Exhibit 10.3

 
     EMPLOYMENT AGREEMENT dated as of May 10, 2004 (this “Agreement”), by and
between RESOLUTION PERFORMANCE PRODUCTS LLC, a Delaware corporation (the
“Company”) and DAVID S. GRAZIOSI (“Executive”).

     In order to induce Executive to accept employment with the Company, the
Company desires to provide Executive with compensation and other benefits on the
terms and conditions set forth in this Agreement. Executive is willing to enter
into such employment and perform services for the Company on the terms and
conditions set forth in this Agreement. Therefore, the Company and Executive
agree as follows:

1. Employment.

     Subject to the terms and conditions of this Agreement, the Company agrees
to employ Executive during the term hereof as Executive Vice President and Chief
Financial Officer of the Company. Executive hereby accepts employment as such
and agrees to devote his working time and efforts, to the best of his ability,
experience and talent, to the performance of services, duties and
responsibilities in connection therewith. As Executive Vice President and Chief
Financial Officer, Executive will perform those duties that are (a) customarily
performed by executive vice presidents and chief financial officers of companies
similar to the Company and/or (b) requested by the Chief Executive Officer or
the Board of Directors (the “Board”) of the Company. Consistent with Section 9
herein, Executive shall be entitled to join boards of directors of other
companies subject to a conflict of interest evaluation by the Company’s General
Counsel and approval of the Company’s Chief Executive Officer, which shall not
be unreasonably withheld. Furthermore, Executive shall have the opportunity to
respond to inquiries from a previous employer or others in the industry provided
that it shall not substantially interfere with the performance of his duties
hereunder.

2. Term of Employment.

     This Agreement and the term of employment shall commence and be effective
from and after the date hereof (the “Commencement Date”) and, subject to the
terms hereof, shall terminate on the third anniversary of the Commencement Date
(the “Termination Date”); provided, however, that on such anniversary date and
on each subsequent one year anniversary of such anniversary date, the
Termination Date shall automatically be extended for a period of one year,
unless either party shall have given written notice to the other party not less
than one hundred and twenty days prior to the Termination Date that the
Termination Date shall not be so extended.

3. Compensation and Benefits.

     (a) Base Salary. The Company shall pay Executive a base salary (“Base
Salary”) at the annual rate of $245,000. The Base Salary shall be payable in
accordance with the ordinary payroll practices of the Company and shall be
subject to increase as determined by the Board or its compensation committee
(the “Compensation Committee”).

 

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     (b) Annual Bonus. In addition to the Base Salary, Executive shall receive a
cash bonus (the “Bonus”) with respect to each fiscal year; provided that the
Executive is employed by the Company on the last day of such fiscal year without
giving effect to any pro rata allocation in fiscal year 2004. The Bonus shall be
based on the Company’s achievement of certain operating and/or financial goals
to be reasonably established by the Compensation Committee, with an annual
target bonus amount equal to 50% of Executive’s then current Base Salary.

     (c) Signing Bonus. Effective upon the execution of this Agreement by the
parties hereto, Executive shall receive a cash payment of $75,000, which shall
be due and payable by the Company no later than May 31, 2004.

     (d) Extension Bonus Plan. Executive shall participate in the Company’s
Executive Supplemental Bonus Plan (the “Extension Plan”). In connection
therewith, Executive shall receive the following payments (the “Extension
Payments”) within fifteen (15) days of each of the dates (the “Extension Dates”)
set forth below, provided that Executive remains employed by the Company as of
each such Extension Date.

          Extension Date

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  Payment Amount

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June 30, 2004
  $ 6,000  
September 30, 2004
  $ 6,000  
December 31, 2004
  $ 6,000  
March 31, 2005
  $ 6,000  
June 30, 2005
  $ 6,000  
September 30, 2005
  $ 6,000  
December 31, 2005
  $ 6,000  
March 31, 2006
  $ 78,000  

     All remaining unpaid Extension Payments under the Extension Plan shall
become immediately due and payable effective immediately prior to a Realization
Event (as such term is defined in Resolution Performance Products Inc.’s 2000
Stock Option Plan).

