-----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, OFiART812/Mvt3C+Op8y1seCkGTlNo4mGi+mekbWvSyooJCQRN4o1/6cEONB8QC3 n/TRzOCMOYt2ZIEhL5KnTw== 0001036050-98-000721.txt : 19980430 0001036050-98-000721.hdr.sgml : 19980430 ACCESSION NUMBER: 0001036050-98-000721 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980429 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-Q SEC ACT: SEC FILE NUMBER: 001-09678 FILM NUMBER: 98603752 BUSINESS ADDRESS: STREET 1: 3801 WEST CHESTER PIKE CITY: NEWTOWN SQUARE STATE: PA ZIP: 19073 BUSINESS PHONE: 2153592000 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 --------------- 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 IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 3801 WEST CHESTER PIKE (ZIP CODE) NEWTOWN SQUARE, PENNSYLVANIA 19073-2387 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) --------------- (610) 359-2000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) --------------- NOT APPLICABLE (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) 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 --- --- NUMBER OF SHARES OF COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING AS OF MARCH 31, 1998: 97,242,729. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION ITEM 1. ARCO CHEMICAL COMPANY AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) CONSOLIDATED STATEMENTS OF INCOME (Millions of Dollars, Except Per Share Data)
Three Months Ended March 31, ------------------- 1998 1997 ------- ---------- Sales and other operating revenues $ 934 $1,029 Costs and other operating expenses 720 844 ----- ------ Gross profit 214 185 Selling, general and administrative expenses 52 68 Research and development 17 21 ----- ------ Operating income 145 96 Interest expense 18 22 Other (income) expense, net (8) 1 ----- ------ Income before income taxes 135 73 Provision for income taxes 43 25 ----- ------ Net income $ 92 $ 48 ===== ====== Earnings per share: Basic $ .95 $ .50 ===== ====== Diluted $ .95 $ .50 ===== ====== Cash dividends paid per share $ .70 $ .70 ===== ======
See accompanying notes. See accompanying notes. ARCO CHEMICAL COMPANY CONSOLIDATED BALANCE SHEETS (Millions of Dollars) March 31, December 31, 1998 1997 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 39 $ 29 Accounts receivable, net 614 612 Inventories 467 484 Prepaid expenses and other current assets 29 21 ------ ------ Total current assets 1,149 1,146 Investments and long-term receivables 61 64 Property, plant and equipment, net 2,495 2,534 Deferred charges and other assets (net of accumulated amortization of $115 in 1998 and $113 in 1997) 364 372 ------ ------ Total assets $4,069 $4,116 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 110 $ 98 Long-term debt due within one year 23 23 Accounts payable 265 304 Taxes payable 58 56 Other accrued liabilities 275 278 ------ ------ Total current liabilities 731 759 ------ ------ Long-term debt 773 792 Other liabilities and deferred credits 225 215 Deferred income taxes 332 338 Minority interest 206 219 Stockholders' equity: Common stock 100 100 Additional paid-in capital 881 880 Retained earnings 926 902 Foreign currency translation (33) (14) Treasury stock, at cost (72) (75) ------ ------ Total stockholders' equity 1,802 1,793 ------ ------ Total liabilities and stockholders' equity $4,069 $4,116 ====== ====== See accompanying notes. -2- ARCO CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions of Dollars) Three Months Ended March 31, ------------------ 1998 1997 ------ ------ Cash flows from operating activities Net income $ 92 $ 48 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 52 57 Changes in working capital accounts (40) (37) Other 14 (2) ---- ----- Net cash provided by operating activities 118 66 ---- ----- Cash flows from investment activities Capital expenditures (44) (60) Proceeds from asset sales - 20 Other 4 5 ---- ----- Net cash used in investment activities (40) (35) ---- ----- Cash flows from financing activities Dividends paid (68) (68) Repayment of long-term debt (14) (158) Proceeds from issuance of long-term debt - 158 Net proceeds from notes payable 10 21 Other 4 4 ---- ----- Net cash used in financing activities (68) (43) ---- ----- Effect of exchange rate changes on cash - (4) ---- ----- Net increase in cash and cash equivalents 10 (16) Cash and cash equivalents at beginning of year 29 70 ---- ----- Cash and cash equivalents at end of period $ 39 $ 54 ==== ===== See accompanying notes. -3- ARCO CHEMICAL COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Millions of Dollars) Three Months Ended March 31, ------------------- 1998 1997 ------- ------- Net income $ 92 $ 48 Foreign currency translation, net of tax (19) (40) ----- ----- Comprehensive income $ 73 $ 8 ===== ===== See accompanying notes. -4- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED NOTE A. BASIS OF PRESENTATION The foregoing financial information is unaudited and has been prepared from the records of ARCO Chemical Company (the Company). In the opinion of management, the financial information reflects all adjustments (consisting only of items of a normal recurring nature) necessary for a fair statement of financial position and results of operations in conformity with generally accepted accounting principles. Certain amounts in 1997 have been reclassified for comparative purposes. These interim financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 1997. NOTE B. 