-----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, Rg5vavIZ+dRzO54UW6YAx/AfyBA6N20k+5R3mZWUCEdg+gDNL8yXXPmLNsN+1Nrr tCC6eNJC3l5tlHI+lSkjdg== 0000950109-97-001544.txt : 19970226 0000950109-97-001544.hdr.sgml : 19970226 ACCESSION NUMBER: 0000950109-97-001544 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970225 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARCO CHEMICAL CO CENTRAL INDEX KEY: 0000819544 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 510104393 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09678 FILM NUMBER: 97542948 BUSINESS ADDRESS: STREET 1: 3801 WEST CHESTER PIKE CITY: NEWTOWN SQUARE STATE: PA ZIP: 19073 BUSINESS PHONE: 2153592000 10-K 1 ARCO CHEMICAL COMPANY FORM 10-K [LOGO OF ARCO CHEMICAL COMPANY APPEARS HERE] ARCO CHEMICAL COMPANY ANNUAL REPORT ON FORM 10-K 1996 1996 FORM 10-K ---------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 Commission file number 1-9678 ARCO CHEMICAL COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 51-0104393 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 3801 WEST CHESTER PIKE, NEWTOWN SQUARE, PENNSYLVANIA 19073-2387 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (610) 359-2000 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant on January 30, 1997, based on the closing price on the New York Stock Exchange composite tape on that date, was $797,904,448. Number of shares of Common Stock, $1.00 par value, outstanding at December 31, 1996: 96,759,317. DOCUMENTS INCORPORATED BY REFERENCE The registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1996 (incorporated by reference under Part III). TABLE OF CONTENTS PART I
PAGE ITEM ---- 1. and 2. Business and Properties...................................... 1 General Development of Business............................ 1 Industry Segment and Geographic Disclosure................. 1 Summary Description of Business and Products............... 1 Sales and Marketing........................................ 4 Joint Ventures and Other Arrangements...................... 4 Research and Development................................... 5 Raw Materials.............................................. 5 Competition................................................ 5 Properties and Production Facilities....................... 7 Patents, Trade Names, and Trademarks....................... 8 Environmental Matters...................................... 8 Human Resources............................................ 9 3. Legal Proceedings............................................ 9 4. Submission of Matters to a Vote of Security Holders.......... 10 --------------------------- Executive Officers of the Company............................ 11 PART II 5. Market for Registrant's Common Stock and Related Stockholder Matters..................................................... 13 6. Selected Financial Data...................................... 14 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 14 8. Financial Statements......................................... 20 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 43 PART III 10. Directors and Executive Officers of the Registrant........... 43 11. Executive Compensation....................................... 43 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 43 13. Certain Relationships and Related Transactions............... 43 PART IV 14. Exhibits and Reports on Form 8-K............................. 43
(i) PART I ITEMS 1. AND 2.BUSINESS AND PROPERTIES GENERAL DEVELOPMENT OF BUSINESS ARCO Chemical Company (the Company) is a Delaware corporation with principal executive offices at 3801 West Chester Pike, Newtown Square, Pennsylvania 19073-2387 (telephone no. 610-359-2000). The Company is the successor to certain portions of the ARCO Chemical Division of Atlantic Richfield Company (ARCO), a Delaware corporation. On June 9, 1987, ARCO transferred substantially all the assets and liabilities of the oxygenates and polystyrenics businesses of the then ARCO Chemical Division to the Company in exchange for 80,000,001 shares of common stock. On October 5, 1987, the Company completed an initial public offering of 19,550,000 shares of common stock. As of January 30, 1997, ARCO's 80,000,001 shares represented approximately 82.7 percent of the outstanding shares of common stock. See Item 13. Prior to October 5, 1987, the Company and ARCO entered into a number of agreements for the purpose of defining their ongoing relationship. These agreements were developed in connection with the establishment of the Company by ARCO, and, therefore, were not the result of arm's-length negotiations between independent parties. For additional information relating to certain continuing relationships between the Company and ARCO, including potential conflicts of interest, see Item 13 and Note 3 of Notes to Consolidated Financial Statements. On September 30, 1996, the Company sold its plastics business to NOVA Chemicals Inc. (NOVA). With the sale of the plastics business the Company no longer manufactures or sells styrene monomer derivatives, but the Company will continue to manufacture and market styrene monomer. See Note 21 of Notes to Consolidated Financial Statements. On December 4, 1996, the Company purchased substantially all of the assets of Olin Corporation's (Olin) toluene diisocyanate (TDI) and aliphatic diisocyanate (ADI) businesses. The purchase included Olin's TDI and ADI production facilities at Lake Charles, Louisiana, and certain related assets, including trademarks, patents and technology. This acquisition supplements the Company's entry into the isocyanates market in 1995, through a long-term, European-based TDI supply arrangement with Rhone-Poulenc. The Olin acquisition gives the Company a U.S.-based TDI manufacturing presence. Also, see Note 20 of Notes to Consolidated Financial Statements. INDUSTRY SEGMENT AND GEOGRAPHIC DISCLOSURE The Company operates in one industry segment. Reference is made to Note 4 of Notes to Consolidated Financial Statements for disclosure of financial information by geographic location. SUMMARY DESCRIPTION OF BUSINESS AND PRODUCTS The Company, including its subsidiaries, is a leading international manufacturer and marketer of intermediate chemicals and specialty products used in a broad range of consumer goods. The Company operates in a single industry segment and conducts business primarily in the Americas, Europe, and the Asia Pacific region. The Company's core product is propylene oxide (PO), which it produces through two distinct process technologies based on indirect oxidation (peroxidation) processes that yield co-products. One process yields tertiary butyl alcohol (TBA) as the co-product; the other process yields styrene monomer (SM) as the co-product. The two technologies are mutually exclusive such that either a dedicated PO/TBA plant or a dedicated PO/SM plant must be built. The Company also manufactures numerous derivatives of PO and TBA. Among these are polyols, a key derivative of PO, and methyl tertiary butyl ether (MTBE), a principal derivative of TBA. MTBE is used in oxygenated fuels and as an octane additive. In 1995, the Company began selling TDI obtained under long-term supply agreements with Rhone-Poulenc. With the 1996 acquisition of Olin's TDI production facilities, the Company also manufactures TDI. TDI and polyols are combined in the manufacture of polyurethanes. Following is a list of certain of the Company's principal products, the forms in which they are sold, and typical end uses.
PRODUCT FORM TYPICAL USES - ------- ---- ------------ Propylene oxide PO Polyether polyols (polyols), propylene (PO) glycols, ethers, and surfactants Polyols Combined with isocyanates, such as TDI, for polyurethane applications such as flexible foam for seat cushions, bedding and carpet underlay; and coatings, adhesives, sealants, and elastomers Propylene glycols (PG) Unsaturated polyester resins; food, cosmetic, and pharmaceutical applications; automotive coolants and aircraft deicers Propylene glycol ethers Coatings and paints, cleaning (PGE) and PGE acetates compounds, solvents, and inks Butanediol, Engineering resins, fibers, solvents, Tetrahydrofuran (THF) and resins, coatings and polyurethanes N-Methyl Pyrrolidone (NMP) Toluene diisocyanate TDI Combined with polyols to manufacture (TDI) polyurethanes Tertiary butyl Methyl tertiary butyl Gasoline additives to increase octane alcohol ether (MTBE) and reduce emissions (TBA) and ethyl tertiary butyl ether (ETBE) Gasoline-grade TBA (GTBA) Octane additive Styrene monomer SM Acrylonitrile-butadiene-styrene (ABS) (SM) resins, polystyrene, expandable polystyrene (EPS), rubber components, and polyester resins
Propylene Oxide and Derivatives Propylene oxide is a commodity chemical that the Company consumes directly or delivers to the merchant market through processing or sales agreements for further conversion by its customers into derivative products, including polyols for polyurethane applications, propylene glycols and PGEs, and various other chemical products. Sales and other operating revenues for PO and derivatives constituted 47 percent, 45 percent, and 48 percent, respectively, of the Company's total 1996, 1995, and 1994 sales and other operating revenues. In the aggregate, the Company consumed approximately 56 percent of its PO production in 1996 for the production of derivatives. See Item 7 for additional discussion. Based on published data, worldwide demand for PO was approximately 8.7 billion pounds in 1996. Approximately 90 percent of that volume was consumed in the manufacture of three derivative families of products: polyols, PG, and PGE. The largest of the PO derivative families is polyols, which are used in the manufacture of polyurethanes. Within the polyurethane industry, the largest market for polyols is in flexible foams, which are produced when polyols are reacted with isocyanates, such as TDI. Polyols and isocyanates are also used in coatings, adhesives, sealants and elastomers. Propylene glycols are principally used as intermediate chemicals to produce unsaturated polyester resins. Propylene glycols have low toxicity and are also used in certain food, cosmetic, and pharmaceutical applications and in automotive coolants and aircraft deicers. Propylene glycol ethers and acetates are low toxicity, high performance solvents. Past studies have indicated that 2 these materials generally have safer toxicological profiles than their ethylene oxide-based counterparts. Butanediol is an intermediate chemical having diverse applications in engineering resins, elastomers, and solvents. The Company produces butanediol from allyl alcohol, a PO derivative. Isocyanates In January 1995, the Company entered into long-term agreements under which Rhone-Poulenc supplies TDI, which the Company markets to customers. On December 4, 1996, the Company purchased substantially all of the assets of Olin's TDI and ADI businesses. The purchase includes Olin's TDI and ADI production facilities at Lake Charles, Louisiana, and certain related assets, including trademarks, patents and technology. Also, see Note 20 of Notes to Consolidated Financial Statements. TDI complements the Company's existing line of polyols products and strengthens its position as a chemical supplier to the polyurethanes market. See Item 7 for additional discussion. Tertiary Butyl Alcohol and Derivatives Tertiary butyl alcohol is the major co-product of one of the Company's two PO processes. The Company utilizes most of its TBA, combined with methanol, to make MTBE, a gasoline blending component that increases octane and reduces emissions. The Company also has the capability of producing ETBE, an alternative gasoline blending component. ETBE is manufactured from TBA and ethanol and has a lower vapor pressure than MTBE or ethanol. Worldwide demand for MTBE in 1996 was approximately 375 thousand barrels per day, based on published data. Worldwide MTBE demand has increased dramatically over the past seven years as a result of the U.S. Clean Air Act Amendments of 1990 (the Amendments), state and local regulations and the need for incremental octane in the U.S. and other countries. In the U.S., the Amendments set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. The Environmental Protection Agency recently proposed a reduction in the ozone standard in the U.S. which, if adopted, may create additional demand for oxygenates. However, other federal and local legislative initiatives, challenging the effectiveness of oxygenated fuels in reducing air pollution or responding to consumer concerns about the possible health effects of widespread use of oxygenated fuels, could adversely affect demand for MTBE. Sales and other operating revenues for TBA and derivatives constituted 29 percent, 27 percent, and 30 percent, respectively, of the Company's total 1996, 1995, and 1994 sales and other operating revenues. See Item 7 for additional discussion. Styrene Monomer Styrene is the major co-product of the second of the Company's two PO processes. Styrene is a commodity chemical produced and traded worldwide. Based on published data, worldwide demand in 1996 was approximately 38 billion pounds. The major markets include commodity and specialty polymer applications, such as polystyrene, ABS, EPS and polyester resins, as well as various rubber industry uses. Sales and other operating revenues for SM and derivatives constituted 15 percent, 20 percent, and 19 percent, respectively, of the Company's total 1996, 1995, and 1994 sales and other operating revenues. The Company delivers most of its styrene production to the U.S. merchant market and to selected export markets through sales or processing agreements. See Item 7 for additional discussion. The Company utilized about 12 percent of its styrene production in 1995 for the manufacture of derivatives. With the sale of the plastics business to NOVA on September 30, 1996, the Company no longer manufactures or sells styrene monomer derivatives. The Company has substantially replaced this volume by entering 3 into a long-term sales agreement to supply NOVA with approximately the same volume of SM that had been consumed by the plastics business before its sale. SALES AND MARKETING In 1996, most of the Company's sales and other operating revenues were derived from sales to, or processing agreements with, unrelated third parties. Over the past three years, no single unrelated third-party customer, or any related party customer, accounted for more than 10 percent of total sales and other operating revenues in any one year. The Company delivers products through sales agreements, processing agreements, and spot sales. The Company purchases limited amounts of MTBE and SM for resale to the extent that demand for these co-products exceeds the Company's production. Production levels of co-products are based upon the demand for PO and the market economics of the co-products. For several years, the Company has followed the practice of entering into multi-year PO processing or sales agreements in an effort to mitigate any adverse impact from competitive factors and economic business cycles on demand for the Company's PO. The Company has also entered into a number of multi-year SM sales and processing agreements and MTBE sales agreements. The SM processing agreements include long-term processing agreements providing for the delivery of fixed annual quantities of SM-see Joint Ventures and Other Arrangements below. On September 30, 1996, the Company sold its plastic business to NOVA. As part of the transaction, the Company entered into a long-term sales agreement to supply NOVA with styrene monomer. The Company entered into a number of multi-year, fixed-margin MTBE toll- based sales contracts covering a substantial portion of the Company's U.S.- based MTBE volume. Those contracts have had the effect of reducing the exposure of the MTBE business to market cycles. A significant number of those contracts have terminated, while the remainder will terminate in early 1997. The Company is in the process of negotiating new contracts. In view of current market conditions, however, it is anticipated that the pricing in the new contracts will provide margins that are less favorable than those provided in the former contracts. The Company's sales are made through its own marketing and sales personnel and through distributors and independent agents. The Company maintains sales offices or sales representation in the United States, Australia, Austria, Brazil, Canada, China, Finland, France, Germany, Hong Kong, Indonesia, Italy, Japan, Mexico, the Netherlands, New Zealand, Russia, Singapore, South Africa, Spain, Taiwan, Thailand, Turkey, and the United Kingdom. For information about certain data relating to foreign operations and export sales, see Note 4 of Notes to Consolidated Financial Statements. JOINT VENTURES AND OTHER ARRANGEMENTS In January 1995, the Company entered into long-term TDI supply agreements with Rhone-Poulenc. Since January 1, 1995, the Company has been entitled to the entire TDI output of Rhone-Poulenc's two plants in France, which have a combined annual capacity of approximately 264 million pounds. The Company markets this TDI principally in Europe and Asia. 4 The world-scale PO/SM plant at the Channelview, Texas complex that was completed in 1992 (PO/SM II) is owned by the Company together with third-party investors. The Company sold additional interests to the investors in 1994 and 1996. In addition, portions of the pending PO/SM II expansion--see Item 7 for additional discussion--are being funded through third-party investment. The Company retains a majority interest in the PO/SM II plant. A substantial portion of the current SM output of the PO/SM II plant is committed, and the increased SM output resulting from the expansion will be committed, under long-term processing agreements. As of December 31, 1996, 800 million pounds per year of the PO/SM II plant's existing SM capacity was committed under such agreements. The Company, through an affiliate, has a 50 percent equity interest in Nihon Oxirane Co., Ltd. (Nihon Oxirane), a joint venture with Sumitomo Chemical Co., Ltd. and Showa Denko K.K. Since 1976, Nihon Oxirane has operated a PO/SM plant in Chiba, Japan. RESEARCH AND DEVELOPMENT The Company has its principal research and development facility at Newtown Square, Pennsylvania, technical centers in Villers Saint Paul, France and Singapore, and a technical facility in South Charleston, West Virginia. The Company's research and development expenditures for 1996, 1995, and 1994 were $81 million, $79 million, and $76 million, respectively. RAW MATERIALS The principal hydrocarbon raw materials purchased by the Company are propylene, butanes, ethylene, benzene and methanol. The market prices of these raw materials historically have been related to the price of crude oil and its principal refinery derivatives and natural gas liquids. These materials are available in bulk quantities via pipeline or marine vessels. The Company's raw material requirements are purchased from numerous suppliers in the United States and Europe, with which the Company has established contractual relationships, and in the spot market. The Company receives a portion of its methanol requirements under a cost-based supply arrangement with a third party. See Item 13 and Note 3 of Notes to Consolidated Financial Statements. The Company is a large volume consumer of isobutane for chemical production. The Company has invested in facilities, or entered into processing agreements with unrelated third parties, to convert the widely available commodity normal butane to isobutane. The Company is also a large consumer of oxygen for its PO/TBA plants at Bayport, Texas; Rotterdam, the Netherlands; and Fos-sur-Mer, France. In order to assure adequate and reliable sources of supply at competitive prices and rates, the Company has entered into long-term agreements and other arrangements with suppliers of raw materials, products, industrial gas and other utilities. See Note 11 of Notes to Consolidated Financial Statements. COMPETITION Competition within the Company's segment of the chemical industry is significant and is affected by a variety of factors, including quality, product price, reliability of supply, technical support, customer service, and potential substitute materials. Capacity share figures for the Company and its competitors, disclosed below, are based on completed production facilities and include the full capacity of joint-venture facilities and certain long-term supply agreements. The Company's major worldwide PO competitor is Dow Chemical Company (Dow). Dow's operations are based on chlorohydrin technology, and Dow is integrated upstream from chlorine and 5 propylene and downstream into a variety of PO derivatives. Based on published data relating to the PO market, the Company believes that it has 38 percent and Dow has 31 percent of the total worldwide capacity for PO. No other producer is believed to have more than 4 percent of worldwide PO capacity. Dow is in the process of completing expansions of annual PO capacity at existing facilities, which, in total, are equivalent to the addition of a world-scale PO plant, and has announced plans for similar capacity expansions in the 1998-1999 time frame. In late 1994, Texaco Chemical Company completed and brought on stream a PO/MTBE plant in Texas. Huntsman Corporation recently announced that it is buying Texaco Chemical's PO/MTBE plant, including the right to license the underlying technology. Shell has announced the construction of a PO/SM plant in Singapore, which is scheduled for completion in 1997. In 1996, Shell and BASF AG announced plans for a joint venture to construct a PO/SM plant in Europe, using Shell technology, with a target completion date in the 1999 time frame. In addition, Repsol Quimica, S.A. (Quimica) announced plans to build a PO/SM plant in Tarragona, Spain, using technology for the production of PO and SM licensed from the Company under agreements entered into in conjunction with the dissolution in 1986 of a Spanish joint venture called Montoro. The Company believes that such action by Quimica would contravene the terms of the license. See Item 3, "Legal Proceedings". Several other companies have been attempting to develop or license commercial PO processes, and additional PO plants may be built by competitors. On April 12, 1996, the Company's Board of Directors gave final approval for the expansion of the PO/SM complex in Channelview, Texas, and the construction of a new world-scale PO/SM plant in Rotterdam, the Netherlands. The Channelview PO/SM expansion will add annual PO and SM capacity of 110 million and 248 million pounds, respectively, in early 1998. The new PO/SM plant is expected to be completed in the fourth quarter 1999, adding annual PO and SM capacity of 625 million and 1,400 million pounds, respectively, upon start up. The Company competes with many polyols producers worldwide, including Dow and Bayer AG. Based on published data, Dow is believed to have 26 percent of worldwide polyols capacity while the Company is believed to have 15 percent and Bayer AG is believed to have 10 percent. No other polyols producer is believed to have more than 7 percent of worldwide polyols capacity. The Company has long-term supply agreements for TDI, an isocyanate, which is reacted with polyols to produce flexible foams. With the acquisition of Olin's production facilities, the Company also manufactures TDI. TDI enables the Company to compete more effectively with other suppliers to the flexible foam market who offer both polyols and TDI to customers. In the majority of flexible foam applications, such as furniture, bedding and automotive seating, there is some competition for foams from substitute materials. The Company competes with many TDI producers worldwide including Bayer AG and BASF AG. Based on published data, Bayer AG is believed to have 25 percent of worldwide TDI capacity while the Company is believed to have 19 percent and BASF AG is believed to have 10 percent. No other TDI producer is believed to have more than 7 percent of worldwide TDI capacity. The Company competes with many MTBE producers worldwide; the most significant is Ibn Zahr (a joint venture 70 percent owned by Saudi Basic Industries Corp.). Based on published data, the Company believes that it has 12 percent of the total worldwide capacity for MTBE while Ibn Zahr is believed to have 11 percent. No other producer is believed to have more than 6 percent of worldwide MTBE capacity. MTBE also faces potential competition from substitute products such as ethanol. The Company competes with several SM producers worldwide; among them are Dow and Shell. Based on published data, Dow is believed to have 10 percent of the total worldwide SM capacity while Shell and the Company are believed to have 9 percent and 8 percent, respectively. No other producer is believed to have more than 6 percent of worldwide SM capacity. There can be no assurance that the Company will not face additional competition in the future. 6 PROPERTIES AND PRODUCTION FACILITIES The Company's corporate and executive headquarters and its principal research operations are located at Newtown Square, Pennsylvania. The Company leases the Newtown Square property from ARCO. See Item 13. The Company's European headquarters are located in leased facilities in Maidenhead, England, and the Company's Asia Pacific headquarters are located in leased facilities in Hong Kong. Depending on location and market needs, the Company's production facilities can receive primary raw materials by pipeline, rail car, truck, barge, or ship and can deliver finished products by pipeline, rail car, truck, barge, isotank, ship, or in drums. The Company charters ships, owns and charters barges, and leases isotanks and rail cars for the dedicated movement of interplant products, products to customers or terminals, or raw materials to plants, as necessary. The Company leases liquid and bulk storage and warehouse facilities at terminals in the Americas, in Europe, and in the Asia Pacific region. In the Rotterdam outer harbor area, the Company operates an on-site butane storage tank, propylene spheres, pipeline connections, and a jetty that accommodates deep-draft vessels. In the United States, the Company produces PO, TBA, PG, and PGE at the Bayport, Texas plants and PO, SM, MTBE, polyols, and butanediol at the Channelview, Texas plants. The Channelview plant has the capability to produce either MTBE or ETBE. Polyols are also produced at the Company's plants in South Charleston and Institute, West Virginia, which are situated on leased land. With the acquisition of Olin's TDI and ADI businesses, the Company now has isocyanate production facilities in Lake Charles, Louisiana. In Europe, the Company produces PO, TBA, MTBE, and PG at plants located in Rotterdam, the Netherlands and Fos-sur-Mer, France. In addition, polyols are produced at plants located in Rieme, Belgium and Fos-sur-Mer, France. The Rotterdam plant also produces PGE. In the Asia Pacific region, the Company's PO/SM plant, owned by Nihon Oxirane, is located in Chiba, Japan. Polyols plants are located in Kaohsiung, Taiwan and Anyer, West Java, Indonesia. The Anyer plant is owned by P.T. ARCO Chemical Indonesia, an Indonesian joint venture with P.T. Gema Supra Abadi in which the Company, through a subsidiary, has a majority interest. The following table shows the Company's worldwide production capacity (in millions of pounds per year, except where otherwise noted) for certain key products. The Company has committed 800 million pounds of the indicated domestic SM capacity through long-term processing arrangements. See Item 7 for additional discussion.
