............................................. 72 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K............... 73
i 3 IMPORTANT INFORMATION REGARDING THIS FORM 10-K Readers should consider the following information as they review this Form 10-K. FORWARD-LOOKING STATEMENTS This Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, 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. SUBSEQUENT EVENTS, ETC. All statements contained in this Form 10-K, including the forward-looking statements discussed above, are made as of December 17, 1998, except for those statements that are expressly made as of another date. The Company disclaims any responsibility for the correctness of any information contained in this Form 10-K to the extent such information is affected or impacted by events, circumstances, or developments occurring after December 17, 1998, or by the passage of time after such date and, except as required by applicable securities laws, does not intend to update such information. DOCUMENT SUMMARIES Statements contained in this Form 10-K describing documents and agreements are provided in summary form only and such summaries are qualified in their entirety by reference to the actual documents and agreements filed as exhibits to this Form 10-K. 1 4 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 plant in Valdosta, Georgia (the "Valdosta Plant"), 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 its acrylic fibers manufacturing technology to producers worldwide. Sodium chlorate is produced at the five plants in Canada and at the Valdosta Plant. 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 become a premier producer of chemicals with a strong market position in all major product and fist quartile cost position in existing businesses, 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 reducing costs and working capital and by investing in new technology and equipment; (ii) pursue low cost expansions; (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 long-term 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. 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 Company's outstanding debt limit the Company's ability to incur additional debt to finance additional acquisitions and other expenditures. These and other factors may limit the Company's ability to successfully implement its business strategy. RECENT DEVELOPMENTS On March 30, 1998, the Company and BP Chemicals Inc. ("BP") established an exclusive 50/50 acrylonitrile joint venture marketing company, ANEXCO LLC, to service the acrylonitrile marketing needs of both partners in Asia and South America beginning April 1, 1998. The Company and BP project annual sales by ANEXCO LLC of approximately 500,000 metric tons of acrylonitrile with most materials coming from the United States, supplemented by product from South Africa. The Company's methanol production facility at the Texas City Plant was shut down in August 1998. This action was taken solely for economic reasons relating to a significant disparity between domestic and foreign natural gas prices and the resulting costing disadvantage to domestic methanol producers. The Company has contracted with a third party to supply methanol to the Company through January 31, 1999, for both its internal needs and to satisfy delivery requirements under existing contractual commitments. The Company believes the methanol production unit is capable of being restarted without significant expense or delay; however, as of December 17, 1998 no decision had been made as to if or when the unit will be restarted. During fiscal 1998, 111 Company employees took early retirement under voluntary severance programs established by the Company at the Texas City Plant. The Company recorded a pre-tax charge of $6 million in fiscal 2 5 1998 for costs associated with the workforce reductions. The Company anticipates annual savings from such workforce reductions of approximately $6 million. In addition, in September 1998, the Company reduced its pulp chemicals workforce by 25 employees and recorded a pre-tax charge of approximately $1 million. The Company anticipates annual savings from such workforce reductions of approximately $1 million. Additionally, a Multiskilling/CLAIR (Clean, Lubricate, Adjust, Inspect & Repair) program, which improves work practices at the Texas City Plant, has resulted in a reduction of contract maintenance workforce of over 100 workers over the past two years. In November 1998, the Company further reduced its workforce in its petrochemical business and corporate office by 60 employees and contractors at a pre-tax cost of approximately $2 million with expected annual savings of approximately $5 million. The Company plans to pursue additional cost reductions in 1999 through changes in its manufacturing processes and workforce reductions. In December 1998, the Company obtained certain amendments to the financial covenants in the Company's Amended and Restated Credit Agreement. At no time was the Company not in compliance with the covenants. The Company requested the amendments based on its revised financial projections, and the amendments made the financial covenants less restrictive through December 31, 1999. In December 1998, the Company entered into separate Standby Purchase Agreements (collectively, the "Purchase Agreements") with each of Gordon A. Cain, William A. McMinn, James Crane, Mr. Diassi, Mr. Hevrdejs and Koch Capital (collectively, the "Purchasers"). Pursuant to the terms of the Purchase Agreements, the Purchasers committed to purchase up to 2.5 million shares of Common Stock, at a price of $6.00 per share, if, as and when requested by the Company at any time or from time to time prior to December 15, 2001. Under each of the Purchasers Agreements, the Company may only require the Purchasers to purchase such shares if it believes that such capital is necessary to maintain, reestablish, or enhance its borrowing ability under the Company's revolving credit facilities or to satisfy any requirement thereunder to raise additional equity. To induce the Purchasers to enter into the Purchase Agreements, the Company issued to them warrants to purchase an aggregate of 300,000 shares of Common Stock at an exercise price of $6.00 per share. Pursuant to the Purchase Agreements, the Company agreed to issue to the Purchasers additional warrants to purchase up to 300,000 additional shares of Common Stock if, as and when they purchase shares of Common Stock under the Purchase Agreements. Any shares of Common Stock purchased under the Purchase Agreement and the warrants issued to the Purchasers as contemplated by the Purchase Agreements will be subject to the terms of the Amended and Restated Voting Agreement dated as of December 15, 1998, the Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, as amended, and the Tag-Along Agreement dated as of August 21, 1996, each of which is filed as an Exhibit to this Form 10-K. 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 to certain customers significant portions of the Company's production of styrene, acrylonitrile, and methanol, the Company's major petrochemical products. Some of 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. The Company, through two wholly-owned subsidiaries (collectively, "Sterling Fibers"), currently markets its acrylic fiber products to North American customers through internal sales staff and to international customers through 3 6 non-affiliated agents. Acrylic fiber products are priced based upon market conditions, which include, but are not limited to, raw material costs, prices of competing products and suppliers, and type of end use. 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. The Company markets chlorine dioxide generators worldwide to the pulp and paper industry. The Company sells the technology and equipment, which it designs and purchases from specific strategic alliance partners. In addition to being paid for the technology and equipment, the Company receives royalties based on the amount of chlorine dioxide produced by the generator, generally over a ten-year period. CONTRACTS The Company's key multi-year contracts and conversion agreements, which collectively accounted for 24% of the Company's fiscal 1998 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 1998, the Company delivered approximately 9% 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 extended this agreement on substantially the same terms but at approximately half of the original volume through June 30, 1999. During fiscal 1998, the Company delivered approximately 6% of its styrene production to BP pursuant to this agreement. Acrylonitrile-Solutia The Company and Solutia Inc., formerly the chemical business of Monsanto Company ("Solutia"), are parties to a multi-year conversion agreement, pursuant to which the Company delivered approximately 31% and 27% of its fiscal 1998 and 1997 acrylonitrile production, respectively. Solutia has recently announced that it is constructing a new acrylonitrile production facility in Chocolate Bayou, Texas, which is expected to have an annual capacity of 500 million pounds and which is currently expected to begin production in the third calendar quarter of 2000. Solutia has elected to terminate the aforementioned agreement, effective September 1, 2000. Acrylonitrile-Cytec In connection with the Company's acquisition of its acrylic fibers business from Cytec Industries Inc. ("Cytec") on January 31, 1997 (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 expects to supply all of Sterling Fibers' acrylonitrile requirements from the Texas City Plant. Acrylonitrile-BP Chemicals In 1988, the Company entered into a long-term production 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. This agreement was amended and restated during April 1998 to, among other things, encourage increased manufacturing and technical cooperation. Under the agreement, BP furnishes the necessary raw materials and pays the Company a conversion fee for the amount of acrylonitrile it takes and reimburses the Company for a portion of the fixed costs related to 4 7 acrylonitrile production at the Texas City Plant. During fiscal 1998, the Company delivered approximately 17% 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. To protect BP in the event the Company defaults under the production agreement, 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 BP is entitled to purchase the same under the production agreement. As previously discussed, in April 1998 the Company and BP formed ANEXCO LLP for the purposes of jointly marketing acrylonitrile in Asia and South America. The Company delivered approximately 18% of its fiscal 1998 acrylonitrile production to ANEXCO LLC pursuant to this agreement. 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. Under the agreement, BP is obligated to make certain unconditional monthly payments to the Company until August 2006 and to reimburse 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 August 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 methanol production facility at the Texas City Plant and obtained the right to receive a substantial portion of the Company's methanol production. During fiscal 1998, the Company delivered approximately 40% 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 facility is marketed by BP to the Company's acetic acid unit, the merchant market, and BP's worldwide acetic acid business. Due to a significant disparity between domestic and foreign natural gas prices and the resulting costing disadvantage to domestic methanol producers, the Company shut down its methanol production facility in August 1998. The Company has contracted with a third party to supply methanol to the Company through January 31, 1999 for both its internal needs and to satisfy delivery requirements under existing contractual commitments. The Company believes the methanol production unit is capable of being restarted without significant expense or delay; however, as of December 17, 1998, no decision had been made as to if or when the unit will be restarted. 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 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. During fiscal 1998, BP accounted for approximately 12% of the Company's revenues. No other single customer of the Company accounted for more than 10% of the Company's revenues in fiscal 1998. 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. 5 8 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 Styrene Polystyrene Building products, boat and automotive Ethylene and Benzene ABS/SAN resins components, disposable cups and trays, Styrene butadiene packaging and containers, housewares, latex tires, audio and video cassettes, Unsaturated polyester luggage, resins children's toys, paper coating, appliance parts, and carpet backing Acrylonitrile Acrylic fibers Apparel, furnishings, upholstery, Ammonia, Air, and Propylene ABS/SAN resins household appliances, carpets, plastics for automotive parts using ABS and SAN polymers Acetic Acid Vinyl acetate monomer Adhesives, cigarette filters, and Methanol, Carbon Monoxide surface coatings Methanol Acetic acid Adhesives, cigarette filters, and Natural Gas, Steam, and Carbon MTBE surface coatings, gasoline oxygenate Dioxide Formaldehyde and octane enhancer, plywood adhesives Plasticizers Polyvinyl chloride Flexible plastics, such as shower Alpha-Olefins, Carbon (PVC) curtains and liners, floor coverings, Monoxide, Hydrogen, cable insulation, upholstery, and Orthoxylene, and Air plastic molding TBA NA Pesticides, solvents, Isobutylene and the pharmaceuticals, and synthetic rubber Acrylonitrile by-product Hydrogen Cyanide ("HCN") Sodium Cyanide NA Electroplating and precious metals Sodium Hydroxide and recovery by-product HCN Regular Textile NA Apparel, fleece, hosiery, industrial, Acrylonitrile, Vinyl Acetate, Fibers and sweaters Sodium Thiocyanate, Sodium Bisulfate, and Finish Oil Specialty Textile NA High-end hosiery, pile fabrics, and Acrylonitrile, Vinyl Acetate, Fibers outdoor furniture Sodium Thiocyanate, Sodium Bisulfate, and Finish Oil Technical Fibers NA Friction materials (brake linings), Acrylonitrile, Vinyl Acetate, gaskets, specialty papers, and Sodium Thiocyanate, Sodium non-wovens Bisulfate, and Finish Oil Pulp Chemicals Sodium Chlorate Chlorine dioxide Bleaching agent for pulp production; Electricity, Salt, and Water Downstream products include high quality office and coated papers Chlorine Dioxide NA Chlorine dioxide for use in the NA Generators bleaching of pulp Sodium Chlorite Chlorine dioxide Antimicrobial agent for municipal Sodium Chlorate and water treatment, disinfectant for Hydrochloric Acid fresh produce Chlor-alkali Caustic soda NA Bleaching and digesting agent for Electricity, Salt, and Water pulp and paper Chlorine NA Widely used in potable water and Electricity, Salt, and Water wastewater treatment programs, as well as swimming pools Muriatic acid NA Stimulation agent in oil and gas Chlorine, Hydrogen, and Water extraction operations Calcium NA Sanitizing agent to control bacteria Lime,Water, Caustic Soda, and Hypochlorite and algae in swimming pools Chlorine
6 9 PRODUCTS Petrochemicals and Fibers Styrene. The Company is the third largest North American producer of styrene. The Company's styrene unit, located at the Texas City Plant, is one of the largest in the world and has an annual rated production capacity of 1.7 billion pounds, which represents approximately 12% of total North American capacity. The Company sold approximately 34% of its styrene sales volumes pursuant to conversion contracts during fiscal 1998. Approximately 40% of the Company's styrene sales volumes were exported in fiscal 1998, principally to Asia, 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, located at the Texas City Plant, has an annual rated production capacity of 740 million pounds, which represents approximately 22% of total North American capacity. The Company sold approximately 45% of its acrylonitrile sales volumes pursuant to long-term conversion agreements during fiscal 1998. Approximately 50% of the Company's acrylonitrile production in fiscal 1998 was exported. ANEXCO LLC was formed by the Company and BP to service their acrylonitrile marketing needs in Asia and South America, beginning April 1, 1998. HCN 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. The Company's acetic acid unit, located at the Texas City Plant, has an annual rated production capacity of nearly 800 million pounds, which represents approximately 11% 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. 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 42% of the methanol production was used as a raw material in the Company's acetic acid unit during fiscal 1998, 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. As previously discussed, the Company shut down its methanol production facility in August 1998. The Company believes the methanol production unit is capable of being restarted without significant expense or delay; however, as of December 17, 1998, no decision had been made as to if or when the unit will be restarted. 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 rated plasticizers capacity is 280 million pounds per year. TBA. The Company produces HCN as a by-product of its acrylonitrile manufacturing process. The Company uses a portion of its HCN to produce TBA, which it sells to Flexsys America L.P. ("Flexsys") pursuant to a long-term conversion agreement. The Company's rated capacity for TBA is 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, HCN by-product generated by the Company's acrylonitrile manufacturing process. The rated 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 35% of total North American capacity. Approximately 15% of the Company's acrylic fibers production in fiscal 1998 was exported. Sterling Fibers produces regular textile fibers, specialty textile fibers, and technical fibers. Regular textile fibers are commodity fibers whose sales are primarily driven by price and service rather than product characteristics. Specialty textile fibers are targeted for specific applications or end uses and typically have higher margins than regular textile fibers. Technical fibers are specially engineered for industrial, non-textile uses and typically have higher margins than textile fibers. 7 10 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. The Company is 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, which represents approximately 23% of total 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 a 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 requires a licensing agreement, which generally provides for payment of an additional ten-year royalty. Sodium Chlorite. The Company has a rated annual sodium chlorite capacity of approximately 3,500 tons, which represents approximately 37% of total North American capacity. Chlor-alkali Products. The Company's rated 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 muriatic acid production capacity of 37,000 and 45,000 metric tons per year, respectively. Calcium Hypochlorite. The Company currently has rated calcium hypochlorite production capacity of 8,500 metric tons per year. This volume represents 6% of total 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. Most of the raw materials used by the Company are supplied by others, and many of them are subject to wide price fluctuations for a variety of reasons beyond the Company's control. 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 converts benzene and 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. The Company's conversion agreements require that the other parties to such agreements furnish the Company with the ethylene and/or benzene necessary to fulfill its conversion obligations. Approximately 16% and 23% of the Company's fiscal 1998 benzene and ethylene requirements, respectively, were furnished by customers pursuant to conversion arrangements. Acrylonitrile. The Company produces acrylonitrile by reacting propylene and ammonia over a solid-fluidized catalyst at low pressure. Propylene and ammonia are both commodity chemicals and the price for each can fluctuate widely due to significant changes in the availability of these products. The Company purchases propylene and ammonia for use in the production of acrylonitrile for sale to others. For acrylonitrile produced by the Company under conversion contracts, the requisite propylene and/or ammonia is furnished to the Company by the customers. Approximately 44% and 40% of the Company's fiscal 1998 propylene and ammonia requirements, respectively, were furnished by customers pursuant to conversion arrangements. If various customers for whom the Company now 8 11 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. HCN 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 Company normally produces all of the methanol required by its acetic acid unit; however, the Company is currently purchasing its methanol requirements from a third party due to the Company's shutdown of its methanol production facility in August 1998. In 1996, Praxair Hydrogen Supply, Inc. ("Praxair") constructed a partial oxidation unit at the Texas City Plant that supplies carbon monoxide to the Company for production of acetic acid. Methanol. The Company produces methanol primarily from natural gas and steam. The Company obtains its natural gas under various supply contracts. As previously indicated, the Company's methanol production facility was shut down in August 1998. The Company believes the methanol production unit is capable of being restarted without significant expense or delay; however, as of December 17, 1998, no decision had been made as to if or when the unit will be restarted. Plasticizers. The 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. TBA. The Company produces HCN as a by-product of its acrylonitrile manufacturing process. The Company uses a portion of its HCN to produce TBA, which it sells to Flexsys pursuant to a long-term conversion agreement. Flexsys supplies the isobutylene, sulfuric acid, and caustic soda needed in the Company's TBA operations. Sodium Cyanide. Sodium cyanide is manufactured from the Company's by-product HCN and caustic soda. DuPont supplies the caustic soda for sodium cyanide production 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 time the Company expects to supply such acrylonitrile requirements from the Texas City Plant. Pulp Chemicals Sodium Chlorate. The primary raw materials for the production of sodium chlorate are electricity, salt, and water. Of these, 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 pulp chemicals 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 at its pulp chemical facilities are believed to be competitive with other producers in the areas in which it operates. The Company purchases most of the sodium chloride (salt) that it uses in the manufacture of sodium chlorate under requirements contracts with major suppliers. Chlor-alkali. The primary raw materials for the production of chlor-alkali are salt, water, and electricity. The Company's plant near Saskatoon, Saskatchewan, Canada (the "Saskatoon Plant") is located on top of a bed of sodium chloride, or 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. Lime is purchased pursuant to a long-term contract, while caustic soda and chlorine are produced at the Saskatoon Plant. 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. 9 12 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). On December 30, 1997, the Company entered into an Acetic Acid Technology Agreement with BP and BPCL, pursuant to which BPCL granted the Company a non-exclusive, irrevocable, and perpetual right and license to use BPCL's acetic acid technology at the Texas City Plant, including any new acetic technology developed by BPCL at its acetic acid facilities in England during the term of such agreement or pursuant to the research and development program provided by BPCL under the terms of such agreement. BPCL has also granted 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 1988 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 the 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 owns substantially all of the technology used in its acrylic fibers operations. 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 15% of the world's total acrylic fibers capacity is based on Sterling Fibers' technology. 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 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. 10 13 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 maintain existing profit margins or to obtain higher profit margins, even during periods of increased demand for the Company's products. Many of the Company's primary competitors by product are set forth below: Styrene Dow Chemical Company, Lyondell 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.), Nova Chemical Co., 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 Methanol Co., Borden Chemicals, Lyondell Chemical Company, Celanese Ltd., 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., Kerr-McGee Corporation, and Huron Chemicals 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. In fiscal 1998, economic events in various Asian countries negatively impacted the demand growth for the Company's products and, along with increases in supply (particularly styrene, acrylonitrile, and methanol) had 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 1998, the Company's export sales were approximately 28% of total revenues. It is not possible to predict accurately how changes in raw material costs, market conditions, or other factors will affect future sales volumes, prices, and margins for the Company's products. 11 14 Petrochemicals and Fibers Styrene. According to Chemical Marketing Associates, Inc. ("CMAI"), the total North American capacity for styrene is 14.4 billion pounds per year. The Company's rated capacity of 1.7 billion pounds per year represents approximately 12% of total North American capacity. Styrene prices are 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. Increased capacity additions, particularly in Asia, resulted in lower styrene prices and margins in 1996, 1997, and 1998. Economic events in various Asian countries in 1997 and 1998 reduced demand growth for styrene and, along with capacity increases in 1997 and 1998, resulted in lower prices and margins. Global production capacity for styrene is estimated at approximately 45 billion pounds, including 6-7 billion pounds of capacity which was added by competitors in 1997 and 1998. Average styrene sales prices received by the Company declined by 41% from fiscal 1995 to 1996, 2% from fiscal 1996 to 1997, and 11% from fiscal 1997 to 1998. 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. 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 Asia and weakened demand growth in Asian markets resulted in lower acrylonitrile prices and margins in 1996, 1997, and 1998. Global production capacity for acrylonitrile is estimated at over 11 billion pounds, including 1 billion pounds which was added by competitors in 1998. Solutia has recently announced that it is constructing a new acrylonitrile production facility in Chocolate Bayou, Texas, which is expected to have an annual capacity of 500 million pounds and which is currently expected to begin production in the third calendar quarter of 2000. Average acrylonitrile sales prices received by the Company declined by 29% from fiscal 1995 to 1996, 3% from fiscal 1996 to 1997, and 25% from fiscal 1997 to 1998. Methanol. The methanol facility production capacity is shared by the Company and BP. Approximately 42% of the methanol production was used as a raw material in the Company's acetic acid unit in fiscal 1998. The remaining methanol production was used for the merchant market. As previously indicated, the methanol production facility was shut down in August 1998. 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 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. Acrylic fibers also compete with other fibers, including cotton and polyester. During fiscal 1998, Sterling Fibers experienced decreased sales prices and margins due to a significant drop in the demand for its products as a result of the economic events in various countries in Asia and increased competition from European suppliers. Pulp Chemicals Sodium Chlorate. The primary derivative of sodium chlorate is chlorine dioxide. 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. Substitution of chlorine dioxide for elemental chlorine is driven primarily by environmental concerns. By the end of 1997, approximately 80% to 85% 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. These regulations, commonly referred to as the "Cluster Rules", require increased substitution of chlorine dioxide for elemental chlorine in the pulp 12 15 bleaching process which significantly reduces the amount of absorbable organic halides ("AOX") and chlorine derivatives in bleach plant effluent. On May 7, 1998, several conservation groups and an Indian tribe instigated litigation in the Court of Appeals for the Ninth Circuit (San Francisco) challenging the EPA's passage of the Cluster Rules on the grounds that EPA violated the Clean Water Act and the Administrative Procedures Act because EPA did not adopt the "best available technology" and that the Cluster Rules violated certain treaty rights of the Indian tribe. A representative of the paper industry was permitted to intervene in such action on June 8, 1998. In addition, three separate petitions were filed by industry representatives on August 26, 1998 in the Fourth Circuit, the Eleventh Circuit and District of Columbia Circuit challenging certain aspects of the Cluster Rules for reasons generally supportive of industry's positions. On October 9, 1998, a motion to consolidate all of such actions was filed in the Ninth Circuit and a stay of further proceedings was ordered until November 30, 1998. The Ninth Circuit approved the motion to consolidate and the actions filed in the District of Columbia and Fourth Circuits have been transferred. The action in the Eleventh Circuit has not yet been transferred by the Eleventh Circuit. The Company believes that the industry's position in such actions is likely to prevail, although no assurances can be given to that effect. Even if industry does prevail in such actions, the existence of such actions adds a measure of uncertainty as to rate of implementation of the Cluster Rules, which could negatively affect the performance of the Company's sodium chlorate operations. 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 for elemental chlorine in bleaching applications. In fiscal 1998, demand for sodium chlorate did not increase at historical rates as a result of weak market conditions and lower operating rates in the pulp and paper industry. Chlor-alkali. Through one of its wholly-owned subsidiaries ("Sterling Sask"), the Company has one of three Western Canadian chlor-alkali production operations. Dow Chemicals Company, 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 Sterling Sask 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 total 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." For historical information presented on a segmented basis for the Company's petrochemicals and fibers business and pulp chemical business, see Note 9 of Item 8, "Notes to Consolidated Financial Statements." ENVIRONMENTAL MATTERS General The Company's operations involve the handling, production, transportation, treatment, and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental and health and safety laws and regulations. Environmental permits required for the Company's operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental laws or permit requirements are implemented. Changing and increasingly strict environmental laws, regulations, and permit requirements can affect the manufacture, handling, processing, distribution, and use of the Company's chemical products and, if so, the Company's business and operations may be materially and adversely affected. In addition, changes in the law, regulations, and permit requirements can cause the Company to incur substantial costs in upgrading or redesigning its facilities and processes, including its waste treatment, storage, disposal, and other waste handling practices and equipment. 13 16 At all of its facilities, the Company conducts environmental management programs designed to maintain compliance with applicable environmental laws. The Company routinely conducts inspection and surveillance programs designed to detect and respond to leaks or spills of regulated hazardous substances and to correct identified regulatory deficiencies. Likewise, the Company believes that its procedures for waste handling are consistent with industry standards and applicable laws and regulations. In addition, the Company believes that its operations are consistent with good industry practice through participation in the Responsible Care initiatives as a part of membership in the CMA (U.S.) and the Canadian Chemical Producers Association. However, a business risk frequently associated with chemical operations is the potential for personal injury and property damage claims from nearby landowners and occupants. While the Company believes that its business operations and facilities generally are operated in compliance with all material aspects of applicable environmental and health and safety laws, regulations, and disclosure requirements, there can be no assurance that past practices and future operations will not result in material claims or regulatory action, require material environmental expenditures, or result in exposure or injury claims by employees and the public. Some risk of environmental costs and liabilities are inherent in the operations and products of the Company, as it is with other companies engaged in similar businesses. The Company's operating expenditures for environmental matters, mostly waste management and compliance, were approximately $52 million and $50 million for fiscal 1998 and 1997, respectively. The Company also spent approximately $2 million and $3 million for environmentally related capital projects in fiscal 1998 and 1997, respectively. In fiscal 1999, the Company anticipates spending approximately $2 million for capital projects related to waste management and environmental compliance. There are no capital expenditures related to remediation projected in fiscal 1999. The Company does not expect expenditures for environmentally related capital projects in fiscal 2000 to differ materially from fiscal 1999 expenditures. In light of its historical expenditures and expected future results of operations, the Company believes that it will have adequate resources to conduct its operations in compliance with applicable environmental and health and safety laws, regulations, and disclosure requirements. Nevertheless, the Company may be required to make significant site and operational modifications that are not currently contemplated in order to comply with changing facility permitting requirements and regulatory standards. Additionally, the Company has incurred and may yet incur liability for investigation and cleanup of waste or contamination at its own facilities or at facilities operated by third parties where the Company has disposed of waste. The Company continually reviews all estimates of potential environmental liabilities but can give no assurances that all potential liabilities arising out of the Company's past and present operations have been identified and fully assessed or that the amount necessary to investigate and remediate such conditions will not be significant to the Company. The Company believes that it would be able to recover certain losses that may arise out of claims related to environmental conditions that existed at each of its facilities which existed prior to their acquisition by the Company through contractual indemnities and/or statutory law and common law principles, although there can be no assurance that the Company would prevail against any prior owner of any of its facilities with respect to any such claim. Petrochemicals and Fibers Air emissions from the Texas City Plant and the Santa Rosa 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 the EPA has classified 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"). The Texas Natural Resource Conservation Commission has imposed strict requirements on regulated facilities, including the Texas City Plant, to ensure that the air quality control region would achieve the ambient air quality standards for ozone. The Santa Rosa Plant is located in an area currently designated as being in attainment for ozone under the Clean Air Act. The Texas City Plant and the Santa Rosa Plant are subject to the federal government's June 1997 National Ambient Air Quality Standards ("NAAQS") which lower the ozone and particulate matter ("PM") threshold for attainment. Local authorities also may impose new ozone and PM standards. Compliance with these stricter standards may substantially increase the Company's future NOx and PM control costs, the amount and full impact of which cannot be determined at this time. To reduce the risk of offsite consequences from unanticipated events, the Company acquired a greenbelt buffer zone adjacent to the Texas City Plant in 1991 and, in connection with the AFB Acquisition, acquired 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 the Responsible Care initiatives of the CMA. 14 17 A December 1994 Florida Department of Environmental Protection ("FDEP") waiver for use of an onsite nonhazardous landfill applies to the Santa Rosa Plant. This waiver was obtained in connection with Cytec's July 1994 petition for a rulemaking to avoid a January 1995 rule prohibiting disposal of industrial waste in other than a Class I landfill. Upon consummation of the AFB Acquisition, Sterling Fibers succeeded to the rights of Cytec under that petition and waiver. Should the petition be denied or the waiver be revoked there are certain administrative options available to the Company. However, the Company does not believe the additional cost of sending all of the Company's waste to an offsite facility would have a material adverse impact on the Company. A settlement agreement entered into by the EPA, FDEP, and an environmental group may also potentially apply to the Santa Rosa Plant. The settlement imposes a no-migration standard for injection wells in underground drinking water zones without regard to actual risk considerations. The Company, along with several similarly situated companies, is contesting this no-migration settlement. In the event that the no-migration rule becomes enforceable, Sterling Fibers may incur material costs in redesigning its waste water handling systems. Pulp Chemicals The Company's pulp chemical business is sensitive to potential environmental regulations. On November 14, 1997, the EPA enacted regulations that support substitution of chlorine dioxide for elemental chlorine in paper pulp bleaching processes to reduce the amount of AOX and other chlorine derivatives in bleach plant effluent. Chlorine dioxide is produced from sodium chlorate, which is one of the Company's pulp chemical products. Thus, regulations restricting, but not altogether banning, AOX and other chlorine derivatives in bleach plant effluent have a favorable effect on the Company's business. Conversely, a significant ban on all chlorine containing compounds could have a materially adverse effect on the Company's financial condition and results of operations. British Columbia has a regulation in place requiring elimination of the use of all chlorine products, including chlorine dioxide, in the bleaching process by the year 2002. The pulp and paper industry believes that a ban of chlorine dioxide in the bleaching process will yield no measurable environmental or public health benefit and is working to change this regulation but there can be no assurance that the regulation will be changed. In the event such a regulation is implemented, the Company would seek to sell the products it manufactures at its British Columbia facility to customers in other markets. The Company is not aware of any other laws or regulations in place in North America which would restrict the use of such products for other purposes. Four of the Canadian pulp chemicals facilities (the "Tenneco Facilities") were acquired from Tenneco Canada, Inc. ("Tenneco") in 1992. Groundwater data obtained during the acquisition of the Tenneco Facilities indicated elevated concentrations of certain chemicals in the soil and groundwater. Prior to completion of the acquisition, the Company conducted a focused baseline sampling of groundwater conditions beneath the facilities and confirmed the previous data. The Company has addressed or is addressing elevated soil or groundwater concentrations of chemicals, which it has encountered from time to time at the Tenneco Facilities. The Company also reviewed air emissions sources during the acquisition of the Tenneco Facilities and considered all available dustfall and vegetation stress studies. This review indicated emission excursion episodes at specific locations in the scrubber systems at the Thunder Bay, Buckingham, and Vancouver facilities. The conditions at the three sites have been addressed and satisfactorily resolved. The Company believes that the Tenneco Facilities are otherwise in compliance with all material aspects of permit requirements under applicable provincial law. For more information regarding the environmental risks faced by the Company, including risks that affect the Company's ability to predict future environmental expenditures and developments, see Item 7 "Managements Discussion and Analysis of Financial Condition and Results of Operations-Certain Known Events, Trends, Uncertainties, and Risk Factors-Environmental and Safety Matters." EMPLOYEES As of September 30, 1998, the Company had approximately 1,500 employees, including approximately 675 assigned to its petrochemicals division, approximately 325 assigned to its acrylic fibers division, and approximately 500 assigned to its pulp chemicals division. Approximately 40% of the employees at the Company's manufacturing facilities are covered by union agreements. The primary union agreement at the Texas City Plant is with the Texas City, Texas Metal Trades Council, AFL-CIO, of Galveston County, Texas. It covers all hourly employees at the Texas City Plant and will expire in April 1999. The Company is negotiating a new labor agreement with the union that the Company expects will improve the competitiveness of the Texas City Plant, although no assurances can be given to that effect. Employees at the Vancouver plant are represented by the Pulp, Paper, and Woodworkers Union. The Vancouver labor agreement was renegotiated in November 1997 and is subject to further renegotiation in November 15 18 2000. Employees at the Buckingham plant are represented by either the Communications, Energy, and Paperworkers Union or an office and professional workers union. Both Buckingham labor agreements were renegotiated in November 1997 and are subject to renegotiation in November 1999. Approximately 70% of the employees at the Saskatoon Plant are represented by the Communications, Energy, and Paperworkers of Canada. The collective agreement is a four year contract expiring September 30, 2001. In April 1998, production and maintenance workers at the Valdosta Plant voted to be represented by the United Paper Workers International Union. The Company is negotiating a labor agreement at this facility. The Company believes its relationship with its employees is generally good. However, a strike by one or more of the unions representing the Company's employees could have a materially adverse effect on the Company's financial condition, results of operations, or cash flows. INSURANCE The Company maintains full replacement value insurance coverage for property damage to all of its plants and business interruption insurance. Although the Company carries such insurance, a significant interruption in the operation of one or more of the Company's 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 can be no assurance that the Company will not incur losses beyond the limits of, or outside the coverage of, its insurance. From time to time various types of insurance for companies in the chemical industry have been very expensive or, in some cases, unavailable. There can be no assurance that in the future the Company will be able to maintain its existing coverage or that the premiums will not increase substantially. ITEM 2. PROPERTIES The principal executive offices of the Company are located in Houston, Texas, and are subleased through Citicorp, N.A. The 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 the 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 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 connection with the petrochemicals business. 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 chemicals business includes five manufacturing plants in Canada and the Valdosta Plant. 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 487 rail cars in connection with its pulp chemicals business. Headquarters for the pulp chemicals operations is located in Toronto, Ontario, 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. The Company believes its 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 On May 8, 1994, an ammonia release occurred at the 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 16 19 approximately 6,000 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. 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. Approximately 5,500 of the claims in litigation have now been resolved or are pending final resolution, and the Company continues to vigorously defend against the claims of the approximately 500 remaining plaintiffs. 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. Lee Arvie, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0431; In the 56th Judicial District Court of Galveston County, Texas. 6. Nita Moore, et al. v. Sterling Chemicals, Inc.; Cause No. 96-22420; In the 270th Judicial District Court of Harris County, Texas. 7. Gloria Cotton, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0446; In the 122nd Judicial District Court of Galveston County, Texas. 8. Timothy McClurkin, Sr. v. Sterling Chemicals, Inc.; Cause No. 96CV0451; In the 56th Judicial District Court of Galveston County, Texas. 9. Allen E. Kitchens v. Sterling Chemicals, Inc., et al.; Cause No. 43,352; In the Galveston County Court, Galveston County, Texas. The following ammonia lawsuits were settled or dismissed after September 30, 1997: 1. Maurice Benson, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1265; In the 56th Judicial District Court of Galveston County, Texas. 2. Darrell Vick, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1262; In the 122nd Judicial District Court of Galveston County, Texas. 3. Nathaniel Barron, et al. v. Sterling Chemicals, Inc., and Paul Saunders; Cause No. 96CV0103; In the 10th Judicial District Court of Galveston County, Texas. 4. 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. 5. 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. 6. Mattie Moses, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0458; In the 56th Judicial District Court of Galveston County, Texas. 7. Prince Ella Green and James Green v. Sterling Chemicals, Inc.; Cause No. 96CV0454; In the 212th Judicial District Court of Galveston County, Texas. 8. Jacqueline Lynch, et al. v. Sterling Chemicals, Inc.; Cause No. 43353; In the County Court at Law No. 2 of Galveston County, Texas. 9. Phyllis Joiner, et al. v. Sterling Chemicals, Inc.; Cause No. 56189; In the Justice of the Precinct No. 1, Galveston County, Texas. 17 20 10. 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. 11. Wayne R. Lee v. Sterling Chemicals, Inc.; Cause No. 96CV0467; In the 10th Judicial District Court of Galveston County, Texas. 12. Rodney Curry, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1263; In the 122nd Judicial District Court of Galveston County, Texas. 13. Jayson Rhodes, et al. v. Sterling Chemicals, Inc.; Cause No. 95CV1266; In the 10th Judicial District Court of Galveston County, Texas. 14. Bertha L. Anderson, et al. v. Sterling Chemicals, Inc.; Cause No. 96CV0440; In the 122nd Judicial District Court of Galveston County, Texas 15. Carl Terry, et al. v. Sterling Chemicals, Inc. and Paul Saunders; Cause No. 96CV0436; In the 212th Judicial District Court of Galveston County, Texas. 16. Phyllis Cormier, et al. v. Sterling Chemicals, Inc.; Cause No. 96-023195; In the 269th Judicial District Court of Harris County, Texas. The Company does not believe the claims and litigation arising out of this incident will have a material adverse effect on the Company's financial condition, results or operations, or cash flows, although no assurances can be given to that effect. Nickel Carbonyl Release 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. Sixteen contractor employees allegedly exposed to nickel carbonyl are plaintiffs in 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. Additional claims and litigation against the Company relating to this incident may ensue. The Company does not believe that the claims and litigation arising out of this incident will have a material adverse effect on the Company's financial condition, results of operations, or cash flows, although no assurances can be given to that effect. Ethylbenzene Release On April 1, 1998, a chemical leak occurred when a line failed in the ethylbenzene unit at the Texas City Plant. The released chemicals included ethylbenzene, benzene, polyethylbenzene, and hydrochloric acid. The Company does not believe any serious injuries were sustained, although a number of citizens sought medical examinations at local hospitals after a precautionary alert was given to neighboring communities. There is no lawsuit pending against the Company based on this release, but the Company has received, and in some instances resolved, claims from individuals for alleged damage from this incident. The Company believes that its general liability insurance coverage is sufficient to cover all costs and expenses related to this incident in excess of the deductible. Other Claims 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 18 21 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." The following table sets forth the high and low bid information of the Common Stock as reported on the OTC Electronic Bulletin Board for the fiscal years ended September 30, 1998 and 1997.
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1998 High $13 $12 $9 1/2 $ 9 1/8 Low $11 $8 $8 $ 7 1997 High $12 3/4 $12 1/2 $12 1/4 $ 13 Low $11 $11 $11 $ 11 3/8
As of December 7, 1998, there were approximately 426 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 Holding's 13 1/2% Senior Secured Discount Notes Due 2008 ("13 1/2% Notes") and the terms of both series of Holding's outstanding preferred stock. Holdings' subsidiaries (including Chemicals) are parties to various debt agreements that limit their ability to provide funds to Holdings by way of dividends, distributions, and advances. 19 22 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, -------------------------------------------------------------------------- 1998 1997 1996(1) 1995 1994 ----------- ----------- ----------- ----------- ----------- OPERATING DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues $ 822,590 $ 908,787 $ 790,465 $ 1,030,198 $ 700,840 Gross profit 90,179 95,639 111,426 271,618 93,924 Net income (loss) attributable to common stockholders (2) (48,579) (28,965) 31,604 150,049 19,132 Net cash provided by operating activities 45,884 47,314 63,601 191,838 75,249 Net cash used in investing activities (26,622) (196,351) (95,957) (53,962) (9,737) Net cash provided by (used in) financing activities (15,238) 151,610 7,190 (109,017) (64,874) EBITDA(3) 88,753 107,318 121,200 281,480 108,600 PER SHARE DATA: Net income (loss) per common share (3.99) (2.58) 0.62 2.70 0.34 Cash dividends -- -- -- -- -- BALANCE SHEET DATA: Working capital $ 91,910 $ 120,104 $ 76,933 $ 74,620 $ 20,809 Total assets 765,956 878,971 689,684 609,939 580,925 Long-term debt (excluding current maturities) 873,616 876,281 714,632 103,581 192,621 Redeemable preferred stock 18,249 15,793 -- -- -- Stockholders' equity (deficiency in assets) (348,179) (288,528) (272,439) 239,318 89,734
(1) See Note 1 of Notes to Consolidated Financial Statements for a discussion of merger activities and related financing. (2) During fiscal 1998, the Company recorded a pre-tax charge of $6 million for costs associated with workforce reductions. (3) EBITDA (earnings before interest, taxes, depreciation, amortization, stock appreciation rights ("SARs"), and certain merger-related expenses) is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. It is not intended as an alternative measure of performance to net income (loss). Because EBITDA excludes some, but not all, items that affect net income (loss) and may vary among companies, the EBITDA calculation presented above may not be comparable to similarly titled measures of other companies. SARs expense (income) was $8,540, $(2,767), and $21,843 for the years ended September 30, 1996, 1995 and 1994, respectively. Certain merger-related expenses were $3,633 for the year ended September 30, 1996. 20 23 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.
YEAR ENDED SEPTEMBER 30, PERIOD FROM ------------------------ MAY 14, 1996 (DATE OF INCEPTION) 1998 1997 TO SEPTEMBER 30, 1996(1) --------- --------- -------------------------------- OPERATING DATA: (Dollars in Thousands) Revenues $ 822,590 $ 908,787 $ 83,410 Gross profit 90,179 95,639 363 Net income (loss) (33,669) (14,851) 174 BALANCE SHEET DATA: Working capital $ 92,008 $ 119,829 $ 77,299 Total assets 762,503 875,317 685,451 Long-term debt (excluding current maturities) 745,720 768,870 619,875 Stockholder's equity (deficiency in assets) (220,445) (175,587) (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. 21 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Holdings is a holding company whose only material asset is its investment in Chemicals. Holdings' only material liabilities are its obligation to repay the 13 1/2% Notes, redeem its outstanding preferred stock, and certain other contingent obligations. Chemicals directly or indirectly owns substantially all of the consolidated operating assets, and is obligated for substantially all remaining liabilities, of the Company. The Merger 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 were completed during 1997 and 1998. In addition, recent events in the financial markets in certain Asian countries have impacted the demand growth for the Company's products, particularly styrene and acrylonitrile, resulting in a negative impact on sales volumes, prices, and margins in fiscal 1998. Styrene prices are 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. Increased capacity additions, particularly in Asia, resulted in lower styrene prices and margins in 1996, 1997, and 1998. Economic events in various Asian countries in 1997 and 1998 reduced demand growth for styrene and, along with capacity increases in 1997 and 1998, resulted in lower prices and margins. Global production capacity for styrene is estimated at approximately 45 billion pounds, including approximately 6-7 billion pounds of capacity which was added by competitors in 1997 and 1998. Average styrene sales prices received by the Company declined by 41% from fiscal 1995 to 1996, 2% from fiscal 1996 to 1997, and 11% from fiscal 1997 to 1998. 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. 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 Asia and weakened demand growth in Asian markets resulted in lower acrylonitrile prices and margins in 1996, 1997, and 1998. Global production capacity for acrylonitrile is estimated at over 11 billion pounds, including one billion pounds which was added by competitors in 1998. Solutia has recently announced that it is constructing a new acrylonitrile production facility in Chocolate Bayou, Texas which is expected to have annual capacity of 500 million pounds and which is expected to begin production in the third calendar quarter of 2000. Average acrylonitrile sales prices received by the Company declined by 29% from fiscal 1995 to 1996, 3% from fiscal 1996 to 1997, and 25% from fiscal 1997 to 1998. 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 fiscal 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 fibers and pulp chemicals, which have historically been subject to different market dynamics, including timing differences in their respective cyclical upturns and downturns. 22 25 In addition, the Company markets substantial volumes of petrochemicals (approximately 52%, 50%, and 50% of total sales volumes in fiscal years 1998, 1997, and 1996, respectively) and generates substantial revenues (approximately 34%, 32%, and 36% of total revenues in fiscal years 1998, 1997, and 1996, 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. In July 1997, Chemicals entered into an Amended and Restated Credit Agreement (as amended, the "Credit Agreement") with Chase Bank of Texas, National Association (formerly named Texas Commerce Bank National Association), individually and as administrative agent, Credit Suisse First Boston, individually and as documentation agent, and certain other financial institutions. As of September 30, 1998, Chemicals had outstanding under the Credit Agreement three series of term loans (the "Term Loans") consisting of (a) Tranche A term loans due March 31, 2003 in the aggregate principal amount of $76 million, (b) Tranche B term loans due September 30, 2004 in the aggregate principal amount of $198 million, and (c) ESOP term loans due September 30, 2000 in the aggregate principal amount of $3 million. The Credit Agreement 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 1999. The Credit Agreement establishes a revolving credit facility pursuant to which Chemicals may borrow, repay, and reborrow funds for general corporate purposes (the "Revolver"). The Revolver matures on March 31, 2003. As of September 30, 1998, the Company had no amounts drawn and approximately $3 million in letters of credit outstanding under the Revolver. Availability of credit under the Revolver is subject to a monthly borrowing base consisting of 85% of eligible accounts receivable and 65% of eligible inventory with an inventory cap of 50% of the borrowing base. At September 30, 1998, and after deducting approximately $3 million on account of outstanding letters of credit, the borrowing base limited the total credit available under the Revolver to a maximum of $118 million, up from $113 million at September 30, 1997. Although no assurances can be given, the Company does not believe the borrowing base will operate to prevent the Company from obtaining any credit that it may require under the Revolver in the reasonably foreseeable future. Availability of credit under the Revolver is also subject to the Company being in compliance with numerous financial and operational covenants contained in the Credit Agreement. The Company's ability to obtain additional financing in the future (including amounts available under the Revolver) 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 (including, without limitation, covenants that restrict 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 covenants that obligate the Company to maintain certain financial ratios) and by cash requirements for debt service. Based on the Company's results of operations for the four quarters ended September 30, 1998, these covenants operate to limit the amount of additional debt (including amounts available under the Revolver) that may be incurred by the Company. Notwithstanding these limitations, and although no assurances can be given, the Company believes the credit available to it under the Revolver, when added to its internally generated funds and other sources of capital, will be sufficient to meet its liquidity needs in the reasonably foreseeable future. Moreover, under limited circumstances, additional indebtedness may be incurred by the Company to finance future acquisitions (i) if the debt is incurred in Unrestricted Subsidiaries (as defined in the Credit Agreement and the Company's indentures) or (ii) if the pro forma effect of such acquisition has a sufficient positive impact on certain financial ratios. If the Company makes an acquisition through an Unrestricted Subsidiary, however, the Company's access to the cash flow of that entity is likely to be limited. In April and December of 1998, the Company obtained certain amendments to the financial covenants in the Credit Agreement which made the financial covenants less restrictive through December 31, 1999. At no time was the Company not in compliance with the covenants. The Company requested the amendments based on its revised financial projections. Beginning March 31, 2000, certain of these financial covenants become more restrictive, and therefore the Company will be required to have significantly increased cash flows and operating results (or obtain further amendments or waivers) in order to maintain compliance. 23 26 In December 1998, the Company entered into separate Standby Purchase Agreements (collectively, the "Purchase Agreements") with each of Gordon A. Cain, William A. McMinn, James Crane, Mr. Diassi, Mr. Hevrdejs and Koch Capital (collectively, the "Purchasers"). Pursuant to the terms of the Purchase Agreements, the Purchasers committed to purchase up to 2.5 million shares of Common Stock, at a price of $6.00 per share, if, as and when requested by the Company at any time or from time to time prior to December 15, 2001. Under each of the Purchasers Agreements, the Company may only require the Purchasers to purchase such shares if it believes that such capital is necessary to maintain, reestablish, or enhance its borrowing ability under the Company's revolving credit facilities or to satisfy any requirement thereunder to raise additional equity. To induce the Purchasers to enter into the Purchase Agreements, the Company issued to them warrants to purchase an aggregate of 300,000 shares of Common Stock at an exercise price of $6.00 per share. Pursuant to the Purchase Agreements, the Company agreed to issue to the Purchasers additional warrants to purchase up to 300,000 additional shares of Common Stock if, as and when they purchase shares of Common Stock under the Purchase Agreements. Any shares of Common Stock purchased under the Purchase Agreement and the warrants issued to the Purchasers as contemplated by the Purchase Agreements will be subject to the terms of the Amended and Restated Voting Agreement dated as of December 15, 1998, the Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, as amended, and the Tag-Along Agreement dated as of August 21, 1996, each of which is filed as an Exhibit to this Form 10-K. 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, which is subject to a number of risks and uncertainties. At September 30, 1998, the Company was in compliance with its financial covenants and, based on its financial projections, the Company believes that it will remain in compliance for the reasonably foreseeable future, although no assurances can be given to that effect. However, if weak market conditions (particularly in various Asian countries) continue to negatively impact the sales prices, margins, and volumes of the Company's products (particularly styrene, acrylonitrile, methanol, sodium chlorate, and acrylic fibers), the Company may have difficulty remaining in compliance with the financial covenants in certain of its debt agreements. If the Company fails to remain in compliance with any financial covenants and if appropriate amendments or waivers are not obtained, debt holders could pursue remedies available to them under the relevant debt agreements. See "Certain Known Events, Trends, Uncertainties, and Risk Factors". The Company's loan documents contain provisions which restrict the payment of advances, loans, and dividends from its subsidiaries (including Chemicals) to Holdings. The most restrictive of those covenants limits such payments during fiscal 1999 to approximately $2 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 1999. In July 1997, Sterling Sask entered into a Credit Agreement (the "Sask Credit Agreement") with The Chase Manahattan Bank of Canada, individually and as administrative agent, and certain other financial institutions. As of September 30, 1998, Sterling Sask had outstanding under the Sask Credit Agreement two series of term loans (the "Sask Term Loans") consisting of (a) Tranche A term loans due June 30, 2003 in the aggregate principal amount of Cdn. $21 million and (b) Tranche B term loans due June 30, 2005 in the aggregate principal amount of $36 million. The Sask Credit Agreement requires that certain amounts of Excess Cash Flow (as defined therein) be used to prepay amounts outstanding under the Sask Term Loans. A mandatory prepayment in the amount of approximately Cdn. $5 million will be required in fiscal 1999. The Sask Credit Agreement provides for a revolving credit facility of Cdn. $8 million to be used by Sterling Sask solely for its general corporate purposes (the "Saskatoon Revolver"). No borrowings were outstanding under the Sask Revolver as of September 30, 1998. Although no assurances can be given, the Company believes the credit available to Sterling Sask under the Saskatoon Revolver and the funds internally generated by Sterling Sask will be sufficient to meet Sterling Sask's liquidity needs in the reasonably foreseeable future. Because of restrictions in the Sask Credit Agreement, the Company will generally not have access to the cash flows of Sterling Sask. In addition, because of its designation as an Unrestricted Subsidiary under the Credit Agreement and the indentures governing the 13 1/2% Notes, Chemical's 11 3/4% Senior Subordinated Notes Due 2006 ("11 3/4% Notes"), and Chemicals' 11 1/4% Senior Subordinated Notes Due 2007 ("11 1/4% Notes") (collectively, the "Indentures"), Sterling Sask's results are not considered in determining the Company's compliance with the covenants contained therein. The Saskatoon Credit Agreement contains provisions, which restrict the payment of advances, loans and dividends from Sterling Sask to Chemicals. The most restrictive of the covenants limits such payments during fiscal 1999 to less than $1 million, plus any amounts due to Chemicals or Holdings from Sterling Sask under the intercompany tax sharing agreement. 24 27 At September 30, 1998, the Company's long-term debt (excluding current maturities) was $874 million. Working Capital. Working capital at September 30, 1998 was $92 million, a decrease of $28 million from September 30, 1997. This decrease was the result of the following changes:
Current Assets Current Liabilities (In Millions) (In Millions) Cash and cash equivalents $ 3 Accounts payable $ 34 Inventories (15) Accrued liabilities 5 Accounts receivable (53) Current portion long-term debt (3) Other 1 --------- -------- $ 36 $ (64)
( ) - Decrease in assets, increase in liabilities Cash Flow. Net cash provided from operations was $46 million for fiscal 1998, a decrease of $1 million compared to fiscal 1997. The decreased earnings during fiscal 1998 as compared to fiscal 1997 was offset by lower working capital requirements as a result of lower raw materials prices, lower receivables, and improved working capital management. Net cash flow used in investing activities was $27 million in fiscal 1998 compared to $196 million in fiscal 1997. The decrease was primarily due to the absence of the consummation of any acquisitions in fiscal 1998, whereas both the AFB Acquisition and the Saskatoon Acquisition were consummated in fiscal 1997. Net cash flow used in financing activities was $15 million in fiscal 1998 as compared to net cash flows provided by financing activities of $152 million in fiscal 1997. The decrease in net cash flows from financing activities in fiscal 1998 as compared to fiscal 1997 was primarily due to the inclusion of the proceeds from long-term debt associated with the AFB Acquisition and the Saskatoon Acquisition in fiscal 1997. Capital Expenditures. Capital expenditures for fiscal 1998, 1997, and 1996 were $27 million, $43 million, and $96 million, respectively. The fiscal 1998 capital expenditures were primarily related to routine safety, environmental, and replacement capital. The fiscal 1997 capital expenditures were primarily for 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 fiscal 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 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 1999, 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 enhancements for styrene, expansion of acetic acid, and routine safety, environmental, and replacement capital. The Company's capital expenditures for environmentally-related prevention, containment, and process improvements were $2 million and $3 million for fiscal years 1998 and 1997, respectively. The Company does not anticipate a material increase in these types of expenditures during fiscal 1999, although no assurances can be given to that effect. During fiscal years 1998 and 1997, 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, Uncertainties, and Risk Factors - - 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 $52 million and $50 million for fiscal years 1998 and 1997, respectively. The Company does not anticipate a material increase in these types of expenses during fiscal 1999, although no assurances can be given to that effect. The Company considers these types of environmental expenditures normal operating expenses and includes them in cost of goods sold. 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 25 28 United States dollars for Canadian dollars at rates agreed to at inception of the contracts. The Company had a notional amount of approximately $54 million and $20 million of forward foreign exchange contracts outstanding to buy Canadian dollars at September 30, 1998 and 1997, respectively. The deferred loss on these forward foreign exchange contracts at September 30, 1998 was $5 million and at September 30, 1997 was less than $1 million. ACCOUNTING CHANGES The Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No 128, "Earnings Per Share" which establishes standards for computing and presenting earnings per share ("EPS"). SFAS No. 128 replaces the presentation of primary EPS previously prescribed by Accounting Principles Board ("APB") Opinion 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 adopted SFAS No. 128 for fiscal 1998 and has restated prior year amounts to reflect adoption of the new standard. SFAS No. 130, "Reporting Comprehensive Income," established standards for reporting and displaying of comprehensive income and its components. SFAS No. 131, "Disclosure 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. SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," establishes revisions to employers' disclosure about pension and other post retirement benefit plans. Management is evaluating the disclosures required when these three statements are adopted in the first quarter of fiscal 1999. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Management is evaluating the disclosures required when this statement is adopted in the first quarter of fiscal 2000. 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. Most of the raw materials used by the Company are supplied by others, and many of them are subject to wide price fluctuations for a variety of reasons beyond the Company's control, 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 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 purchases all of the Santa Rosa Plant's requirements for acrylonitrile from Cytec. Upon the expiration of such supply contract, the Company expects to 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 fibers and pulp chemical products are cyclical and sensitive to overall supply relative to demand and the level of general business activity. Large global capacity additions of styrene and acrylonitrile were completed in 1997 and 1998. For styrene, approximately 6-7 billion pounds of new capacity was added, and for acrylonitrile, approximately one billion pounds of new capacity was added. The resulting impact on prices and margins negatively impacted the Company's results in fiscal 1998. The Company believes that these completed and announced global capacity additions in styrene and acrylonitrile will result in continued overcapacity for these markets in the foreseeable future. Environmental and Safety Matters. The Company's operations involve the handling, production, transportation, treatment, and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental and health and safety laws and regulations. Environmental permits required for the Company's operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental laws or permit requirements are implemented. Changing and increasingly strict environmental laws, regulations, and permit requirements can affect the manufacture, handling, processing, distribution, and use of the 26 29 Company's chemical products and, if so, the Company's business and operations may be materially and adversely affected. In addition, changes in the law, regulations, and permit requirements can cause the Company to incur substantial costs in upgrading or redesigning its facilities and processes, including its waste treatment, storage, disposal, and other waste handling practices and equipment. For these reasons, the Company's estimates of future environmental expenditures and liabilities are uncertain. A business risk inherent in all chemical operations is the potential for personal injury and property damage claims from nearby landowners and occupants. While the Company believes that its business operations and facilities generally are operated in compliance with all material aspects of applicable environmental and health and safety laws, regulations, and disclosure requirements, there can be no assurance that past practices and future operations will not result in material claims or regulatory action, require material environmental expenditures, or result in exposure or injury claims by employees and the public. Some risk of environmental costs and liabilities are inherent in the operations and products of the Company, as it is with other companies engaged in similar businesses. In addition, a catastrophe at any of the Company's facilities could result in liabilities to the Company in excess of its insurance coverages. The Company's pulp chemical business is sensitive to potential environmental regulations. On November 14, 1997, the EPA enacted regulations, commonly referred to as the "Cluster Rules", that support substitution of chlorine dioxide for elemental chlorine in paper pulp bleaching processes to reduce the amount of AOX and other chlorine derivatives in bleach plant effluent. Chlorine dioxide is produced from sodium chlorate, which is one of the Company's pulp chemical products. Thus, regulations restricting, but not altogether banning, AOX and other chlorine derivatives in bleach plant effluent have a favorable effect on the Company's business. On May 7, 1998, several conservation groups and an Indian tribe instigated litigation in the Court of Appeals for the Ninth Circuit (San Francisco) challenging the EPA's passage of the Cluster Rules. See Item 1 "Business-Environmental Matters" for a more detailed discussion of this litigation. The Company believes that the industry's position in such actions is likely to prevail, although no assurances can be given to that effect. Even if industry does prevail in such actions, the existence of such actions adds a measure of uncertainty as to rate of implementation of the Cluster Rules, which could negatively affect the performance of the Company's sodium chlorate operations. Any significant ban on all chlorine containing compounds could have a materially adverse effect on the Company's financial condition and results of operations. British Columbia has a regulation in place requiring elimination of the use of all chlorine products, including chlorine dioxide, in the bleaching process by the year 2002. The pulp and paper industry believes that a ban of chlorine dioxide in the bleaching process will yield no measurable environmental or public health benefit and is working to change this regulation but there can be no assurance that the regulation will be changed. In the event such a regulation is implemented, the Company would seek to sell the products it manufactures at its British Columbia facility to customers in other markets. The Company is not aware of any other laws or regulations in place in North America which would restrict the use of such products for other purposes. Legal Proceedings. The Company is currently a party to several legal proceedings. See the information under "Legal Proceedings" in Note 7 to Consolidated Financial Statements, which is incorporated by reference, for a more detailed description of these proceedings. The Company is not able to predict the final outcome of these proceedings, and there can be no assurance that the ultimate resolution will not have a material adverse effect on the Company's financial condition, results of operations, and/or liquidity. Additional legal proceedings could be commenced against the Company in the future. See "Environmental and Safety Matters." These proceedings could have a material adverse effect on the Company's financial condition, results of operations, and liquidity. High Financial Leverage, Substantial Restrictions, and Covenants. The Company had consolidated indebtedness of $883 million and deficiency in assets of $348 million at September 30, 1998. The Company may in the future incur additional debt in order to finance acquisitions or for general corporate purposes. The Company's high degree of leverage could have important consequences, including the following: (i) the ability to obtain additional financing in the future (including amounts available under the Revolver) 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. There can be no assurance that the Company's internally generated funds and availability to credit will be sufficient to enable the Company to meet its debt service obligations. For this and other reasons, the Company may determine to raise additional equity capital through one or more public or private transactions. Such transactions could be dilutive to all or a portion of the Company's common stockholders and could adversely affect prevailing market prices of the Company's common stock. 27 30 The Company's debt instruments contain numerous financial and operating covenants which (i) restrict the Company's ability to incur indebtedness, pay dividends, create liens, sell assets, engage in certain mergers and acquisitions, and refinance existing indebtedness, (ii) obligate the Company to maintain certain financial ratios, including an interest coverage ratio, a current ratio, a fixed charge coverage ratio, a leverage ratio, and a senior debt leverage ratio, and (iii) may limit the Company's ability to carry out its acquisition strategy. Certain of these ratios escalate over time, and therefore the Company will be required to have increased cash flows and operating results in future periods in order to maintain compliance with the terms of such debt instruments. The instruments governing future debt of the Company, if any, may also contain similar covenants. 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 prevailing economic conditions and the risks and uncertainties discussed herein, many of which are beyond its control. There can be no assurance that the Company will be able to comply with such covenants and terms in the future. The failure of the Company to comply with any of these covenants would permit the lenders to accelerate the maturity of the indebtedness owing to them and to exercise other remedies provided for in the debt instruments. 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 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 markets 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. Assets Pledged to Secure Debt. The Company has granted liens on substantially all of its assets to secure its senior debt. If an event of default occurs, the lenders will have the right to foreclose upon such collateral or to take other actions to protect their interests, in each case without the approval of the Company or its stockholders. Foreclosure would involve a disposal of substantially all the Company's assets and could result in an investment loss. Highly Competitive Industry. The industries in which the Company operates are highly competitive. Many of the Company's competitors, particularly in the petrochemical industry, are larger, are better capitalized, and have substantially greater financial resources than the Company. Among the Company's competitors are some of the world's largest chemical companies, many of whom 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 maintain existing profit margins or 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. An element of the Company's stated 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, 1998, the financial covenants contained in various debt instruments of the Company operate to limit the amount of additional debt that may be incurred by the Company, although, under certain 28 31 circumstances, additional debt may be incurred by the Company to finance future acquisitions if the debt is incurred in Unrestricted Subsidiaries or if the pro forma effect of the acquisition has a sufficient positive impact on certain financial ratios. Long-Term Contracts and Significant Customers. The Company sells 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 1998, 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. Solutia has elected to terminate an acrylonitrile purchase agreement, effective September 1, 2000. The Company does not believe this termination will have a material adverse effect on its financial condition, results of operations, or cash flows, although no assurance can be given to that effect. Foreign Operations, Country Risks, and Exchange Rate Fluctuations. Approximately 21% of the Company's fiscal 1998 revenues were derived from its Canadian-based pulp chemicals business and approximately 28% 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 laws, 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 interpretations thereof, the Company may suffer material 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 material 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 to fluctuations in the Canadian dollar against the United States dollar. These currency fluctuations could have a material adverse 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. Subsidiary Operations. All of Holdings' operations are conducted, and all of Holdings' assets are owned, by its subsidiaries (including Chemicals). The right of Holdings, and thus the right of its stockholders, to participate in any distribution of earnings or assets of Holdings' subsidiaries is subject to the claims of creditors of such subsidiaries. Holdings' subsidiaries are parties to various debt documents and other agreements that limit their ability to incur additional indebtedness and to provide funds to Holdings by way of dividends, distributions, and advances. A substantial portion of Chemicals' operations are conducted, and a substantial portion of Chemicals' assets are owned, by its subsidiaries. The right of Chemicals, and thus the right of its stockholder (Holdings), to participate in any distribution of earnings or assets of Chemicals' subsidiaries is subject to the claims of creditors of such subsidiaries. Chemicals' subsidiaries are parties to various debt documents and other agreements that limit their ability to incur additional indebtedness and to provide funds to Chemicals by way of dividends, distributions, and advances. Year 2000 Issue. Certain computer systems and other equipment with computer chips store dates as two digits rather than four to define the applicable year (e.g. 97 for 1997). Any clock or date recording mechanism (including date sensitive software) which uses only two digits to represent the year may interpret the digits "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing serious disruption of operations. As is the case with most companies, the Company is in the process, using both internal and external resources, of addressing the Year 2000 issue. The Company is currently engaged in a comprehensive project intended to upgrade its information technology (IT) systems (such as computer systems and software) and non-IT systems (such as process 29 32 control systems and other equipment that utilize embedded chips to control various functions) to systems that will consistently and properly recognize the Year 2000 and subsequent years. The Company has conducted an inventory of its hardware and software and made a preliminary assessment of the Year 2000 compliance of its business and process control systems. This preliminary assessment determined which of the Company's business and process control systems are critical to its business. Those systems deemed to be critical were assigned a higher priority in the Year 2000 remediation effort as compared to other non-critical systems. In this phase of the project, the Company discovered certain Year 2000 deficiencies in its business systems and initiated plans to rectify such issues in the remediation and replacement phase of the project. The preliminary assessment of the Company's process control systems did not detect any material Year 2000 difficulties. The Company then engaged a nationally recognized independent consultant to perform a more detailed survey of all of its business and process control systems (both critical and non-critical) to confirm the absence of any additional material Year 2000 deficiencies, which survey is scheduled to be completed by December 31, 1998. In the event that the survey does reveal additional material Year 2000 deficiencies, the Company plans to initiate the remediation or replacement of such systems. In the second phase of the Company's Year 2000 project, the Company believes it is taking the necessary steps to rectify all material Year 2000 deficiencies. A major component of this effort involves the replacement of all critical business systems, which may not be Year 2000 compliant with new business systems intended to be Year 2000 compliant. All of such projects are scheduled to be completed by mid-year 1999. If the Company's consultant determines that any additional systems under review have material Year 2000 deficiencies, the Company plans to take appropriate remedial action. The final phase of the Company's Year 2000 project involves testing all critical systems to confirm that such systems will react properly to the advent of the year 2000. The Company is in the process of conducting tests on all of its current IT and non-IT systems that were not identified as having Year 2000 deficiencies and anticipates that all such testing will be completed by April 1, 1999. Once the remediation and replacement phase is completed, the Company will conduct tests on all newly installed and updated systems to determine if they are Year 2000 compliant. Such testing is expected to be completed by mid-year 1999. The total estimated expense for the Company's Year 2000 compliance projects is approximately $7 to $10 million, of which the Company has incurred approximately $3 million through September 30, 1998. The Company has and will fund such expense out of its operating cash flow and/or borrowings under its credit facilities. Irrespective of the efforts of the Company, certain Year 2000 problems, such as processing failures, error messages, or incorrect data may still occur in some of its computer systems if the Company receives programs and/or data from third parties who are not Year 2000 compliant. Moreover, the Company's business may be disrupted in other ways by Year 2000 problems of third parties, which may affect, for example, the Company's ability to obtain needed materials or deliver its products. The Company is in the process of determining whether vendors, customers, and others with whom it deals are Year 2000 compliant and has requested that such persons (other than those that the Company believes do not have a material impact on the business of the Company or its operations) complete and return surveys with respect to their Year 2000 issues. The Company had not received any survey response which indicates that any of such persons has any specific Year 2000 problems. However, no assurances can be given that a Year 2000 problem will not occur for the Company as a result of a Year 2000 problem of a vendor or customer of the Company or some other person with whom the Company deals. While the Company's Year 2000 projects are expected to be successfully completed by mid-year 1999, it is possible that one or more of such projects may not be completed or that compliance efforts may be ineffective. A failure to properly and timely correct any Year 2000 deficiencies would affect the Company on several levels. If the Company's Year 2000 remediation efforts were to prove unsuccessful, the Company might be unable to take orders, sell products, and otherwise generally conduct its business. Since the Company's business is characterized by large volume sales to a relatively limited number of customers, the Company believes that, with the engagement of additional personnel, orders could be processed and deliveries completed through manual means. In preparation for such a scenario, the Company has outlined a contingency plan to guide the hiring and training of additional personnel and the processing of paperwork by manual means. Although the Company believes that it is taking the appropriate courses of action to ensure that it is Year 2000 compliant, there can be no assurance that the actions discussed herein will have the anticipated results or that Year 2000 problems will not have a material adverse effect on the Company's financial condition or results of operations. Specific factors which might affect the success of the Company's Year 2000 efforts and the occurrence of Year 2000 disruption or expense include failure of the Company or its consultant to properly identify deficient systems, the failure of the 30 33 selected remedial action to adequately address the deficiencies, the failure of the Company's consultant to complete the remediation in a timely manner (due to shortages of qualified labor or other factors), unforeseen expenses related to the remediation of existing systems or the transition to replacement systems, and the failure of third parties to become compliant or to adequately notify the Company of potential noncompliance. Labor Relations. Approximately 40% of the Company's employees are covered under various union contracts. Approximately 27% of the Company's employees are covered by one union contract, which expires on May 1, 1999 (the "Texas City Union Contract"). The Company is in the process of negotiating for a new union contract to replace the existing Texas City Union Contract. The Company's objective is for the new Texas City Union Contract to provide work rules and other changes that are more favorable to the Company and that will improve the competitiveness of the Texas City Plant. The Company is not able to predict if it will be successful in replacing the existing Texas City Union Contract or, if so, the extent to which the new contract will improve the competitiveness of the Texas City Plant. Although the Company believes its relationship with its employees is generally good, a strike by one or more of the unions representing the Company's employees could have a material adverse effect on the Company's financial condition, results of operations, or cash flows. 31 34 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, 1998, 1997, and 1996.