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 is indicated by the table below. In addition to total revenues by origin (point of sale), the Company has also presented total revenues by destination (customer location). Intercompany sales between geographic areas are excluded. Three Months Ended March 31, ------------------ 1998 1997 ------ ------ (Millions of Dollars) Total revenues (by destination) United States $477 $ 531 Europe 251 264 Other foreign 206 234 ---- ------ Total $934 $1,029 ==== ====== Total revenues (by origin) United States $567 $ 639 Europe 281 292 Other foreign 86 98 ---- ------ Total $934 $1,029 ==== ====== Pretax earnings United States $136 $ 91 Europe 15 2 Other foreign 2 2 Interest expense (18) (22) ---- ------ Total $135 $ 73 ==== ====== Pretax earnings include royalty charges made to foreign operations for the use of Company technology. -5- NOTE C. INVENTORIES Inventories at March 31, 1998 and December 31, 1997 comprised the following categories: 1998 1997 ---- ---- (Millions of Dollars) Finished goods $329 $336 Work-in-process 51 45 Raw materials 44 58 Materials and supplies 43 45 ---- ---- Total $467 $484 ==== ==== NOTE D. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, at cost, and related accumulated depreciation at March 31, 1998 and December 31, 1997 were as follows: 1998 1997 ------ ------ (Millions of Dollars) Property, plant and equipment $4,124 $4,149 Less: accumulated depreciation 1,629 1,615 ------ ------ Total $2,495 $2,534 ====== ====== NOTE E. CONTINGENCIES 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 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 March 31, 1998, the Company's environmental liability totaled $43 million, which reflected the Company's latest assessment of potential future remediation costs associated with existing sites. A significant portion of the liability is related to the Beaver Valley plant site, located in Monaca, Pennsylvania. The Company sold the Beaver Valley plant assets to NOVA Chemicals Inc. (NOVA) on September 30, 1996, but retained ownership of the land at the Beaver Valley plant site, substantial portions of which were leased to NOVA. On -6- October 20, 1997, the Company, Beazer East, Inc. (Beazer) and the Pennsylvania Department of Environmental Protection (PADEP) entered into a consent agreement that acknowledged the completion of remedial investigations and conditionally approved the proposed remediation methods at the Beaver Valley plant site, all pursuant to a 1994 work plan previously agreed to by the Company and PADEP. Following execution of the consent agreement, the Company transferred to NOVA title to the previously leased portions of the land at the Beaver Valley plant site. The Company continues to retain responsibility for remediation of the land. Final approval of the remediation methods is subject to PADEP's approval of risk assessment studies to be submitted by the Company in the near future. The Company has an agreement with Beazer whereby Beazer has agreed to pay for approximately 50 percent of the Beaver Valley plant site remediation costs. The Company and Beazer 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 Beazer for remediation of substantial portions of the Beaver Valley site. The remainder of the liability is related to four other plant sites and one federal Superfund site for amounts ranging from $2 million to $13 million per site. The Company is involved in administrative proceedings or lawsuits relating to a minimal number of 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 accrued 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 the scope of remediation required, the final remediation method selected and the cleanup standard applied vary from the assumptions used in estimating the liability. 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 accrued or disclosed above would not have a material adverse impact on the Company's consolidated financial statements. The Company and the Atlantic Richfield Company (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. -7- NOTE F. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." SFAS No. 128 required companies to adopt its provisions in financial statements issued for periods ending after December 15, 1997 and required restatement of all prior earnings per share ("EPS") data presented. Basic EPS is based on the average number of common shares outstanding during each period. Diluted EPS includes the effect of outstanding stock options. Three Months Ended March 31, 1998 1997 -------- -------- Shares EPS Shares EPS -------- ------- -------- ------- (Millions, except per share amounts) Earnings per Share: Basic....................... 97.2 $0.95 96.8 $0.50 Dilutive effect of options.. 0.1 - 0.1 - ---- ------- ---- ------- Diluted..................... 