PRODUCT DOMESTIC FOREIGN TOTAL ------- -------- ------- ------ PO 2,335 1,360 3,695 Polyols 725 590 1,315 PG 565 345 910 PGE 120 155 275 Butanediol 75 -- 75 TDI 250 -- 250 MTBE--Bbls/day 30,000 28,500 58,500 SM 2,570 790 3,360
Capacities shown are the production capacities that the Company believes could be obtained, as of December 31, 1996, based upon plant design and subject to certain on-stream factors, product mix, and other variable factors. Capacities shown include the full capacity of joint-venture facilities. Plants can and have exceeded these capacities for extended periods of time. 7 The Company also contracts for the manufacture of certain of its products, from time to time, at third party facilities under supply and processing agreements. The Company has long-term supply agreements with Rhone-Poulenc for TDI. These agreements entitle the Company to all of the TDI output of the supplier's two plants in France with a combined capacity of approximately 264 million pounds per year. Under a processing agreement with a producer located in Corpus Christi, Texas, the Company has secured additional MTBE capacity totaling 12,000 bbls/day. The production facility at Corpus Christi, Texas has the capability for either MTBE or ETBE production. PATENTS, TRADE NAMES, AND TRADEMARKS ARCO has granted the Company a license to use "ARCO" in its name and the ARCO spark design as a logo. This license by ARCO has been granted on a royalty-free basis, which is consistent with ARCO's practice of licensing its name and design to its subsidiaries and affiliates. The Company owns and has licensed from ARCO various domestic and foreign trademarks. The Company possesses a body of patented and unpatented technology and trade secrets relating to its products, processes and the design and operation of its plants, all of which are valuable to the Company. The Company does not believe that the loss of any individual patent or trade secret would have a material adverse effect on its business. The basic patents relating to the Company's PO/SM and PO/TBA process technologies have expired. ENVIRONMENTAL MATTERS The Company (together with the industry in which it operates) is subject to federal, state, local, and foreign environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters, and the generation, handling, storage, transportation, treatment, and disposal of waste materials. The Company and the industry are also subject to other federal, state, local, and foreign environmental laws and regulations, including those that require the Company to remove or mitigate the effects of the disposal or release of certain chemical substances at various sites. It is impossible to predict precisely what effect these laws and regulations will have on the Company in the future. Compliance with environmental laws and regulations could result in significant capital expenditure requirements as well as other costs and liabilities. Management believes, based upon its past experience and best assessment of future events, that these environmental liabilities and costs will be determined and incurred over an extended period of time, allowing the Company to fund such liabilities and costs in the ordinary course of business. See Item 3, "Legal Proceedings" and Note 11 of Notes to Consolidated Financial Statements. It is the Company's policy to comply with all environmental laws and regulations. In some cases, compliance can be achieved only by capital expenditures. The Company's annual environmental-related capital expenditures for 1996, 1995, and 1994 were $24 million, $27 million, and $29 million, respectively. For the years 1997 and 1998, the Company anticipates annual environmental-related capital expenditures to range from $34 million to $37 million. These figures do not include any environmental-related capital expenditures associated with construction of new facilities. Environmental- related capital expenditures include the cost of projects to reduce and/or eliminate pollution and contamination in the future and the cost of modifications to the Company's manufacturing facilities necessary to comply with environmental laws and regulations. In 1996, 1995 and 1994, the Company's charges for estimated future expenses for remediation were $4 million, $12 million and $13 million, respectively, while actual expenditures for the past three years have averaged $6 million per year. The Company's operating expenses also include ongoing costs of controlling or disposing of pollutants. The Company estimates that its operating expenses related to these ongoing costs were approximately $33 million, $31 million and $36 million for 1996, 1995 and 1994, respectively. 8 HUMAN RESOURCES At December 31, 1996, the Company employed approximately 4,000 people (exclusive of employees of unconsolidated joint ventures). The Company added approximately 500 former Olin employees to the payroll as of January 1, 1997. The Company believes its relationships with its employees are satisfactory. Approximately 23 percent of the Company's domestic employees, including former Olin employees, are represented by labor unions. ITEM 3. LEGAL PROCEEDINGS ENVIRONMENTAL MATTERS AND RELATED LITIGATION In December 1993, the U.S. Environmental Protection Agency (the EPA) issued a Unilateral Administrative Order (the Order) to the Company and other potentially responsible parties requiring implementation of a remedial design/remedial action for the Turtle Bayou, Texas site under the Comprehensive Environmental Response, Compensation and Liability Act, as amended (Superfund). The Company has raised certain legal defenses against the enforcement of the Order. In January 1994, the EPA filed a complaint against the Company and certain other defendants, including ARCO, in the United States District Court for the Eastern District of Texas seeking recovery of costs of removal and/or remedial action allegedly incurred or to be incurred by the federal government. In 1994, the Company reached an agreement in principle with the EPA to settle the cost recovery lawsuit under which the Company and ARCO agreed (i) to pay $1.1 million in reimbursement of past costs incurred by the federal government and (ii) to perform remedial activities with respect to a portion of the site. In late 1996, the agreement in principle was modified to provide that the Company and ARCO will perform remedial activities with respect to certain additional portions of the site in lieu of reimbursing the federal government for past costs. Site remediation is expected to take at least five years. The parties have substantially agreed to the terms of a consent decree to embody the settlement. After the consent decree becomes effective, it is expected that the Order will be rescinded with respect to the Company. The Company is currently involved in administrative proceedings or lawsuits relating to eight other Superfund sites. Based on currently available information, the Company does not believe that the potential cost associated with these sites, individually or in the aggregate, will be significant. The Company may in the future be involved in additional assessments and clean-ups under environmental laws. The future costs in connection with such matters will be affected by such factors as the unknown magnitude of clean-up costs, the unknown timing and extent of the remedial actions that may be required, the determination of the Company's liability in proportion to other potentially responsible parties, and the extent, if any, to which such costs are recoverable from insurance. Certain organic waste material is contained in the soil and ground water at the site of the Company's former Monaca, Pennsylvania (Beaver Valley) plant. In 1994, the Company entered into a Consent Order and Agreement (the Consent Agreement) with the Pennsylvania Department of Environmental Protection (PADEP) pursuant to which the Company and PADEP agreed upon a work plan for testing and remedial process design with regard to the conditions at the Beaver Valley site. Under the terms of the Consent Agreement, the Company paid civil penalties totalling $363,000 in 1994. In addition, the Company is paying a penalty of $63,000 each year until the commencement of active remediation at the Beaver Valley site, after which the amount of such annual penalty shall be reduced based on the extent of remediation commenced at the site. The Company sold the Beaver Valley plant assets to NOVA Chemicals Inc. (NOVA) as of September 30, 1996, but currently retains ownership of the Beaver Valley land, substantial portions of which are being leased to NOVA. NOVA will assume ownership of such portions of the Beaver Valley land after the occurrence of certain defined events. The Company has retained responsibility for the work plan and for certain additional remediation of the Beaver Valley land that may be required by PADEP pursuant to the Pennsylvania Land Recycling and Environmental Remediation Standards Act. The Company has an agreement with 9 Beazer East, Inc. (Beazer), the successor to Koppers Inc. (the previous owner of the Beaver Valley plant), whereby Beazer agreed to pay for approximately 50 percent of the cost of the remediation. The Company and Beazer have reached an agreement with the U.S. government pursuant to which the government will pay 28.5 percent of the costs incurred by the Company and Beazer for remediation of substantial portions of the Beaver Valley site. In addition to the matters reported herein, from time to time the Company and its subsidiaries become aware of compliance matters relating to, or receive notices from federal, state or local governmental entities of alleged violations of, environmental, health and/or safety laws and regulations pertaining to, among other things, the disposal or discharge of chemical substances (including hazardous wastes). In some instances, these matters may become the subject of administrative proceedings or lawsuits and may involve monetary sanctions of $100,000 or more (exclusive of interest and costs). See Items 1 and 2, "Business and Properties--Environmental Matters" and Note 11 of Notes to Consolidated Financial Statements. OTHER LITIGATION On October 15, 1996, the Company commenced an arbitration proceeding in the International Chamber of Commerce Court of Arbitration in Paris, France against Repsol, S.A. (Repsol), Repsol Quimica, S.A. (Quimica) and Repsol Petroleo, S.A. (Petroleo). The dispute concerns technology for the production of PO and SM licensed to Quimica by the Company under agreements entered into in conjunction with the dissolution in 1986 of a Spanish joint venture called Montoro. The Company seeks in the arbitration to enforce the Company's rights under the 1986 agreements and to protect the licensed technology. Subsequently, pursuant to an agreement among the parties, Repsol was permitted to withdraw as a party to the arbitration. On October 15, 1996, the Company also formally notified the European Commission of the 1986 agreements, because Quimica and its affiliates take the position that those agreements are not enforceable under European law. Quimica and Petroleo concurrently filed a complaint with the European Commission in which they seek to have the 1986 agreements declared to be contrary to Articles 85 and 86 of the Treaty of Rome and therefore unenforceable. Quimica and Petroleo also filed a complaint with the Spanish Bureau for the Protection of Competition seeking relief under Spanish competition law. The Company believes that these complaints are not well founded and that the 1986 agreements are valid and enforceable. In addition, the Company and its subsidiaries are involved in a number of lawsuits, all of which have arisen in the ordinary course of the Company's business. The Company is unable to predict the outcome of the foregoing matters, but does not believe that the ultimate resolution of such matters will have a material adverse effect on the consolidated financial statements of the Company. ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1996. 10 EXECUTIVE OFFICERS OF THE COMPANY Set forth below are the executive officers of the Company as of January 30, 1997.
NAME, AGE, AND PRESENT BUSINESS EXPERIENCE DURING PAST POSITION WITH THE COMPANY FIVE YEARS AND PERIOD SERVED AS OFFICER(A) ------------------------- ------------------------------------------ Alan R. Hirsig, 57 Mr. Hirsig was elected President and Chief Executive Officer President, Chief on January 1, 1991. He was elected an officer of the Company Executive Officer, and on June 22, 1987 and a Director of the Company on November Director 14, 1989. Previously, Mr. Hirsig was President of the Company's European operations from July 1984 to December 1990 and a Senior Vice President of the Company from July 1988 to December 1990. Morris Gelb, 50 Mr. Gelb was elected an officer of the Company on June 22, Vice President, 1987. He assumed his current position in September 1991. Pre- Environmental, viously, he was Vice President, Research and Engineering from Engineering and September 1986 to September 1991. Manufacturing Programs Michael G. Griffith, 55 Mr. Griffith was elected an officer of the Company on May 9, Vice President, Research 1990. He assumed his current position on that date. Prior to and Development joining the Company, he was Vice President, Technology of Ow- ens-Corning Fiberglas Corp. (building products and reinforce- ments) from January 1989 to May 1990 and Vice President, Re- search and Development of Owens-Corning Fiberglas Corp. from 1983 to January 1989. Robert J. Millstone, 53 Mr. Millstone was elected Vice President and General Counsel Vice President, General of the Company, effective January 1, 1995. Previously, he was Counsel, and Secretary Associate General Counsel from January 1989 to December 1994. He has been Secretary of the Company since October 1990. Marvin O. Schlanger, 48 Mr. Schlanger was elected an officer of the Company on Septem- Executive Vice ber 1, 1987 and a Director of the Company on November 14, President, Chief 1989. He assumed his current position in November 1994. Pre- Operating Officer, and viously, he was Senior Vice President of the Company and Director President of ARCO Chemical Americas Company from August 1992 to November 1994, Senior Vice President and Chief Financial Officer from October 1989 to August 1992 and Vice President, Worldwide Business Management from September 1988 to Septem- ber 1989. John A. Shaw, 48 Mr. Shaw was elected an officer of the Company on May 13, Vice President and 1993. He assumed his current position in January 1995. Previ- Controller ously, he was Vice President and Treasurer of ARCO Chemical Company from July 1993 to January 1995 and Vice President, Planning and Control of the Company's European operations from July 1987 to July 1993. Walter J. Tusinski, 49 Mr. Tusinski was elected an officer and a Director of the Com- Senior Vice President, pany on September 1, 1992. He assumed his current position on Chief Financial Officer, that date. Previously, he served as Vice President, New Busi- and Director ness Ventures of ARCO International Oil and Gas Company from September 1990 to August 1992 and Vice President, Planning and Control of ARCO Products Company from October 1986 to Au- gust 1990.
11
NAME, AGE, AND PRESENT BUSINESS EXPERIENCE DURING PAST POSITION WITH THE COMPANY FIVE YEARS AND PERIOD SERVED AS OFFICER(A) ------------------------- ------------------------------------------ Francis W. Welsh, 53 Mr. Welsh was elected an officer of the Company on June 22, Vice President, Human 1987. He has held his current position since August 1983. Resources Previously, he was Manager of Compensation and Manager of Personnel Resources and Development, Corporate Employee Rela- tions of ARCO from September 1980 to May 1983.
- -------- (a) The By-Laws of the Company provide that each officer shall hold office until his successor is elected or appointed and qualified, or until his death or resignation, or his removal by the Board of Directors. 12 PART II ITEM 5.MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The common stock is listed on the New York Stock Exchange. The reported high and low sales prices of the common stock on the New York Stock Exchange (New York Stock Exchange Composite Tape) from January 1, 1995 through January 30, 1997, inclusive, were:
PERIOD HIGH LOW ------ ---- --- 1995 First Quarter.............................................. 45 41 3/8 Second Quarter............................................. 47 7/8 44 Third Quarter.............................................. 50 1/8 45 1/2 Fourth Quarter............................................. 50 1/2 47 5/8 1996 First Quarter.............................................. 52 7/8 48 1/2 Second Quarter............................................. 54 50 1/2 Third Quarter.............................................. 52 1/2 47 1/8 Fourth Quarter............................................. 50 3/4 47 1/2 1997 First Quarter (through January 30)......................... 47 3/4 47 1/2
On January 30, 1997, the closing price of the common stock was $47 5/8. As of December 31, 1996, the number of holders of record of common stock of the Company was 2,014. The Company has paid quarterly cash dividends as follows:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- 1995............................ $0.625 $0.625 $0.700 $0.700 1996............................ $0.700 $0.700 $0.700 $0.700 1997............................ $0.700*
- -------- * On January 23, 1997, a dividend of $0.70 per share was declared on the common stock, payable on March 7, 1997 to stockholders of record on February 14, 1997. The current quarterly dividend rate for the common stock is $0.70 per share. The declaration and payment of future dividends and the amount thereof will be dependent on the Company's results of operations, financial condition, cash requirements, and future prospects as well as on other factors deemed relevant by the Board of Directors. It is the current intention of the Company to declare and pay quarterly cash dividends on its common stock. 13 ITEM 6.SELECTED FINANCIAL DATA The following table sets forth selected financial information for the Company:
YEAR ENDED DECEMBER 31, -------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA) Sales and other operating reve- nues............................. $3,955 $4,282 $3,423 $3,192 $3,100 Costs and other operating ex- penses........................... 3,067 3,102 2,586 2,453 2,343 Income before changes in account- ing principles................... 348 508 269 214 197 Net income(1)..................... 348 508 269 214 195 Total assets...................... 4,394 4,135 3,737 3,502 3,599 Long-term debt, including current portion.......................... 869 912 913 905 1,102 Dividends per common share........ 2.80 2.65 2.50 2.50 2.50 Earnings per share before changes in accounting principles......... 3.60 5.28 2.80 2.23 2.05 Earnings per share(1)............. 3.60 5.28 2.80 2.23 2.03
- -------- (1) Net income in 1992 includes a charge of $2 million, or $.02 per share, for the net cumulative effect of changes in accounting principles, and a $56 million charge, or $.58 per share, related to the divestiture of a joint venture in Korea. ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in connection with the information contained in the Consolidated Financial Statements and the Notes thereto. OVERVIEW The Company manufactures and markets intermediate chemicals and specialty products, operating in a single industry segment. It conducts business primarily in the Americas, Europe, and the Asia Pacific region. Each of the Company's two principal manufacturing processes yields its key product, propylene oxide (PO), and one of two co-products, styrene monomer (SM) or tertiary butyl alcohol (TBA). The Company also manufactures numerous derivatives of PO and TBA. Among these are polyols, a key derivative of PO, and methyl tertiary butyl ether (MTBE), a principal derivative of TBA. MTBE is used in oxygenated fuels and as an octane additive. On December 4, 1996, the Company purchased substantially all of the assets of Olin Corporation's (Olin) toluene diisocyanate (TDI) and aliphatic diisocyanate (ADI) businesses. The purchase included Olin's TDI and ADI production facilities at Lake Charles, Louisiana, and certain related assets, including trademarks, patents and technology. TDI and polyols are combined in the manufacture of polyurethanes. On September 30, 1996, the Company sold its plastics business to NOVA Chemicals Inc. (NOVA). As a result of the sale of the plastics business, the Company no longer manufactures or sells SM derivatives, but will continue to manufacture and market SM. Net income for 1996 was $348 million compared with $508 million in 1995 and $269 million in 1994. Net income in 1996 decreased versus 1995 primarily due to significantly lower SM margins and, to a lesser extent, lower PO and derivatives volumes and lower MTBE margins. Net income for 1995 increased over 1994 primarily due to improved margins for PO and derivatives and a significant improvement in SM margins. 14 RESULTS OF OPERATIONS Product Volumes Sales and other operating revenues include the sales and processing volumes of PO, TBA, SM and their derivatives as set forth below for the years indicated. As a result of the sale of the plastics business on September 30, 1996, the Company no longer manufactures or sells SM derivatives, but will continue to manufacture and market SM.