YEAR ENDED SEPTEMBER 30, ------------------------------- 1998 1997 1996 ------ ------ ------ (Dollars in Millions) REVENUES: Petrochemicals and Fibers ................. $ 622 $ 728 $ 633 Pulp Chemicals ............................ 201 181 157 ------ ------ ------ $ 823 $ 909 $ 790 ====== ====== ====== GROSS PROFIT: Petrochemicals and Fibers ................. $ 31 $ 33 $ 53 Pulp Chemicals ............................ 59 63 58 ------ ------ ------ $ 90 $ 96 $ 111 ====== ====== ====== OPERATING INCOME (LOSS): Petrochemicals and Fibers ................. $ (3) $ 11 $ 31 Pulp Chemicals ............................ 36 46 36 ------ ------ ------ $ 33 $ 57 $ 67 ====== ====== ======
COMPARISON OF FISCAL 1998 TO FISCAL 1997 Revenues for fiscal 1998 were $823 million compared to revenues of $909 million for fiscal 1997, a decrease of 9%. The decrease in revenues resulted primarily from lower styrene, acrylonitrile, and methanol sales prices and reduced styrene sales volumes, partially offset by a full year of operations from the AFB Acquisition and the Saskatoon Acquisition. Revenues excluding the impact of the AFB Acquisition and the Saskatoon Acquisition would have been $676 million and $807 million for fiscal 1998 and 1997, respectively. A net loss of $48.6 million, or $3.99 per share, was recorded for fiscal 1998 compared to a net loss of $29.0 million, or $2.58 per share, for fiscal 1997. Increased losses for fiscal 1998, as compared to fiscal 1997, were primarily due to: (i) reduced styrene, acrylonitrile, sodium chlorate, and methanol margins, (ii) weak markets in acrylic fibers, (iii) increased interest expense resulting from financings related to the AFB Acquisition and the Saskatoon Acquisition, and the issuance of the 11 1/4% Notes, the proceeds of which were used to prepay outstanding indebtedness under the Term Loans, (iv) increased selling, general, and administrative ("SG&A") expense, and (v) costs associated with workforce reductions, all of which were partially offset by the results of the Sterling Sask's operations. Revenues, Cost of Goods, and Gross Profit Petrochemicals and Fibers For fiscal 1998, the Company's revenues from its petrochemical and fibers businesses decreased to $622 million when compared to fiscal 1997 revenues of $728 million. The 15% decrease in revenues was primarily due to reduced styrene, acrylonitrile, and methanol sales prices and decreased styrene sales volumes. The economic conditions in Asia negatively impacted market conditions in the fiscal 1998 period, particularly for the Company's styrene, acrylonitrile, and acrylic fibers products. The Company's petrochemicals and fibers businesses recorded an operating loss of $3 million for fiscal 1998 compared to operating income of $11 million for fiscal 1997. The decrease in operating results for fiscal 1998, as compared to fiscal 1997, was primarily due to weaker operational performance in styrene, acrylonitrile, and methanol, partially offset by stronger performance in acetic acid. Styrene revenues decreased 24% to $237 million in fiscal 1998, compared to fiscal 1997. Styrene sales prices decreased 11% for fiscal 1998 as compared to the prior year period. In addition, styrene sales volumes decreased 16% for fiscal 1998 as compared to the prior year period. These decreases in sales prices and volumes were primarily due to weaker market conditions, particularly in Asia. The prices of styrene's major raw materials, benzene and ethylene, were approximately 14% and 25% lower, respectively, during fiscal 1998 as compared to fiscal 1997. Styrene margins decreased in fiscal 1998 compared to fiscal 1997, as significantly lower sales prices more then offset the lower raw materials costs. Acrylonitrile revenues decreased 23% to $112 million in fiscal 1998, compared to fiscal 1997. Acrylonitrile sales prices decreased 25% in fiscal 1998, as compared to the prior year period. The lower sales price was primarily due to 32 35 weaker market conditions, primarily in Asia. Acrylonitrile sales volumes increased 2% in fiscal 1998, as compared to the prior year period. The prices of acrylonitrile's major raw materials, propylene and ammonia, were approximately 28% and 25% lower, respectively, in fiscal 1998 as compared to the comparable period in fiscal 1997. Acrylonitrile margins decreased in fiscal 1998 compared to fiscal 1997, as significantly lower sales prices more then offset the lower raw material costs. Revenues from the Company's acrylic fibers business for fiscal 1998 were $100 million. The Company consummated the AFB Acquisition on January 31, 1997 and recorded revenues of $92 million for fiscal 1997. Sterling Fibers performance in fiscal 1998 was negatively impacted by weak market conditions, particularly in Asia, and imports from European suppliers. Revenues from the Company's other petrochemical products (including methanol, acetic acid, plasticizers, TBA, and sodium cyanide) in fiscal 1998 decreased 5% to $173 million as compared to fiscal 1997. The decrease in revenues was primarily due to a 16% decrease in methanol sales prices as a result of overcapacity in the global methanol market, partially offset by better operating performance in acetic acid. The Company's other petrochemical products reported increased operating earnings in fiscal 1998 as compared to fiscal 1997. The increase in operating earnings is primarily due to better operating performance in acetic acid, partially offset by the aforementioned weaker pricing in methanol. Pulp Chemicals Revenues from the Company's pulp chemical business for fiscal 1998 increased by approximately 11% to $201 million compared to fiscal 1997. The increase in revenues was primarily due to an increase in sales volumes of sodium chlorate of 12% compared to fiscal 1997. The increase in sales volumes was primarily due to the additional volumes from the Saskatoon Acquisition in July 1997 and the startup of the Valdosta Plant in December 1996. Average sales prices for sodium chlorate declined 7% in fiscal 1998, compared to fiscal 1997. The decline in sodium chlorate sales prices was primarily due to decreased demand as a result of lower pulp mill operating rates partially due to the economic environment in various countries in Asia. The Company's pulp chemicals business recorded operating earnings of $36 million in fiscal 1998, compared to operating earnings of $46 million in fiscal 1997. The reduced operating earnings in fiscal 1998 compared to fiscal 1997 is primarily due to reduced sodium chlorate sales prices and higher energy costs in the current period, partially offset by increased sodium chlorate sales volumes. Selling, General and Administrative Expenses SG&A expenses for fiscal 1998 totaled $51 million, compared to $38 million in fiscal 1997. The increase was primarily due to SG&A expense related to the new fibers business, the new Saskatoon chemical business, increased corporate development activities, and costs associated with upgrades of certain of the Company's information technology systems, which include Year 2000 compliance activities. Other Expenses Other expense of $6 million in fiscal 1998 is related to the voluntary severance programs offered by the Company in January and April 1998 at the Texas City Plant. Interest and Debt Related Expenses Interest and debt related expense for fiscal 1998 increased $16 million compared to fiscal 1997 primarily due to the additional debt incurred in the connection with the AFB Acquisition and the Saskatoon Acquisition and the issuance of the 11 1/4% Notes. The proceeds of the 11 1/4% Notes were used to prepay outstanding indebtedness under the Term Loans. Provision (Benefit) for Income Taxes Benefit for income taxes for fiscal 1998 was $26 million, with an effective tax rate of 36%, compared to $7 million, with an effective tax rate of 23%, for fiscal 1997. The increase in the benefit was primarily the result of the Company's pre-tax loss of approximately $72 million for fiscal 1998 compared to a pre-tax loss of $31 million in fiscal 1997. Extraordinary Item The $4 million after-tax ($6 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. 33 36 COMPARISON OF FISCAL 1997 TO FISCAL 1996 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 AFB Acquisition, three months of operations from the Saskatoon Acquisition, the startup of the Valdosta Plant in December 1996, and the startup of the methanol unit in August 1996. A net loss of $28 million, or $2.58 per share, was recorded in fiscal 1997 compared to net income of $31.6 million, or $0.62 per share, in fiscal 1996. The net loss in fiscal 1997 as compared to net income in fiscal 1996 was primarily due to reduced styrene and acrylonitrile margins and volumes and increased interest expense resulting from the financings related to the 1996 Recapitalization, the AFB Acquisition, and the Saskatoon Acquisition, all partially offset by the results of the acrylic fibers and Saskatoon operations. Revenues, Cost of Goods, and Gross Profit 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. The Company's petrochemical and fibers businesses recorded operating income of $11 million in fiscal 1997 as compared to $31 million in fiscal 1996. The decrease in operating income was primarily due to weaker operational performance in styrene and acrylonitrile, mostly offset by the positive impact of the methanol unit and the AFB Acquisition. Styrene revenues for fiscal 1997 decreased 4% as compared to fiscal 1996 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 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. Sterling Fibers recorded eight months of revenues of approximately $92 million since its acquisition on January 31, 1997. Revenues during fiscal 1997 from the Company's other petrochemical products (including methanol, acetic acid, plasticizers, TBA, and sodium cyanide) increased approximately 23% when compared to fiscal 1996 revenues primarily due to the impact of the methanol unit completion in August 1996, partially offset by 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 supplied by the Company's methanol facility and is included in methanol revenues. In addition, the Company's other petrochemical products reported increased operating earnings in fiscal 1997 as compared to fiscal 1996, primarily due to the aforementioned methanol unit completion and better operating performance in acetic acid. 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 Saskatoon Acquisition. Average sales prices for sodium chlorate declined 5% in fiscal 1997 34 37 compared to fiscal 1996. 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 SG&A expenses for fiscal 1997 totaled $38 million, compared to $40 million in fiscal 1996. This decrease was related to $4 million in SAR expenses, which were paid, as a part of the Merger 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 $4 million after-tax ($6 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 $2 million after-tax ($3 million pre-tax) related to the loss on early extinguishment of debt resulting from the 1996 Recapitalization. 35 38 ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The table below provides information about the Company's market sensitive financial instruments and constitutes a "forward-looking statement." The Company's major market risk exposure is changing interest rates, primarily in the United States. Interest rate swaps may be used to adjust interest rate exposure, when appropriate, based upon market conditions. A portion of the Company's borrowings and transactions are denominated in foreign currencies which exposes the Company to market risk associated with exchange rate movements. The Company's policy generally is to hedge a portion of foreign currency cash exposures through foreign exchange forward contracts. These contracts are entered into with major financial institutions thereby minimizing the risk of credit loss. All items described are non-trading and are stated in U.S. dollars.
FAIR EXPECTED MATURITY DATES VALUE (IN THOUSANDS) 1999 2000 2001 2002 2003 THEREAFTER TOTAL SEPTEMBER ---- ---- ---- ---- ---- ---------- ----- ---------- 30, 1998 DEBT U.S. $ denominated $ 5,941 $ 13,202 $ 24,662 $ 31,442 $ 84,607 $ 708,979 $ 868,833 $ 767,046 Average interest rates - fixed -- -- -- -- -- 12.2% Average interest rates - variable (a) (a) (a) (a) (a) (a) Interest rate swaps $ 49,107 $ 31,250 $ 13,393 -- -- -- $ 2,251(b) Canadian $ denominated $ 2,968 $ 1,938 $ 1,938 $ 3,035 $ 3,813 $ -- $ 13,692 $ 13,692 Average interest rates - variable (c) (c) (c) (c) (c) -- FIRM COMMITMENTS, FORWARD CONTRACTS Contract notional amount - U.S. $ sold $ 48,000 $ 6,000 -- -- -- -- $ 54,000 $ 49,300(d) Average contractual exchange rate 1.40 1.40 -- -- -- --
(a) 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 0.5% to 3.5% 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). At September 30, 1998, the interest rates in effect for the Tranche A term loan, the Tranche B term loan, and the ESOP Loan were 7.8%, 8.3%, and 7.8%, respectively. (b) Represents unrealized loss. (c) The Sterling Sask Tranche A term loan and the Saskatoon Revolver borrowings bear interest, at the Company's option, at an annual rate of either the Bankers Acceptance Rate or the Base Rate plus an Applicable Margin ranging from 1% to 2.5% depending upon the Company's Leverage Ratio (as defined in the Saskatoon Credit Agreement). The Tranche B term loan bears interest, at the Company's option, at an annual rate of either the Eurodollar Rate or the Base Rate plus an Applicable Margin ranging from 0% to 2.5% depending upon the Company's Leverage Ratio (as defined in the Saskatoon Credit Agreement). The "Base Rate" for the Tranche A term loan and the Saskatoon Revolver is equal to the greater of the Prime Rate for Canadian Dollar commercial loans made in Canada, as announced from time to time by the agent bank, or the rate for Canadian Dollar Bankers Acceptances accepted by the agent with a term to maturity of 30 days plus 1% (as such terms are defined in the Saskatoon Credit Agreement). The "Base Rate" for the Tranche B term loan is equal to the greater of the Prime Rate as announced from time to time by the agent bank, the "Federal Funds Effective Rate" plus1/2% or the "Base CD Rate" plus 1% (as such terms are defined in the Saskatoon Credit Agreement). At September 30, 1998, the interest rates in effect for the Tranche A and Tranche B term loans were 8.2% and 8.4%, respectively. (d) Represents notional amount less unrealized foreign exchange losses. 36 39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30, --------------------------------------- 1998 1997 1996 --------- --------- --------- Revenues ................................................. $ 822,590 $ 908,787 $ 790,465 Cost of goods sold ....................................... 732,411 813,148 679,039 --------- --------- --------- Gross profit ............................................. 90,179 95,639 111,426 Selling, general and administrative expenses ............. 51,427 38,170 40,305 Other expense ............................................ 5,962 -- -- Merger related expenses .................................. -- -- 3,633 Write-off of assets ...................................... -- -- 3,706 Interest and debt related expenses, net of interest income 104,455 88,901 13,380 --------- --------- --------- Income (loss) before taxes and extraordinary item ........ (71,665) (31,432) 50,402 Provision (benefit) for income taxes .................... (25,546) (7,296) 16,898 --------- --------- --------- Income (loss) before extraordinary item .................. (46,119) (24,136) 33,504 Extraordinary item, loss on early extinguishment of debt, net of tax (Note 4) .................................. -- 3,924 1,900 --------- --------- --------- Net income (loss) ........................................ (46,119) (28,060) 31,604 Preferred stock dividends ................................ 2,460 905 -- --------- --------- --------- Net income (loss) attributable to common stockholders .... $ (48,579) $ (28,965) $ 31,604 ========= ========= ========= Per share data: Income (loss) before extraordinary item .................. $ (3.99) $ (2.23) $ 0.66 Extraordinary item ....................................... -- (0.35) (0.04) --------- --------- --------- Net income (loss) per common share ....................... $ (3.99) $ (2.58) $ 0.62 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 37 40 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30, ------------------------ 1998 1997 --------- --------- ASSETS Current assets: Cash and cash equivalents ................................................... $ 11,168 $ 7,958 Accounts receivable ......................................................... 114,571 167,248 Inventories ................................................................. 73,225 87,870 Prepaid expenses ............................................................ 15,571 10,956 Deferred income tax benefit ................................................. 5,140 10,005 --------- --------- Total current assets ...................................................... 219,675 284,037 Property, plant and equipment, net ............................................. 450,315 492,036 Other assets ................................................................... 95,966 102,898 --------- --------- Total assets .............................................................. $ 765,956 $ 878,971 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) Current liabilities: Accounts payable ............................................................ $ 46,983 $ 80,658 Accrued liabilities ......................................................... 71,873 77,565 Current portion of long-term debt ........................................... 8,909 5,710 --------- --------- Total current liabilities ................................................. 127,765 163,933 Long-term debt ................................................................. 873,616 876,281 Deferred income tax liability .................................................. 11,123 36,038 Deferred credits and other liabilities ......................................... 80,289 73,336 Common stock held by ESOP ...................................................... 5,938 7,688 Less: unearned compensation ................................................... (2,845) (5,570) Redeemable preferred stock ..................................................... 18,249 15,793 Commitments and contingencies (Note 7) ......................................... -- -- Stockholders' equity (deficiency in assets): Common stock, $.01 par value, 20,000,000 shares authorized, 12,273,000 shares issued and 12,073,000 outstanding at September 30, 1998; and 11,942,000 shares issued and 11,714,000 outstanding at September 30, 1997 ................... 123 120 Additional paid-in capital .................................................. (542,701) (542,485) Retained earnings ........................................................... 229,590 277,691 Pension adjustment .......................................................... (121) (31) Accumulated translation adjustment .......................................... (32,559) (21,093) Deferred compensation ....................................................... (111) -- --------- --------- (345,779) (285,798) Treasury stock, at cost, 200,000 and 228,000 shares at September 30, 1998 and 1997, respectively .................................................... (2,400) (2,730) --------- --------- Total stockholders' equity (deficiency in assets) ....................... (348,179) (288,528) --------- --------- Total liabilities and stockholders' equity (deficiency in assets) ..... $ 765,956 $ 878,971 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 38 41 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) (AMOUNTS IN THOUSANDS)
ADDITIONAL ACCUMULATED COMMON STOCK PAID-IN RETAINED PENSION TRANSLATION DEFERRED TREASURY SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ADJUSTMENT COMPENSATION STOCK ------- ----- --------- --------- --------- ---------- --------- -------- 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 purchases ....... (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) Net loss ....................... -- -- -- (46,119) -- -- -- -- Common stock issued in connection with the exercise of warrants ......... 345 3 -- -- -- -- -- -- Preferred stock dividends ...... -- -- -- (2,460) -- -- -- -- Treasury shares issued as restricted stock .......... 23 -- (48) -- -- -- (222) 270 Treasury shares issued to ESOP . -- -- (168) -- -- -- -- 168 Revaluation of ESOP shares to independently appraised market value ................. -- -- -- 478 -- -- -- -- Amortization of deferred compensation ................. -- -- -- -- -- -- 111 -- Translation adjustment ......... -- -- -- -- -- (11,466) -- -- Treasury stock purchases ....... (9) -- -- -- -- -- -- (108) Pension adjustment ............. -- -- -- -- (90) -- -- -- ------- ----- --------- --------- --------- ---------- --------- -------- Balance, September 30, 1998 ... 12,073 $ 123 $(542,701) $ 229,590 $ (121) $ (32,559) $ (111) $ (2,400) ======= ===== ========= ========= ========= ========== ========= ========
The accompanying notes are an integral part of the consolidated financial statements. 39 42 STERLING CHEMICALS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ---------------------------------- 1998 1997 1996 -------- --------- --------- Cash flows from operating activities: Net income (loss) ................................................... $(46,119) $ (28,060) $ 31,604 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization .................................. 55,963 49,849 41,539 Interest amortization .......................................... 4,376 4,163 1,163 Loss on disposal/write off of assets ........................... 353 241 3,706 Extraordinary item ............................................. -- 3,924 1,900 Deferred tax expense (benefit) ................................. (14,877) 2,866 4,172 Accrued compensation including SARs ............................ -- -- 8,984 Merger related expenses ........................................ -- -- 3,633 Discount notes amortization .................................... 16,878 15,499 1,656 Other .......................................................... 1,467 2,087 (3,766) Change in assets/liabilities: Accounts receivable ............................................ 44,419 (8,985) (18,297) Inventories .................................................... 13,675 (6,674) 14,147 Prepaid expenses ............................................... (2,852) (7,767) (5,173) Other assets ................................................... 654 (1,754) (8,900) Accounts payable ............................................... (32,896) (1,424) (5,454) Accrued liabilities ............................................ (9,300) 27,305 (7,018) Other liabilities .............................................. 14,143 (3,956) (295) -------- --------- --------- Net cash provided by operating activities ........................... 45,884 47,314 63,601 -------- --------- --------- Cash flows from investing activities: Capital expenditures ........................................... (26,622) (43,428) (95,957) Business acquisitions .......................................... -- (152,923) -- -------- --------- --------- Net cash used in investing activities ............................... (26,622) (196,351) (95,957) -------- --------- --------- Cash flows from financing activities: Proceeds from long-term debt ................................... 59,862 375,260 800,350 Repayment of long-term debt .................................... (75,152) (236,104) (196,285) Redemption of common stock ..................................... -- -- (616,160) Purchase of other equity interests ............................. -- -- (14,587) Issuance of common stock, net .................................. 3 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 ..................................... (105) (3,256) -- Other .......................................................... 154 (627) (289) -------- --------- --------- Net cash provided by (used in) financing activities ................. (15,238) 151,610 7,190 Effect of United States /Canadian exchange rate on cash ............. (814) (224) (107) -------- --------- --------- Net increase (decrease) in cash and cash equivalents ................ 3,210 2,349 (25,273) Cash and cash equivalents - beginning of year ....................... 7,958 5,609 30,882 -------- --------- --------- Cash and cash equivalents - end of year ............................. $ 11,168 $ 7,958 $ 5,609 ======== ========= ========= Supplement disclosures of cash flow information: Interest paid, net of interest income received ................. $(92,251) $ (60,387) $ (8,378) Income taxes received (paid) ................................... 6,653 3,116 (15,618)
The accompanying notes are an integral part of the consolidated financial statements. 40 43 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ------------------------ MAY 14, 1996 (DATE OF INCEPTION) 1998 1997 TO SEPTEMBER 30, 1996 (1) --------- --------- -------------------------------- Revenues ............................................ $ 822,590 $ 908,787 $ 83,410 Cost of goods sold .................................. 732,411 813,148 83,047 --------- --------- -------- Gross profit ........................................ 90,179 95,639 363 Selling, general and administrative expenses ........ 50,231 37,475 3,426 Other expense ....................................... 5,962 -- -- Interest and debt related expenses .................. 86,618 72,931 1,615 Interest income from parent ......................... -- (1,692) (5,236) --------- --------- -------- Income (loss) before taxes and extraordinary item ... (52,632) (13,075) 558 Provision (benefit) for income taxes ................ (18,963) (2,148) 384 --------- --------- -------- Income (loss) before extraordinary item ............. (33,669) (10,927) 174 Extraordinary item, loss on early extinguishment of debt, net of tax (Note 4) ..................... -- 3,924 -- --------- --------- -------- Net income (loss) ................................... $ (33,669) $ (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. 41 44 STERLING CHEMICALS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30, -------------------------- 1998 1997 ----------- ----------- ASSETS Current assets: Cash and cash equivalents ......................................... $ 11,159 $ 7,958 Accounts receivable ............................................... 116,398 167,898 Inventories ....................................................... 73,225 87,870 Prepaid expenses .................................................. 13,632 10,031 Deferred income tax benefit ....................................... 5,140 10,005 ----------- ----------- Total current assets ............................................ 219,554 283,762 Property, plant and equipment, net ................................... 450,315 492,036 Other assets ......................................................... 92,634 99,519 ----------- ----------- Total assets .................................................... $ 762,503 $ 875,317 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS) Current liabilities: Accounts payable .................................................. $ 46,764 $ 80,658 Accrued liabilities ............................................... 71,873 77,565 Current portion of long-term debt ................................. 8,909 5,710 ----------- ----------- Total current liabilities ......................................... 127,546 163,933 Long-term debt ....................................................... 745,720 768,870 Deferred income tax liability ........................................ 23,301 42,646 Deferred credits and other liabilities ............................... 83,288 73,337 Common stock held by ESOP ............................................ 5,938 7,688 Less: unearned compensation ......................................... (2,845) (5,570) Commitments and contingencies ........................................ -- Stockholder's equity (deficiency in assets): Common stock, $.01 par value ...................................... -- -- Additional paid-in capital ........................................ (139,786) (139,786) Accumulated deficit ............................................... (47,868) (14,677) Pension adjustment ................................................ (121) (31) Accumulated translation adjustment ................................ (32,559) (21,093) Deferred Compensation ............................................. (111) -- ----------- ----------- Total stockholder's equity (deficiency in assets) ................. (220,445) (175,587) ----------- ----------- Total liabilities and stockholder's equity (deficiency in assets) . $ 762,503 $ 875,317 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 42 45 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS) (DOLLARS IN THOUSANDS)
ADDITIONAL ACCUMULATED COMMON STOCK PAID-IN ACCUMULATED PENSION DEFERRED TRANSLATION SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT COMPENSATION 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) Net loss ......................... -- -- (33,669) -- -- -- Pension adjustment ............... -- -- -- (90) -- -- Establishment of restricted .... -- -- -- -- -- (222) -- stock Revaluation of ESOP shares to independently appraised market value .......................... -- -- -- 478 -- -- -- Amortization of deferred compensation ................... -- -- -- -- -- 111 -- Translation adjustment ........... -- -- -- -- -- (11,466) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance, September 30, 1998 ...... 1 -- (139,786) (47,868) (121) (111) (32,559) ========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 43 46 STERLING CHEMICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ------------------------ MAY 14, 1996 (DATE OF INCEPTION) 1998 1997 TO SEPTEMBER 30, 1996 (1) ---------- ---------- ------------------------- Cash flows from operating activities: Net income (loss) .................................... $ (33,669) $ (14,851) $ 174 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ..................... 59,151 53,680 4,801 Deferred tax expense (benefit) .................... (10,771) 7,847 1,457 Extraordinary item ................................ -- 3,924 -- Other ............................................. 2,020 2,173 (511) Change in assets/liabilities: Accounts receivable ............................... 45,484 (13,510) 164 Inventories ....................................... 13,675 (6,674) (468) Prepaid expenses .................................. (1,838) (5,733) (2,428) Other assets ...................................... 2,078 (2,271) 784 Accounts payable .................................. (35,102) (1,288) 7,025 Accrued liabilities ............................... (3,441) 27,218 (4,460) Other liabilities ................................. 8,288 (3,941) (2,294) ---------- ---------- ---------- Net cash provided by operating activities ............ 45,875 46,574 4,244 ---------- ---------- ---------- Cash flows from investing activities: Capital expenditures .............................. (26,623) (43,428) (6,398) Business acquisitions ............................. -- (152,923) -- ---------- ---------- ---------- Net cash used in investing activities ................ (26,623) (196,351) (6,398) ---------- ---------- ---------- Cash flows from financing activities: Proceeds from long-term debt ...................... 59,862 375,260 637,900 Repayment of long-term debt ....................... (75,153) (236,104) (6,400) Debt issuance costs ............................... -- (9,684) (27,939) Intercompany financing ............................ 1 3,000 -- Distribution to parent ............................ -- -- (609,961) Contribution from parent .......................... -- 22,286 14,165 Other ............................................. 54 (2,380) -- ---------- ---------- ---------- Net cash provided by (used in) financing activities .. (15,236) 152,378 7,765 Effect of United States /Canadian exchange rate on . (815) (224) (30) ---------- ---------- ---------- cash Net increase in cash and cash equivalents ............ 3,201 2,377 5,581 Cash and cash equivalents - beginning of period ...... 7,958 5,581 -- ---------- ---------- ---------- Cash and cash equivalents - end of year .............. $ 11,159 $ 7,958 $ 5,581 ========== ========== ========== Supplement disclosures of cash flow information: Interest paid, net of interest income received .... $ (92,279) $ (60,402) $ (2,655) Income taxes received (paid) ...................... 6,653 3,116 (4,950)
(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. 44 47 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 Ownership 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 (i) 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"), (ii) an offering by Chemicals of $275.0 million of Chemicals' 11 3/4% Senior Subordinated Notes Due 2006 (the "11 3/4% Notes"), (iii) 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, (iv) equity raised by STX Acquisition of approximately $70.7 million, and (v) 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 plant in Valdosta, Georgia (the "Valdosta Plant"), 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 the Valdosta Plant. 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. The significant accounting policies of the Company are described below. 45 48 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 and a 50/50 acrylonitrile marketing joint venture are accounted for under the equity method with the Company's share of the operating results of the joint ventures recorded in its Statement of Operations. 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 1998, 1997, and 1996 was $0.8 million, $3.8 million, and $4.1 million, respectively. IMPAIRMENT OF LONG-LIVED ASSETS Impairment tests of long lived assets are made when conditions indicate their carrying cost may not be recoverable. Such impairment tests are based on a comparison of undiscounted future cash flows or the market value of similar assets to the carrying cost of the asset. If an impairment is indicated, the asset value is written down to its estimated fair value. 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. 46 49 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. HEDGING The Company periodically enters into contracts to hedge against the volatility in natural gas prices, which is used in the production of styrene and methanol. These transactions generally take the form of price collars, and are placed with major financial institutions and industrial companies. The results of the hedging transactions are included in Cost of Goods Sold as the related production of styrene and methanol occurs. EARNINGS PER SHARE Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", establishes standards for computing and presenting earnings per share ("EPS") and 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 Accounting Principles Board Opinion No. 15. The Company adopted SFAS No. 128 for fiscal 1998 and has restated prior year amounts to reflect adoption of the new standard. As losses were incurred in fiscal 1998 and 1997 and there were an insignificant number of options outstanding during fiscal 1996, basic and diluted EPS are the same amount for these periods. For purposes of computing net income (loss) per common share, net income (loss) has been reduced by an amount equal to the fair market value of Released Shares (as hereinafter defined) at the end of the period, minus the sum of the amount previously recognized as compensation expense with respect to Released Shares and the amount of depreciation/appreciation in value of Released Shares in prior periods. This reduction results from the Company being required, under certain circumstances, to purchase for cash common stock distributed to participants by the ESOP. "Released Shares" are shares held by the ESOP but allocated to employees. The weighted average number of outstanding shares and computation of the net income (loss) per common share is as follows (in thousands, except per share data):
YEAR ENDED SEPTEMBER 30, ------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Net income (loss) attributable to common stockholders $ (48,579) $ (28,965) $ 31,604 Plus depreciation in value of Released Shares 298 -- -- ---------- ---------- ---------- Net income (loss) for purpose of computing net income (loss) per share $ (48,281) $ (28,965) $ 31,604 ========== ========== ========== Net income (loss) per common share $ (3.99) $ (2.58) $ 0.62 ========== ========== ========== Weighted average shares outstanding 12,104 11,237 50,700 ========== ========== ==========
47 50 CASH FLOW STATEMENT During the fourth quarter of fiscal 1998, the Company elected to change from the direct method of reporting net cash flows from operating activities to the indirect method. Accordingly, the prior years statements of cash flows have been conformed to the current year presentation. 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. RECLASSIFICATION Certain amounts reported in the financial statements for the prior periods have been reclassified to conform with the current financial statement presentation with no effect on net income (loss) or stockholders' equity (deficiency in assets). 48 51 3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
SEPTEMBER 30, ------------------------ 1998 1997 ---------- ---------- (Dollars in Thousands) Inventories: Finished products ............................... $ 42,436 $ 47,572 Raw materials ................................... 8,089 17,800 ---------- ---------- Inventories at FIFO cost ........................... 50,525 65,372 ---------- ---------- Inventories under exchange agreements ........... 3,031 2,179 Stores and supplies ............................. 19,669 20,319 ---------- ---------- $ 73,225 $ 87,870 ========== ========== Property, plant and equipment: Land ............................................ $ 12,897 $ 12,766 Buildings ....................................... 51,362 51,032 Plant and equipment ............................. 652,872 634,772 Construction in progress ........................ 30,506 43,856 Less: accumulated depreciation ................. (297,322) (250,390) ---------- ---------- $ 450,315 $ 492,036 ========== ========== Other assets: Patents and technology, net ..................... $ 26,821 $ 32,918 Debt issue costs ................................ 28,248 32,472 Other ........................................... 40,897 37,508 ---------- ---------- $ 95,966 $ 102,898 ========== ========== Accrued liabilities: Repairs ......................................... $ 16,890 $ 19,205 Interest ........................................ 14,433 14,661 Property taxes .................................. 7,754 8,255 Other ........................................... 32,796 35,444 ---------- ---------- $ 71,873 $ 77,565 ========== ========== Deferred credits and other liabilities: Deferred revenue ................................ $ 15,168 $ 19,963 Accrued postretirement benefits ................. 37,663 33,448 Other ........................................... 27,458 19,925 ---------- ---------- $ 80,289 $ 73,336 ========== ==========
4. LONG-TERM DEBT: Long-term debt consisted of the following:
SEPTEMBER 30, -------------------------- 1998 1997 ---------- ---------- (Dollars in Thousands) Revolving credit facilities $ -- $ 9,400 Term loans 274,000 275,334 Saskatoon term loans 49,552 53,822 ESOP term loan 3,250 4,875 11 1/4% notes 152,816 153,148 11 3/4% notes 275,000 275,000 13 1/2% notes 127,907 110,412 ---------- ---------- Total debt outstanding 882,525 881,991 ========== ========== Less: Current maturities (8,909) (5,710) ---------- ---------- Total long-term debt $ 873,616 $ 876,281 ========== ==========
49 52 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 (now Chase Bank of Texas, N.A., "Chase"), 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 Chase, 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 Original 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 Original 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"). 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 0.5% to 3.5% 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). At September 30, 1998, the interest rates in effect for the Tranche A term loan, the Tranche B term loan, and the ESOP Loan were 7.8%, 8.3%, and 7.8%, respectively. The Credit Agreement also requires Chemicals to pay a commitment fee in the amounts of 3/8% or 1/2% 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. 50 53 The Credit Agreement contains numerous financial and operating covenants, including, but not limited to, restrictions on Chemicals' ability to incur indebtedness (including future borrowings under the Revolver), 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. During April and December 1998, the Company obtained certain amendments to the financial covenants in the Credit Agreement. At no time was the Company not in compliance with the covenants. The Company requested the amendments based on its revised financial projections, and the amendments made the financial covenants less restrictive through December 31, 1999. Under certain circumstances, the amendments require the Company to raise up to $15 million in additional stockholders' equity. As discussed in Note 12, the Company has made provisions for such equity. 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 Revolver"), and a term loan facility consisting of Cdn. $21.2 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 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, 1998, the borrowing base did not limit such available credit and there were no borrowings outstanding under the Saskatoon Revolver. Sterling Sasks' obligations under the Saskatoon Credit Agreement are secured by substantially all of the assets of Sterling Sask. The Saskatoon Credit Agreement requires Sterling Sask to satisfy certain financial covenants and tests. In addition, the Saskatoon Credit Agreement requires that certain amounts of Excess Cash Flow (as defined therein) be used to prepay amounts outstanding under the Saskatoon Term Loans. A mandatory prepayment of Cdn. $5.3 million will be required in fiscal 1999. The Sterling Sask Tranche A term loan and the Saskatoon Revolver borrowings bear interest, at the Company's option, at an annual rate of either the Bankers Acceptance Rate or the Base Rate plus an Applicable Margin ranging from 1% to 2.5% depending upon the Company's Leverage Ratio (as defined in the Saskatoon Credit Agreement). The Tranche B term loan bears interest, at the Company's option, at an annual rate of either the Eurodollar Rate or the Base Rate plus an Applicable Margin ranging from 0% to 2.5% depending upon the Company's Leverage Ratio (as defined in the Saskatoon Credit Agreement). The "Base Rate" for the Tranche A term loan and the Saskatoon Revolver is equal to the greater of the Prime Rate for Canadian Dollar commercial loans made in Canada, as announced from time to time by the agent bank, or the rate for Canadian Dollar Bankers Acceptances accepted by the agent with a term to maturity of 30 days plus 1% (as such terms are defined in the Saskatoon Credit Agreement). The "Base Rate" for the Tranche B term loan is equal to the greater of the Prime Rate as announced from time to time by the agent bank, the "Federal Funds Effective Rate" plus 1/2% or the "Base CD Rate" plus 1% (as such terms are defined in the Saskatoon Credit Agreement). At September 30, 1998, the interest rates in effect for the Tranche A and Tranche B term loans were 8.12% and 8.4%, respectively. The Saskatoon Credit Agreement also requires Sterling Sask to pay a commitment fee in the amount of 1/2% of the unused commitment under the Saskatoon Revolver. At September 30, 1998, Chemicals had indebtedness of $274.0 million under the Term Loans, $49.6 million under the Saskatoon Term Loans, and $3.3 million under the ESOP Loan. The Revolver has a total commitment of $125 million. The Revolver matures at March 31, 2003. As of September 30, 1998, the Company had no amounts drawn and approximately $2.7 million in letters of credit outstanding under the Revolver. Available credit under the Revolver for loans and letters of credit is subject to a monthly 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, 1998, the borrowing base limited the total credit available under the Revolver to a maximum of $120.9 million. Accordingly and after giving effect to the $2.7 million of outstanding letters of credit, as of September 30, 1998, the unused credit available under the Revolver was $118.2 million, up from $113 million at September 30, 1997. Availability of credit under the Revolver is subject to Chemicals being in compliance with numerous financial and operational covenants contained in the Credit Agreement. At September 30, 1998, Chemicals was in compliance with such covenants. The failure of Chemicals to comply with these covenants would permit the lenders to accelerate the maturity of the indebtedness under the Credit Agreement and exercise other remedies, in each case without the approval of Chemicals. In addition, based on the 51 54 Company's results of operations for the four quarters ended September 30, 1998, these covenants operate to limit the amount of additional debt (including amounts available under the Revolver) that may be incurred by the Company. DISCOUNT NOTES AND SUBORDINATED NOTES As part of the 1996 Recapitalization, 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% Note 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%, compounded semi-annually. Commencing in 2002, interest will be payable semi-annually on February 15 and August 15 of each year until maturity. Except as otherwise provided below, the 11 3/4% Notes may not be redeemed by Chemicals prior to August 15, 2001. From that date through August 15, 2004, the 11 3/4% Notes may be redeemed at a premium of the principal amount thereof at maturity varying between 105.875% and 101.958%. Subsequent to August 15, 2004, Chemicals may redeem the 11 3/4% Notes at their face value plus accrued and unpaid 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 and unpaid 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. Except as otherwise provided below, the 13 1/2% Notes may not be redeemed by Holdings prior to August 15, 2001. From that date through August 15, 2006, the 13 1/2% Notes may be redeemed at a premium of the principal amount thereof at maturity varying between 106.75% and 101.35%. Subsequent to August 15, 2006, the Company may redeem the 13 1/2% Notes at their principal amount plus accrued interest. Prior to August 15, 1999, Holdings may redeem in the aggregate up to 35% of the Accreted Value (as defined in the Indenture) 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 Accreted Value plus accrued and unpaid 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. 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. Except as otherwise provided below, the 11 1/4% Notes may not be redeemed by Chemicals prior to April 1, 2002. From that date through April 1, 2005, the 11 1/4% Notes may be redeemed at a premium of the principal amount thereof at maturity varying between 105.625% and 101.875%. Subsequent to April 1, 2005, Chemicals may redeem the 11 1/4% Notes at their face value plus accrued and unpaid 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 and unpaid 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 Saskatoon Credit Agreement contains provisions, which restrict the payment of advances, loans and dividends from Sterling Sask to Chemicals. The most restrictive of the covenants limits such payments during fiscal 1999 to approximately $0.5 million, plus any amounts due to Chemicals or Holdings from Sterling Sask under the intercompany tax sharing agreement. 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 1999 to approximately $2.0 million, plus any amounts due to Holdings from Chemicals under the intercompany tax sharing agreement. 52 55 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) 1999 ............................................................... $ 8,909 2000 ............................................................... 15,140 2001 ............................................................... 26,600 2002 ............................................................... 34,477 2003 ............................................................... 88,420 Thereafter .......................................................... 153,256 -------- Total Term Loans, Saskatoon Term Loans, Revolver and ESOP Loan ...... $326,802 ========
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, -------------------------------- 1998 1997 1996 -------- -------- -------- (Dollars in Thousands) Provision (benefit) for federal income tax at the statutory rate .. $(26,968) $(11,001) $ 17,641 Foreign sales corporation ......................................... -- -- (700) State and foreign income taxes .................................... 1,422 3,782 1,529 Other ............................................................. -- (77) (1,572) -------- -------- -------- Effective tax provision (benefit) ................................. $(25,546) $ (7,296) $ 16,898 ======== ======== ========
The provision (benefit) for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30, --------------------------------- 1998 1997 1996 -------- ------- -------- (Dollars in Thousands) From operations: Current federal ..................... $ (5,900) $(6,131) $ 12,084 Deferred federal .................... (21,854) (9,211) (3,249) Deferred foreign .................... 2,132 6,104 7,421 Current state ....................... 76 1,942 642 Deferred state ...................... -- -- -- -------- ------- -------- Total tax provision (benefit) ............ $(25,546) $(7,296) $ 16,898 ======== ======= ========
53 56 The components of the Company's deferred income tax assets and liabilities are summarized below:
YEAR ENDED SEPTEMBER 30, ----------------------- 1998 1997 ---------- ---------- (Dollars in Thousands) Deferred tax assets: Accrued liabilities ........................................ $ 23,177 $ 6,461 Accrued postretirement cost ................................ 10,010 12,350 Tax loss and credit carryforward ........................... 24,783 12,723 Foreign dividends .......................................... 15,490 11,764 Other ...................................................... 2,490 1,166 ---------- ---------- Total deferred tax assets .................................. 75,950 44,464 ---------- ---------- Less: current deferred income tax assets .................. 5,140 10,005 ---------- ---------- Noncurrent deferred tax assets ............................. $ 70,810 $ 34,459 ========== ========== Deferred tax liabilities: Property, plant and equipment .............................. $ 78,113 $ 67,996 Accrued pension cost ....................................... 2,211 1,665 Other ...................................................... 1,609 836 ---------- ---------- Total deferred tax liabilities ............................. 81,933 70,497 ---------- ---------- Net deferred tax liability ................................. $ 11,123 $ 36,038 ========== ==========
In fiscal 1998, the Company generated approximately $65 million in United States net operating losses, of which $18 million will be carried back and utilized in a prior fiscal year and $47 million will be carried forward and if not utilized in future years, will expire in fiscal 2013. The Company also has approximately Cdn. $12.9 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 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. The estimated liability for such supplements as of September 30, 1998 and 1997 is immaterial. In accordance with generally accepted accounting principles, the Company has recorded its additional minimum liability. In recognizing the additional pension liability at September 30, 1998 and 1997, the Company recorded a net reduction to stockholders' equity of $121,000 and $31,000, respectively. 54 57 The components of pension expense for the years ended September 30, 1998, 1997, and 1996 were as follows:
1998 1997 1996 --------- --------- --------- (Dollars in Thousands) Service cost (for benefits earned during the period) . $ 5,093 $ 4,857 $ 3,664 Interest cost on projected benefit obligation ........ 6,153 5,941 5,044 Actual return on plan assets and contributions ....... (75) (16,116) (6,001) Deferral of asset gain (loss) ........................ (7,336) 10,107 1,050 Net amortization of unrecognized amounts ............. 906 831 926 --------- --------- --------- Pension expense ...................................... $ 4,741 $ 5,620 $ 4,683 ========= ========= =========
Assumptions used in determining the projected benefit obligation and pension cost for the periods were as follows:
FISCAL YEAR --------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Discount rates......................................................... 7.0% 7.75% 7.75% Rates of increase in salary compensation level......................... 4.75% 5.25% 5.5% Expected long-term rate of return on assets............................ 8.0% 8.5% 9.0%
The funded status of the Company's pension plans as of the actuarial valuation dates of August 31, 1998 and 1997 were as follows:
1998 1997 ---------------------------- ---------------------------- 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 ............................ $ 70,634 $ 2,258 $ 62,396 $ 771 Non-vested benefit obligation ........................ 3,750 95 1,685 5 Accumulated benefit obligation ....................... 74,384 2,353 64,081 776 Plan assets at fair value ............................ 85,073 1,115 84,598 -- Plan assets in excess of (less than) accumulated benefit obligation ................................ 10,689 (1,238) 20,517 (776) Additional amounts related to projected salary increases ......................................... 19,419 2,648 18,017 98 Plan assets more (less) than total projected benefit obligation ........................................ (8,730) (1,410) 2,500 (874) Unrecognized net (gain) loss resulting from plan experience and changes in actuarial assumptions ... 7,880 266 (6,913) 40 Unrecognized prior service cost ...................... 5,689 177 6,370 3 Unrecognized transition obligation ................... 1,734 4 2,110 5 ------------ ------------ ------------ ------------ Total prepaid (accrued) pension obligation ........... $ 6,573 $ (963) $ 4,067 $ (826) ============ ============ ============ ============
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, 1998, 1997, and 1996 were as follows: 55 58
1998 1997 1996 ---------- ---------- ---------- (Dollars in Thousands) Service cost (for benefits earned during the period) . $ 1,466 $ 1,343 $ 1,155 Interest cost on projected benefit obligation ........ 2,818 2,494 1,985 Amortization of plan amendments ...................... 26 29 243 ---------- ---------- ---------- $ 4,310 $ 3,866 $ 3,383 ========== ========== ==========
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 average assumed composite rate of future increases in per capita cost of health care benefits (health care cost trend rate) was 8.8% for fiscal 1998, 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 $226,000. The following sets forth the plans funded status reconciled with amounts reported in the Company's consolidated balance sheet at September 30, 1998 and 1997. Accumulated postretirement benefit obligation (APBO):
1998 1997 ---------- ---------- (Dollars in Thousands) Retirees ........................................... $ 13,530 $ 10,723 Fully eligible active plan participants ............ 11,865 11,421 Other active plan participants ..................... 17,736 16,473 ---------- ---------- Total APBO .................................... 43,131 38,617 Plan assets at fair value .......................... -- -- Unrecognized loss .................................. (5,303) (4,975) Unrecognized prior service cost .................... (165) (194) ---------- ---------- Accrued postretirement benefit liability ........... $ 37,663 $ 33,448 ========== ==========
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 (the "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 year ended September 30, 1996 was $1.7 million. 56 59 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 (the "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 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 1998 and 1997, the new ESOT purchased 14,000 and 99,000, respectively, shares of Holdings Common Stock. In fiscal 1998 and 1997, 172,000 and 49,000, respectively, new ESOT shares had been allocated to employees. The Company recorded $1.4 million and $1.6 million of expense related to the new ESOT in fiscal 1998 and 1997, respectively. 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 year ended September 30, 1996, was $2.8 million. No expenses for profit sharing or bonuses were incurred in fiscal 1998 and 1997. OMNIBUS STOCK AND INCENTIVE PLAN Prior to the Merger, the Company had an Omnibus Stock and Incentive Plan (the "Original Omnibus Plan"), under which the Company could grant to key employees incentive and nonincentive stock options, SARs, 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) was 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 for the year ended September 30, 1996 of $8.5 million and paid $13.8 million in August 1996, pursuant to the SARs, as amended. The expense for the SARs is included in selling, general, and administrative expenses in the Company's income statement. All existing stock options and the Original Omnibus Plan were terminated in connection with the Merger. 57 60 OMNIBUS STOCK AWARDS AND INCENTIVE PLAN In April 1997, the Board of Directors approved the establishment of the Omnibus Stock Awards and Incentive Plan (as amended, the "Omnibus Plan"). Under the Omnibus Plan, the Company may grant to key employees incentive and nonqualified stock options, SARs, restricted stock awards, performance awards, and phantom stock awards. One million shares of the Company's stock are reserved for issuance under the Omnibus Plan. The terms and amounts of the awards (including vesting schedule) are determined by the Compensation Committee of the Board of Directors. Substantially all of the outstanding stock options become exercisable (vest) in equal annual installments beginning a year from date of grant and ending in fiscal 2002. 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. During fiscal 1998, the Company issued 23,000 restricted stock awards to certain employees. The restricted stock awards vest 25% immediately and 25% per year over the next three years. NONQUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS Also in April 1997, the Board of Directors 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 Board of Directors on each subsequent October 1st is automatically granted an option to acquire 1,000 shares of Holdings Common Stock (2,000 shares for the Vice-Chairman). All options expire ten years from date of grant. All options are granted at the fair market value on the date of grant (as determined by the Board of Directors) which vest and are exercisable immediately. A total of 160,000 shares of Holdings Common Stock are reserved for issuance under the Nonqualified Plan. OUTSTANDING STOCK OPTIONS A summary of the status of the Company's outstanding stock options as of September 30, 1998 and 1997, and changes during the years then ended is presented below:
1998 1997 ------------------------------- ------------------------------ WEIGHTED- WEIGHTED- SHARES AVERAGE SHARES AVERAGE (IN THOUSANDS) EXERCISE PRICE (IN THOUSANDS) EXERCISE PRICE --------------- -------------- -------------- -------------- Outstanding at beginning of year 241 $ 12.00 -- -- Granted 489 $ 11.62 274 $ 12.00 Exercised -- -- -- Forfeited (38) $ 11.94 (33) $ 12.00 ---------- ---------- ---------- ---------- Outstanding at end of year 692 $ 11.74 241 $ 12.00 ========== ========== ========== ========== Options exercisable at end of year 86 14 ========== ==========
The range of exercise prices for options outstanding at September 30, 1998, was $9.50 - $12.00, with all exercisable options having an exercise price of $12.00. In addition, during fiscal 1998, the Company granted certain employees rights to purchase an aggregate of 230,000 shares of Common Stock, at then current market prices. These rights expired without being exercised. In the first quarter of fiscal 1998, 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 SFAS No. 123, "Accounting for Stock-Based Compensation." All stock options are granted at or above fair market value of the Holdings Common Stock at the grant date. The weighted average fair value of the stock options granted during fiscal 1998 and 1997 was $1.9 million and $0.5 million, respectively. The fair value of each such stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for the grants in fiscal 1998: risk free interest rate of 4.4%; expected dividend yield of 0.0%; expected life of ten years; and expected volatility of 29%. Stock options generally expire ten years from the date of grant and fully vest after five years. The outstanding stock options at September 30, 1998, have a weighted average contractual life of approximately 9 years. 58 61 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 fiscal 1998. On December 14, 1998, the Company issued to all of its employees who held stock options on that date new options with an exercise price of $6.00 per share. The new options were issued in exchange for and cancellation of stock options previously issued to those employees for the same number of shares, and with the same vesting schedules, as the new stock options. 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. Some of these agreements generally provide for cost recovery plus an agreed margin or element of profit based upon market price. LEASE COMMITMENTS The Company has entered into various long-term noncancellable operating leases. Future minimum lease commitments at September 30, 1998, are as follows: fiscal 1999 -- $4.9 million; fiscal 2000 -- $4.2 million; fiscal 2001 -- $4.0 million; fiscal 2002 -- $3.9 million; fiscal 2003 -- $3.3 million; and $8.1 million thereafter. ENVIRONMENTAL AND SAFETY MATTERS The Company's operations involve the handling, production, transportation, treatment, and disposal of materials that are classified as hazardous or toxic waste and that are extensively regulated by environmental and health and safety laws and regulations. Environmental permits required for the Company's operations are subject to periodic renewal and can be revoked or modified for cause or when new or revised environmental laws or permit requirements are implemented. Changing and increasingly strict environmental laws, regulations, and permit requirements can affect the manufacture, handling, processing, distribution, and use of the Company's chemical products and, if so, the Company's business and operations may be materially and adversely affected. In addition, changes in the law, regulations, and permit requirements can cause the Company to incur substantial costs in upgrading or redesigning its facilities and processes, including waste treatment, storage, disposal, and other waste handling practices and equipment. While the Company believes that its business operations and facilities generally are operated in compliance with all material aspects of applicable environmental and health and safety laws, regulations, and disclosure requirements, there can be no assurance that past practices and future operations will not result in material claims or regulatory action, require material environmental expenditures, or result in exposure or injury claims by employees and the public. Some risk of environmental costs and liabilities is inherent in the operations and products of the Company, as it is with other companies engaged in similar businesses. In addition, a catastrophic event at any of the Company's facilities could result in liabilities to the Company substantially in excess of its insurance coverages. The Company's operating expenditures for environmental matters, mostly waste management and compliance, were approximately $52 million, $50 million, and $47 million for fiscal 1998, 1997, and 1996, respectively. The Company also spent approximately $2 million and $3 million for environmentally related capital projects in fiscal 1998 and 1997 respectively. Any significant ban on all chlorine containing compounds could have a materially adverse effect on the Company's financial condition and results of operations. British Columbia has a regulation in place requiring elimination of the use of all chlorine products, including chlorine dioxide, in the bleaching process by the year 2002. Chlorine dioxide is produced from sodium chlorate, which is one of the Company's pulp chemical products. The pulp and paper industry believes that a ban of chlorine dioxide in the bleaching process will yield no measurable environmental or public health benefit and is working to change this regulation but there can be no assurance that the regulation will be changed. In the event such a regulation is implemented, the Company would seek to sell the products it manufactures at its British 59 62 Columbia facility to customers in other markets. The Company is not aware of any other laws or regulations in place in North America, which would restrict the use of such products for other purposes. LEGAL PROCEEDINGS Ammonia Release On May 8, 1994, an ammonia release occurred at the Texas City Plant while a reactor in the acrylonitrile unit was being restarted after a shutdown for routine maintenance. Approximately 52 lawsuits and interventions involving approximately 6,000 plaintiffs were filed against 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. 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. Approximately 5,500 of the claims in litigation have now been resolved or are pending final resolution and the Company continues to vigorously defend against the claims of the approximately 500 remaining plaintiffs. Nickel Carbonyl Release 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. Sixteen contractor employees allegedly exposed to nickel carbonyl are plaintiffs in a lawsuit against the Company seeking unspecified damages for personal injuries. Additional claims and litigation against the Company relating to this incident may ensue. Ethylbenzene Release On April 1, 1998, a chemical leak occurred when a line failed in the ethylbenzene unit at the Texas City Plant. The released chemicals included ethylbenzene, benzene, polyethylbenzene, and hydrochloric acid. The Company does not believe any serious injuries were sustained, although a number of citizens sought medical examinations at local hospitals after a precautionary alert was given to neighboring communities. There is no lawsuit pending against the Company based on this release, but the Company has received, and in some instances resolved, claims from individuals for alleged damage from this incident. Other Claims 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, 1998, the Company has accrued approximately $8.3 million as its estimate of aggregate contingent liability for these matters and has also recorded 60 63 aggregate receivables from its insurers and third-party indemnitors of approximately $6.6 million. At September 30, 1998, management estimates that the aggregate reasonably possible range of loss for all litigation combined, in addition to the amount accrued, is from $0 to $9 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. 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 supplies 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 acquired substantially all of the assets of Saskatoon Chemicals. 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' Series B "pay in kind" mandatory Cumulative Redeemable Preferred Stock ("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
61 64 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, --------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (Dollars in Thousands) Major Customers: British Petroleum plc and subsidiaries $ 100,610 * * Export Sales: Export revenues $ 233,165 $ 274,139 $ 267,153 Percentage of total revenues 28% 30% 34% Export revenues (as a percent of total exports) by geographical area: Asia 65% 56% 66% Europe 16% 41% 34% Other 19% 3% --
* DOES NOT COMPRISE 10% OF TOTAL REVENUE FOR 1997 AND 1996, THEREFORE NOT REPORTED.
YEAR ENDED SEPTEMBER 30, ------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- (Dollars in Thousands) Segment Information (1) Revenues: Petrochemical and Fibers $ 621,605 $ 728,215 $ 633,754 Pulp 200,985 180,572 156,711 ---------- ---------- ---------- Total $ 822,590 $ 908,787 $ 790,465 Operating income (loss): Petrochemical and Fibers $ (3,442) $ 11,524 $ 31,891 Pulp 36,232 45,945 35,597 ---------- ---------- ---------- Total $ 32,790 $ 57,469 $ 67,488 Depreciation and amortization expenses: Petrochemical and Fibers $ 31,894 $ 32,762 $ 28,125 Pulp 24,069 21,250 14,577 ---------- ---------- ---------- Total $ 55,963 $ 54,012 $ 42,702 Capital expenditures: Petrochemical and Fibers $ 16,768 $ 22,664 $ 50,033 Pulp 9,854 20,764 45,924 ---------- ---------- ---------- Total $ 26,622 $ 43,428 $ 95,957 Identifiable assets: Petrochemicals and Fibers $ 474,426 $ 554,474 $ 457,273 Pulp 300,576 324,497 232,411 ---------- ---------- ---------- Total $ 775,002 $ 878,971 $ 689,684
(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 $54 million and $20 million of forward foreign exchange contracts outstanding to buy Canadian dollars at September 30, 1998 and 1997, respectively. The deferred loss on these forward foreign exchange contracts at September 30, 1998 and 1997 was $4.7 million and $0.3 million, respectively. 62 65 GAS HEDGE The Company hedged a portion of its natural gas to be used in the production of styrene and methanol during fiscal 1998 and 1999. At September 30, 1998, the Company had primarily natural gas collar contracts on 900,000 MMbtu's of natural gas per month for October 1998 through March 1999 with an average "floor" price of $2.23 per MMbtu and an average "cap" price of $2.51 per MMbtu. The Company's hedging agreements are settled on a monthly basis. All of the Company's 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 $1.0 million and $0.1 million due to natural gas hedging contracts in fiscal 1998 and 1997, respectively, and an unrealized gain of $0.2 million at September 30, 1998. INTEREST RATE SWAPS The Company has entered into a declining balance interest rate swap contract to hedge a portion of its interest rate risk that expires in January 2002. At September 30, 1998, the Company had a contractual notional amount of $62.5 million outstanding with a fixed rate of 6.66% and a floating rate based on LIBOR. The Company's interest rate swap is settled on a quarterly basis, with the interest rate differential received or paid by the Company recognized as adjustments to interest expense. 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 27% 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 by the Company with any single bank, financial institution, or United States corporation. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reflected in the consolidated balance sheet for cash, cash equivalents, and receivables approximate fair value as reported in the balance sheet due to the short maturities. The following table presents the carrying values and fair values of the Company's long-term debt at September 30, 1998.