     (e) Benefits. During the term of employment hereunder, the Company shall
provide to Executive coverage under any standard employee benefit programs,
plans and practices, in accordance with the terms that the Company makes
generally available to its executive officers. Notwithstanding the foregoing,
the Company shall pay Executive the amount equivalent to a 6% Company match each
year until such time as the Company has a 401(k) match program that Executive
can participate in on an equivalent vested basis. The Company shall pay
Executive the above-described payment in monthly installments commencing on the
first payroll period following the Commencement Date and terminating on the date
when the Company implements a 401(k) match program that provides Executive with
an equivalent vested benefit. If Executive elects to receive any matching
contributions from the Company in connection with the Company’s 401(k) program,
then the above-described annual payment will be reduced by the amount of the
Company’s annual match. In addition, the Company shall provide Executive with
four weeks vacation per year.

 

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     4. Termination of Employment.

     (a) Termination Rights. The Company may terminate Executive’s employment at
any time, and Executive may terminate his employment at any time.

     (b) Definitions.

     (i) “Affiliate” of the Company shall mean a Person that directly, or
indirectly through one or more intermediaries, controls, or is controlled by, or
is under common control with, the Company. As used in this definition, the term
“control,” including the correlative terms “controlling,” “controlled by” and
“under common control with,” means possession, directly or indirectly, of the
power to direct or cause the direction of management or policies (whether
through ownership of securities or any partnership or other ownership interest,
by contract or otherwise) of a Person. The term “Affiliate” shall not include at
any time any portfolio companies of Apollo Management IV, L.P. or its
Affiliates.

     (ii) “Cause” shall mean termination by the Company of Executive’s
employment (a) based on a determination that Executive has engaged in conduct
constituting willful misconduct or gross negligence, or breach of a fiduciary
duty; (b) based on a determination that Executive has failed to substantially
perform the duties required by such Executive’s employment and such failure
shall not have been cured within a reasonable time after notice from the
Company; (c) because Executive has breached or violated any of the provisions of
the Company’s employee handbook or other policies in effect from time to time
that by their terms may result in termination of employment and which meet the
standard in (ii)(a) above; (d) because Executive has committed a felony, has
engaged in any act involving the misuse or misappropriation of money or other
property of the Company, has defrauded the Company, any Affiliate of the Company
or any customer of the Company, or because of habitual intoxication while
performing his job duties, or drug addiction; or (e) because Executive has
failed to take action consistent with or has taken actions inconsistent with a
directive of the Chief Executive Officer of the Company or the Board.

     (iii) “Disability” shall mean that Executive has been unable, for 180
consecutive days, or for periods aggregating 180 business days in any period of
twelve months, to perform Executive’s duties under this Agreement, as a result
of physical or mental impairment, illness or injury, as determined by a medical
doctor jointly selected by the Company and Executive. A termination of
Executive’s employment by either party for Disability shall be communicated to
the other party by written notice, and shall be effective on the 30th day after
receipt of such notice by the other party (the “Disability Effective Date”),
unless Executive returns to full-time performance of Executive’s duties before
the Disability Effective Date.

     (iii) “Good Reason” shall mean the occurrence of any of the following
events without Executive’s express prior written consent and which event shall
not have been cured within a reasonable period after notice from the Executive:
(A) the assignment to Executive by the Company of duties materially inconsistent
with Executive’s duties as set forth in Section 1 hereof, or any material
reduction by the Company of Executive’s

 

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duties, except in connection with the termination of Executive’s employment for
any other reason; (B) a reduction by the Company in Executive’s Base Salary or
Bonus (other than due to the failure to meet applicable performance objectives);
or (C) any material breach by the Company of any material provision of this
Agreement after a written notice of such breach shall have been delivered to the
Company and, if such breach can be cured, such breach shall not have been cured
prior to the tenth day after delivery of such notice.

     (iv) “Person” shall be construed broadly and shall include, without
limitation, an individual, a partnership, a corporation, an association, a joint
stock company, a limited liability company, a trust, a joint venture, an
unincorporated organization and a governmental entity or any department, agency
or political subdivision thereof.

     (v) “Termination Payments” shall mean earned but unpaid amounts as of the
date of any termination under applicable benefit plans or programs.

     (c) Termination other than for Cause or Termination for Good Reason; for
Death and Disability. If Executive’s employment is terminated by the Company
other than for Cause or Executive terminates his employment for Good Reason, or
if Employee dies or his employment is terminated by either party for Executive’s
Disability, in each case, prior to the Termination Date, Executive (or his
estate) shall be entitled to receive (i) no later than 30 days after the date of
termination, the Termination Payments; (ii) in lieu of any other cash
compensation provided for herein but not in substitution for compensation
already paid or earned, payable in accordance with the Company’s customary
payroll practices, for a period equal to 12 months following the date of
termination (such period, the “Termination Period”) an amount equal to the
Executive’s Base Salary at its then current annual rate; and (iii) the remaining
unpaid Extension Payments under the Extension Plan. During the Termination
Period, the Company shall continue to provide Executive with access to the
Company’s health benefit programs and plans.