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 1994 ------- ------- ------- (MILLIONS) PO and derivatives (pounds)....................... 3,351 3,476 3,699 Co-products: SM and derivatives (pounds)..................... 2,647 2,579 2,496 TBA and derivatives (gallons)................... 1,107 1,140 1,004
The reported SM volumes include quantities processed for PO/SM II equity partners (SM equity volumes) under long-term processing arrangements. The SM equity volumes were 748 million, 609 million and 577 million pounds in 1996, 1995 and 1994, respectively. Revenues Revenues decreased eight percent to $3,955 million in 1996 from $4,282 million in 1995 primarily reflecting lower SM prices and, to a lesser extent, lower volumes for PO and derivatives. SM sales prices decreased significantly versus the 1995 period as increased industry capacity depressed SM market prices. For example, based on domestic market quotations, average 1996 SM contract and spot prices decreased more than 30 percent and 40 percent, respectively, versus 1995. SM capacity increases are expected to continue to impact SM prices and margins in the near term. PO and derivatives volumes in 1996 decreased four percent compared to 1995 due to increased availability of PO supplies in 1996 and slower growth in demand. PO industry capacity increased in 1996, following the addition of a new competitive facility in 1994, which operated at reduced rates in 1995, and a significant competitor's debottleneck in 1995. Conversely, the Company estimates that worldwide market demand for PO, in 1996 and 1995, slowed to less than half of its historical five percent long-term annual rate of growth. SM and derivatives volumes increased three percent, primarily due to increased SM equity volumes, as noted above. Revenues increased 25 percent to $4,282 million in 1995 from $3,423 million in 1994 primarily due to higher sales prices. While sales prices were generally higher for all products, average SM sales prices increased significantly versus the 1994 period as a result of higher worldwide demand during the early part of 1995. Volume benefits from higher domestic MTBE volumes and first-time sales of TDI were substantially offset by lower volumes for PO and derivatives. Domestic MTBE volumes increased versus 1994 primarily due to increased demand, which resulted from implementation of the reformulated gasoline phase of the Clean Air Act in 1995. PO and derivatives volumes in 1995 decreased six percent compared to 1994 primarily due to the addition of a new competitive facility in the U.S. in late 1994, as well as lower Asia Pacific sales, which were affected by a slowdown in China markets. 15 Gross Profit Gross profit decreased 25 percent to $888 million in 1996 from $1,180 million in 1995. The gross profit decrease was primarily attributable to lower SM margins and, to a lesser extent, lower PO and derivatives volumes and lower MTBE margins. These were partly offset by higher PO and derivatives margins. Overall gross profit was 22.5 percent of sales in 1996 compared to 27.6 percent in 1995. SM margins were significantly lower versus 1995 as prices decreased substantially more than raw material costs. MTBE margins primarily decreased due to increases in feedstock and other costs as MTBE prices were relatively flat year to year. Gross profit increased 41 percent to $1,180 million in 1995 from $837 million in 1994, reflecting the 25 percent increase in revenues as well as higher margins. Overall gross profit was 27.6 percent of sales in 1995 compared to 24.5 percent in 1994 as higher sales prices more than offset net increases in raw materials costs. The margin improvements were seen in PO and derivatives, especially in the fourth quarter, and in SM margins during the first half of the year. Average SM margins improved significantly in 1995 as evidenced by industry raw material margins, which doubled, on average, compared to 1994. SM prices and margins increased substantially during the first half of 1995, but declined over the second half as worldwide demand declined. Raw material cost comparisons, 1995 versus 1994, were mixed, with substantial increases in average propylene costs, more moderate increases in average butane and ethylene costs and a decrease in average benzene and methanol costs. The Company entered into a number of multi-year, fixed-margin MTBE toll- based sales contracts covering a substantial portion of the Company's U.S.- based MTBE volume. Those contracts have had the effect of reducing the exposure of the MTBE business to market cycles. A significant number of those contracts have terminated, while the remainder will terminate in early 1997. The Company is in the process of negotiating new contracts. In view of current market conditions, however, it is anticipated that the pricing in the new contracts will provide margins that are less favorable than those provided in the former contracts. Other In 1994, management adopted a corporate restructuring program, resulting in a pretax charge of $30 million, primarily for costs associated with personnel reductions. This item was reported as restructuring costs in 1994. Other income (expense), net, was $33 million in 1996, $22 million in 1995 and $26 million in 1994. The increase in 1996 primarily reflects benefits from insurance proceeds and higher interest income, partly offset by lower equity earnings from the Company's PO/SM joint venture in Japan. The 1995 period included higher equity earnings from the Japanese joint venture, while 1994 included an $18 million pretax benefit from an insurance settlement related to the 1990 Channelview plant incident. Income Taxes The Company's effective income tax rate was 28.5 percent in 1996, 32.8 percent in 1995, and 35.3 percent in 1994. The decrease in the 1996 rate versus 1995 is due to the utilization of capital loss carryforwards, utilization of foreign tax credits pursuant to the tax sharing agreement with ARCO, and lower state income taxes in 1996. The decrease in 1995 versus 1994 reflected benefits from higher export income and increased utilization of foreign tax credits due to higher foreign earnings. 16 FINANCIAL CONDITION Liquidity and Capital Resources As of December 31, 1996, the Company had $70 million in cash and cash equivalents and short-term investments compared with $260 million at December 31, 1995. The Consolidated Statement of Cash Flows for the year ended December 31, 1996 shows that net cash flows provided by operating activities were $562 million, whereas net cash flows used by investment and financing activities were $589 million and $133 million, respectively. On December 4, 1996, the Company purchased substantially all of the assets of Olin's TDI and ADI businesses for approximately $571 million. The purchase included Olin's TDI and ADI production facilities at Lake Charles, Louisiana, working capital of approximately $94 million and certain related assets, including trademarks, patents and technology. The Company financed the acquisition through a combination of cash on hand and short-term borrowing. Investment activities in 1996 included expenditures for plant and equipment, excluding the Olin acquisition, of $244 million. A significant portion of the 1996 capital program was devoted to environmental, health and safety projects as well as PO derivative capacity expansions at existing facilities. Minority interest includes equity contributions designated for specific capital projects. At December 31, 1996, the unexpended amounts were classified as long-term other assets in the balance sheet. The Company's 1997 capital budget for plant and equipment is $453 million. On October 4, 1996, the Company announced the start of engineering on a 250 million pound-per-year butanediol (BDO) plant to be built in Rotterdam, the Netherlands, by the year 2001, and plans to expand existing BDO capacity in Channelview, Texas, from 75 million to 120 million pounds per year in late 1997. On September 30, 1996, the Company sold its plastics business to NOVA. The sale proceeds were approximately $160 million. As part of the transaction, the Company entered into a long-term sales agreement to supply NOVA with approximately the same amount of SM as had been consumed by the plastics business. The sale of the plastics business did not have a material effect on the Company's consolidated financial statements. In connection with the sale of the plastics business, the Company implemented a stock repurchase program for up to 320,000 shares of the Company's common stock held in certain employee benefit plans by former employees associated with the plastics business. Through December 31, 1996, the Company repurchased 72,445 shares. On April 12, 1996, the Board of Directors gave final approval for the expansion of the PO/SM complex in Channelview, Texas, and the construction of a new world-scale PO/SM plant in Rotterdam, the Netherlands. The Channelview PO/SM expansion will add annual PO and SM capacity of 110 million and 248 million pounds, respectively, in early 1998. The new PO/SM plant is expected to be completed in the fourth quarter 1999, adding annual PO and SM capacity of 625 million and 1,400 million pounds, respectively, upon start up. The Company plans to finance portions of the Channelview PO/SM expansion and the new Rotterdam PO/SM plant through limited partners who will have a minority equity interest in the completed facilities. The Company also plans to commit substantial portions of the increased SM capacity from these projects, as well as additional SM capacity at existing PO/SM facilities, under long-term processing arrangements. The Company paid dividends totalling $271 million in 1996, including a $.70 per share dividend, totalling $68 million, during the quarter ended December 31, 1996. On January 23, 1997, the Board of Directors declared a dividend of $.70 per share on the Company's common stock, payable March 7, 1997. The Company maintains a credit agreement under which it can borrow amounts of up to $300 million. At December 31, 1996, the Company had no outstanding borrowings against the credit agreement, which is used to back up the Company's commercial paper borrowing. 17 It is expected that future cash requirements for capital expenditures, dividends and debt repayments will be met by cash generated from operating activities and additional borrowing. Effects of Inflation Based on the age of the Company's fixed assets, it is estimated that the replacement cost of those assets is greater than the historical cost reflected in the Company's financial statements. Accordingly, the Company's depreciation and amortization expense for the three years ended December 31, 1996, would be greater if the expense were stated on a current cost basis. Risk Management The Company uses derivative financial instruments to reduce certain types of financial risk. Use of derivatives is limited to simple, non-leveraged instruments placed with major financial institutions whose creditworthiness is monitored. Company policy provides restrictions on concentrating credit risk in any one institution. Hedging strategies and transactions are reviewed and approved by management before being implemented. Monthly market valuations and quarterly sensitivity analyses are performed to monitor the effectiveness of the Company's risk management program. The Company enters into the following activities using derivative financial instruments: (1) foreign currency forward contracts, option contracts and swap contracts to reduce the risk of foreign currency fluctuations on future cash flows, and, to a lesser extent, (2) interest rate swaps to minimize the impact of fluctuating interest rates on the Company's outstanding floating rate debt. Feedstock Costs See "Raw Materials" included in Items 1 and 2. Environmental The Company is subject to loss contingencies pursuant to federal, state, local, and foreign environmental laws and regulations. These contingencies include possible obligations to remove or mitigate the effects on the environment of the past disposal or release of certain chemical substances at various sites (remediation costs). The Company continues to evaluate the amount of these remediation costs and periodically adjusts its reserve for remediation costs and its estimate of additional environmental loss contingencies based on progress made in determining the magnitude, method and timing of the remedial actions that may be required by government authorities and an evaluation of the Company's potential liability in relation to the liability and financial resources of any other potentially responsible parties. Reflected in costs and other operating expenses for 1996 is a $4 million pretax charge for estimated future remediation costs compared with $12 million in 1995 and $13 million in 1994. These charges do not reflect any potential benefit from insurance proceeds. At December 31, 1996, the Company's environmental reserve totaled $53 million, which reflected the Company's latest assessment of potential future remediation costs associated with existing sites. A significant portion of the reserve is related to the Beaver Valley plant site, located in Monaca, Pennsylvania. The reserve gives recognition to a work plan, between the Company and the Pennsylvania Department of Environmental Protection (PADEP), for testing, risk assessment, remedial process design and remediation of conditions at the Beaver Valley plant. The reserve also reflects an agreement between the Company and another responsible party whereby that party has agreed to pay for approximately 50 percent of the costs associated with the Beaver Valley plant work plan. The Company sold the Beaver Valley plant assets to NOVA as of September 30, 1996, see Note 21 of Notes to Consolidated FInancial Statements, but currently retains ownership of the land at the Beaver Valley plant site, substantial portions of which are being leased to NOVA. The Company has retained 18 responsibility for certain remediation of the land at the Beaver Valley plant site under the work plan and for certain additional remediation that may be required by PADEP pursuant to the Pennsylvania Land Recycling and Environmental Remediation Standards Act. The remainder of the reserve is related to four other plant sites and one federal Superfund site for amounts ranging from $2 million to $16 million per site. The Company is involved in administrative proceedings or lawsuits relating to eight other Superfund sites. However, the Company estimates, based on currently available information, that potential loss contingencies associated with these sites, individually and in the aggregate, are not significant. Substantially all amounts reserved are expected to be paid out over the next five to ten years. The Company relies upon remedial investigation/feasibility studies (RI/FS) at each site as a basis for estimating remediation costs at the site. The Company has completed RI/FS or preliminary assessments at most of its sites. However, selection of the remediation method and the cleanup standard to be applied are, in most cases, subject to approval by the appropriate government authority. Accordingly, the Company may have possible loss contingencies in excess of the amounts reserved to the extent that the scope of remediation required, the final remediation method selected and the cleanup standard applied vary from the assumptions used in estimating the reserve. The Company estimates that the upper range of these possible loss contingencies should not exceed the amount accrued by more than $65 million. The extent of loss related to environmental matters ultimately depends upon a number of factors, including technological developments, changes in environmental laws, the number and ability to pay of other parties involved at a particular site and the Company's potential involvement in additional environmental assessments and cleanups. Based upon currently known facts, management believes that any remediation costs the Company may incur in excess of the amounts reserved or disclosed above would not have a material adverse impact on the Company's consolidated financial statements. The Company and the other principal responsible party (PRP) at the Beaver Valley site have reached an agreement with the U.S. government whereby the government will pay 28.5 percent of the costs incurred by the Company and the PRP for remediation of substantial portions of the Beaver Valley site. The Company has neither recorded an asset nor reduced any liability as of December 31, 1996 as a result of this agreement. 19 ITEM 8.FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ARCO CHEMICAL COMPANY PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants...................................... 21 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995, and 1994........................................................ 22 Consolidated Balance Sheets as of December 31, 1996 and 1995........... 23 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995, and 1994.................................................. 24 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995, and 1994..................................... 25 Notes to Consolidated Financial Statements............................. 26
20 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of ARCO Chemical Company We have audited the consolidated financial statements of ARCO Chemical Company and Subsidiaries listed in the index on page 20 of this Form 10-K. 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 ARCO Chemical Company and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania February 12, 1997 21 ARCO CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
1996 1995 1994 ------ ------ ------ Sales and other operating revenues: Unrelated parties.................................... $3,775 $4,085 $3,267 Related parties...................................... 180 197 156 ------ ------ ------ Total revenues....................................... 3,955 4,282 3,423 Costs and other operating expenses (includes costs of $132 in 1996, $134 in 1995, and $85 in 1994, of related parties sales)................................ 3,067 3,102 2,586 ------ ------ ------ Gross profit......................................... 888 1,180 837 Selling, general and administrative expenses........... 267 278 256 Research and development............................... 81 79 76 Restructuring costs.................................... -- -- 30 ------ ------ ------ Operating income..................................... 540 823 475 Interest expense....................................... (86) (89) (85) Other income (expense), net............................ 33 22 26 ------ ------ ------ Income before income taxes........................... 487 756 416 Provision for income taxes............................. 139 248 147 ------ ------ ------ Net income........................................... $ 348 $ 508 $ 269 ====== ====== ====== Earnings per common share.............................. $ 3.60 $ 5.28 $ 2.80 ====== ====== ======
See accompanying notes. 22 ARCO CHEMICAL COMPANY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (MILLIONS OF DOLLARS) ASSETS
1996 1995 ------ ------ Current assets: Cash and cash equivalents.................................... $ 70 $ 235 Short-term investments....................................... -- 25 Accounts receivable.......................................... 623 630 Accounts receivable--related parties......................... 6 1 Inventories.................................................. 536 472 Prepaid expenses and other current assets.................... 37 19 ------ ------ Total current assets......................................... 1,272 1,382 Investments and long-term receivables.......................... 71 90 Property, plant and equipment, net............................. 2,622 2,293 Deferred charges and other assets (net of accumulated amortiza- tion of $312 in 1996 and $285 in 1995)........................ 429 370 ------ ------ Total assets................................................. $4,394 $4,135 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable................................................ $ 150 $ -- Long-term debt due within one year........................... 25 25 Accounts payable............................................. 330 228 Accounts payable--related parties............................ 19 25 Taxes payable................................................ 19 94 Other accrued liabilities.................................... 229 217 ------ ------ Total current liabilities.................................... 772 589 ------ ------ Long-term debt................................................. 844 887 Other liabilities and deferred credits......................... 171 158 Deferred income taxes.......................................... 408 409 Minority interest.............................................. 185 123 Stockholders' equity: Common stock, $1 par value; authorized 250,000,000 shares; 99,550,001 issued; outstanding 96,759,317 (1996), 96,488,880 (1995)...................................................... 100 100 Additional paid-in capital................................... 875 869 Retained earnings............................................ 1,062 985 Foreign currency translation................................. 64 110 Treasury stock, at cost (shares: 2,790,684, 1996; 3,061,121, 1995)....................................................... (87) (95) ------ ------ Total stockholders' equity................................... 2,014 1,969 ------ ------ Total liabilities and stockholders' equity................... $4,394 $4,135 ====== ======
See accompanying notes. 23 ARCO CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (MILLIONS OF DOLLARS)
1996 1995 1994 ----- ----- ----- Cash flows from operating activities Net income.............................................. $ 348 $ 508 $ 269 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......................... 222 233 235 Deferred income taxes................................. 50 15 27 Restructuring costs................................... -- -- 30 Provision for environmental liabilities............... 4 12 13 Equity in net loss (income) of affiliate.............. 1 (14) (2) Dividends received from affiliate..................... 12 17 -- Changes in working capital accounts................... (37) (76) 36 Other................................................. (38) (18) (43) ----- ----- ----- Net cash provided by operating activities............... 562 677 565 ----- ----- ----- Cash flows from investment activities Purchase of business.................................... (568) -- -- Capital expenditures.................................... (244) (195) (186) Proceeds from asset sales............................... 179 6 22 Increase in deferred charges............................ (10) (82) (9) Net proceeds from (purchases of) short-term investments. 25 (25) -- Other................................................... 29 (5) (3) ----- ----- ----- Net cash used in investment activities.................. (589) (301) (176) ----- ----- ----- Cash flows from financing activities Dividends paid.......................................... (271) (255) (240) Net proceeds from (repayment of) notes payable ......... 149 (24) (33) Repayment of long-term debt............................. (24) (23) (18) Other................................................... 13 17 3 ----- ----- ----- Net cash used in financing activities................... (133) (285) (288) ----- ----- ----- Effect of exchange rate changes on cash................... (5) -- 1 ----- ----- ----- Net (decrease) increase in cash and cash equivalents...... (165) 91 102 Cash and cash equivalents at beginning of year............ 235 144 42 ----- ----- ----- Cash and cash equivalents at end of year.................. $ 70 $ 235 $ 144 ===== ===== =====
See accompanying notes. 24 ARCO CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