CARRYING VALUE FAIR VALUE -------------- ------------ (DOLLARS IN THOUSANDS) Revolving credit facilities $ -- $ -- Term loans 274,000 274,000 Saskatoon term loans 49,552 49,552 ESOP term loans 3,250 3,250 11 1/4% Notes 152,816 126,645 11 3/4% Notes 275,000 238,453 13 1/2% Notes 127,907 88,838
The fair values of the 13 1/2% Notes, 11 1/4% Notes, and 11 3/4% Notes are based on quoted market prices. 63 66 At September 30, 1998, the outstanding natural gas hedging contracts had a fair value of approximately $0.2 million gain and the foreign exchange contracts had a fair value of $4.7 million loss. In addition, the interest rate swaps had a fair market value of $2.3 million loss, based on the Company's estimate of what it would have to pay to terminate the swap at September 30, 1998. 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. T. Hunter Nelson and Frank J. Hevrdejs, members of the Board of Directors of the Company, are principals of TSG and Frank P. Diassi, Chairman of the Board of Directors of the Company, is a principal of Unicorn. 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. 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, 1998, 1997, and 1996 (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 5% 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 former director of the Company, is President of Clipper. Affiliates of Clipper and Olympus are significant stockholders of the Company. As of December 15, 1998, the Company entered into the Standby Purchase Agreements with, and issued warrants to, Frank P. Diassi, Frank J. Hevrdejs, and Koch Capital Services, Inc. as describe below in Footnote 12. 12. CAPITAL STOCK The authorized shares of Holdings Common Stock at September 30, 1998 and 1997 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, on July 10, 1997, 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 1998 until August 2008. During fiscal 1998, 345,123 shares of Common Stock were issued as a result of 115,041 of these warrants being exercised. In connection with the Saskatoon Acquisition, Holdings also issued to holders of the Series B Preferred Stock warrants to purchase 201,048 shares of Holdings Common Stock for $0.01, exercisable beginning in July 1997 until December 2007. At September 30, 1998, warrants to purchase an aggregate of 431,178 shares Holdings Common Stock were outstanding. In December 1998, the Company entered into separate Standby Purchase Agreements (collectively, the "Purchase Agreements") with each of Gordon A. Cain, William A. McMinn, James Crane, Mr. Diassi, Mr. Hevrdejs and Koch 64 67 Capital (collectively, the "Purchasers"). Pursuant to the terms of the Purchase Agreements, the Purchasers committed to purchase up to 2.5 million shares of Common Stock, at a price of $6.00 per share, if, as and when requested by the Company at any time or from time to time prior to December 15, 2001. Under each of the Purchasers Agreements, the Company may only require the Purchasers to purchase such shares if it believes that such capital is necessary to maintain, reestablish, or enhance its borrowing ability under the Company's revolving credit facilities or to satisfy any requirement thereunder to raise additional equity. To induce the Purchasers to enter into the Purchase Agreements, the Company issued to them warrants to purchase an aggregate of 300,000 shares of Common Stock at an exercise price of $6.00 per share. Pursuant to the Purchase Agreements, the Company agreed to issue to the Purchasers additional warrants to purchase up to 300,000 additional shares of Common Stock if, as and when they purchase shares of Common Stock under the Purchase Agreements. Any shares of Common Stock purchased under the Purchase Agreement and the warrants issued to the Purchasers as contemplated by the Purchase Agreements will be subject to the terms of the Amended and Restated Voting Agreement dated as of December 15, 1998, the Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, as amended, and the Tag-Along Agreement dated as of August 21, 1996, each of which is filed as an Exhibit to this Form 10-K. 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 elect to 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, 1998 and 1997, was $11.8 million and $10.7 million, respectively (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 elect to 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, 1998 and 1997, was $6.5 million and $5.1 million, respectively (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. 14. NEW ACCOUNTING STANDARDS SFAS No. 130, "Reporting Comprehensive Income," establishes standards for reporting and displaying of comprehensive income and its components. SFAS No. 131, "Disclosure 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. SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," establishes revisions to employers' disclosure about pension and other post retirement benefit plans. Management is currently evaluating the disclosures required when these three statements are adopted in the first quarter of fiscal 1999. Adoption of these three statements will have no effect on net income (loss). SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Management is currently evaluating the accounting impact and disclosures required when this statement is adopted in the first quarter of fiscal 2000. 65 68 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 SEPTEMBER 30, -------------------------- MAY 14, 1996 1998 1997 TO SEPTEMBER 30, 1996 ---------- ---------- --------------------- (DOLLARS IN THOUSANDS) Provision (benefit) for federal income tax at the statutory rate ..... $ (20,385) $ (4,576) $ 195 Foreign sales corporation ............................................ -- -- (116) State and foreign income taxes ....................................... 1,422 3,782 115 Tax settlements and other ............................................ -- (1,354) 190 ---------- ---------- ---------- Effective tax provision (benefit) .................................... (18,963) (2,148) $ 384 ========== ========== ==========
The provision (benefit) for income taxes is composed of the following:
YEAR ENDED SEPTEMBER 30, -------------------------- MAY 14, 1996 1998 1997 TO SEPTEMBER 30, 1996 ---------- ---------- --------------------- (DOLLARS IN THOUSANDS) From operations: Current federal ................ $ (5,900) $ (5,959) $ (1,001) Deferred federal ............... (15,271) (4,235) 1,457 Deferred foreign ............... 2,132 6,104 90 Current state .................. 76 1,942 (162) ---------- ---------- ---------- Total tax provision (benefit) .. (18,963) (2,148) $ 384 ========== ========== ==========
66 69 The components of Chemicals' deferred income tax assets and liabilities are summarized below:
SEPTEMBER 30, ------------------------- 1998 1997 ---------- ---------- (Dollars in Thousands) Deferred tax assets: Accrued liabilities .................................. $ 12,074 $ 5,367 Accrued postretirement cost .......................... 10,010 12,350 Tax loss and credit carryforward and other ........... 24,783 7,209 Foreign dividends .................................... 15,490 11,764 Other ................................................ 2,490 1,166 ---------- ---------- Total deferred tax assets ............................ 64,847 37,856 ---------- ---------- Less: current deferred income tax asset ............. 5,140 10,005 ---------- ---------- Noncurrent deferred tax assets ....................... $ 59,707 $ 27,851 ========== ========== Deferred tax liabilities: Property, plant and equipment ........................ $ 78,113 $ 67,996 Accrued pension cost ................................. 2,211 1,665 Other ................................................ 2,684 836 ---------- ---------- Total deferred tax liabilities ....................... 83,008 70,497 ---------- ---------- Net deferred tax liability ........................... $ 23,301 $ 42,646 ========== ==========
In fiscal 1998, Chemicals generated approximately $48 million in United States net operating losses, of which $18 million will be carried back and utilized in a prior fiscal year and $30 million will be carried forward and if not utilized in future years, will expire in fiscal 2013. Chemicals also has approximately Cdn. $12.9 million in Canadian tax credit carry forwards which will expire from 1999 through 2004. 67 70 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, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity (deficiency in assets) and cash flows for each of the three years in the period ended September 30, 1998. 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, 1998 and 1997 and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP December 4, 1998 (December 17, 1998 as to Notes 4, 11, and 12) Houston, Texas 68 71 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, 1998 and 1997, and the related consolidated statements of operations, changes in stockholder's equity (deficiency in assets) and cash flows for the years ended September 30, 1998 and 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, 1998 and 1997 and the consolidated results of their operations and their cash flows for the years ended September 30, 1998 and 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 4, 1998 (December 17, 1998 as to Notes 4, 11, and 12) Houston, Texas 69 72 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. Deloitte & Touche LLP performed an independent audit of the Company's financial statements for fiscal years 1998, 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 and Compliance Committee of the Board. The Audit and Compliance Committee of the Board of Directors is composed solely of outside directors. The Audit and Compliance 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. Peter W. De Leeuw President and Chief Executive Officer Paul G. Vanderhoven Controller - Principal Accounting Officer December 17, 1998 70 73 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 1998 $ 230,236 $ 204,504 $ 205,414 $ 182,436 1997 186,926 239,763 239,244 242,854 Gross Profit 1998 22,497 14,388 25,604 27,690 1997 15,083 16,827 28,995 34,734 Loss before extraordinary items 1998 (10,145) (16,288) (13,118) (6,568) 1997 (7,198) (7,811) (5,453) (3,674) Net loss (1) 1998 (10,145) (16,288) (13,118) (6,568) 1997 (7,198) (7,811) (9,377) (3,674) Per Share Data: Loss before extraordinary item 1998 $ (0.91) $ (1.37) $ (1.13) $ (0.60) 1997 (0.68) (0.72) (0.48) (0.35) Net loss attributable to common stockholders 1998 (0.91) (1.37) (1.13) (0.60) 1997 (0.68) (0.72) (0.84) (0.35)
- -------------------- (1) During the second and third quarters of fiscal 1998, the Company recorded $3.0 million and $3.0 million, respectively, related to voluntary severance programs offered by the Company at the Texas City Plant. 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. 71 74 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 1999 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 1999 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 1999 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 1999 Annual Meeting of Stockholders is incorporated herein by reference in response to this item. 72 75 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, 1998, 1997, and 1996............................................. 37 Sterling Chemicals Holdings, Inc. Consolidated Balance Sheets as of September 30, 1998 and 1997................................................................................... 38 Sterling Chemicals Holdings, Inc. Consolidated Statements of Changes in Stockholders' Equity.. (Deficiency in Assets) for the fiscal years ended September 30, 1998, 1997, and 1996...... 39 Sterling Chemicals Holdings, Inc. Consolidated Statements of Cash Flows for the fiscal years ended September 30, 1998, 1997, and 1996............................................. 40 Sterling Chemicals, Inc. Consolidated Statements of Operations for the period from May 14, 1996 to September 30, 1996 and the fiscal years ended September 30, 1998 and 1997...... 41 Sterling Chemicals, Inc. Consolidated Balance Sheets as of September 30, 1998 and 1997........ 42 Sterling Chemicals, Inc. Consolidated Statements of Changes in Stockholder's Equity (Deficiency in Assets) for the period from May 14, 1996 to September 30, 1996 and the fiscal years ended September 30, 1998 and 1997............................................. 43 Sterling Chemicals, Inc. Consolidated Statements of Cash Flows for the period from May 14, 1996 to September 30, 1996 and the fiscal years ended September 30, 1998 and 1997.......... 44 Notes to Consolidated Financial Statements.................................................... 45 Reports of Independent Accountants............................................................ 68 Report of Management.......................................................................... 70
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. 73 76 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 - Warrant Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Harris Trust and Savings Bank, as Warrant Agent. **4.4 - Warrant Agreement dated as of December 15, 1998 executed by Sterling Chemicals Holdings, Inc. in favor of Chase Bank of Texas, National Association, Credit Suisse First Boston and certain other financial institutions. 4.5 - Indenture dated as of August 15, 1996 between Sterling Chemicals Holdings, Inc. and Fleet National Bank governing the 13 1/2% Senior Secured Discount Notes Due 2008 of 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). 4.5(a) - First Supplement Indenture dated October 1, 1997 governing the 13 1/2 % Senior Secured Discount Notes Due 2008 of the Company, incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.5(b) - Second Supplement Indenture dated March 16, 1998 governing the 13 1/2 % Senior Secured Discount Notes Due 2008 of the Company, incorporated by reference from Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.6 - Indenture dated as of August 15, 1996 between Sterling Chemicals, Inc. and Fleet National Bank governing the 11 3/4% Senior Subordinated Notes Due 2006 of Sterling Chemicals, Inc. (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). 4.6(a) - First Supplement Indenture dated October 1, 1997 governing the 11 3/4% Senior Subordinated Notes Due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.6(b) - Second Supplement Indenture dated March 16, 1998 governing the 11 3/4% Senior Subordinated Notes Due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 74 77 4.7 - Indenture dated as of April 7, 1997 between Sterling Chemicals, Inc. and Fleet National Bank governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997. 4.7(a) - First Supplement Indenture dated March 16, 1998 governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.8 - Amended and Restated Credit Agreement dated July 10, 1997 among Sterling Chemicals, Inc. and Texas Commerce Bank National Association, individually and as Administrative Agent, Credit Suisse First Boston, individually and as Documentation Agent, and the other lenders named therein, incorporated by reference from Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. 4.8(a) - First Amendment to Amended and Restated Credit Agreement, dated March 31, 1998, among Sterling Chemicals, Inc. and Chase Bank of Texas, N.A., individually and as Administrative Agent, Credit Suisse First Boston, individually and as Documentation Agent, and the other lenders named therein, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. **4.8(b) - Second Amendment to Amended and Restated Credit Agreement, dated December 15, 1998, among Sterling Chemicals, Inc. and Chase Bank of Texas, National Association, individually and as Administrative Agent, Credit Suisse First Boston, individually and as Documentation Agent, and the other lenders named therein. 4.9 - Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, incorporated by reference from Exhibit 4.10 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.9(a) - First Amendment to Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of December 31, 1997, incorporated by reference from Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. **4.9(b) - Second Amendment to Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of May 1, 1998. 4.10 - 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). 4.11 - 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, 1998. **4.11(a) - Amended and Restated Voting Agreement dated as of December 15, 1998. 4.12 - Tag-Along Agreement dated as of August 21, 1996 incorporated by reference from Exhibit 4.13 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.13 - Intercreditor Agreement dated as of August 21, 1996 between Texas Commerce Bank National Association and Fleet National Bank, incorporated by reference from Exhibit 4.14 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No.333-04343). 4.14 - Security Agreement (Pledge) dated August 21, 1996 between STX Acquisition Corp. and Texas Commerce Bank National Association, 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). 4.14(a) - Second Amendment and Supplement to Security Agreement (Pledge) dated January 31, 1997 between Sterling Chemicals Holdings, Inc. and Texas Commerce Bank National Association, incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1996. +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. 75 78 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 - 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). +10.8(a) - Amended and Restated Production Agreement dated March 31, 1998, between BP Chemicals, Inc. and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.9 - 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). +10.10 - Amended and Restated Product Sales Agreement dated January 1, 1997, between BASF Corporation and the Company, incorporated by referenced from Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. 10.11 - 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). 76 79 +10.12 - 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. +10.12(a)- Second Amended and Restated Production Agreement dated effective as of August 1, 1996, between BP Chemicals Inc. and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 10.13 - 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. 10.14 - 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. 10.15 - 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). 10.16 - 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). 10.17 - 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. 10.18 - 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. 10.19 - 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. +10.20 - 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. 10.21 - 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, 1998, 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. +10.22 - Methanol Production Agreement between BP Chemicals Inc. and Sterling Chemicals, Inc. 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. 10.23 - Consulting Agreement dated April 23, 1996, among The Sterling Group, Inc., STX Acquisition Corp., and STX Chemicals Corp, incorporated by reference from Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.24 - 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. 10.25 - Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and Incentive Plan effective April 23, 1997, as amended, incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.26 - Joint Venture Agreement dated March 31, 1998, between Sterling Chemicals, Inc. and BP Chemicals, Inc., incorporated by reference from Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 77 80 ++10.26(a)- First Amendment to Joint Venture Agreement dated effective as of March 31, 1998 between Sterling Chemicals, Inc. and BP Chemicals Inc. **10.27 - Employment Agreement dated as of March 16, 1998 between Peter W. De Leeuw and the Company. **10.28 - Employment Agreement dated as of January 19, 1998 between Gary M. Spitz and the Company. **10.29 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Frank P. Diassi. **10.30 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Frank J. Hevrdejs. **10.31 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Koch Capital Services, Inc. **21.1 - Subsidiaries of Sterling Chemicals Holdings, Inc. **23.1 - Consent of Deloitte & Touche LLP **27.1 - Financial Data Schedule - Sterling Chemicals Holdings, Inc. **27.2 - Financial Data Schedule - Sterling Chemicals, Inc. ** 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. None. 78 81 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/ PETER W. DE LEEUW -------------------------------------- (Peter W. De Leeuw) President and Chief Executive Officer DATE: DECEMBER 17, 1998 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 17, 1998 - -------------------------------------------- Directors (Frank P. Diassi) /s/ PETER W. DE LEEUW President, Chief Executive December 17, 1998 - -------------------------------------------- Officer and Director (Peter W. De Leeuw) (principal executive officer) /s/ GARY M. SPITZ Vice President-Finance and December 17, 1998 - -------------------------------------------- Chief Financial Officer (Gary M. Spitz) (principal finance officer) /s/ PAUL G. VANDERHOVEN Controller December 17, 1998 - -------------------------------------------- (principal accounting officer) (Paul G. Vanderhoven) /s/ ROBERT W. ROTEN Vice Chairman of the Board of December 17, 1998 - -------------------------------------------- Directors (Robert W. Roten) /s/ FRANK J. HEVRDEJS Director December 17, 1998 - -------------------------------------------- (Frank J. Hevrdejs) /s/ T. HUNTER NELSON Director December 17, 1998 - -------------------------------------------- (T. Hunter Nelson) /s/ JOHN L. GARCIA Director December 17, 1998 - -------------------------------------------- (John L. Garcia) /s/ ALLAN R. DRAGONE Director December 17, 1998 - -------------------------------------------- (Allan R. Dragone) /s/ GEORGE J. DAMIRIS Director December 17, 1998 - -------------------------------------------- (George J. Damiris) /s/ ROLF H. TOWE Director December 17, 1998 - -------------------------------------------- (Rolf H. Towe)
79 82 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 - Warrant Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Harris Trust and Savings Bank, as Warrant Agent. **4.4 - Warrant Agreement dated as of December 15, 1998 executed by Sterling Chemicals Holdings, Inc. in favor of Chase Bank of Texas, National Association, Credit Suisse First Boston and certain other financial institutions. 4.5 - Indenture dated as of August 15, 1996 between Sterling Chemicals Holdings, Inc. and Fleet National Bank governing the 13 1/2% Senior Secured Discount Notes Due 2008 of 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). 4.5(a) - First Supplement Indenture dated October 1, 1997 governing the 13 1/2 % Senior Secured Discount Notes Due 2008 of the Company, incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.5(b) - Second Supplement Indenture dated March 16, 1998 governing the 13 1/2 % Senior Secured Discount Notes Due 2008 of the Company, incorporated by reference from Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.6 - Indenture dated as of August 15, 1996 between Sterling Chemicals, Inc. and Fleet National Bank governing the 11 3/4% Senior Subordinated Notes Due 2006 of Sterling Chemicals, Inc. (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). 4.6(a) - First Supplement Indenture dated October 1, 1997 governing the 11 3/4% Senior Subordinated Notes Due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.6(b) - Second Supplement Indenture dated March 16, 1998 governing the 11 3/4% Senior Subordinated Notes Due 2006 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 83 4.7 - Indenture dated as of April 7, 1997 between Sterling Chemicals, Inc. and Fleet National Bank governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997. 4.7(a) - First Supplement Indenture dated March 16, 1998 governing the 11 1/4% Senior Subordinated Notes due 2007 of Sterling Chemicals, Inc., incorporated by reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 4.8 - Amended and Restated Credit Agreement dated July 10, 1997 among Sterling Chemicals, Inc. and Texas Commerce Bank National Association, individually and as Administrative Agent, Credit Suisse First Boston, individually and as Documentation Agent, and the other lenders named therein, incorporated by reference from Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. 4.8(a) - First Amendment to Amended and Restated Credit Agreement, dated March 31, 1998, among Sterling Chemicals, Inc. and Chase Bank of Texas, N.A., individually and as Administrative Agent, Credit Suisse First Boston, individually and as Documentation Agent, and the other lenders named therein, incorporated by reference from Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. **4.8(b) - Second Amendment to Amended and Restated Credit Agreement, dated December 15, 1998, among Sterling Chemicals, Inc. and Chase Bank of Texas, National Association, individually and as Administrative Agent, Credit Suisse First Boston, individually and as Documentation Agent, and the other lenders named therein. 4.9 - Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, incorporated by reference from Exhibit 4.10 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.9(a) - First Amendment to Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of December 31, 1997, incorporated by reference from Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. **4.9(b) - Second Amendment to Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of May 1, 1998. 4.10 - 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). 4.11 - 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, 1998. **4.11(a) - Amended and Restated Voting Agreement dated as of December 15, 1998. 4.12 - Tag-Along Agreement dated as of August 21, 1996 incorporated by reference from Exhibit 4.13 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No. 333-04343). 4.13 - Intercreditor Agreement dated as of August 21, 1996 between Texas Commerce Bank National Association and Fleet National Bank, incorporated by reference from Exhibit 4.14 to the Registration Statement on Form S-1 of STX Acquisition Corp. and STX Chemicals Corp. (Registration No.333-04343). 4.14 - Security Agreement (Pledge) dated August 21, 1996 between STX Acquisition Corp. and Texas Commerce Bank National Association, 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). 4.14(a) - Second Amendment and Supplement to Security Agreement (Pledge) dated January 31, 1997 between Sterling Chemicals Holdings, Inc. and Texas Commerce Bank National Association, incorporated by reference from Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1996. +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. 84 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 - 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). +10.8(a) - Amended and Restated Production Agreement dated March 31, 1998, between BP Chemicals, Inc. and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.9 - 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). +10.10 - Amended and Restated Product Sales Agreement dated January 1, 1997, between BASF Corporation and the Company, incorporated by referenced from Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. 10.11 - 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). 85 +10.12 - 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. +10.12(a)- Second Amended and Restated Production Agreement dated effective as of August 1, 1996, between BP Chemicals Inc. and Sterling Chemicals, Inc., incorporated by reference from Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 10.13 - 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. 10.14 - 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. 10.15 - 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). 10.16 - 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). 10.17 - 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. 10.18 - 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. 10.19 - 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. +10.20 - 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. 10.21 - 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, 1998, 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. +10.22 - Methanol Production Agreement between BP Chemicals Inc. and Sterling Chemicals, Inc. 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. 10.23 - Consulting Agreement dated April 23, 1996, among The Sterling Group, Inc., STX Acquisition Corp., and STX Chemicals Corp, incorporated by reference from Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996. 10.24 - 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. 10.25 - Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and Incentive Plan effective April 23, 1997, as amended, incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. +10.26 - Joint Venture Agreement dated March 31, 1998, between Sterling Chemicals, Inc. and BP Chemicals, Inc., incorporated by reference from Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998. 86 ++10.26(a)- First Amendment to Joint Venture Agreement dated effective as of March 31, 1998 between Sterling Chemicals, Inc. and BP Chemicals Inc. **10.27 - Employment Agreement dated as of March 16, 1998 between Peter W. De Leeuw and the Company. **10.28 - Employment Agreement dated as of January 19, 1998 between Gary M. Spitz and the Company. **10.29 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Frank P. Diassi. **10.30 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Frank J. Hevrdejs. **10.31 - Standby Purchase Agreement dated as of December 15, 1998 between Sterling Chemicals Holdings, Inc. and Koch Capital Services, Inc. **21.1 - Subsidiaries of Sterling Chemicals Holdings, Inc. **23.1 - Consent of Deloitte & Touche LLP **27.1 - Financial Data Schedule - Sterling Chemicals Holdings, Inc. **27.2 - Financial Data Schedule - Sterling Chemicals, Inc. ** 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. None. EX-4.3 2 WARRANT AGREEMENT - DATED 12/15/1998 1 EXHIBIT 4.3 ================================================================================ ================================================================================ WARRANT AGREEMENT BETWEEN STERLING CHEMICALS HOLDINGS, INC. AND HARRIS TRUST AND SAVINGS BANK, AS WARRANT AGENT ================================================================================ DATED AS OF DECEMBER 15, 1998 ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I - DEFINITIONS AND INTERPRETATION.................................................................. 1 Section 1.01 Certain Defined Terms............................................................. 1 Section 1.02 Interpretation.................................................................... 5 ARTICLE II - ORIGINAL ISSUE OF WARRANTS..................................................................... 6 Section 2.01 Form of Warrant Certificates...................................................... 6 Section 2.02 Legends........................................................................... 6 Section 2.03 Execution, Issuance and Delivery of Warrant Certificates.......................... 7 Section 2.04 Registration, Transfer and Exchange of Warrant Certificates....................... 7 Section 2.05 Surrender and Cancellation of Warrant Certificates................................ 8 ARTICLE III - EXERCISE PRICE; EXERCISE OF WARRANTS.......................................................... 8 Section 3.01 Exercise Price.................................................................... 8 Section 3.02 Exercise; Restrictions on Exercise................................................ 8 Section 3.03 Method of Exercise; Payment of Exercise Price..................................... 9 ARTICLE IV - ADJUSTMENTS.................................................................................... 10 Section 4.01 Adjustments....................................................................... 10 Section 4.02 Notice of Adjustment.............................................................. 16 Section 4.03 Statements on Warrants............................................................ 16 Section 4.04 Notice of Consolidation, Merger or Sale of Substantially All Assets, Etc................................................ 16 Section 4.05 Fractional Interests.............................................................. 17 Section 4.06 Concerning All Adjustments........................................................ 17 ARTICLE V - LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT CERTIFICATES.................................. 17 ARTICLE VI - AUTHORIZATION AND RESERVATION OF COMMON STOCK; PURCHASE OF WARRANTS..................................................... 18 Section 6.01 Reservation of Authorized Common Stock............................................ 18 Section 6.02 Purchase of Warrant by Holdings................................................... 18 ARTICLE VII - WARRANT HOLDERS NOT DEEMED STOCKHOLDERS....................................................... 19
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Page ---- ARTICLE VIII - THE WARRANT AGENT............................................................................ 19 Section 8.01 Appointment and Acceptance of Agency.............................................. 19 Section 8.02 Correctness of Statements; Distribution of Warrants............................... 19 Section 8.03 Use of Agents..................................................................... 19 Section 8.04 Proof of Actions Taken............................................................ 19 Section 8.05 Compensation; Indemnity........................................................... 20 Section 8.06 Legal Proceedings................................................................. 20 Section 8.07 Other Transactions Involving Holdings............................................. 20 Section 8.08 Actions as Agent.................................................................. 20 Section 8.09 Liability of Warrant Agent........................................................ 21 Section 8.10 Validity of Agreement............................................................. 21 Section 8.11 Acceptance of Instructions........................................................ 21 Section 8.12 Right to Consult and Rely Upon Counsel............................................ 22 Section 8.13 Change of Warrant Agent........................................................... 22 Section 8.14 Successor Warrant Agent........................................................... 23 Section 8.15 Other............................................................................. 23 ARTICLE IX - MISCELLANEOUS.................................................................................. 23 Section 9.01 Money Deposited with the Warrant Agent............................................ 23 Section 9.02 Payment of Taxes.................................................................. 23 Section 9.03 Merger, Consolidation or Sale of Assets of Holdings............................... 24 Section 9.04 Reports to Holders................................................................ 24 Section 9.05 Notices........................................................................... 24 Section 9.06 Governing Law..................................................................... 25 Section 9.07 Binding Effect.................................................................... 25 Section 9.08 Counterparts...................................................................... 25 Section 9.09 Amendments........................................................................ 25 Section 9.10 Common Stock Legend............................................................... 26 Section 9.11 Third Party Beneficiaries......................................................... 27 Exhibit A - Form of Warrant Certificate
-ii- 4 WARRANT AGREEMENT THIS WARRANT AGREEMENT dated as of December 15, 1998 (this "Agreement") is by and between STERLING CHEMICALS HOLDINGS, INC., a Delaware corporation ("Holdings"), and HARRIS TRUST AND SAVINGS BANK, as warrant agent (in such capacity, the "Warrant Agent"). PRELIMINARY STATEMENTS A. Concurrently with the execution hereof, Holdings is entering into a Standby Purchase Agreement (collectively, the "Purchase Agreements") with each of Gordon A. Cain, William A. McMinn, James Crane, Frank P. Diassi, Frank J. Hevrdejs and Koch Capital Services, Inc. (collectively, the "Purchasers"). B. Pursuant to the terms of, and subject to the conditions contained in, the Purchase Agreements, Holdings has agreed to issue to the Purchasers warrants (each, a "Warrant") entitling the holders thereof to purchase shares of the common stock, par value $.01 per share, of Holdings at a price of $6.00 per share. C. Holdings wishes the Warrant Agent to act on its behalf, and the Warrant Agent is willing to act on behalf of Holdings, in connection with the issuance, exchange, transfer, substitution and exercise of Warrants. D. Holdings desires to enter into this Agreement to set forth the terms and conditions of the Warrants and the rights and obligations of Holdings, the Warrant Agent and the registered holders of the Warrants (the "Holders"). NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein and the Purchase Agreements, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Holdings and the Warrant Agent, intending to be legally bound, hereby agree as follows: ARTICLE I Definitions and Interpretation Section 1.01. Certain Defined Terms. Capitalized terms used in this Agreement shall have the following respective meanings, except as otherwise provided herein or as the context shall otherwise require: "Affiliate" means, with respect to any Person, any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by or is under 5 common control with such Person. The term "control" (including, with correlative meaning, the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether though the ownership of voting securities, by contract or otherwise. "Business Day" means any day which is not a Saturday, a Sunday, or any other day on which banking institutions are authorized or required to be closed in the State of New York or Illinois or the state in which the principal corporate trust office of the Warrant Agent is located. "Closing Date" means December 15, 1998 or such other date as the Purchasers and Holdings may agree. "Commission" means the Securities and Exchange Commission. "Common Stock" means the common stock, par value $0.01 per share, of Holdings, including any other capital stock into which such common stock may be converted or reclassified or that may be issued in respect of, in exchange for, or in substitution of, such common stock for reason of any stock splits, stock dividends, distributions, mergers, consolidations or other like events. "Current Market Value" means, with respect to any security (including Common Stock), as of a specified date (the "date of calculation"): (i) if such security is not registered under the Exchange Act, the value of such security (A) as determined in good faith by the Board of Directors of Holdings based upon the most recently completed arm's-length transaction with respect to such security between Holdings and a Person other than an Affiliate of Holdings, the closing of which shall have occurred within the six months preceding the date of calculation, (B) if no such transaction shall have occurred within such six-month period, as most recently determined as of a date within the six months preceding the date of calculation by an Independent Financial Expert selected by Holdings, or (C) if no such determination shall have been made within such six-month period or if Holdings so chooses, as determined as of the date of calculation by an Independent Financial Expert selected by Holdings; or (ii) if such security is registered under the Exchange Act, the average of the daily market prices of such security for the 20 consecutive trading days immediately preceding the date of calculation or, if such security has been registered under the Securities Act for less than 20 consecutive trading days before the date of calculation, then the average of the daily market prices for all of the trading days before the date of calculation for which daily market prices are available; provided, however, that if the market price cannot be calculated (as provided below), the Current Market Value of -2- 6 such security shall be determined as if such security were not registered under the Exchange Act. For purposes of this Agreement, the term "market price" means, with respect to any security for any trading day, (A) in the case of a security listed or admitted to trading on any national securities exchange, the closing sales price, regular way, on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day on the principal national securities exchange on which such security is listed or admitted, as determined by the Board of Directors of Holdings, in good faith, (B) in the case of a security not then listed or admitted to trading on any national securities exchange, the last reported sales price on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reputable quotation source designated by Holdings, or (C) in the case of a security not then listed or admitted to trading on any national securities exchange and as to which no such reported sales price or bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reputable quotation service, or a newspaper of general circulation in the Borough of Manhattan, City and State of New York customarily published on each Business Day, designated by Holdings, or, if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 30 days prior to the date in question) for which prices have been so reported. "Exchange Act" means the Securities Exchange Act of 1934. "Exercise Price" has the meaning specified in Section 3.01. "Expiration Date" means, with respect to any Warrant, the fifth anniversary of its Issue Date. "Governmental Authority" means (i) any nation or government, (ii) any federal, state, county, province, city, town, municipality, local or other political subdivision thereof or thereto, (iii) any court, tribunal, department, commission, board, bureau, instrumentality, agency, council, arbitrator or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and (iv) any other governmental entity, agency or authority having or exercising jurisdiction over any relevant Person, item or matter. "Holders" has the meaning specified in the Preliminary Statements of this Agreement. "Holdings" has the meaning specified in the opening paragraph of this Agreement. "Independent Financial Expert" means a nationally recognized investment banking firm or appraisal firm which is not an Affiliate of Holdings. "Issue Date" has the meaning specified in Section 2.03 hereof. -3- 7 "Laws" means (i) all laws, statutes, rules, regulations, ordinances, orders, writs, injunctions or decrees and other pronouncements having the effect of law of any Governmental Authority and (ii) all Contracts with any Governmental Authority relating to compliance with the matters described in (i) above. "Person" means any individual, limited liability company, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, Governmental Authority or other entity or enterprise. "Purchase Agreements" has the meaning specified in the Preliminary Statements of this Agreement. "Purchasers" has the meaning specified in the Preliminary Statements of this Agreement. "Registration Statement" refers to the registration statement to be filed under the Securities Act as contemplated by that certain Registration Rights Agreement dated as of August 21, 1996 among Holdings and the Persons named therein. "Right" means any right, option, warrant or convertible or exchangeable security containing the right to subscribe for or acquire one or more shares of Common Stock, excluding the Warrants. "Securities Act" means the Securities Act of 1933. "Spread" means, with respect to any Warrant, the Current Market Value of the Underlying Securities issuable upon exercise of such Warrant (adjusted as provided herein), less the Exercise Price of such Warrant. "Underlying Securities" means the shares of Common Stock or other securities or property issuable upon exercise of the Warrants. "Value Report" has the meaning specified in Section 4.01(i). "Warrant" has the meaning specified in the Preliminary Statements of this Agreement. "Warrant Agent" has the meaning specified in the opening paragraph hereof. "Warrant Certificates" has the meaning specified in Section 2.01. -4- 8 Section 1.02. Interpretation. In this Agreement, unless a clear contrary intention appears: (a) the words "hereof," "herein" and "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular provision of this Agreement; (b) reference to any gender includes each other gender and the neuter; (c) all terms defined in the singular shall have the same meanings in the plural and vice versa; (d) reference to any Person includes such Person's heirs, executors, personal representatives, administrators, successors and assigns; provided, however, that nothing contained in this clause (d) is intended to authorize any assignment not otherwise permitted by this Agreement; (e) reference to a Person in a particular capacity or capacities excludes such Person in any other capacity; (f) reference to any contract or agreement means such contract or agreement as amended, supplemented or modified from time to time in accordance with the terms thereof; (g) all references to Articles and Sections shall be deemed to be references to the Articles and Sections of this Agreement; (h) all references to Exhibits shall be deemed to be references to the Exhibits attached hereto which are made a part hereof and incorporated herein by reference; (i) the word "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; (j) with respect to the determination of any period of time, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding"; (k) the captions and headings contained in this Agreement shall not be considered or given any effect in construing the provisions hereof if any question of intent should arise; (l) reference to any Law means such Law as amended, modified, codified, reenacted, supplemented or superseded in whole or in part, and in effect from time to time; (m) where any provision of this Agreement refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person; and -5- 9 (n) no provision of this Agreement shall be interpreted or construed against any Party solely because that Party or its legal representative drafted such provision. ARTICLE II Original Issue Of Warrants Section 2.01. Form of Warrant Certificates. The Warrants shall be evidenced by certificates in registered form (the "Warrant Certificates"), substantially in the form attached hereto as Exhibit A, and may have such insertions, letters, numbers or other marks of identification and such legends and endorsements stamped, printed, lithographed or engraved thereon as may, consistently herewith, be determined to be necessary or appropriate by the officers of Holdings executing such Warrant Certificates as evidenced by their execution of the Warrant Certificates, or as may be required to comply with any applicable Law or with any rule or regulation of any securities exchange or to conform to usage. Each Warrant shall represent the right, subject to the provisions of this Agreement and of the Warrant Certificate, to purchase one share of Common Stock at the Execution Price, subject to adjustment pursuant to the provisions of Section 4.01. The definitive Warrant Certificates shall be typed, printed, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by applicable Law. Section 2.02.Legends. Each Warrant shall bear the following legend: THE COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF STERLING CHEMICALS HOLDINGS, INC. (THE "COMMON STOCK") FOR WHICH THIS WARRANT IS EXERCISABLE MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES ABSENT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. ACCORDINGLY, NO HOLDER SHALL BE ENTITLED TO EXERCISE SUCH HOLDER'S WARRANTS AT ANY TIME UNLESS, AT THE TIME OF EXERCISE, (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT RELATING TO THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAS BEEN FILED WITH, AND DECLARED EFFECTIVE BY, THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), AND NO STOP ORDER SUSPENDING THE EFFECTIVENESS OF SUCH REGISTRATION STATEMENT HAS BEEN ISSUED BY THE COMMISSION, OR (ii) THE ISSUANCE OF SUCH SHARES IS PERMITTED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. -6- 10 Section 2.03. Execution, Issuance, Delivery of Warrant Certificates. (a) Each Warrant Certificate, whenever issued, shall be dated as of the date of countersignature thereof by the Warrant Agent (the "Issue Date"), either upon initial issuance or upon exchange, substitution or transfer and shall be executed on behalf of Holdings by its Chairman of the Board, Chief Executive Officer, President or any Vice President, either manually or by facsimile signature printed thereon. The Warrant Certificates shall be countersigned by manual or facsimile signature of the Warrant Agent and shall not be valid for any purpose unless so countersigned. In the event that any officer of Holdings whose signature shall have been placed upon any of the Warrant Certificates shall cease to be an officer of Holdings before countersignature by the Warrant Agent and the issuance and delivery thereof, such Warrant Certificates may, nevertheless, be countersigned by the Warrant Agent and issued and delivered with the same force and effect as though such person had not ceased to be such officer of Holdings. (b) Holdings shall instruct the Warrant Agent to countersign, issue and deliver, at the expense of Holdings, Warrant Certificates evidencing Warrants to purchase an aggregate of up to 600,000 shares of Common Stock at the times required by, and in accordance with the terms and conditions of, the Purchase Agreements. The Warrant Agent shall, and is hereby authorized to, countersign, issue and deliver Warrants as and when so instructed by Holdings. In addition, the Warrant Agent is hereby authorized to countersign, issue and deliver Warrant Certificates as required by Section 2.04, Section 3.03 or Article V. Section 2.04. Registration, Transfer and Exchange of Warrant Certificates. (a) The Warrant Agent shall maintain books , subject to such reasonable regulations as it may prescribe, for the registration of Warrant Certificates and transfers and exchanges of Warrant Certificates as provided in this Agreement. (b) A Holder may transfer its Warrants only by written application to the Warrant Agent stating the name of the proposed transferee and otherwise complying with the terms of this Agreement and all applicable Laws. No such transfer shall be effected until, and such transferee shall succeed to the rights of a Holder only upon, final acceptance and registration of the transfer by the Warrant Agent in the register in accordance with this Agreement. Prior to due presentation for registration of transfer, Holdings, the Warrant Agent and any agent of Holdings may deem and treat the Person in whose name the Warrants are registered as the absolute owner thereof for all purposes (notwithstanding any notation of ownership or other writing thereon made by anyone), and neither Holdings nor the Warrant Agent shall be affected by any notice to the contrary or be bound to recognize any equitable or other claim to or in interest in any Warrants on the part of any other Person and shall not be liable for any registration of transfer of Warrants that are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration of transfer or with such knowledge of such facts that its participation therein amount to bad faith. When Warrants are presented to the Warrant Agent with a request to -7- 11 register the transfer thereof or to exchange them for an equal number of Warrants of other authorized denominations, the Warrant Agent shall register the transfer or make the exchange as requested if the requirements of this Agreement for such transaction are met. To permit registrations of transfers and exchanges, Holdings shall execute Warrant Certificates at the Warrant Agent's request. No service charge shall be made for any registration of transfer or exchange of Warrants, but Holdings or the Warrant Agent may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection with any registration of transfer of Warrants. (c) All Warrant Certificates issued upon any registration of transfer or exchange of Warrants shall be the valid obligations of Holdings, evidencing the same obligations, and entitled to the same benefits under this Agreement, as the Warrant Certificates surrendered for registration of transfer or exchange. Section 2.05. Surrender and Cancellation of Warrant Certificates. Any Warrant Certificate surrendered for registration of transfer, exchange or exercise of the Warrants represented thereby shall, if surrendered to Holdings, be delivered to the Warrant Agent, and all Warrant Certificates surrendered or so delivered to the Warrant Agent shall be promptly canceled by the Warrant Agent and shall not be reissued by Holdings and, except as provided in Section 2.04 (in the case of a transfer or exchange), Section 3.03 (in the case of the exercise of less than all the Warrants represented by the surrendered Warrant Certificate) or Article V (in the case of a lost, stolen, destroyed or mutilated Warrant Certificate), no Warrant Certificate shall be issued hereunder in lieu thereof. On request of Holdings, the Warrant Agent shall destroy canceled Warrant Certificates held by it and shall deliver its certificates of destruction to Holdings. The Warrant Agent shall destroy all canceled Warrant Certificates in accordance with its normal procedures. ARTICLE III Exercise Price; Exercise Of Warrants Section 3.01. Exercise Price. Each Warrant Certificate shall, when countersigned by the Warrant Agent, entitle the Holder thereof, subject to the provisions of this Agreement and such Warrant Certificate, to purchase one share of Common Stock (subject to adjustment as provided herein) for each Warrant represented thereby at a purchase price (the "Exercise Price") of $6.00 per share, payable in full at the time of purchase; provided, however, that, at the option of the Holder thereof, payment of the Exercise Price may be satisfied through the delivery and cancellation of additional Warrants having an aggregate Spread equal to the aggregate Exercise Price of the Warrants being exercised. The calculation of the Spread and the number of Warrants deliverable in payment of the Exercise Price shall be verified by Holdings. Section 3.02. Exercise; Restrictions on Exercise. (a) Each outstanding Warrant may be exercised on any Business Day which is on or after its Issue Date and on or before the -8- 12 Expiration Date, but only if the Registration Statement is, at the time of exercise, effective and available or the exercise of such Warrants is exempt from the registration requirements of the Securities Act. Any Warrants not exercised by 5:00 p.m., New York City time, on the Expiration Date shall expire and all rights thereunder and all rights in respect thereof under this Agreement shall automatically terminate at such time. Additionally, pursuant to Section 4.01(g), the Warrants may expire and all rights of the Holders of such Warrants shall terminate in the event Holdings merges or consolidates with or sells all or substantially all of its property and assets to any Person if the consideration payable to the holders of shares of Common Stock in exchange for their shares in connection with such merger, consolidation or sale consists solely of cash or in the event of the dissolution, liquidation or winding up of Holdings. (b) Holdings shall give notice not less than 90 and not more than 120 days prior to the Expiration Date to the Holders of all then outstanding Warrants to the effect that the Warrants will terminate and become void as of 5:00 p.m., New York City time, on the Expiration Date; provided, however, that the Warrants will terminate and become void as of 5:00 p.m., New York City time, on the Expiration Date irrespective of whether Holdings provides such notice. (c) In the event a Holder exercises its Warrants at a time when the Registration Statement is not effective and available, such Holder must furnish to Holdings such certifications, legal opinions or other information as Holdings may reasonably require to confirm that such exercise is being made pursuant to an exemption from the registration requirements of the Securities Act. Section 3.03. Method of Exercise: Payment of Exercise Price. (a) In order to exercise any of the Warrants, the Holder thereof must surrender the Warrant Certificate evidencing such Warrants to the Warrant Agent at its corporate trust office set forth in Section 9.05 (with the Subscription Form set forth in the Warrant Certificate duly executed), together with payment in full of the Exercise Price then in effect for each share of Common Stock as to which a Warrant is exercised and any applicable taxes that Holdings is not required to pay pursuant to this Section 3.03, Sections 2.04(b), 3.03 or 9.02 or Article V. Payment of the Exercise Price may be made by the Holder either (i) by wire transfer or by certified or official bank or bank cashier's check payable to the order of Holdings or (ii) through the delivery for cancellation of additional Warrants having an aggregate Spread equal to the aggregate Exercise Price of the Warrants being exercised. Upon the exercise of any Warrant, the Warrant Agent shall promptly provide written notice of such exercise to Holdings, including notice of the number of shares of Common Stock delivered upon the exercise of such Warrant, and deliver all payments received upon exercise of such Warrant to Holdings in such manner as Holdings shall instruct in writing. (b) A Holder may exercise all or any number of whole Warrants represented by a Warrant Certificate. If less than all of the Warrants represented by a Warrant Certificate are exercised, such Warrant Certificate shall be surrendered and a new Warrant Certificate of the same tenor and for the number of Warrants which were not exercised shall be executed by Holdings and delivered to the Warrant Agent. Upon receipt of any such Warrant Certificate from -9- 13 Holdings, the Warrant Agent shall (i) countersign such Warrant Certificate, (ii) register such Warrant Certificate in such name or names as may be directed in writing by the Holder and (iii) deliver such Warrant Certificate to the Person or Persons entitled to receive the same. (c) Upon the exercise of any Warrant and the surrender of the Warrant Certificate evidencing such Warrant in conformity with the foregoing provisions, the Warrant Agent shall instruct Holdings to (i) transfer promptly to or upon the written order of the Holder of such Warrant Certificate, appropriate evidence of ownership of any shares of Common Stock or other securities or property (including money) to which it is entitled, registered or otherwise placed in such name or names as may be directed in writing by the Holder, and (ii) deliver such evidence of ownership and any other securities or property (including money) to the Person or Persons entitled to receive the same (together with an amount in cash in lieu of any fractional shares as provided in Section 4.05); provided, however, that the Holder of such Warrant shall be responsible for the payment of any transfer taxes or other governmental charges imposed as the result of any change in the ownership of such Warrants or the issuance of such shares of Common Stock or other securities or Warrants other than to the registered owner of such Warrants. (d) Upon the exercise of any Warrant, the Warrant Agent is hereby authorized and directed to requisition from any transfer agent of the Common Stock (and all such transfer agents are hereby irrevocably authorized to comply with all such requests) certificates (bearing the legend set forth in Section 9.10, if applicable) for the necessary number of shares of Common Stock to which the Holder of such Warrant may be entitled upon such exercise. (e) Any Warrant which is exercised hereunder shall be deemed to have been exercised immediately prior to the close of business on the date of the surrender, as provided above, of the Warrant Certificate representing such Warrant, together with payment in full of the Exercise Price and any applicable taxes that Holdings is not required to pay pursuant to this Section 3.03, Sections 2.04(b), 3.03 or 9.02 or Article V, and, for purposes of this Agreement, the Person entitled to receive any shares of Common Stock or other securities or property deliverable upon such exercise shall, as between such Person and Holdings, be deemed to be the Holder of such shares of Common Stock or other securities or property of record as of the close of business on such date and shall be entitled to receive, and the Warrant Agent shall deliver to such Person, any money, shares of Common Stock or other securities or property to which he would have been entitled had he been a record holder on such date. ARTICLE IV Adjustments Section 4.01. Adjustments. The number of shares of Common Stock issuable upon exercise of each Warrant shall be subject to adjustment from time to time as follows: -10- 14 (a) Stock Dividends; Stock Splits; Reverse Stock Splits; Reclassifications. In the event that Holdings after the date hereof (i) pays a dividend or makes any other distribution with respect to its shares of Common Stock in shares of any class or series of its capital stock, (ii) subdivides its outstanding shares of Common Stock, (iii) combines its outstanding shares of Common Stock into a smaller number of shares or (iv) issues any shares of its capital stock in a reclassification of its shares of Common Stock (other than a reclassification in connection with a merger, consolidation or other business combination which will be governed by Section 4.01(g)), then in any such case the number of shares of Common Stock purchasable upon exercise of each Warrant immediately prior to the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be adjusted so that the Holder of each Warrant shall be entitled to receive the kind and number of shares of Common Stock or other securities of Holdings which such Holder would have been entitled to receive after the happening of any of the events described above had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto (with any record date requirement being deemed to have been satisfied). An adjustment made pursuant to this Section 4.01(a) shall become effective retroactively immediately after the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification, as the case may be. (b) Rights; Options; Warrants; Convertible or Exchangeable Securities. In the event that Holdings after the date hereof issues any Rights (other than a convertible or exchangeable security subject to Section 4.01(a)) to all holders of its shares of Common Stock, entitling them to subscribe for or purchase Common Stock at a price per share (determined, in the case of such Rights, by dividing (i) the total amount receivable by Holdings in consideration of the issuance of such Rights, if any, plus the total consideration payable to Holdings upon exercise, conversion or exchange thereof, by (ii) the total number of shares of Common Stock covered by such Rights) which is lower (at the record date for such issuance) than the then Current Market Value per share of Common Stock, then the number of shares of Common Stock thereafter purchasable upon exercise of each Warrant shall be determined by multiplying the number of shares of Common Stock theretofore purchasable upon exercise of each Warrant by a fraction having (A) a numerator equal to the number of shares of Common Stock outstanding immediately prior to the issuance of such Rights plus the number of additional shares of Common Stock offered for subscription or purchase or issuable upon exercise, conversion or exchange, and (B) a denominator equal to the number of shares of Common Stock outstanding immediately prior to the issuance of such Rights plus the number of shares which the aggregate offering price of the total number of shares of Common Stock so offered would purchase at the then Current Market Value per share of Common Stock. Such adjustment shall be made whenever such Rights are issued, and shall become effective retroactively immediately after the record date for the determination of stockholders entitled to receive such Rights. (c) Issuance of Common Stock at Lower Values. In the event that Holdings after the date hereof shall sell or issue any shares of Common Stock or Right (excluding (i) any Right issued in any of the transactions described in Section 4.01(a) or (b) above, (ii) any -11- 15 shares of Common Stock issued pursuant to (x) any Rights outstanding on the date of this Agreement, (y) a Right, if on the date such Right was issued, the exercise, conversion or exchange price per share of Common Stock with respect thereto was at least equal to the Current Market Value per share of Common Stock on such date and (z) Rights (with respect to not more than an aggregate of 10% of the outstanding shares of Common Stock) issued to employees of Holdings and its subsidiaries and (iii) any Right issued as consideration when any corporation or business is acquired, merged into or becomes part of Holdings or a subsidiary of Holdings in an arm's-length transaction between Holdings and a Person other than an Affiliate of Holdings) at a price per share of Common Stock (determined, in the case of such Right, by dividing (A) the total amount receivable by Holdings in consideration of the sale and issuance of such Right, plus the total consideration payable to Holdings upon exercise, conversion or exchange thereof, by (B) the total number of shares of Common Stock covered by such Right) that is lower than the Current Market Value per share of Common Stock in effect immediately prior to such sale or issuance, then the number of shares of Common Stock thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of shares of Common Stock theretofore purchasable upon exercise of such Warrant by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately after such sale or issuance and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such sale or issuance plus the number of shares of Common Stock which the aggregate consideration received (determined as provided below) for such sale or issuance would purchase at such Current Market Value per share of Common Stock. For purposes of this Section 4.01(c), the shares of Common Stock which the holder of any such Right shall be entitled to subscribe for or purchase shall be deemed to be issued and outstanding as of the date of such sale and issuance and the consideration received by Holdings therefor shall be deemed to be the consideration received by Holdings for such Right, plus the consideration or premiums stated in such Right to be paid for the shares of Common Stock covered thereby. In the event that Holdings shall sell and issue shares of Common Stock or any Right, for a consideration consisting, in whole or in part, of property other than cash or its equivalent, then in determining the "price per share of Common Stock" and the "consideration received by Holdings" for purposes of the first sentence of this Section 4.01(c), the Board of Directors of Holdings shall determine, in good faith, the fair value of said property. In the event that Holdings shall sell and issue any Right together with one or more other securities as part of a unit at a price per unit, then in determining the "price per share of Common Stock" and the "consideration received by Holdings" for purposes of the first sentence of this Section 4.01(c), the Board of Directors of Holdings shall determine, in good faith, the fair value of the Right then being sold as part of such unit. (d) Distributions of Debt, Assets, Subscription Rights or Convertible Securities. In the event that Holdings after the date hereof shall fix a record date for the making of a distribution to all holders of shares of Common Stock of evidences of its indebtedness, assets, cash dividends or distributions (excluding dividends or distributions referred to in Section 4.01(a) and excluding distributions in connection with the dissolution, liquidation -12- 16 or winding up of Holdings which will be governed by Section 4.01(g)) or securities (excluding those referred to in Section 4.01(a), Section 4.01(b) or Section 4.01(c)), then in each case the number of shares of Common Stock purchasable after such record date upon the exercise of each Warrant shall be determined by multiplying the number of shares of Common Stock purchasable upon the exercise of such Warrant immediately prior to such record date by a fraction, the numerator of which shall be the Current Market Value per share of Common Stock immediately prior to the record date for such distribution and the denominator of which shall be the Current Market Value per share of Common Stock immediately prior to the record date for such distribution less the then fair value (as determined in good faith by the Board of Directors of Holdings) of the portion of the assets, evidence of indebtedness, cash dividends or distributions or securities so distributed applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. (e) Expiration of Rights, Options and Conversion Privileges. Upon the expiration of any rights, options, warrants or conversion or exchange privileges that have previously resulted in an adjustment hereunder, if any thereof shall not have been exercised, the number of shares of Common Stock issuable upon the exercise of each Warrant shall, upon such expiration, be readjusted and shall thereafter, upon any future exercise, be such as they would have been had they been originally adjusted (or had the original adjustment not been required, as the case may be) as if (i) the only shares of Common Stock so issued were the shares of Common Stock, if any, actually issued or sold upon the exercise of such rights, options, warrants or conversion or exchange rights and (ii) such shares of Common Stock, if any, were issued or sold for the consideration actually received by Holdings upon such exercise plus the consideration, if any, actually received by Holdings for issuance, sale or grant of all such rights, options, warrants or conversion or exchange rights whether or not exercised; provided, however, that no such readjustment shall have the effect of decreasing the number of shares issuable upon exercise of each Warrant by a number which exceeds the amount or number of the adjustment initially made in respect to the issuance, sale or grant of such rights, options, warrants or conversion or exchange rights. (f) De Minimis Adjustments. No adjustment in the number of shares of Common Stock purchasable upon the exercise of any Warrant shall be required unless such adjustment would require an increase or decrease of at least one percent in the number of shares of Common Stock purchasable upon the exercise of such Warrant; provided, however, that any adjustments which are not required to be made by reason of this Section 4.01(f) shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 4.01(f) shall be made to the nearest one-thousandth of a share. (g) Consolidation; Merger; Sale of Substantially All Assets. Subject to the provisions of this Section 4.01(g), in case of the consolidation of Holdings with, or merger of Holdings with or into, or of the sale of all or substantially all of the properties and assets -13- 17 of Holdings to, any Person and in connection therewith consideration is payable to holders of Common Stock (or other securities or property purchasable upon exercise of Warrants) in exchange therefor, the Warrants shall remain subject to the terms and conditions set forth in this Agreement and each Warrant shall, after such consolidation, merger or sale, entitle the Holder to receive upon exercise the number of shares of capital stock or other securities or property (including cash) of Holdings, or of such Person resulting from such consolidation or surviving such merger or to which such sale shall be made, as the case may be, that would have been distributable or payable on account of the shares of Common Stock (or other securities or properties purchasable upon exercise of Warrants) if such Holder's Warrants had been exercised immediately prior to such merger, consolidation or sale (or, if applicable, the record date therefor); and in any such case the provisions of this Agreement with respect to the rights and interests thereafter of the Holders of Warrants shall be appropriately adjusted by the Board of Directors of Holdings in good faith so as to be applicable, as nearly as may reasonably be, to any shares of stock or other securities or any property thereafter deliverable on the exercise of the Warrants. Notwithstanding the foregoing, (i) if Holdings merges or consolidates with, or sells all or substantially all of its property and assets to, another Person and the consideration payable to the holders of shares of Common Stock in exchange for their shares of Common Stock in such merger, consolidation or sale consists solely of cash, or (ii) in the event of the dissolution, liquidation or winding up of Holdings, then the Holders of each Warrant shall be entitled to receive distributions on the date of such event on an equal basis with holders of shares of Common Stock (or other securities issuable upon exercise of such Warrant) as if such Warrant had been exercised immediately prior to such event, less the Exercise Price. Upon receipt of such payments, if any, the rights of a Holder hereunder with respect to such Warrant shall terminate and cease and such Warrant shall expire. In case of any such merger, consolidation or sale of assets, the surviving or acquiring Person and, in the event of any dissolution, liquidation or winding up of Holdings, Holdings shall deposit promptly with the Warrant Agent the funds, if any, necessary to make such payments to the Holders of the Warrants. After receipt of such deposit from such Person or Holdings, the Warrant Agent shall make the appropriate payments to the Holder of each Warrant, upon surrender of the Warrant Certificate evidencing such Warrant, by delivering a check in such amount as is appropriate (or, in the case of consideration other than cash, such other consideration as is appropriate) to such Person or Persons as it may be directed in writing by the Holder surrendering such Warrant. (h) Other Adjustments. In addition to the foregoing adjustments, Holdings may make any other adjustment to increase the number of Underlying Securities issuable upon exercise of each Warrant as it may, in good faith, deem desirable to protect the rights and benefits of the Holders. In addition, Holdings may from time to time increase the number of Underlying Securities issuable upon exercise of each Warrant; provided, however, that any such increase must be effective for at least 30 calendar days, and must be preceded by written notice of such increase to the Holders and the Warrant Agent, which notice must be mailed at least 30 calendar days prior to the effective date of such increase. Any such increase shall not alter or adjust the Exercise Price. -14- 18 (i) Determination of Current Market Value and Related Deliveries. (A) If at any time the Current Market Value of any security is required to be calculated pursuant to the terms of this Agreement, the determination of such Current Market Value, if calculated in accordance with the terms of this Agreement, shall be conclusive and binding on all Persons. (B) If at any time the Current Market Value of any security is required to be calculated pursuant to the terms of this Agreement, and such Current Market Value is determined as if such security is not registered under the Exchange Act: (x) if the Current Market Value of such security is determined by the Board of Directors of Holdings based upon the most recently completed arm's-length transaction with respect to such security, Holdings shall, as promptly as practicable, deliver to the Warrant Agent a report specifying the amount of such Current Market Value determination and containing a brief description of the arm's-length transaction upon which such determination was based; (y) if the Current Market Value of such security is determined as of a date within the six months preceding the date of calculation by an Independent Financial Expert selected by Holdings, Holdings shall, as promptly as practicable, deliver to the Warrant Agent the value report of the Independent Financial Expert, stating the value of such security and briefly describing the nature and scope of the examination upon which the determination was made (the "Value Report"); and (z) if the Current Market Value of such security is determined as of the date of calculation by an Independent Financial Expert selected by Holdings, Holdings shall cause the Independent Financial Expert to deliver the Value Report to Holdings, with a copy to the Warrant Agent, within 45 days of the appointment of the Independent Financial Expert. The Warrant Agent shall have no duty with respect to any such report or Value Report, except to keep it on file and available for inspection by the Holders. (C) The Independent Financial Expert (if any) shall use one or more valuation methods that it determines, in its best professional judgment, to be most appropriate and shall consult with the management of Holdings, and allow the management of Holdings to comment on the proposed value, prior to delivery to Holdings of any Value Report delivered pursuant to paragraph (B) above. The Independent Financial Expert may be compensated and indemnified by Holdings for opinions or services it provides as an Independent Financial Expert. -15- 19 Section 4.02. Notice of Adjustment. Whenever the number of shares of Common Stock or other stock or property purchasable upon the exercise of each Warrant is required to be adjusted pursuant to Section 4.01, Holdings shall deliver to the Warrant Agent a certificate of a firm of independent public accountants selected by the Board of Directors of Holdings (who may be the regular accountants employed by Holdings) setting forth (a) the number of shares of Common Stock or other stock or property purchasable upon the exercise of each Warrant after such adjustment, (b) a brief statement of the facts requiring such adjustment and (c) the computation by which such adjustment was made. Such certificate shall be conclusive evidence of the correctness of such adjustment. The Warrant Agent shall not be deemed to have knowledge of such adjustment unless and until it shall have received such certificate. Upon receipt of such certificate, the Warrant Agent shall mail notice of the adjustment described in such certificate to each Holder at the expense of Holdings. The Warrant Agent shall be entitled to rely on such certificate and shall be under no duty or responsibility with respect to any such certificate, except to exhibit the same, from time to time, to any Holder desiring to inspect such certificate during reasonable business hours. The Warrant Agent shall not at any time be under any duty or responsibility to any Holder to determine whether any facts exist which may require any adjustment of the Exercise Price or the number of shares of Common Stock or other securities or property purchasable upon exercise of any Warrant, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed in making such adjustment, or the validity or value (or the kind or amount) of any shares of Common Stock or other securities or property which may be purchasable on exercise of any Warrant. The Warrant Agent shall not be responsible for any failure of Holdings to make any cash payment or to issue, transfer or deliver any shares of Common Stock or other securities or property upon the exercise of any Warrant. Section 4.03. Statement on Warrants. The form of Warrant Certificate need not be changed because of any adjustment made pursuant to Section 4.01, and Warrant Certificates issued after such adjustment may state the same Exercise Price and the same number and kind of shares of Common Stock as are stated in the Warrant Certificates initially issued pursuant to this Agreement. Holdings may, however, at any time in its sole discretion (which shall be conclusive), make any change in the form of Warrant Certificate that it may deem appropriate and that does not affect the substance thereof and any Warrant Certificate thereafter issued or countersigned, whether in exchange or substitution for an outstanding Warrant Certificate or otherwise, may be in the form so changed. Section 4.04. Notice of Consolidation, Merger or Sale of Substantially All Assets, Etc. In the event that, at any time after the date hereof and prior to 5:00 p.m., New York City time, on the Expiration Date, (a) Holdings shall consolidate with, merge with or into or sell, transfer or otherwise dispose of all or substantially all of its properties, assets or business (except a merger in which Holdings is the surviving corporation and the holders of Common Stock (or other securities or property purchasable upon exercise of the Warrants) receive no consideration in respect of their shares) or (b) Holdings shall dissolve, liquidate or wind-up its operations, then in any one or more of such cases, Holdings shall cause to be mailed to the Warrant Agent and -16- 20 each Holder, at the earliest practicable time (and, in any event, not less than 20 calendar days before any date set for definitive action), notice of the date on which such consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also set forth such facts as shall indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the kind and amount of shares of Common Stock and other securities, money and other property deliverable upon exercise of the Warrants. Such notice shall also specify the date as of which the holders of record of shares of Common Stock or other securities or property issuable upon exercise of the Warrants shall be entitled to exchange their shares for securities, money or other property deliverable upon such consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Section 