     (d) Voluntary Termination by Executive; Discharge for other reasons. If
Executive’s employment is terminated by the Company for any reason other than a
termination without Cause or by Executive other than for Good Reason, in each
case prior to the Termination Date, Executive shall be entitled to receive,
within a reasonable time after the date of termination, the Termination Payments
and the remaining unpaid Extension Payments under the Extension Plan.

     (e) DEFRA.

     (i) Notwithstanding anything in this Agreement or any other agreement
between the Executive and the Company to the contrary, in the event that the
provisions of the Deficit Reduction Act of 1984 (“DEFRA”), and Section 280G of
the Internal Revenue Code of 1986, as amended (the “Code”) relating to “excess
parachute payments” (as defined in the Code) shall be applicable to any payment
or benefit received or to be received by Executive, then the total amount of
payments or benefits payable to Executive shall be reduced to the largest amount
such that the provisions of DEFRA and Section 280G of the Code relating to
“excess parachute payments” shall no longer be applicable. Should such a
reduction be required, the Executive shall determine, in the exercise of his
sole discretion, which payment or benefit to reduce or eliminate. Pending such
determination, the Company shall continue to make all other required payments to

 

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Executive at the time and in the manner provided herein and shall pay the
largest portion of any parachute payments such that the provisions of DEFRA
relating to “excess parachute payments” shall no longer be applicable.

     (ii) Due to the complexity in the application of Section 280(G) of the
Code, it is possible that payments made or benefits received hereunder should
not have been made under clause (e)(i) above (an “Overpayment”). If it is
determined by the Company’s outside auditors in their reasonable good faith
judgment or by any court of competent jurisdiction that an Overpayment has been
made resulting in an “Excess Parachute Payment” as defined in Section 280G(b)(1)
of the Code), then any such Overpayment shall be treated for all purposes as an
unsecured, long-term loan from the Company to the Executive, or the Executive’s
personal representative, successors or assigns, as the case may be, that is
payable, together with accrued interest from the date of the making of the
Overpayment at the rate of 8% per annum on the later to occur of the third
anniversary of the payment of such Overpayment, or 6 months following the date
upon which it is determined an Overpayment was made. Should it be determined
that such an Overpayment has been made, the Executive shall determine, in the
exercise of his sole discretion, which payments or benefits shall be deemed to
constitute the Overpayment.

5. Notices.

     All notices or communications hereunder shall be in writing, addressed, in
the case of the Executive, at the address set forth on the signature pages
hereto, and to the Company, as follows:

     

  Resolution Performance Products LLC

  1600 Smith Street

  Suite 2416

  Houston, Texas 77002

  Attention: Vice President — Human Resources

  Telecopy:(832) 366-2582

  Telephone: (832) 366-2429
 
   

  with a copy to:
 
   

  RPP Holdings LLC

  c/o Apollo Management, L.P.

  1301 Avenue of the Americas

  38th Floor

  New York, New York 10019

  Attn: Scott Kleinman

  Telecopy: (212) 515-3232

  Telephone: (212) 515-3200
 
   

  with a copy to:
 
   

 

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  O’Melveny & Myers LLP

  Times Square Tower

  7 Times Square

  New York, New York 10036

  Attention: Adam Weinstein, Esq.

  Telecopy: (212) 408-2420

  Telephone: (212) 408-2491

Any such notice or communication shall be sent certified or registered mail,
return receipt requested, postage prepaid, addressed as above (or to such other
address as such party may designate in a notice duly delivered as described
above), and the actual date of mailing shall constitute the time at which notice
was given.

6. Separability; Arbitration.

     If any provision of this Agreement shall be declared to be invalid or
unenforceable, in whole or in part, such invalidity or unenforceability shall
not affect the remaining provisions hereof, which shall remain in full-force and
effect. Any controversy or claim arising out of or relating to this Agreement or
the breach of this Agreement (other than Section 9 hereof) that cannot be
resolved by Executive on the one hand and the Company on the other, including
any dispute as to the calculation of Executive’s benefits or any payments
hereunder, shall be submitted to arbitration in New York, New York in accordance
with New York law and the procedures of the American Arbitration Association.
The determination of the arbitrators shall be conclusive and binding on the
Company and Executive, and judgment may be entered on the arbitrators’ award in
any court having jurisdiction.