ADDITIONAL FOREIGN COMMON STOCK PAID-IN RETAINED CURRENCY ISSUED TREASURY CAPITAL EARNINGS TRANSLATION ------ -------- ---------- -------- ----------- Balance December 31, 1993 (99,550,001 shares issued; 3,551,300 treasury shares).... $100 $(110) $864 $ 703 $ 19 Net income................... -- -- -- 269 -- Cash dividends ($2.50 per share)...................... -- -- -- (240) -- Foreign currency translation. -- -- -- -- 51 Reissuance of 86,500 treasury shares upon exercise of stock options............... -- 3 -- -- -- ---- ----- ---- ------ ---- Balance December 31, 1994 (99,550,001 shares issued; 3,464,800 treasury shares).... 100 (107) 864 732 70 Net income................... -- -- -- 508 -- Cash dividends ($2.65 per share)...................... -- -- -- (255) -- Foreign currency translation. -- -- -- -- 40 Reissuance of 403,679 trea- sury shares in connection with purchases by employee benefit plan and upon exercise of stock options... -- 12 5 -- -- ---- ----- ---- ------ ---- Balance December 31, 1995 (99,550,001 shares issued; 3,061,121 treasury shares).... 100 (95) 869 985 110 Net income................... -- -- -- 348 -- Cash dividends ($2.80 per share)...................... -- -- -- (271) -- Foreign currency translation. -- -- -- -- (46) Reissuance of 342,882 trea- sury shares in connection with purchases by employee benefit plan and upon exer- cise of stock options....... -- 11 6 -- -- Repurchase of 72,445 shares from former employees....... -- (3) -- -- -- ---- ----- ---- ------ ---- Balance December 31, 1996 (99,550,001 shares issued; 2,790,684 treasury shares).... $100 $ (87) $875 $1,062 $ 64 ==== ===== ==== ====== ====
See accompanying notes. 25 ARCO CHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1.FORMATION OF THE COMPANY On June 9, 1987, Atlantic Richfield Company (ARCO) transferred substantially all the assets and liabilities of the oxygenates and polystyrenics businesses of the then ARCO Chemical Division to ARCO Chemical Company (the Company) in exchange for 80,000,001 shares of common stock. On October 5, 1987, the Company completed an initial public offering of 19,550,000 shares of common stock. ARCO's 80,000,001 shares represented approximately 82.7 percent of the outstanding shares of common stock at December 31, 1996. 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation--The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries and partnerships. Investments in affiliates (20 percent to 50 percent owned) are accounted for under the equity method. All significant intercompany transactions have been eliminated in consolidation. Certain amounts in 1995 and 1994 have been reclassified for comparative purposes. Use of 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, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. See Note 11. Cash Equivalents; Short-Term Investments--Cash equivalents consist of highly liquid investments, such as time deposits, certificates of deposit and marketable securities other than equity securities, maturing within three months from the date of purchase. Short-term investments consist of similar investments maturing in more than three months from the date of purchase. Cash equivalents and short-term investments are carried at cost, which approximates market. Property, Plant and Equipment--Property, plant and equipment are depreciated on a straight-line method over their estimated useful lives. Upon disposition, residual cost less salvage is included in current income. Maintenance and repairs are expensed and betterments are capitalized. Deferred Charges--Deferred charges are carried at cost and consist primarily of the value assigned to acquired technology, capacity reservation fees and other long-term processing rights and costs. These assets are being amortized on a straight-line method over their estimated useful lives or the term of the related agreement, if shorter. Environmental Expenditures--Environmental expenditures that relate to current operations are expensed or capitalized, depending upon their future economic benefit. Expenditures that result from the remediation of an existing condition caused by past operations are expensed. Liabilities are recognized for remedial activities when remediation is probable and the costs can be reasonably estimated. Income Taxes--The Company's results of operations are included in the consolidated federal income tax return, and certain consolidated, combined, or unitary state returns of ARCO. The Company's income tax expense in the consolidated financial statements is computed on a modified stand-alone basis pursuant to a tax sharing agreement, with any resulting liability or refund settled with ARCO. The agreement, as modified effective January 1, 1995, permits the Company to reduce its federal income tax liability through the use of certain tax attributes that produce a benefit to the ARCO affiliated group, but would not otherwise benefit the Company on a stand-alone basis. Income tax expense also reflects the Company's liability under separate company returns filed with certain states. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Long-Lived Asset Impairment--Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The provisions of SFAS No. 121 require the Company to review its long- lived assets for impairment on an exception basis whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through future cash flows. If it is determined that an impairment loss has occurred based on expected future cash flows, then the loss is recognized in the income statement and certain disclosures regarding the impairment are made in the financial statements. The adoption of the provisions of SFAS No. 121 did not have an effect on the Company's 1995 consolidated financial statements. Stock-Based Compensation--Employee stock options are accounted for under the intrinsic-value-based method prescribed by Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees". See Note 14. 3.RELATED PARTY TRANSACTIONS AND COST ALLOCATIONS Effective July 1, 1987, the Company and ARCO (including ARCO subsidiaries) entered into a series of agreements that included, among other things, purchase, exchange and processing agreements, product sales agreements, operational services agreements, and an administrative services agreement. Certain of these agreements are between the Company and Lyondell Petrochemical Company (Lyondell). Currently, ARCO's interest in Lyondell is 49.9 percent. In 1994, ARCO issued Exchangeable Notes due 1997, which, at ARCO's option, can be exchanged at maturity into Lyondell common stock or cash of equal value. If ARCO elects to deliver shares of Lyondell common stock at maturity, ARCO's equity interest in Lyondell will be substantially reduced or eliminated. Lyondell is treated by the Company as a related party. The purchase, exchange, and processing agreements are principally for methanol, benzene, ethylene, propylene, and MTBE. Other purchases from ARCO and Lyondell principally include normal butane, isobutane, isobutylene, nonenes and tetramers, natural gas and certain butanediol feedstocks. Product sales include sales by the Company to ARCO and Lyondell of MTBE and propane. The Company has entered into long-term sales agreements with ARCO providing for delivery of fixed quantities of MTBE. The operational services agreements are for various plant services performed by ARCO and Lyondell. The administrative services agreement provides that beginning October 1, 1987, ARCO provides the Company with certain leased office space, insurance and other financial, internal audit, legal, aviation and administrative services, and the Company provides ARCO with various technical and legal services. These agreements have various durations, ranging from monthly renewals to a term extending to 2017. An analysis of the aggregate transactions for the years ended December 31, 1996, 1995, and 1994 is as follows:
1996 1995 1994 ---- ---- ---- (MILLIONS OF DOLLARS) Purchases..................................................... $274 $344 $332 Product sales................................................. 180 197 156 Processing fees and operational services...................... 10 11 16 Administrative services: For ARCO.................................................... 1 1 1 By ARCO..................................................... 30 32 34
27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3.RELATED PARTY TRANSACTIONS AND COST ALLOCATIONS--(CONTINUED) Outstanding balances under these agreements at December 31, 1996 and 1995, are included in "Accounts receivable--related parties" and "Accounts payable-- related parties." 4. GEOGRAPHIC INFORMATION The Company is an international manufacturer of intermediate chemicals and specialty chemical products which it principally markets to other industrial concerns. The Company operates in one industry segment. The geographic distribution of the Company's markets and assets is indicated by the table below.
1996 1995 1994 ---- ---- ---- (MILLIONS OF DOLLARS) Total revenues (by destination) United States.................................... $ 2,112 $ 2,181 $ 1,911 Europe........................................... 1,058 1,178 868 Other foreign.................................... 785 923 644 ------- ------- ------- Total.......................................... $ 3,955 $ 4,282 $ 3,423 ======= ======= ======= Total revenues (by origin) United States.................................... $ 2,363 $ 2,505 $2,213 Europe........................................... 1,236 1,465 909 Other foreign.................................... 356 312 301 ------- ------- ------- Total.......................................... $ 3,955 $ 4,282 $3,423 ======= ======= ======= Pretax earnings United States.................................... $ 480 $ 748 $ 494 Europe........................................... 96 76 3 Other foreign.................................... (3) 21 4 Interest expense................................. (86) (89) (85) ------- ------- ------- Total.......................................... $ 487 $ 756 $ 416 ======= ======= ======= Total assets United States.................................... $ 2,985 $ 2,610 $2,462 Europe........................................... 1,393 1,530 1,298 Other foreign.................................... 289 315 283 Eliminations..................................... (273) (320) (306) ------- ------- ------- Total.......................................... $ 4,394 $ 4,135 $3,737 ======= ======= ======= United States export sales Asia Pacific..................................... $ 189 $ 294 $ 206 Canada and Latin America......................... 127 115 114 Europe and other foreign......................... 5 11 9 ------- ------- ------- Total.......................................... $ 321 $ 420 $ 329 ======= ======= =======
28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. GEOGRAPHIC INFORMATION--(CONTINUED) Intercompany sales are made at prices approximating current market values. The amounts of intercompany sales that are eliminated from total revenues are as follows:
1996 1995 1994 ------- ------- ------- (MILLIONS OF DOLLARS) United States........................................ $ 280 $373 $ 218 Europe............................................... 117 32 34 Other foreign........................................ 1 1 1 ------- ------- ------- Total.............................................. $ 398 $406 $ 253 ======= ======= =======
Included in pretax earnings are royalty charges made to foreign operations for the use of Company technology. Eliminations principally include intercompany receivables. 5.INVENTORIES Inventories are stated at the lower of cost or market. In 1996, approximately 94 percent of inventories, excluding materials and supplies, were determined by the last-in, first-out (LIFO) method. Materials and supplies and other non-LIFO inventories are valued using either the first-in, first-out (FIFO) or the average cost methods. Inventories at December 31, 1996 and 1995, comprised the following categories:
1996 1995 ---------- ---------- (MILLIONS OF DOLLARS) Finished goods......................................... $ 392 $338 Work-in-process........................................ 38 38 Raw materials.......................................... 62 51 Materials and supplies................................. 44 45 ---------- ---------- Total................................................ $ 536 $472 ---------- ---------- ========== ==========
If the FIFO inventory valuation method had been used exclusively, inventories would have been higher than the book value of such inventories by approximately $17 million and $9 million at December 31, 1996 and 1995, respectively. 6.PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, at cost, and related accumulated depreciation at December 31, 1996 and 1995, were as follows:
1996 1995 ------ ------ (MILLIONS OF DOLLARS) Land.......................................................... $ 23 $ 18 Buildings and equipment....................................... 3,941 3,670 Construction in progress...................................... 188 124 ------ ------ 4,152 3,812 Less: Accumulated depreciation................................ 1,530 1,519 ------ ------ Total....................................................... $2,622 $2,293 ====== ======
Depreciation expense for the years ended December 31, 1996, 1995 and 1994 was $184 million, $192 million, and $193 million, respectively. Expenses for maintenance and repairs, including costs associated with plant maintenance turnarounds, for the years ended December 31, 1996, 1995, and 1994 were $113 million, $97 million, and $105 million, respectively. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7.BANK CREDIT FACILITIES In April 1996, the Company executed an amendment of the existing credit agreement extending the term to 2001. The existing credit agreement, as amended, allows the Company to borrow a total amount of up to $300 million and has a restrictive financial covenant which requires that the Company maintain a minimum net worth, as defined, of $1 billion. At December 31, 1996, the Company had no outstanding borrowings against the credit agreement. Notes payable at December 31, 1996 consisted primarily of short-term bank borrowings and commercial paper issued to a variety of financial investors and institutions at various interest rates and maturities of up to 270 days. The weighted average effective interest rate for these borrowings at December 31, 1996 was 5.6 percent. As a condition of the sale of commercial paper, the Company is required to maintain a back-up credit facility at least equal to the amount of the outstanding commercial paper. The Company uses the credit agreement for this purpose. 8.OTHER ACCRUED LIABILITIES Other accrued liabilities at December 31, 1996 and 1995, were as follows:
1996 1995 ---- ---- (MILLIONS OF DOLLARS) Payroll and benefits............................................... $ 81 $ 79 Contractual obligations............................................ 30 26 Interest........................................................... 18 20 Restructuring costs................................................ -- 6 Other.............................................................. 100 86 ---- ---- Total............................................................ $229 $217 ==== ====
9.TAXES The components of the provision for income taxes for the years ended December 31, 1996, 1995, and 1994 were as follows:
1996 1995 1994 ------- ------- ------- (MILLIONS OF DOLLARS) Federal: Current.......................................... $ 73 $ 202 $123 Deferred......................................... 17 6 21 ------- ------- ------- Total.......................................... 90 208 144 ------- ------- ------- Foreign: Current.......................................... 15 21 (6) Deferred......................................... 34 9 12 ------- ------- ------- Total.......................................... 49 30 6 ------- ------- ------- State: Current.......................................... 1 10 3 Deferred......................................... (1) -- (6) ------- ------- ------- Total.......................................... -- 10 (3) ------- ------- ------- $ 139 $248 $147 ======= ======= =======
30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9.TAXES--(CONTINUED) Deferred tax liabilities and assets are comprised of the following at December 31, 1996 and 1995:
1996 1995 ------- -------- (MILLIONS OF DOLLARS) Deferred tax liabilities: Depreciation and amortization............... $457 $435 Other....................................... 30 47 ---- ---- Gross deferred tax liabilities............. 487 482 ---- ---- Deferred tax assets: Loss carryforwards.......................... 162 167 Tax basis in excess of book................. 10 31 Provisions for benefit plans and estimated expenses................................... 76 74 ---- ---- Gross deferred tax assets.................. 248 272 ---- ---- Deferred tax asset valuation allowance..... 140 138 ---- ---- Net deferred tax liability. $379 $348 ==== ====
During 1996, the valuation allowance was increased for certain foreign tax loss carryforwards and reduced with respect to federal capital loss carryforwards. The valuation allowance was $101 million at December 31, 1994. A reconciliation of the federal statutory rate to the effective tax rate for the years ended December 31, 1996, 1995, and 1994 is as follows:
PERCENT OF PRETAX INCOME ---------------------------- 1996 1995 1994 -------- -------- -------- Federal statutory rate........................ 35.0 35.0 35.0 Increase (reduction) in taxes resulting from: State income taxes (net of federal ef- fect).................................... -- 0.9 (0.5) Utilization of capital loss carryforward.. (3.0) -- -- Foreign tax credits pursuant to tax shar- ing agreement............................ (1.6) -- -- Other..................................... (1.9) (3.1) 0.8 -------- -------- -------- Effective tax rate............................ 28.5 32.8 35.3 ======== ======== ========
At December 31, 1996, the Company had federal capital loss carryforwards of $36 million, foreign tax loss carryforwards of $383 million, and state tax loss carryforwards of $114 million. These carryforwards begin expiring in 1997. Existing foreign tax credits are sufficient to offset any tax on undistributed earnings of foreign subsidiaries. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10.LONG-TERM DEBT Long-term debt at December 31, 1996 and 1995, comprised the following:
1996 1995 ---- ---- (MILLIONS OF DOLLARS) 9.9% debentures due in 2000........................................$200 $200 9.375% debentures due in 2005..................................... 100 100 10.25% debentures due in 2010..................................... 100 100 9.8% debentures due in 2020....................................... 224 224 Dutch bank loans.................................................. 173 187 French bank loans................................................. 55 76 Other............................................................. 17 25 ---- ---- Total........................................................... 869 912 Debt due within one year.......................................... 25 25 ---- ---- Long-term debt.................................................. $844 $887 ==== ====
The Dutch bank loans, entered into by the Company's wholly owned subsidiary, ARCO Chemie Nederland, Ltd. (ACNL), consisted of two borrowings, both due in 1997. In February 1997, the Company executed an agreement to refinance the Dutch bank loans on a long-term basis. As part of the agreement, one loan, due in 2002, will replace the two borrowings due in 1997. Accordingly, the Dutch bank loans were classified as long-term debt at December 31, 1996. At December 31, 1996, ACNL had outstanding interest rate swaps on both of its bank loans, totalling 300 million Dutch guilders, or approximately $173 million. The swaps mature in 1997. The swaps effectively changed both loans' floating rates, which were based on the Amsterdam Interbank Offer Rate ("AIBOR"), to fixed rates of 5.7 percent and 6.7 percent. See Note 19. The French bank loans, entered into by the Company's wholly owned affiliate, ARCO Chimie France, SNC, mature at various dates through 2006. The weighted average effective interest rate for these borrowings was approximately 7.3 percent and 7.4 percent in 1996 and 1995, respectively. Aggregate maturities of all long-term debt during the next five years are $25 million in 1997, $25 million in 1998, $18 million in 1999, $201 million in 2000, $1 million in 2001, and $599 million thereafter. 