4.05. Fractional Interests. Notwithstanding anything to the contrary contained in this Agreement, if the number of shares of Common Stock purchasable on the exercise of each Warrant is adjusted pursuant to the provisions of Section 4.01, Holdings shall not be required to issue any fraction of a share of Common Stock or to distribute a certificate that evidences a fraction of a share of Common Stock. If Warrant Certificates evidencing more than one Warrant shall be surrendered for exercise at the same time by the same Holder, the number of full shares of Common Stock which shall be issuable upon such exercise thereof shall be computed on the basis of the aggregate number of Warrants so surrendered. If any fraction of a share of Common Stock would, except for the provisions of this Section 4.05, be issuable on the exercise of any Warrant (or specified portion thereof), in lieu of the issuance of such fractional share, Holdings shall pay the Holder of such Warrant an amount in cash equal to the then Current Market Value per share of Common Stock multiplied by such fraction (computed to the nearest whole cent). The Holders, by their acceptance of the Warrant Certificates, expressly waive their right to receive any fraction of a share of Common Stock or a stock certificate representing a fraction of a share of Common Stock. Section 4.06. Concerning All Adjustments. Notwithstanding anything to the contrary contained in this Agreement, if an adjustment is made under any provision of Section 4.01 on account of any event, transaction, circumstance, condition or happening, no additional adjustment shall be made under any other provision of Section 4.01 on account of such event, transaction, circumstance, condition or happening. Unless otherwise expressly provided in this Article IV, all determinations and calculations required or permitted under this Article IV shall be made by Holdings or its Board of Directors, as appropriate, and all such calculations and determinations shall be conclusive and binding in the absence of manifest error. ARTICLE V Loss, Theft, Destruction Or Mutilation of Warrant Certificates Upon receipt by Holdings and the Warrant Agent of evidence satisfactory to them of the ownership and the loss, theft, destruction or mutilation of any Warrant Certificate, and an indemnity bond in form and amount and with corporate surety satisfactory to them, and (in the -17- 21 case of mutilation) upon surrender and cancellation thereof, then, in the absence of notice to Holdings or the Warrant Agent that the Warrants represented thereby have been acquired by a bona fide purchaser, Holdings shall issue and the Warrant Agent shall countersign and deliver to the Holder of the lost, stolen, destroyed or mutilated Warrant Certificate, in exchange and substitution for or in lieu thereof, a new Warrant Certificate of the same tenor and representing an equivalent number of Warrants. Upon the issuance of any new Warrant Certificate under this Article V, Holdings may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and other expenses (including the fees and expenses of the Warrant Agent) in connection therewith. Every new Warrant Certificate executed and delivered pursuant to this Article V in lieu of any lost, stolen, destroyed or mutilated Warrant Certificate shall constitute an original contractual obligation of Holdings, whether or not the allegedly lost, stolen, destroyed or mutilated Warrant Certificates shall be at any time enforceable by anyone, and shall be entitled to the benefits of this Agreement equally and proportionately with any and all other Warrant Certificates duly executed and delivered hereunder. The provisions of this Article V are exclusive and shall preclude (to the extent lawful) all other rights or remedies with respect to the replacement of lost, stolen, destroyed or mutilated Warrant Certificates. ARTICLE VI Authorization and Reservation of Common Stock; Purchase of Warrants Section 6.01. Reservation of Authorized Common Stock. Holdings shall at all times reserve and keep available for issue upon the exercise of Warrants, such number of its authorized but unissued shares of Common Stock or other securities deliverable upon exercise of Warrants as will be sufficient to permit the exercise in full of all outstanding Warrants. Holdings will cause appropriate evidence of ownership of such Common Stock or other securities to be delivered to the Warrant Agent upon its request for delivery upon the exercise of Warrants, and all such shares of Common Stock will, at all times, be duly approved for listing subject to official notice of issuance on each securities exchange, interdealer quotation system or market, if any, on which such Common Stock is then listed. Holdings covenants that all Common Stock or other securities that may be issued upon the exercise of the Warrants will, upon issuance, be duly authorized, validly issued, fully paid and non-assessable, and free from preemptive rights and all taxes, liens, charges, encumbrances and security interests. Section 6.02. Purchase of Warrants by Holdings. Holdings shall have the right, except as limited by law or other agreement, to purchase or otherwise acquire Warrants at such times, in such manner and for such consideration as it may deem appropriate; provided, however, that Holdings shall not purchase any Warrants from any Holder unless the other Holders are given the opportunity to include their Warrants in such sale pro rata based upon the number of Warrants held by each of the Holders. In the event Holdings shall purchase or otherwise acquire Warrants, the related Warrant Certificates shall thereupon be delivered to the Warrant Agent for -18- 22 cancellation; provided, however, that unless and until the Warrant Certificates evidencing such Warrants are surrendered by Holdings to the Warrant Agent for cancellation, such purchase or acquisition shall not operate as a redemption or termination of the right represented by such Warrants. ARTICLE VII Warrant Holders Not Deemed Stockholders Prior to the exercise of any Warrant, nothing contained in this Agreement or any Warrant Certificate shall be construed as conferring on the Holder of any Warrant or Warrant Certificate any rights whatsoever as a stockholder of Holdings, either at law or in equity, including the right to vote or to consent to any action of the stockholders, to receive dividends or other distributions, to exercise any preemptive right or to receive any notice of meetings of stockholders and, except as otherwise provided in this Agreement, shall not be entitled to receive any notice of any proceedings of Holdings. ARTICLE VIII The Warrant Agent Section 8.01. Appointment and Acceptance of Agency. Holdings hereby appoints the Warrant Agent to act as agent for Holdings in accordance with the instructions set forth in this Agreement and the Warrant Agent hereby accepts the agency established by this Agreement and agrees to perform the same on the terms and conditions herein set forth.. Section 8.02. Correctness of Statements; Distribution of Warrants. The statements contained herein and in each Warrant Certificate shall be taken as statements of Holdings, and the Warrant Agent assumes no responsibility for the correctness of any of the same except as describe the Warrant Agent or any action taken by it. The Warrant Agent assumes no responsibility with respect to the distribution of the Warrants except as herein otherwise provided. Section 8.03. Use of Agents. The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty thereunder either itself (through its employees) or by or through its attorneys or agents (which shall not include its employees) and shall not be responsible for the misconduct or negligence of any agent appointed, provided that due care had been exercised in the appointment and continued employment thereof. Section 8.04. Proof of Actions Taken. Whenever in the performance of its duties under this Agreement, the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by Holdings prior to taking or suffering any action hereunder, such fact or matter (unless such evidence in respect thereof be herein specifically prescribed) may, in the absence of bad faith on the part of the Warrant Agent, be deemed to be conclusively proved -19- 23 and established by a certificate signed by the Chairman of the Board, President, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, any Vice President, the Treasurer or Secretary of Holdings and delivered to the Warrant Agent; and such certificate, in the absence of bad faith on the part of the Warrant Agent, shall be full authorization to the Warrant Agent for any action taken, suffered or omitted by it under the provisions of this Agreement in reliance upon such certificate. Section 8.05. Compensation; Indemnity. Holdings agrees to pay the Warrant Agent compensation for all services rendered by the Warrant Agent in the performance of its duties under this Agreement, in accordance with the separate letter agreement entered into by Holdings and the Warrant Agent dated the date hereof. Holdings agrees to reimburse the Warrant Agent for all expenses, taxes and governmental charges and other charges of any kind and nature incurred by the Warrant Agent (including reasonable fees and expenses of the Warrant Agent's counsel and agents) in the performance of its duties under this Agreement. Holdings also agrees to indemnify the Warrant Agent for, and to hold it harmless against, any loss, liability or expenses incurred without negligence or willful misconduct on the part of the Warrant Agent, for anything done or omitted by the Warrant Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises. The indemnity provided for herein shall survive the expiration of the Warrants and the termination of this Agreement. The costs and expenses incurred in enforcing this right of indemnification shall be paid by Holdings. Notwithstanding anything in this Agreement to the contrary, in no event shall the Warrant Agent be liable for special, indirect or consequential loss or damage of any kind whatsoever (including lost profits), even if the Warrant Agent has been advised of the likelihood of such loss or damage and regardless of the form of the action. Section 8.06. Legal Proceedings. The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expense unless Holdings or one or more Holders shall furnish the Warrant Agent with reasonable security and indemnity satisfactory to the Warrant Agent for any costs and expenses which may be incurred, but this provision shall not affect the power of the Warrant Agent to take such action as the Warrant Agent may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrants or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the Holders, as their respective rights or interests may appear. Section 8.07. Other Transactions Involving Holdings. The Warrant Agent and any stockholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of Holdings or become pecuniarily interested in any transactions in which Holdings may be interested, or contract with or lend money to Holdings or otherwise act as fully and freely as though it were not Warrant Agent under this Agreement or such director, officer or employee. Nothing herein shall preclude the Warrant Agent from acting in any other -20- 24 capacity for Holdings or for any other legal entity including acting as transfer agent or as a lender to Holdings or an affiliate thereof Section 8.08. Actions as Agent. The Warrant Agent shall act hereunder solely as agent, and its duties shall be determined solely by the provisions of this Agreement. No implied duties or obligations shall be read into this Agreement against the Warrant Agent. The Warrant Agent shall not be liable for anything which it may do or refrain from doing in connection with this Agreement except for its own negligence or willful misconduct. Section 8.09. Liability of Warrant Agent. The Warrant Agent may conclusively rely upon and shall be protected by Holdings and shall not incur any liability or responsibility to Holdings or to any Holder for or in respect of any action taken, suffered or omitted by it (a) in connection with its administration of this Agreement or (b) in reliance on any Warrant Certificate or certificate for shares of stock or other securities of Holdings, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, direction, statement, notice, resolution, waiver, consent, order, certificate or other paper, document or instrument reasonably believed by it to be genuine and to have been signed, executed, sent, presented and, where necessary, verified or acknowledged, by the proper party or parties. Section 8.10. Validity of Agreement. The Warrant Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution and delivery hereof by the Warrant Agent) or in respect of the validity or execution of any Warrant (except its counter-signature thereof); nor shall it be responsible for any breach by Holdings of any covenant or condition contained in this Agreement or in any Warrant Certificate; nor shall the Warrant Agent by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Underlying Securities (or other stock) to be issued pursuant to this Agreement or any Warrant, or as to whether any Underlying Securities (or other stock) will, when issued, be validly issued, fully paid and non-assessable, or as to the Exercise Price or the number or amount of Underlying Securities or other securities or other property issuable upon exercise of any Warrant. Section 8.11. Acceptance of Instructions. The Warrant Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Chairman of the Board, President, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, any Vice President or Secretary of Holdings, and to apply to such officers for advice or instructions in connection with its duties, and shall not be liable for any action taken or suffered by it in good faith in accordance with instructions of any such officer or officers or for any delay in acting while waiting for those instructions. Any application by the Warrant Agent for written instructions from Holdings may, at the option of the Warrant Agent, set forth in writing any action proposed to be taken or omitted by the Warrant Agent under this Agreement and the date on or after which such action shall be taken or such omission shall be effective. The Warrant Agent shall not be liable for any action taken by, or omission of, the Warrant Agent in accordance with a proposal included in any such application on or after the date specified in such application (which date shall not be less than ten Business Days after the date any officer of Holdings actually -21- 25 receives such application, unless any such officer shall have consented in writing to an earlier date) unless prior to taking any such action (or the effective date in the case of an omission), the Warrant Agent shall have received written instructions in response to such application subject to the proposed action or omission and/or specifying the action to be taken or omitted. Section 8.12. Right to Consult and Rely Upon Counsel. Before the Warrant Agent acts or refrains from acting, it may at any time consult with legal counsel (who may be legal counsel for Holdings), and the opinion or advice of such counsel shall be full and complete authorization and protection to the Warrant Agent and the Warrant Agent shall incur no liability or responsibility to Holdings or to any Holder for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. Section 8.13. Change of Warrant Agent. (a) The Warrant Agent, or any successor to it hereafter appointed, may resign from its position as such and be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's own negligence or willful misconduct), after giving one month's prior written notice to Holdings. Holdings may remove the Warrant Agent upon not less than 30 days' prior written notice specifying the date when such discharge shall take effect, and the Warrant Agent shall thereupon in like manner be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's own negligence or willful misconduct). Holdings shall cause to be mailed, at the expense of Holdings, to each Holder a copy of said notice of resignation or notice of removal, as the case may be. Upon such resignation or removal Holdings shall appoint in writing a successor Warrant Agent. If Holdings shall fail to make such appointment within a period of 30 calendar days after it has been notified in writing of such resignation by the resigning Warrant Agent or after such removal, then the Holder of any Warrant may apply to any court of competent jurisdiction for the appointment of a successor Warrant Agent. Pending appointment of a successor to the original Warrant Agent, either by Holdings or by such a court, the duties of the Warrant Agent shall be carried out by Holdings. (b) Any successor Warrant Agent, whether appointed by Holdings or by a court, shall be a bank (or subsidiary thereof) or trust company doing business under the laws of the United States or any state thereof, in good standing and having a combined capital and surplus of not less than $50,000,000. The combined capital and surplus of any such successor Warrant Agent shall be deemed to be the combined capital and surplus as set forth in the most recent annual report of its condition published by such successor Warrant Agent prior to its appointment; provided that such reports are published at least annually pursuant to law or to the requirements of a federal or state supervising or examining authority. After acceptance in writing of such appointment by the successor Warrant Agent, it shall be vested with the same authority, powers, rights, immunities, duties and responsibilities as its predecessor Warrant Agent, without any further assurance, conveyance, act or deed; provided, however, the predecessor Warrant Agent shall in all events deliver and transfer to the successor Warrant Agent all property, if any, at the time held hereunder by the predecessor Warrant Agent and if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of Holdings and shall be legally and validly executed and delivered by the -22- 26 resigning or removed Warrant Agent. As soon as practicable after such appointment, Holdings shall give notice thereof to the predecessor Warrant Agent and the Holders. Failure to give any notice provided for in this Section 8.13, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the predecessor Warrant Agent or the appointment of the successor Warrant Agent, as the case may be. Section 8.14. Successor Warrant Agent. Any corporation into which the Warrant Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Warrant Agent shall be a party, shall be the successor Warrant Agent under this Agreement without any further act; provided, however, that such corporation would be eligible for appointment as a successor to the Warrant Agent under the provisions of Section 8.13 hereof. Any such successor Warrant Agent shall promptly cause notice of its succession as Warrant Agent to be mailed to Holdings and the Holders. Section 8.15. Other. (a) No provision of this Agreement shall require the Warrant Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (b) The Warrant Agent shall not be required to take notice or be deemed to have notice of any fact, event or determination (including any dates or events defined in this Agreement or the designation of any Person as an acquiring Person or Affiliate) under this Agreement unless and until the Warrant Agent shall be specifically notified in writing by Holdings of such fact, event or determination. (c) If, with respect to any Warrant Certificate surrendered to the Warrant Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase, as the case may be, has not been completed, the Warrant Agent shall not take any further action with respect to the requested exercise or transfer without first consulting with Holdings. ARTICLE IX Miscellaneous Section 9.01. Money Deposited with the Warrant Agent. The Warrant Agent shall not be required to pay interest on any moneys deposited pursuant to the provisions of this Agreement, except such as it shall agree in writing with Holdings to pay thereon. Any moneys, securities or other property which at any time shall be deposited by Holdings or on its behalf with the Warrant Agent pursuant to this Agreement shall be and are hereby assigned, transferred and set over to the Warrant Agent in trust for the purpose for which such moneys, securities or other -23- 27 property shall have been deposited; but such moneys, securities or other property need not be segregated from other funds, securities or other property except to the extent required by law. Section 9.02. Payment of Taxes. All Common Stock or other securities issuable upon the exercise of Warrants shall be validly issued, fully paid and non-assessable, and Holdings shall pay any taxes and other governmental charges that may be imposed under the Laws of the United States of America or any political subdivision or taxing authority thereof or therein in respect of the issue or delivery thereof or of other securities deliverable upon exercise of Warrants (other than income taxes imposed on the Holders). Holdings shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issuance of any certificate evidencing shares of Common Stock or other securities or property issuable upon the exercise of the Warrants or payment of cash to any Person other than the Holder of a Warrant Certificate surrendered upon the exercise of a Warrant and in case of such transfer or payment, the Warrant Agent and Holdings shall not be required to issue any stock certificate or pay any cash until such tax or charge has been paid or it has been established to the Warrant Agent's and Holdings's satisfaction that no such tax or charge is due. Section 9.03. Merger, Consolidation or Sale of Assets of Holdings. Holdings will not merge into or consolidate with any other Person, or sell or otherwise transfer all or substantially all of its property, assets or business to any Person (other than a merger, consolidation or sale in which the consideration payable to the holders of shares of Common Stock in exchange for their shares consists solely of cash), unless the Person resulting from such merger or consolidation, or transferee of such property, assets or business, as the case may be, executes with the Warrant Agent a supplemental agreement providing for the express assumption by such Person of the due and punctual performance and observance of each and every covenant and condition of this Agreement to be performed and observed by Holdings. Section 9.04. Reports to Holders. Notwithstanding that Holdings may not be required to remain subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, Holdings shall file with the Commission and provide the Warrant Agent and the Holders with such annual reports and such information, documents and other reports specified in Section 13 and 15(d) of the Exchange Act, such information, documents and other reports to be so filed and provided at the times specified for the filing of such information, documents and reports under such Sections. Section 9.05. Notices. (a) Any notice, request, demand or report (each, a "Communication") required or permitted to be given or made by this Agreement shall be in writing (b) Any Communication authorized by this Agreement to be given or made by the Warrant Agent or by any Holder to or on Holdings shall be sufficiently given or made if sent by registered or certified mail and shall be deemed given upon receipt, or by facsimile or electronic mail, addressed (until another address is filed Holdings with the Warrant Agent) as follows: -24- 28 Sterling Chemicals Holdings, Inc. 1200 Smith, Suite 1900 Houston, Texas 77002 Attention: General Counsel Facsimile No.: (713) 654-9577 E-Mail: delkins@sterlingchemicals.com (c) Any Communication authorized by this Agreement to be given or made by Holdings or by any Holder to or on the Warrant Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, or by facsimile or electronic mail, addressed (until another address is filed by the Warrant Agent with Holdings) as follows: Harris Trust and Savings Bank 700 Louisiana Street, Suite 3350 Houston, Texas 77002 Attention: Ray G. Rosenbaum Facsimile No.: (713) 223-0674 E-Mail: Ray.Rosenbaum@bmo.com (d) Any Communication authorized by this Agreement to be given or made by Holdings or the Warrant Agent to any Holder shall be sufficiently given or made if sent by first-class mail, postage prepaid, or by facsimile or electronic mail, addressed to such Holder at the address of such Holder as shown on the registry books of Holdings. Holdings shall deliver a copy of any notice or demand it delivers to any Holder to the Warrant Agent and the Warrant Agent shall deliver a copy of any notice or demand it delivers to any Holder to Holdings. Section 9.06. Governing Law. THE VALIDITY, INTERPRETATION AND PERFORMANCE OF THIS AGREEMENT AND THE WARRANT CERTIFICATES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Section 9.07. Binding Effect. This Agreement shall be binding upon and inure to the benefit of Holdings and the Warrant Agent and their respective successors and assigns, and the Holders from time to time of the Warrants. Nothing in this Agreement is intended or shall be construed to confer upon any Person, other than Holdings, the Warrant Agent and the Holders of the Warrants, any right, remedy or claim under or by reason of this Agreement or any part hereof. Section 9.08. Counterparts. This Agreement may be executed manually or by facsimile in any number of counterparts, each of which shall be deemed an original, but all of which together constitute one and the same instrument. Section 9.09. Amendments. (a) The Warrant Agent may, without the consent or concurrence of the Holders, enter into one or more supplemental agreements or amendments with Holdings for the purpose of (i) evidencing the rights of the Holders upon consolidation, merger, -25- 29 sale, transfer, reclassification, liquidation or dissolution pursuant to Section 4.01(g), (ii) making any changes or corrections in this Agreement that are required to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provision herein or any clerical omission or mistake or manifest error herein contained, (iii) making such other provisions in regard to matters or questions arising under this Agreement as shall not adversely affect the interest of the Holders in any material respect or be inconsistent with this Agreement or any supplemental agreement or amendment or (iv) adding further covenants and agreements of Holdings in this Agreement or surrendering any rights or power reserved to or conferred upon Holdings in this Agreement. (b) With the consent of the Holders of at least a majority in number of the Warrants at the time outstanding, Holdings and the Warrant Agent may at any time and from time to time by supplemental agreement or amendment add any provisions to or change in any manner or eliminate any of the provisions of this Agreement or of any supplemental agreement or modify in any manner the rights and obligations of the Holders and Holdings; provided, however, that no such supplemental agreement or amendment shall, without the consent of the Holder of each outstanding Warrant affected thereby, (i) alter the provisions of this Agreement so as to adversely affect in any material respect the terms upon which Warrants are exercisable, (ii) decrease the number of Underlying Securities (other than pursuant to adjustments made in accordance with Article IV hereof) or (iii) reduce the number of Warrants outstanding the consent of whose holders is required for any such supplemental agreement or amendment. Notwithstanding anything to the contrary contained in this Agreement, no supplement agreement or amendment that changes the rights and duties of the Warrant Agent under this Agreement shall be effective against the Warrant Agent without the written consent of the Warrant Agent. Section 9.10. Common Stock Legend. In the event a Holder exercises any Warrant at a time when the Registration Statement is not effective and available pursuant to an exemption from the registration requirements of the Securities Act, any Common Stock or other securities of Holdings issuable upon exercise of such Warrant shall bear the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW (COLLECTIVELY, THE "ACTS") AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS MADE PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACTS OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF. FURTHER, THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS AND UNTIL (1) SUCH SECURITIES HAVE BEEN REGISTERED UNDER THE ACTS OR (2) THE HOLDER OF SUCH SECURITIES PROVIDES THE COMPANY WITH (A) AN UNQUALIFIED WRITTEN OPINION OF LEGAL -26- 30 COUNSEL, WHICH COUNSEL AND OPINION (IN FORM AND SUBSTANCE) SHALL BE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT THE PROPOSED DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACTS OR (B) SUCH OTHER EVIDENCE AS MAY BE REASONABLY SATISFACTORY TO THE COMPANY THAT THE PROPOSED DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACTS. Section 9.11. Third Party Beneficiaries. The Holders shall be third party beneficiaries to the agreements made hereunder between Holdings, on the one hand, and the Warrant Agent, on the other hand, and each Holder shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed, as of the day and year first above written. STERLING CHEMICALS HOLDINGS, INC. By: ---------------------------------- Printed Name: ------------------------ Title: ------------------------------- HARRIS TRUST AND SAVINGS BANK, as Warrant Agent By: ---------------------------------- Ray G. Rosenbaum, Vice President -27- 31 EXHIBIT A Form Of Warrant Certificate THE COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF STERLING CHEMICALS HOLDINGS, INC. (THE "COMMON STOCK") FOR WHICH THIS WARRANT IS EXERCISABLE MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES ABSENT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE, "SECURITIES ACT"), AND ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. ACCORDINGLY, NO HOLDER SHALL BE ENTITLED TO EXERCISE SUCH HOLDER'S WARRANTS AT ANY TIME UNLESS, AT THE TIME OF EXERCISE, (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT RELATING TO THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAS BEEN FILED WITH, AND DECLARED EFFECTIVE BY, THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), AND NO STOP ORDER SUSPENDING THE EFFECTIVENESS OF SUCH REGISTRATION STATEMENT HAS BEEN ISSUED BY THE COMMISSION, OR (ii) THE ISSUANCE OF SUCH SHARES IS PERMITTED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. 32 STERLING CHEMICALS HOLDINGS, INC. No. Warrants ----------- --------- WARRANTS TO PURCHASE COMMON STOCK This certifies that , or its registered assigns, is the owner of the number of Warrants set forth above, each of which represents the right to purchase, commencing December __, 1998, from STERLING CHEMICALS HOLDINGS, INC., a Delaware corporation ("Holdings"), one share of the common stock, par value $0.01 per share (the "Common Stock"), of Holdings (subject to adjustment as provided in the Warrant Agreement hereinafter referred to) at the purchase price (the "Exercise Price") of $6.00 per share, upon surrender hereof at the office of Harris Trust and Savings Bank or to its successor as the warrant agent under the Warrant Agreement (any such warrant agent being herein call the "Warrant Agent"), with the Subscription Form on the reverse hereof duly executed, with signature guaranteed as therein specified and simultaneous payment in full (by wire transfer or by certified or official bank or bank cashier's check payable to the order of Holdings, or by the surrender of Warrants having an aggregate Spread equal to the Exercise Price of the Warrants being exercised) of the purchase price for the shares as to which the Warrant(s) represented by this Warrant Certificate are exercised, all subject to the terms and conditions hereof and of the Warrant Agreement. Notwithstanding anything to the contrary contained herein, Holdings shall have the right to not allow an exercise of any Warrants in the event the Registration Statement is not effective and available at the time such Warrants are exercised, unless prior to the exercise of such Warrants, the Holder thereof furnishes to the Warrant Agent and Holdings such certifications, legal opinions or other information as either of them may reasonably require to confirm that such exercise is being made pursuant to an exemption from the registration requirements of the Securities Act. This Warrant Certificate is issued under and in accordance with a Warrant Agreement dated as of December __, 1998 (the "Warrant Agreement") by and between Holdings and Harris Trust and Savings Bank, as Warrant Agent, and is subject to the terms and provisions contained therein, all of which terms and provisions the Holder of this Warrant Certificate consents to by acceptance hereof. The Warrant Agreement is hereby incorporated herein by reference and made a part hereof. Reference is hereby made to the Warrant Agreement for a full description of the rights, limitations of rights, obligations, duties and immunities thereunder of Holdings and the Holders of the Warrants. The summary of the terms of the Warrant Agreement contained in this Warrant Certificate is qualified in its entirety by express reference to the Warrant Agreement. All capitalized terms used in this Warrant Certificate that are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. 33 Copies of the Warrant Agreement are on file at the office of the Warrant Agent and may be obtained by writing to the Warrant Agent at the following address: Harris Trust and Savings Bank 700 Louisiana Street Suite 3350 Houston, Texas 77002 Attention: Ray G. Rosenbaum If Holdings merges or consolidates with or into, or sells all or substantially all of its property and assets to, another Person solely for cash, or in the event of the dissolution, liquidation or winding-up of Holdings, the Holders of Warrants shall be entitled to receive distributions on the date of such event on an equal basis with holders of Common Stock (or other securities issuable upon exercise of the Warrants) as if the Warrants had been exercised immediately prior to such event (less the Exercise Price). The number of shares of Common Stock purchasable upon the exercise of each Warrant is subject to adjustment as provided in the Warrant Agreement. Except as stated in the immediately preceding paragraph, in the event Holdings merges or consolidates with, or sells all or substantially all of its assets to, another Person, each Warrant will, upon exercise, entitle the Holder thereof to receive the number of shares of capital stock or other securities or the amount of money and other property which the holder of a share of Common Stock (or other securities or property issuable upon exercise of a Warrant) is entitled to receive upon completion of such merger, consolidation or sale. As to any final fraction of a share which the same Holder of one or more Warrants would otherwise be entitled to purchase upon exercise thereof in the same transaction, Holdings shall pay the cash value thereof determined as provided in the Warrant Agreement. All Common Stock or other securities issuable by Holdings upon the exercise of Warrants shall be validly issued, fully-paid and non-assessable, and Holdings shall pay all taxes and other governmental charges that may be imposed under the Laws of the United States of America or any political subdivision or taxing authority thereof or therein in respect of the issue or delivery of such shares or of other securities deliverable upon exercise of Warrants. Holdings shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for Common Stock, and in such case Holdings shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the Warrant Agent's and Holdings' satisfaction that no tax or other charge is due. This Warrant Certificate and all rights hereunder are transferable by the registered Holder hereof, in whole or in part, in accordance with the provisions of the Warrant Agreement, on the register of Holdings maintained by the Warrant Agent for such purpose at its office in Houston, Texas, upon surrender of this Warrant Certificate duly endorsed, or accompanied by a 34 written instrument of transfer form satisfactory to Holdings and the Warrant Agent duly executed, with signatures guaranteed as specified in the attached Form of Assignment, by the registered Holder hereof or his attorney duly authorized in writing and upon payment of any necessary transfer tax or other governmental charge imposed upon such transfer. Upon any partial transfer, Holdings will issue and the Warrant Agent will deliver to such Holder a new Warrant Certificate with respect to any portion not so transferred. Each taker and Holder of this Warrant Certificate, by taking and holding the same, consents and agrees that prior to the registration of transfer as provided in the Warrant Agreement, Holdings and the Warrant Agent may treat the person in whose name the Warrants are registered as the absolute owner hereof for any purpose and as the Person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding. This Warrant Certificate may be exchanged, in accordance with the terms of the Warrant Agreement, at the office of the Warrant Agent maintained for such purpose in Houston, Texas for Warrant Certificates representing the same aggregate number of Warrants, each new Warrant Certificate to represent such number of Warrants as the Holder hereof shall designate at the time of such exchange. Prior to the exercise of the Warrants represented hereby, the Holder of this Warrant Certificate, as such, shall not be entitled to any rights of a stockholder of Holdings, including, without limitation, the right to vote or to consent to any action of the stockholders, to receive dividends or other distributions, to exercise any preemptive right or to receive any notice of meetings of stockholders, and shall not be entitled to receive any notice of any proceedings of Holdings except as provided in the Warrant Agreement. This Warrant Certificate shall be void and all rights evidenced hereby shall cease on ______________, unless sooner terminated by the liquidation, dissolution or winding-up of Holdings or as otherwise provided in the Warrant Agreement upon the consolidation or merger of Holdings with, or sale of all or substantially all of the assets and properties of Holdings to, another Person. 35 This Warrant Certificate shall not be valid for any purpose until it shall have been countersigned by the Warrant Agent. Dated: STERLING CHEMICALS HOLDINGS, INC. ------------ By: --------------------------------- Printed Name: ----------------------- Title: ------------------------------ Countersigned: HARRIS TRUST AND SAVINGS BANK, as Warrant Agent By: -------------------------------- Authorized Signatory 36 FORM OF REVERSE OF WARRANT CERTIFICATE SUBSCRIPTION FORM (to be executed only upon exercise of Warrants) To: --------------- The undersigned hereby irrevocably exercises of the Warrants represented by the within Warrant Certificate for the purchase of (subject to adjustment) share of Common Stock, par value $0.01 per share, of STERLING CHEMICALS HOLDINGS, INC., a Delaware corporation, and herewith makes payment of $______________ (such payment being by wire transfer or by certified or official bank or bank cashier's check payable to the order or at the direction of Sterling Chemicals Holdings, Inc.), or by the surrender of Warrants having an aggregate Spread (as defined in the Warrant Agreement) equal to the Exercise Price of the Warrants being exercised), all at the exercise price and on the terms and conditions specified in the within Warrant Certificate and the Warrant Agreement therein referred to, and hereby surrenders this Warrant Certificate and all right, title and interest therein to and directs that the Common Stock deliverable upon the exercise of such Warrants be registered or placed in the name and at the address specified below and delivered thereto. Dated: ------------------ ---------------------------------- (Signature of Owner) ---------------------------------- (Street Address) ---------------------------------- (City) (State) (Zip Code) Signature Guaranteed By(1) ---------------------------------- - ---------- (1) The Holder's signature must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" as defined by Rule 17Ad-15 under the Exchange Act. 37 Securities and/or check to be issued to: --------------------------------------- Please insert social security or identifying number: --------------------------- Name: -------------------------------------------------- Street Address: ---------------------------------------- City, State and Zip Code: ------------------------------ 38 FORM OF ASSIGNMENT FOR VALUE RECEIVED, the undersigned registered holder of the within Warrant Certificate hereby sells, assigns and transfers unto the Assignee(s) named below (including the undersigned with respect to any Warrants constituting a part of the Warrants evidenced by the within Warrant Certificate not being assigned hereby) all of the right of the undersigned under the within Warrant Certificate, with respect to the number of Warrants set forth below: Name(s) of Assignee(s): ---------------------------------- Address: ------------------------------------------------- No. of Warrants: ----------------------------------------- Please insert social security or other identifying number of assignee(s): ____________________ and does hereby irrevocably constitute and appoint _______________________________ the undersigned's attorney to make such transfer on the books of _____________________ maintained for such purposes, with full power of substitution in the premises. Dated: ------------------ ---------------------------------- (Signature of Owner) ---------------------------------- (Street Address) ---------------------------------- (City) (State) (Zip Code) Signature Guaranteed By(2) ---------------------------------- - ---------- (2) The Holder's signature must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" as defined by Rule 17Ad-15 under the Exchange Act. EX-4.4 3 WARRANT AGREEMENT - DATED 12/15/1998 1 EXHIBIT 4.4 WARRANT AGREEMENT AMONG STERLING CHEMICALS HOLDINGS, INC. AND CHASE BANK OF TEXAS, NATIONAL ASSOCIATION CREDIT SUISSE FIRST BOSTON AND CERTAIN OTHER FINANCIAL INSTITUTIONS DECEMBER 15, 1998 2 TABLE OF CONTENTS 1. Issuance of Warrants; Form of Warrant......................................1 2. Representations, Warranties and Covenants of the Company...................2 (a) Existence...........................................................2 (b) Power and Authority.................................................2 (c) Reservation, Issuance and Delivery of Common Stock..................2 (d) Execution and Delivery..............................................3 (e) Valid and Binding Obligations.......................................3 (f) Liabilities, Litigation and Restrictions............................3 (g) Authorization and Consents..........................................4 (h) Compliance with Laws................................................4 (i) No Material Misstatements...........................................4 (j) Solvency............................................................4 3. Registration...............................................................4 4. Exchange of Warrant Certificates...........................................4 5. Transfer of Warrants.......................................................5 6. Term of Warrants; Exercise of Warrants.....................................5 7. Compliance with Government Regulations.....................................7 8. Payment of Taxes...........................................................7 9. Mutilated or Missing Warrants..............................................7 10. Reservation of Warrant Shares; Purchase and Cancellation of Warrants.......8 11. Adjustment of Number of Warrant Shares.....................................8 11.1. Mechanical Adjustments..............................................9 11.2. Voluntary Adjustment by the Company................................14 11.3. Notice of Adjustment...............................................14 11.4. Preservation of Purchase Rights Upon Merger, Consolidation, Etc....14 11.5. Statement on Warrants..............................................15 11.6. Company to Prevent Dilution........................................15 11.7. Concerning All Adjustments.........................................15 12. Fractional Interests......................................................15
i 3 13. Registration Under the Securities Act of 1933.............................16 14. Certificate to Bear Legends...............................................17 15. Registration Rights.......................................................18 (a) Demand Registration Rights.........................................18 (b) Piggy-back Registration Rights.....................................21 (c) Other Matters......................................................22 (d) Restrictions on Public Sale by the Company.........................23 (e) Rule 144...........................................................23 (f) Other Registration Rights..........................................23 16. No Rights as Stockholders; Notice to Warrant Holders......................24 17. Expenses..................................................................25 18. Right to Inspection.......................................................25 19. Right to Information......................................................25 20. Notices...................................................................25 21. Governing Law.............................................................26 22. Supplements and Amendments................................................26 23. Survival of Representations, Warranties and Covenants.....................26 24. Successors................................................................26 25. Merger or Consolidation of the Company....................................27 26. Benefits of this Warrant Agreement........................................27 27. Captions..................................................................27 28. Counterparts..............................................................27 29. Termination...............................................................27
ii 4 WARRANT AGREEMENT THIS WARRANT AGREEMENT ("Warrant Agreement") is dated as of December 15, 1998, among Sterling Chemicals Holdings, Inc., a Delaware corporation (the "Company"), Chase Bank of Texas, National Association ("Chase"), Credit Suisse First Boston ("CS First Boston"), and the financial institutions signatory hereto. WHEREAS, Chase, individually and as Administrative Agent ("Agent"), CS First Boston, individually and as the Documentation Agent (the "Documentation Agent"), certain other financial institutions (the Agent as a lender, the Documentation Agent as a lender and such other financial institutions referred to are hereinafter collectively called the "Lenders") and the Company's wholly owned subsidiary, Sterling Chemicals, Inc. ("SCI"), have entered into a certain Amended and Restated Credit Agreement, dated July 10, 1997, as amended and supplemented as of March 31, 1998 and December 15, 1998 (the "Facility"); WHEREAS, the Company owns all of the issued and outstanding capital stock of SCI and is indirectly is benefitted by the Facility; and WHEREAS, to induce the Lenders to enter into the Second Amendment to Amended and Restated Credit Agreement of even date herewith, the Company agreed to enter into this Warrant Agreement pursuant to which, upon the occurrence of certain events and on the terms and subject to the conditions set forth herein, the Company would issue to the Lenders warrants (the "Warrants") to purchase up to the number of shares of the common stock, par value $0.01 per share, of the Company ("Common Stock") which in the aggregate is equal to five percent (5%) of the number of shares of Common Stock issued and outstanding (on a fully diluted basis and treating all of the shares of common stock issuable upon exercise, conversion or exchange of all options, warrants and other convertible and exchangeable securities as being outstanding) immediately after such issuance, each Warrant entitling the registered holder thereof (the "Holder" and, together with the registered holders of all other Warrants, the "Holders") to purchase one share of Common Stock at the Exercise Price (as defined in Section 6 hereof), subject to adjustment as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, and for other good and valuable consideration, the parties hereto agree as follows: 1. ISSUANCE OF WARRANTS; FORM OF WARRANT. In the event, and only in the event, that SCI becomes obligated to request or otherwise cause the Company to issue Warrants to the Lenders pursuant to Section 5.01(k) of the Facility, the Company will, on the Warrant Date referred to in the Facility, issue and deliver to each Lender, or to an affiliate, successors or assigns thereof designated in writing by such Lender, Warrants to purchase up to that number of shares of Common Stock which in the aggregate is equal to such Lender's Total Credit Percentage (as defined in the Facility) times the number which in the aggregate is equal to (5%) of the number of shares of Common Stock issued and outstanding (on a fully diluted basis and treating all of the shares of common stock issuable upon exercise, conversion or exchange of all options, warrants and other convertible and exchangeable securities as being outstanding) immediately after such issuance. The Warrants shall be evidenced by -1- 5 certificates in registered form (the "Warrant Certificates"), in the form attached hereto as Exhibit A, and may have such insertions, letters, numbers or other marks of identification and such legends and endorsements stamped, printed, lithographed or engraved thereon as may, consistently herewith, be determined to be necessary or appropriate by the officers of the Company executing such Warrant Certificates, as evidenced by their execution of the Warrant Certificates, or as may be required to comply with any applicable law, rule or regulation or with any rule or regulation of any securities exchange or to conform to usage. The Warrants shall be executed on behalf of the Company by its Chairman of the Board, President, Treasurer or any Vice President, under its corporate seal, affixed or in facsimile, attested by the signature of its Secretary or an Assistant Secretary. The execution of a Warrant Certificate by any such officer of the Company may be made either manually or by facsimile signature printed thereon. A Warrant Certificate bearing the signature of individuals who were at any time the proper officers of the Company shall bind the Company notwithstanding that such individuals or any of them shall have ceased to hold such offices prior to the delivery of such Warrant Certificate or did not hold such offices on the date of this Warrant Agreement. Warrant Certificates shall be dated as of the date of execution thereof by the Company, either upon initial issuance or upon division, exchange, substitution or transfer. The exercise of any Warrant by a Holder which is a bank holding company under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), or by any Holder who is a transferee from such a bank holding company, is subject to the provisions of Section 6(c). 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company hereby represents, warrants and covenants as follows: (a) EXISTENCE. The Company is a corporation, duly organized and validly existing under the laws of the State of Delaware and is authorized to do business and is in good standing as a foreign corporation in every jurisdiction in which it owns or leases real property or in which the nature of its business requires it to be so qualified, except where the failure to so qualify, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business, operations, assets, condition (financial or otherwise) or results of operations of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect"). (b) POWER AND AUTHORITY. The Company has all requisite corporate power and authority, and has taken all corporate action necessary, to execute, deliver and perform this Warrant Agreement, to grant, issue and deliver the Warrants and to authorize and reserve for issuance and, upon payment from time to time of the Exercise Price, to issue and deliver the shares of Common Stock or other securities issuable upon exercise of the Warrants. This Warrant Agreement has been duly executed and delivered by the Company. (c) RESERVATION, ISSUANCE AND DELIVERY OF COMMON STOCK. There have been reserved for issuance, and the Company shall at all times keep reserved for issuance, out of the authorized and unissued shares of Common Stock, a number of shares of Common Stock sufficient to provide for the exercise of the rights of purchase represented by the Warrants, and such shares, when issued upon receipt of payment therefor in accordance with the terms of the -2- 6 Warrant Certificates and of this Warrant Agreement, will be legally and validly issued, fully paid and non-assessable and will be free of any preemptive rights of stockholders or any restrictions; provided, however, that unless the Holders shall have exercised their registration rights in Section 15 hereof, such shares will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state's securities act. (d) EXECUTION AND DELIVERY. Neither the execution or delivery of this Warrant Agreement nor the consummation of the transactions herein contemplated does or will result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other 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 or to which any of the property or assets of the Company is subject, nor will such action result in any violation of any provision of the Certificate of Incorporation or Bylaws of the Company or any of its subsidiaries or any statute or any order, rule or regulation or any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of its or their properties, except for breaches, violations and defaults which could not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issuance and sale of the Warrants or the consummation by the Company of the transactions contemplated by this Warrant Agreement, except those required by the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any State securities laws and except for those which the failure to obtain or make could not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. (e) VALID AND BINDING OBLIGATIONS. Assuming the due authorization, execution and delivery hereof and thereof by the parties hereto and thereto (other than the Company), this Warrant Agreement and all related documents, when duly executed and delivered, are legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and general equitable principles. (f) LIABILITIES, LITIGATION AND RESTRICTIONS. Except for the litigation and liabilities disclosed in connection with the Facility and the litigation and liabilities described in the reports (including annual and quarterly reports), proxy or information statements and/or registration statements filed by the Company with the Securities and Exchange Commission, (including the exhibits thereto and the financial statements contained therein and the notes thereto, collectively, the "SEC Documents"), the Company and its subsidiaries have no liabilities, direct or contingent, which could reasonably be expected to have a Material Adverse Effect. Except as disclosed to the Lenders or described in the SEC Documents, no litigation or other action of any nature affecting the Company or any of its subsidiaries is pending before any governmental authority or, to the knowledge of the Company, threatened against or affecting the Company or any of its subsidiaries, which could reasonably be expected to have a Material Adverse Effect. -3- 7 (g) AUTHORIZATION AND CONSENTS. No authorization, consent, approval, exemption, franchise, permit or license of, or filing with, any governmental authority or other person is required to authorize, or is otherwise required in connection with, the valid execution and delivery by the Company of this Warrant Agreement and all related documents and the performance by the Company of its obligations hereunder, except those required by the Securities Act, the Exchange Act, and any State securities laws and except for those which the failure to obtain or make could not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. (h) COMPLIANCE WITH LAWS. Except as otherwise described in the SEC Documents, to the knowledge of the Company, neither the business nor any of the activities of the Company or any of its subsidiaries, as presently conducted, violates any requirement of law the result of which violation could reasonably be expected to have a Material Adverse Effect. (i) NO MATERIAL MISSTATEMENTS. Except as otherwise described in the SEC Documents, no information, statement, certificate, document, exhibit or report prepared by or at the direction or with the supervision of the Company and furnished to the Lenders in connection with the negotiation and preparation of this Warrant Agreement and all related documents contains any material misstatements of fact or omits to state a material fact necessary to make the statements contained therein not misleading as of the date made or deemed made. (j) SOLVENCY. The Company and its subsidiaries, taken as a whole, are Solvent (as this term is defined in the Facility) as of and immediately following the date of execution of this Warrant Agreement. 3. REGISTRATION. The Warrants shall be numbered and shall be registered on the books of the Company (the "Warrant Register") as they are issued. The Warrants shall be registered initially in such names and such denominations as the Lenders have specified (or will specify) to the Company in writing. 4. EXCHANGE OF WARRANT CERTIFICATES. Subject to any restriction upon transfer set forth in this Warrant Agreement, each Warrant Certificate may be exchanged at the option of the Holder thereof for another Warrant Certificate or Certificates of different denominations entitling the Holder thereof to purchase upon surrender to the Company or its duly authorized agent a like aggregate number of shares of Common Stock as the Warrant Certificate or Certificates surrendered then entitle such Holder to purchase. The shares of Common Stock issuable upon exercise of the Warrants are referred to herein as "Warrant Shares". Any Holder desiring to exchange a Warrant Certificate or Certificates shall make such request in writing delivered to the Company, and shall surrender, properly endorsed, the Warrant Certificate or Certificates to be so exchanged. Thereupon, the Company shall execute and deliver to the person entitled thereto a new Warrant Certificate or Certificates, as the case may be, as so requested. Any Warrant Certificate issued upon exchange, transfer or partial exercise of the Warrants shall be the valid obligation of the Company, evidencing the same generic rights and entitled to the same generic benefits under this Warrant Agreement as the Warrant Certificate surrendered for such exchange, transfer or exercise. -4- 8 5. TRANSFER OF WARRANTS. A Holder may transfer its Warrants only by written notice to the Company stating the name of the proposed transferee and otherwise complying with the terms of this Warrant Agreement and all applicable laws, rules and regulations. Subject to the provisions of Section 15 hereof, the Warrants shall be transferrable only on the Warrant Register upon delivery to the Company of the Warrant Certificate or Certificates duly endorsed by the Holder or by his duly authorized attorney-in-fact or legal representative, or accompanied by proper evidence of succession, assignment or authority to transfer. In all cases of transfer by an attorney-in-fact, the original power of attorney, duly approved, or an official copy thereof, duly certified, shall be deposited with the Company. In case of transfer by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced, and may be required to be deposited with the Company in its discretion. Prior to due presentation for registration of transfer, the Company and any agent of the Company may deem and treat the person in whose name the Warrants are registered in the Warrant Register as the absolute owner thereof for all purposes (notwithstanding any notation of ownership or other writing on the Warrant Certificate made by anyone), and the Company shall not be affected by any notice to the contrary or be bound to recognize any equitable or other claim to or in interest in any Warrants on the part of any other person and shall not be liable for any registration of transfer of Warrants that are registered or to be registered in the Warrant Register in the name of a fiduciary or the nominee of a fiduciary unless made with actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration of transfer or with such knowledge of such facts that its participation therein amounts to bad faith. No service charge shall be made for any registration of transfer or exchange of Warrants, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection with any registration of transfer of Warrants. Upon any registration of transfer, the Company shall deliver a new Warrant Certificate or Certificates to the person(s) entitled thereto. 6. TERM OF WARRANTS; EXERCISE OF WARRANTS. (a) Each Warrant entitles the Holder thereof to purchase one share of Common Stock at any time from the Warrant Date until 5:00 P.M., Houston time, on January 1, 2007 (the "Expiration Date") at a purchase price of $0.01 per share (the "Exercise Price"). Each outstanding Warrant may be exercised on any business day which is on or after its date of issue and on or before the Expiration Date, but only if a registration statement filed under the Securities Act with respect to the exercise of such Warrants (a "Registration Statement") is, at the time of exercise, effective and available or the exercise of such Warrants is exempt from the registration requirements of the Securities Act. Any Warrants not exercised by 5:00 p.m., Houston time, on the Expiration Date shall expire and all rights thereunder and all rights in respect thereof under this Warrant Agreement shall automatically terminate at such time. The number of shares issuable upon exercise of Warrants are subject to adjustment upon the occurrence of certain events pursuant to the provisions of Section 11 of this Warrant Agreement. -5- 9 (b) Each Warrant Certificate shall, subject to the provisions of this Warrant Agreement and such Warrant Certificate, entitle the Holder thereof to purchase from the Company (and the Company shall issue and sell to such Holder) one share of Common Stock (subject to adjustment as provided herein) for each Warrant represented thereby at the Exercise Price, upon surrender to the Company, or its duly authorized agent, of such Warrant Certificate, with the purchase form on the reverse thereof duly filled in and signed, and upon payment to the Company of the Exercise Price for each Warrant being exercised. Each Holder may pay the Exercise Price in cash, by certified or official bank check payable to the order of the Company; provided, that each Holder may at any time exercise the Warrants for "Net Warrant Shares." The number of Net Warrant Shares will be determined as described by the following formula: Net Warrant Shares = [WS x (MP-EP)]/MP. "WS" is the aggregate number of Warrant Shares issuable upon exercise of the Warrants or portion of Warrants in question. "MP" is the Market Price of the Common Stock on the last trading day preceding the date of the request to exercise the Warrants. "Market Price" shall mean the then current market price per share of Common Stock, as determined in paragraph 11.1(e). "EP" shall mean the Exercise Price. Upon such surrender of a Warrant Certificate, and payment of the Exercise Price, the Company at its expense shall cause its transfer agent to issue and cause to be delivered with all reasonable dispatch (but in any event within 5 business days) to or upon the written order of the Holder and in such name or names as the Holder may designate, a Warrant Certificate or Certificates for the number of full shares of Common Stock so purchased upon the exercise of such Warrants, together with cash, as provided in Section 12 of this Warrant Agreement, in respect of any fraction of a share of such Common Stock otherwise issuable upon such surrender. Such Warrant Certificate or Certificates shall be deemed for all purposes to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such shares as of the date of the surrender of such Warrant Certificate and payment of the Exercise Price or surrender of such Warrant Certificate with a notice requesting a net exercise as aforesaid. The rights of purchase represented by the Warrant Certificates shall be exercisable, at the election of the Holders thereof, either in full or from time to time in part and, in the event that any Warrant Certificate is exercised in respect of less than all of the Warrants represented thereby at any time prior to the Expiration Date, a new Warrant Certificate evidencing the remaining Warrant or Warrants will be issued. (c) A Holder which is a bank holding company under the Bank Holding Company Act shall so inform the Company and, at the time any Warrant is exercised by such Holder, and as a condition thereto, such Holder shall certify to the Company that such exercise, whether in whole or in part, does not violate such act; and no Warrant may be exercised in whole or in part prior to 45 days before the Expiration Date without such certification. If any such Holder shall transfer any Warrant, the transferee may not exercise such Warrant until the earlier of six months following the date of transfer and 45 days before the Expiration Date unless the transferror bank holding company shall certify to the Company at the time of transfer that, had such transferror exercised such Warrant at the time of transfer, such exercise would not have violated the Bank Holding Company Act. (d) In no event shall any Warrant be exercisable after the Expiration Date. -6- 10 7. COMPLIANCE WITH GOVERNMENT REGULATIONS. In the event a Holder exercises its Warrants at a time when the Registration Statement is not effective and available, such Holder must furnish to the Company such certifications, legal opinions or other information as the Company may reasonably require to confirm that such exercise is being made pursuant to an exemption from the registration requirements of the Securities Act. The Company covenants that if any share of Common Stock required to be reserved for purposes of exercise or conversion of Warrants require, under any Federal or state law or applicable governing rule or regulation of any national securities exchange, registration with or approval of any governmental authority, or listing on any such national securities exchange, before such shares may be issued upon exercise and subject to the provisions of Section 11, the Company will use its best efforts to cause such shares to be duly registered, approved or listed on the relevant national securities exchange, as the case may be; provided, however, the Company shall not be required to effect any registration under the Securities Act except in accordance with Section 15 hereof. 8. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of Warrant Shares upon the exercise of Warrants and any securities issued pursuant to Section 11 hereof; provided, however, that the Company shall not be required to pay (and the Holder or its transferee shall pay) any tax or taxes which may be payable in respect of any transfer involved in the issue or delivery of any Warrant Certificate or Certificates for Warrant Shares and any securities issued pursuant to Section 11 hereof in a name other than that of the Holder of such Warrants. 9. MUTILATED OR MISSING WARRANTS. Upon receipt by the Company of evidence satisfactory to it of the ownership and the loss, theft, destruction or mutilation of any Warrant Certificate, and an indemnity bond in form and amount and with corporate surety satisfactory to the Company, and (in the case of mutilation) upon surrender and cancellation thereof, then, in the absence of notice to the Company that the Warrants represented thereby have been acquired by a bona fide purchaser, the Company shall issue and deliver to the Holder of the lost, stolen, destroyed or mutilated Warrant Certificate, in exchange and substitution for or in lieu thereof, a new Warrant Certificate of the same tenor and representing an equivalent number of Warrants. Upon the issuance of any new Warrant Certificate under this Section 9, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and other expenses in connection therewith. Every new Warrant Certificate executed and delivered pursuant to this Section 9 in lieu of any lost, stolen, destroyed or mutilated Warrant Certificate shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, destroyed or mutilated Warrant Certificates shall be at any time enforceable by anyone, and shall be entitled to the benefits of this Warrant Agreement equally and proportionately with any and all other Warrant Certificates duly executed and delivered hereunder. The provisions of this Section 9 are exclusive and shall preclude (to the extent lawful) all other rights or remedies with respect to the replacement of lost, stolen, destroyed or mutilated Warrant Certificates. Notwithstanding the foregoing, no Lender which is a Holder shall be required to provide an indemnity bond as described in this Section 9 so long as such Lender provides the Company with an indemnity agreement in form and substance reasonably satisfactory to the Company. -7- 11 10. RESERVATION OF WARRANT SHARES; PURCHASE AND CANCELLATION OF WARRANTS. (a) The Company shall at all times reserve, out of its authorized and unissued shares of Common Stock, a number of shares of Common Stock sufficient to provide for the exercise of the rights of purchase represented by the Warrants. The Company will keep a copy of this Warrant Agreement on file with every transfer agent for any shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by the Warrants. Upon notice of exercise, the Company will supply any transfer agent with duly executed stock certificates for such purpose and will itself provide or otherwise make available any cash which may be issuable as provided by Section 12 of this Warrant Agreement. The Company will furnish to the transfer agent and any such subsequent transfer agent a copy of all notices of adjustments, and certificates related thereto, transmitted to each Holder pursuant to Section 11.3 hereof. All Warrants surrendered in the exercise of the rights thereby evidenced shall be cancelled. No shares of stock shall be subject to reservation in respect of the Warrants subsequent to the Expiration Date except to the extent necessary to comply with the terms of this Warrant Agreement. (b) The Company shall have the right, except as limited by law or other agreement, to purchase or otherwise acquire Warrants at such times, in such manner and for such consideration as it may deem appropriate. In the event the Company shall purchase or otherwise acquire Warrants, the Company may, at its option, cancel the related Warrant Certificates; provided, however, that unless and until the Warrant Certificates evidencing such Warrants are cancelled, such purchase or acquisition shall not operate as a redemption or termination of the right represented by such Warrants. 11. ADJUSTMENT OF NUMBER OF WARRANT SHARES. From and after the issuance of the Warrants, the number and kind of securities purchasable upon the exercise of each Warrant shall be subject to adjustment from time to time upon the occurrence of certain events, as hereafter defined, provided that the Company shall not be required to make any such adjustment unless such specified event occurs after the issuance of the Warrants. -8- 12 11.1. MECHANICAL ADJUSTMENTS. From and after the issuance of the Warrants, the number of Warrant Shares purchasable upon the exercise of each Warrant shall be subject to adjustment as follows: (a) In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) issue by reclassification of its shares of Common Stock other securities of the Company (including any such reclassification in connection with a consolidation or merger in which the Company is the surviving corporation), the number of Warrant Shares purchasable upon exercise of each Warrant immediately prior to the record date of such dividend or the effective date of such subdivision, combination or reclassification shall be adjusted so that the Holder of each Warrant shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which such Holder would have owned or have been entitled to receive after the happening of any of the events described above, had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) In case the Company shall issue rights, options or warrants generally to holders of its outstanding shares of Common Stock, without any charge to such holders, entitling them to subscribe for or purchase shares of Common Stock at a price per share which is lower at the record date mentioned below than the then current Market Price per share of Common Stock (as determined in accordance with paragraph (e) below), then in each such case the number of Warrant Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon exercise of each Warrant by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such rights, options or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such rights, options or warrants plus the number of shares which the aggregate offering price of the total number of shares of Common Stock so offered would purchase at the then current Market Price per share of Common Stock. Such adjustment shall be made whenever such rights, options or warrants are issued, and shall become effective retroactively immediately after the record date for the determination of stockholders entitled to receive such rights, options or warrants. (c) In case the Company shall distribute generally to holders of its outstanding shares of Common Stock evidences of its indebtedness or assets (including cash dividends or other cash distributions) or rights, options or warrants, or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock (excluding those referred to in paragraph (b) above), then in each case -9- 13 the number of Warrant Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon the exercise of each Warrant by a fraction, of which the numerator shall be the then current Market Price per share of Common Stock (as determined in accordance with paragraph (e) below) on the date of such distribution, and of which the denominator shall be the then current Market Price per share of Common Stock, less the then fair value (as determined in good faith by the Board of Directors of the Company, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights, options or warrants, or of such convertible or exchangeable securities applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. In the event of a distribution by the Company generally to holders of its outstanding shares of Common Stock of stock of a subsidiary or securities convertible into or exercisable for such stock, then in lieu of an adjustment in the number of Warrant Shares purchasable upon the exercise of each Warrant, the Holder, upon the exercise thereof at any time after such distribution, shall be entitled to receive from the Company, such subsidiary or both, as the Company shall determine, the number of shares of stock of a subsidiary or other securities to which such Holder would have been entitled if such Holder had exercised such Warrant immediately prior thereto, all subject to further adjustment as provided in this subsection 11.1; provided, however, that no adjustment in respect of dividends or interest on such stock of a subsidiary or other securities shall be made during the term of a Warrant or upon the exercise of a Warrant. (d) In case the Company shall sell and issue shares of Common Stock (other than pursuant to rights, options, warrants, or convertible or exchangeable securities (collectively, "Rights") initially issued before the initial issuance of Warrants under this Warrant Agreement or pursuant to any Rights if no adjustment was required in connection with the issuance of such Right or any adjustment required in connection with the issuance of such Right has been previously made) or Rights containing the right to subscribe for or purchase shares of Common Stock (excluding (i) shares and Rights issued in any of the transactions described in paragraphs (a), (b) or (c) above), (ii) any shares or Rights, if on the date the same were issued, the purchase, exercise, conversion or exchange price per share of Common Stock with respect thereto was at least equal to the Market Price per share of Common Stock on such date, (iii) any shares or Rights (with respect to not more than an aggregate of 10% of the outstanding shares of Common Stock) issued to employees of the Company or any of its subsidiaries and (iv) any shares or Rights issued as consideration when any corporation or business is acquired, merged into or becomes part of the Company or any subsidiary of the Company in an arm's-length transaction between the Company and a person or entity other than an affiliate of the Company) at a price per share of Common Stock (determined, in the case of such Rights by dividing (w) the total of the amount received or receivable by the Company (determined as provided below) in consideration of the -10- 14 sale and issuance of such Rights by (x) the total number of shares of Common Stock covered by such Rights) lower than the Market Price per share of Common Stock in effect immediately prior to such sale and issuance, then the number of Warrant Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon exercise of such Warrant by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately prior to such sale or issuance plus the number of additional shares of Common Stock sold or subject to issuance pursuant to such Rights and of which the denominator shall be the number of shares of Common Stock outstanding immediately prior to such sale or issuance of such shares or Rights plus the number of shares of Common Stock which the aggregate consideration received or receivable (determined as provided below) for such sale or issuance would purchase at the Market Price per share of Common Stock. Such adjustment shall be made successively whenever such an issuance is made. For the purposes of such adjustments, the consideration received or receivable by the Company for Rights shall be deemed to be the consideration received by the Company for such Rights, plus the consideration or premiums stated in such Rights to be paid for the shares of Common Stock covered thereby. In case the Company shall sell and issue shares of Common Stock or Rights containing the right to subscribe for or purchase shares of Common Stock, for a consideration consisting, in whole or in part, of property other than cash or its equivalent, then in determining the "price per share of Common Stock" and the "consideration received or receivable by the Company" for purposes of the first sentence of this paragraph (d), the Board of Directors shall determine, in its discretion, the fair value of said property, and such determination, if made in good faith, shall be binding upon all Holders. -11- 15 (e) The "Market Price" on any day shall mean the average of the daily market prices for a share of Common Stock over a period of 20 consecutive business days prior to the day as of which "Market Price" is being determined. The Market Price for each such business day shall be the average of the closing prices on such day of the Common Stock on all domestic exchanges on which the Common Stock is then listed, or, if there shall have been no sales on any such exchange on such day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if the Common Stock shall not be so listed, the average of the representative bid and asked prices quoted on The Nasdaq Stock Market as of 3:30 P.M., New York time, on such day, or if the Common Stock shall not be quoted on The Nasdaq Stock Market, the average of the high and low bid and asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization. If the Common Stock is listed on any domestic exchange, the term "business days" as used in this sentence shall mean business days on which such exchange is open for trading. If at any time the Common Stock is not listed on any domestic exchange or quoted on The Nasdaq Stock Market or the domestic over-the-counter market, the "Market Price" shall be deemed to be the higher of (i) the book value thereof, as determined by any firm of independent public accountants of recognized standing selected by the Board of Directors of the Company, as at the last day of any month ending within 60 days preceding the date as of which the determination is to be made or (ii) the fair value thereof, which shall be reasonably determined by the Board of Directors of the Company as of a date which is within 15 days of the date as of which the determination is to be made. Notwithstanding the foregoing, for the purpose of any calculation under paragraph (d) above, (A) with respect to any issuance of options under the Company's employee or director compensation stock option plans as in effect or as adopted by the Board of Directors of the Company, the term "Market Price", in such instances shall mean the fair market price on the date of the issuance of any such option determined in accordance with the Company's employee compensation stock option plans as in effect or adopted by the Board of Directors of the Company; and (B) with respect to any issuances of Common Stock (or Rights) in connection with bona fide corporate transactions (other than issuances in such transactions for cash or similar consideration), the term "Market Price" shall mean the fair market price per share as determined in arm's-length negotiations by the Company and such other parties (other than affiliates or subsidiaries of the Company) to such transactions as reflected in the definitive documentation with respect thereto, unless such determination is not reasonably related to the closing market price on the date of such determination. (f) In any case in which this Section 11.1 shall require that any adjustment in the number of Warrant Shares be made effective as of immediately after a record date for a specified event, the Company may elect to defer until the occurrence of the event the issuing to the Holder of any Warrant exercised after that record date the Warrant Shares and other securities of the Company, if any, issuable upon the exercise of any Warrant over and above the Warrant Shares and other securities of the Company, if any, issuable upon the exercise of any Warrant prior to such adjustment; provided, however, -12- 16 that the Company shall deliver to such Holder a due bill or other appropriate instrument evidencing the Holder's right to receive such additional shares or securities upon the occurrence of the event requiring such adjustment. (g) All calculations shall be made to the nearest one-thousandth of a share. (h) No adjustment in the number of Warrant Shares purchasable upon the exercise of any Warrant shall be required unless such adjustment would require an increase or decrease of at least one percent in the number of Warrant Shares purchasable upon the exercise of such Warrant; provided, however, that any adjustments which are not required to be made by reason of this Section 11.1(h) shall be carried forward and taken into account in any subsequent adjustment. No adjustment in the number of Warrant Shares purchasable upon the exercise of each Warrant need be made under paragraphs (b), (c) and (d) if the Company issues or distributes to each Holder the Rights or evidences of indebtedness or assets referred to in those paragraphs which each Holder would have been entitled to receive had the Warrants been exercised prior to the happening of such event or the record date with respect thereto regardless of whether the Warrants are exercisable at the time of the happening of such event or at the time of any record date with respect thereto. No adjustment need be made for a change in the par value of the Warrant Shares. (i) For the purpose of this Section 11.1, the terms "shares of Common Stock" and "Warrant Shares" shall mean (i) the class of stock designated as the common stock of the Company at the date of this Warrant Agreement, or (ii) any other class of stock resulting from successive changes or reclassifications of such shares consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time, as a result of an adjustment made pursuant to paragraph (a) above, the Holders shall become entitled to purchase any securities of the Company other than shares of Common Stock, thereafter the number of such other securities so purchasable upon exercise of each Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Shares contained in paragraphs (a) through (h), inclusive, above, and the provisions of Section 6 and Section 11.2 through 11.7, inclusive, with respect to the Warrant Shares, shall apply on like terms to any such other securities. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall not be considered an issue or sale of Common Stock for the purposes of this Section 11. -13- 17 (j) Upon the expiration of any Rights, if any thereof shall not have been exercised, the number of shares of Common Stock purchasable upon the exercise of each Warrant shall, upon such expiration, be readjusted and shall thereafter be such as it would have been had it been originally adjusted (or had the original adjustment not been required, as the case may be) as if (A) the only shares of Common Stock so issued were the shares of Common Stock, if any, actually issued or sold upon the exercise of such Rights, and (B) such shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise plus the aggregate consideration, if any, actually received by the Company for the issuance, sale or grant of all such Rights whether or not exercised; provided, however, that no such readjustment shall have the effect of decreasing the number of Warrant Shares issuable upon the exercise of each Warrant by an amount in excess of the amount of the adjustment initially made with respect to the issuance, sale or grant of such Rights. 11.2. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may, at its option, at any time during the term of the Warrants, reduce the then current Exercise Price to any amount determined appropriate by the Board of Directors of the Company or may make any other adjustment to increase the number of Warrant Shares issuable upon exercise of each Warrant as it may, in good faith, deem desirable to protect the rights and benefits of the Holders. 11.3. NOTICE OF ADJUSTMENT. When the number of Warrant Shares purchasable upon the exercise of each Warrant is adjusted, as herein provided, the Company shall promptly mail by first class, postage prepaid, to each Warrant Holder notice of such adjustment or adjustments and a certificate of a firm of independent public accountants selected by the Board of Directors of the Company (who may be the regular accountants employed by the Company) setting forth the number of Warrant Shares purchasable upon the exercise of each Warrant after such adjustment and setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. Such certificate, absent manifest error, shall be conclusive evidence of the correctness of such adjustment. 11.4. PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION, ETC. In case of any consolidation of the Company with or merger of the Company into another person or in case of any sale, transfer or lease to another person of all of or substantially all the assets of the Company, the Company or such successor or purchaser, as the case may be, shall execute with each Holder an agreement that each Holder shall have the right thereafter upon payment of the Exercise Price in effect immediately prior to such action to purchase upon exercise of each Warrant the kind and amount of shares and other securities and property which the Holder would have owned or have been entitled to receive after the happening of such consolidation, merger, sale, transfer or lease had such Warrant been exercised immediately prior to such action regardless of whether the Warrants are exercisable at the time of such action. Such agreement shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 11. The provisions of this Section 11.4 shall similarly apply to successive consolidations, mergers, sales, transfers or leases. -14- 18 11.5. STATEMENT ON WARRANTS. Even though Warrants heretofore or hereafter issued may continue to express the same number and kind of shares as are stated in the Warrants initially issuable pursuant to this Warrant Agreement; the parties understand and agree that such Warrants will represent rights consistent with any adjustments in the number or kind of shares purchasable upon the exercise of the Warrants. The Company may, however, at any time in its sole discretion (which shall be conclusive), make any change in the form of Warrant Certificate that it may deem appropriate and that does not affect the substance thereof and any Warrant Certificate thereafter issued, whether in exchange or substitution for an outstanding Warrant Certificate or otherwise, may be in the form so changed. 11.6. COMPANY TO PREVENT DILUTION. If any event or condition occurs as to which other provisions of this Section 11 are not strictly applicable or if strictly applicable would not fairly protect the exercise or purchase rights of this Warrant Agreement in accordance with the essential intent and principles of such provisions, or which might materially and adversely affect the exercise or purchase rights of the Holders under any provision of the Warrant Certificates, then the Company shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such exercise and purchase rights as aforesaid, and any adjustment necessary with respect to the number of Warrant Shares purchasable hereunder so as to preserve without dilution the rights of the Holders. In no event shall any such adjustment have the effect of increasing the Exercise Price. Unless otherwise expressly provided in this Section 11, all determinations and calculations required or permitted under this Section 11 shall be made by the Company or its Board of Directors, as appropriate, and all such calculations and determinations shall be conclusive and binding in the absence of manifest error. 11.7. CONCERNING ALL ADJUSTMENTS. Notwithstanding anything to the contrary contained in this Warrant Agreement, if an adjustment is made under any provision of this Section 11 on account of any event, transaction, circumstance, condition or happening, no additional adjustment shall be made under any other provision of this Section 11 on account of such event, transaction, circumstance, condition or happening. Unless otherwise expressly provided in this Section 11, all determinations and calculations required or permitted under this Section 11 shall be made by the Company or its Board of Directors, as appropriate, and all such calculations and determinations shall be conclusive and binding in the absence of manifest error. 12. FRACTIONAL INTERESTS. The Company shall not be required to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be presented for exercise in full at the same time by the same Holder, the number of full Warrant Shares which shall be issuable upon the exercise thereof shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of the Warrants so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 12, be issuable on the exercise of any Warrant (or specified portion, thereof), the Company shall pay an amount in cash equal to the Market Price for one share of Common Stock as of the trading day immediately preceding the date the Warrant is presented for exercise, multiplied by such fraction. -15- 19 13. REGISTRATION UNDER THE SECURITIES ACT OF 1933. Each Lender (for itself and no one else) represents, warrants, covenants and agrees that it will not dispose of any Warrant or any Warrant Shares except pursuant to (i) an effective registration statement, or (ii) an applicable exemption from registration under the Securities Act. In connection with any sale by a Lender pursuant to clause (ii) of the preceding sentence, it shall furnish to the Company an opinion of counsel reasonably satisfactory to the Company to the effect that such exemption from registration is available in connection with such sale. Each Lender (for itself and no one else) acknowledges, understands and agrees that the following limitations and restrictions are applicable to the purchase, resale and distribution of the Warrants and the Warrant Shares: (a) each Lender must bear the economic risk of its investment in the Company for an indefinite period of time because neither the Warrants nor the Warrant Shares have been registered under the Securities Act or any State securities laws and, therefore, may not be subsequently offered, sold, transferred, pledged or otherwise disposed of unless and until they have been registered under the Securities Act and any applicable State securities laws or exemptions from registration thereunder are available, and each Lender further understands that only the Company can take action to register the Warrants or the Warrant Shares; and (b) each Lender has been advised that the Company does not expect that Rule 144 under the Securities Act will be available to such Lender with respect to any of the Warrants or the Warrant Shares unless such Lender is a non-affiliate of the Company (and has not been an affiliate of the Company for at least three months) and has held such securities for at least one year from the later of the date that they were issued by the Company or the date that they were acquired from an affiliate of the Company. Each Lender (for itself and no one else) represents, warrants, covenants and agrees that (i) it is purchasing the Warrants for its own account, for investment purposes and not with a view to, or for resale in connection with, any distribution or public offering thereof (as defined in the rules and regulations under the federal securities laws) and is an "accredited investor" (as defined in Regulation D under the Securities Act); (ii) it is not participating and does not have a participation in any distribution or the underwriting of any distribution in violation of the Securities Act, and has no present intention of selling or otherwise disposing of any of the Warrants or the Warrant Shares in violation of the Securities Act, (iii) it is aware that neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the Warrants or the Warrants Shares or passed upon the accuracy or adequacy of this Warrant Agreement, (iv) it recognizes that an investment in the Warrants and the Warrant Shares involves a high degree of risk, it has such knowledge and experience in financial and business matters as to be capable of evaluating the risks and merits of this investment and protecting its interests in connection with this investment and it is able to bear the economic risk of an investment in the Warrants and the Warrant Shares, including the risk of the total loss of such investment, (v) it has received all information it considers necessary or appropriate for deciding whether to enter into this Warrant Agreement or to acquire the Warrants or the Warrant Shares (including the SEC Documents filed over the last 12-month period), and it has had an opportunity to ask questions of and receive answers from the Company regarding the Company and the terms and conditions of the Warrants and the Warrant Shares, and (vi) it understands that neither the Warrants nor the Warrant Shares have been registered under the Securities Act on the basis that the issuance or sale of the Warrants and the Warrant Shares is exempt from the registration provisions thereof, and that the Company's reliance on the exemption is predicated on its representations herein. -16- 20 14. CERTIFICATE TO BEAR LEGENDS. The Warrants shall be subject to a stop-transfer order and the Warrant Certificates therefor shall bear the following legend by which each Holder shall be bound: "THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT, OR (ii) AN APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED. ANY SALE PURSUANT TO CLAUSE (ii) OF THE PRECEDING SENTENCE MUST BE ACCOMPANIED BY AN UNQUALIFIED WRITTEN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH EXEMPTION FROM REGISTRATION IS AVAILABLE IN CONNECTION WITH SUCH SALE. THE COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF STERLING CHEMICALS HOLDINGS, INC. (THE "COMMON STOCK") FOR WHICH THIS WARRANT IS EXERCISABLE MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES ABSENT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. ACCORDINGLY, NO HOLDER SHALL BE ENTITLED TO EXERCISE SUCH HOLDER'S WARRANTS AT ANY TIME UNLESS, AT THE TIME OF EXERCISE, (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT RELATING TO THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAS BEEN FILED WITH, AND DECLARED EFFECTIVE BY, THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), AND NO STOP ORDER SUSPENDING THE EFFECTIVENESS OF SUCH REGISTRATION STATEMENT HAS BEEN ISSUED BY THE COMMISSION, OR (ii) THE ISSUANCE OF SUCH SHARES IS PERMITTED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. ANY SALE PURSUANT TO CLAUSE (ii) OF THE PRECEDING SENTENCE MUST BE ACCOMPANIED BY AN UNQUALIFIED WRITTEN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH EXEMPTION FROM REGISTRATION IS AVAILABLE IN CONNECTION WITH SUCH SALE." -17- 21 The Warrant Shares or other securities issued upon exercise of the Warrants shall, unless issued pursuant to an effective registration statement, be subject to a stop-transfer order and the certificate or certificates evidencing any such Warrant Shares or securities shall bear the following legend by which the Warrant Holder thereof shall be bound: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW (COLLECTIVELY, THE "ACTS") AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS MADE PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACTS OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF. FURTHER, THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS AND UNTIL (1) SUCH SECURITIES HAVE BEEN REGISTERED UNDER THE ACTS OR (2) THE HOLDER OF SUCH SECURITIES PROVIDES THE COMPANY WITH (A) AN UNQUALIFIED WRITTEN OPINION OF LEGAL COUNSEL, WHICH COUNSEL AND OPINION (IN FORM AND SUBSTANCE) SHALL BE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT THE PROPOSED DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACTS OR (B) SUCH OTHER EVIDENCE AS MAY BE REASONABLY SATISFACTORY TO THE COMPANY THAT THE PROPOSED DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACTS." Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon completion of a public distribution under a registration statement of the securities represented thereby) shall also bear such legend unless in the opinion of counsel satisfactory to the Company, the securities represented thereby need no longer be subject to the restrictions contained herein. The provisions of this Section 14 shall be binding upon all subsequent holders of certificates bearing the above legend, and shall also be applicable to all subsequent holders of any Warrants. 15. REGISTRATION RIGHTS. (a) DEMAND REGISTRATION RIGHTS. The Company covenants and agrees with the Lenders and any subsequent holders of the Warrants and/or Warrant Shares that: -18- 22 (i) Within sixty (60) days after receipt of a written request from Warrant Holders, the Company shall file a registration statement (and use its best efforts to cause such registration statement to become effective under the Securities Act) with respect to the offering and sale or other disposition of such of the Warrants and/or Warrant Shares (including any securities received by the Holders pursuant to Section 11 hereof) (all such securities, the "Registrable Securities") as the Holders of such Registrable Securities shall elect provided that such amount shall constitute (at the date of such request) at least 50% of the Registrable Securities and, provided further, that, with respect to any particular securities which are issued and outstanding, such securities shall cease to be Registrable Securities upon the earliest to occur of (A) the expiration of the Registration Period (as defined below), (B) the time at which a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with the plan of distribution set forth in such registration statement, (C) the time at which such securities shall have been disposed of by the holder thereof in accordance with Rule 144, (D) the time at which the Company has caused to be delivered to the holder of and each transfer agent for such holder's Registrable Securities an opinion of counsel from a law firm reasonably acceptable to such holder to the effect that such holder may dispose of such securities without registration in reliance on Rule 144(k), or (E) the time at which such securities shall have been otherwise transferred, and the transferee has received certificates evidencing such securities not bearing a legend restricting further transfer. The Company shall use its best efforts to continuously maintain the effectiveness of such registration statement for a period (the "Registration Period") ending on the earlier of (x) 90 days after the effective date of the registration statement or (y) the consummation of the distribution by the holders of the Registrable Securities covered by such registration statement (the "Termination Date"); provided, however, that if at the Termination Date, the securities are covered by a registration statement which also covers other securities and which is required to remain in effect beyond the Termination Date, the Company shall maintain in effect such registration statement as it relates to the Registrable Securities for so long as such registration statement (or any subsequent registration statement) remains or is required to remain in effect for any of such other securities. Notwithstanding anything to the contrary contained in this Agreement, (i) with respect to requests for registration on Form S-3 (or any successor or similar short form registration statement ("Short-Form Registration")), the Company shall not be required to comply with more than one request for a Short-Form Registration in any 90-day period, and shall not be required to comply with any such request if the Company is not then entitled to use Short-Form Registration, (ii) except with respect to requests for registration using Short-Form Registration, the Company shall not be required to comply with more than two requests for registration pursuant to this Section 15(a) and (iii) the Company shall not be required to comply with any request for registration pursuant to this Section 15(a) unless such request relates to Registrable Securities with an anticipated aggregate price to the public of at least $1,000,000. All expenses of such registration shall be borne by the Company, except that brokers' commissions and underwriting discounts, commissions, fees and expenses attributable to the Registrable Securities and fees and distributions of counsel (if any) to the holders of such Registrable Securities will be borne by such holders requesting that such securities be registered. -19- 23 (ii) The Company may postpone the filing of any registration statement otherwise required to be prepared and filed by it pursuant to this Section 15(a) or suspend the effectiveness of any such registration statement for a reasonable period of time (not to exceed 90 days) if, at the time: (x) the Board of Directors of the Company shall determine in good faith that such offering will interfere materially with, or would require the disclosure of (which disclosure the Board of Directors has determined to not be in the best interests of the Company), a pending or contemplated financing, merger, sale of assets, recapitalization, acquisition or other similar corporate action of the Company and the Company shall have furnished to the holders seeking such registration a certificate signed by the President of the Company to that effect, accompanied by a certified copy of the relevant board resolutions; or (y) the Board of Directors of the Company shall determine in good faith that the disclosures required in connection with such registration could reasonably be expected to have a Materially Adverse Effect and the Company shall have furnished to the holders seeking such registration a certificate signed by the President of the Company to that effect, accompanied by a certified copy of the relevant board resolutions. In addition, the Company may postpone the filing of, or suspend the use of, any such registration statement during the period starting with the date 30 days prior to the Company's good faith estimate of the date of filing of, and ending on a date 90 days after the effective date of, a piggyback registration under Section 15(b), provided that the Company is actively employing in good faith its best efforts to cause such piggyback registration to become effective. Any postponement or suspension described in this Section 15(a)(ii) being referred to herein as a "Permitted Postponement or Suspension". (iii) If a registration requested pursuant to this Section 15(a) is to involve an underwritten public offering in which the obligation of the underwriters is to take all of the securities to be sold if any are to be taken, the Company and any other holders of securities of the Company may include securities in such registration only if the managing underwriter of such public offering concludes that such inclusion will not adversely affect the successful marketing or the price of the Registrable Securities to be included in such public offering. (iv) No holder of Registrable Securities may demand registration of any Registrable Securities at any time within six (6) months of the effective date of a registration for sale of Common Stock in which such holder was entitled to join and sell any of its Registrable Securities pursuant to Section 15(b). -20- 24 (v) If the holders of Registrable Securities intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 15(a). A holder may elect to include in such underwriting all or a part of the Registrable Securities it holds. The Company shall (together with holders proposing to distribute their Registrable Securities through such underwriting) enter into an underwriting agreement in customary form with a representative of the underwriter or underwriters selected for such underwriting by a majority in interest of the holders of Registrable Securities participating in such underwriting. (b) PIGGY-BACK REGISTRATION RIGHTS. (i) The Company covenants and agrees with the Lenders and any subsequent holders of Registrable Securities that, in the event the Company proposes to file a registration statement under the Securities Act with respect to the offering of Common Stock in an underwritten offering (other than in connection with an exchange offer or a registration statement on Form S-4 or S-8 or other similar registration statements not available to register securities so requested to be included), the Company shall in each case give written notice of such proposed filing to the holders of Registrable Securities in each case at least 30 days before the initial filing of such registration statement, and such notice shall offer to such holders the opportunity (subject to Section 15(b)(ii)) to include in such registration statement such number of Registrable Securities as they may request. Holders desiring inclusion of Registrable Securities in such registration statement shall so inform the Company by written notice, given within 20 days of the giving of such notice by the Company in accordance with the provisions of Section 20 hereof. The Company shall use commercially reasonable efforts to include, or cause the managing underwriter of a proposed offering to include, the Registrable Securities requested to be included in the proposed offering on the same terms and conditions as applicable to any similar securities of the Company, if any, included therein; provided, however, that the Company may, in its sole discretion, determine not to file such registration statement or withdraw such registration statement (if filed) and abandon any proposed offering by giving notice of such intention to each participating holder of Registrable Securities, in which event the Company shall be relieved of its obligation to register any Registrable Securities pursuant to such registration. The right of any holder of Registrable Securities to participate in any piggyback registration shall be conditioned on the inclusion in the underwriting of those of such holder's Registrable Securities to be included in the underwriting. The Company shall (together with all participating holders of Registrable Securities) enter into an underwriting agreement in customary form with the representative of the underwriters. The Company shall continuously maintain in effect any registration statement with respect to which the Registrable Securities have been requested to be included (and so included) for a period ending on the earlier of (x) 90 days after the effectiveness of such registration statement or (y) the consummation of the distribution by the holders of the Registrable Securities ("Piggy-back Termination Date"); provided, however, that if at the Piggy-back Termination Date the Registrable Securities are covered by a registration statement which is, or is required to remain, in effect beyond the Piggy-back Termination Date, the Company shall maintain in effect the registration statement as it relates to the Registrable Securities for so long as such registration statement remains or is required to remain in effect for any of such other securities. All expenses of such registration shall be borne by the Company, except that brokers' commissions and underwriting discounts, commissions, fees and expenses attributable to the Registrable Securities and fees and distributions of counsel (if any) to the holders requesting that the Registrable Securities be offered will be borne by such holders requesting that such securities be offered. -21- 25 (ii) Notwithstanding any other provision of this Section 15(b) to the contrary, if the managing underwriters in such piggyback registration advises the Company in writing that marketing factors require a limitation on the number of shares to be underwritten, the underwriters may (subject to the limitations set forth below) limit the number of Registrable Securities to be included in the registration and underwriting. The Company shall so advise the holders of all securities requesting registration and the Company will include in such registration such amount of securities which the Company is so advised can be sold in (or during the time of) such offering as follows: first, all securities proposed by the Company to be sold for its own account; second, such securities requested to be included in such registration by the persons or entities on whose behalf such registration was originally proposed pro rata on the basis of the amount of such securities so proposed to be sold and so requested to be included by such parties; third, such Registrable Securities requested to be included in such registration by all holders of Registrable Securities pro rata on the basis of the amount of such securities so proposed to be sold and so requested to be included by such holders; and fourth, all other securities of the Company requested to be included in such registration pro rata on the basis of the amount of such securities so proposed to be sold and so requested to be included. (c) OTHER MATTERS. In connection with the registration of Registrable Securities in accordance with paragraph (a) or (b) above, the Company agrees to: (i) use its best efforts to register or qualify the Registrable Securities for offer or sale under State securities or Blue Sky laws of such jurisdictions in which the holders of such Registrable Securities shall reasonably designate; provided, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service of process or taxation in any jurisdiction where it is not now so subject, and use its best efforts to do any and all other acts and things which may be necessary or advisable to enable the holders of Registrable Securities to consummate the sale, transfer or other disposition of such securities in any jurisdiction; (ii) enter into indemnity and contribution agreements, each in customary form, with each underwriter, if any, and each holder of Registrable Securities included in such registration statement; and, if requested, enter into an underwriting agreement containing customary representations, warranties, covenants, indemnifications, allocation of expenses, and customary closing conditions including, but not limited to, opinions of counsel and accountants' comfort letters with any underwriter who participates in the offering of Registrable Securities; (iii) pay all reasonable expenses in connection with the registration of the Registrable Securities under the Securities Act and compliance with the provisions of clause (i) above, except to the extent otherwise provided in Sections 15(a) and 15(b); and -22- 26 (iv) list the Registrable Securities on each national securities exchange on which the Common Stock is then listed. In connection with the registration of Registrable Securities in accordance with paragraph (b) above, the holders of Registrable Securities agree to enter into an underwriting agreement containing customary representations, warranties, covenants, indemnifications, allocation of expenses (not otherwise inconsistent with this Warrant Agreement), and customary closing conditions, with any underwriter who participates in the offering of Registrable Securities. (d) RESTRICTIONS ON PUBLIC SALE BY THE COMPANY. To the extent not inconsistent with applicable law, the Company agrees not to effect any public sale or distribution of any securities similar to the Registrable Securities or any securities convertible into or exchangeable or exercisable for such securities (or any option or other right for such securities) during the 7-day period prior to, and during the 60-day period beginning on the effective date of any registration statement under which the Registrable Securities are registered in accordance with Section 15(a) (other than as part of such registration), except (i) sales or distributions exempt from the registration requirements of the Securities Act, (ii) a continuous offering pursuant to a shelf registration statement that becomes effective prior to the aforementioned period or (iii) in connection with an exchange offer or a registration statement on Form S-4 or S-8 and for any securities that may be issued to the Holders pursuant Section 11 hereof. (e) RULE 144. With a view to making available to Holders the benefits of certain rules of the Securities and Exchange Commission that may permit the sale of Registrable Securities to the public without registration, the Company hereby covenants and agrees to use its best efforts to: (i) file in a timely manner all reports and other documents required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the Commission thereunder, necessary to satisfy the current public information requirement of Rule 144(c) under the Securities Act, and the Company will take such further action to the extent required from time to time to enable holders to sell Registrable Securities without registration under the Securities Act pursuant to (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any successor rule or regulation hereafter adopted by the Securities and Exchange Commission and (ii) promptly furnish each holder of Registrable Securities a copy of all such reports and documents. Upon the request of a holder of Registrable Securities, the Company will deliver to such holder of Registrable Securities a written statement as to whether it has complied with such requirements. (f) OTHER REGISTRATION RIGHTS. The Company hereby agrees that it shall not after the date hereof, prior to termination of this Agreement, issue any additional registration rights with respect to shares of its Common Stock, warrants to purchase its Common Stock or securities convertible into its Common Stock, which limits or restricts in any manner the performance of the Company's obligations under this Agreement. (g) Each holder of Registrable Securities shall promptly furnish to the Company such information regarding such holder, the Registrable Securities held by such holder and the intended plan of distribution of such Registrable Securities as the Company may from time to time -23- 27 reasonably request in writing in connection with any registration, and the provision of such information shall be a condition precedent to the Company's obligations to include such holder's Registrable Securities in such registration. Each holder of Registrable Securities agrees that, upon receipt of a notice (a "Suspension Notice") from the Company of the happening of any Suspension Event (as defined below) or any Permitted Postponement or Suspension, such Holder will not dispose of any Registrable Securities pursuant to such registration statement during the period (the "Suspension Period") commencing on receipt by such holder of such Suspension Notice from the Company and continuing thereafter until (i) in the case of a Suspension Event, receipt by such holder of a Curative Prospectus (as defined below), or (ii) in the case of a Permitted Postponement or Suspension, until the earlier to occur of (A) the receipt of written notice from the Company that such Permitted Postponement or Suspension has terminated or (B) the expiration of 90 days from the receipt of such Suspension Notice from the Company; provided, however, that the Registration Period applicable to the registration statement covering any such Registrable Securities shall automatically be extended for a period equal to the Suspension Period. The Company shall take such actions as are necessary to end any Suspension Period as promptly as practicable. (h) For purposes of this Warrant Agreement, the term "Suspension Event" shall mean, with respect to any registration, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, the discovery by the Company that, or the happening of any event known to the Company as a result of which, the prospectus included in the registration statement pertaining to such registration, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, and (ii) the term "Curative Prospectus" shall mean a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made. 16. NO RIGHTS AS STOCKHOLDERS; NOTICE TO WARRANT HOLDERS. Nothing contained in this Warrant Agreement or in any of the Warrants shall be construed as conferring upon the Holders or their transferees the right to vote or to receive dividends or to consent or to receive notice as stockholders in respect of any meeting of stockholders for the election of directors of the Company or any other matter, or any other rights whatsoever as stockholders of the Company or, except as otherwise provided in this Warrant Agreement, to receive any notice of any proceedings of the Company. If, however, at any time prior to the expiration of the Warrants and prior to their exercise, any of the following events shall occur or be proposed: (a) the Company shall make any declaration of a dividend upon the shares of Common Stock which is payable in any securities or make any distribution (other than a cash dividend) to the holders of the shares of Common Stock; (b) the Company shall make any offer to the holders of the shares of Common Stock to purchase or acquire any additional shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock or any right to subscribe to or purchase any thereof; or -24- 28 (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger, sale, transfer or lease of all or substantially all of its property, assets, and business as an entirety), then, in any one or more of said events, the Company shall give notice in writing of such event to the Holders as provided in Section 20 hereof, such giving of notice to be completed at least 30 days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, or subscription rights, or for the determination of stockholders entitled to vote on such proposed dissolution, liquidation or winding up. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. 17. EXPENSES. The Company agrees to reimburse Chase upon demand for its reasonable out-of-pocket costs and expenses incurred in connection with the preparation, review, negotiation, execution and delivery of this Warrant Agreement and all other related documents. 18. RIGHT TO INSPECTION. The Company will permit the Holders upon prior notice to the Company, during normal business hours, to inspect those properties, books and records reasonably related to their interests as Holders, and will promptly respond to and discuss with such Holders inquiries regarding the management, business and affairs of the Company; provided, however, that these inspection rights exist only for Holders of (singularly or collectively) at least 33% of the then outstanding Warrants and, provided further, that such inspection rights shall be (a) subject to adherence by the Holders and their representatives to such restrictions, requirements and conditions that are imposed by the Company on visitors to its premises generally and (b) conducted in such a manner so as to not cause any unreasonable disruption of or to the personnel and operations of the Company. 19. RIGHT TO INFORMATION. The Company will provide to all Holders, on a timely basis, copies of all documents and reports, filed with the Securities and Exchange Commission. 20. NOTICES. Any notice, request, demand or report (each, a "Communication") required or permitted to be given or made by this Warrant Agreement shall be in writing. Any Communication authorized pursuant to this Warrant Agreement to be given or made by the holder of any Warrant or Warrant Shares to or on the Company shall be sufficiently given or made if sent by registered mail, return receipt requested, postage prepaid, or by facsimile or electronic mail, addressed or sent as follows: Sterling Chemicals, Inc. 1200 Smith Street Suite 1900 Houston, Texas 77002 Attn: General Counsel Fax: (713) 654-9577 E-Mail: delkins@sterlingchemicals.com -25- 29 Any Communication authorized by this Warrant Agreement to be given or made to or on the Holder of any Warrant shall be sufficiently given or made (except as otherwise provided in this Warrant Agreement) if sent by registered mail, return receipt requested, postage prepaid, or by facsimile or electronic mail, to such Holder at the address or number of such Holder as shown on the Warrant Register. 21. GOVERNING LAW. THIS WARRANT AGREEMENT, THE WARRANTS AND ALL RELATED DOCUMENTS SHALL BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW, AND, WITH RESPECT TO USURY, THE LAWS OF ANY OTHER JURISDICTION WHOSE LAWS MAY BE APPLICABLE PURSUANT TO THE PROVISIONS OF TITLE 12, SECTION 85 OF THE UNITED STATES CODE. 22. SUPPLEMENTS AND AMENDMENTS. (a) The Company and the Holders of at least a majority of the outstanding Warrants may, without the consent or concurrence of the other Holders, enter into one or more supplemental agreements or amendments for the purpose of (i) evidencing the rights of the Holders upon consolidation, merger, or sale pursuant to Section 25, (ii) making any changes or corrections in this Warrant Agreement that are required to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provision herein or any clerical omission or mistake or manifest error herein contained, (iii) making such other provisions in regard to matters or questions arising under this Warrant Agreement as shall not adversely affect the interest of the Holders in any material respect or be inconsistent with this Warrant Agreement or any supplemental agreement or amendment or (iv) adding further covenants and agreements of the Company in this Warrant Agreement or surrendering any rights or power reserved to or conferred upon the Company in this Agreement. (b) The Company and the Holders of at least a majority in number of the Warrants at the time outstanding may at any time and from time to time by supplemental agreement or amendment add any provisions to or change in any manner or eliminate any of the provisions of this Warrant Agreement or of any supplemental agreement or modify in any manner the rights and obligations of the Holders and the Company; provided, however, that no such supplemental agreement or amendment shall, without the consent of the Holder of each outstanding Warrant affected thereby, (i) alter the provisions of this Warrant Agreement so as to adversely affect in any material respect the terms upon which Warrants are exercisable, (ii) decrease the number of Warrant Shares (other than pursuant to adjustments made in accordance with Section 11 hereof) or (iii) reduce the number of Warrants outstanding the consent of whose holders is required for any such supplemental agreement or amendment. 23. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations and warranties of the Company and the Lenders and all covenants and agreements made herein shall survive the execution and delivery of this Warrant Agreement and the Warrants and shall remain in force and effect. 24. SUCCESSORS. This Warrant Agreement shall be binding upon and inure to the benefit of (i) the Company and its successors and assigns, (ii) the Holders from time to time of the Warrants (including their successors and assigns) and (iii) the holders from time to time of the Registrable Securities. -26- 30 25. MERGER OR CONSOLIDATION OF THE COMPANY. So long as this Warrant Agreement remains in effect, the Company will not merge or consolidate with or into, or sell, transfer or lease all or substantially all of its property to, any other corporation unless the successor or purchasing corporation, as the case may be (if not the Company), shall expressly assume, by supplemental agreement executed and delivered to the Warrant Holders, the due and punctual performance and observance of each and every covenant and condition of this Warrant Agreement to be performed and observed by the Company. 26. BENEFITS OF THIS WARRANT AGREEMENT. Nothing in this Warrant Agreement shall be construed to give to any person or entity other than the Company and the Holders, any legal or equitable right, remedy or claim under this Warrant Agreement, but this Warrant Agreement shall be for the sole and exclusive benefit of the Company and the Holders and the holders of Registrable Securities. 27. CAPTIONS. The captions of the sections and subsections of this Warrant Agreement have been inserted for convenience and shall have no substantive effect. 28. COUNTERPARTS. This Warrant Agreement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original; but such counterparts together shall constitute but one and the same instrument. 29. TERMINATION. The rights and obligations under this Warrant Agreement of each Holder shall terminate with respect to such Holder at such time as such Holder ceases to hold any Registrable Securities. The rights and obligations of the Company under this Warrant Agreement shall terminate at such time as the rights of all Holders have terminated. Upon the termination of a party's rights and obligations under this Warrant Agreement, this Warrant Agreement shall terminate and have no further effect with respect to such party; provided, however, that the rights and obligations of the parties with respect to the breach of any provision hereof prior to such termination and any and all accrued rights and obligations as of the date of such termination shall survive the termination of this Warrant Agreement with respect to any party. Notwithstanding anything to the contrary contained in this Warrant Agreement, this Warrant Agreement shall terminate on such date as SCI no longer is or could at any time thereafter be required to request or otherwise cause the Company to issue any Warrants pursuant to Section 5.01(k) of the Facility if, on such date, no Warrants have theretofore been issued, or are required to be issued, pursuant to this Warrant Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be duly executed on the day, month and year first above written. STERLING CHEMICALS HOLDINGS, INC. By:______________________________ Name: Title: (CORPORATE SEAL) ATTEST: ________________________________ Name: Title: -27- 31 EXHIBIT "A" WARRANT CERTIFICATE THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT, OR (ii) AN APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED. ANY SALE PURSUANT TO CLAUSE (ii) OF THE PRECEDING SENTENCE MUST BE ACCOMPANIED BY AN UNQUALIFIED WRITTEN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH EXEMPTION FROM REGISTRATION IS AVAILABLE IN CONNECTION WITH SUCH SALE. THE COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF STERLING CHEMICALS HOLDINGS, INC. (THE "COMMON STOCK") FOR WHICH THIS WARRANT IS EXERCISABLE MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES ABSENT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE, "SECURITIES ACT"), AND ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. ACCORDINGLY, NO HOLDER SHALL BE ENTITLED TO EXERCISE SUCH HOLDER'S WARRANTS AT ANY TIME UNLESS, AT THE TIME OF EXERCISE, (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT RELATING TO THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAS BEEN FILED WITH, AND DECLARED EFFECTIVE BY, THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), AND NO STOP ORDER SUSPENDING THE EFFECTIVENESS OF SUCH REGISTRATION STATEMENT HAS BEEN ISSUED BY THE COMMISSION, OR (ii) THE ISSUANCE OF SUCH SHARES IS PERMITTED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. ANY OFFER OR SALE PURSUANT TO CLAUSE (ii) OF THE PRECEDING SENTENCE MUST BE ACCOMPANIED BY AN UNQUALIFIED WRITTEN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH EXEMPTION FROM REGISTRATION IS AVAILABLE IN CONNECTION WITH SUCH SALE. THE TRANSFER OR EXCHANGE OF THE WARRANTS AND COMMON STOCK UNDERLYING SUCH WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. 32 No. ____ Warrants _______ Warrants VOID AFTER 5:00 P.M. HOUSTON TIME ON JANUARY 1, 2007 STERLING CHEMICALS HOLDINGS, INC. WARRANT CERTIFICATE THIS CERTIFIES THAT for value received ___________________________, the registered holder hereof or registered assigns (the "Warrant Holder"), is the owner of the number of Warrants set forth above, each of which entitles the owner thereof to purchase at any time until 5:00 P.M., Houston time, on January 1, 2007, one fully paid and nonassessable share of the common stock, par value $0.01 per share (the "Common Stock"), of Sterling Chemicals Holdings, Inc., a Delaware corporation (the "Company"), (subject to adjustment as described in the Warrant Agreement referred to below) at the purchase price of $0.01 per share, (the "Exercise Price"). The Warrant Holder may pay the Exercise Price in cash, or by certified or official bank check, or make a net exercise for Net Warrant Shares as described in the Warrant Agreement. This Warrant Certificate is subject to, and entitled to the benefits of, all of the terms, provisions and conditions of an agreement dated December 15, 1998 (the "Warrant Agreement") among the Company and Chase Bank of Texas, National Association, Credit Suisse First Boston and certain other financial institutions, which Warrant Agreement is hereby incorporated herein by reference and made a part hereof and to which Warrant Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Company and the Warrant Holders. Copies of the Warrant Agreement are on file at the principal office of the Company. The registered holder hereof may be treated by the Company and all other persons dealing with this Warrant Certificate as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented hereby, or to the transfer hereof on the books of the Company, any notice to the contrary notwithstanding, and until such transfer on such books, the Company may treat the registered holder hereof as the owner for all purposes. This Warrant Certificate, with or without other Warrant Certificates, upon surrender at the principal office of the Company prior to exercise, may be exchanged for another Warrant Certificate or Warrant Certificates of like tenor evidencing Warrants entitling the Warrant Holder to purchase a like aggregate number of shares of Common Stock as the Warrants evidenced by the Warrant Certificate or Warrant Certificates surrendered entitled to such Warrant Holder to purchase. If this Warrant Certificate shall be exercised in part, the Warrant Holder shall be entitled to receive upon surrender hereof, another Warrant Certificate or Warrant Certificates for the number of whole Warrants not exercised. No fractional shares of Common Stock will be issued upon the exercise of any Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment will be made, as provided in the Warrant Agreement. 33 Neither the Warrants nor this Warrant Certificate entitles any Warrant Holder hereof to any of the rights of a stockholder of the Company. THIS WARRANT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW, AND, WITH RESPECT TO USURY, THE LAWS OF ANY OTHER JURISDICTION WHOSE LAWS MAY BE APPLICABLE PURSUANT TO THE PROVISIONS OF TITLE 12, SECTION 85 OF THE UNITED STATES CODE. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be executed by its duly authorized officers and its corporate seal to be printed hereon. STERLING CHEMICALS HOLDINGS, INC. By: Name: Title: ATTEST: Name:__________________________________ Title:_________________________________ 34 FORM OF REVERSE OF WARRANT CERTIFICATE PURCHASE FORM (to be executed only upon exercise of Warrants) To:_____________________ The undersigned hereby irrevocably exercises of the Warrants represented by the within Warrant Certificate for the purchase of (subject to adjustment) one share of Common Stock, par value $0.01 per share, of STERLING CHEMICALS HOLDINGS, INC., a Delaware corporation, and herewith makes payment of $______________ (such payment being by wire transfer or by certified or official bank or bank cashier's check payable to the order or at the direction of Sterling Chemicals Holdings, Inc.), all at the exercise price and on the terms and conditions specified in the within Warrant Certificate and the Warrant Agreement therein referred to, and hereby surrenders this Warrant Certificate and all right, title and interest therein to and directs that the Common Stock deliverable upon the exercise of such Warrants be registered or placed in the name and at the address specified below and delivered thereto. Dated:__________________ ____________________________________ (Signature of Owner) ____________________________________ (Street Address) ____________________________________ (City) (State) (Zip Code) Signature Guaranteed By(1) ____________________________________ ________________________ (1) The Holder's signature must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" as defined by Rule 17Ad-15 under the Exchange Act. 35 Securities and/or check to be issued to:_________________________________ Please insert social security or identifying number:_____________________ Name:_________________________________________________________ Street Address:_______________________________________________ City, State and Zip Code:_____________________________________ 36 FORM OF ASSIGNMENT FOR VALUE RECEIVED, the undersigned registered holder of the within Warrant Certificate hereby sells, assigns and transfers unto the Assignee(s) named below (including the undersigned with respect to any Warrants constituting a part of the Warrants evidenced by the within Warrant Certificate not being assigned hereby) all of the right of the undersigned under the within Warrant Certificate, with respect to the number of Warrants set forth below: Name(s) of Assignee(s): __________________________ Address: _________________________________________ No. of Warrants: _________________________________ Please insert social security or other identifying number of assignee(s): ______ and does hereby irrevocably constitute and appoint _____________________________ the undersigned's attorney to make such transfer on the books of _______________ maintained for such purposes, with full power of substitution in the premises. Dated:_______________________ ____________________________________ (Signature of Owner) ____________________________________ (Street Address) ____________________________________ (City) (State) (Zip Code) Signature Guaranteed By(2) ____________________________________ ________________________ (2) The Holder's signature must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" as defined by Rule 17Ad-15 under the Exchange Act. EX-4.8.B 4 SECOND AMENDMENT TO RESTATED CREDIT AGREEMENT 1 EXHIBIT 4.8(b) SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Second Amendment") dated as of the "Second Amendment Effective Date" (as hereinafter defined in Section 18 of this Second Amendment) is by and among STERLING CHEMICALS, INC., a Delaware corporation (the "Company"), CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, individually and as Administrative Agent, and CREDIT SUISSE FIRST BOSTON, individually and as Documentation Agent, and the other financial institutions signatories hereto. PRELIMINARY STATEMENTS 1. The Company entered into an Amended and Restated Credit Agreement dated as of July 10, 1997, among the Company, Texas Commerce Bank National Association (now known as Chase Bank of Texas, 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 the financial institutions parties thereto (the "Original Agreement"). 2. The Company entered into the First Amendment to Amended and Restated Credit Agreement dated effective as of March 31, 1998, among the Company, Chase Bank of Texas, 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 the financial institutions parties thereto (the "First Amendment"). The Original Agreement as amended by the First Amendment is hereinafter called the "Credit Agreement". Capitalized terms used but not otherwise defined herein shall have the meanings assigned such terms in the Credit Agreement. 2. The Company has requested that certain provisions of the Credit Agreement be modified and amended. 3. The Company, the Administrative Agent, the Documentation Agent, the Subsidiary Guarantors and the Lenders have agreed to amend the Credit Agreement on the terms and conditions contained herein. AGREEMENT In consideration of the premises and the mutual covenants contained herein and in the Credit Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: Section 1. Amendment of Section 1.01 of the Credit Agreement. Section 1.01 of the Credit Agreement is hereby amended by adding the following new definition thereto immediately following the definition of "SCI Asset Conveyance" contained therein: 2 "Second Amendment" shall mean the Second Amendment to Amended and Restated Credit Agreement dated as of the Second Amendment Effective Date among the Company, the Administrative Agent, the Documentation Agent and the Required Lenders. "Second Amendment Effective Date" shall mean 5:00 p.m. on the date on which the Second Amendment is signed by the Borrower and the Required Lenders, which date is December __, 1998. With respect to the definition of "Second Amendment Effective Date", the Company hereby authorizes the Administrative Agent to complete the date for such defined term on the date that the conditions of the Second Amendment Effective Date have been satisfied. Section 2. Amendment of Existing Terms in Section 1.01 of the Credit Agreement. (a) The definition of "Agreement" contained in Section 1.01 of the Credit Agreement is hereby amended to read in its entirety as follows: "Agreement" shall mean this Amended and Restated Credit Agreement, as amended by the First Amendment, the Second Amendment and as further amended, modified or supplemented from time to time. (b) The definition of "Applicable Margin" contained in Section 1.01 of the Credit Agreement is hereby amended to read in its entirety as follows: "Applicable Margin" shall mean, on any day on or after January 1, 1999 and with respect to any (a) Tranche B Term Loan, for Base Rate Loans, 2.50% per annum and for Eurodollar Loans, 3.50% 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):
========================================================================================================= LEVERAGE RATIO EURODOLLAR LOAN APPLICABLE BASE RATE LOAN APPLICABLE MARGIN PERCENTAGE MARGIN PERCENTAGE - --------------------------------------------------------------------------------------------------------- Greater than or equal to 3.00% 2.00% 4.00 - --------------------------------------------------------------------------------------------------------- Greater than or equal to 2.75% 1.75% 3.75 but less than 4.00 - --------------------------------------------------------------------------------------------------------- Greater than or equal to 2.50% 1.50% 3.50 but less than 3.75 - --------------------------------------------------------------------------------------------------------- Greater than or equal to 2.25% 1.25% 3.25 but less than 3.50 - --------------------------------------------------------------------------------------------------------- Greater than or equal to 2.00% 1.00% 3.00 but less than 3.25 - --------------------------------------------------------------------------------------------------------- Greater than or equal to 1.75% .75% 2.75 but less than 3.00 - --------------------------------------------------------------------------------------------------------- Less than 2.75 1.50% .50% =========================================================================================================
-2- 3 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, 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 3.00% and the Base Rate Loan Applicable Margin for the Revolving Credit Loans, the Tranche A Term Loans, and the ESOP Term Loans will be 2.00% 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. (c) The definition of "EBITDA" contained in Section 1.01 of the Credit Agreement is hereby amended to read in its entirety as follows: "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 non-cash 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, other non-cash 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 December 31, 1998, March 31, 1999, June 30, 1999, September 30, 1999 and December 31, 1999, the lesser of (i) $4,000,000 and (ii) the amount of non-recurring cash charges relating to employee severance programs of the Company actually booked during such Rolling Period. -3- 4 (d) The definition of "Funded Indebtedness" contained in Section 1.01 of the Credit Agreement is hereby amended to read in its entirety as follows: "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 obligations of such Person (whether contingent or otherwise) in respect of letters of credit, all Capital Lease Obligations, and all guaranties of Funded Indebtedness of other Persons. Section 3. Amendment of Section 5.01 of the Credit Agreement. Section 5.01 of the Credit Agreement is hereby amended by adding a new Section 5.01(k) to read in its entirety as follows: (k) Equity Call and Lender Warrants. At any time during the period commencing on the Second Amendment Effective Date through and ending on December 31, 1999, if the average daily outstanding principal balance of the Revolving Credit Exposure during the immediately preceding 60 calendar days exceeds $50,000,000, then, on or before the expiration of 90 days from such date, the Company will solicit and obtain a $15,000,000 equity capital infusion from Holdco (subject to reduction as provided below); provided that if the Company shall fail to obtain such $15,000,000 equity capital infusion on or before the last day of such 90-day period, then on the next immediately succeeding day following such period (the "Warrant Date"), the Company shall request or otherwise cause Holdco to issue to each Lender warrants pursuant to the terms of the Warrant Agreement in the form attached as Exhibit M to this Agreement, such warrants to provide for the purchase at the option of the holder thereof of a number of shares of Holdco Common Stock equal to such Lender's Total Credit Percentage times the number of shares of Holdco Common Stock constituting 5% of all Holdco Common Stock on a fully diluted basis outstanding immediately after such issuance (but treating all of the share of Holdco Common Stock issuable upon exercise, conversion or exchange of all options, warrants and other convertible and exchangeable securities as being outstanding) at an exercise price equal to $0.01 per share and shall continue, or cause to be continued, all efforts to obtain such $15,000,000 equity capital infusion for an additional period equal to 45 days from the Warrant Date. In the event that the Company is unsuccessful in obtaining the $15,000,000 equity contribution required above by the end of the additional 45-day period, such failure shall constitute an Event of Default pursuant to Section 6.02. If the Company shall receive any equity capital infusion from Holdco on or prior to February 28, 1999, then in such case, the required $15,000,000 equity capital infusion described above shall be reduced, on a dollar-for-dollar basis by the amount of the equity capital infusion received by the Company on or prior to February 28, 1999. Section 4. Amendment of Section 5.03(a) of the Credit Agreement. Section 5.03(a) of the Credit Agreement is hereby amended to read in its entirety as follows: -4- 5 (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 -------------------------- ----- September 30, 1998 1.00 December 31, 1998 0.80 March 31, 1999 0.80 June 30, 1999 0.80 September 30, 1999 0.80 December 31, 1999 0.80 Each Rolling Period Ratio ------------------- ----- thereafter 2.50
Section 5. Amendment of Section 5.03(c) of the Credit Agreement. Section 5.03(c) of the Credit Agreement is hereby amended to read in its entirety as follows: (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 ending Ratio -------------------------- ----- September 30, 1998 0.75 December 31, 1998 0.55 March 31, 1999 0.55 June 30, 1999 0.55 September 30, 1999 0.55 December 31, 1999 0.55 March 31, 2000 1.15 June 30, 2000 1.15 September 30, 2000 1.15 Each Rolling Period Ratio ------------------- ----- thereafter 1.20
Section 6. Amendment of Section 5.03(d) of the Credit Agreement. Section 5.03(d) of the Credit Agreement is hereby amended to read in its entirety as follows: (d) Leverage Ratio. Maintain a Leverage Ratio of not greater than the ratio for each Rolling Period indicated below:
Each Rolling Period ending Ratio -------------------------- ----- September 30, 1998 9.75 December 31, 1998 12.00 March 31, 1999 12.00 June 30, 1999 12.00 September 30, 1999 12.00 December 31, 1999 12.00 Each Rolling Period after December 31, 1999 during the Fiscal Years ending Ratio September 30, 2000 4.00 September 30, 2001 3.50 Each Rolling Period Ratio ------------------- ----- thereafter 3.00
-5- 6 Section 7. Amendment of Section 5.03(e) of the Credit Agreement. Section 5.03(e) of the Credit Agreement is hereby amended to read in its entirety as follows: (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 -------------------------- ----- September 30, 1998 4.25 December 31, 1998 4.75 March 31, 1999 4.75 June 30, 1999 5.20 September 30, 1999 5.20 December 31, 1999 4.85 Each Rolling Period Ratio thereafter 3.00
Section 8. Amendment of Section 5.04(o) of the Credit Agreement. Section 5.04(o) of the Credit Agreement is hereby amended by adding a new clause (v) after clause (iv) of such Section, such clause (v) to read in its entirety as follows: (v) Notwithstanding the Capital Expenditures permitted by Sections 5.04(o)(i), (ii), (iii), and (iv) above, for the Fiscal Year ending September 30, 1999, the Company and its Subsidiaries (excluding Unrestricted Subsidiaries) shall not make Capital Expenditures in excess of $35,000,000. Section 9. Amendment to Section 6.02 of the Credit Agreement. Section 6.02 of the Credit Agreement is hereby amended to read in its entirety as follows: 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), (i) or (k), Section 5.03 or Section 5.04 (other than Subsections 5.04(b)(iii)-(v) hereof). -6- 7 Section 10. Addition of Exhibit M to the Credit Agreement. The form of Warrant Agreement and attached exhibits thereto contained in Exhibit M attached hereto is appended to the Credit Agreement as Exhibit M thereto. Section 11. Limitations. The amendments set forth herein are limited precisely as written and shall not (a) be deemed to be a consent to, or a waiver or modification of, any other term or condition of any of the Financing Documents or (b) except as expressly set forth herein, prejudice any right or rights which the Lenders may now have or may have in the future under or in connection with any of the Financing Documents or any of the other documents or instruments referred to therein. Except as expressly modified hereby or by express written amendments thereof, each of the Financing Documents and each of the other documents and instruments executed in connection with any of the foregoing are and shall remain in full force and effect. In the event of a conflict between this Second Amendment and any of the foregoing documents, the terms of this Second Amendment shall be controlling. Section 12. Conditions Precedent and Effectiveness. This Second Amendment shall not be effective unless (i) this Second Amendment has been executed and delivered by the Required Lenders, (ii) the Warrant Agreement in the form of Exhibit M attached hereto has been executed and delivered by Holdco to the Administrative Agent and (iii) each Lender delivering its executed signature pages to this Second Amendment shall have received from the Company its amendment fee pursuant to the provisions of Section 17 hereof. Section 13. Representations and Warranties. The Company hereby represents and warrants to the Administrative Agent, the Documentation Agent and each of the Lenders that (a) except as affected by the transactions contemplated in the Credit Agreement and this Second Amendment, each of the representations and warranties made by the Company and the Subsidiary Guarantors in or pursuant to each of the Financing Documents is true and correct in all material respects as of the Second Amendment Effective Date, as if made on and as of such date, except for any representations and warranties made as of a specified date, which are true and correct in all material respects as of such specified date and (b) no Default or Event of Default has occurred and is continuing as of the Second Amendment Effective Date. Section 14. Adoption, Ratification and Confirmation of Credit Agreement. Each of the Company, the Administrative Agent, the Documentation Agent and each of the Lenders signatories hereto hereby adopts, ratifies and confirms the Credit Agreement, as amended hereby, and acknowledges and agrees that the Credit Agreement, as amended hereby, is and remains in full force and effect. Section 15. Ratification and Affirmation of Subsidiary Guaranty. Each of the Subsidiary Guarantors hereby expressly (a) acknowledges the terms of this Second Amendment, (b) acknowledges, renews and extends its continued liability under the Guaranty Agreement to which it is a party and agrees that such Guaranty Agreement remains in full force and effect and (c) agrees with the Administrative Agent, the Documentation Agent, each Lender and each Issuing Bank to promptly pay when due all amounts owing or to be owing by it under such Guaranty Agreement pursuant to the terms and conditions thereof. -7- 8 Section 16. Payment of Expenses. The Company agrees, whether or not the transactions contemplated hereby shall be consummated, to reimburse and save and hold the Administrative Agent and the Documentation Agent harmless from and against liability for the payment of all reasonable out-of-pocket costs and expenses arising in connection with the preparation, execution, delivery, amendment, modification, waiver and enforcement of, or the preservation of any rights under this Second Amendment, including, without limitation, the reasonable fees and expenses of any local or other counsel for the Administrative Agent, and all stamp taxes (including interest and penalties, if any), recording taxes and fees, filing taxes and fees and other charges which may be payable in respect of, or in respect of any modification of, any of the Financing Documents. The provisions of this Section shall survive the termination of the Credit Agreement and the repayment of the Loans. Section 17. Amendment Fee. The Company agrees to pay to each Lender that executes this Second Amendment and delivers such executed Second Amendment to the Administrative Agent on or prior to the Second Amendment Effective Date an amendment fee in an amount equal to 25 basis points times such Lender's Revolving Credit Commitment and the aggregate outstanding principal amount of such Lender's Tranche A Term Loans, Tranche B Term Loans and ESOP Loans. Section 18. Second Amendment Effective Date. As used in this Second Amendment, the term "Second Amendment Effective Date" shall mean 5:00 p.m. on the date on which this Second Amendment is signed by the Company and the Required Lenders. Section 19. Governing Law. THIS SECOND AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATION LAW, OR ANY SIMILAR SUCCESSOR PROVISIONS THERETO, BUT EXCLUDING ALL OTHER CONFLICT-OF-LAWS RULES) AND TO THE EXTENT CONTROLLING, LAWS OF THE UNITED STATES OF AMERICA. Section 20. Descriptive Headings, Etc. The descriptive headings of the several sections of this Second Amendment are inserted for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. Section 21. Entire Agreement. This Second Amendment and the documents referred to herein represent the entire understanding of the parties hereto regarding the subject matter hereof and supersede all prior and contemporaneous oral and written agreements of the parties hereto with respect to the subject matter hereof. Section 22. Counterparts. This Second Amendment may be executed in any number of counterparts (including by telecopy) and by different parties on separate counterparts and all of such counterparts shall together constitute one and the same instrument. [Signature Pages to this Second Amendment begin on the next page] -8- 9 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed and delivered by their respective duly authorized officers as of the Second Amendment Effective Date. COMPANY: STERLING CHEMICALS, INC. By: ---------------------------------------- Gary M. Spitz, Vice President - Finance and Chief Financial Officer ADMINISTRATIVE AGENT CHASE BANK OF TEXAS, DOCUMENTATION AGENT NATIONAL ASSOCIATION, AND THE LENDERS: Individually and as Administrative Agent By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 1] 10 CREDIT SUISSE FIRST BOSTON, Individually and as Documentation Agent By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 2] 11 ABN AMRO BANK N.V. Houston Agency By: ABN AMRO North America, Inc., as Agent By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 3] 12 AERIES FINANCE LTD. By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 4] 13 THE BANK OF NOVA SCOTIA By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 5] 14 BANK OF SCOTLAND By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 6] 15 BANKERS TRUST COMPANY By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 7] 16 PARIBAS By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 8] 17 BHF-BANK AKTIENGESELLSCHAFT By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 9] 18 CAPTIVA FINANCE LTD. By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 10] 19 CAPTIVA II FINANCE LTD. By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 11] 20 CERES FINANCE LTD. By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 12] 21 CIBC INC. By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 13] 22 THE CIT GROUP/BUSINESS CREDIT, INC. By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 14] 23 COMERICA BANK By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 15] 24 CREDIT LYONNAIS NEW YORK BRANCH By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 16] 25 CREDITANSTALT CORPORATE FINANCE, INC. By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 17] 26 THE FIRST NATIONAL BANK OF CHICAGO By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 18] 27 FIRST SOURCE FINANCIAL LLP By: First Source Financial, Inc., as its Agent/Manager By: ----------------------------------- Printed Name: ------------------------- Title: -------------------------------- [Signature Page to Second Amendment -- Page 19] 28 HIBERNIA NATIONAL BANK By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 20] 29 KZH III LLC By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 21] 30 KZH STERLING LLC By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 22] 31 THE LONG-TERM CREDIT BANK OF JAPAN LIMITED NEW YORK BRANCH By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 23] 32 MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 24] 33 MERRILL LYNCH PRIME RATE PORTFOLIO By: Merrill Lynch Asset Management, L.P., as Investment Advisor By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 25] 34 MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 26] 35 NATIONAL BANK OF CANADA By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 27] 36 PARIBAS CAPITAL FUNDING LLC By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 28] 37 SENIOR DEBT PORTFOLIO By: Boston Management and Research, as Investment Advisor By: ------------------------------------ Printed Name: -------------------------- Title: --------------------------------- [Signature Page to Second Amendment -- Page 29] 38 VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 30] 39 VAN KAMPEN AMERICAN CAPITAL SENIOR INCOME TRUST By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 31] 40 VAN KAMPEN CLO II, LTD. By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 32] 41 CAPTIVA III FINANCE, LTD. By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 33] 42 ROYALTON COMPANY By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 34] 43 DELANO COMPANY By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 35] 44 KEYPORT LIFE INSURANCE COMPANY By: ---------------------------------------- Printed Name: ------------------------------ Title: ------------------------------------- [Signature Page to Second Amendment -- Page 36] 45 SUBSIDIARY GUARANTORS: STERLING CHEMICALS INTERNATIONAL, INC. STERLING CHEMICALS ENERGY, INC. STERLING FIBERS, INC. By: ---------------------------------------- Gary M. Spitz, Vice President STERLING CANADA, INC. STERLING PULP CHEMICALS US, INC. STERLING PULP CHEMICALS, INC. By: ---------------------------------------- Gary M. Spitz, Vice President - Finance [Signature Page to Second Amendment -- Page 37] EX-4.9.B 5 SECOND AMENDMENT TO STOCKHOLDERS AGREEMENT 1 EXHIBIT 4.9(b) SECOND AMENDMENT TO STERLING CHEMICALS HOLDINGS, INC. STOCKHOLDERS AGREEMENT THIS SECOND AMENDMENT TO STERLING CHEMICALS HOLDINGS, INC. STOCKHOLDERS AGREEMENT (this "Amendment") dated effective as of May 1, 1998 is by and among STERLING CHEMICALS HOLDINGS, INC., a Delaware corporation (the "Corporation"), STERLING CHEMICALS, INC. EMPLOYEE STOCK OWNERSHIP TRUST, an employee stock ownership trust created pursuant to the Sterling Chemicals, Inc., Employee Stock Ownership Plan (the "ESOT"), and the other persons and entities whose signatures appear on the signature pages hereof (the "Other Parties" and, together with the Corporation and the ESOT, the "Parties"). Capitalized terms used but not defined herein shall have the respective meanings ascribed to such terms in the Existing Agreement referred to below. PRELIMINARY STATEMENTS A. The Parties, together with certain other Holders, are parties to that certain Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996 (the "Original Agreement"). B. The Original Agreement was amended by that certain First Amendment to Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of December 31, 1997 (the Original Agreement, as so amended, the "Existing Agreement"). C. The Parties desire to amend the Existing Agreement in certain respects in order to exclude certain shares of Stock from the coverage of the Existing Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and in the Existing Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: Section 1. Amendment of Section 2.16 of the Existing Agreement. Section 2.16 of the Existing Agreement is hereby amended to read in its entirety as follows: 2.16. Except as provided below, the term "Stock" shall mean (1) all shares of Common Stock owned by each Holder and the ESOT on the Effective Date; (2) all shares of Common Stock issued by the Company to or acquired by any Holder or the ESOT after the Effective Date, whether in connection with a purchase, issuance, grant, stock split, stock dividend, reorganization, warrant, option, convertible security, right to acquire or otherwise; (3) all securities of the Company or any other corporation or entity which any Holder or the ESOT acquires after the Effective Date in respect of his, her or its shares of Common Stock in connection with any exchange, merger, consolidation, recapitalization, reorganization or other transaction 2 to which the Company is a party; and (4) all shares of Common Stock owned by any person or entity who becomes subject to this Agreement pursuant to the terms of this Agreement. Notwithstanding the foregoing, the term "Stock" shall not include (a) any shares of Common Stock which were retained by a Holder or any other person or entity on the Effective Date by virtue of a "Rollover Election" made in connection with the Merger (other than any such shares held on the Effective Date by a person who was a Holder on the Effective Date and who is a party to the Inducement Agreement); (b) any shares of Common Stock purchased after the Effective Date in the open market through a broker or in a transaction directly with a market maker (as defined in section 3(a)(38) of the Securities Exchange Act of 1934, as amended); (c) any shares of Common Stock distributed by the ESOT; (d) any shares of Common Stock distributed under the Sterling Chemicals, Inc. Amended and Restated Employees' Stock Ownership Plan, as amended, or any trust created pursuant thereto; or (e) any securities of the Company or any other corporation or entity which any Holder or the ESOT acquires in respect of any shares of Common Stock referred to in clauses (a) through (d) above in connection with any exchange, merger, consolidation, recapitalization, reorganization or other transaction to which the Company is a party. All references herein to the Stock owned by a Holder include the community interest or similar marital property interest, if any, of the spouse of such Holder in such Stock. Section 2. Effect of Amendments. Except as amended and modified by this Amendment, the Existing Agreement shall continue in full force and effect. The Existing Agreement and this Amendment shall be read, taken and construed as one and the same instrument. Upon the effectiveness of this Amendment, each reference in the Existing Agreement to "this Agreement" shall mean and be a reference to the Existing Agreement as amended hereby. Section 3. Effectiveness. This Amendment shall not be or become effective unless and until it has been duly executed and delivered by the Corporation and Holders constituting a Required Voting Percentage. Section 4. Binding Effect. This Amendment shall inure to the benefit of, and shall be binding upon (i) the Corporation and its successors and permitted assigns and (ii) the Holders and their respective heirs, legatees, executors, personal representatives, administrators, successors and permitted assigns. Section 5. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original but all of which taken together shall constitute one and the same agreement. It shall not be necessary in making proof of this Amendment to produce or account for more than one such counterpart. Section 6. Severability. Should any clause, sentence, paragraph, subsection or Section of this Amendment be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Amendment, and the Parties agree that the part or parts of this Amendment so held to be invalid, unenforceable or -2- 3 void will be deemed to have been stricken herefrom as if such stricken part or parts had never been included herein. Section 7. Governing Law. THIS AMENDMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW. Section 8. Entire Agreement. This Amendment and the Existing Agreement set forth all of the promises, agreements, conditions, understandings, warranties and representations among the Parties with respect to the matters cover hereby, and supersede all prior agreements, arrangements and understandings among the Parties, whether written, oral or otherwise. There are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, among the Parties concerning the subject matter hereof or thereof except as set forth herein or therein. IN WITNESS WHEREOF, the Parties have executed this Amendment effective as of the date first written above. STERLING CHEMICALS HOLDINGS, INC. By: --------------------------------- Printed Name: ----------------------- Title: ------------------------------ STERLING CHEMICALS, INC. EMPLOYEE STOCK OWNERSHIP TRUST By: Merrill Lynch Trust Co. of Texas, solely in its capacity as Trustee By: ----------------------------- Printed Name: ------------------- Title: -------------------------- -3- 4 OTHER PARTIES: Individual: ------------------------------------ Printed Name: ----------------------- Entity: ------------------------------------ (Print Name of Entity) By: --------------------------------- Printed Name: ----------------------- Title: ------------------------------ -4- EX-4.11.A 6 AMENDED & RESTATED VOTING AGREEMENT - 12/15/1998 1 EXHIBIT 4.11(a) AMENDED AND RESTATED VOTING AGREEMENT THIS AMENDED AND RESTATED VOTING AGREEMENT (the "Agreement") is entered into as of December 15, 1998, by and among the stockholders named on the signature pages hereto (each a "Stockholder" and, collectively, the "Stockholders") and Sterling Chemicals Holdings, Inc. (the "Company"). PRELIMINARY STATEMENTS A. The Stockholders are beneficial owners of common stock, par value $.01 per share, of the Company ("Common Stock"); B. Certain of the Stockholders and the Company heretofore entered into an Amended and Restated Voting Agreement dated as of January 22, 1997 (the "Existing Voting Agreement"). C. The parties hereto desire to amend the Existing Voting Agreement in certain respects and to restate the Existing Voting Agreement, as so amended, in its entirety. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, hereby agree as follows: ARTICLE I Definitions and Interpretation 1.1. Definitions. As used in this Agreement, the following terms shall have the meanings provided below: "Annual Cain Designation" has the meaning specified in Section 5.2. "Annual Clipper Designation" has the meaning specified in Section 3.2. "Annual Koch Designation" has the meaning specified in Section 4.2. "Annual Meeting" means an annual meeting of the stockholders of the Company. "Board" means the board of directors of the Company. "Cain" means Gordon A. Cain. 2 "Cain Designee" means a person designated as a nominee for election to the Board pursuant to Article V. "Cain Director" means a director of the Company designated by Cain pursuant to Article V. "Clipper Designee" means a person designated as a nominee for election to the Board pursuant to Article III. "Clipper Director" means a director of the Company designated by the Clipper Representative pursuant to Article III. "Clipper Investors" means (i) Clipper Capital Associates, L.P., (ii) Clipper Equity Partners I, L.P., (iii) Clipper/Merchant Partners, L.P., (iv) Clipper/European Re, L.P., Clipper/Merban, L.P., (v) CS First Boston Merchant Investments 1995/96, L.P., (vi) certain accredited investors who enter into agreements with Clipper Capital Associates, L.P. under which such partnership acts as a nominee with respect to Common Stock purchased on behalf of such investors and who are identified as Clipper Investors by written notice given by Clipper Capital Associates, L.P. to the Company and (vii) those employees of CS First Boston Corporation who enter into subscription agreements with the Company and who are identified as Clipper Investors by written notice given by Clipper Capital Associates, L.P. to the Company. "Clipper Observer" has the meaning specified in Section 3.6. "Clipper Representative" means Clipper Equity Partners I, L.P. so long as it holds Common Stock and thereafter means all the remaining Clipper Investors. "Koch" means Koch Capital Services, Inc. "Koch Designee" means a person designated for election to the Board pursuant to Article IV. "Koch Director" means a director of the Company designated by Koch pursuant to Article IV. "Voting Stock" means Common Stock and any other class of capital stock of the Company entitled to vote generally in an election of directors. 1.2. Interpretation. (a) In this Agreement, unless a contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any gender includes each other gender; -2- 3 (iii) the words "herein," hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision; (iv) reference to any person or entity includes such person's or entity's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a person or entity in a particular capacity excludes such person or entity in any other capacity or individually; (v) reference to any agreement, document or instrument means such agreement, document or instrument as amended, supplemented or modified and in effect from time to time in accordance with the terms thereof; and (vi) reference to any Article or Section means such Article or Section hereof. (b) The Article and Section headings herein are for convenience only and shall not affect the construction hereof. (c) This Agreement shall be deemed drafted jointly by all the parties hereto and shall not be specifically construed against any party hereto based on any claim that such party or its legal counsel drafted such provision. ARTICLE II Size of Board The parties hereto acknowledge and agree that, so long as this Agreement remains in effect, at no time shall the total number of directors be less than four plus the total number of director nominees that the Clipper Representative, Koch and Cain shall then be entitled to designate in accordance with Articles III, IV and V, respectively. ARTICLE III The Clipper Director and Observer 3.1. General. The Clipper Representative shall be entitled to designate one individual as a director nominee to serve on the Board. Such designation shall be made annually as provided in Section 3.2 or at other times as provided in Section 3.3. The parties hereto acknowledge that Robert B. Calhoun has heretofore been designated and elected as the initial Clipper Director. The Clipper Director shall serve on the Board until a successor director shall be duly elected and qualified or until his earlier death, removal or resignation. 3.2. Annual Clipper Designations. The Company shall, no later than 45 days prior to the mailing of any proxy statement with respect to an Annual Meeting, notify the Clipper Representative of the date of such mailing. As soon as practicable after receipt of such notice but -3- 4 in any event no later than 20 days prior to the mailing date specified therein, the Clipper Representative shall provide the Company a written instrument ("Annual Clipper Designation") designating either the incumbent Clipper Director or a person other than the incumbent Clipper Director, in which event the Annual Clipper Designation shall include such other person's name, age, principal occupation, business address and telephone number and residence address and telephone number. The Annual Clipper Designation shall also include or be accompanied by (i) all information relating to the person designated therein that is required to be disclosed in the proxy statement pursuant to applicable regulations of the Securities and Exchange Commission, (ii) such person's consent to being named in the proxy statement as a nominee and (iii) a statement of such person's intention to serve as a director if elected to the Board. The Company shall nominate for election at such Annual Meeting the person designated in the Annual Clipper Designation. Subject to applicable laws, the Company shall take all other actions reasonably necessary to cause the Clipper Designee to be elected to the Board. Each Stockholder agrees to vote (or caused to be voted) the Voting Stock owned by it in favor of the Clipper Designee and to take any other necessary or desirable action in its capacity as a stockholder of the Company to cause the Clipper Designee to be elected to the Board. 3.3. Interim Clipper Designations. In case a vacancy shall occur on the Board because of the death, resignation or removal of the Clipper Director, the Clipper Representative may elect either (i) to have such vacancy filled at the next Annual Meeting pursuant to a designation made in accordance with Section 3.2 or (ii) to have such vacancy filled prior to such Annual Meeting by a majority of the directors remaining in office. If the Clipper Representative wishes to make the election provided for in clause (ii) above, it shall designate a successor director nominee by written notice given to the Company and each of the other Stockholders (the "Interim Clipper Designation"). Subject to applicable laws, the Company shall recommend that the remaining directors elect the Clipper Designee named in any Clipper Interim Designation and shall take all other actions reasonably necessary to cause such Clipper Designee to be elected to the Board. Each Stockholder agrees to vote (or cause to be voted) the Voting Stock owned by it in favor of any such Clipper Designee and to take any other necessary or desirable action in its capacity as a stockholder of the Company to cause any such Clipper Designee to be elected to the Board. Without limitation of the foregoing, each of Cain and Koch agrees to cause the Cain Director and the Koch Director, respectively, to vote in favor of any such Clipper Designee and each Stockholder who is a member of the Board agrees, subject to his fiduciary duties, to vote in favor of any such Clipper Designee. (b) In the event Clipper shall make an Interim Clipper Designation in accordance with paragraph (a) above in order to fill the vacancy created by the death, resignation or removal of the Clipper Director and in the event a majority of the directors remaining in office shall fail or refuse to appoint the Clipper Designee named in such Interim Clipper Designation to fill such vacancy within 30 days after receipt by the Company of such Interim Clipper Designation, then the Company agrees, if requested by Clipper to do so, to call a special meeting of the stockholders of the Company for the purpose of voting upon a proposal to elect such Clipper Designee to the Board; provided, however, that in no event shall the Company be required to call a special meeting of the stockholders if the Company has given a formal notice of the next Annual Meeting. -4- 5 3.4. Failure of Clipper to Designate. If the Clipper Representative shall fail or refuse to designate a nominee for director pursuant to Section 3.2 or 3.3, such directorship shall remain vacant unless and until such designation shall be made as provided in this Article III; provided, however, that if such vacancy results in less than the minimum number of directors required by law or by the charter or bylaws of the Company as then in effect, such vacancy shall be filled by an individual elected by a majority of the directors then serving. 3.5. Removal of Clipper Director. The Clipper Representative shall have the exclusive right (except as otherwise provided by applicable law or the Company's charter) to remove or replace the Clipper Director. If the Clipper Representative desires to remove the Clipper Director, it shall give written notice of such desire to the Company and the other Stockholders who shall thereupon become obligated to vote all Voting Stock owned by them in favor of the removal of the Clipper Director. No Stockholder (other than the Clipper Investors) shall vote any of the securities of the Company owned by it or take any other action in its capacity as a stockholder of the Company for the removal of the Clipper Director without the prior written approval of the Clipper Representative. 3.6. The Clipper Observer. The Clipper Representative shall have the right, exercisable by written notice to the Company, to designate from time to time an observer (the "Clipper Observer") who shall have the right to attend meetings of the Board and to receive information delivered to the Board, at the expense of the Clipper Investors. The initial Clipper Observer shall be Kevin A. Macdonald. 3.7. Termination/Suspension of Clipper Rights. Notwithstanding anything in this Agreement to the contrary, the rights of the Clipper Investors and the Clipper Representative under this Article III and the obligations of the other parties hereto under this Article III shall terminate immediately and without notice upon the earliest of (i) August 21, 2006, (ii) the termination of this Agreement under Section 8.3 and (iii) any event or occurrence resulting in the holding by the Clipper Investors of less than 5% of the outstanding shares of Common Stock. Promptly upon the termination of its rights under this Article III, the Clipper Investors agree to (i) cause the resignation of, or provide notice to the other parties hereto as provided in Section 3.5 requesting the removal of, the incumbent Clipper Director and (ii) inform the Clipper Observer that his rights under Section 3.6 have terminated. 3.8. Irrevocable Proxy. Each of the Stockholders hereby grants to the Clipper Representative, on behalf of the Clipper Investors, an irrevocable proxy to vote all shares of Common Stock presently or at any future time owned beneficially or of record by such Stockholder which the Stockholder is entitled to vote, and to represent and otherwise act as such Stockholder could act, in the same manner and with the same effect as if such Stockholder were personally present, at any annual, special or other meeting of the stockholders of the Company, and at any adjournment thereof, or pursuant to any written consent in lieu of meeting or otherwise; provided, however, that any such vote or consent in lieu thereof or any other action so taken shall be solely for the purposes of electing a Clipper Designee to the Board as provided in Section 3.2 or 3.3 or removing the Clipper Director from the Board as provided in Section 3.5. -5- 6 ARTICLE IV The Koch Director 4.1. General. Koch shall be entitled to designate one individual as a director nominee to serve on the Board. Such designation shall be made annually as provided in Section 4.2 or at other times as provided in Section 4.3. The parties hereto acknowledge that George J. Damiris has heretofore been designated and elected as the current Koch Director. The Koch Director shall serve on the Board until a successor director shall be duly elected and qualified or until his earlier death, removal or resignation. 4.2. Annual Koch Designations. The Company shall, no later than 45 days prior to the mailing of any proxy statement with respect to an Annual Meeting, notify Koch of the date of such mailing. As soon as practicable after receipt of such notice but in any event no later than 20 days prior to the mailing date specified therein, Koch shall provide the Company a written statement ("Annual Koch Designation") designating either the incumbent Koch Director or a person other than the incumbent Koch Director, in which event the Annual Koch Designation shall include such other person's name, age, principal occupation, business address and telephone number and residence address and telephone number. The Annual Koch Designation shall also include or be accompanied by (i) all information relating to the person designated therein that is required to be disclosed in the proxy statement pursuant to applicable regulations of the Securities and Exchange Commission, (ii) such person's consent to being named in the proxy statement as a nominee and (iii) a statement of such person's intention to serve as a director if elected to the Board. The Company shall nominate for election at such Annual Meeting the person designated in the Annual Koch Designation. Subject to applicable laws, the Company agrees to take all other actions reasonably necessary to cause the Koch Designee to be elected to the Board. Each Stockholder agrees to vote (or cause to be voted) the Voting Stock owned by it in favor of the Koch Designee and to take any other necessary or desirable action in its capacity as a stockholder of the Company to elect the Koch Designee to the Board. 4.3. Interim Koch Designations. (a) In case a vacancy shall occur on the Board because of the death, resignation or removal of the Koch Director, Koch may elect either (i) to have such vacancy filled at the next Annual Meeting pursuant to a designation made in accordance with Section 4.2 or (ii) to have such vacancy filled prior to such Annual Meeting by a majority of the directors remaining in office. If Koch wishes to make the election provided for in clause (ii) above, it shall designate a successor director nominee by written notice given to the Company and each of the other Stockholders (the "Interim Koch Designation"). Subject to applicable laws, the Company shall recommend that the remaining directors elect the Koch Designee named in the Interim Koch Designation and shall take all other actions reasonably necessary to cause such Koch Designee to be elected to the Board. Each Stockholder agrees to vote the Voting Stock owned by it in favor of any such Koch Designee and to take any other necessary or desirable action in its capacity as a stockholder of the Company to cause any such Koch Designee to be elected to the Board. Without limitation of the foregoing, each of Cain and the Clipper Investors agrees to cause the Cain Director and the Clipper Director, respectively, to vote in favor of any -6- 7 such Koch Designee and each Stockholder who is a member of the Board agrees, subject to his fiduciary duties, to vote in favor of any such Koch Designee. (b) In the event Koch shall make an Interim Koch Designation in accordance with paragraph (a) above in order to fill the vacancy created by the death, resignation or removal of the Koch Director and in the event a majority of the directors remaining in office shall fail or refuse to appoint the Koch Designee named in such Interim Koch Designation to fill such vacancy within 30 days after receipt by the Company of such Interim Koch Designation, then the Company agrees, if requested by Koch to do so, to call a special meeting of the stockholders of the Company for the purpose of voting upon a proposal to elect such Koch Designee to the Board; provided, however, that in no event shall the Company be required to call a special meeting of the stockholders if the Company has given a formal notice of the next Annual Meeting. 4.4. Failure of Koch to Designate. If Koch shall fail or refuse to designate a nominee for director pursuant to Section 4.2 or 4.3, such directorship shall remain vacant unless and until such designation shall be made as provided in this Article IV; provided, however, that if such vacancy results in less than the minimum number of directors required by law or by the charter or bylaws of the Company as then in effect, such vacancy shall be filled by an individual elected by a majority of the directors then serving. 4.5. Removal of Koch Director. Koch shall have the exclusive right (except as otherwise provided by applicable law) to remove or replace the Koch Director. If Koch desires to remove the Koch Director, it shall give written notice of such desire to the Company and the other Stockholders who shall thereupon become obligated to vote all Voting Stock owned by them in favor of the removal of the Koch Director. No Stockholder (other than Koch) shall vote any of the securities of the Company owned by it or take any other action in its capacity as a stockholder of the Company for the removal of the Koch Director without the prior written approval of Koch. 4.6. Termination/Suspension of Koch Rights. Notwithstanding anything in this Agreement to the contrary, the rights of Koch under this Article IV and the obligations of the other parties hereto under this Article IV shall terminate immediately and without notice upon the earliest of (i) August 21, 2006, (ii) the termination of this Agreement under Section 8.3 and (iii) any event or occurrence resulting in the holding by Koch of less than 5% of the outstanding shares of Common Stock. Promptly upon the termination of its rights under this Article IV, Koch agrees to cause the resignation of, or provide notice to the other parties hereto as provided in Section 4.5 requesting the removal of, the incumbent Koch Director. 4.7. Irrevocable Proxy. Each of the Stockholders hereby grants to Koch an irrevocable proxy to vote all shares of Common Stock presently or at any future time owned beneficially or of record by such Stockholder which the Stockholder is entitled to vote, and to represent and otherwise act as such Stockholder could act, in the same manner and with the same effect as if such Stockholder were personally present, at any annual, special or other meeting of the stockholders of the Company, and at any adjournment thereof, or pursuant to any written consent in lieu of meeting or otherwise; provided, however, that any such vote or consent in lieu -7- 8 thereof or any other action so taken shall be solely for the purposes of electing a Koch Designee to the Board as provided in Section 4.2 or 4.3 or removing the Koch Director from the Board as provided in Section 4.5. ARTICLE V The Cain Director 5.1. General. Cain shall be entitled to designate one individual as a director nominee to serve on the Board. The initial Cain Director may be designated by Cain at any time on or after the earlier of (i) February 1, 1999 and (ii) the consummation of the first Closing (as defined in that certain Standby Purchase Agreement dated as of December 15, 1998 between the Company and Cain, which is referred to herein as the "Purchase Agreement"). Thereafter, such designation shall be made annually as provided in Section 5.2 or at other times as provided in Section 5.3. In order to designate the initial Cain Director, Cain shall provide the Company a written statement designating a person as the Cain Director, which statement shall include such person's name, age, principal occupation, business address and telephone number and residence address and telephone number and shall also include or be accompanied by (A) all information relating to the person designated therein that is required to be disclosed in the proxy statement pursuant to applicable regulations of the Securities and Exchange Commission, (B) such person's social security number, (C) such person's consent to being named in the proxy statement as a nominee and (D) a statement of such person's intention to serve as a director if elected to the Board. Upon receipt of such statement, the Company shall, as soon as practicable, call a special meeting of the Board of Directors for the purpose of increasing the size of the Board of Directors by one and electing the initial Cain Designee to fill the vacancy caused by such increase. 5.2. Annual Cain Designations. The Company shall, no later than 45 days prior to the mailing of any proxy statement with respect to an Annual Meeting, notify Cain of the date of such mailing. As soon as practicable after receipt of such notice but in any event no later than 20 days prior to the mailing date specified therein, Cain shall provide the Company a written statement ("Annual Cain Designation") designating either the incumbent Cain Director or a person other than the incumbent Cain Director, in which event the Annual Cain Designation shall include such other person's name, age, principal occupation, business address and telephone number and residence address and telephone number. The Annual Cain Designation shall also include or be accompanied by (i) all information relating to the person designated therein that is required to be disclosed in the proxy statement pursuant to applicable regulations of the Securities and Exchange Commission, (ii) such person's consent to being named in the proxy statement as a nominee and (iii) a statement of such person's intention to serve as a director if elected to the Board. The Company shall nominate for election at such Annual Meeting the person designated in the Annual Cain Designation. Subject to applicable laws, the Company agrees to take all other actions reasonably necessary to cause the Cain Designee to be elected to the Board. Each Stockholder agrees to vote (or cause to be voted) the Voting Stock owned by it in favor of the Cain Designee and to take any other necessary or desirable action in its capacity as a stockholder of the Company to elect the Cain Designee to the Board. -8- 9 5.3. Interim Cain Designations. (a) In case a vacancy shall occur on the Board because of the death, resignation or removal of the Cain Director, Cain may elect either (i) to have such vacancy filled at the next Annual Meeting pursuant to a designation made in accordance with Section 5.2 or (ii) to have such vacancy filled prior to such Annual Meeting by a majority of the directors remaining in office. If Cain wishes to make the election provided for in clause (ii) above, he shall designate a successor director nominee by written notice given to the Company and each of the other Stockholders (the "Interim Cain Designation"). Subject to applicable laws, the Company shall recommend that the remaining directors elect the Cain Designee named in the Interim Cain Designation and shall take all other actions reasonably necessary to cause such Cain Designee to be elected to the Board. Each Stockholder agrees to vote the Voting Stock owned by it in favor of any such Cain Designee and to take any other necessary or desirable action in its capacity as a stockholder of the Company to cause any such Cain Designee to be elected to the Board. Without limitation of the foregoing, each of the Clipper Investors and Koch agrees to cause the Clipper Director and the Koch Director, respectively, to vote in favor of any such Cain Designee and each Stockholder who is a member of the Board agrees, subject to his fiduciary duties, to vote in favor of any such Cain Designee. (b) In the event Cain shall make an Interim Cain Designation in accordance with paragraph (a) above in order to fill the vacancy created by the death, resignation or removal of the Cain Director and in the event a majority of the directors remaining in office shall fail or refuse to appoint the Cain Designee named in such Interim Cain Designation to fill such vacancy within 30 days after receipt by the Company of such Interim Cain Designation, then the Company agrees, if requested by Cain to do so, to call a special meeting of the stockholders of the Company for the purpose of voting upon a proposal to elect such Cain Designee to the Board; provided, however, that in no event shall the Company be required to call a special meeting of the stockholders if the Company has given a formal notice of the next Annual Meeting. 5.4. Failure of Cain to Designate. If Cain shall fail or refuse to designate a nominee for director pursuant to Section 5.2 or 5.3, such directorship shall remain vacant unless and until such designation shall be made as provided in this Article V; provided, however, that if such vacancy results in less than the minimum number of directors required by law or by the charter or bylaws of the Company as then in effect, such vacancy shall be filled by an individual elected by a majority of the directors then serving. 5.5. Removal of Cain Director. Cain shall have the exclusive right (except as otherwise provided by applicable law) to remove or replace the Cain Director. If Cain desires to remove the Cain Director, he shall give written notice of such desire to the Company and the other Stockholders who shall thereupon become obligated to vote all Voting Stock owned by them in favor of the removal of the Cain Director. No Stockholder (other than Cain) shall vote any of the securities of the Company owned by it or take any other action in its capacity as a stockholder of the Company for the removal of the Cain Director without the prior written approval of Cain. 5.6. Termination/Suspension of Cain Rights. Notwithstanding anything in this Agreement to the contrary, the rights of Cain under this Article V and the obligations of the other -9- 10 parties hereto under this Article V shall terminate immediately and without notice upon the earlier of (i) the termination of this Agreement under Section 8.3 and (ii) any event or occurrence resulting in the holding by Cain of less than 5% of the outstanding shares of Common Stock; provided, however, that such rights and obligations shall remain in full force and effect so long as Cain is obligated to purchase Common Stock pursuant to the Purchase Agreement. Promptly upon the termination of his rights under this Article V, Cain agrees to cause the resignation of, or provide notice to the other parties hereto as provided in Section 5.5 requesting the removal of, the incumbent Cain Director. 5.7. Irrevocable Proxy. Each of the Stockholders hereby grants to Cain an irrevocable proxy to vote all shares of Common Stock presently or at any future time owned beneficially or of record by such Stockholder which the Stockholder is entitled to vote, and to represent and otherwise act as such Stockholder could act, in the same manner and with the same effect as if such Stockholder were personally present, at any annual, special or other meeting of the stockholders of the Company, and at any adjournment thereof, or pursuant to any written consent in lieu of meeting or otherwise; provided, however, that any such vote or consent in lieu thereof or any other action so taken shall be solely for the purposes of electing a Cain Designee to the Board as provided in Section 5.2 or 5.3 or removing the Cain Director from the Board as provided in Section 5.5. ARTICLE VI Certain Restrictions on Sale of Common Stock, etc. 6.1. Stock Legend. (a) Each certificate for shares of Common Stock owned by any Stockholder shall bear the following legend: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A VOTING AGREEMENT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF STERLING CHEMICALS HOLDINGS, INC., AND ARE HELD AND MAY BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY IN ACCORDANCE WITH SUCH AGREEMENT. (b) Upon the termination of this Agreement under Section 8.3, the Company shall, without charge and upon surrender of certificates by the holders thereof and written request of such holders, cancel all certificates evidencing shares of Common Stock bearing the legend described above and issue to the holders thereof replacement certificates that do not bear such legend for an equal number of shares held by such holders. Upon the transfer of any Common Stock bearing the legend described above to a party believed by the Company to be not bound by and subject to this Agreement by virtue of Section 8.2, the Company shall, without charge and upon surrender of certificates by the holders thereof and written request of either the transferor or transferee, cancel all certificates evidencing such shares of Common Stock and issue to the transferee thereof replacement certificates that do not bear such legend. -10- 11 6.2. Voting Trusts, etc. No Stockholder shall deposit any shares of Common Stock in a voting trust or subject any shares of Common Stock to any arrangement or agreement (other than this Agreement) with respect to the voting of such shares unless such trust or arrangement or agreement is made expressly subject to the provisions of this Agreement. Except as provided in this Agreement, no Stockholder shall give any proxy or power of attorney with respect to any shares of Common Stock that permits the holder thereof to vote such shares in its discretion in an election of directors or for the removal of the Clipper Director, the Koch Director or the Cain Director unless such proxy or power of attorney is made expressly subject to the provisions of this Agreement. ARTICLE VII Representations and Warranties Each party hereto hereby represents and warrants, severally and not jointly, to each other party hereto as follows: (a) Such party has all necessary power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. (b) Assuming this Agreement has been duly and validly authorized, executed and delivered by the other parties hereto, this Agreement constitutes a valid and binding agreement of such party, enforceable in accordance with its terms. (c) Neither the execution and delivery of this Agreement by such party nor the consummation by such party of the transactions contemplated hereby will conflict with or constitute a violation of or default under any contract, commitment, agreement, arrangement or restriction of any kind to which such party is a party or by which such party is bound. ARTICLE VIII Miscellaneous Provisions 8.1. Specific Performance. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties hereto shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state thereof having jurisdiction (this being in addition to any other remedy to which they are entitled at law or in equity), and each party hereto agrees to waive in any action for such enforcement the defense that a remedy at law would be adequate. 8.2. Agreement Binding on Certain Transferees. Prior to any transfer of shares of Common Stock by any Stockholder (excluding any transfer pursuant to (i) a bona fide public offering of such shares or (ii) a sale of such shares pursuant to Rule 144 under the Securities Act -11- 12 of 1933, as amended), the transferee of such shares must agree in writing to become bound by the terms of this Agreement. For purposes of this Agreement, all references to Stockholders shall be deemed to refer to the Stockholders and all direct and indirect transferees thereof so required to become bound. 8.3. Term of Agreement. (a) This Agreement shall not become effective for any purpose until such time as one or more counterparts hereof shall have been executed and delivered by the Company, Frank P. Diassi and Marianne R. Diassi (Joint Tenants with Right of Survivorship), William C. and Margaret W. Oehmig (Tenants in Common), The Rheney Living Trust U/A 8/23/93, Frank J. Hevrdejs, Hunter Nelson, Clipper Capital Associates, L.P., in its individual capacity and as nominee, Clipper Equity Partners I, L.P., Clipper/Merchant Partners, L.P., Clipper/Merban, L.P., Clipper/European Re, L.P., CS First Boston Merchant Investments 1995/96, L.P., Fayez Sarofim & Co., Koch Capital Services, Inc. and Olympus Growth Fund II, L.P., Olympus Executive Fund, L.P. (the "Original Parties") and Gordon A. Cain, William A. McMinn and James Crane. From and after such time, (i) this Agreement shall be binding on the Original Parties and Messrs. Cain, McMinn and Crane and (ii) as and when one or more counterparts are executed and delivered by the other parties named herein, this Agreement shall be binding on such parties. The Existing Agreement shall remain in full force and effect until such time as all of the parties named herein have executed and delivered one or more counterparts of this Agreement, at which time the Existing Agreement shall automatically terminate and be of no further force or effect; provided, however, that at all times, if any, when both this Agreement and the Existing Agreement are in force and effect, (A) a designation by the Clipper Representative under the Existing Agreement shall be deemed to be a designation by the Clipper Representative under this Agreement and vice versa, and (B) a designation by Koch under the Existing Agreement shall be deemed to be a designation by Koch under this Agreement and vice versa. (b) This Agreement shall terminate on December 15, 2008 or such earlier date as all the parties hereto shall agree upon in writing. Upon the termination of this Agreement, the rights and obligations hereunder of the parties hereto shall terminate and the provisions of this Agreement shall be of no force and effect. 8.4. Reliance on Opinions of Counsel. (a) The Company shall not be obligated to take any action hereunder which is contrary to applicable law. The Company may rely and shall be fully protected in acting upon any notice, request, consent, approval or other paper or document reasonably believed by it to be genuine and to have been signed or presented by the proper person or persons. The Company may consult with, and obtain advice from, legal counsel in the event any question as to any of its duties hereunder and it shall incur no liability and shall be fully protected in acting or refusing to act in good faith in accordance with the written opinion or advice of such counsel. (b) Any notice, request, designation, consent or approval given or made by any Stockholder hereunder shall be conclusive and binding on the successors, assigns and transferees of such Stockholder. -12- 13 (c) For the purpose of determining the number of shares of Voting Stock owned or held by any Stockholder, the Company may rely and shall be fully protected in acting upon the stock records maintained by or on behalf of the Company. 8.5. No Inconsistent Actions. No party hereto shall, directly or indirectly, undertake any course of action inconsistent with the provisions or intent of this Agreement. Without limitation of the foregoing, each party hereto agrees that it will not amend or cause to be amended the provisions of the Company's charter or bylaws if such amendment would create a conflict or inconsistency between this Agreement and the Company's charter or bylaws. 8.6. Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 8.7. Amendments. Except as otherwise specifically provided herein, this Agreement shall not be amended other than by an instrument in writing signed by all of the parties hereto. 8.8. Notices. Any notice, request or communication shall be sufficiently given if given in writing addressed as indicated on the signature pages hereof. Notice shall be deemed given when transmitted by telex or telecopier, delivered to the telegraph or cable office or personally delivered or, in the case of a mailed notice, three business days after the date deposited in the United States mails. Each party hereto, by written notice to the other parties, may designate additional or different addresses for subsequent notices or communications. 8.9. Counterparts. This Agreement may be executed in counterparts, each of which when executed shall be deemed an original, but all of which together shall constitute one and the same agreement. 8.10. Entire Agreement. This Agreement contains the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior arrangements or understandings with respect to the subject matter hereof. 8.11. Conflict with Governing Documents. In the event of a conflict between this Agreement and the certificate of incorporation or the bylaws of the Company, the provisions of this Agreement shall govern. 8.12. Governing Law. THE LAWS OF THE JURISDICTION IN WHICH HOLDINGS IS INCORPORATED, THE STATE OF DELAWARE, SHALL GOVERN THIS AGREEMENT WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. -13- 14 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed under their respective seals, as of the day and year first written above. THE COMPANY: STERLING CHEMICALS HOLDINGS, INC. 1200 Smith Street, Suite 1900 Houston, Texas 77002 Attention: General Counsel and Secretary Fax: 713-654-9577 By: --------------------------------------------- Peter W. De Leeuw, President and Chief Executive Officer STOCKHOLDERS: FRANK P. DIASSI AND MARIANNE R. DIASSI JOINT TENANTS WITH RIGHT OF SURVIVORSHIP 6 Commerce Drive Cranford, New Jersey 07016 Fax: (908) 276-5635 ------------------------------------------------ Frank P. Diassi ------------------------------------------------ Marianne R. Diassi -14- 15 WILLIAM C. AND MARGARET W. OEHMIG TENANTS IN COMMON 8 Greenway Plaza, Suite 702 Houston, Texas 77046 Fax: (713) 877-1824 ------------------------------------------------ William C. Oehmig ------------------------------------------------ Margaret W. Oehmig THE RHENEY LIVING TRUST U/A 8/23/93 8 Greenway Plaza, Suite 702 Houston, Texas 77046 Fax: (713) 877-1824 By: --------------------------------------------- Susan O. Rheney, As Trustee ------------------------------------------------ Frank J. Hevrdejs 8 Greenway Plaza, Suite 702 Houston, Texas 77046 Fax: (713) 877-1824 ------------------------------------------------ Hunter Nelson 8 Greenway Plaza, Suite 702 Houston, Texas 77046 Fax: (713) 877-1824 -15- 16 CLIPPER CAPITAL ASSOCIATES, L.P., in its individual capacity and as nominee By: Clipper Capital Associates, Inc. its general partner By: --------------------------------------- Printed Name: ----------------------------- Title: ------------------------------------ Attn: Eugene Lynch 650 Madison Avenue, 9th Floor New York, New York 10022 Fax: (212) 940-6055 CLIPPER EQUITY PARTNERS I, L.P. By: Clipper Capital Associates, L.P. its general partner By: Clipper Capital Associates, Inc. its general partner By: ---------------------------------- Printed Name: ------------------------ Title: ------------------------------- Attn: Eugene Lynch 650 Madison Avenue, 9th Floor New York, New York 10022 Fax: (212) 940-6055 -16- 17 CLIPPER/MERCHANT PARTNERS, L.P. By: Clipper Capital Associates, L.P. its general partner By: Clipper Capital Associates, Inc. its general partner By: ---------------------------------- Printed Name: ------------------------ Title: ------------------------------- Attn: Eugene Lynch 650 Madison Avenue, 9th Floor New York, New York 10022 Fax: (212) 940-6055 CLIPPER/MERBAN, L.P. By: Clipper Capital Associates, L.P. its general partner By: Clipper Capital Associates, Inc. its general partner By: ---------------------------------- Printed Name: ------------------------ Title: ------------------------------- Attn: Eugene Lynch 650 Madison Avenue, 9th Floor New York, New York 10022 Fax: (212) 940-6055 -17- 18 CLIPPER/EUROPEAN RE, L.P. By: Clipper Capital Associates, L.P. its general partner By: Clipper Capital Associates, Inc. its general partner By: ---------------------------------- Printed Name: ------------------------ Title: ------------------------------- Attn: Eugene Lynch 650 Madison Avenue, 9th Floor New York, New York 10022 Fax: (212) 940-6055 CS FIRST BOSTON MERCHANT INVESTMENTS 1995/96, L.P. By: Merchant Capital, Inc. its general partner By: Clipper Capital Associates, L.P. Attorney-in-Fact By: Clipper Capital Corporation, its general partner By: ---------------------------- Printed Name: ------------------ Title: ------------------------- Attn: Eugene Lynch 650 Madison Avenue, 9th Floor New York, New York 10022 Fax: (212) 940-6055 -18- 19 FSI NO. 2 CORPORATION By: --------------------------------------------- Printed Name: ----------------------------------- Title: ------------------------------------------ Two Houston Center, Suite 2907 Houston, Texas 77010 Fax: (713) 654-8184 KOCH CAPITAL SERVICES, INC. By: ---------------------------- Printed Name: ------------------ Title: ------------------------- Attn: Paul Brooks 4111 East 37th Street North Wichita, Kansas 67220 Fax: (316) 828-3133 OLYMPUS GROWTH FUND II, L.P. By: OGP II, L.P., its general partner By: LJM Corporation, a general partner By: ----------------------------- Printed Name: ------------------- Title: -------------------------- Metro Center, One Station Place Stamford, Connecticut 06902 Fax: (203) 353-5910 -19- 20 OLYMPUS EXECUTIVE FUND, L.P. By: OEF, L.P. By: LJM L.L.C., a general partner By: ---------------------------- Printed Name: ------------------ Title: ------------------------- Metro Center, One Station Place Stamford, Connecticut 06902 Fax: (203) 353-5910 ------------------------------------------------ Gordon A. Cain Address: ---------------------------------------- ---------------------------------------- ---------------------------------------- Fax: -------------------------------------------- ------------------------------------------------ William A. McMinn Address: ---------------------------------------- ---------------------------------------- ---------------------------------------- Fax: -------------------------------------------- ------------------------------------------------ James Crane Address: ---------------------------------------- ---------------------------------------- ---------------------------------------- Fax: -------------------------------------------- -20- 21 BAYLOR SCHOOL By: --------------------------------------------- Printed Name: ----------------------------------- Title: ------------------------------------------ Attn: N. Stewart Saltonstall Box 1337 Chattanooga, Texas 37401 Fax: (423) 265-4276 VANDERBILT UNIVERSITY By: --------------------------------------------- Printed Name: ----------------------------------- Title: ------------------------------------------ Attn: George B. Stadler, Asst. Treasurer Treasurer's Office 102 Alumni Hall Nashville, Tennessee 37240 Fax: (615) 343-3930 KINKAID INVESTMENTS FOUNDATION By: --------------------------------------------- Printed Name: ----------------------------------- Title: ------------------------------------------ Attn: William M. Wheless III 201 Kinkaid School Dr. Houston, Texas 77024 Fax: (713) 782-3543 -21- 22 ------------------------------------------------ Von D. Oehmig 1230 Scenic Highway Lookout Mountain, Tennessee 30750 Fax: (706) 820-0323 (Phone (706) 820-0268) ------------------------------------------------ Marian Oehmig Latimer 8 Bartram Road Lookout Mountain, Tennessee 37350 Fax: (423) 825-0950 WILLIAM C. AND MATILDA PATTON ------------------------------------------------ William C. Patton ------------------------------------------------ Matilda Patton 217 N. Hermitage Avenue Lookout Mountain, Tennessee 37350 Fax: (423) 265-3217 RAY W. GRIFFIN III By: --------------------------------------------- Marian Oehmig Latimer (Power of Attorney) c/o Marian Oehmig Latimer 8 Bartram Road Lookout Mountain, Tennessee 37350 Fax: (423) 265-3217 -22- 23 ------------------------------------------------ Margaret Jones 912 Euclid Avenue Birmingham, Alabama 35213 Fax: None ------------------------------------------------ Alexander Jones 912 Euclid Avenue Birmingham, Alabama 35214 Fax: None ------------------------------------------------ Margaret Jones as Custodian for Andrews Jones Under the Texas UGMA 912 Euclid Avenue Birmingham, Alabama 35213 Fax: None ------------------------------------------------ Margaret Jones as Custodian for Michael Jones Under the Texas UGMA 912 Euclid Avenue Birmingham, Alabama 35213 Fax: None -23- 24 ------------------------------------------------ P. Michael Gilbert P.O. Box 22522 Houston, Texas 77227 Fax: (713) 961-0441 1988 OEHMIG DECENDANTS TRUST By: --------------------------------------------- Randolph D. Oehmig, Trustee P.O. Box 3088 Crystal River, Florida 34423-3088 Fax: (352) 795-8755 (Phone (352) 795-2402) ------------------------------------------------ Randolph D. Oehmig P.O. Box 3088 Crystal River, Florida 34423-3088 Fax: (352) 795-8755 (Phone (352) 795-2402) ------------------------------------------------ William Brittain Oehmig P.O. Box 2587 Chattanooga, Tennessee 37409 Fax: (423) 756-4111 -24- 25 ------------------------------------------------ William C. Oehmig, Custodian for Gordon D. Oehmig 8 Greenway Plaza, Suite 702 Houston, Texas 77046 Fax: (713) 877-1824 NICHOLAS DIASSI TRUST AGREEMENT By: --------------------------------------------- Frank P. Diassi, Trustee 6 Commerce Drive Cranford, New Jersey 07016 Fax: (908) 276-5635 BRIANNA DIASSI TRUST AGREEMENT By: --------------------------------------------- Frank P. Diassi, Trustee 6 Commerce Drive Cranford, New Jersey 07016 Fax: (908) 276-5635 ------------------------------------------------ John K. O'Connor One Rolling Ridge Road Northfield, Illinois 60093-1013 Fax: (312) 443-0336 -25- 26 THE DIASSI CHILDREN'S TRUST U/A 12/21/89 By: --------------------------------------------- Frank P. Diassi, Trustee c/o Frank P. Diassi, Trustee 6 Commerce Drive Cranford, New Jersey 07016 Fax: (908) 276-5635 GABRIELLE DIASSI TRUST U/A 9/24/90 By: --------------------------------------------- Frank P. Diassi, Trustee 6 Commerce Drive Cranford, New Jersey 07016 Fax: (908) 276-5635 ------------------------------------------------ Bryan Clifford Campbell Custodian for Caroline Frances Campbell UGMA Thermo Instrument Controls 2215 Grand Avenue Parkway Austin, Texas 78728-3812 Fax: (512) 251-1485 ------------------------------------------------ Bryan Clifford Campbell, Custodian for Stephen Clifford Campbell UGMA 2904 Greenlee Drive Austin, Texas 78703 Fax: (512) 251-1485 -26- 27 ------------------------------------------------ Bryan Clifford Campbell 2904 Greenlee Drive Austin, Texas 78703 Fax: (512) 251-1485 ------------------------------------------------ William J. Campbell, Custodian for Andrew Dyer Campbell UGMA 6134 Sugar Hill Houston, Texas 77057 Fax: (713) 464-0970 ------------------------------------------------ William Jefferson Campbell 6134 Sugar Hill Houston, Texas 77057 Fax: (713) 464-0970 ------------------------------------------------ Ross Eastman, Custodian for Ross Eastman Jr. UGMA 6255 Chevy Chase Houston, Texas 77057 Fax: (713) 785-0956 -27- 28 ------------------------------------------------ Ross Eastman, Custodian for Alexandra Eastman UGMA 6255 Chevy Chase Houston, Texas 77057 Fax: (713) 785-0956 ------------------------------------------------ Merrie H. Clarke, Custodian for Julian Patrick Clarke UGMA 3728 Northhampton St. NW Washington, D.C. 20015 Fax: None ------------------------------------------------ Merrie H. Clarke, Custodian for Sean McLean Clarke UGMA 3728 Northhampton St. NW Washington, D.C. 20015 Fax: None ------------------------------------------------ Merrie H. Clarke 3728 Northhampton St. NW Washington, D.C. 20015 Fax: None -28- 29 ------------------------------------------------ Patricia Meyer Hevrdejs %Graphic Arts Corp. 2000 N.W. Wilson Portland, Oregon 97209 Fax: (503) 222-0779 ------------------------------------------------ Dale E. Barnes The Sterling Group 8 Greenway Plaza, Suite 702 Houston, Texas 77046 Fax: (713) 877-1824 ------------------------------------------------ Stephen A. Adger %R.R. Donnelly & Sons 1015 S. Shepherd Houston, Texas 77019 Fax: (713) 521-9707 -29- 30 ------------------------------------------------ William J. Campbell, Custodian for William J. Campbell, Jr. UGMA 6134 Sugar Hill Houston, Texas 77057 Fax: (713) 464-0970 -30- EX-10.26.A 7 FIRST AMENDMENT TO JOINT VENTURE AGREEMENT 1 EXHIBIT 10.26(a) FIRST AMENDMENT TO JOINT VENTURE AGREEMENT THIS AMENDMENT is entered into and effective as of the 31st day of March, 1998, by and between BP CHEMICALS INC. ("BP") and STERLING CHEMICALS, INC. ("Sterling"). WHEREAS, BP and Sterling are parties to a certain Joint Venture Agreement executed and effective as of March 31, 1998 ("Agreement"); and WHEREAS, BP and Sterling wish to modify the Agreement as hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, and intending to be legally bound, BP and Sterling hereby amend the Agreement in the following respects: 1. Section 3.4.3 of the Agreement is hereby amended to read in its entirety as follows: "3.4.3 The Parties shall ***** 2. Section 3.6 of the Agreement is hereby amended to read in its entirety as follows: "3.6 Price and Terms. The Company shall ***** 3. The seventh sentence of Section 5.1 of the Agreement is hereby amended to read in its entirety as follows: ***** 4. Section 5.6 of the Agreement is hereby amended to read in its entirety as follows: "5.6 Volume Imbalances. Company purchases of Acrylonitrile loaded for shipment during each calendar quarter shall be provisionally allocated between the 2 Parties based, as nearly as possible, on each Party's then applicable BRV Ratio. At the end of each calendar year, each Party's actual BRV for that calendar year shall be reconciled with its provisionally allocated volume during that year and any difference or imbalance shall be added to the underallocated Party's BRV and subtracted from the overallocated Party's BRV for the next calendar year, as described in attached Exhibit D, to determine purchases by the Company from the Parties in such calendar year; provided, however, that such reconciliation of any volume imbalances shall not affect the Parties' respective BRVs or BRV Ratios for any other purpose under this Agreement." 5. Exhibit D of the Agreement is hereby replaced in its entirety by the attached Exhibit D. 6. The sentence ***** 7. To the extent that the terms of this Amendment vary from the terms of the Agreement, this Amendment shall constitute an amendment of the Agreement. Except as amended and modified by this Amendment, the Agreement shall continue in full force and effect. The Agreement and this Amendment shall be read, taken and construed as one and the same instrument. Upon the effectiveness of this Amendment, each reference in the Agreement to "this Agreement" shall mean and be a reference to the Agreement as amended hereby. 8. This Amendment shall not be or become effective unless and until it has been duly executed and delivered by the parties but, upon such execution and delivery, shall be effective as of March 31, 1998. 9. This Amendment shall inure to the benefit of, and shall be binding upon the parties and their respective successors and permitted assigns. -2- 3 10. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original but all of which taken together shall constitute one and the same agreement. It shall not be necessary in making proof of this Amendment to produce or account for more than one such counterpart. 11. Should any clause, sentence, paragraph, subsection or Section of this Amendment be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Amendment, and the parties agree that the part or parts of this Amendment so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom as if such stricken part or parts had never been included herein. 12. THIS AMENDMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW. 13. This Amendment and the Agreement set forth all of the promises, agreements, conditions, understandings, warranties and representations between the parties with respect to the matters cover hereby, and supersede all prior agreements, arrangements and understandings between the parties, whether written, oral or otherwise. There are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, between the parties concerning the subject matter hereof or thereof except as set forth herein or therein. -3- 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized representatives as of the date first written above. BP CHEMICALS INC. STERLING CHEMICALS, INC. By: By: --------------------------- --------------------------------- Title Title: ------------------------- ------------------------------ -4- 5 EXHIBIT D PRICE AND VOLUME RECONCILIATION ***** -5- EX-10.27 8 EMPLOYMENT AGREEMENT - PETER W. DE LEEUW 1 EXHIBIT 10.27 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement"), dated as of March 16, 1998, by and among STERLING CHEMICALS HOLDINGS CORPORATION, a Delaware corporation ("Holdings"), STERLING CHEMICALS, INC., a Delaware corporation and a wholly-owned subsidiary of Holdings ("Sterling" and, together with Holdings, "Employers"), and PETER W. DE LEEUW ("Employee"). WHEREAS, Employers desire to employ Employee as a senior officer and Employee desires to serve in such capacity, in each case on the terms and conditions, and for the consideration, set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I Definitions and Interpretations Section 1.01. Definitions. For purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, the following terms shall have the following respective meanings: "Base Salary" shall have the meaning specified in Section 3.01. "Board" shall mean the Board of Directors of Holdings. "Bonus Plan" has the meaning specified in Section 3.02. "Chairman of the Board" shall mean the Chairman of the Board of Holdings. "Change of Control" shall have the meaning specified in the Incentive Plan. "Code" shall mean the Internal Revenue Code of 1986, as in effect from time to time. "Confidential Information" shall have the meaning specified in Section 5.02. "Constituent Companies" shall mean, collectively, Holdings, Sterling and all other direct or indirect subsidiaries of Holdings. 2 "Disability" shall mean a physical or mental condition of Employee that (a) prevents Employee from being able to perform the services required under this Agreement, (b) has continued for a period of at least 180 days during any period of twelve consecutive months and (c) is reasonably expected to continue. "Dispute" shall have the meaning specified in Section 6.01. "Employment Date" shall have the meaning specified in Section 2.01. "Employment Period" shall have the meaning specified in Section 2.01. "Good Reason" shall mean any of the following actions or events, but in each case only if it occurs during the Employment Period and then only if it is not consented to by Employee: (a) a material alteration by either Employer in the nature or status of Employee's positions, functions, duties or responsibilities from those described in Section 2.02(a), including any change which would (i) alter Employee's reporting responsibilities described in Section 2.02(a) or (ii) cause Employee's positions and functions with Employers to become of less dignity or importance than those described in Section 2.02(a); provided, however, that each such alteration shall cease to be a Good Reason on the date which is 90 days after Employee becomes aware of the occurrence of such alteration unless, prior to such date, Employee gives a Notice of Termination pursuant to Section 4.01 on account of such alteration or notifies Holdings in writing that such alteration constitutes a Dispute which Employee elects to resolve in accordance with Article VI, in which event such alteration shall cease to be a Good Reason on the date which is 30 days after such Dispute is so resolved; (b) the failure of Employers to maintain plans and programs entitling Employee to benefits that, in the aggregate, are at least as favorable to Employee as those available to Employee as of the Employment Date; (c) the failure of either Employer to observe or perform any provision contained in Article III, Article VI or Section 7.03; (d) the failure of either Employer to observe or perform any other provision of this Agreement or any provision of any indemnification agreement between Employee and Employers (or either of them), but only if such failure shall continue unremedied for more than 30 days after written notice thereof is given by Employee to Employers; or 2 3 (e) the failure of either Employer to elect or re-elect, or to appoint or re-appoint, Employee to the offices described in Section 2.02(a). "Holdings" shall have the meaning specified in the recitals of this Agreement. "Incentive Plan" shall mean the Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and Incentive Plan, as amended from time to time. "Miscellaneous Benefits" shall have the meaning specified in Section 3.12. "Misconduct" shall mean (a) the willful commission by Employee of acts that are both dishonest and demonstrably injurious to the Constituent Companies (monetarily or otherwise), taken as a whole, in any material respect; (b) the violation of Employers' drug and alcohol policy; (c) the conviction of Employee for a felony offense; or (d) the failure by Employee to perform of any of his obligations under this Agreement, but only if such failure was not caused by disability or incapacity and shall have continued unremedied for more than 30 days after written notice thereof is given to Employee by Employers. "Notice of Termination" shall mean, as appropriate, (a) a notice from Employee to Employers purporting to terminate Employee's employment in accordance with Section 4.01 or (b) a notice from Employers to Employee purporting to terminate Employee's employment in accordance with Section 4.02. Each Notice of Termination shall be dated the date it is given, shall specify the Termination Date and shall state whether the termination is covered by Section 4.03 or by Section 4.04, specifying the same. Any Notice of Termination by Employee which states that the termination is covered by Section 4.03 shall state that the termination is for a Good Reason and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for such Good Reason. Any Notice of Termination which is not in compliance with the foregoing requirements shall be invalid and ineffective. Any Notice of Termination given by Employers after the death of Employee shall be invalid and ineffective. Any Notice of Termination given by Employers after Employee has given a valid Notice of Termination shall be ineffective and vice versa. "Termination Date" shall mean the termination date specified in a Notice of Termination delivered in accordance with Article IV, provided that in no event shall such termination date be less than 30 nor more than 60 days after the date such Notice of Termination is given. Section 1.02. Interpretation. In this Agreement, unless a clear contrary intention appears, (a) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or 3 4 other subdivision, (b) reference to any Article or Section, means such Article or Section hereof, (c) the words "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term, and (d) where any provision of this Agreement refers to action to be taken by any party, or which such party is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such party. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. No provision of this Agreement shall be interpreted or construed against any party solely because that party or its legal representative drafted such provision. ARTICLE II Employment; Term; Positions and Duties Section 2.01. Employment; Term. Each Employer hereby employs Employee in a senior executive capacity and Employee hereby accepts employment by each Employer, in each case on the terms and conditions, and for the consideration, set forth in this Agreement. Employee's employment hereunder shall begin on March 16, 1998 (the "Employment Date") and shall continue until terminated in accordance with Article IV (the "Employment Period"). Section 2.02. Positions and Duties. (a) While employed hereunder, Employee shall serve as President and Chief Executive Officer of each Employer and shall have and may exercise all of the powers, functions, duties and responsibilities normally attributable to such positions, including any such duties and responsibilities as are set forth with respect to such positions in the Employers' respective certificates of incorporation and bylaws, as from time to time in effect. (b) While employed hereunder, Employee shall observe and comply with all lawful policies, directions and instructions of the Board and/or the Chairman of the Board which are consistent with paragraph (a) above and shall devote substantially all of his business time, attention, skill and efforts to the faithful and efficient performance of his duties hereunder. Notwithstanding the foregoing, Employee may engage in the following activities so long as they do not interfere in any material respect with the performance of Employee's duties hereunder: (i) serve on corporate, civic, religious or charitable boards or committees, (ii) deliver lectures and fulfill speaking engagements and (iii) manage his personal investments. (c) Employers agree to use their reasonable best efforts to cause Employee to be elected or appointed, or re-elected or re-appointed, as a director of each Employer at all times during the Employment Period. Employee agrees to serve as a director of each Employer (and any other Constituent Company so designated by the Board or the Chairman of the Board) at all times during the Employment Period. 4 5 (d) While employed hereunder, Employee shall at all times conduct himself in such a manner as not to knowingly prejudice, in any material respect, the reputation of any Constituent Company in the fields of business in which it engaged or with the investment community or the public at large. Section 2.03. No Conflicting Commitments. Employee represents that he is not a party to or bound by any employment contract, consultancy agreement, non-competition agreement or any other agreement (written or oral) or other arrangement which contains any restrictions or limitations on the ability of Employee to enter into and perform this Agreement or exercise all the powers, functions, duties and responsibilities contemplated by this Agreement, and the execution, delivery and performance of this Agreement by Employee will not result in a violation of or constitute a default under any contract, agreement or other arrangement to which Employee is a party or by which Employee is bound. ARTICLE III Compensation and Benefits Section 3.01. Base Salary. For services rendered by Employee under this Agreement, Employers shall pay to Employee an annual cash base salary ("Base Salary") in the amount of $300,000. The Board shall review the Base Salary at least annually and may increase the amount of the Base Salary at any time as the Board may deem appropriate in its sole discretion. If the Base Salary is increased, it may not thereafter be decreased unless a proportionally similar decrease is made to the base salaries of all other senior executives of Employers; provided that in no event may the Base Salary be decreased below $300,000. The Base Salary shall be paid at regular intervals in accordance with Holdings' payroll policies for senior executives as from time to time in effect. Section 3.02. Bonuses. During the Employment Period, Employee shall be entitled to participate in the bonus/incentive compensation plan for executive officers of Employers in general, as from time to time amended by the Board (the "Bonus Plan"). Employee's annual target bonus under the Bonus Plan for each fiscal year during the Employment Period shall be not less than 75% of the Base Salary for such fiscal year. Each bonus shall be paid to Employee at such time or times provided in the Bonus Plan. Section 3.03. Stock Grant. As soon as practicable after the Employment Date, Holdings shall make a Restricted Stock Award to Employee pursuant to the Incentive Plan for 10,000 shares of Common Stock of Holdings in consideration of Employee's agreement to become an employee of Employers and to enter into this Agreement. The terms and conditions of such Restricted Stock Award shall be determined by the Compensation Committee and shall be set forth in a Restricted Stock Agreement, all as contemplated by Paragraph IX(e) of the Incentive Plan. As more particularly set forth in such Restricted Stock Agreement, 2,500 of the shares included in such Restricted Stock 5 6 Award shall be fully vested as of the date of grant, and the remaining 7,500 shares shall vest during the Employment Period in annual installments of 2,500 shares, commencing on the first anniversary of the Employment Date; provided, however, that all of such shares shall automatically vest upon the occurrence of a Change of Control. Section 3.04. Stock Option. As soon as practicable after the Employment Date, Holdings shall grant to Employee pursuant to the Incentive Plan an Option to purchase 125,000 shares of Common Stock of Holdings, with an exercise price per share equal to $12.00, subject to adjustment as provided in Paragraph XII of the Incentive Plan. The terms and conditions of such Option shall be determined by the Compensation Committee and shall be set forth in an Option Agreement, all as contemplated by Paragraph VII(d) of the Incentive Plan. As more particularly set forth in such Option Agreement, such Option shall become exercisable as to 20% of the shares covered thereby on each anniversary of the Employment Date, so that the Option will be exercisable in full on the fifth anniversary of the Employment Date. Such Option shall become automatically vested in full upon the occurrence of a Change of Control. Section 3.05. Right to Purchase Additional Shares of Common Stock. Holdings agrees that Employee shall have the right, at his option, to purchase up to 100,000 shares of Common Stock of Holdings for a purchase price per share, payable in cash, equal to the lesser of (i) $12 and (ii) the most recent valuation made under Article VI of the Sterling Chemicals ESOP dated August 21, 1996. Such shares are in addition to the shares referred to in Section 3.03 and 3.04. The foregoing right to purchase shares may be exercised by Employee from time to time by a notice in writing which specifies the number of shares in respect of which it is being exercised. Such notice shall (a) be delivered to the Treasurer of Holdings within 180 days after the Employment Date, (b) refer to this Section 3.05, (c) specify the number of shares which Employee desires to purchase, and (d) specify the closing date for such purchase (not later than 15 days after the giving of such notice or the date which is 180 days after the Employment Date, whichever is later). No shares of stock purchased under this Section 3.05 shall be subject to vesting, forfeiture, surrender or restriction of any kind except that such shares shall be subject to the provisions of the Sterling Chemicals Holdings, Inc. Stockholders Agreement effective as of August 21, 1996 (as amended from time to time) and to the transfer restrictions imposed by applicable securities laws. Section 3.06. Vacation. During the Employment Period, Employee shall be entitled to not less than four weeks of paid vacation per year or such greater number of vacation days as may be permitted in accordance with Holdings' vacation policy (as from time to time amended) for senior executives in general. Employee shall not be entitled to accumulate or carryover unused vacation time or pay from year to year except to the extent permitted in accordance with such vacation policy (as from time to time amended). Section 3.07. Professional Fees. Employers shall reimburse Employee for up to $5,000 per year for financial advisory, legal, accounting and tax planning fees and expenses paid or incurred by Employee during the Employment Period. 6 7 Section 3.08. Business Expenses. Each Employer shall, in accordance with the rules and policies that it may establish from time to time for senior executives, reimburse Employee for business expenses reasonably incurred in the performance of Employee's duties hereunder. It is understood that Employee is authorized, during the Employment Period, to incur reasonable business expenses for promoting the businesses and reputations of the Constituent Companies, including reasonable expenditures for travel, lodging, meals and client and/or business associate entertainment. Requests for reimbursement for such expenses must be accompanied by appropriate documentation. Section 3.09. Transfer of Existing Club Memberships. Employers shall pay all standard fees required to transfer into Employee's name the corporate club memberships currently used by Employee under the sponsorship of his current employer; provided that in no event shall Employers' obligation under this Section 3.09 exceed $6,500 in the aggregate. Section 3.10. Cellular Telephone. During the Employment Period, Employers shall provide, at no cost to Employee, a first-class cellular telephone for Employee and pay all charges and other costs relating to Employee's use thereof in connection with his powers, authority and duties hereunder. Section 3.11. Life Insurance. At all times during the Employment Period, Employers will maintain or cause to be maintained, without cost to Employee, a term life insurance policy on the life of Employee in the amount of $2,000,000, the proceeds of which, in the event of Employee's death, shall be payable to the beneficiaries designated by Employee or, in the absence of any such designation, to his estate. Notwithstanding the foregoing, if Employee fails to qualify for such insurance policy during any period within the Employment Period, Employers shall not be required to provide such coverage, but, instead, shall pay to Employee a lump sum cash payment equal to the premiums Employers would have otherwise paid in order to maintain such policy for such period. The insurance benefits described in this Section 3.11 are in addition to those available to Employee under the benefit plans and programs provided to senior executives of Employers in general. Section 3.12. Other Benefits. Employee shall be entitled to receive all fringe benefits and other perquisites that may be offered by each Employer from time to time to its other senior executives in general (collectively, the "Miscellaneous Benefits"), including (a) participation in life, healthcare, medical, retiree medical, dental and disability insurance plans and programs, (b) participation in bonus, profit sharing and incentive compensation plans, programs and arrangements, (c) participation in change in control/severance pay/separation pay plans, programs and practices, (d) automobile allowances, (e) reimbursement for club membership fees, tax and financial planning services and annual physical examination and (f) participation in all other employee benefit plans, programs or arrangements, subject, in each case, to meeting the applicable eligibility requirements. However, nothing in this Section 3.12 shall be deemed to prohibit 7 8 Employers from making any changes in any of the plans, programs or benefits described in the foregoing sentence, provided the change similarly affects all senior executives of Employers similarly situated. Employee's participation in Employers' medical, bonus, profit sharing, incentive compensation, pension and stock ownership plans, programs and arrangements shall commence on the Employment Date. If and to the extent a particular benefit or other perquisite is provided to Employee by two or more provisions of this Agreement, unless a clear contrary intention appears, the provision which is most favorable to Employee shall govern and control to the exclusion of the other provisions. ARTICLE IV Termination of Employment Section 4.01. Employee's Right of Termination. Employee may, at any time, terminate his employment hereunder for any reason by delivering a Notice of Termination to Employers. Section 4.02. Employers' Right of Termination. Employers may, at any time, terminate Employee's employment hereunder for any reason by delivering a Notice of Termination to Employee. Section 4.03. Benefits as a Consequence of Termination by Employers for any Reason other than Misconduct or Disability or Termination by Employee for Good Reason. The following provisions shall apply if, at any time prior to the second anniversary of the Employment Date, (a) Employee terminates his employment in accordance with Section 4.01 for a Good Reason or (b) Employers terminate Employee's employment in accordance with Section 4.02 for any reason other than Misconduct or Disability: (i) Employers shall pay to Employee, within 30 days after the Termination Date, a lump sum cash payment equal to the sum of (A) 200% of the Base Salary as in effect on the date of the Notice of Termination plus (B) the projected bonus for Employee under the Bonus Plan (or any replacement or substitute plan) for the fiscal year that includes the date of the Notice of Termination and the succeeding two fiscal years (such projection to be based on Holdings' reasonable estimate of the financial performance of Holdings and its subsidiaries for such fiscal years) plus (C) all unused vacation time accrued by Employee as of the Termination Date in accordance with this Agreement and Employers' vacation policies for senior executives plus (D) all unpaid vested Miscellaneous Benefits earned or accrued as of the Termination Date plus (E) all amounts owing to Employee under Sections 3.07, 3.08, 3.09, 3.10 and 3.11 plus (F) all amounts forfeited by Employee as a result of such termination under employee benefit plans or programs maintained or sponsored by either Employer plus (G) any additional amounts or benefits which may be required by applicable law, including the Employee Retirement Income Security Act of 1974, as amended 8 9 from time to time, minus (H) the total amount of any separation or severance pay actually paid to cash to Employee under any plan, program or practice of Employers (other than this Agreement); (ii) for a period of 24 months (including 18 months of COBRA coverage) following the Termination Date, Employee shall continue to be covered by all life, healthcare, medical and dental insurance plans and programs (excluding disability) of Employers by which he was covered at the time of such termination, provided that (A) Employee's continued participation is possible under the terms and provisions of such plans and programs and (B) Employee pays the regular employee premium required by such plans and programs or by COBRA, as the case may be; and (iii) any vesting, lapse of time or similar requirement under any plan (other than any plan which is a "qualified plan" within the meaning of section 401(a) of the Code) or program in which Employee may participate shall be accelerated to the date of the Notice of Termination and any conditions to Employee's entitlement to any benefits under any of such plans or programs shall be deemed to have been satisfied. Without limitation of the foregoing, (A) all stock options (including the Option described in Section 3.04) granted to Employee by either Employer shall become and be fully vested and immediately exercisable in accordance with the otherwise applicable terms thereof and shall remain fully exercisable for the remainder of the particular option period and (B) any forfeiture contingencies applicable to the Restricted Stock Award described in Section 3.03 shall immediately lapse in their entirety. No acceleration under this clause (iii) shall be deemed to constitute severance or separation pay. Notwithstanding the foregoing, (1) Employers' shall not be obligated to pay the lump sum described in clause (i) above or continue the non-COBRA benefits described in clause (ii) above if the Termination Date is after Employee's Normal Retirement Date (as defined in the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of May 1, 1996)) and (2) Employers' obligation to continue the benefits described in clause (ii) above shall cease if and when Employee becomes employed by a third party which provides Employee with substantially similar benefits. Section 4.04 Benefits as a Consequence of Termination for other Reasons or upon Death. If Employee dies before his employment is terminated in accordance with Section 4.01 or 4.02 or if Employee's employment is terminated in accordance with section 4.01 or 4.02 under circumstances where Section 4.03 is inapplicable, Employers shall pay to Employee as soon as practicable a lump sum cash payment for (a) any unpaid Base Salary earned hereunder as of the date of death or termination, (b) all unused vacation time accrued by Employee as of the date of death or termination in accordance with this Agreement and Employers' vacation policies for senior executives, (c) all unpaid vested Miscellaneous Benefits earned or accrued as of the date of death or termination, (d) all 9 10 amounts owing to Employee under Section 3.07, 3.08, 3.09, 3.10 and 3.11, (e) the annual target bonus for Employee under the Bonus Plan (or any replacement or substitute plan) for the fiscal year that includes the date of death or termination, prorated as of such date, and (f) any additional amounts or benefits which may be required by applicable law, including the Employee Retirement Income Security Act of 1984, as amended from time to time. Section 4.05. Resignation as a Director. If Employee's employment under this Agreement is terminated for any reason, Employee agrees to resign as a director of all Constituent Companies of which he is a director, such resignation to be effective (a) in the case of a termination by Employee pursuant to Section 4.01, on the date Employee delivers the relevant Notice of Termination and (b) in the case of a termination by Employers pursuant to Section 4.02, on the date Employee receives the relevant Notice of Termination. ARTICLE V Confidential Information Section 5.01. Restriction on Use. Employee recognizes that the services to be performed by him hereunder are special, unique and extraordinary and that, by reason of his employment with Employers and the positions described in Section 2.02(a), he may acquire Confidential Information (defined below) concerning one or more Constituent Companies, the use or disclosure of which might cause the Constituent Companies substantial loss and damages which could not be readily calculated and for which no remedy at law would be adequate. Accordingly, Employee agrees that he will not (directly or indirectly) at any time, whether during or after his employment hereunder, disclose any such Confidential Information to any Person except (a) as required by applicable law, (b) in connection with the performance of his duties and the rendering of services hereunder, (c) in connection with the enforcement of his rights under this Agreement of any other instrument, (d) in connection with the defense or settlement of any claim, suit or action asserted or threatened against Employee by or in the right of any Constituent Company, or (e) with the prior written consent of the Board. Section 5.02. Definition. As used herein, "Confidential Information" means information with respect to the products, services, strategies, facilities, trade secrets and other intellectual property, pricing systems, patents and patent applications, procedures, manuals, confidential reports, financial information, business plans, prospects or opportunities of any Constituent Company; provided, however, that such term shall not include (a) any information that is or becomes generally known or available other than as a result of a disclosure by Employee, (b) any information that is or becomes known or available to Employee on a nonconfidential basis from a source (other than the Constituent Companies) which, to Employee's knowledge is not prohibited from disclosing such information to Employee by a legal, contractual, fiduciary, or other obligation to any Constituent Company, or (c) any general knowledge, skill or experience acquired by Employee. 