7. Assignment.

     This contract shall be binding upon and inure to the benefit of the heirs
and representatives of Executive and the assigns and successors of the Company,
but neither this nor any rights hereunder shall be assignable or otherwise
subject to hypothecation by Executive except by will or by operation of the laws
of intestate succession.

8. Amendment.

     This Agreement may only be amended by written agreement of the parties
hereto.

9. Nondisclosure of Confidential Information; Non-Competition.

     (a) Executive shall not, without the prior written consent of the Company,
divulge, disclose or make accessible to any other person, firm, partnership,
corporation or other entity any Confidential Information pertaining to the
business of the Company, except (i) while employed by the Company, in the
business of and for the benefit of the Company, or (ii) when required to do so
by a court of competent jurisdiction, by any governmental agency having
supervisory authority over the business of the Company, or by any administrative
body or legislative body (including a committee thereof) with purported or
apparent jurisdiction to order Executive to divulge, disclose or make accessible
such information.

     (b) For purposes of this Section, “Confidential Information” shall mean
non-public

 

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information concerning the Company’s and its Affiliates’ financial data,
strategic business plans, product development (or other proprietary product
data), customer lists, marketing plans and other non-public, proprietary and
confidential information of the Company and its Affiliates that is not otherwise
available to the public.

     (c) For the period commencing on the date hereof and ending on (x) the last
day on which Executive receives any payment from the Company or any of its
Affiliates, with respect to a termination by the Company other than for Cause or
a termination by Executive for Good Reason, or (y) the one year anniversary of
the last day on which Executive receives any payment from the Company or any of
its Affiliates, with respect to all other terminations, without the prior
written consent of the Company, which shall not be unreasonably withheld, the
Executive shall not, directly or indirectly, (i) either as principal, manager,
agent, consultant, officer, director, stockholder, partner, member, investor,
lender or employee or in any other capacity, carry on, be engaged in or have any
financial interest in any business that is in material direct competition with
the business of the Company and/or its Affiliates, or (ii) solicit or hire any
employees of the Company and/or its Affiliates. For purposes hereof, a business
shall be deemed to be in material direct competition with the Company if it is
significantly involved in the rendering of any service purchased, sold, dealt in
or rendered by the Company and/or its Affiliates. As used in the preceding
sentence, the term “significantly” shall be deemed to refer to activities
generating gross annual sales of at least $25 million. Nothing in this Section
shall be construed so as to preclude Executive from investing in any publicly
held company provided Executive’s beneficial ownership of any class of such
company’s securities does not exceed 5% of the outstanding securities of such
class.

     (d) Executive and the Company agree that the foregoing covenant not to
compete is a reasonable covenant under the circumstances, and further agree that
if in the opinion of any court of competent jurisdiction such restraint is not
reasonable in any respect, such court shall have the right, power and authority
to excise or modify such provision or provisions of such covenant as to the
court shall appear not reasonable and to enforce the remainder of the covenant
as so amended. Executive agrees that any breach of the covenants contained in
this Section would irreparably injure the Company. Accordingly, the Company may,
in addition to pursuing any other remedies they may have in law or in equity,
obtain an injunction against Executive from any court having jurisdiction over
the matter, restraining any further violation of this Section by Executive.

10. Governing Law.

     This Agreement shall be construed, interpreted and governed in accordance
with the laws of the State of New York, without reference to rules relating to
conflict of laws.

11. Withholding.

     The Company shall be entitled to withhold from any payment hereunder or
under any other agreement between the Company and the Executive any amount
required by law to be withheld.

 

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12. Counterparts.

     This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original.

13. Entire Agreement.

     This Agreement reflects the entire agreement and understanding of the
parties hereto with respect to the subject matter hereof and replaces and
supercedes any prior employment agreements.

* * * * *

     IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.

              RESOLUTION PERFORMANCE PRODUCTS LLC
 
       

  By:   /s/ Marvin O. Schlanger

     

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      Name: Marvin O. Schlanger

      Title: Chief Executive Officer

     
/s/ David S. Grazioso
 

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Name: David S. Graziosi
     
Address:
 
12 Tracy Lane
 
Morris Plains, New Jersey 07950