11.OTHER COMMITMENTS AND CONTINGENCIES COMMITMENTS In January 1995, the Company entered into a long-term supply arrangement for toluene diisocyanate (TDI). Initial payments of $80 million were made at closing for capacity reservation fees, related inventory and other rights and costs. Effective January 1, 1995, the Company was entitled to all of the TDI output of the supplier's two plants in France, which have a combined rated capacity of approximately 264 million pounds per year. Under the arrangement, the Company is required to purchase a minimum of 216 million pounds of TDI per year for up to 15 years. The aggregate purchase price is a combination of plant cost and market price. The Company is further obligated to pay additional capacity reservation fees based upon plant output factors. To assure itself of reliable, long-term supplies of utilities at favorable rates for its Rotterdam plant, the Company entered into a 15-year utility cogeneration joint venture as a limited partner. The joint venture operates a cogeneration plant, primarily funded through nonrecourse debt. The Company is obligated to take or pay for minimum quantities of steam and electricity in support of the joint venture's 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11.OTHER COMMITMENTS AND CONTINGENCIES--(CONTINUED) financing arrangement. The Company pays for actual quantities of steam and electricity taken based on the joint venture's actual cost plus a specified return on the partners' investment. The Company also has a long-term purchase agreement for ethylene which requires the Company to take or pay for 143 million pounds annually at prevailing market prices for a remaining term of four years. Purchases under the cogeneration and the ethylene agreements during 1996, 1995 and 1994 were $43 million, $50 million and $30 million, respectively. The Company has commitments, including those related to capital expenditures, all made in the normal course of business. At December 31, 1996, there were commitments associated with various capital projects which were not significant either individually or in the aggregate. CONTINGENCIES The Company and its subsidiaries are involved in a number of lawsuits, claims and assessments, all of which have arisen in the ordinary course of the Company's business. The Company is unable to predict the outcome of these matters, but does not believe, based upon currently available facts, that the ultimate resolution of such matters will have a material adverse effect on the consolidated financial statements of the Company. The Company is subject to other loss contingencies pursuant to federal, state, local, and foreign environmental laws and regulations. These contingencies include possible obligations to remove or mitigate the effects on the environment of the past disposal or release of certain chemical substances at various sites (remediation costs). The Company continues to evaluate the amount of these remediation costs and periodically adjusts its reserve for remediation costs and its estimate of additional environmental loss contingencies based on progress made in determining the magnitude, method and timing of the remedial actions that may be required by government authorities and an evaluation of the Company's potential liability in relation to the liability and financial resources of any other potentially responsible parties. At December 31, 1996, the Company's environmental reserve totaled $53 million, which reflected the Company's latest assessment of potential future remediation costs associated with existing sites. A significant portion of the reserve is related to the Beaver Valley plant site, located in Monaca, Pennsylvania. The reserve gives recognition to a work plan, between the Company and the Pennsylvania Department of Environmental Protection (PADEP), for testing, risk assessment, remedial process design and remediation of conditions at the Beaver Valley plant. The reserve also reflects an agreement between the Company and another responsible party whereby that party has agreed to pay for approximately 50 percent of the costs associated with the Beaver Valley plant work plan. The Company sold the Beaver Valley plant assets to NOVA Chemicals Inc. (NOVA) as of September 30, 1996, see Note 21, but currently retains ownership of the land at the Beaver Valley plant site, substantial portions of which are being leased to NOVA. The Company has retained responsibility for certain remediation of the land at the Beaver Valley plant site under the work plan and for certain additional remediation that may be required by PADEP pursuant to the Pennsylvania Land Recycling and Environmental Remediation Standards Act. The remainder of the reserve is related to four other plant sites and one federal Superfund site for amounts ranging from $2 million to $16 million per site. The Company is involved in administrative proceedings or lawsuits relating to eight other Superfund sites. However, the Company estimates, 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11.OTHER COMMITMENTS AND CONTINGENCIES--(CONTINUED) based on currently available information, that potential loss contingencies associated with these sites, individually and in the aggregate, are not significant. Substantially all amounts reserved are expected to be paid out over the next five to ten years. The Company relies upon remedial investigation/feasibility studies (RI/FS) at each site as a basis for estimating remediation costs at the site. The Company has completed RI/FS or preliminary assessments at most of its sites. However, selection of the remediation method and the cleanup standard to be applied are, in most cases, subject to approval by the appropriate government authority. Accordingly, the Company may have possible loss contingencies in excess of the amounts reserved to the extent that the scope of remediation required, the final remediation method selected and the cleanup standard applied vary from the assumptions used in estimating the reserve. The Company estimates that the upper range of these possible loss contingencies should not exceed the amount accrued by more than $65 million. The extent of loss related to environmental matters ultimately depends upon a number of factors, including technological developments, changes in environmental laws, the number and ability to pay of other parties involved at a particular site and the Company's potential involvement in additional environmental assessments and cleanups. Based upon currently known facts, management believes that any remediation costs the Company may incur in excess of the amounts reserved or disclosed above would not have a material adverse impact on the Company's consolidated financial statements. The Company and the other principal responsible party (PRP) at the Beaver Valley site have reached an agreement with the U.S. government whereby the government will pay 28.5 percent of the costs incurred by the Company and the PRP for remediation of substantial portions of the Beaver Valley site. The Company has neither recorded an asset nor reduced any liability as of December 31, 1996 as a result of this agreement. The Company and ARCO are parties to an agreement whereby the Company has indemnified ARCO against certain claims or liabilities that ARCO may incur relating to ARCO's former ownership and operation of the oxygenates and polystyrenics businesses of the Company, including liabilities under laws relating to the protection of the environment and the workplace and liabilities arising out of certain litigation. ARCO has indemnified the Company with respect to claims or liabilities and other matters of litigation not related to the assets or businesses reflected in the consolidated financial statements. ARCO has also indemnified the Company for certain federal, foreign, state, and local taxes that might be assessed upon audit of the operations of the Company included in its consolidated financial statements for periods prior to the July 1, 1987 formation of the Company. 12.RETIREMENT PLANS Substantially all employees are covered by various pension plans. The ARCO Chemical Retirement Plan (ACRP), a defined benefit plan, provides pension benefits to all of the Company's employees in the United States and certain employees in foreign countries. In addition to the ACRP, the Company also maintains defined benefit pension plans for former hourly employees at the Beaver Valley plant in Monaca, Pennsylvania, as well as several plans covering certain employees throughout its European and Asia Pacific operations. Retirement benefits under the ACRP are based on years of participation service and the employee's compensation primarily during the last three years of service. Retirement benefits for the Beaver Valley Hourly Retirement Plan are primarily based on years of service and on the employee's career average earnings and, accordingly, the final liability was determined as of September 30, 1996, the date of sale of the plastics business to NOVA. European and Asia Pacific plans vary by country, but are primarily based on years of service and compensation during the last year of service. The 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12.RETIREMENT PLANS--(CONTINUED) funding policy for these plans consists of annual contributions as required by applicable regulations. The Company charges pension costs as accrued, based on an actuarial valuation, and funds the plans through contributions to separate trust funds that are kept apart from Company funds. The following tables set forth the plans' funded status and amounts recognized in the Company's balance sheets at December 31, 1996 and 1995:
1996 --------------------------- ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS BENEFITS EXCEED ASSETS ------------- ------------- (MILLIONS OF DOLLARS) Actuarial present value of benefit obligations: Vested benefit obligation..................... $161 $ 18 ==== ==== Accumulated benefit obligation................ $182 $ 19 ==== ==== Projected benefit obligation.................. $246 $ 34 Plan assets at fair value, primarily stocks and bonds.......................................... 311 -- ---- ---- Projected benefit obligation less than (in excess of) plan assets......................... 65 (34) Unrecognized net (gain) loss.................... (6) 14 Prior service cost not yet recognized in net periodic pension cost...................... 5 2 Unrecognized net liability at January 1, 1996... 3 -- Adjustment required to recognize minimum liabil- ity............................................ -- (2) ---- ---- Prepaid pension cost (liability) recognized in the balance sheet.............................. $ 67 $(20) ==== ====
1995 --------------------------- ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS BENEFITS EXCEED ASSETS ------------- ------------- (MILLIONS OF DOLLARS) Actuarial present value of benefit obligations: Vested benefit obligation..................... $171 $ 20 ==== ==== Accumulated benefit obligation................ $194 $ 20 ==== ==== Projected benefit obligation.................. $261 $ 32 Plan assets at fair value, primarily stocks and bonds.......................................... 258 -- ---- ---- Projected benefit obligation in excess of plan assets......................................... (3) (32) Unrecognized net loss........................... 32 15 Prior service cost not yet recognized in net periodic pension cost...................... 6 2 Unrecognized net liability at January 1, 1995... 4 -- Adjustment required to recognize minimum liabil- ity............................................ -- (6) ---- ---- Prepaid pension cost (liability) recognized in the balance sheet.............................. $ 39 $(21) ==== ====
The above tables for plans with assets exceeding accumulated benefits include foreign pension plans. These foreign plans constituted approximately 27 percent and 21 percent of the projected benefit obligation and 23 percent and 24 percent of the plan assets in the table at December 31, 1996 and 1995, respectively. The plans for which accumulated benefits exceed assets represent supplemental retirement benefits for executives and expatriated employees. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12.RETIREMENT PLANS--(CONTINUED) Components of net pension cost related to Company-sponsored plans for the years ended December 31, 1996, 1995, and 1994 were as follows:
1996 1995 1994 ------- ------- ------- (MILLIONS OF DOLLARS) Service cost...................................... $ 16 $ 13 $ 15 Interest cost..................................... 19 19 15 Actual return on plan assets...................... (42) (44) 1 Net amortization and deferral..................... 18 25 (18) ------- ------- ------- Net periodic pension cost....................... $ 11 $ 13 $ 13 ======= ======= =======
In addition to the pension cost above, in 1994 the Company recorded additional pension expense of $13 million pretax in connection with work force reductions resulting from the corporate restructuring program. Foreign pension plans comprised $3 million, $3 million and $5 million of net periodic pension cost for the years 1996, 1995 and 1994, respectively. The assumptions used as of December 31, 1996, 1995, and 1994 in determining the domestic net pension cost and net pension liability were as follows:
1996 1995 1994 ----- ----- ----- Discount rate......................................... 7.25% 7.0% 8.25% Rate of salary progression............................ 5.0 5.0 5.0 Long-term rate of return on assets.................... 10.25 10.25 10.25
The assumptions used in determining the net pension cost and pension liability for foreign pension plans were based on the economic environment of each applicable country. The range of assumptions used as of December 31, 1996 was as follows: discount rates, 6.5 to 8.05 percent; rate of salary progression, 4.0 to 6.5 percent; long-term rate of return on assets, 7.0 to 9.0 percent. 13.OTHER POSTRETIREMENT BENEFITS The Company provides medical and life insurance benefits for retired employees and covered dependents. Substantially all U.S. employees of the Company may become eligible for these benefits if they remain employed until normal retirement age or fulfill other eligibility requirements. Retiree contribution levels to the medical benefit plan are determined annually by the Company; the life insurance plan is noncontributory. The underlying plans are not funded. The following reconciles the unfunded accumulated obligation to the Company's balance sheet as of December 31, 1996 and 1995:
1996 1995 ---------- ---------- (MILLIONS OF DOLLARS) Accumulated postretirement benefit obligation (APBO): Retirees............................................ $17 $ 20 Fully eligible active plan participants............. 6 8 Other active plan participants...................... 26 31 ---------- ---------- Total APBO........................................ 49 59 Unrecognized net gain (loss)........................ 12 (1) Unrecognized prior service cost..................... (5) -- ---------- ---------- Accrued postretirement benefit liability.............. $56 $ 58 ========== ==========
36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13.OTHER POSTRETIREMENT BENEFITS--(CONTINUED) Net periodic postretirement benefit cost for the years ended December 31, 1996, 1995 and 1994 included the following components:
1996 1995 1994 ---- ---- ---- (MILLIONS OF DOLLARS) Service cost.................................................. $2 $2 $4 Interest cost................................................. 3 3 4 --- --- --- Net periodic postretirement benefit cost...................... $5 $5 $8 === === ===
The medical cost trend inflation rate assumption was changed during 1995, based on cumulative experience, from 10 percent to 9 percent annually for the period 1993 to 1996, from 8 percent to 7 percent annually for the period 1997 to 2001, and from 6 percent to 5 percent annually thereafter. Increasing the health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by $7 million and increase net periodic postretirement benefit cost for 1996 by $1 million. The discount rate used was 7.25 percent. 14.STOCK OPTION AND EMPLOYEE BENEFIT PLANS In November 1989, the Board of Directors adopted the 1990 Long-Term Incentive Plan (the 1990 Plan). The 1990 Plan, which became effective January 1, 1990, provided, among other things, for the granting to officers and other key management employees of nonqualified stock options for the purchase of up to two million shares of the Company's common stock. During 1996, the Board of Directors authorized an additional 200,000 shares of common stock for granting under the 1990 Plan. The option price per share is fixed by the Long-Term Incentive Plan Administration Subcommittee (the subcommittee) of the Board of Directors, which administers the 1990 Plan, but may not be less than the fair market value of the Company's common stock on the date the option is granted. The maximum option period is ten years. Options granted before January 1, 1996 may be exercised after one year of continuous service with ARCO, the Company, or any of their subsidiaries immediately following the date of the grant. Options granted after January 1, 1996 may be exercised after four years of continuous service. The subcommittee may, at its discretion, establish a longer waiting period. In July 1987, ARCO, the Company's sole stockholder at the time, approved the 1987 Executive Long-Term Incentive Plan (the 1987 Plan). The 1987 Plan, which became effective September 1, 1987, provided, among other things, for the granting to officers and other key management employees of non-qualified stock options for the purchase of up to 290,000 shares of the Company's common stock at $32 per share. The options are currently exercisable through October 1997. No additional options will be granted under the 1987 Plan. Dividend share credits accrue on options granted under both the 1990 Plan and the 1987 Plan. Dividend share credits are allocated to officers and other key management employees holding stock options (optionees) whenever dividends are declared on shares of common stock. Upon the exercise, expiration or surrender of an option, an optionee may receive a cash payment in respect of the dividend share credits attributable to such option provided that certain performance-based conditions are satisfied. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 14.STOCK OPTION AND EMPLOYEE BENEFIT PLANS--(CONTINUED) The following table summarizes the activity relating to the Company's stock option plans:
WEIGHTED AVERAGE EXERCISE PRICE -------- Balance, January 1, 1994................................. 1,280,806 $37.23 Granted................................................ 250,000 48.56 Exercised.............................................. (86,500) 35.02 Forfeited.............................................. (1,200) 48.56 --------- Balance, December 31, 1994............................... 1,443,106 39.31 Granted................................................ 339,200 42.44 Exercised.............................................. (100,133) 34.87 Forfeited.............................................. (800) 42.44 --------- Balance, December 31, 1995............................... 1,681,373 40.21 Granted................................................ 292,800 50.63 Exercised.............................................. (61,627) 34.83 Forfeited.............................................. -- -- --------- Balance, December 31, 1996............................... 1,912,546 41.97 =========
The Company issues treasury shares upon exercise of stock options. A summary of the Company's stock options as of December 31, 1996 and 1995 was as follows:
1996 1995 --------- -------- Shares available for option.............................. 181,110 273,910 Options exercisable...................................... 1,619,746 1,342,973 Weighted average exercise price of options exercisable... $40.41 $39.64 Fair value per share of options granted during the year.. $23.90 $22.60
At December 31, 1996, exercise prices for options outstanding ranged from $32 to $50.63 and the weighted average remaining option period was 6 years. The Company applies APB No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized in connection with stock option grants under the plans. The pro forma impact to both net income and earnings per share from calculating compensation expense consistent with SFAS No. 123, "Accounting for Stock-Based Compensation", was immaterial for the years ended December 31, 1996 and 1995. Effective January 1, 1995, the Company began issuing treasury shares in connection with purchases of the Company's common stock made by the ARCO Chemical Company Capital Accumulation Plan (the CAP Plan), a defined contribution plan for current and former employees of the Company. Participants' contributions to the CAP Plan through payroll deductions may be used to purchase the Company's common stock, among other investment alternatives. The Company makes matching contributions which are used solely to purchase the Company's common stock. Prior to January 1, 1995, purchases of the Company's common stock by the CAP Plan were made on the open market. In connection with the sale of the plastics business on September 30, 1996, the Company implemented a stock repurchase program for up to 320,000 shares of the Company's common stock held in certain employee benefit plans by former employees associated with the plastics business. The Company repurchased 72,445 shares through December 31, 1996. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 15.EARNINGS PER COMMON SHARE Earnings per common share are computed based on the weighted average number of shares outstanding during the year. For 1996, 1995 and 1994, the weighted average number of shares was 96,660,715, 96,294,810 and 96,059,348 shares, respectively. The effect of stock options issued under the 1987 Executive Long-Term Incentive Plan and the 1990 Long-Term Incentive Plan (see Note 14) on the computation of primary and fully diluted earnings per common share was not material. 16.SUPPLEMENTAL CASH FLOW INFORMATION Following is supplemental cash flow information provided for the years ended December 31, 1996, 1995, and 1994:
1996 1995 1994 ------- -------- ------- (MILLIONS OF DOLLARS) Changes in working capital-increase (decrease) to cash: Accounts receivable........................... $ (9) $ (43) $ (88) Inventories................................... (50) (64) 28 Prepaid expense and other current assets...... (3) (4) 7 Accounts payable.............................. 98 (5) 34 Taxes payable................................. (77) 28 38 Other accrued liabilities..................... 4 12 17 ------ -------- ------ Changes in working capital accounts........... $ (37) $ (76) $ 36 ====== ======== ====== The above changes exclude the effects of a business purchase (see Note 20), a sale of assets (see Note 21), and foreign exchange rate changes. Short-term investments: Gross proceeds from maturities................ $ 139 $ 30 $ -- Gross purchases............................... (114) (55) -- ------ -------- ------ Net proceeds (purchases)...................... $ 25 $ (25) $ -- ====== ======== ====== Notes payable: Gross proceeds from issuances................. $ 382 $ 1,484 $ 724 Gross repayments.............................. (233) (1,508) (757) ------ -------- ------ Net proceeds (repayments)..................... $ 149 $ (24) $ (33) ====== ======== ====== Cash paid during the year for: Interest (net of amount capitalized).......... $ 83 $ 87 $ 82 Income taxes.................................. 165 213 93
17.LEASE COMMITMENTS The Company leases various facilities and equipment under noncancelable lease arrangements for varying periods. At December 31, 1996, future minimum lease payments for all noncancelable operating leases with lease terms in excess of one year were as follows:
(MILLIONS OF DOLLARS) 1997.......................................................... $ 53 1998.......................................................... 42 1999.......................................................... 29 2000.......................................................... 23 2001.......................................................... 20 Later years................................................... 197 ---- Total minimum lease payments................................ $364 ====
Rental expense for the years ended December 31, 1996, 1995, and 1994 was $107 million, $100 million and $88 million, respectively. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 18.FOREIGN CURRENCY TRANSACTIONS For the years ended December 31, 1996, 1995, and 1994, losses on foreign exchange transactions, including foreign currency derivative instruments, were $11 million, $13 million, and $2 million, respectively. See Note 19. 19.FINANCIAL INSTRUMENTS The Company does not hold or issue financial instruments for speculative trading purposes. Various types of foreign currency forward, option and swap contracts are used to minimize foreign exchange exposures. Foreign exchange exposures result from cash flows between U.S. and international operations and transactions denominated in currencies other than the local currency of an operating entity. Swap contracts are used predominantly to minimize intercompany debt exposures with maturities exceeding one year, while forward and option contracts are used for other types of foreign exchange exposures. During 1995, the Company announced plans to commence engineering studies for the construction of a new world scale PO/SM plant in Rotterdam, the Netherlands. In connection with this project, the Company anticipated that it would be making capital commitments denominated in a foreign currency for a period extending through 2000. During 1995, the Company entered into foreign currency forward and purchased option contracts to minimize the foreign exchange exposures associated with these anticipated commitments. The notional amounts of foreign currency contracts outstanding, principally involving European currencies, were $371 million at December 31, 1996, with various maturity dates ranging from 1997 to 2000. At December 31, 1995, the notional amounts of foreign currency contracts outstanding were $442 million. Interest rate swap contracts are used to minimize interest rate exposures on foreign bank loans due in 1997. The interest rate swap contracts mature in 1997. Gains and losses, realized and unrealized, on foreign currency forward contracts covering anticipatory cash flows are recognized currently as other income or expense in the results of operations. Gains and losses on foreign currency swaps are recognized currently in income to the extent of offsetting foreign exchange gains and losses on the underlying intercompany loans. Gains and losses on interest rate swap contracts are accrued for each annual period to yield an effective fixed rate of interest on the related debt. Net gains and losses associated with derivative contracts for 1996, 1995 and 1994 were not material. Gains on the purchased options related to the new PO/SM plant project are deferred and will be used in the measurement of the plant construction costs. There were no deferred hedging gains as of December 31, 1996. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 19.FINANCIAL INSTRUMENTS--(CONTINUED) The carrying value and the estimated fair value of the Company's derivative instruments as of December 31, 1996 and 1995 are shown as assets (liabilities) in the table below. The carrying value of the purchased options represents the unamortized balance of the option premium.