10 11 Section 5.03. Ownership; Return to Employers. Employee confirms that all Confidential Information is the exclusive property of the relevant Constituent Company. All business records, papers and documents kept or made by Employee (whether electronically or otherwise) while employed hereunder relating to the business of any Constituent Company shall be and remain the property of such Constituent Company at all times. Upon the request of Holdings or Sterling at any time, Employee shall promptly deliver to Holdings, and shall retain no copies of, any electronic media or written materials records and documents made by Employee or coming into his possession while employed hereunder concerning the business or affairs of any Constituent Company other than personal materials, records, and documents (including notes and correspondence) of Employee not containing proprietary information relating to such business or affairs. Notwithstanding the foregoing, Employee shall be permitted to retain copies of, or have access to, all such materials, records and documents relating to any rights, privileges or benefits of Employee or any disagreement, dispute or litigation between Employee and any Constituent Company. Section 5.04. Injunctive Relief etc. Employee acknowledges that the covenants contained in this Article V are intended for the benefit of, and may be enforced by, Employers and their respective successors and assigns. Employee further acknowledges that a breach of any of the covenants contained in this Article V may result in material irreparable injury to the Constituent Companies for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach, any payments remaining under the terms of this Agreement shall cease and Employers (or either of them) shall be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining Employee from engaging in activities prohibited by this Article V or such other relief as may required to specifically enforce any of the covenants contained in this Article V. Employee agrees to and hereby does submit to in personam jurisdiction before each and every court for that purpose. Section 5.05. Limitation on Personal Liability. Employee shall not be personally liable to any Constituent Company or its stockholders for monetary damages for any breach of this Article V if Employee acted in good faith and in a manner Employee reasonably believed to be in or not opposed to the best interests of Employers. Employee shall be deemed to have met the standard of conduct required by the foregoing defense unless the contrary is conclusively established by a court of competent jurisdiction. The provisions of this Article V shall survive the termination of Employee's employment hereunder. ARTICLE VI Dispute Resolution Section 6.01. Definition. As used herein, "Dispute" means any and all questions, claims, controversies or disputes arising out of or relating to this Agreement, including the construction, meaning, performance, effect or breach of this Agreement. 11 12 Section 6.02. Agreement to Mediate/Arbitrate. In the event a Dispute shall arise between Employee, on the one hand, and Holdings or Sterling, on the other hand, the parties agree to resolve such Dispute in accordance with the following procedure: (1) A meeting shall be held promptly between Employee and Holdings, attended (in the case of Holdings) by one or more individuals with decision-making authority regarding the Dispute, to attempt in good faith to negotiate a resolution of the Dispute. (2) If, within 10 days after such meeting, Employee and Holdings have not succeeded in negotiating a resolution of the Dispute, the Dispute shall be submitted to the Compensation Committee of the Board to attempt in good faith to negotiate a resolution of the Dispute. (3) If, within 10 days after the submission referred to in paragraph (2) above, Employee and Holdings have not succeeded in negotiating a resolution of the Dispute, the Dispute shall be submitted to mediation in accordance with the Commercial Mediation Rules of the American Arbitration Association. (4) Employee and Holdings will jointly appoint a mutually acceptable mediator, seeking assistance in such regard from the American Arbitration Association if they have been unable to agree upon such appointment within 10 days following the 10-day period referred to in paragraph (3) above. (5) Upon appointment of the mediator, Employee and Holdings agree to participate in good faith in the mediation and negotiations relating thereto for 15 days. (6) If Employee and Holdings are not successful in resolving the Dispute through mediation within such 15-day period, the Dispute shall be settled by arbitration in accordance with the Expedited Procedures of the Commercial Arbitration Rules of the American Arbitration Association. (7) The fees and expenses of the mediator/arbitrators shall be borne solely by the non-prevailing party or, in the event there is no clear prevailing party, as the mediator/arbitrators deem appropriate. (8) If any dispute shall arise under this Agreement involving termination of Employee's employment with Employers or involving the failure or refusal of Employers to fully perform in accordance with the terms hereof, Employers shall reimburse Employee (without duplication), on a current basis, for all legal fees and expenses, if any, incurred by Employee in connection with such dispute, together with interest thereon at the rate of 6% per annum, such interest to accrue from the date Holdings receives Employee's statement for such fees and expenses through the date of payment thereof; provided, however, that in the event the resolution of 12 13 such dispute in accordance with this Article VI includes a finding denying, in all material respects, Employee's claims in such dispute, Employee shall be required to reimburse Employers, within 30 days after the date of such resolution, for all sums advanced to Employee with respect to such dispute pursuant to this paragraph (8). (9) Except as provided above, each of Employee and Holdings shall pay its own costs and expenses (including, without limitation, attorneys' fees) relating to any mediation/arbitration proceeding conducted under this Article VI. (10) All mediation/arbitration conferences and hearings will be held in Houston, Texas. Section 6.03. Arbitration Procedures. In the event there is any disputed question of law involved in any arbitration proceeding, such as the proper legal interpretation of any provision of this Agreement, the arbitrators shall make separate and distinct findings of all facts material to the disputed question of law to be decided and, on the basis of the facts so found, express their conclusion of the question of law. The facts so found shall be conclusive and binding on the parties, but any legal conclusion reached by the arbitrators from such facts may be submitted by either Employee or Holdings to a court of law for final determination by initiation of a civil action in the manner provided by law. Such action, to be valid, must be commenced within 20 days after receipt of the arbitrators' decision. If no such civil action is commenced within such 20-day period, the legal conclusion reached by the arbitrators shall be conclusive and binding on the parties. Any such civil action shall be submitted, heard and determined solely on the basis of the facts found by the arbitrators. Neither of Employee or Holdings shall, or shall be entitled to, submit any additional or different facts for consideration by the court. In the event any civil action is commenced under this Section 6.03 and if Employee is the party who prevails or substantially prevails (as determined by the court) in such civil action, Employee shall be entitled to recover from Employers all reasonable costs, expenses and attorneys' fees incurred by Employee in connection with such action and on appeal. Section 6.04. Arbitration Award, etc. Except as limited by Section 6.03, the parties agree that judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. In the event legal proceedings are commenced to enforce the rights awarded in an arbitration proceeding and if Employee is the party who prevails or substantially prevails in such legal proceeding, Employee shall be entitled to recover from Employers all reasonable costs, expenses and attorneys' fees incurred by Employee in connection with such legal proceeding and on appeal. Section 6.05. Exclusivity. All decisions and actions by Holdings under this Article VI shall be binding on Sterling and each other Constituent Company. Except as provided above, (i) no legal action may be brought by any party with respect to any Dispute and (ii) all Disputes shall be determined only in accordance with the procedures set forth above. 13 14 ARTICLE VII Miscellaneous Section 7.01. Notices. All notices and all other communications provided for in the Agreement shall be in writing and shall be sent, delivered or mailed, addressed as follows: (i) if to Employers (or either of them), at Holdings' principal office address or such other address as Holdings may have designated by written notice to Employee for purposes hereof, directed (except as otherwise provided herein) to the attention of the Chairman and (ii) if to Employee, at his residence address on the records of Holdings or to such other address as he may have designated to Holdings in writing for purposes hereof. Each such notice or other communication shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, except that any notice of change of address shall be effective only upon receipt. Section 7.02. Assignability. The obligations of Employee hereunder are personal and may not be assigned or delegated by Employee or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment or transfer. Each Employer shall have the right to assign this Agreement and to delegate all of its rights, duties and obligations hereunder as provided in Section 7.03, but not otherwise; provided, however, that no such assignment shall relieve or discharge either Employer of or from any of its obligations under this Agreement. Section 7.03. Successors; Binding Agreement. (a) Each Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of such Employer, by written agreement in form and substance reasonably acceptable to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that such Employer would be required to perform it if no such succession had taken place. Such agreement shall be become effective concurrently with the consummation of the transaction requiring the same. A copy of such agreement shall be provided to Employee upon request. As used herein, (i) the term "Holdings" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 7.03 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law and (ii) the term "Sterling" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 7.03 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of Employee hereunder shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts would be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisees, legatees or other designees or, if there be no such designees, legatees or other designees, to Employee's estate. This Agreement and 14 15 all rights of Employers hereunder shall inure to the benefit of and be enforceable by Employers and their respective successors and assigns. Section 7.04. Tax Withholdings. Each Employer shall withhold from all payments hereunder all applicable taxes (federal, state or other) which it is required to withhold therefrom unless Employee has otherwise paid to such Employer the amount of such taxes. Section 7.05. Gross-Up Payments. (a) Anything in this Agreement to the contrary notwithstanding, in the event any income is imputed to Employee on account of any payment, distribution or benefit provided under Sections 3.05, 3.07 and 3.11, then Employee shall be entitled to receive from Employers an additional payment in an amount equal to all income taxes (including any interest or penalties imposed with respect to such taxes) attributable to such imputed income. In the event Employee receives any payment under the foregoing sentence, Employee shall be entitled to receive from Employers an additional amount equal to all income taxes attributable to such payment. (b) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution to or for the benefit of Employee in connection with his employment hereunder (a "Payment") would be subject to the excise tax imposed by section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, being collectively referred to below as the "Excise Tax"), then Employee shall be entitled to receive from Employers an additional payment (the "Gross-Up Payment") in an amount such that after payment by Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. All determinations required to be made under this paragraph (b) shall be made by the independent accounting firm then retained by Holdings in the ordinary course of business. Section 7.06. Amendments and Waivers. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by any party hereto at any time of any breach by any other party hereto of, or in compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Section 7.07. Governing Law. THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO ITS CONFLICT OF LAWS PRINCIPLES. 15 16 Section 7.08. Counterparts, Severability, etc. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof, and supersedes all prior contracts or agreements, whether oral or written. No right, power or remedy granted under this Agreement is intended to be exclusive, but each shall be cumulative and in addition to any other rights, powers or remedies referred to in this Agreement or otherwise available at law or in equity. The obligations of Employers hereunder shall be joint and several. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. STERLING CHEMICALS HOLDINGS, INC. By: --------------------------------- Chairman of the Board STERLING CHEMICALS, INC. By: --------------------------------- Chairman of the Board EMPLOYEE ------------------------------------ Peter W. De Leeuw 16 EX-10.28 9 EMPLOYMENT AGREEMENT - GARY M. SPITZ 1 EXHIBIT 10.28 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement"), dated as of January 19, 1998, by and among STERLING CHEMICALS HOLDINGS CORPORATION, a Delaware corporation ("Holdings"), STERLING CHEMICALS, INC., a Delaware corporation and a wholly-owned subsidiary of Holdings ("Sterling" and, together with Holdings, "Employers"), and GARY M. SPITZ ("Employee"). WHEREAS, Employers desire to employ Employee as a senior officer and Employee desires to serve in such capacity, in each case on the terms and conditions, and for the consideration, set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I Definitions and Interpretations Section 1.01. Definitions. For purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, the following terms shall have the following respective meanings: "Base Salary" shall have the meaning specified in Section 3.01. "Board" shall mean the Board of Directors of Holdings. "Bonus Plan" has the meaning specified in Section 3.02. "CEO" shall mean the Chief Executive Officer of Holdings. "Change of Control" shall have the meaning specified in the Incentive Plan. "Confidential Information" shall have the meaning specified in Section 5.02. "Constituent Companies" shall mean, collectively, Holdings, Sterling and all other direct or indirect subsidiaries of Holdings. "Disability" shall mean a physical or mental condition of Employee that (a) prevents Employee from being able to perform the services required under this Agreement, (b) has continued for a period of at least 180 days during any period of twelve consecutive months and (c) is reasonably expected to continue. "Dispute" shall have the meaning specified in Section 6.01. "Employment Date" shall have the meaning specified in Section 2.01. 2 "Employment Period" shall have the meaning specified in Section 2.01. "Good Reason" shall mean any of the following actions or events, but in each case only if it occurs during the Employment Period and then only if it is not consented to by Employee: (a) a material alteration by either Employer in the nature or status of Employee's positions, functions, duties or responsibilities from those described in Section 2.02(a), including any change which would (i) alter Employee's reporting responsibilities described in Section 2.02(a) or (ii) cause Employee's positions and functions with Employers to become of less dignity or importance than those described in Section 2.02(a); provided however, that each such alteration shall cease to be a Good Reason on the date which is 90 days after Employee becomes aware of the occurrence of such alteration unless, prior to such date, Employee gives a Notice of Termination pursuant to Section 4.01 on account of such alteration; (b) the failure of Employers to maintain plans and programs entitling Employee to benefits that, in the aggregate, are at least as favorable to Employee as those available to Employee as of the Employment Date; (c) the failure of either Employer to observe or perform any provision contained in Article III, Article VI, Section 7.03; (d) the failure of either Employer to observe or perform any other provision of this Agreement or any provision of any indemnification agreement between Employee and Employers (or either of them), but only if such failure shall continue unremedied for more than 30 days after written notice thereof is given by Employee to Employers; or (e) the failure of either Employer to elect or re-elect, or to appoint or reappoint, Employee to the offices described in Section 2.02(a). "Holdings" shall have the meaning specified in the recitals of this Agreement. "Incentive Plan" shall mean the Sterling Chemicals Holdings, Inc. Omnibus Stock Awards and Incentive Plan, as amended from time to time. "Miscellaneous Benefits" shall have the meaning specified in Section 3.09. "Misconduct" shall mean (a) the willful commission by Employee of acts that are both dishonest and demonstrably injurious to the Constituent Companies (monetarily or otherwise), taken as a whole, in any material respect; (b) the violation of the Employer's drug and alcohol policy; (c) the conviction of Employee for a felony offense; or (d) the failure by Employee to perform of any of his obligations under this Agreement, but only if such failure was not caused by disability or incapacity and shall have continued 2 3 unremedied for more than 30 days after written notice thereof is given to Employee by Employers. "Notice of Termination" shall mean, as appropriate, (a) a notice from Employee to Employers purporting to terminate Employee's employment in accordance with Section 4.01 or (b) a notice from Employers to Employee purporting to terminate Employee's employment in accordance with Section 4.02. Each Notice of Termination shall be dated the date it is given, shall specify the Termination Date and shall state whether the termination is covered by Section 4.03 or by Section 4.04, specifying the same. Any Notice of Termination by Employee which states that the termination is covered by Section 4.03 shall state that the termination is for a Good Reason and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for such Good Reason. Any Notice of Termination which is not in compliance with the foregoing requirements shall be invalid and ineffective. Any Notice of Termination given by Employers after the death of Employee shall be invalid and ineffective. Any Notice of Termination given by Employers after Employee as given a valid Notice of Termination shall be ineffective and vice versa. "Termination Date" shall mean the termination date specified in a Notice of Termination delivered in accordance with Article IV, provided that in no event shall such termination date be less than 30 nor more than 60 days after the date such Notice of Termination is given. Section 1.02. Interpretation. In this Agreement, unless a clear contrary intention appears, (a) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision, (b) reference to any Article or Section, means such Article or Section hereof, (c) the words "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term, and (d) where any provision of this Agreement refers to action to be taken by any party, or which such party is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such party. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. No provision of this Agreement shall be interpreted or construed against any party solely because that party or its legal representative drafted such provision. 3 4 ARTICLE II Employment; Term; Positions and Duties Section 2.01. Employment; Term. Each Employer hereby employees Employee in a senior executive capacity and Employee hereby accepts employment by each Employer, in each case on the terms and conditions, and for the consideration, set forth in this Agreement. Employee's employment hereunder shall begin on January 19, 1998 (the "Employment Date") and shall continue until terminated in accordance with Article IV (the "Employment Period"). Section 2.02. Positions and Duties. (a) While employed hereunder, Employee shall serve as Vice President and Chief Financial Officer of each Employer and shall have and may exercise all of the powers, functions, duties and responsibilities normally attributable to such positions, including any such duties and responsibilities as are set forth with respect to such positions in the Employers' respective certificates of incorporation and bylaws, as from time to time in effect. During the Employment Period, Employee shall report directly to the CEO unless otherwise determined by the Board. (b) While employed hereunder, Employee shall observe and comply with all lawful policies, directions instructions of the CEO and/or the Board which are consistent with paragraph (a) above and shall devote substantially all of his business time, attention, skill and efforts to the faithful and efficient performance of his duties hereunder. Notwithstanding the foregoing, Employee may engage in the following activities so long as they do not interfere in any material respect with the performance of Employee's duties hereunder: (i) serve on corporate, civic, religious or charitable board or committees, (ii) deliver lectures and fulfill speaking engagements and (iii) manage his personal investments. (c) While employed hereunder, Employee shall at all times conduct himself in such a manner as not to knowingly prejudice, in any material respect, the reputation of any Constituent Company in the fields of business in which it engaged or with the investment community or the public at large. ARTICLE III Compensation and Benefits Section 3.01. Base Salary. For services rendered by Employee under this Agreement, Employers shall pay to Employee an annual cash base salary ("Base Salary") in the amount of $180,000. The Board shall review the Base Salary at least annually and may increase the amount of the Base Salary at any time as the Board may deem appropriate in its sole discretion. The Base Salary shall be paid at regular intervals in accordance with Holdings' payroll policies for senior executives as from time to time in effect. 4 5 Section 3.02. Bonuses. During the Employment Period, Employee shall be entitled to participate in the bonus/incentive compensation plan for executive officers of Employers in general, as from time to time amended by the Board (the "Bonus Plan"). Employee's annual target bonus under the Bonus Plan for each fiscal year during the Employment Period shall be not less than 60% of the Base Salary for such fiscal year. Each bonus shall be paid to Employee at such time or times provided in the Bonus Plan. Employee will participate in the Bonus Plan in 1998 prorated based on his start date. Section 3.03. Stock Grant. As soon as practicable after the Employment Date, Holdings shall make a Restricted Stock Award to Employee pursuant to the Incentive Plan for 5,000 shares of Common Stock of Holdings in consideration of Employee's agreement to become an employee of Employers and to enter into this Agreement. The terms and conditions of such Restricted Stock Award shall be determined by the Compensation Committee and shall be set forth in a Restricted Stock Agreement, all as contemplated by Paragraph IX(e) of the Incentive Plan. The employee will vest in 25% of shares on his employment date and will vest in the remainder of the shares at a rate of 25% per year over the next 3 years. Section 3.04. Stock Option. As soon as practicable after the Employment Date, Holdings shall grant to Employee pursuant to the Incentive Plan an Option to purchase 45,000 shares of Common Stock of Holdings, with an exercise price per share equal to $12.00, subject to adjustment as provided in Paragraph XII of the Incentive Plan. The terms and conditions of such Option shall be determined by the Compensation Committee and shall be set forth in an Option Agreement, all as contemplated by Paragraph VII(d) of the Incentive Plan. The Stock Options will vest at the rate of 20% per year. Section 3.05. Right to Purchase Additional Shares of Common Stock. Holdings agrees that Employee shall have the right, at his option, to purchase up to 50,000 shares of Common Stock of Holdings for $12 per share, payable in cash. Such shares are in addition to the shares referred to in Section 3.03 and 3.04. In order to purchase any shares under this Section 3.05. Employee must notify Holdings in writing on or before April 30, 1998, which notice shall (a) refer to this Section 3.05, (b) specify the number of shares which Employee desires to purchase, (c) specify the closing date for such purchase (not later than 15 days after the giving of such notice or April 30, 1998, whichever is later) and (d) be delivered to the Treasurer of Holdings or addressed to such Treasurer at the principal corporate offices of Holdings. No shares of stock purchased under this Section 3.05 shall be subject to vesting, forfeiture, surrender or restriction of any kind except that such shares shall be subject to the provisions of the Sterling Chemicals Holdings, Inc. Stockholders Agreement effective as of August 21, 1996 (as amended from time to time) and to the transfer restrictions imposed by applicable securities laws. Section 3.06. Vacation. During the Employment Period, Employee shall be entitled to not less than four (4) weeks of paid vacation per year or such greater number of vacation days as may be permitted in accordance with Holdings' vacation policy (as from time to time amended) for senior executives in general. Employee shall not be entitled to accumulate or carryover unused vacation time or pay from year to year except to the extent permitted in accordance with such vacation policy (as from time to time amended). 5 6 Section 3.07. Professional Fees. Employers shall reimburse Employee for up to $5,000 per year for financial advisory, legal, accounting and tax planning fees and expenses paid or incurred by Employee during the Employment Period. Section 3.08. Business Expenses. Each Employer shall, in accordance with the rules and policies that it may establish from time to time for senior executives, reimburse Employee for business expenses reasonably incurred in the performance of Employee's duties hereunder. It is understood that Employee is authorized, during the Employment Period, to incur reasonable business expenses for promoting the businesses and reputations of the Constituent Companies, including reasonable expenditures for travel, lodging, meals and client and/or business associate entertainment. Requests for reimbursement for such expenses must be accompanied by appropriate documentation. Section 3.09. Other Benefits. Employee shall be entitled to receive all fringe benefits and other perquisites that may be offered by each Employer from time to time to its other senior executives in general (collectively, the "Miscellaneous Benefits"), including (a) participation in all life ($2 million of coverage assuming insurability), medical, retiree medical, dental and disability insurance plans and programs, (b) participation in the bonus, profit sharing and incentive compensation plans, programs and arrangements, (c) participation in all change in control/severance pay/separation pay plans, programs and practices, (d) automobile allowances, (e) reimbursement for club membership fees, tax and financial planning services and annual physical examination and (f) participation in all other employee benefit plans, programs or arrangements, subject, in each case, to meeting the applicable eligibility requirements. However, nothing in this Section 3.09 shall be deemed to prohibit Employers from making any changes in any of the plans, programs or benefits described in the foregoing sentence, provided the change similarly affects all senior executives of Employers similarly situated. Employee's participation in Employers' medical, bonus, profit sharing, incentive compensation, pension and stock ownership plans, programs and arrangements shall commence on the Employment Date. If and to the extent a particular benefit or other perquisite is provided to Employee by two or more provisions of this Agreement, unless a clear contrary intention appears, the provision which is most favorable to Employee shall govern and control to the exclusion of the other provisions. Section 3.10. Relocation Expenses. (a) Employers agree to reimburse Employee for all reasonable moving expenses (including packing, storage and cartage) incurred by Employee during the Relocation Period in relocating his principal residence to the Houston, Texas metropolitan area. As used herein, "Relocation Period" means the period from the date of this Agreement to the earlier of (i) the date on which Employee relocates his principal residence in the Houston, Texas metropolitan area and (ii) June 30, 1998. (b) Employers shall pay the reasonable out-of-pocket expenses incurred by Employee and his wife during the Relocation Period in connection with the relocation of his principal residence to the Houston, Texas metropolitan, excluding moving expenses but interim lodging in the Houston, Texas metropolitan area and traveling between Baltimore, Maryland and Houston, Texas; 6 7 (c) Employer shall pay normal closing costs on Employee's home in Maryland as well as Employee's home purchase in Houston, Texas. Normal closing costs do not include points paid for the specific purpose of reducing the interest on the loan; (d) Employers shall pay a miscellaneous relocation allowance to take care of miscellaneous expenses incurred in setting up a new household in Houston in the amount of one month's pay ($15,000); (e) The Employers expect Employee to put your house on the market to sell the property as soon as practical. In the event the property does not sell in a reasonable period of time, the Company will protect Employee for any loss on the appraised value versus the purchase price of the Employee's home; (f) Employers shall pay for temporary housing for Employee from the date of this Agreement until Employee relocates wife and children from Maryland in May or June of 1998. Section 3.11. Signing Bonus. Employers shall pay to Employee a Signing Bonus of $25,000 within 15 working days of the date Employee reports to work. ARTICLE IV Termination of Employment Section 4.01. Employee's Right of Termination. Employees may, at any time, terminate his employment hereunder for any reason by delivering a Notice of Termination to Employers. Section 4.02. Employers' Right of Termination. Employers may, at any time, terminate Employee's employment hereunder for any reason by delivery a Notice of Termination to Employee. Section 4.03. Benefits as a Consequence of Termination by Employers for any Reason other than Misconduct or Disability or Termination by Employee for Good Reason. The following provisions shall apply if (a) Employers, at any time prior to the second anniversary of the Employment Date, terminates Employee's employment for any reason other than misconduct or disability in accordance with Section 4.02 or (b) a Change of Control occurs during the two-year period commencing on the Employment Date and at any time after such Change of Control (but before the second anniversary of the Employment Date) the Employee terminates his employment in accordance with Section 4.01 for a Good Reason; (i) Employers shall pay to Employee, within 30 days after the Termination Date, a lump sum cash payment equal to the sum of (A) 200% of the Base Salary as in effect on the date of the Notice of Termination plus (B) the projected bonus for Employee under the Bonus Plan (or any replacement or substitute plan) for the fiscal year that includes the date of the Notice of Termination and the succeeding two fiscal years (such 7 8 projection to be based on Holdings' reasonable estimate of the financial performance of Holdings and its subsidiaries for such fiscal years) plus (C) all unused vacation time accrued by Employee as of the Termination Date in accordance with this Agreement and Employers' vacation policies for senior executives plus (D) all unpaid vested Miscellaneous Benefits earned or accrued as of the Termination Date plus (E) all amounts owing to Employee under Sections 3.07, 3.08, 3.10 and 3.11 plus (F) all amounts forfeited by Employee as a result of such termination under employee benefit plans or programs maintained or sponsored by either Employer plus (G) any additional amounts or benefits which may be required by applicable law, including the Employee Retirement Income Security Act of 1974, as amended from time to time, minus (H) the total amount of any separation or severance pay actually paid in cash to Employee under any plan, program or practice of Employers (other than this Agreement): and (ii) for a period of 24 months (including 18 months of COBRA coverage) following the Termination Date, Employee shall continue to be covered by all life, medical and dental insurance plans and programs (excluding disability) of Employers by which he was covered at the time of such termination, provided that (A) Employee's continued participation is possible under the terms and provisions of such plans and programs and (B) Employee pays the regular employee premium, if any, required by such plans and programs or by COBRA, as the case may be. Notwithstanding the foregoing, (1) Employers' shall not be obligated to pay the lump sum described in clause (i) above or continue the non-COBRA benefits described in clause (b) above if the Termination Date is after Employee's Normal Retirement Date (as defined in the Sterling Chemicals, Inc. Amended and Restated Salaried Employees' Pension Plan (Effective as of May 1, 1996)) and (2) Employers' obligation to continue the benefits described in clause (ii) above shall cease if and when Employee becomes employed by a third party which provides Employee with substantially similar benefits. Section 4.04. Benefits as a Consequence of Termination for other Reasons or upon Death. If Employee dies before his employment is terminated in accordance with Section 4.01 or 4.02 or if Employee's employment is terminated in accordance with Section 4.01 or 4.02 under circumstances where Section 4.03 is inapplicable, Employers shall pay to Employee as soon as practicable a lump sum cash payment for (a) any unpaid Base Salary earned hereunder as of the date of death or termination, (b) all unused vacation time accrued by Employee as of the date of death or termination in accordance with this Agreement and Employers' vacation policies for senior executives, (c) all unpaid vested Miscellaneous Benefits earned or accrued as of the date of death or termination, (d) all amounts owing to Employee under Section 3.06, (e) the annual target bonus for Employee under the Bonus Plan (or any replacement or substitute plan) for the fiscal year that includes the date of death or termination, prorated as of such date, and (f) any additional amounts or benefits which may be required by applicable law, including the Employee Retirement Income Security Act of 1974, as amended from time to time. Section 4.05. Resignation as a Director. If Employee's employment under this Agreement is terminated for any reason, Employee agrees to resign as a director of all Constituent Companies of which he is a director, such resignation to be effective (a) in the case of a termination by Employee pursuant to Section 4.01, on the date Employee delivers the relevant 8 9 Notice of Termination and (b) in the case of a termination by Employers pursuant to Section 4.02, on the date Employee receives the relevant Notice of Termination. Section 4.06. Employee Termination. In the event Employee is terminated after the term of this Agreement, Employee may be eligible for severance benefits outside of the Company's benefit plans, if any, extended to other terminating Company officers. ARTICLE V Confidential Information Section 5.01. Restriction on Use. Employee recognizes that the services to be performed by him hereunder are special, unique and extraordinary and that, by reason of his employment with Employers and the positions described in Section 2.02(a), he may acquire Confidential Information (defined below) concerning one or more Constituent Companies, the use or disclosure of which might cause the Constituent Companies substantial loss and damages which could not be readily calculated and for which no remedy at law would be adequate. Accordingly, Employee agrees that he will not (directly or indirectly) at any time, whether during or after his employment hereunder, disclose any such Confidential Information to any Person except (a) as required by applicable law, (b) in connection with the performance of his duties and the rendering of services hereunder, (c) in connection with the enforcement of his rights under this Agreement or any other instrument, (d) in connection with the defense or settlement of any claim, suit or action asserted or threatened against Employee by or in the right of any Constituent Company or (e) with the prior written consent of the CEO or the Board. Section 5.02. Definition. As used herein, "Confidential Information" means information with respect to the products, services, strategies, facilities, trade secrets and other intellectual property, pricing systems, patents and patent applications, procedures, manuals, confidential reports, financial information, business plans, prospects or opportunities of any Constituent Company; provided, however, that such term shall not include (a) any information that is or becomes generally known or available other than as a result of a disclosure by Employee, (b) any information that is or becomes known or available to Employee on a nonconfidential basis from a source (other than the Constituent Companies) which, to Employee's knowledge, is not prohibited from disclosing such information to Employee by a legal, contractual, fiduciary or other obligation to any Constituent Company or (c) any general knowledge, skill or experience acquired by Employee. Section 5.03. Ownership; Return to Employers. Employee confirms that all Confidential Information is the exclusive property of the relevant Constituent Company. All business records, papers and documents kept or made by Employee (whether electronically or otherwise) while employed hereunder relating to the business of any Constituent Company shall be and remain the property of such Constituent Company at all times. Upon the request of Holdings at any time, Employee shall promptly deliver to Holdings, and shall retain no copies of, any electronic media or written materials, records and documents made by Employee or coming into his possession while employed hereunder concerning the business or affairs of any Constituent Company other than personal materials, records and documents (including notes and correspondence) of Employee not containing proprietary information relating to such business or 9 10 affairs. Notwithstanding the foregoing, Employee shall be permitted to retain copies of, or have access to, all such materials, records and documents relating to any rights, privileges or benefits of Employee or any disagreement, dispute or litigation between Employee and any Constituent Company. Section 5.04. Injunctive Relief, etc. Employee acknowledges that the covenants contained in this Article V are intended for the benefit of, and may be enforced by, Employers and their respective successors and assigns. Employee further acknowledges that a breach of any of the covenants contained in this Article V may result in material irreparable injury to the Constituent Companies for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach, any payments remaining under the terms of this Agreement shall cease and Employers (or either of them) shall be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining Employee from engaging in activities prohibited by this Article V or such other relief as may be required to specifically enforce any of the covenants contained in this Article V. Employee agrees to and hereby does submit to in personam jurisdiction before each and every such court for that purpose. Section 5.05. Limitation on Personal Liability. Employee shall not be personally liable to any Constituent Company or its stockholders for monetary damages for any breach of this Article V if Employee acted in good faith and in a manner Employee reasonably believed to be in or not opposed to the best interest of Employers. Employee shall be deemed to have met the standard of conduct required by the foregoing defense unless the contrary is conclusively established by a court of competent jurisdiction. The provisions of this Article V shall survive the termination of Employee's employment hereunder. ARTICLE VI Dispute Resolution Section 6.01. Definition. As used herein, "Dispute" means any and all questions, claims, controversies or disputes arising out of or relating to this Agreement, including the construction, meaning, performance, effect or breach of this Agreement. Section 6.02. Agreement to Mediate/Arbitrate. In the event a Dispute shall arise between Employee, on the one hand, and Holdings or Sterling, on the other hand, the parties agree to resolve such Dispute in accordance with the following procedure: (1) A meeting shall be held promptly between Employee and Holdings, attended (in the case of Holdings) by one or more individuals with decision-making authority regarding the Dispute, to attempt in good faith to negotiate a resolution of the Dispute. (2) If, within 10 days after such meeting, Employee and Holdings have not succeeded in negotiating a resolution of the Dispute, the Dispute shall be submitted to mediation in accordance with the Commercial Mediation Rules of the American Arbitration Association. 10 11 (3) Employee and Holdings will jointly appoint a mutually acceptable mediator seeking assistance in such regard from the American Arbitration Association if they have been unable to agree upon such appointment within 10 days following the 10-day period referred to in clause (2) above. (4) Upon appointment of the mediator, Employee and Holdings agree to participate in good faith in the mediation and negotiations relating thereto for 15 days. (5) If Employee and Holdings are not successful in resolving the Dispute through mediation within such 15-day period, the Dispute shall be settled by arbitration in accordance with the Expedited Procedures of the Commercial Arbitration Rules of the American Arbitration Association. (6) The fees and expenses of the mediator/arbitrators shall be borne solely by the non-prevailing party or, in the even there is no clear prevailing party, as the mediator/arbitrators deem appropriate. (7) If any dispute shall arise under this Agreement involving termination of Employee's employment with Employers or involving the failure or refusal of Employers to fully perform in accordance with the terms hereof, Employers shall reimburse Employee (without duplication), on a current basis, for all reasonable legal fees and expenses, if any, incurred by Employee in connection with such dispute, together with interest thereon at the rate of 6% per annum, such interest to accrue from the date Holdings received Employee's statement for such fees and expenses through the date of payment thereof; provided, however, that in the event the resolution of such dispute in accordance with this Article VI includes a finding denying, in all material respects, Employee's claims in such dispute, Employee shall be required to reimburse Employers, within 30 days after the date of such resolution, for all sums advanced to Employee with respect to such dispute pursuant to this paragraph (7). (8) Except as provided above, each of Employee and Holdings shall pay its own costs and expenses (including, without limitation, attorneys' fees) relating to any mediation/arbitration proceeding conducted under this Article VI. (9) All mediation/arbitration conferences and hearing will be held in Houston, Texas. Section 6.03. Arbitration Procedures. In the event there is any disputed question of law involved in any arbitration proceeding, such as the proper legal interpretation of any provision of this Agreement, the arbitrators shall make separate and distinct findings of all facts material to the disputed questions of law to be decided and, on the basis of the facts so found, express their conclusion of the question of law. The facts so found shall be conclusive and binding on the parties, but any legal conclusion reached, by the arbitrators from such facts may be submitted by either Employee or Holdings to a court of law for final determination by initiation of a civil action in the manner provided by law. Such action, to be valid, must be commenced within 20 days after receipt of the arbitrators' decision. If no such civil action is commenced within such 11 12 20-day period, the legal conclusion reached by the arbitrators shall be conclusive and binding on the parties. Any such civil action shall be submitted, heard and determined solely on the basis of the facts found by the arbitrators. Neither of Employee or Holdings shall, or shall be entitled to, submit any additional or different facts for consideration by the court. In the event any civil action is commenced under this Section 6.03 and if Employee is the party who prevails or substantially prevails (as determined by the court) in such civil action, Employee shall be entitled to recover from Employers all costs, expenses and reasonable attorneys' fees incurred by Employee in connection with such action and on appeal. In the event any civil action is commenced under this Section 6.03 and if Holdings is the party who prevails or substantially prevails (as determined by the court) in such civil action, Holdings shall be entitled to recover from Employee all costs, expenses and reasonable attorneys' fees incurred by Employers in connection with such action and on appeal. Section 6.04. Arbitration Award, etc. Except as limited by Section 6.03, the parties agree that judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. In the event legal proceedings are commenced to enforce the rights awarded in an arbitration proceeding and if Employee is the party who prevails or substantially prevails in such legal proceeding, Employee shall be entitled to recover from Employers all costs, expenses and reasonable attorneys' fees incurred by Employee in connection with such legal proceeding and on appeal. In the event legal proceedings are commenced to enforce the rights awarded in an arbitration proceeding and if Holdings is the party who prevails or substantially prevails in such legal proceeding, Holdings shall be entitled to recover from Employee all costs, expenses and reasonable attorneys' fees incurred by Employers in connection with such legal proceeding and on appeal. Section 6.05. Exclusivity. All decisions and actions by Holdings under this Article VI shall be binding on Sterling and each other Constituent Company. Except as provided above, (i) no legal action may be brought by any party with respect to any Dispute and (ii) all Disputes shall be determined only in accordance with the procedures set forth above. ARTICLE VII Miscellaneous Section 7.01. Notices. All notices and all other communications provided for in the Agreement shall be in writing and shall be sent, delivered or mailed, addressed as follows: (i) if to Employers (or either of them), at Holdings' principal office address or such other address as Holdings may have designated by written notice to Employee for purposes hereof, directed (except as otherwise provided herein) to the attention of the Chairman and (ii) if to Employee, at his residence address on the records of Holdings or to such other address as he may have designated to Holdings in writing for purposes hereof. Each such notice or other communication shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, except that any notice of change of address shall be effective only upon receipt. Section 7.02. Assignability. The obligations of Employee hereunder are personal and may not be assigned or delegated by Employee or transferred in any manner whatsoever, nor 12 13 are such obligations subject to involuntary alienation, assignment or transfer. Each Employer shall have the right to assign this Agreement and to delegate all of its rights, duties and obligations hereunder as provided in Section 7.03, but not otherwise; provided however, that no such assignment shall relieve or discharge either Employer of or from any of its obligations under this Agreement. Section 7.03. Successors; Binding Agreement. (a) Each Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of such Employer, by written agreement in form and substance reasonable acceptable to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that such Employer would be required to perform it if no such succession had taken place. Such agreement shall become effective concurrently with the consummation of the transaction requiring the same. A copy of such agreement shall promptly be provided to Employee. As used herein, (i) the term "Holdings" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 7.03 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law and (ii) the term "Sterling" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 7.03 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of Employee hereunder shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts would be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisees, legatees or other designees or, if there be no such designees, legatees or other designees, to Employee's estate. This Agreement and all rights of Employers hereunder shall inure to the benefit of and be enforceable by Employers and their respective successors and assigns. Section 7.04. Tax Withholdings. Each Employer shall withhold from all payments hereunder all applicable taxes (federal, state or other) which it is required to withhold therefrom unless Employee has otherwise paid to such Employer the amount of such taxes. Section 7.05. Amendments and Waivers. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by any party hereto at any time of any breach by 13 14 any other party hereto of, or in compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Section 7.06. Governing Law. THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO ITS CONFLICT OF LAWS PRINCIPLES. Section 7.07. Counterparts, Severability, etc. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof, and supersedes all prior contracts or agreements, whether oral or written. No right, power or remedy granted under this Agreement is intended to be exclusive, but each shall be cumulative and in addition to any other rights, powers or remedies referred to in this Agreement or otherwise available at law or in equity. The obligations of Employers hereunder shall be joint and several. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. STERLING CHEMICALS HOLDINGS, INC. By: -------------------------------------- President and Chief Executive Officer STERLING CHEMICALS, INC. By: -------------------------------------- President and Chief Executive Officer EMPLOYEE ----------------------------------------- Gary M. Spitz 14 EX-10.29 10 STANDBY PURCHASE AGREEMENT - FRANK P. DIASSI 1 EXHIBIT 10.29 =============================================================================== =============================================================================== STANDBY PURCHASE AGREEMENT BY AND BETWEEN STERLING CHEMICALS HOLDINGS, INC. AND FRANK P. DIASSI =============================================================================== DATED AS OF DECEMBER 15, 1998 =============================================================================== 2 IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE SECURITIES PURCHASED HEREUNDER HAVE NOT BEEN RECOMMENDED OR APPROVED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SECURITIES PURCHASED HEREUNDER ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. 3 TABLE OF CONTENTS
Page ---- Section 1 Definitions and Interpretation............................................................ 2 Section 2 Standby Commitment........................................................................ 5 Section 3 Closings.................................................................................. 6 Section 4 Simultaneous Closings Under Other Purchase Agreements..................................... 7 Section 5 Use of Proceeds........................................................................... 7 Section 6 Representations and Warranties of the Company............................................. 7 Section 7 Representations and Warranties of the Purchaser........................................... 9 Section 8 Compliance with Securities Laws and Agreements............................................ 10 Section 9 Changes in Capital Structure.............................................................. 12 Section 10 Specific Performance...................................................................... 12 Section 11 Notices................................................................................... 12 Section 12 Survival.................................................................................. 12 Section 13 Benefit and Burden........................................................................ 12 Section 14 No Third Party Rights..................................................................... 13 Section 15 Amendments and Waiver..................................................................... 13 Section 16 Severability.............................................................................. 13 Section 17 Expenses.................................................................................. 13 Section 18 Governing Law............................................................................. 13 Section 19 Entire Agreement.......................................................................... 13 Schedule I Purchasers
4 STANDBY PURCHASE AGREEMENT THIS STANDBY PURCHASE AGREEMENT (this "Agreement") is made and entered into as of December 15, 1998 by and between STERLING CHEMICALS HOLDINGS, INC., a Delaware corporation (the "Company"), and FRANK P. DIASSI (the "Purchaser"). PRELIMINARY STATEMENTS A. The Company and the Purchaser are entering into this Agreement to evidence the Purchaser's agreement to purchase up to 166,667 shares of common stock, par value $0.01 per share, of the Company ("Common Stock"). B. Simultaneously with the execution and delivery of this Agreement, the Company and Harris Trust and Savings Bank, as agent, entered into a Warrant Agreement dated as of the date hereof (the "Warrant Agreement"). In order to induce the Purchaser to enter into this Agreement, the Company has issued to the Purchaser on the date hereof warrants to purchase 20,000 shares of Common Stock (the "Initial Warrants"). The Initial Warrants are evidenced by a certificate in the form attached as Exhibit A to the Warrant Agreement and are subject to the terms and conditions set forth in the Warrant Agreement and such certificate. C. The Company and the Purchaser are parties to the Stockholders Agreement, the Registration Rights Agreement and the Tag-Along Agreement (as such terms are defined below). D. In connection with the issuance of the Initial Warrants, the Company, the Purchaser and certain other parties entered into an Amended and Restated Voting Agreement dated as of the date hereof (the "Voting Agreement"). E. Simultaneously with the execution and delivery of this Agreement, the Company is entering into separate Standby Purchase Agreements, substantially identical to this Agreement, with the other purchasers named in Schedule I (the "Other Purchasers") to evidence the Other Purchasers' agreement to purchase up to the number of shares of Common Stock set opposite their respective names in Schedule I. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 5 Section 1. Definitions and Interpretation. Capitalized terms used in this agreement shall, except where the context otherwise requires, have the following respective meanings: "Acts" has the meaning specified in Section 7(e). "Agreement" means this Standby Purchase Agreement, as from time to time amended in accordance with the terms hereof. "Bankruptcy Event" means that: (i) the Company or any Subsidiary has (A) made a general assignment for the benefit of creditors, (B) filed a voluntary bankruptcy petition, (C) become the subject of an order for relief or been declared insolvent in any federal or state bankruptcy or insolvency proceeding, (D) instituted a proceeding or filed an answer in a proceeding seeking to adjudicate itself insolvent or seeking reorganization, arrangement, composition, readjustment, protection, liquidation, winding-up, dissolution or similar relief of it or its debts under any Debtor Relief Law, (E) filed an answer or other pleading admitting or failing to contest the material allegations of a petition filed against it in a proceeding of the type described in subclauses (A) through (D) of this clause (i), (F) sought, consented to or acquiesced in an order for relief or the appointment of a trustee, receiver, liquidator or similar official for it or for any substantial part of such its assets or (G) taken any action in furtherance of any such actions; or (ii) any proceeding of the type referred to in clause (i) above has been filed or commenced against the Company or any Subsidiary or the Company or any Subsidiary by any act has indicated its approval thereof, consented thereto or acquiesced therein, or an order for relief has been entered in an involuntary case under any Debtor Relief Law, or an order, judgment or decree has been entered appointing a trustee, receiver, custodian, liquidator or similar official or adjudicating it insolvent, or approving the petition in any such proceedings. "Business Day" means any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in New York, New York, or Houston, Texas. "Closing" has the meaning specified in Section 3(a). "Closing Date" has the meaning specified in Section 2(b). "Common Shares" means the shares of Common Stock issuable to the Purchaser under this Agreement. "Common Stock" has the meaning specified in the Preliminary Statements of this Agreement. -2- 6 "Company" has the meaning specified in the opening paragraph hereof. "Debtor Relief Laws" means the Bankruptcy Code of the United States, and any successor statute of similar import, and all other applicable dissolution, liquidation, conservatorship, bankruptcy, moratorium, readjustment of debt, compromise, rearrangement, receivership, insolvency, fraudulent transfer or conveyance, reorganization or similar debtor relief laws from time to time in effect affecting the rights of creditors generally. "Election Notice" has the meaning specified in Section 2(a). "Exchange Act" means the Securities Exchange Act of 1934. "Form 10-K Report" has the meaning specified in Section 6(d). "Governmental Authority" means (i) any nation or government, (ii) any federal, state, county, province, city, town, municipality, local or other political subdivision thereof or thereto, (iii) any court, tribunal, department, commission, board, bureau, instrumentality, agency, council, arbitrator or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and (iv) any other governmental entity, agency or authority having or exercising jurisdiction over any relevant Person, item or matter. "Initial Warrants" has the meaning specified in the Preliminary Statements of this Agreement. "Laws" means all laws, statutes, rules, regulations, ordinances, orders, writs, injunctions or decrees and other pronouncements having the effect of law of any Governmental Authority. "Material Adverse Effect" means a material adverse effect on the business, properties, assets, financial condition or results of operations of the Company and the Subsidiaries, taken as a whole. "Other Purchasers" has the meaning specified in the Preliminary Statements of this Agreement. "Person" means any individual, corporation, partnership, limited liability company, firm, association, joint venture, Governmental Authority or other entity or enterprise. "Purchaser" has the meaning specified in the opening paragraph hereof. -3- 7 "Registration Rights Agreement" means the Registration Rights Agreement dated as of August 21, 1996, as amended, among the Company and the Persons named therein. "SEC" means the Securities and Exchange Commission. "Securities" means the Common Shares, the Warrants and the Warrant Shares. "Securities Act" means the Securities Act of 1933. "Stockholders Agreement" means the Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, as amended, among the Company and the stockholders of the Company parties thereto. "Subsequent Warrants" has the meaning specified in Section 3(f). "Subsidiary" means any subsidiary of the Company of which greater than 50% of the outstanding shares of capital stock having ordinary voting power for the election of directors is owned directly or indirectly by the Company. "Tag-Along Agreement" means the Tag-Along Agreement dated effective as of August 21, 1996, among the Company and the stockholders of the Company parties thereto. "Transaction Documents" means, collectively, this Agreement, the Registration Rights Agreement, the Voting Agreement, the Tag-Along Agreement, the Warrant Agreement and the Stockholders Agreement. "Voting Agreement" means an Amended and Restated Voting Agreement dated as of the date hereof among the Company and the Persons named therein. "Warrants" means the Initial Warrants and the Subsequent Warrants. "Warrant Agreement" has the meaning specified in the Preliminary Statements of this Agreement. "Warrant Shares" means the shares of Common Stock issuable to the Purchaser upon exercise of the Warrants. (b) In this Agreement, unless a clear contrary intention appears: (i) the words "hereof," "herein" and "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular provision of this Agreement; (ii) reference to any gender includes each other gender and the neuter; -4- 8 (iii) all terms defined in the singular shall have the same meanings in the plural and vice versa; (iv) reference to any Person includes such Person's heirs, executors, personal representatives, administrators, successors and assigns; provided, however, that nothing contained in this clause (iv) is intended to authorize any assignment not otherwise permitted by this Agreement; (v) reference to a Person in a particular capacity or capacities excludes such Person in any other capacity; (vi) reference to any contract or agreement means such contract or agreement as amended, supplemented or modified from time to time in accordance with the terms thereof; (vii) all references to Sections shall be deemed to be references to the Sections of this Agreement; (viii) all references to Exhibits and Schedules shall be deemed to be references to the Exhibits and Schedules attached hereto which are made a part hereof and incorporated herein by reference; (ix) the word "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; (x) with respect to the determination of any period of time, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding"; (xi) the captions and headings contained in this Agreement shall not be considered or given any effect in construing the provisions hereof if any question of intent should arise; (xii) reference to any Law means such Law as amended, modified, codified, reenacted, supplemented or superseded in whole or in part, and in effect from time to time; and (xiii) no provision of this Agreement shall be interpreted or construed against any party solely because that party or its legal representative drafted such provision. Section 2. Standby Commitment. (a) Upon the terms and subject to the satisfaction or waiver of the conditions set forth herein, the purchaser agrees to purchase from the Company such number of shares of Common Sock (not to exceed 166,667 in the aggregate) as the Company may, in its sole discretion, specify at any time or from time to time, in each case at a price per share, payable in cash, of $6.00. If the Company desires to require the purchaser to purchase shares of Common Stock as aforesaid, the company must give the purchaser not less than 15 days' prior written notice (an "Election Notice"). each election notice shall (i) be given in -5- 9 accordance with Section 11, (ii) refer to this Agreement, (iii) specify the number of shares to be purchased, (iv) specify the applicable Closing Date (as defined below), which may not be later than the third anniversary of the date hereof, and (v) state that, in the good faith judgement of the Company, the sale of the Common Shares referred to in such Election Notice is necessary in order for the Company to maintain, reestablish or enhance its borrowing rights under its revolving credit facilities and/or to satisfy any obligation under the documentation governing its revolving credit facilities to raise additional equity capital. Notwithstanding anything to the contrary contained herein, in no event Shall the Company be required to sell or issue any Common Shares unless the Company has given to the Purchaser an Election Notice with respect to such Common Shares pursuant to this paragraph (a) and then only the number of Common Shares specified in such Election Notice. The Company may not revoke any Election Notice given by it as aforesaid. (b) For purposes of this Agreement, "Closing Date" means, when used with reference to any purchase of Common Shares, the date on which such purchase is to be consummated; provided, however, that if such date is not a Business Day, then the Closing DATE FOR SUCH PURCHASE SHALL BE AUTOMATICALLY EXTENDED TO THE NEXT SUCCEEDING BUSINESS DAY AND, PROVIDED FURTHER, THAT EACH CLOSING DATE SHALL BE AT LEAST 30 DAYS AFTER THE IMMEDIATELY PRECEDING CLOSING DATE, IF ANY. Section 3. Closings. (a) The consummation of each purchase of Common Stock pursuant to this Agreement (a "Closing) shall take place on the applicable Closing Date at 10:00 a.m. (Houston time) unless a different time is specified in the applicable Election Notice. Each Closing shall be held at the corporate offices of the Company or at such other place as may be agreed upon by the Company and the Purchaser. (b) At each Closing, the Company shall deliver to the Purchaser (i) a duly executed certificate evidencing the Common Shares being purchased at such Closing and (ii) a duly executed certificate of the chief executive officer, the chief financial officer or the treasurer of the Company, dated the applicable Closing Date, stating that the representations and warranties of the Company contained in Section 6 are true and correct on and as of such Closing Date with the same force and effect as though made on and as of such Closing Date, except for any representations and warranties made as of a specified date, which shall be true and correct in all material respects as of such specified date, and stating that (A) no Bankruptcy Event has occurred and is continuing, (B) the Company is generally paying its debts as they become due, (C) the Company owns property having a value greater than the amount required to pay the probable liability on its debts and (D) the Company has no plans or intentions to initiate a Bankruptcy Event nor is it aware that any creditor of the Company plans or intends to initiate a Bankruptcy Event. (c) If the first Closing occurs before March 1, 1999, then the Company shall issue and deliver to the Purchaser at the first Closing, for no additional consideration, a certificate (in the form attached as Exhibit A to the Warrant Agreement) evidencing warrants to purchase that number of shares of Common Stock (rounded to the nearest whole number) equal to the number of Common Shares purchased by the Purchaser at the first Closing divided by 8.3333. -6- 10 (d) If the first Closing occurs before March 1, 1999, then the Company shall issue and deliver to the Purchaser at the second Closing, for no additional consideration, a certificate (in the form attached as Exhibit A to the Warrant Agreement) evidencing warrants to purchase 20,000 shares of Common Stock minus the number of Common Shares covered by the warrants issued to the Purchaser at the first Closing. (e) If the first Closing occurs after February 28, 1999, then the Company shall issue and deliver to the Purchaser at the first Closing, for no additional consideration, a certificate (in the form attached as Exhibit A to the Warrant Agreement) evidencing warrants to purchase 20,000 shares of Common Stock. (f) All warrants issued to the Purchaser pursuant to this Section 3 are collectively referred to herein as the "Subsequent Warrants". The Subsequent Warrants shall be subject to the terms and conditions set forth in the Warrant Agreement and the certificates evidencing the same. (g) At each Closing, the Purchaser shall deliver to the Company (i) an amount (in immediately available funds) equal to the number of Common Shares being purchased by the Purchaser times $6.00 and (ii) a duly executed certificate of the Purchaser, dated the applicable Closing Date, stating that the representations and warranties of the Purchaser contained in Section 7 are true and correct on and as of such Closing Date with the same force and effect as though made on and as of such Closing Date, except for any representations and warranties made as of a specified date, which shall be true and correct in all material respects as of such specified date. Section 4. SIMULTANEOUS CLOSINGS UNDER OTHER PURCHASE AGREEMENTS. in no event shall the purchaser be obligated to consummate any closing unless simultaneously with such closing (a) the company shall sell to the other purchasers shares of common stock numbering, in the aggregate, not less than the amount (rounded to the nearest whole number) determined by multiplying the number of common shares being purchased by the purchaser at such closing times 13.99 and (b) the company shall have received from the other purchasers payments (in immediately available funds) of the purchase price for such shares, which shall not be less than $6.00 per share. Section 5. Use of Proceeds. The Company shall use the proceeds from the sale of Common Shares at each Closing and the proceeds from each sale of Common Stock to the Other Purchasers as contemplated by Section 4 solely for general corporate purposes. Section 6. Representations and Warranties of the Company. The Company represents and warrants to the Purchaser as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the corporate power to own its property and to carry on its business as now being conducted. -7- 11 (b) The Company has all requisite corporate power to enter into and perform its obligations under the Transaction Documents and the Warrants and to consummate the transactions contemplated thereby. The Company has taken all corporate actions necessary to authorize it to enter into and perform its obligations under the Transaction Documents and the Warrants and to consummate the transactions contemplated thereby. The Transaction Documents have been duly executed and delivered by the Company and constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and general equitable principles. Upon issuance in accordance with this Agreement and the Warrant Agreement, the Warrants will have been duly executed and delivered by the Company and will constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and general equitable principles. The Common Shares have been duly authorized and, when issued and paid for in accordance with this Agreement, will be validly issued, fully paid and nonassessable. The Warrant Shares have been duly authorized and reserved for issuance and, when issued and paid for upon proper exercise of the Warrants, will be validly issued, fully paid and nonassessable. (c) Neither the execution, delivery or performance of any of the Transaction Documents by the Company, nor the consummation by the Company of the transactions contemplated thereby, will violate, or result in a breach of the terms of, or constitute a default under, the charter or bylaws of the Company or any agreement, instrument or other arrangement or obligation to which the Company is subject, except for such violations, breaches or defaults that would not have a Material Adverse Effect. (d) The Company has delivered to the Purchaser true and complete copies of (i) the Stockholders Agreement, the Registration Rights Agreement, the Tag-Along Agreement, the Warrant Agreement and the Company's charter and bylaws, in each case as in effect on the date hereof, and (ii) the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 (the "Form 10-K Report"). As of the date hereof, the Form 10-K Report complies in all material respects with all applicable requirements of the Exchange Act and the applicable rules and regulations promulgated thereunder and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of the date hereof, the consolidated financial statements of the Company included in the Form 10-K Report comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements were prepared in accordance with applicable generally accepted accounting principles applied on a consistent basis during the periods involved. -8- 12 Section 7. Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to the Company as follows: (a) The Purchaser has all requisite power, authority and capacity to execute and deliver the Transaction Documents to which the Purchaser is a party (the "Purchaser Transaction Documents"), to consummate the transactions contemplated thereby and to perform its obligations thereunder. Each of the Purchaser Transaction Documents has been executed and delivered by the Purchaser and constitutes the legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and general equitable principles. (b) Neither the execution, delivery and performance by the Purchaser of the Purchaser Transaction Documents, nor the consummation by the Purchaser of the transactions contemplated thereby, will violate, result in a breach of the terms of or constitute a default under, any material agreement, instrument or other arrangement or obligation to which the Purchaser is subject. (c) The Purchaser has read and understands this Agreement, including the Schedules and Exhibits hereto, and acknowledges and understands that execution and delivery of this Agreement by the Purchaser creates an irrevocable obligation of the Purchaser, subject to the terms and conditions contained in this Agreement, to purchase the Common Shares. (d) The Purchaser is an "accredited investor" within the meaning of Regulation D under the Securities Act. (e) The acquisition of the Securities by the Purchaser is for the Purchaser's own account, is for investment purposes and is not with a view to, or for offer or sale for the Company in connection with, the distribution of any Securities in violation of the Securities Act, the Exchange Act or any state securities laws (collectively, the "Acts"). The Purchaser is not participating and does not have a participation in any such distribution or the underwriting of any such distribution, and has no present intention of selling or otherwise disposing of any of the Securities in violation of the Acts. (f) The Purchaser is aware that neither the SEC nor any state securities commission has approved or disapproved the Securities or passed upon the accuracy or adequacy of this Agreement or any of the other Transaction Documents. (g) The Purchaser (i) recognizes that an investment in the Securities involves a high degree of risk, (ii) has such knowledge and experience in financial and business matters as to be capable of evaluating the risks and merits of this investment and protecting the Purchaser's interests in connection with this investment and (iii) is able to bear the economic risk of an investment in the Securities, including the risk of the total loss of such investment. -9- 13 (h) The Purchaser has received copies of the Transactions Documents, the Form 10-K Report and the Company's charter and bylaws. The Purchaser has received all the information the Purchaser considers necessary or appropriate for deciding whether to enter into this Agreement or to acquire the Securities, and the Purchaser has had an opportunity to ask questions of and receive answers from the Company regarding the Company and the terms and conditions of the Securities. (i) The Purchaser understands that the Securities have not been registered under the Securities Act on the basis that the issuance or sale of the Securities is exempt from the registration provisions thereof, and that the Company's reliance on the exemption is predicated upon the representations of the Purchaser herein. (j) The Purchaser has read and understands the terms and provisions of the Transaction Documents and understands that all Common Shares and all Warrant Shares issued to the Purchaser will automatically become subject to the terms and provisions of the Stockholders Agreement, the Tag-Along Agreement and the Voting Agreement. The Purchaser understands that other shares of Common Stock currently held or subsequently acquired by the Purchaser may also become subject to the terms and provisions of the Stockholders Agreement, the Tag-Along Agreement and the Voting Agreement pursuant to the terms thereof. Section 8. Compliance with Securities Laws and Agreements. The Purchaser acknowledges, understands and agrees that the following limitations and restrictions are applicable to the purchase, resale and distribution of the Securities: (a) The Purchaser must bear the economic risk of its investment in the Company for an indefinite period of time because the Securities have not been registered under the Acts and, therefore, may not be subsequently offered, sold, transferred, pledged or otherwise disposed of unless and until they have been registered under the Acts or exemptions from registration thereunder are available, and the Purchaser further understands that only the Company can take action to register the Securities. (b) The Purchaser has been advised that the Company does not expect that Rule 144 under the Securities Act will be available to the Purchaser with respect to any of the Securities unless the Purchaser is a non-affiliate of the Company (and has not been an affiliate of the Company for at least three months) and has held such Securities for at least one year from the later of the date that they were issued by the Company or the date that they were acquired from an affiliate of the Company. (c) The certificates representing the Warrants issued pursuant to this Agreement will bear the legend provided in the Warrant Agreement. The certificates representing the Securities issued pursuant to this Agreement (other than the Warrants) will bear a legend in substantially the following form: -10- 14 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW (COLLECTIVELY, THE "ACTS") AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS MADE PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACTS OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF. FURTHER, SUCH SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS AND UNTIL (1) SUCH SECURITIES HAVE BEEN REGISTERED UNDER THE ACTS OR (2) THE HOLDER OF SUCH SECURITIES PROVIDES THE COMPANY WITH (A) AN UNQUALIFIED WRITTEN OPINION OF LEGAL COUNSEL, WHICH COUNSEL AND OPINION (IN FORM AND SUBSTANCE) SHALL BE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT THE PROPOSED DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACTS OR (B) SUCH OTHER EVIDENCE AS MAY BE REASONABLY SATISFACTORY TO THE COMPANY THAT THE PROPOSED DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACTS. (d) In addition to the legends provided in paragraph (c) above, the certificates evidencing the Common Shares and the Warrant Shares will bear legends in substantially the following forms: BY THE TERMS OF THE STOCKHOLDERS AGREEMENT AND THE TAG-ALONG AGREEMENT, CERTAIN RESTRICTIONS HAVE BEEN PLACED UPON THE TRANSFERABILITY OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE. THE COMPANY WILL FURNISH A COPY OF THE STOCKHOLDERS AGREEMENT AND THE TAG-ALONG AGREEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. NO REGISTRATION OR TRANSFER OF ANY SECURITIES REPRESENTED BY THIS CERTIFICATE WILL BE MADE ON THE BOOKS OF THE COMPANY UNLESS AND UNTIL SUCH RESTRICTIONS HAVE BEEN COMPLIED WITH. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF AN AMENDED AND RESTATED VOTING AGREEMENT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY, AND ARE HELD AND MAY BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY IN ACCORDANCE WITH SUCH AGREEMENT. -11- 15 (e) Stop Transfer Instructions. The Company's stock transfer records will contain stop transfer instructions with respect to the Common Shares and the Warrant Shares to provide notice of the restrictions on the resale or distribution thereof imposed by the Acts and the Stockholders Agreement, the Tag-Along Agreement and the Voting Agreement. Section 9. Changes in Capital Structure. In the event of any change after the date hereof in the number of issued shares of Common Stock by reason of any stock dividend, split-up, recapitalization, merger, combination, conversion, exchange of shares or other change in the corporate or capital structure of the Company, then there shall be appropriate and equitable adjustments made in the number and kind of shares of stock or other securities of the Company thereafter issued to the Purchaser pursuant to this Agreement. Section 10. Specific Performance. The parties agree that the covenants and obligations contained in this Agreement relate to special, unique and extraordinary matters and that a violation of any of the terms hereof would cause irreparable injury in an amount which would be impossible to estimate or determine and for which any remedy at law would be inadequate. As such, the parties agree that if either party fails or refuses to fulfill any of such party's obligations under this Agreement or to make any payment or deliver any instrument required hereunder, then the other party shall have the remedy of specific performance, which remedy shall be cumulative and nonexclusive and shall be in addition to any other rights and remedies otherwise available under any other contract or at law or in equity and to which such party might be entitled. Section 11. Notices. Any and all notices, requests or other communications hereunder shall be given in writing and delivered by (a) regular, overnight or registered or certified mail (return receipt requested), with first class postage prepaid, (b) hand delivery, (c) facsimile or electronic mail transmission or (d) overnight courier service, to the parties at addresses or facsimile numbers set forth below their respective names on the signature pages hereof, or at such other address or number as shall be designated by either party in a notice to the other party given in accordance with this Section 11. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given, (i) in the case of a notice sent by regular mail, on the date actually received by the addressee, (ii) in the case of a notice sent by registered or certified mail, on the date receipted for (or refused) on the return receipt, (iii) in the case of a notice delivered by hand, when personally delivered, (iv) in the case of a notice sent by facsimile or electronic mail, upon transmission subject to telephone confirmation of receipt, and (v) in the case of a notice sent by overnight mail or overnight courier service, the date delivered at the designated address, in each case given or addressed as aforesaid. Section 12. Survival. All representations, warranties and covenants contained in this Agreement shall survive the execution and delivery of this Agreement, the Closings, the delivery of any Securities to the Purchaser and the death or disability of the Purchaser. Section 13. Benefit and Burden. This Agreement shall inure to the benefit of, and shall be binding upon, the Company and its successors and assigns and the Purchaser and the Purchaser's heirs, executors, personal representatives, administrators, successors and assigns. -12- 16 Section 14. No Third Party Rights. Nothing in this Agreement shall be deemed to create any right in any creditor or other Person not a party hereto, and this Agreement shall not be construed in any respect to be a contract in whole or in part for the benefit of any third party. Section 15. Amendments and Waiver. No amendment, modification, restatement or supplement of this Agreement shall be valid unless the same is in writing and signed by the parties. No waiver of any provision of this Agreement shall be valid unless in writing and signed by the party against whom that waiver is sought to be enforced. No failure or delay on the part of any of the parties in exercising any right, power or privilege hereunder, and no course of dealing between or among the parties, shall operate as a waiver of any right, power or privilege hereunder. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. No notice to or demand on either party in any case shall entitle such party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of any party to any other or further action in any circumstances without notice or demand. Section 16. Severability. Should any clause, sentence, paragraph, subsection or Section of this Agreement be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Agreement, and the parties agree that the part or parts of this Agreement so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom as if such stricken part or parts had never been included herein. Section 17. Expenses. The Company will pay, or reimburse the Purchaser for the payment of, all reasonable expenses incurred by the Purchaser prior to the date hereof in connection with this Agreement, including all legal and accounting fees and disbursements. Except as aforesaid, each of the parties shall pay its own expenses incident to this Agreement, including all legal and accounting fees and disbursements. SECTION 18. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED UNDER, AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO THE CONFLICT-OF-LAWS PROVISIONS THEREOF. Section 19. Entire Agreement. This Agreement sets forth all of the promises, agreements, conditions, understandings, warranties and representations of the parties with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings between the parties, whether written, oral or otherwise, with respect to the subject matter hereof. There are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, between the parties concerning the subject matter hereof except as set forth herein. -13- 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. STERLING CHEMICALS HOLDINGS, INC. By: ------------------------------------- Printed Name: --------------------------- Title: ---------------------------------- Address: Sterling Chemicals Holdings, Inc. 1200 Smith, Suite 1900 Houston, Texas 77002 Attention: General Counsel Facsimile No.: (713) 654-9577 E-Mail: Delkins@sterlingchemicals.com PURCHASER: ---------------------------------------- Frank P. Diassi Address: -------------------------------- -------------------------------- -------------------------------- -------------------------------- Facsimile No.: -------------------------- E-Mail: --------------------------------- -14- 18 SCHEDULE I PURCHASERS
PURCHASER NUMBER OF SHARES PERCENTAGE - --------- ---------------- ALLOCATION ---------- Gordon A. Cain.................................................. 1,333,333 53.33% William A. McMinn............................................... 333,333 13.33% James Crane..................................................... 250,000 10.00% Frank P. Diassi................................................. 166,667 6.67% Frank J. Hevrdejs............................................... 166,667 6.67% Koch Capital Services, Inc...................................... 250,000 10.00% --------- ------ Total.................................................. 2,500,000 100.00%
-15- EX-10.30 11 STANDBY PURCHASE AGREEMENT - FRANK J. HEVRDEJS 1 EXHIBIT 10.30 =============================================================================== =============================================================================== STANDBY PURCHASE AGREEMENT BY AND BETWEEN STERLING CHEMICALS HOLDINGS, INC. AND FRANK J. HEVRDEJS =============================================================================== DATED AS OF DECEMBER 15, 1998 =============================================================================== 2 IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE SECURITIES PURCHASED HEREUNDER HAVE NOT BEEN RECOMMENDED OR APPROVED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SECURITIES PURCHASED HEREUNDER ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. 3 TABLE OF CONTENTS
Page ---- Section 1 Definitions and Interpretation............................................................ 2 Section 2 Standby Commitment........................................................................ 5 Section 3 Closings.................................................................................. 6 Section 4 Simultaneous Closings Under Other Purchase Agreements..................................... 7 Section 5 Use of Proceeds........................................................................... 7 Section 6 Representations and Warranties of the Company............................................. 7 Section 7 Representations and Warranties of the Purchaser........................................... 9 Section 8 Compliance with Securities Laws and Agreements............................................ 10 Section 9 Changes in Capital Structure.............................................................. 12 Section 10 Specific Performance...................................................................... 12 Section 11 Notices................................................................................... 12 Section 12 Survival.................................................................................. 12 Section 13 Benefit and Burden........................................................................ 12 Section 14 No Third Party Rights..................................................................... 13 Section 15 Amendments and Waiver..................................................................... 13 Section 16 Severability.............................................................................. 13 Section 17 Expenses.................................................................................. 13 Section 18 Governing Law............................................................................. 13 Section 19 Entire Agreement.......................................................................... 13 Schedule I Purchasers
4 HEVRDEJS STANDBY PURCHASE AGREEMENT THIS STANDBY PURCHASE AGREEMENT (this "Agreement") is made and entered into as of December 15, 1998 by and between STERLING CHEMICALS HOLDINGS, INC., a Delaware corporation (the "Company"), and FRANK J. HEVRDEJS (the "Purchaser"). PRELIMINARY STATEMENTS A. The Company and the Purchaser are entering into this Agreement to evidence the Purchaser's agreement to purchase up to 166,667 shares of common stock, par value $0.01 per share, of the Company ("Common Stock"). B. Simultaneously with the execution and delivery of this Agreement, the Company and Harris Trust and Savings Bank, as agent, entered into a Warrant Agreement dated as of the date hereof (the "Warrant Agreement"). In order to induce the Purchaser to enter into this Agreement, the Company has issued to the Purchaser on the date hereof warrants to purchase 20,000 shares of Common Stock (the "Initial Warrants"). The Initial Warrants are evidenced by a certificate in the form attached as Exhibit A to the Warrant Agreement and are subject to the terms and conditions set forth in the Warrant Agreement and such certificate. C. The Company and the Purchaser are parties to the Stockholders Agreement, the Registration Rights Agreement and the Tag-Along Agreement (as such terms are defined below). D. In connection with the issuance of the Initial Warrants, the Company, the Purchaser and certain other parties entered into an Amended and Restated Voting Agreement dated as of the date hereof (the "Voting Agreement"). E. Simultaneously with the execution and delivery of this Agreement, the Company is entering into separate Standby Purchase Agreements, substantially identical to this Agreement, with the other purchasers named in Schedule I (the "Other Purchasers") to evidence the Other Purchasers' agreement to purchase up to the number of shares of Common Stock set opposite their respective names in Schedule I. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 5 Section 1. Definitions and Interpretation. Capitalized terms used in this Agreement shall, except where the context otherwise requires, have the following respective meanings: "Acts" has the meaning specified in Section 7(e). "Agreement" means this Standby Purchase Agreement, as from time to time amended in accordance with the terms hereof. "Bankruptcy Event" means that: (i) the Company or any Subsidiary has (A) made a general assignment for the benefit of creditors, (B) filed a voluntary bankruptcy petition, (C) become the subject of an order for relief or been declared insolvent in any federal or state bankruptcy or insolvency proceeding, (D) instituted a proceeding or filed an answer in a proceeding seeking to adjudicate itself insolvent or seeking reorganization, arrangement, composition, readjustment, protection, liquidation, winding-up, dissolution or similar relief of it or its debts under any Debtor Relief Law, (E) filed an answer or other pleading admitting or failing to contest the material allegations of a petition filed against it in a proceeding of the type described in subclauses (A) through (D) of this clause (i), (F) sought, consented to or acquiesced in an order for relief or the appointment of a trustee, receiver, liquidator or similar official for it or for any substantial part of such its assets or (G) taken any action in furtherance of any such actions; or (ii) any proceeding of the type referred to in clause (i) above has been filed or commenced against the Company or any Subsidiary or the Company or any Subsidiary by any act has indicated its approval thereof, consented thereto or acquiesced therein, or an order for relief has been entered in an involuntary case under any Debtor Relief Law, or an order, judgment or decree has been entered appointing a trustee, receiver, custodian, liquidator or similar official or adjudicating it insolvent, or approving the petition in any such proceedings. "Business Day" means any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in New York, New York, or Houston, Texas. "Closing" has the meaning specified in Section 3(a). "Closing Date" has the meaning specified in Section 2(b). "Common Shares" means the shares of Common Stock issuable to the Purchaser under this Agreement. "Common Stock" has the meaning specified in the Preliminary Statements of this Agreement. -2- 6 "Company" has the meaning specified in the opening paragraph hereof. "Debtor Relief Laws" means the Bankruptcy Code of the United States, and any successor statute of similar import, and all other applicable dissolution, liquidation, conservatorship, bankruptcy, moratorium, readjustment of debt, compromise, rearrangement, receivership, insolvency, fraudulent transfer or conveyance, reorganization or similar debtor relief laws from time to time in effect affecting the rights of creditors generally. "Election Notice" has the meaning specified in Section 2(a). "Exchange Act" means the Securities Exchange Act of 1934. "Form 10-K Report" has the meaning specified in Section 6(d). "Governmental Authority" means (i) any nation or government, (ii) any federal, state, county, province, city, town, municipality, local or other political subdivision thereof or thereto, (iii) any court, tribunal, department, commission, board, bureau, instrumentality, agency, council, arbitrator or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and (iv) any other governmental entity, agency or authority having or exercising jurisdiction over any relevant Person, item or matter. "Initial Warrants" has the meaning specified in the Preliminary Statements of this Agreement. "Laws" means all laws, statutes, rules, regulations, ordinances, orders, writs, injunctions or decrees and other pronouncements having the effect of law of any Governmental Authority. "Material Adverse Effect" means a material adverse effect on the business, properties, assets, financial condition or results of operations of the Company and the Subsidiaries, taken as a whole. "Other Purchasers" has the meaning specified in the Preliminary Statements of this Agreement. "Person" means any individual, corporation, partnership, limited liability company, firm, association, joint venture, Governmental Authority or other entity or enterprise. "Purchaser" has the meaning specified in the opening paragraph hereof. -3- 7 "Registration Rights Agreement" means the Registration Rights Agreement dated as of August 21, 1996, as amended, among the Company and the Persons named therein. "SEC" means the Securities and Exchange Commission. "Securities" means the Common Shares, the Warrants and the Warrant Shares. "Securities Act" means the Securities Act of 1933. "Stockholders Agreement" means the Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, as amended, among the Company and the stockholders of the Company parties thereto. "Subsequent Warrants" has the meaning specified in Section 3(f). "Subsidiary" means any subsidiary of the Company of which greater than 50% of the outstanding shares of capital stock having ordinary voting power for the election of directors is owned directly or indirectly by the Company. "Tag-Along Agreement" means the Tag-Along Agreement dated effective as of August 21, 1996, among the Company and the stockholders of the Company parties thereto. "Transaction Documents" means, collectively, this Agreement, the Registration Rights Agreement, the Voting Agreement, the Tag-Along Agreement, the Warrant Agreement and the Stockholders Agreement. "Voting Agreement" means an Amended and Restated Voting Agreement dated as of the date hereof among the Company and the Persons named therein. "Warrants" means the Initial Warrants and the Subsequent Warrants. "Warrant Agreement" has the meaning specified in the Preliminary Statements of this Agreement. "Warrant Shares" means the shares of Common Stock issuable to the Purchaser upon exercise of the Warrants. (b) In this Agreement, unless a clear contrary intention appears: (i) the words "hereof," "herein" and "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular provision of this Agreement; (ii) reference to any gender includes each other gender and the neuter; -4- 8 (iii) all terms defined in the singular shall have the same meanings in the plural and vice versa; (iv) reference to any Person includes such Person's heirs, executors, personal representatives, administrators, successors and assigns; provided, however, that nothing contained in this clause (iv) is intended to authorize any assignment not otherwise permitted by this Agreement; (v) reference to a Person in a particular capacity or capacities excludes such Person in any other capacity; (vi) reference to any contract or agreement means such contract or agreement as amended, supplemented or modified from time to time in accordance with the terms thereof; (vii) all references to Sections shall be deemed to be references to the Sections of this Agreement; (viii) all references to Exhibits and Schedules shall be deemed to be references to the Exhibits and Schedules attached hereto which are made a part hereof and incorporated herein by reference; (ix) the word "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; (x) with respect to the determination of any period of time, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding"; (xi) the captions and headings contained in this Agreement shall not be considered or given any effect in construing the provisions hereof if any question of intent should arise; (xii) reference to any Law means such Law as amended, modified, codified, reenacted, supplemented or superseded in whole or in part, and in effect from time to time; and (xiii) no provision of this Agreement shall be interpreted or construed against any party solely because that party or its legal representative drafted such provision. Section 2. Standby Commitment. (a) Upon the terms and subject to the satisfaction or waiver of the conditions set forth herein, the Purchaser agrees to purchase from the Company such number of shares of Common Stock (not to exceed 166,667 in the aggregate) as the Company may, in its sole discretion, specify at any time or from time to time, in each case at a price per share, payable in cash, of $6.00. If the Company desires to require the Purchaser to purchase shares of Common Stock as aforesaid, the Company must give the Purchaser not less than 15 days' prior written notice (an "Election Notice"). Each Election Notice shall (i) be given in -5- 9 accordance with Section 11, (ii) refer to this Agreement, (iii) specify the number of shares to be purchased, (iv) specify the applicable Closing Date (as defined below), which may not be later than the third anniversary of the date hereof, and (v) state that, in the good faith judgement of the Company, the sale of the Common Shares referred to in such Election Notice is necessary in order for the Company to maintain, reestablish or enhance its borrowing rights under its revolving credit facilities and/or to satisfy any obligation under the documentation governing its revolving credit facilities to raise additional equity capital. Notwithstanding anything to the contrary contained herein, in no event shall the Company be required to sell or issue any Common Shares unless the Company has given to the Purchaser an Election Notice with respect to such Common Shares pursuant to this paragraph (a) and then only the number of Common Shares specified in such Election Notice. The Company may not revoke any Election Notice given by it as aforesaid. (b) For purposes of this Agreement, "Closing Date" means, when used with reference to any purchase of Common Shares, the date on which such purchase is to be consummated; provided, however, that if such date is not a Business Day, then the Closing Date for such purchase shall be automatically extended to the next succeeding Business Day and, provided further, that each Closing Date shall be at least 30 days after the immediately preceding Closing Date, if any. Section 3. Closings. (a) The consummation of each purchase of Common Stock pursuant to this Agreement (a "Closing) shall take place on the applicable Closing Date at 10:00 a.m. (Houston time) unless a different time is specified in the applicable Election Notice. Each Closing shall be held at the corporate offices of the Company or at such other place as may be agreed upon by the Company and the Purchaser. (b) At each Closing, the Company shall deliver to the Purchaser (i) a duly executed certificate evidencing the Common Shares being purchased at such Closing and (ii) a duly executed certificate of the chief executive officer, the chief financial officer or the treasurer of the Company, dated the applicable Closing Date, stating that the representations and warranties of the Company contained in Section 6 are true and correct on and as of such Closing Date with the same force and effect as though made on and as of such Closing Date, except for any representations and warranties made as of a specified date, which shall be true and correct in all material respects as of such specified date, and stating that (A) no Bankruptcy Event has occurred and is continuing, (B) the Company is generally paying its debts as they become due, (C) the Company owns property having a value greater than the amount required to pay the probable liability on its debts and (D) the Company has no plans or intentions to initiate a Bankruptcy Event nor is it aware that any creditor of the Company plans or intends to initiate a Bankruptcy Event. (c) If the first Closing occurs before March 1, 1999, then the Company shall issue and deliver to the Purchaser at the first Closing, for no additional consideration, a certificate (in the form attached as Exhibit A to the Warrant Agreement) evidencing warrants to purchase that number of shares of Common Stock (rounded to the nearest whole number) equal to the number of Common Shares purchased by the Purchaser at the first Closing divided by 8.3333. -6- 10 (d) If the first Closing occurs before March 1, 1999, then the Company shall issue and deliver to the Purchaser at the second Closing, for no additional consideration, a certificate (in the form attached as Exhibit A to the Warrant Agreement) evidencing warrants to purchase 20,000 shares of Common Stock minus the number of Common Shares covered by the warrants issued to the Purchaser at the first Closing. (e) If the first Closing occurs after February 28, 1999, then the Company shall issue and deliver to the Purchaser at the first Closing, for no additional consideration, a certificate (in the form attached as Exhibit A to the Warrant Agreement) evidencing warrants to purchase 20,000 shares of Common Stock. (f) All warrants issued to the Purchaser pursuant to this Section 3 are collectively referred to herein as the "Subsequent Warrants". The Subsequent Warrants shall be subject to the terms and conditions set forth in the Warrant Agreement and the certificates evidencing the same. (g) At each Closing, the Purchaser shall deliver to the Company (i) an amount (in immediately available funds) equal to the number of Common Shares being purchased by the Purchaser times $6.00 and (ii) a duly executed certificate of the Purchaser, dated the applicable Closing Date, stating that the representations and warranties of the Purchaser contained in Section 7 are true and correct on and as of such Closing Date with the same force and effect as though made on and as of such Closing Date, except for any representations and warranties made as of a specified date, which shall be true and correct in all material respects as of such specified date. Section 4. Simultaneous Closings under Other Purchase Agreements. In no event shall the Purchaser be obligated to consummate any Closing unless simultaneously with such Closing (a) the Company shall sell to the Other Purchasers shares of Common Stock numbering, in the aggregate, not less than the amount (rounded to the nearest whole number) determined by multiplying the number of Common Shares being purchased by the Purchaser at such Closing times 13.99 and (b) the Company shall have received from the Other Purchasers payments (in immediately available funds) of the purchase price for such shares, which shall not be less than $6.00 per share. Section 5. Use of Proceeds. The Company shall use the proceeds from the sale of Common Shares at each Closing and the proceeds from each sale of Common Stock to the Other Purchasers as contemplated by Section 4 solely for general corporate purposes. Section 6. Representations and Warranties of the Company. The Company represents and warrants to the Purchaser as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the corporate power to own its property and to carry on its business as now being conducted. -7- 11 (b) The Company has all requisite corporate power to enter into and perform its obligations under the Transaction Documents and the Warrants and to consummate the transactions contemplated thereby. The Company has taken all corporate actions necessary to authorize it to enter into and perform its obligations under the Transaction Documents and the Warrants and to consummate the transactions contemplated thereby. The Transaction Documents have been duly executed and delivered by the Company and constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and general equitable principles. Upon issuance in accordance with this Agreement and the Warrant Agreement, the Warrants will have been duly executed and delivered by the Company and will constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and general equitable principles. The Common Shares have been duly authorized and, when issued and paid for in accordance with this Agreement, will be validly issued, fully paid and nonassessable. The Warrant Shares have been duly authorized and reserved for issuance and, when issued and paid for upon proper exercise of the Warrants, will be validly issued, fully paid and nonassessable. (c) Neither the execution, delivery or performance of any of the Transaction Documents by the Company, nor the consummation by the Company of the transactions contemplated thereby, will violate, or result in a breach of the terms of, or constitute a default under, the charter or bylaws of the Company or any agreement, instrument or other arrangement or obligation to which the Company is subject, except for such violations, breaches or defaults that would not have a Material Adverse Effect. (d) The Company has delivered to the Purchaser true and complete copies of (i) the Stockholders Agreement, the Registration Rights Agreement, the Tag-Along Agreement, the Warrant Agreement and the Company's charter and bylaws, in each case as in effect on the date hereof, and (ii) the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 (the "Form 10-K Report"). As of the date hereof, the Form 10-K Report complies in all material respects with all applicable requirements of the Exchange Act and the applicable rules and regulations promulgated thereunder and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of the date hereof, the consolidated financial statements of the Company included in the Form 10-K Report comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements were prepared in accordance with applicable generally accepted accounting principles applied on a consistent basis during the periods involved. -8- 12 Section 7. Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to the Company as follows: (a) The Purchaser has all requisite power, authority and capacity to execute and deliver the Transaction Documents to which the Purchaser is a party (the "Purchaser Transaction Documents"), to consummate the transactions contemplated thereby and to perform its obligations thereunder. Each of the Purchaser Transaction Documents has been executed and delivered by the Purchaser and constitutes the legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and general equitable principles. (b) Neither the execution, delivery and performance by the Purchaser of the Purchaser Transaction Documents, nor the consummation by the Purchaser of the transactions contemplated thereby, will violate, result in a breach of the terms of or constitute a default under, any material agreement, instrument or other arrangement or obligation to which the Purchaser is subject. (c) The Purchaser has read and understands this Agreement, including the Schedules and Exhibits hereto, and acknowledges and understands that execution and delivery of this Agreement by the Purchaser creates an irrevocable obligation of the Purchaser, subject to the terms and conditions contained in this Agreement, to purchase the Warrant Shares. (d) The Purchaser is an "accredited investor" within the meaning of Regulation D under the Securities Act. (e) The acquisition of the Securities by the Purchaser is for the Purchaser's own account, is for investment purposes and is not with a view to, or for offer or sale for the Company in connection with, the distribution of any Securities in violation of the Securities Act, the Exchange Act or any state securities laws (collectively, the "Acts"). The Purchaser is not participating and does not have a participation in any such distribution or the underwriting of any such distribution, and has no present intention of selling or otherwise disposing of any of the Securities in violation of the Acts. (f) The Purchaser is aware that neither the SEC nor any state securities commission has approved or disapproved the Securities or passed upon the accuracy or adequacy of this Agreement or any of the other Transaction Documents. (g) The Purchaser (i) recognizes that an investment in the Securities involves a high degree of risk, (ii) has such knowledge and experience in financial and business matters as to be capable of evaluating the risks and merits of this investment and protecting the Purchaser's interests in connection with this investment and (iii) is able to bear the economic risk of an investment in the Securities, including the risk of the total loss of such investment. -9- 13 (h) The Purchaser has received copies of the Transactions Documents, the Form 10-K Report and the Company's charter and bylaws. The Purchaser has received all the information the Purchaser considers necessary or appropriate for deciding whether to enter into this Agreement or to acquire the Securities, and the Purchaser has had an opportunity to ask questions of and receive answers from the Company regarding the Company and the terms and conditions of the Securities. (i) The Purchaser understands that the Securities have not been registered under the Securities Act on the basis that the issuance or sale of the Securities is exempt from the registration provisions thereof, and that the Company's reliance on the exemption is predicated upon the representations of the Purchaser herein. (j) The Purchaser has read and understands the terms and provisions of the Transaction Documents and understands that all Common Shares and all Warrant Shares issued to the Purchaser will automatically become subject to the terms and provisions of the Stockholders Agreement, the Tag-Along Agreement and the Voting Agreement. The Purchaser understands that other shares of Common Stock currently held or subsequently acquired by the Purchaser may also become subject to the terms and provisions of the Stockholders Agreement, the Tag-Along Agreement and the Voting Agreement pursuant to the terms thereof. Section 8. Compliance with Securities Laws and Agreements. The Purchaser acknowledges, understands and agrees that the following limitations and restrictions are applicable to the purchase, resale and distribution of the Securities: (a) The Purchaser must bear the economic risk of its investment in the Company for an indefinite period of time because the Securities have not been registered under the Acts and, therefore, may not be subsequently offered, sold, transferred, pledged or otherwise disposed of unless and until they have been registered under the Acts or exemptions from registration thereunder are available, and the Purchaser further understands that only the Company can take action to register the Securities. (b) The Purchaser has been advised that the Company does not expect that Rule 144 under the Securities Act will be available to the Purchaser with respect to any of the Securities unless the Purchaser is a non-affiliate of the Company (and has not been an affiliate of the Company for at least three months) and has held such Securities for at least one year from the later of the date that they were issued by the Company or the date that they were acquired from an affiliate of the Company. (c) The certificates representing the Warrants issued pursuant to this Agreement will bear the legend provided in the Warrant Agreement. The certificates representing the Securities issued pursuant to this Agreement (other than the Warrants) will bear a legend in substantially the following form: -10- 14 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW (COLLECTIVELY, THE "ACTS") AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS MADE PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACTS OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF. FURTHER, SUCH SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS AND UNTIL (1) SUCH SECURITIES HAVE BEEN REGISTERED UNDER THE ACTS OR (2) THE HOLDER OF SUCH SECURITIES PROVIDES THE COMPANY WITH (A) AN UNQUALIFIED WRITTEN OPINION OF LEGAL COUNSEL, WHICH COUNSEL AND OPINION (IN FORM AND SUBSTANCE) SHALL BE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT THE PROPOSED DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACTS OR (B) SUCH OTHER EVIDENCE AS MAY BE REASONABLY SATISFACTORY TO THE COMPANY THAT THE PROPOSED DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACTS. (d) In addition to the legends provided in paragraph (c) above, the certificates evidencing the Common Shares and the Warrant Shares will bear legends in substantially the following forms: BY THE TERMS OF THE STOCKHOLDERS AGREEMENT AND THE TAG-ALONG AGREEMENT, CERTAIN RESTRICTIONS HAVE BEEN PLACED UPON THE TRANSFERABILITY OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE. THE COMPANY WILL FURNISH A COPY OF THE STOCKHOLDERS AGREEMENT AND THE TAG-ALONG AGREEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. NO REGISTRATION OR TRANSFER OF ANY SECURITIES REPRESENTED BY THIS CERTIFICATE WILL BE MADE ON THE BOOKS OF THE COMPANY UNLESS AND UNTIL SUCH RESTRICTIONS HAVE BEEN COMPLIED WITH. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF AN AMENDED AND RESTATED VOTING AGREEMENT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY, AND ARE HELD AND MAY BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY IN ACCORDANCE WITH SUCH AGREEMENT. -11- 15 (e) Stop Transfer Instructions. The Company's stock transfer records will contain stop transfer instructions with respect to the Common Shares and the Warrant Shares to provide notice of the restrictions on the resale or distribution thereof imposed by the Acts and the Stockholders Agreement, the Tag-Along Agreement and the Voting Agreement. Section 9. Changes in Capital Structure. In the event of any change after the date hereof in the number of issued shares of Common Stock by reason of any stock dividend, split-up, recapitalization, merger, combination, conversion, exchange of shares or other change in the corporate or capital structure of the Company, then there shall be appropriate and equitable adjustments made in the number and kind of shares of stock or other securities of the Company thereafter issued to the Purchaser pursuant to this Agreement. Section 10. Specific Performance. The parties agree that the covenants and obligations contained in this Agreement relate to special, unique and extraordinary matters and that a violation of any of the terms hereof would cause irreparable injury in an amount which would be impossible to estimate or determine and for which any remedy at law would be inadequate. As such, the parties agree that if either party fails or refuses to fulfill any of such party's obligations under this Agreement or to make any payment or deliver any instrument required hereunder, then the other party shall have the remedy of specific performance, which remedy shall be cumulative and nonexclusive and shall be in addition to any other rights and remedies otherwise available under any other contract or at law or in equity and to which such party might be entitled. Section 11. Notices. Any and all notices, requests or other communications hereunder shall be given in writing and delivered by (a) regular, overnight or registered or certified mail (return receipt requested), with first class postage prepaid, (b) hand delivery, (c) facsimile or electronic mail transmission or (d) overnight courier service, to the parties at addresses or facsimile numbers set forth below their respective names on the signature pages hereof, or at such other address or number as shall be designated by either party in a notice to the other party given in accordance with this Section 11. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given, (i) in the case of a notice sent by regular mail, on the date actually received by the addressee, (ii) in the case of a notice sent by registered or certified mail, on the date receipted for (or refused) on the return receipt, (iii) in the case of a notice delivered by hand, when personally delivered, (iv) in the case of a notice sent by facsimile or electronic mail, upon transmission subject to telephone confirmation of receipt, and (v) in the case of a notice sent by overnight mail or overnight courier service, the date delivered at the designated address, in each case given or addressed as aforesaid. Section 12. Survival. All representations, warranties and covenants contained in this Agreement shall survive the execution and delivery of this Agreement, the Closings, the delivery of any Securities to the Purchaser and the death or disability of the Purchaser. Section 13. Benefit and Burden. This Agreement shall inure to the benefit of, and shall be binding upon, the Company and its successors and assigns and the Purchaser and the Purchaser's heirs, executors, personal representatives, administrators, successors and assigns. -12- 16 Section 14. No Third Party Rights. Nothing in this Agreement shall be deemed to create any right in any creditor or other Person not a party hereto, and this Agreement shall not be construed in any respect to be a contract in whole or in part for the benefit of any third party. Section 15. Amendments and Waiver. No amendment, modification, restatement or supplement of this Agreement shall be valid unless the same is in writing and signed by the parties. No waiver of any provision of this Agreement shall be valid unless in writing and signed by the party against whom that waiver is sought to be enforced. No failure or delay on the part of any of the parties in exercising any right, power or privilege hereunder, and no course of dealing between or among the parties, shall operate as a waiver of any right, power or privilege hereunder. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. No notice to or demand on either party in any case shall entitle such party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of any party to any other or further action in any circumstances without notice or demand. Section 16. Severability. Should any clause, sentence, paragraph, subsection or Section of this Agreement be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Agreement, and the parties agree that the part or parts of this Agreement so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom as if such stricken part or parts had never been included herein. Section 17. Expenses. The Company will pay, or reimburse the Purchaser for the payment of, all reasonable expenses incurred by the Purchaser prior to the date hereof in connection with this Agreement, including all legal and accounting fees and disbursements. Except as aforesaid, each of the parties shall pay its own expenses incident to this Agreement, including all legal and accounting fees and disbursements. Section 18. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED UNDER, AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO THE CONFLICT-OF-LAWS PROVISIONS THEREOF. Section 19. Entire Agreement. This Agreement sets forth all of the promises, agreements, conditions, understandings, warranties and representations of the parties with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings between the parties, whether written, oral or otherwise, with respect to the subject matter hereof. There are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, between the parties concerning the subject matter hereof except as set forth herein. -13- 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. STERLING CHEMICALS HOLDINGS, INC. By: ------------------------------------------------ Printed Name: -------------------------------------- Title: --------------------------------------------- Address: Sterling Chemicals Holdings, Inc. 1200 Smith, Suite 1900 Houston, Texas 77002 Attention: General Counsel Facsimile No.: (713) 654-9577 E-Mail: Delkins@sterlingchemicals.com PURCHASER: --------------------------------------------------- Frank J. Hevrdejs Address: ------------------------------------------- ------------------------------------------- ------------------------------------------- ------------------------------------------- Facsimile No.: ------------------------------------- E-Mail: -------------------------------------------- -14- 18 SCHEDULE I PURCHASERS
PERCENTAGE PURCHASER NUMBER OF SHARES ALLOCATION - --------- ---------------- ---------- Gordon A. Cain.................................................. 1,333,333 53.33% William A. McMinn............................................... 333,333 13.33% James Crane..................................................... 250,000 10.00% Frank P. Diassi................................................. 166,667 6.67% Frank J. Hevrdejs............................................... 166,667 6.67% Koch Capital Services, Inc...................................... 250,000 10.00% ---------- ------- Total.................................................. 2,500,000 100.00%
-15- EX-10.31 12 STANDBY PURCHASE AGREEMENT - KOCH CAPITAL SERVICES 1 EXHIBIT 10.31 ================================================================================ ================================================================================ STANDBY PURCHASE AGREEMENT BY AND BETWEEN STERLING CHEMICALS HOLDINGS, INC. AND KOCH CAPITAL SERVICES, INC. ================================================================================ DATED AS OF DECEMBER 15, 1998 ================================================================================ 2 IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THER TERMS OF THE OFFERING, INCLUDING THER MERITS AND RISKS INVOLVED. THE SECURITIES PURCHASED HEREUNDER HAVE NOT BEEN RECOMMENDED OR APPROVED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SECURITIES PURCHASED HEREUNDER ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BEW TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM, INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. 3 TABLE OF CONTENTS
Page ---- Section 1 Definitions and Interpretation............................. 2 Section 2 Standby Committment........................................ 5 Section 3 Closings................................................... 6 Section 4 Simultaneous Closings Under Other Purchase Agreements...... 7 Section 5 Use of Proceeds............................................ 7 Section 6 Representations and Warranties of the Company.............. 7 Section 7 Representations and Warranties of the Purchaser............ 9 Section 8 Compliance with Securities Laws and Agreements............. 10 Section 9 Changes in Capital Structure............................... 12 Section 10 Specific Performance....................................... 12 Section 11 Notices.................................................... 12 Section 12 Survival................................................... 12 Section 13 Benefit and Burden......................................... 13 Section 14 No Third Party Rights...................................... 13 Section 15 Amendments and Waiver...................................... 13 Section 16 Severability............................................... 13 Section 17 Expenses................................................... 13 Section 18 Governing Law.............................................. 13 Section 19 Entire Agreement........................................... 13 Schedule I Purchasers
4 KOCH STANDBY PURCHASE AGREEMENT THIS STANDBY PURCHASE AGREEMENT (this "Agreement") is made and entered into as of December 15, 1998 by and between STERLING CHEMICALS HOLDINGS, INC., a Delaware corporation (the "Company"), and KOCH CAPITAL SERVICES, INC., a Delaware corporation (the "Purchaser"). PRELIMINARY STATEMENTS A. The Company and the Purchaser are entering into this Agreement to evidence the Purchaser's agreement to purchase up to 250,000 shares of common stock, par value $0.01 per share, of the Company ("Common Stock"). B. Simultaneously with the execution and delivery of this Agreement, the Company and Harris Trust and Savings Bank, as agent, entered into a Warrant Agreement dated as of the date hereof (the "Warrant Agreement"). In order to induce the Purchaser to enter into this Agreement, the Company has issued to the Purchaser on the date hereof warrants to purchase 30,000 shares of Common Stock (the "Initial Warrants"). The Initial Warrants are evidenced by a certificate in the form attached as Exhibit A to the Warrant Agreement and are subject to the terms and conditions set forth in the Warrant Agreement and such certificate. C. The Company and the Purchaser are parties to the Stockholders Agreement, the Registration Rights Agreement and the Tag-Along Agreement (as such terms are defined below). D. In connection with the issuance of the Initial Warrants, the Company, the Purchaser and certain other parties entered into an Amended and Restated Voting Agreement dated as of the date hereof (the "Voting Agreement"). E. Simultaneously with the execution and delivery of this Agreement, the Company is entering into separate Standby Purchase Agreements, substantially identical to this Agreement, with the other purchasers named in Schedule I (the "Other Purchasers") to evidence the Other Purchasers' agreement to purchase up to the number of shares of Common Stock set opposite their respective names in Schedule I. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 5 Section 1. Definitions and Interpretation. Capitalized terms used in this Agreement shall, except where the context otherwise requires, have the following respective meanings: "Acts" has the meaning specified in Section 7(e). "Agreement" means this Standby Purchase Agreement, as from time to time amended in accordance with the terms hereof. "Bankruptcy Event" means that: (i) the Company or any Subsidiary has (A) made a general assignment for the benefit of creditors, (B) filed a voluntary bankruptcy petition, (C) become the subject of an order for relief or been declared insolvent in any federal or state bankruptcy or insolvency proceeding, (D) instituted a proceeding or filed an answer in a proceeding seeking to adjudicate itself insolvent or seeking reorganization, arrangement, composition, readjustment, protection, liquidation, winding-up, dissolution or similar relief of it or its debts under any Debtor Relief Law, (E) filed an answer or other pleading admitting or failing to contest the material allegations of a petition filed against it in a proceeding of the type described in subclauses (A) through (D) of this clause (i), (F) sought, consented to or acquiesced in an order for relief or the appointment of a trustee, receiver, liquidator or similar official for it or for any substantial part of such its assets or (G) taken any action in furtherance of any such actions; or (ii) any proceeding of the type referred to in clause (i) above has been filed or commenced against the Company or any Subsidiary or the Company or any Subsidiary by any act has indicated its approval thereof, consented thereto or acquiesced therein, or an order for relief has been entered in an involuntary case under any Debtor Relief Law, or an order, judgment or decree has been entered appointing a trustee, receiver, custodian, liquidator or similar official or adjudicating it insolvent, or approving the petition in any such proceedings. "Business Day" means any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in New York, New York, or Houston, Texas. "Closing" has the meaning specified in Section 3(a). "Closing Date" has the meaning specified in Section 2(b). "Common Shares" means the shares of Common Stock issuable to the Purchaser under this Agreement. "Common Stock" has the meaning specified in the Preliminary Statements of this Agreement. -2- 6 "Company" has the meaning specified in the opening paragraph hereof. "Debtor Relief Laws" means the Bankruptcy Code of the United States, and any successor statute of similar import, and all other applicable dissolution, liquidation, conservatorship, bankruptcy, moratorium, readjustment of debt, compromise, rearrangement, receivership, insolvency, fraudulent transfer or conveyance, reorganization or similar debtor relief laws from time to time in effect affecting the rights of creditors generally. "Election Notice" has the meaning specified in Section 2(a). "Exchange Act" means the Securities Exchange Act of 1934. "Form 10-K Report" has the meaning specified in Section 6(d). "Governmental Authority" means (i) any nation or government, (ii) any federal, state, county, province, city, town, municipality, local or other political subdivision thereof or thereto, (iii) any court, tribunal, department, commission, board, bureau, instrumentality, agency, council, arbitrator or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and (iv) any other governmental entity, agency or authority having or exercising jurisdiction over any relevant Person, item or matter. "Initial Warrants" has the meaning specified in the Preliminary Statements of this Agreement. "Laws" means all laws, statutes, rules, regulations, ordinances, orders, writs, injunctions or decrees and other pronouncements having the effect of law of any Governmental Authority. "Material Adverse Effect" means a material adverse effect on the business, properties, assets, financial condition or results of operations of the Company and the Subsidiaries, taken as a whole. "Other Purchasers" has the meaning specified in the Preliminary Statements of this Agreement. "Person" means any individual, corporation, partnership, limited liability company, firm, association, joint venture, Governmental Authority or other entity or enterprise. "Purchaser" has the meaning specified in the opening paragraph hereof. -3- 7 "Registration Rights Agreement" means the Registration Rights Agreement dated as of August 21, 1996, as amended, among the Company and the Persons named therein. "SEC" means the Securities and Exchange Commission. "Securities" means the Common Shares, the Warrants and the Warrant Shares. "Securities Act" means the Securities Act of 1933. "Stockholders Agreement" means the Sterling Chemicals Holdings, Inc. Stockholders Agreement dated effective as of August 21, 1996, as amended, among the Company and the stockholders of the Company parties thereto. "Subsequent Warrants" has the meaning specified in Section 3(f). "Subsidiary" means any subsidiary of the Company of which greater than 50% of the outstanding shares of capital stock having ordinary voting power for the election of directors is owned directly or indirectly by the Company. "Tag-Along Agreement" means the Tag-Along Agreement dated effective as of August 21, 1996, among the Company and the stockholders of the Company parties thereto. "Transaction Documents" means, collectively, this Agreement, the Registration Rights Agreement, the Voting Agreement, the Tag-Along Agreement, the Warrant Agreement and the Stockholders Agreement. "Voting Agreement" means an Amended and Restated Voting Agreement dated as of the date hereof among the Company and the Persons named therein. "Warrants" means the Initial Warrants and the Subsequent Warrants. "Warrant Agreement" has the meaning specified in the Preliminary Statements of this Agreement. "Warrant Shares" means the shares of Common Stock issuable to the Purchaser upon exercise of the Warrants. (b) In this Agreement, unless a clear contrary intention appears: (i) the words "hereof," "herein" and "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular provision of this Agreement; (ii) reference to any gender includes each other gender and the neuter; -4- 8 (iii) all terms defined in the singular shall have the same meanings in the plural and vice versa; (iv) reference to any Person includes such Person's heirs, executors, personal representatives, administrators, successors and assigns; provided, however, that nothing contained in this clause (iv) is intended to authorize any assignment not otherwise permitted by this Agreement; (v) reference to a Person in a particular capacity or capacities excludes such Person in any other capacity; (vi) reference to any contract or agreement means such contract or agreement as amended, supplemented or modified from time to time in accordance with the terms thereof; (vii) all references to Sections shall be deemed to be references to the Sections of this Agreement; (viii) all references to Exhibits and Schedules shall be deemed to be references to the Exhibits and Schedules attached hereto which are made a part hereof and incorporated herein by reference; (ix) the word "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; (x) with respect to the determination of any period of time, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding"; (xi) the captions and headings contained in this Agreement shall not be considered or given any effect in construing the provisions hereof if any question of intent should arise; (xii) reference to any Law means such Law as amended, modified, codified, reenacted, supplemented or superseded in whole or in part, and in effect from time to time; and (xiii) no provision of this Agreement shall be interpreted or construed against any party solely because that party or its legal representative drafted such provision. Section 2. Standby Commitment. (a) Upon the terms and subject to the satisfaction or waiver of the conditions set forth herein, the Purchaser agrees to purchase from the Company such number of shares of Common Stock (not to exceed 250,000 in the aggregate) as the Company may, in its sole discretion, specify at any time or from time to time, in each case at a price per share, payable in cash, of $6.00. If the Company desires to require the Purchaser to purchase shares of Common Stock as aforesaid, the Company must give the Purchaser not less than 15 days' prior written notice (an "Election Notice"). Each Election Notice shall (i) be given in -5- 9 accordance with Section 11, (ii) refer to this Agreement, (iii) specify the number of shares to be purchased, (iv) specify the applicable Closing Date (as defined below), which may not be later than the third anniversary of the date hereof, and (v) state that, in the good faith judgement of the Company, the sale of the Common Shares referred to in such Election Notice is necessary in order for the Company to maintain, reestablish or enhance its borrowing rights under its revolving credit facilities and/or to satisfy any obligation under the documentation governing its revolving credit facilities to raise additional equity capital. Notwithstanding anything to the contrary contained herein, in no event shall the Company be required to sell or issue any Common Shares unless the Company has given to the Purchaser an Election Notice with respect to such Common Shares pursuant to this paragraph (a) and then only the number of Common Shares specified in such Election Notice. The Company may not revoke any Election Notice given by it as aforesaid. (b) For purposes of this Agreement, "Closing Date" means, when used with reference to any purchase of Common Shares, the date on which such purchase is to be consummated; provided, however, that if such date is not a Business Day, then the Closing Date for such purchase shall be automatically extended to the next succeeding Business Day and, provided further, that each Closing Date shall be at least 30 days after the immediately preceding Closing Date, if any. Section 3. Closings. (a) The consummation of each purchase of Common Stock pursuant to this Agreement (a "Closing) shall take place on the applicable Closing Date at 10:00 a.m. (Houston time) unless a different time is specified in the applicable Election Notice. Each Closing shall be held at the corporate offices of the Company or at such other place as may be agreed upon by the Company and the Purchaser. (b) At each Closing, the Company shall deliver to the Purchaser (i) a duly executed certificate evidencing the Common Shares being purchased at such Closing and (ii) a duly executed certificate of the chief executive officer, the chief financial officer or the treasurer of the Company, dated the applicable Closing Date, stating that the representations and warranties of the Company contained in Section 6 are true and correct on and as of such Closing Date with the same force and effect as though made on and as of such Closing Date, except for any representations and warranties made as of a specified date, which shall be true and correct in all material respects as of such specified date, and stating that (A) no Bankruptcy Event has occurred and is continuing, (B) the Company is generally paying its debts as they become due, (C) the Company owns property having a value greater than the amount required to pay the probable liability on its debts and (D) the Company has no plans or intentions to initiate a Bankruptcy Event nor is it aware that any creditor of the Company plans or intends to initiate a Bankruptcy Event. (c) If the first Closing occurs before March 1, 1999, then the Company shall issue and deliver to the Purchaser at the first Closing, for no additional consideration, a certificate (in the form attached as Exhibit A to the Warrant Agreement) evidencing warrants to purchase that number of shares of Common Stock (rounded to the nearest whole number) equal to the number of Common Shares purchased by the Purchaser at the first Closing divided by 8.3333. -6- 10 (d) If the first Closing occurs before March 1, 1999, then the Company shall issue and deliver to the Purchaser at the second Closing, for no additional consideration, a certificate (in the form attached as Exhibit A to the Warrant Agreement) evidencing warrants to purchase 30,000 shares of Common Stock minus the number of Common Shares covered by the warrants issued to the Purchaser at the first Closing. (e) If the first Closing occurs after February 28, 1999, then the Company shall issue and deliver to the Purchaser at the first Closing, for no additional consideration, a certificate (in the form attached as Exhibit A to the Warrant Agreement) evidencing warrants to purchase 30,000 shares of Common Stock. (f) All warrants issued to the Purchaser pursuant to this Section 3 are collectively referred to herein as the "Subsequent Warrants". The Subsequent Warrants shall be subject to the terms and conditions set forth in the Warrant Agreement and the certificates evidencing the same. (g) At each Closing, the Purchaser shall deliver to the Company (i) an amount (in immediately available funds) equal to the number of Common Shares being purchased by the Purchaser times $6.00 and (ii) a duly executed certificate of the Purchaser, dated the applicable Closing Date, stating that the representations and warranties of the Purchaser contained in Section 7 are true and correct on and as of such Closing Date with the same force and effect as though made on and as of such Closing Date, except for any representations and warranties made as of a specified date, which shall be true and correct in all material respects as of such specified date. Section 4. Simultaneous Closings under Other Purchase Agreements. In no event shall the Purchaser be obligated to consummate any Closing unless simultaneously with such Closing (a) the Company shall sell to the Other Purchasers shares of Common Stock numbering, in the aggregate, not less than the amount (rounded to the nearest whole number) determined by multiplying the number of Common Shares being purchased by the Purchaser at such Closing times nine and (b) the Company shall have received from the Other Purchasers payments (in immediately available funds) of the purchase price for such shares, which shall not be less than $6.00 per share. Section 5 Use of Proceeds. The Company shall use the proceeds from the sale of Common Shares at each Closing and the proceeds from each sale of Common Stock to the Other Purchasers as contemplated by Section 4 solely for general corporate purposes. Section 6. Representations and Warranties of the Company. The Company represents and warrants to the Purchaser as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the corporate power to own its property and to carry on its business as now being conducted. -7- 11 (b) The Company has all requisite corporate power to enter into and perform its obligations under the Transaction Documents and the Warrants and to consummate the transactions contemplated thereby. The Company has taken all corporate actions necessary to authorize it to enter into and perform its obligations under the Transaction Documents and the Warrants and to consummate the transactions contemplated thereby. The Transaction Documents have been duly executed and delivered by the Company and constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and general equitable principles. Upon issuance in accordance with this Agreement and the Warrant Agreement, the Warrants will have been duly executed and delivered by the Company and will constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and general equitable principles. The Common Shares have been duly authorized and, when issued and paid for in accordance with this Agreement, will be validly issued, fully paid and nonassessable. The Warrant Shares have been duly authorized and reserved for issuance and, when issued and paid for upon proper exercise of the Warrants, will be validly issued, fully paid and nonassessable. (c) Neither the execution, delivery or performance of any of the Transaction Documents by the Company, nor the consummation by the Company of the transactions contemplated thereby, will violate, or result in a breach of the terms of, or constitute a default under, the charter or bylaws of the Company or any agreement, instrument or other arrangement or obligation to which the Company is subject, except for such violations, breaches or defaults that would not have a Material Adverse Effect. (d) The Company has delivered to the Purchaser true and complete copies of (i) the Stockholders Agreement, the Registration Rights Agreement, the Tag-Along Agreement, the Warrant Agreement and the Company's charter and bylaws, in each case as in effect on the date hereof, and (ii) the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 (the "Form 10-K Report"). As of the date hereof, the Form 10-K Report complies in all material respects with all applicable requirements of the Exchange Act and the applicable rules and regulations promulgated thereunder and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of the date hereof, the consolidated financial statements of the Company included in the Form 10-K Report comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements were prepared in accordance with applicable generally accepted accounting principles applied on a consistent basis during the periods involved. -8- 12 Section 7. Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to the Company as follows: (a) The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Purchaser has all requisite corporate power to execute and deliver the Transaction Documents to which the Purchaser is a party (the "Purchaser Transaction Documents"), to consummate the transactions contemplated thereby and to perform its obligations thereunder. The Purchaser has taken all corporate actions necessary to authorize it to enter into and perform its obligations under the Purchaser Transaction Documents and to consummate the transactions contemplated thereby. Each of the Purchaser Transaction Documents has been executed and delivered by the Purchaser and constitutes the legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting creditors' rights generally and general equitable principles. (b) Neither the execution, delivery and performance by the Purchaser of the Purchaser Transaction Documents, nor the consummation by the Purchaser of the transactions contemplated thereby, will violate, result in a breach of the terms of or constitute a default under, the charter or bylaws of the Purchaser or any material agreement, instrument or other arrangement or obligation to which the Purchaser is subject. (c) The Purchaser has read and understands this Agreement, including the Schedules and Exhibits hereto, and acknowledges and understands that execution and delivery of this Agreement by the Purchaser creates an irrevocable obligation of the Purchaser, subject to the terms and conditions contained in this Agreement, to purchase the Common Shares. (d) The Purchaser is an "accredited investor" within the meaning of Regulation D under the Securities Act. (e) The acquisition of the Securities by the Purchaser is for the Purchaser's own account, is for investment purposes and is not with a view to, or for offer or sale for the Company in connection with, the distribution of any Securities in violation of the Securities Act, the Exchange Act or any state securities laws (collectively, the "Acts"). The Purchaser is not participating and does not have a participation in any such distribution or the underwriting of any such distribution, and has no present intention of selling or otherwise disposing of any of the Securities in violation of the Acts. (f) The Purchaser is aware that neither the SEC nor any state securities commission has approved or disapproved the Securities or passed upon the accuracy or adequacy of this Agreement or any of the other Transaction Documents. (g) The Purchaser (i) recognizes that an investment in the Securities involves a high degree of risk, (ii) has such knowledge and experience in financial and business matters as to be -9- 13 capable of evaluating the risks and merits of this investment and protecting the Purchaser's interests in connection with this investment and (iii) is able to bear the economic risk of an investment in the Securities, including the risk of the total loss of such investment. (h) The Purchaser has received copies of the Transactions Documents, the Form 10-K Report and the Company's charter and bylaws. The Purchaser has received all the information the Purchaser considers necessary or appropriate for deciding whether to enter into this Agreement or to acquire the Securities, and the Purchaser has had an opportunity to ask questions of and receive answers from the Company regarding the Company and the terms and conditions of the Securities. (i) The Purchaser understands that the Securities have not been registered under the Securities Act on the basis that the issuance or sale of the Securities is exempt from the registration provisions thereof, and that the Company's reliance on the exemption is predicated upon the representations of the Purchaser herein. (j) The Purchaser has read and understands the terms and provisions of the Transaction Documents and understands that all Common Shares and all Warrant Shares issued to the Purchaser will automatically become subject to the terms and provisions of the Stockholders Agreement, the Tag-Along Agreement and the Voting Agreement. The Purchaser understands that other shares of Common Stock currently held or subsequently acquired by the Purchaser may also become subject to the terms and provisions of the Stockholders Agreement, the Tag-Along Agreement and the Voting Agreement pursuant to the terms thereof. Section 8. Compliance with Securities Laws and Agreements. The Purchaser acknowledges, understands and agrees that the following limitations and restrictions are applicable to the purchase, resale and distribution of the Securities: (a) The Purchaser must bear the economic risk of its investment in the Company for an indefinite period of time because the Securities have not been registered under the Acts and, therefore, may not be subsequently offered, sold, transferred, pledged or otherwise disposed of unless and until they have been registered under the Acts or exemptions from registration thereunder are available, and the Purchaser further understands that only the Company can take action to register the Securities. (b) The Purchaser has been advised that the Company does not expect that Rule 144 under the Securities Act will be available to the Purchaser with respect to any of the Securities unless the Purchaser is a non-affiliate of the Company (and has not been an affiliate of the Company for at least three months) and has held such Securities for at least one year from the later of the date that they were issued by the Company or the date that they were acquired from an affiliate of the Company. (c) The certificates representing the Warrants issued pursuant to this Agreement will bear the legend provided in the Warrant Agreement. The certificates representing the Securities -10- 14 issued pursuant to this Agreement (other than the Warrants) will bear a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW (COLLECTIVELY, THE "ACTS") AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS MADE PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACTS OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF. FURTHER, SUCH SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS AND UNTIL (1) SUCH SECURITIES HAVE BEEN REGISTERED UNDER THE ACTS OR (2) THE HOLDER OF SUCH SECURITIES PROVIDES THE COMPANY WITH (A) AN UNQUALIFIED WRITTEN OPINION OF LEGAL COUNSEL, WHICH COUNSEL AND OPINION (IN FORM AND SUBSTANCE) SHALL BE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT THE PROPOSED DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACTS OR (B) SUCH OTHER EVIDENCE AS MAY BE REASONABLY SATISFACTORY TO THE COMPANY THAT THE PROPOSED DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACTS. (d) In addition to the legends provided in paragraph (c) above, the certificates evidencing the Common Shares and the Warrant Shares will bear legends in substantially the following forms: BY THE TERMS OF THE STOCKHOLDERS AGREEMENT AND THE TAG-ALONG AGREEMENT, CERTAIN RESTRICTIONS HAVE BEEN PLACED UPON THE TRANSFERABILITY OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE. THE COMPANY WILL FURNISH A COPY OF THE STOCKHOLDERS AGREEMENT AND THE TAG-ALONG AGREEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. NO REGISTRATION OR TRANSFER OF ANY SECURITIES REPRESENTED BY THIS CERTIFICATE WILL BE MADE ON THE BOOKS OF THE COMPANY UNLESS AND UNTIL SUCH RESTRICTIONS HAVE BEEN COMPLIED WITH. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF AN AMENDED AND RESTATED VOTING AGREEMENT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY, AND ARE HELD AND -11- 15 MAY BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY IN ACCORDANCE WITH SUCH AGREEMENT. (e) Stop Transfer Instructions. The Company's stock transfer records will contain stop transfer instructions with respect to the Common Shares and the Warrant Shares to provide notice of the restrictions on the resale or distribution thereof imposed by the Acts and the Stockholders Agreement, the Tag-Along Agreement and the Voting Agreement. Section 9. Changes in Capital Structure. In the event of any change after the date hereof in the number of issued shares of Common Stock by reason of any stock dividend, split-up, recapitalization, merger, combination, conversion, exchange of shares or other change in the corporate or capital structure of the Company, then there shall be appropriate and equitable adjustments made in the number and kind of shares of stock or other securities of the Company thereafter issued to the Purchaser pursuant to this Agreement. Section 10. Specific Performance. The parties agree that the covenants and obligations contained in this Agreement relate to special, unique and extraordinary matters and that a violation of any of the terms hereof would cause irreparable injury in an amount which would be impossible to estimate or determine and for which any remedy at law would be inadequate. As such, the parties agree that if either party fails or refuses to fulfill any of such party's obligations under this Agreement or to make any payment or deliver any instrument required hereunder, then the other party shall have the remedy of specific performance, which remedy shall be cumulative and nonexclusive and shall be in addition to any other rights and remedies otherwise available under any other contract or at law or in equity and to which such party might be entitled. Section 11. Notices. Any and all notices, requests or other communications hereunder shall be given in writing and delivered by (a) regular, overnight or registered or certified mail (return receipt requested), with first class postage prepaid, (b) hand delivery, (c) facsimile or electronic mail transmission or (d) overnight courier service, to the parties at addresses or facsimile numbers set forth below their respective names on the signature pages hereof, or at such other address or number as shall be designated by either party in a notice to the other party given in accordance with this Section 11. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given, (i) in the case of a notice sent by regular mail, on the date actually received by the addressee, (ii) in the case of a notice sent by registered or certified mail, on the date receipted for (or refused) on the return receipt, (iii) in the case of a notice delivered by hand, when personally delivered, (iv) in the case of a notice sent by facsimile or electronic mail, upon transmission subject to telephone confirmation of receipt, and (v) in the case of a notice sent by overnight mail or overnight courier service, the date delivered at the designated address, in each case given or addressed as aforesaid. Section 12. Survival. All representations, warranties and covenants contained in this Agreement shall survive the execution and delivery of this Agreement, the Closings and the delivery of any Securities to the Purchaser. -12- 16 Section 13. Benefit and Burden. This Agreement shall inure to the benefit of, and shall be binding upon, the Company and the Purchaser and their respective successors and assigns. Section 14. No Third Party Rights. Nothing in this Agreement shall be deemed to create any right in any creditor or other Person not a party hereto, and this Agreement shall not be construed in any respect to be a contract in whole or in part for the benefit of any third party. Section 15. Amendments and Waiver. No amendment, modification, restatement or supplement of this Agreement shall be valid unless the same is in writing and signed by the parties. No waiver of any provision of this Agreement shall be valid unless in writing and signed by the party against whom that waiver is sought to be enforced. No failure or delay on the part of any of the parties in exercising any right, power or privilege hereunder, and no course of dealing between or among the parties, shall operate as a waiver of any right, power or privilege hereunder. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. No notice to or demand on either party in any case shall entitle such party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of any party to any other or further action in any circumstances without notice or demand. Section 16. Severability. Should any clause, sentence, paragraph, subsection or Section of this Agreement be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Agreement, and the parties agree that the part or parts of this Agreement so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom as if such stricken part or parts had never been included herein. Section 17. Expenses. The Company will pay, or reimburse the Purchaser for the payment of, all reasonable expenses incurred by the Purchaser prior to the date hereof in connection with this Agreement, including all legal and accounting fees and disbursements. Except as aforesaid, each of the parties shall pay its own expenses incident to this Agreement, including all legal and accounting fees and disbursements. Section 18. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED UNDER, AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO THE CONFLICT-OF-LAWS PROVISIONS THEREOF. Section 19. Entire Agreement. This Agreement sets forth all of the promises, agreements, conditions, understandings, warranties and representations of the parties with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings between the parties, whether written, oral or otherwise, with respect to the subject matter hereof. There are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, between the parties concerning the subject matter hereof except as set forth herein. -13- 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. STERLING CHEMICALS HOLDINGS, INC. By: ------------------------------------------- Printed Name: --------------------------------- Title: ---------------------------------------- Address: Sterling Chemicals Holdings, Inc. 1200 Smith, Suite 1900 Houston, Texas 77002 Attention: General Counsel Facsimile No.: (713) 654-9577 E-Mail: Delkins@sterlingchemicals.com PURCHASER: KOCH CAPITAL SERVICES, INC. By: ------------------------------------------- Printed Name: --------------------------------- Title: ---------------------------------------- Address: -------------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- Facsimile No.: -------------------------------- E-Mail: --------------------------------------- -14- 18 SCHEDULE I PURCHASERS
PURCHASER NUMBER OF SHARES PERCENTAGE ALLOCATION - --------- ---------------- --------------------- Gordon A. Cain........................................ 1,333,333 53.33% William A. McMinn..................................... 333,333 13.33% James Crane........................................... 250,000 10.00% Frank P. Diassi....................................... 166,667 6.67% Frank J. Hevrdejs..................................... 166,667 6.67% Koch Capital Services, Inc............................ 250,000 10.00% --------- ------ Total..................................... 2,500,000 100.00%
-15- EX-21.1 13 SUBSIDIARIES OF STERLING CHEMICALS HOLDINGS, INC. 1 Exhibit 21.1 Subsidiaries of STERLING CHEMICALS HOLDINGS, INC. As of September 30, 1998 Owns 100% of: Sterling Chemicals, Inc., a Delaware corporation Owns 100% of: Sterling Fibers, Inc., a Delaware corporation Sterling Chemicals Acquisitions, Inc., a Delaware corporation Owns 100% of: Sterling Pulp Chemicals Fuzhou, Ltd., an Ontario corporation Sterling (Sask) Holdings Ltd., an Ontario corporation Owns 100% of: Sterling Pulp Chemicals (Sask) Ltd., an Ontario corporation Owns 100% of 619220 Saskatchewan Ltd., a Saskatchewan corporation Sterling Chemicals International, Inc., a Delaware corporation Sterling Chemicals Energy, Inc., a Delaware corporation Sterling Chemicals Marketing, Inc., a Barbados corporation Sterling Canada, Inc., a Delaware corporation Owns 100% of: Sterling Pulp Chemicals US, Inc., a Delaware corporation Owns 100% of: Sterling Pulp Chemicals, Inc., a Georgia corporation Sterling NRO, Ltd., an Ontario corporation Sterling Pulp Chemicals, Ltd., an Ontario corporation EX-23.1 14 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-30917 of Sterling Chemicals Holdings, Inc. on Form S-3 and Registration Statement No. 333-52795 of Sterling Chemicals Holdings, Inc. on Form S-8 of our report dated December 4, 1998 (December 17, 1998 as to Notes 4, 11, and 12), appearing in this Annual Report on Form 10-K of Sterling Chemicals Holdings, Inc. for the year ended September 30, 1998. DELOITTE & TOUCHE LLP December 17, 1998 Houston, Texas EX-27.1 15 FDS FOR STERLING CHEMICALS HOLDINGS, INC.
5 0000795662 STERLING CHEMICALS HOLDINGS, INC. 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 11,168 0 116,098 (1,527) 73,225 219,675 747,637 297,322 765,956 127,765 873,616 18,249 0 123 (348,302) 765,956 822,590 822,590 732,411 732,411 57,389 0 104,455 (71,665) (25,546) (46,119) 0 0 0 (46,119) (3.99) (3.99)
EX-27.2 16 FDS FOR STERLING CHEMICALS, INC.
5 0001014669 Sterling Chemicals, Inc. 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 11,159 0 117,925 (1,527) 73,225 219,554 747,637 297,322 762,503 127,546 745,720 0 0 0 (220,445) 762,503 822,590 822,590 732,411 732,411 56,193 0 86,618 (52,632) (18,963) (33,669) 0 0 0 (33,669) 0 0
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