1996 1995 --------------- --------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- ------ -------- ------ (MILLIONS OF DOLLARS) Nonderivatives: Short-term investments..................... $ -- $ -- $ 25 $ 25 Investments and long-term receivables...... 71 71 90 90 Notes payable.............................. 150 150 -- -- Long-term debt (including current maturi- ties)..................................... 869 1,001 912 1,095 Derivatives: Foreign currency forwards.................. (14) (14) (5) (5) Foreign currency options................... 6 6 7 7 Foreign currency swaps .................... (4) (4) (6) (6) Interest rate swaps........................ (1) (3) (1) (5)
The carrying amounts of nonderivative financial instruments are reported on the balance sheet under the indicated captions. All derivative instruments are off-balance-sheet instruments, however net receivable or payable positions related to derivative instruments are carried on the balance sheet. Short-term investments consist of highly liquid investments, such as time deposits, certificates of deposit and marketable securities other than equity securities, maturing in more than three months from the date of purchase. Short-term investments are carried at cost, which approximates fair value. Investments and long-term receivables, which consist primarily of equity investments in affiliated companies, were valued using current financial and other available information. The fair value of notes payable approximates carrying value due to the relatively short-term maturities of such instruments. Long-term debt was valued based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of derivative financial instruments represents the amount to be exchanged if the existing contracts were settled at year end and are based on market quotes. The Company is exposed to credit risk related to its financial instruments in the event of nonperformance by the counterparties. The Company does not generally require collateral or other security to support these financial instruments. However, the counterparties to these transactions are major institutions deemed creditworthy by the Company; the Company does not anticipate nonperformance by the counterparties. 20.BUSINESS ACQUISITION On December 4, 1996, the Company purchased substantially all of the assets of Olin Corporation's (Olin) toluene diisocyanate (TDI) and aliphatic diisocyanate (ADI) businesses. The purchase included Olin's TDI and ADI production facilities in Lake Charles, Louisiana, and certain related assets, including trademarks, patents, and technology. Effective December 1, 1996, the Company has accounted for the acquired business under the purchase method of accounting and, accordingly, the results of operations of the acquired business are included in the Company's consolidated results of operations prospectively from that date. The acquisition cost of approximately 41 20.Business Acquisition--(Continued) $571 million has been allocated to the assets acquired and liabilities assumed, including approximately $94 million of working capital, based on the fair value of such assets and liabilities at the date of acquisition. Based on preliminary appraisals, the fair value of the net assets acquired approximates the acquisition cost, and no goodwill has been recorded. Had the acquired business been accounted for under the purchase method as of January 1, 1995, consolidated results of operations for the years 1995 and 1996 would not have been materially affected. 21.ASSET SALE On September 30, 1996, the Company sold its plastics business to NOVA. The sale proceeds were approximately $160 million. As part of the transaction, the Company entered into a long-term sales agreement to supply NOVA with approximately the same amount of styrene monomer as had been consumed by the plastics business. The sale of the plastics business did not have a material effect on the Company's consolidated financial statements. 22.CORPORATE RESTRUCTURING PROGRAM In November 1994, the Company announced a worldwide corporate restructuring program to reorganize its workforce on a global basis. In connection with the restructuring, approximately 130 positions in the Company were eliminated. The Company accrued $30 million before tax in the fourth quarter of 1994, consisting primarily of personnel costs (pension enhancements, severance and other ancillary costs) associated with personnel reductions. Of the total accrued, approximately $15 million was primarily related to enhanced pension benefits, the majority of which will be paid from the assets of qualified pension plans. An additional $15 million was related to severance and other ancillary costs to be paid from Company funds. Through the end of 1995, the program was substantially completed. The accrual balance at December 31, 1995 was $6 million, which primarily consisted of severance payments that were deferred by employees and which were paid in 1996. 23.SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
MARCH JUNE SEPTEMBER DECEMBER 31 30 30 31 ----------- ----------- ------------- ------------ (MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA) 1996 ---- Net sales.................... $ 982 $ 959 $1,035 $ 979 Gross profit................. 252 216 235 185 Net income................... 106 81 97 64 Earnings per common share (1)......................... 1.10 .84 1.00 .66 1995 ---- Net sales.................... $ 1,141 $ 1,149 $ 999 $ 993 Gross profit................. 297 327 270 286 Net income................... 126 150 117 115 Earnings per common share (1)......................... 1.31 1.56 1.21 1.19
- -------- (1) Earnings per common share calculations for each of the quarters are based on the weighted average number of shares outstanding for each period. The sum of the quarters may not necessarily be equal to the full year earnings per share amount. 42 ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11.EXECUTIVE COMPENSATION ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding executive officers of the company is included in Part I. For the other information called for by Items 10, 11, 12, and 13, reference is made to the Company's definitive proxy statement for its Annual Meeting of Stockholders, to be held on May 8, 1997, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1996, and which is incorporated herein by reference. PART IV ITEM 14.EXHIBITS AND REPORTS ON FORM 8-K (A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT: 1. and 2. Financial Statements: These documents are listed in the Index to Consolidated Financial Statements. See Item 8. 3. Exhibits: 2.1 Asset Purchase Agreement, dated October 9, 1996, between ARCO Chemical Com- pany and Olin Corporation, filed as Exhibit 2.1 to the Company's Current Re- port on Form 8-K, dated December 17, 1996, and incorporated herein by refer- ence. 2.2 Amendment No. 1, dated December 4, 1996, to the Asset Purchase Agreement be- tween ARCO Chemical Company and Olin Corporation, filed as Exhibit 2.2 to the Company's Current Report on Form 8-K, dated December 17, 1996, and incorpo- rated herein by reference. 3.1 Certificate of Amendment and Restated Certificate of Incorporation of ARCO Chemical Company, filed as an Exhibit bearing the same number to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by reference. 3.2 By-Laws of ARCO Chemical Company, filed as an Exhibit bearing the same number to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by reference. 4.1 Indenture, dated as of June 15, 1988, between ARCO Chemical Company and The Bank of New York as Trustee, filed as Exhibit 4.2 to the Company's Registra- tion Statement on Form S-3 (No. 33-23340), filed on July 27, 1988, and incor- porated herein by reference. 4.2 Forms of Debt Securities issuable under the Indenture referred to in Exhibit 4.1, filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3 (No. 33-23340), filed on July 27, 1988, and incorporated herein by reference.
43 4.3 Form of Debt Security issuable under the Indenture referred to in Exhibit 4.1, filed as Exhibit 4 to the Company's Current Report on Form 8-K dated January 30, 1990, and incorporated herein by reference. 4.4 Forms of Debt Securities issuable under the Indenture referred to in Exhibit 4.1, filed as Exhibits 4.1 and 4.2 to the Company's Current Report on Form 8- K dated October 31, 1990, and incorporated herein by reference. 4.5 Form of Debt Security issuable under the Indenture referred to in Exhibit 4.1, filed as Exhibit 4 to the Company's Current Report on Form 8-K dated De- cember 7, 1990, and incorporated herein by reference. 4.6 Credit Agreement, dated as of November 19, 1993, between ARCO Chemical Com- pany and The First National Bank of Chicago, as Agent for the banks listed therein, filed as an Exhibit bearing the same number to the Company's Annual Report on Form 10-K for 1993, and incorporated herein by reference. 4.7 Amendment No. 1 to the Credit Agreement, dated as of October 14, 1994, be- tween ARCO Chemical Company and The First National Bank of Chicago, as Agent for the banks listed therein, filed as an Exhibit bearing the same number to the Company's Annual Report on Form 10-K for 1994, and incorporated herein by reference. 4.8 Amendment No. 2 to the Credit Agreement, dated as of April 3, 1996, between ARCO Chemical Company and The First National Bank of Chicago, as Agent for the banks listed therein. 4.9 Instruments defining the rights of holders of long-term debt not registered under the Securities Exchange Act of 1934 (other than long-term debt issued pursuant to the Credit Agreement) are not filed because the total amount of securities authorized under any such instrument does not exceed 10 percent of the consolidated total assets of the company. The Company agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request. 10.1 ARCO Chemical Company Annual Incentive Plan, effective January 1, 1988, filed as an Exhibit bearing the same number to the Company's Annual Report on Form 10-K for 1993, and incorporated herein by reference. 10.2 Resolutions relating to Amendment No. 1 to ARCO Chemical Company Annual In- centive Plan, as adopted February 15, 1989, filed as an Exhibit bearing the same number to the Company's Annual Report on Form 10-K for 1990, and incor- porated herein by reference. 10.3 Resolutions relating to Amendment No. 2 to ARCO Chemical Company Annual In- centive Plan, as adopted July 17, 1990, effective September 1, 1990, filed as an Exhibit bearing the same number to the Company's Annual Report on Form 10- K for 1990, and incorporated herein by reference. 10.4 Amendment and Restatement of ARCO Chemical Company Executive Supplementary Savings Plan, effective January 1, 1995. 10.5 ARCO Chemical Company 1987 Executive Long-Term Incentive Plan, filed as Ex- hibit 10.12 to the Company's Registration Statement on Form S-1 (No. 33- 15930), filed on July 28, 1987, and incorporated herein by reference. 10.6 Amendment No. 1 to the ARCO Chemical Company 1987 Executive Long-Term Incen- tive Plan. 10.7 ARCO Chemical Company 1990 Long-Term Incentive Plan, restated as amended through July 20, 1995, filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for 1995, and incorporated herein by reference. 10.8 Amendment No. 5 to the ARCO Chemical Company 1990 Long-Term Incentive Plan, filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996, and incorporated herein by reference.
44 10.9 ARCO Chemical Company Supplementary Executive Retirement Plan, effective October 1, 1990, filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for 1992, and incorporated herein by reference. 10.10 ARCO Chemical Company Financial Counseling Policy, effective January 1, 1988, filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for 1993, and incorporated herein by reference. 10.11 ARCO Chemical Company Executive Medical Insurance Plan (Summary Plan Descrip- tion), effective January 1, 1988, filed as Exhibit 10.14 to the Company's An- nual Report on Form 10-K for 1993, and incorporated herein by reference. 10.12 ARCO Chemical Company Key Management Deferral Plan, effective October 1, 1990, filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for 1990, and incorporated herein by reference. 10.13 Amendment No. 1 to the Key Management Deferral Plan, effective as of October 22, 1992, filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for 1995, and incorporated herein by reference. 10.14 ARCO Chemical Company Key Management Long-Term Disability Plan, effective Oc- tober 1, 1990, filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for 1992, and incorporated herein by reference. 10.15 Resolutions relating to ARCO Chemical Company Key Management Life Insurance Plan, as adopted July 17, 1990, effective August 1, 1990, filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K for 1990, and incorporated herein by reference. 10.16 ARCO Chemical Company Retirement Plan for Outside Directors, as amended and restated effective October 1, 1990, filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for 1992, and incorporated herein by reference. 10.17 ARCO Chemical Company Deferral Plan for Outside Directors, effective October 1, 1990, filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for 1992, and incorporated herein by reference. 10.18 Cross-Indemnification Agreement, dated as of June 1, 1987, between ARCO Chem- ical Company and Atlantic Richfield Company, filed as Exhibit 10.2(a) to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by reference. 10.19 Amendment No. 1 to Cross-Indemnification Agreement, dated as of June 30, 1987, between ARCO Chemical Company and Atlantic Richfield Company, filed as Exhibit 10.2(b) to the Company's Registration Statement on Form S-1 (No. 33- 15930), filed on July 28, 1987, and incorporated herein by reference. 10.20 Amendment No. 2 to Cross-Indemnification Agreement, dated as of July 1, 1987, between ARCO Chemical Company and Atlantic Richfield Company, filed as Ex- hibit 10.2(c) to Amendment No. 1 to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on August 21, 1987, and incorporated herein by reference. 10.21 Amended and Restated Tax Sharing Agreement, effective as of January 1, 1995, between ARCO Chemical Company and Atlantic Richfield Company, filed as Ex- hibit 10 to the Company's Quarterly Report on Form 10-Q for the quarterly pe- riod ended June 30, 1995, and incorporated herein by reference. 10.22 LPC/ACC Services Agreement, dated as of June 30, 1987, between ARCO Chemical Company and Lyondell Petrochemical Company, filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by reference.
45 10.23 Services Agreement, dated as of July 18, 1987, between ARCO Chemical Company and Atlantic Richfield Company, filed as Exhibit 10.5 to the Company's Regis- tration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and in- corporated herein by reference. 10.24 Amendment No. 1 to Services Agreement, dated as of March 30, 1990, between ARCO Chemical Company and Atlantic Richfield Company, filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for 1990, and incorporated herein by reference. 10.25 Shareholder Agreement, dated as of June 30, 1987, between ARCO Chemical Com- pany and Atlantic Richfield Company, filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by reference. 10.26 Form of ARCO Chemical Company Indemnity Agreement with officers and direc- tors, filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by refer- ence. 12 Statement re computation of the ratio of earnings to fixed charges. 21 Subsidiaries of ARCO Chemical Company. 23 Consent of Independent Accountants. 24 Power of Attorney. 27 Financial Data Schedule.
All documents incorporated herein by reference to any Annual Report on Form 10-K, Quarterly Report on Form 10-Q or Current Report on Form 8-K previously filed by the Company relate to Commission File No. 1-9678. Copies of exhibits will be furnished upon prepayment of 25 cents per page. Requests should be addressed to the Corporate Secretary. (B) REPORTS ON FORM 8-K: The Company filed a Current Report on Form 8-K, dated October 10, 1996, which contained a press release, dated October 1, 1996, announcing the sale of its worldwide plastics business to NOVA Chemicals Inc. on September 30, 1996. The Company filed a Current Report on Form 8-K, dated October 24, 1996, which contained a press release, dated October 10, 1996, announcing the Company's agreement to purchase Olin Corporation's (Olin) toluene diisocyanate (TDI) and aliphatic diisocyanate (ADI) businesses. The Company filed a Current Report on Form 8-K, dated December 17, 1996, which contained a copy of the Asset Purchase Agreement, dated October 9, 1996, and Amendment No. 1 thereto, dated December 4, 1996, between the Company and Olin pursuant to which the Company purchased substantially all of the assets of Olin's TDI and ADI businesses, and a press release, dated December 4, 1996, announcing the consummation of the transaction. 46 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Newtown Square, Commonwealth of Pennsylvania, on February 25, 1997. ARCO Chemical Company By: ALAN R. HIRSIG --------------------------------- Alan R. Hirsig President and Chief Executive Officer ---------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. SIGNATURE TITLE DATE MIKE R. BOWLIN* Chairman of the - ------------------------------------- Board and Director Mike R. Bowlin ALAN R. HIRSIG President, Chief - ------------------------------------- Executive Officer Alan R. Hirsig and Director MARVIN O. SCHLANGER* Executive Vice - ------------------------------------- President, Chief Marvin O. Schlanger Operating Officer and Director WALTER J. TUSINSKI* Senior Vice - ------------------------------------- President, Chief Walter J. Tusinski Financial Officer and Director WALTER F. BERAN* Director February 25, 1997 - ------------------------------------- Walter F. Beran ANTHONY G. FERNANDES* Director - ------------------------------------- Anthony G. Fernandes MARIE L. KNOWLES* Director - ------------------------------------- Marie L. Knowles JAMES A. MIDDLETON* Director - ------------------------------------- James A. Middleton STEPHEN R. MUT* Director - ------------------------------------- Stephen R. Mut FRANK SAVAGE* Director - ------------------------------------- Frank Savage 47 SIGNATURE TITLE DATE ROBERT H. STEWART, III* - ------------------------------------- Director Robert H. Stewart, III JOHN A. SHAW - ------------------------------------- Vice President and John A. Shaw Controller (principal February 25, 1997 accounting officer) JOHN A. SHAW *By:_________________________________ John A. Shaw (Attorney in fact) 48 EXHIBITS TO FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-9678 ARCO CHEMICAL COMPANY EXHIBIT INDEX
EXHIBIT NO. ------- 2.1 Asset Purchase Agreement, dated October 9, 1996, between ARCO Chemical Company and Olin Corporation, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, dated December 17, 1996, and incorporated herein by reference...................... 2.2 Amendment No. 1, dated December 4, 1996, to the Asset Purchase Agreement between ARCO Chemical Company and Olin Corporation, filed as Exhibit 2.2 to the Company's Current Report on Form 8- K, dated December 17, 1996, and incorporated herein by refer- ence............................................................ 3.1 Certificate of Amendment and Restated Certificate of Incorpora- tion of ARCO Chemical Company, filed as an Exhibit bearing the same number to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by reference.................................................... 3.2 By-Laws of ARCO Chemical Company, filed as an Exhibit bearing the same number to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by reference............................................. 4.1 Indenture, dated as of June 15, 1988, between ARCO Chemical Com- pany and The Bank of New York as Trustee, filed as Exhibit 4.2 to the Company's Registration Statement on Form S-3 (No. 33- 23340), filed on July 27, 1988, and incorporated herein by ref- erence.......................................................... 4.2 Forms of Debt Securities issuable under the Indenture referred to in Exhibit 4.1, filed as Exhibit 4.1 to the Company's Regis- tration Statement on Form S-3 (No. 33-23340), filed on July 27, 1988, and incorporated herein by reference...................... 4.3 Form of Debt Security issuable under the Indenture referred to in Exhibit 4.1, filed as Exhibit 4 to the Company's Current Re- port on Form 8-K dated January 30, 1990, and incorporated herein by reference.................................................... 4.4 Forms of Debt Securities issuable under the Indenture referred to in Exhibit 4.1, filed as Exhibits 4.1 and 4.2 to the Company's Current Report on Form 8-K dated October 31, 1990, and incorporated herein by reference................................ 4.5 Form of Debt Security issuable under the Indenture referred to in Exhibit 4.1, filed as Exhibit 4 to the Company's Current Re- port on Form 8-K dated December 7, 1990, and incorporated herein by reference.................................................... 4.6 Credit Agreement, dated as of November 19, 1993, between ARCO Chemical Company and The First National Bank of Chicago, as Agent for the banks listed therein, filed as an Exhibit bearing the same number to the Company's Annual Report on Form 10-K for 1993, and incorporated herein by reference......................
1
EXHIBIT NO. ------- 4.7 Amendment No. 1 to the Credit Agreement, dated as of October 14, 1994, between ARCO Chemical Company and The First National Bank of Chicago, as Agent for the banks listed therein, filed as an Exhibit bearing the same number to the Company's Annual Report on Form 10-K for 1994, and incorporated herein by reference..... 4.8 Amendment No. 2 to the Credit Agreement, dated as of April 3, 1996, between ARCO Chemical Company and The First National Bank of Chicago, as Agent for the banks listed therein............... 4.9 Instruments defining the rights of holders of long-term debt not registered under the Securities Exchange Act of 1934 (other than long-term debt issued pursuant to the Credit Agreement) are not filed because the total amount of securities authorized under any such instrument does not exceed 10 percent of the consoli- dated total assets of the Company. The Company agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request......................................... 10.1 ARCO Chemical Company Annual Incentive Plan, effective January 1, 1988, filed as an Exhibit bearing the same number to the Company's Annual Report on Form 10-K for 1993, and incorporated herein by reference ............................................ 10.2 Resolutions relating to Amendment No. 1 to ARCO Chemical Company Annual Incentive Plan, as adopted February 15, 1989, filed as an Exhibit bearing the same number to the Company's Annual Report on Form 10-K for 1990, and incorporated herein by reference..... 10.3 Resolutions relating to Amendment No. 2 to ARCO Chemical Company Annual Incentive Plan, as adopted July 17, 1990, effective Sep- tember 1, 1990, filed as an Exhibit bearing the same number to the Company's Annual Report on Form 10-K for 1990, and incorpo- rated herein by reference ...................................... 10.4 Amendment and Restatement of ARCO Chemical Company Executive Supplementary Savings Plan, effective January 1, 1995........... 10.5 ARCO Chemical Company 1987 Executive Long-Term Incentive Plan, filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorpo- rated herein by reference....................................... 10.6 Amendment No. 1 to the ARCO Chemical Company 1987 Executive Long-Term Incentive Plan........................................ 10.7 ARCO Chemical Company 1990 Long-Term Incentive Plan, restated as amended through July 20, 1995, filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for 1995, and incorporated herein by reference............................................. 10.8 Amendment No. 5 to the ARCO Chemical Company 1990 Long-Term In- centive Plan, filed as Exhibit 10 to the Company's Quarterly Re- port on Form 10-Q for the quarterly period ended June 30, 1996, and incorporated herein by reference............................ 10.9 ARCO Chemical Company Supplementary Executive Retirement Plan, effective October 1, 1990, filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for 1992, and incorporated herein by reference............................................. 10.10 ARCO Chemical Company Financial Counseling Policy, effective January 1, 1988, filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for 1993, and incorporated herein by refer- ence............................................................ 10.11 ARCO Chemical Company Executive Medical Insurance Plan (Summary Plan Description), effective January 1, 1988, filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for 1993, and incorporated herein by reference................................ 10.12 ARCO Chemical Company Key Management Deferral Plan, effective October 1, 1990, filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for 1990, and incorporated herein by refer- ence............................................................
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EXHIBIT NO. ------- 10.13 Amendment No. 1 to the Key Management Deferral Plan, effective as of October 22, 1992, filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for 1995, and incorporated herein by reference....................................................... 10.14 ARCO Chemical Company Key Management Long-Term Disability Plan, effective October 1, 1990, filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for 1992, and incorporated herein by reference ............................................ 10.15 Resolutions relating to ARCO Chemical Company Key Management Life Insurance Plan, as adopted July 17, 1990, effective August 1, 1990, filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K for 1990, and incorporated herein by reference..... 10.16 ARCO Chemical Company Retirement Plan for Outside Directors, as amended and restated effective October 1,1990, filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for 1992, and incorporated herein by reference. .............................. 10.17 ARCO Chemical Company Deferral Plan for Outside Directors, ef- fective October 1, 1990, filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for 1992, and incorporated herein by reference....................................................... 10.18 Cross-Indemnification Agreement, dated as of June 1, 1987, be- tween ARCO Chemical Company and Atlantic Richfield Company, filed as Exhibit 10.2(a) to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorpo- rated herein by reference....................................... 10.19 Amendment No. 1 to Cross-Indemnification Agreement, dated as of June 30, 1987, between ARCO Chemical Company and Atlantic Rich- field Company, filed as Exhibit 10.2(b) to the Company's Regis- tration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by reference...................... 10.20 Amendment No. 2 to Cross-Indemnification Agreement, dated as of July 1, 1987, between ARCO Chemical Company and Atlantic Rich- field Company, filed as Exhibit 10.2(c) to Amendment No. 1 to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on August 21, 1987, and incorporated herein by reference.. 10.21 Amended and Restated Tax Sharing Agreement, effective as of Jan- uary 1, 1995, between ARCO Chemical Company and Atlantic Rich- field Company, filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995, and incorporated herein by reference...................... 10.22 LPC/ACC Services Agreement, dated as of June 30, 1987, between ARCO Chemical Company and Lyondell Petrochemical Company, filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by reference............................................. 10.23 Services Agreement, dated as of July 18, 1987, between ARCO Chemical Company and Atlantic Richfield Company, filed as Ex- hibit 10.5 to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by reference.................................................... 10.24 Amendment No. 1 to Services Agreement, dated as of March 30, 1990, between ARCO Chemical Company and Atlantic Richfield Com- pany, filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for 1990, and incorporated herein by reference........ 10.25 Shareholder Agreement, dated as of June 30, 1987, between ARCO Chemical Company and Atlantic Richfield Company, filed as Ex- hibit 10.6 to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by reference.................................................... 10.26 Form of ARCO Chemical Company Indemnity Agreement with officers and directors, filed as Exhibit 10.8 to the Company's Registra- tion Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by reference......................
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EXHIBIT NO. ------- 12 Statement re computation of the ratio of earnings to fixed charges.......................................................... 21 Subsidiaries of ARCO Chemical Company............................ 23 Consent of Independent Accountants............................... 24 Power of Attorney................................................ 27 Financial Data Schedule..........................................
4 EX-4.8 2 AMENDMENT NO. 2 TO THE CREDIT AGREEMENT EXHIBIT 4.8 AMENDMENT NO. 2 AMENDMENT NO. 2 dated as of April 3, 1996 (this "Amendment") to that certain Credit Agreement dated as of November 19, 1993, as amended by Amendment No. 1 dated as of October 14, 1994 (as so amended, the "Credit Agreement") among ARCO Chemical Company, a Delaware corporation, the Banks party thereto and The First National Bank of Chicago, as Agent for such Banks. WHEREAS, the parties hereto desire to amend the Credit Agreement to, among other things, (i) release each of Toronto Dominion (Texas), Inc., Credit Suisse and Texas Commerce Bank National Association, (collectively, the "Withdrawing Banks") from all of their respective rights and obligations as "Banks" under and as defined in the Credit Agreement, (ii) add ABN AMRO Bank N.V., Deutsche Bank AG and Rabobank Nederland (collectively, the "New Banks") as new Banks party to the Credit Agreement, (iii) increase the respective Commitments under and as defined in the Credit Agreement of certain other Banks (collectively, with the New Banks, the "Increasing Banks") as herein provided, (iv) amend the facility fee and interest rate payable under the Credit Agreement and (v) amend the Credit Agreement in certain other respects; NOW THEREFORE, in consideration of the premises and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. Unless the context otherwise requires, all capitalized ----------- terms used but not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement. 2. Amendments. Upon the Closing Date (as defined in Section 6 of this ---------- Amendment) and effective as of the Effective Date (also as defined in Section 6 of this Amendment), the Credit Agreement shall be amended as follows: (a) The definition of "Facility Fee Percentage" contained in Section 1.01 of the Credit Agreement shall be amended and restated in its entirety as follows: "Facility Fee Percentage" shall mean, with respect to each payment of the facility fee pursuant to Section 2.08(b), the percentage rate per annum set forth below opposite the ratings on the Borrower's senior unsecured long-term public debt issued by both Moody's Investor Service, Inc. (or its successor) and Standard & Poor's Corporation (or its successor) in effect on the applicable date of determination:
Facility Fee S & P Rating Moody's Rating Percentage ------------ -------------- ---------- A- or higher A3 or higher .075% BBB+ Baa1 .10% BBB Baa2 .125% BBB- Baa3 .150% Below BBB- Below Baa3 .20%
For each facility fee payment pursuant to Section 2.08(b) , the applicable Facility Fee Percentage shall be determined as of the Quarterly Date, or date of termination of the Commitments in their entirety, as the case may be, which is five Domestic Business Days preceding the date such payment is due pursuant to Section 2.08(b). In the event of a split rating, the Borrower shall be entitled to the benefit of the higher rating, unless either rating is below BBB- or Baa3 (in which case the lower rating shall control). In the event that a rating is available from only one rating agency, such rating shall control. In the event that a rating is not available from either rating agency, the applicable Facility Fee Percentage shall be .20%. (b) The definition of "CD Reference Banks" contained in Section 1.01 of the Credit Agreement shall be amended and restated in its entirety as follows: "'CD Reference Banks' shall mean Bank of America NT & SA, The Chase Manhattan Bank, N.A. and The First National Bank of Chicago, and each such other bank as may be appointed pursuant to Section 9.07(f)." (c) The definition of "Euro-Currency Reference Banks" contained in Section 1.01 of the Credit Agreement shall be amended and restated in its entirety as follows: "'Euro-Currency Reference Banks' shall mean the principal London offices of Bank of America NT & SA, The Chase Manhattan Bank, N.A. and The First National Bank of Chicago, and each such other bank as may be appointed pursuant to Section 9.07(f)." (d) The definition of "Syndicated Margin" contained in Section 1.01 of the Credit Agreement shall be amended and restated in its entirety as follows: "Syndicated Margin" shall mean, with respect to a Syndicated Loan outstanding on the applicable date of determination, the applicable Syndicated Margin set forth below (i) beneath the interest rate option applicable to such Syndicated Loan and (ii) opposite the ratings on the Borrower's senior unsecured long-term public debt issued Page 2 by both Moody's Investor Service, Inc. (or its successor) and Standard & Poor's Corporation (or its successor) in effect on such date of determination:
S & P Rating Moody's Rating Euro-Currency Fixed CD Base Rate ------------- -------------- ------------- -------- --------- A- or higher A3 or higher .15% .275% 0.0% BBB+ Baa1 .20% .325% 0.0% BBB Baa2 .225% .35% 0.0% BBB- Baa3 .30% .425% 0.0% Below BBB- Below Baa3 .45% .575% 0.0%
The rate of interest applicable to any outstanding Syndicated Loan shall change simultaneously with, and to the extent that, the applicable Syndicated Margin changes (as a result of a rating change). In the event of a split rating, the Borrower shall be entitled to the benefit of the higher rating, unless either rating is below BBB- or Baa3 (in which case the lower rating shall control). In the event that a rating is available from only one rating agency, such rating shall control. In the event that a rating is not available from either rating agency, the applicable Syndicated Margin shall be that which would be applicable in the case of a rating below BBB- or Baa3. (e) The definition of "Termination Date" contained in Section 1.01 of the Credit Agreement shall be amended and restated in its entirety as follows: "'Termination Date' shall mean April 3, 2001 or, if such day is not a Euro-Currency Business Day, the next preceding Euro-Currency Business Day." (f) The signature pages and Commitments set forth following Section 9.13 of the Credit Agreement shall be amended by (i) deleting the signature line and Commitment amount for each of the Withdrawing Banks, (ii) adding a new signature line and Commitment amount for each of the New Banks in the same form and position as set forth for each such New Bank on the signature pages to this Amendment and (iii) replacing the respective Commitment amounts set forth next to the name of each Increasing Bank (other than the New Banks) with the respective Commitment amount set forth next to the name of each such Increasing Bank on the signature pages to this Amendment. 3. Release of Withdrawing Banks; Provision for Facility Fee Accrued ---------------------------------------------------------------- Through Effective Date. Upon the Closing Date (as defined in Section 6 of this - ---------------------- Amendment) and effective as of the Effective Date (also as defined in Section 6 of this Amendment), each of the Withdrawing Banks shall cease to have any rights or obligations under the Credit Agreement and shall cease to be a "Bank" for all purposes thereunder; provided, however, that to the extent that the facility fee -------- ------- payable pursuant to Section 2.08(b) of the Credit Agreement on April 8, 1996 has accrued for the period prior to the Effective Date, such fee Page 3 shall be promptly distributed by the Agent to each of the Withdrawing Banks according to their respective Commitments as in effect prior to the Effective Date and the Withdrawing Banks shall remain "Banks" party to the Credit Agreement for the sole purpose of collecting said facility fee until such time as such facility fee has been paid in full with respect to such period ending on the Effective Date. Promptly upon the Closing Date, each Withdrawing Bank hereby agrees to promptly mark "Cancelled" the Note held by it pursuant to the Credit Agreement and return the same to the Agent (who shall promptly forward the same to the Borrower). 4. Assumption by the New Banks. By its execution and delivery of this --------------------------- Amendment and in consideration of the undertakings set forth herein and in the Credit Agreement and other good and valuable consideration, the receipt of which is hereby acknowledged, each of the New Banks hereby assumes and covenants and agrees fully, completely and timely to perform, comply with, and discharge each and all of the obligations, duties, and liabilities of a Bank under the Credit Agreement, which assumption includes, without limitation, the obligation to fund its respective Commitment, subject to the terms and conditions of the Credit Agreement. Each New Bank hereby agrees to be bound by all provisions relating to Banks under and as defined in the Credit Agreement and shall, upon the Closing Date and effective as of the Effective Date, be deemed a Bank for all purposes hereunder and under the Credit Agreement. 5. Representations and Warranties. The Borrower hereby confirms, ------------------------------ reaffirms and restates as of the date hereof the representations and warranties set forth in Article IV of the Credit Agreement except to the extent such representations and warranties relate to a specific date, provided that such representations and warranties shall be and hereby are amended as follows: each reference therein to "this Agreement", including, without limitation, such a reference included in the term "Bank Credit Documents", shall be deemed to be a collective reference to the Credit Agreement, this Amendment and the Credit Agreement as amended by this Amendment. An Event of Default under and as defined in the Credit Agreement as amended by this Amendment shall be deemed to have occurred if any representation or warranty made pursuant to the foregoing sentence of this Section 5 shall be materially false as of the date on which made or, to the extent such representations and warranties relate to a specific date, as of such date. 6. Effectiveness; Additional Conditions Precedent. (a) This Amendment and ---------------------------------------------- the amendments to the Credit Agreement provided for herein shall become effective as of April 3, 1996 (the "Effective Date") on the date, not later than April 30, 1996, on which all of the following conditions precedent shall have been satisfied (the "Closing Date"): (i) This Amendment shall have been duly executed and delivered by the Agent and the Borrower on one counterpart and each of the Banks (including each of the Withdrawing Banks and each of the Increasing Banks) shall have signed a Page 4 counterpart or counterparts hereof and notified the Agent by facsimile or telephone that such action has been taken and that such executed counterpart or counterparts will be mailed or otherwise delivered to the Agent. (ii) No Default or Event of Default shall have occurred and be continuing. (iii) No Loans shall be outstanding on either the Effective Date or the Closing Date, or on any date between the Effective Date and the Closing Date. (iv) The Borrower shall have duly executed and delivered to the Agent (who shall promptly forward the same to the respective New Banks), for the account of each New Bank, a Note payable to the order of such New Bank, which new Note shall thereupon become the Note of such New Bank for all purposes under the Credit Agreement. (b) Upon the Closing Date and effective as of the Effective Date, all references to the Credit Agreement in the conditions precedent to the initial Borrowing set forth in Sections 3.01(i), (ii), and (iii) of the Credit Agreement shall be deemed to refer to the Credit Agreement, this Amendment, and the Credit Agreement as amended by this Amendment. 7. Effect on the Existing Agreement. Except as expressly amended hereby, -------------------------------- all of the representations, warranties, terms, covenants and conditions of the Credit Agreement and the other Bank Credit Documents (a) shall remain unaltered, (b) shall continue to be, and shall remain, in full force and effect in accordance with their respective terms, and (c) are hereby ratified and confirmed in all respects. Upon the effectiveness of this Amendment, all references in the Credit Agreement (including references in the Credit Agreement as amended by this Amendment) to "this Agreement" (and all indirect references such as "hereby", "herein", "hereof" and "hereunder") shall be deemed to be references to the Credit Agreement as amended by this Amendment. 8. Expenses. The Borrower shall reimburse the Agent for any and all -------- reasonable costs, internal charges and out-of-pocket expenses (including reasonable attorneys' fees and time charges of attorneys for the Agent, which attorneys may be employees of the Agent) paid or incurred by the Agent in connection with the preparation, review, execution and delivery of this Amendment. 9. Entire Agreement. This Amendment, the Credit Agreement as amended by ---------------- this Amendment and the other Bank Credit Documents embody the entire agreement and understanding between the parties hereto and supersede any and all prior agreements and understandings between the parties hereto relating to the subject matter hereof. Page 5 10. Governing Law. This Amendment shall be construed in accordance with ------------- the internal laws (and not the law of conflicts) of the State of Illinois, but giving effect to federal laws applicable to a national banking association located in the State of Illinois. 11. Counterparts. This Amendment may be executed in any number of ------------ counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Amendment by signing any such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed effective as of the Effective Date. THE BORROWER ARCO CHEMICAL COMPANY By /s/ R. Remick ----------------------------------- Ronald R. Remick Vice President, Treasury and Planning Address for Notices: 3801 West Chester Pike Newtown Square, Pennsylvania 19073 Attn: Manager of Banking Telex No.: 99-0756 (answerback ARCO CHEM NS1) Telephone No.: 610-359-3362 Telecopier No.: 610-359-3322 Page 6 THE AGENT THE FIRST NATIONAL BANK OF CHICAGO By /s/ Barbara C. Chapman ------------------------------------ Title Corporate Banking Officer --------------------------------- Address for Notices: The First National Bank of Chicago One First National Plaza Chicago, Illinois 60670 Attention: William P. Laird Mail Suite 0464 Telex No.: 4330253 (answerback FNBCUI) Telephone No.: 312-732-5635 Telecopier No.: 312-732-3055 cc: W. Walter Green, III Mail Suite 0363 Telex No.: 4330253 (answerback FNBCUI) Telephone No.: 312-732-7235 Telecopier No.: 312-732-3055 THE BANKS Commitment - ---------- $50,000,000 THE FIRST NATIONAL BANK OF CHICAGO By /s/ Barbara C. Chapman ------------------------------------ Title Corporate Banking Officer --------------------------------- $45,000,000 THE CHASE MANHATTAN BANK, N.A. By [SIGNATURE APPEARS HERE] ------------------------------------ Title Vice President --------------------------------- [NAME APPEARS HERE] Page 7 $40,000,000 BANK OF AMERICA NT & SA By [SIGNATURE APPEARS HERE] ---------------------------- Title MANAGING DIRECTOR ---------------------------- $35,000,000 CREDIT LYONNAIS NEW YORK BRANCH By [SIGNATURE APPEARS HERE] ---------------------------- Title ---------------------------- CREDIT LYONNAIS CAYMAN ISLANDS BRANCH By [SIGNATURE APPEARS HERE] ---------------------------- Title ---------------------------- $30,000,000 DEUTSCHE BANK AG NEW YORK BRANCH By [SIGNATURE APPEARS HERE] /s/ J. Augsburger ---------------------------- Title Vice President Vice President ---------------------------- DEUTSCHE BANK AG CAYMAN ISLANDS BRANCH By [SIGNATURE APPEARS HERE] /s/ J. Augsburger ---------------------------- Title Vice President Vice President ---------------------------- Page 8 $25,000,000 PNC BANK, NATIONAL ASSOCIATION By [SIGNATURE APPEARS HERE] ----------------------------- Title Banking Officer ----------------------------- $15,000,000 ABN AMRO BANK N.V. NEW YORK BRANCH By /s/ George M. Dugan /s/ David W. Stack ----------------------------- Title George M. Dugan, VP David W. Stack, AVP ----------------------------- $15,000,000 BANK OF TOKYO - MITSUBISHI TRUST COMPANY By [SIGNATURE APPEARS HERE] ----------------------------- Title Vice President ----------------------------- $15,000,000 CITIBANK, N.A. By [SIGNATURE APPEARS HERE] ----------------------------- Title [NAME APPEARS HERE] ----------------------------- Vice President $15,000,000 CORESTATES BANK, N.A. By [SIGNATURE APPEARS HERE] ----------------------------- Title V P ----------------------------- Page 9 $15,000,000 COOPERATIVE CENTRALE RAIFFEISEN- BOERENLEENBANK, B.A., "RABOBANK NEDERLAND," NEW YORK BRANCH By /s/ Dana W. Hemenway -------------------------------- Title Dana W. Hemenway ----------------------------- Vice President By /s/ Ian Reece -------------------------------- Title Ian Reece ----------------------------- [TITLE APPEARS HERE] - ------------------- $300,000,000 THE WITHDRAWING BANKS CREDIT SUISSE By /s/ Andrea E. Shkane -------------------------------- Title Andrea E. Shkane ----------------------------- MEMBER OF SENIOR MANAGEMENT By /s/ Eileen O'Connell Fox -------------------------------- Title Eileen O'Connell Fox ----------------------------- MEMBER OF SENIOR MANAGEMENT TORONTO DOMINION (TEXAS), INC. By /s/ Diane Bailey -------------------------------- Title VP ----------------------------- TEXAS COMMERCE BANK NATIONAL ASSOCIATION By /s/ Mary C. Arnold -------------------------------- Title VICE PRESIDENT ----------------------------- Page 10 EX-10.4 3 EXECUTIVE SUPPLEMENTARY SAVINGS PLAN ARCO CHEMICAL COMPANY EXECUTIVE SUPPLEMENTARY SAVINGS PLAN To record the amendment and restatement of the ARCO Chemical Company Executive Supplementary Savings Plan, effective January 1, 1995, the undersigned, being duly authorized to act on behalf of ARCO Chemical Company has executed this plan document at Newtown Square, Pennsylvania on the 26th day of October, 1994. ATTEST: ARCO CHEMICAL COMPANY BY: /s/ Robert J. Millstone BY: /s/ Frank W. Welsh -------------------------- -------------------------- Frank W. Welsh Vice President Human Resources EXHIBIT 10.4 ARCO CHEMICAL COMPANY - -------------------------------------------------------------------------------- Executive Supplementary Savings Plan As Amended and Restated Effective January 1, 1995 ARCO CHEMICAL COMPANY EXECUTIVE SUPPLEMENTARY SAVINGS PLAN TABLE OF CONTENTS -----------------
PAGE NO Section 1 Intent of Plan................................................. 1 Section 2 Effective Date of Plan......................................... 1 Section 3 Definitions.................................................... 1 Section 4 Costs of Plan.................................................. 2 Section 5 Eligibility for Benefits....................................... 2 Section 6 Amount of Benefit.............................................. 2 Section 7 Crediting of Benefit........................................... 3 Section 8 Time of Payment of Benefit..................................... 3 Section 9 Death Benefits................................................. 3 Section 10 Administration................................................. 3 Section 11 Facility of Payment and Lapse of Benefits...................... 4 Section 12 General Provisions............................................. 5 Section 13 Amendments and Discontinuance.................................. 5
Section 1. Intent of Plan 1.1 This Plan is intended to provide an annual benefit, in accordance with the provisions of the Plan contained herein, to that select group of management or highly compensated employees which has been excluded receiving Company contributions ARCO Chemical Company Capital Accumulation Plan, due to the probability that their benefits under one or more qualified employee pension benefit plans maintained by the Company might be reduced solely by reason of the maximum annual limitations on contributions and benefits imposed by (S) 415 of the Internal Revenue Code of 1986, as amended (the "Code"). Section 2. Effective Date of Plan 2.1 This amendment and restatement of the Plan shall be effective as of January 1, 1995. Section 3. Definitions 3.1 Administrative Committee or Committee means the Committee established under Paragraph 10.1 of this Plan. 3.2 Base Salary means the regular wages or salary of an Employee as determined by the Company, excluding extra pay, such as bonuses, or other supplementary allowances. 3.3 Company means ARCO Chemical Company and any of its subsidiaries or affiliates whose employees are included in this Plan upon authorization of the Board of Directors of ARCO Chemical Company. 3.4 Disability or Disabled means an Employee's total and permanent disability as determined by the Administrative Committee. 3.5 Employee means any person who: (a) Is regularly employed by the Company, whether on a full-time or part-time basis; and (b) Either: (i) Is a member of that select group of management or highly compensated employees in the executive payroll grade of 64C5 or above; or (ii) Has an annual Base Salary which is not less than $150,000; or -1- (iii) Was an active participant in the Plan as of the December 31, 1994; and (c) Has been excluded from eligibility to receive Company contributions under the ARCO Chemical Company Capital Accumulation Plan, on account of a determination by the Company of potential application of the maximum annual contribution and benefit limitations imposed by the Code. 3.6 Plan Year means the calendar year. Section 4. Costs of Plan 4.1 All costs of this Plan, including the administration thereof, shall be borne by the Company and no contributions from Employees shall be required or permitted. Section 5. Eligibility for Benefits 5.1 Each person who qualifies as an Employee, as defined in Paragraph 3.5, for all, or any part, of the Plan Year, shall participate in the Plan for such portion of the Plan Year. Section 6. Amount of Benefit 6.1 The amount of an Employee's benefits for each Plan year shall be equal to either of the following: (a) With respect to an Employee who makes the maximum permissible elective deferral under the ARCO Chemical Company Capital Accumulation Plan during the Plan Year, an amount equal to the maximum percentage of the amount of such Employee's Base Salary that would have been contributed by the Company under the ARCO Chemical Company Capital Accumulation Plan assuming that there were no limitations on such contributions imposed by (S) 415 of the Code during the Plan Year; or (b) With respect to an Employee who does not make the maximum permissible elective deferral under the ARCO Chemical Company Capital Accumulation Plan during the Plan Year, an amount equal to the product of two times the amount of elective deferrals made by the Employee under the ARCO Chemical Company Capital Accumulation Plan during the Plan Year. -2- Section 7. Crediting of Benefits 7.1 The Committee shall determine the amount of benefit to be credited to an Employee for a Plan Year within 30 days following the end of the Plan Year, or 30 days following the Employee's termination of employment, whichever occurs earlier. Section 8. Time of Payment of Benefit 8.1 Each benefit to which an Employee is entitled for a Plan Year shall be paid in a single cash payment to the Employee, except as provided in the following paragraph. 8.2 Prior to the commencement of each Plan Year, prospective Participants shall be offered the right to elect irrevocably to defer all or a portion or portions of the payment of their awards for the Plan Year pursuant to the terms and conditions of the ARCO Chemical Company Key Management Deferral Plan. Section 9. Death Benefits 9.1 In the event of an Employee's death prior to payment of the benefit due such Employee under the Plan, the benefit shall be payable as soon as practicable following the Employee's death to the beneficiary or beneficiaries most recently designated by the Employee in writing on a form prescribed by the Committee. If no such designation shall have been made, or if all designated beneficiaries shall have died before the Employee, payment shall be made to the Employee's estate. Section 10. Administration 10.1 Administrative Committee. The Compensation Committee of the Board of Directors of ARCO Chemical Company shall act as the Administrative Committee of this Plan. 10.2 Rules of Conduct. The Administrative Committee shall adopt such rules for the conduct of its business and administration of this Plan as it considers desirable, provided they do not conflict with the provisions of this Plan. 10.3 Legal, Accounting, Clerical and Other Services. The Administrative Committee may authorize one or more of its members or any agent to act on its behalf and may contract for legal, accounting, clerical and other services to carry -3- out this Plan. All expenses of the Administrative Committee shall be paid by the Company. 10.4 Interpretation of Provisions. The Administrative Committee shall have the right to interpret the provisions of this Plan and to decide questions arising in its administration. The decisions and interpretations of the Administrative Committee shall be final and binding on the Company, its Employees and all other persons. 10.5 Records of Administration. The Administrative Committee shall keep records reflecting the administration of this Plan which shall be subject to audit by the Company. 10.6 Denial of Claim. The Administrative Committee shall provide adequate notice in writing to any Employee or beneficiary whose claim for benefits under this Plan has been denied, setting forth the specific reasons for such denial. The Employee or beneficiary will be given an opportunity for a full and fair review by the Administrative Committee of the decision denying the claim. The Employee or beneficiary shall be given 60 days from the date of the notice denying any such claim within which to request such review. 10.7 Liability of Committee. No member of the Administrative Committee shall be liable for any action taken in good faith or for the exercise of any power given the Administrative Committee, or for the actions of other members of said Committee. Section 11. Facility of Payment and Lapse of Benefits 11.1 Provisions for incapacity. If the Administrative Committee deems any person entitled to receive any payment under the provisions of this Plan incapable of receiving or disbursing the same by reason of minority, illness or infirmity, mental incompetency, or incapacity of any kind, the Committee may, in its sole discretion, take any one or more of the following actions: it may apply such payment directly for the comfort, support and maintenance of such person; it may reimburse any person for any such support theretofore supplied to the person entitled to receive any such payment; or it may pay such payment to any other person selected by the Committee to disburse such payment for the comfort, support and maintenance of the person entitled thereto including, without limitation, to any relative who has undertaken, wholly or partially, the expense of such person's comfort, care and maintenance, or any institution in whose care or custody the person entitled to the payment may be. The Administrative Committee may, in its sole discretion, deposit any payment due to a minor to the minor's credit in any savings or commercial bank of the Committee's choice. -4- 11.2 Payments or Deposits. Payment or deposits made pursuant to any provision of this Section 11 shall be a complete discharge, to the extent thereof, of all liability under the provisions of this Plan, or otherwise, of the Administrative Committee, the Company and this Plan, and the receipt by the person or persons receiving any such payment, distribution or deposit shall be a complete acquittance therefor, and there shall be no liability to see to the application of any payments, distributions or deposits so made. Section 12. General Provisions 12.1 Unfunded Benefit Plan. This Plan is intended to constitute a Plan which is unfunded and is maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated Employees. 12.2 Grantor Trust. The Company intends to establish a grantor trust to aid in accumulating the amounts necessary to pay any amount awarded to any Participant for any Plan Year, or any Award deferred pursuant to Section 8 or any interest credited thereon. All Awards, and any interest credited thereon, shall be paid from the general funds of the Company to the extent not paid from the grantor trust. Under no circumstances shall a Participant or other person have any interest whatsoever in any particular property or assets of the Company as a result of this Plan or any Award made thereunder. 12.3 Payments and Benefits Not Assignable. Benefits under this Plan are not assignable or subject to alienation by Employees. Likewise, such payments shall not be subject to attachments by creditors of, or through legal process against, the Company, the Administrative Committee, or any Employee. 12.4 No Right of Employment. The provisions of this Plan shall not give an Employee the right to be retained in the service of the Company. 12.5 Adjustments. The Administrative Committee may, with respect to an Employee, adjust such Employee's benefit under this Plan or make such other adjustments with respect to such Employee as are required to correct administrative errors or provide uniform treatment of Employees in a manner consistent with the intent and purpose of this Plan. Section 13. Amendments and Discontinuance 13.1 Amendment of Plan. This Plan may be amended from time to time by the Board of Directors of ARCO Chemical Company. -5- 13.2 Termination. ARCO Chemical Company intends to continue this Plan indefinitely, but reserves the right to terminate it at any time. 13.3 Effect of Amendment or Termination. No amendment or termination of this Plan may adversely affect the benefit payable to any Employee entitled to receive benefits under this Plan prior to the effective date of the amendment or termination. -6- EX-10.6 4 AMENDMENT NO. 1 TO EXECUTIVE LONG-TERM INCENTIVE PLAN AMENDMENT NO. 1 TO THE ARCO CHEMICAL COMPANY 1987 EXECUTIVE LONG-TERM INCENTIVE PLAN ___________________________________________ The ARCO Chemical Company 1987 Executive Long-Term Incentive Plan, as amended (the "Plan"), is hereby amended as follows: 1. Article I, Section 2 of the Plan shall be amended by adding the following definition as new clause (k): (k) "Sale Price" of any share of Common Stock shall mean the actual price for which such share of Common Stock shall have been sold by an Eligible Employee on the date in question as reported on a confirmation form prepared and furnished to the Company by the broker effecting the transaction on behalf of such Eligible Employee. 2. Article II, Section 2(g) of the Plan shall be amended and restated in its entirety as follows: (g) Dividend Share Credits. Dividend Share Credits shall be credited ---------------------- as provided in Article I, Section 2(i) of the Plan. Upon the exercise, expiration or surrender of any Stock Option, in whole or in part, the Dividend Share Credits attributable to the shares of Common Stock (referred to for purposes of this Section as the "affected shares") underlying such exercised, expired or surrendered Stock Option shall be canceled and a cash payment in respect of such canceled Dividend Share Credits shall be made to the optionee in an amount calculated pursuant to: X, as stated below, in the case of the exercise of any Stock Option and sale of the affected shares in a broker-assisted transaction involving the withholding of a portion of the proceeds from the sale of the affected shares in payment of the Option Price (a "cashless exercise"); or Y, as stated below, in any other case, including, but not limited to, the exercise of any Stock Option involving the delivery of cash (other than pursuant to a cashless exercise) or surrender of shares of Common Stock to the Company in payment of the Option Price, or the expiration or surrender to the Company of any Stock Option. For purposes of this EXHIBIT 10.6 Section, the date of exercise, expiration or surrender of any Stock Option shall be referred to as the "determination date". Where: X = Sale Price of a share of Common Stock multiplied by the total number of canceled Dividend Share Credits. Y = Fair Market Value of a share of Common Stock multiplied by the total number of canceled Dividend Share Credits, less the amount by which the aggregate Option Price of the affected shares exceeds the aggregate Fair Market Value of such shares on the determination date. 3. Except as set forth herein, the Plan shall not be amended or modified and shall remain in full force and effect. All capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Plan. Executed as of this 26th day of July, 1995. Attest: By:/s/Robert J. Millstone By:/s/Frank W. Welsh ------------------------- ----------------------- Robert J. Millstone Frank W. Welsh Secretary Vice President -2- EX-12 5 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ARCO CHEMICAL COMPANY AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (MILLIONS OF DOLLARS)
YEARS ENDED DECEMBER 31, ------------------------ 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Pretax income from continuing operations.............. $322 $311 $416 $756 $487 Add: Interest expense.................................... 91 105 85 89 86 Rental expense factor............................... 26 20 22 25 27 ---- ---- ---- ---- ---- Earnings available for fixed charges.................. $439 $436 $523 $870 $600 ==== ==== ==== ==== ==== Interest expense...................................... $ 91 $105 $ 85 $ 89 $ 86 Add capitalized interest.............................. 37 -- 3 1 3 Rental expense factor................................. 26 20 22 25 27 ---- ---- ---- ---- ---- Fixed charges......................................... $154 $125 $110 $115 $116 ==== ==== ==== ==== ==== Ratio of earnings to fixed charges.................... 2.9 3.5 4.8 7.6 5.2 ==== ==== ==== ==== ====
EXHIBIT 12 EX-21 6 SUBSIDIARIES ARCO CHEMICAL COMPANY SUBSIDIARIES
JURISDICTION NAME ENTITY OF FORMATION ---- ------------------- ------------ ARCO Chemie Nederland, Ltd. corporation Delaware ARCO Chimie France SNC partnership France POSM II Limited Partnership, L.P. limited partnership Delaware ARCO Chemical Delaware Company corporation Delaware ARCO Chemical Technology, L.P. limited partnership Delaware The Meadows Corporation corporation Delaware
The subsidiaries whose names are not listed above, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary of the Company. EXHIBIT 21 EX-23 7 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following registration statements of ARCO Chemical Company and Subsidiaries: Registration Statement on Form S-8 (No. 33-17707), Registration Statement on Form S-8 (No. 33-23867), Registration Statement on Form S-8 (No. 33-38062), Registration Statement on Form S-8 (No. 33-23241), Registration Statement on Form S-8 (No. 333-16395), and Registration Statement on Form S-8 (No. 333-19023) of our report dated February 12, 1997 on our audits of the consolidated financial statements of ARCO Chemical Company and Subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996 which report is included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Philadelphia, Pennsylvania February 25, 1997 EXHIBIT 23 EX-24 8 POWER OF ATTORNEY ARCO CHEMICAL COMPANY POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Alan R. Hirsig, Robert J. Millstone, John A. Shaw, and Walter J. Tusinski, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to effect the following acts as necessary or appropriate for the conduct of the business and affairs of ARCO Chemical Company (the "Company"): I. In connection with any outstanding security of the Company registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (1) to execute any singular or periodic report required or permitted to be filed under the Securities Exchange Act of 1934, as amended, including specifically the Company's Annual Report on Form 10-K for the ------------ fiscal year ended December 31, 1996; and (2) to file or cause to be filed such report with the Securities and Exchange Commission (the "Commission"), any national or foreign securities exchange, any securities industry self-regulatory organization, any state or other jurisdiction of the United States, and any jurisdiction outside the United States, in each case as required or permitted by applicable law; II. In connection with the issuance, offering, or sale of any securities authorized by the Board of Directors of the Company or by the Executive Committee thereof pursuant to due authorization by such Board, or in connection with the issuance, offering or sale of any security, participation or interest in any employee or executive compensation or benefit plan authorized and approved by the Board of Directors of the Company or by the Executive or Compensation Committees thereof pursuant to due authorization by such Board (1) to execute and file, or cause to be filed, with the Commission, (A) Registration Statements and any and all amendments (including post- effective amendments) thereto, and to file, or cause to be filed, all exhibits thereto and other documents in connection therewith as required or permitted by the Commission in connection with such registration under the Securities Act of 1933, as amended, and (B) any singular or periodic report or other document required or permitted to be filed by the Company with the Commission pursuant to the Securities Exchange Act of 1934, as amended; (2) to execute and file, or cause to be filed, any application for registration or exemption therefrom, or any report or any other document required or permitted to be filed by the Company under the Blue Sky or securities laws of any state or other jurisdiction of the United States, and to furnish any other information required in connection therewith, including any reports or other documents required or permitted to be filed subsequent to the issuance of such securities; (3) to execute and file, or cause to be filed, any application for registration or exemption therefrom under the securities laws of any jurisdiction outside the United States, including any reports or other documents required or permitted to be filed subsequent to the issuance of such securities; and (4) to execute and file, or cause to be filed, any application for listing such securities on any national or foreign securities exchange; granting to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act required to be done as he or she might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, and each of them, may lawfully do or cause to be done by virtue of this Power of Attorney. EXHIBIT 24 Each such attorney-in-fact and agent shall have the right to indemnification for any action taken or omitted pursuant to this Power of Attorney provided in the By-Laws of the Company to officers and directors for service as such, including, but not limited to, the non-exclusivity provisions of such By-Laws. Each person whose signature appears below may at any time revoke this Power of Attorney, as to himself or herself only, by an instrument in writing specifying that this Power of Attorney is revoked as to him or her as of the date of delivery of such revocation to the Secretary of the Company or at a subsequent specified date. This Power of Attorney shall be revoked automatically with respect to any person whose signature appears below effective on the date he or she ceases to be a member of the Board of Directors, or in the case of Mr. Millstone, on the date he ceases to be Vice President, General Counsel and Secretary, or in the case of Mr. Shaw, on the date he ceases to be principal accounting officer of the Company. Any revocation shall not void or otherwise affect any acts performed by any attorney-in-fact and agent named herein pursuant to this Power of Attorney prior to the effective date of such revocation. This instrument may be executed in multiple counterparts each of which shall be deemed an original and all of which together shall be deemed one instrument. SIGNATURE TITLE DATE --------- ----- ---- /s/ MIKE R. BOWLIN Chairman of the - ------------------------------------- Board and Director Mike R. Bowlin /s/ ALAN R. HIRSIG President, Chief - ------------------------------------- Executive Officer Alan R. Hirsig and Director /s/ MARVIN O. SCHLANGER Executive Vice - ------------------------------------- President, Chief Marvin O. Schlanger Operating Officer and Director February 25,1997 /s/ WALTER J. TUSINSKI Senior Vice - ------------------------------------- President, Chief Walter J. Tusinski Financial Officer and Director /s/ WALTER F. BERAN - ------------------------------------- Director Walter F. Beran /s/ ANTHONY G. FERNANDES - ------------------------------------- Director Anthony G. Fernandes /s/ MARIE L. KNOWLES - ------------------------------------- Director Marie L. Knowles SIGNATURE TITLE DATE --------- ----- ---- /s/ JAMES A. MIDDLETON - ------------------------------------- Director James A. Middleton /s/ STEPHEN R. MUT - ------------------------------------- Director Stephen R. Mut February 25, 1997 /s/ FRANK SAVAGE - ------------------------------------- Director Frank Savage /s/ ROBERT H. STEWART, III - ------------------------------------- Director Robert H. Stewart, III EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 70 0 629 0 536 1,272 4,152 1,530 4,394 772 844 0 0 100 1,914 4,394 3,955 3,955 3,067 3,067 0 0 86 487 139 348 0 0 0 348 3.60 3.60
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