97.3 $0.95 96.9 $0.50 ==== ======= ==== ======= NOTE G. SUPPLEMENTAL CASH FLOW INFORMATION Following is supplemental cash flow information for the three months ended March 31, 1998 and 1997: 1998 1997 ------ ------ (Millions of Dollars) Changes in working capital-increase (decrease) in cash: Accounts receivable $(13) $(48) Inventories 13 (6) Prepaid expense and other current assets (9) (11) Accounts payable (33) 1 Taxes payable 3 16 Other accrued liabilities (1) 11 ---- ---- Changes in working capital accounts $(40) $(37) ==== ==== The above changes exclude the effects of foreign exchange rate changes. Cash paid during the period for: Interest (net of amount capitalized) $ 16 $ 17 ==== ==== Income taxes $ 20 $ - ==== ======= -8- NOTE H. RESTRUCTURING PROGRAM During the third quarter 1997, the Company recorded a pretax charge of $175 million related to a previously announced restructuring program, which included a review of all operations and assets. Activities related to the restructuring program are expected to continue through the end of 1998. The restructuring charge included $75 million of personnel-related costs and $23 million of exit costs. Other charges included $77 million related to the review of assets. Personnel costs included severance, pension enhancements, and other ancillary costs for the reduction of approximately 630 employees worldwide in manufacturing, commercial, research, and administrative activities. Severance payments and other ancillary costs, which will be paid from Company funds, accounted for $54 million of the accrued liability. Certain of these payments can be deferred at the election of employees, and the Company estimates that such payments will take place over the next two to three years. Exit costs included costs of canceling long-term contracts and leases related to certain production, sales and administrative facilities, including $7 million related to the write down of production assets. Through March 31, 1998, approximately 380 employees have been terminated and approximately $19 million of severance and ancillary costs have been paid out and charged against the accrued liability. There were no payments of exit costs. NOTE I. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which requires prominent disclosure of comprehensive income, as defined, including comparative disclosure in interim financial statements. -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. The Company also manufactures and markets toluene diisocyanate (TDI). TDI and polyols are combined in the manufacture of polyurethanes. Net income for the first quarter 1998 was $92 million compared with $48 million in the first quarter 1997. The $44 million improvement was primarily attributable to higher core product volumes and the Company's cost reduction program. First quarter 1998 core product margins also improved as lower feedstock costs were only partly offset by lower sales prices. RESULTS OF OPERATIONS PRODUCT VOLUMES Sales and other operating revenues included the sales and processing volumes of the Company's core products and co-products for the first quarter 1998 and 1997 as set forth below. Core products included PO, PO derivatives, and TDI. 1998 1997 ----- ----- (Millions) Core products (pounds) 1,071 1,002 Co-products: SM (pounds) 699 708 TBA and derivatives (gallons) 250 260 The reported SM volumes included quantities processed for PO/SM II equity partners (SM equity volumes) under long-term processing arrangements. The SM equity volumes were 216 million and 200 million pounds in the 1998 and 1997 periods, respectively. REVENUES Revenues of $934 million in the first quarter 1998 decreased nine percent compared to revenues of $1,029 million in the first quarter 1997, reflecting lower average sales prices and lower co-product volumes, partly offset by higher core product volumes. Average sales prices were generally lower in 1998, reflecting a combination of lower feedstock costs, ongoing competition in PO derivatives and TDI markets, the negative effects of a stronger U.S. dollar on foreign sales, lower prices in Asian markets, and lower prices for co- products, -10- MTBE and SM. MTBE prices were affected by significantly lower gasoline prices in the 1998 period, while SM prices were affected by industry capacity increases in the face of weaker demand, primarily in Asia. Core product volumes increased seven percent in the first quarter 1998 versus the prior year period, reflecting higher PO volumes and stronger demand for certain PO derivatives in the United States and Western Europe, partly offset by lower volumes in Asian markets. Weaker demand in Asian markets also affected SM export volumes. As a result, total SM volumes declined slightly versus the 1997 period. TBA and derivatives volumes decreased four percent, mainly due to lower contractual MTBE sales. GROSS PROFIT Gross profit of $214 million in the first quarter 1998 increased $29 million compared to gross profit of $185 million in the 1997 first quarter, primarily due to higher core product volumes and, to a lesser extent, fixed cost reductions. First quarter 1998 core product margins also improved as feedstock costs decreased more than sales prices. However, a significant portion of the margin improvement in core products was offset by margin decreases in co- products. Gross profit as a percent of sales increased to 22.9 percent in the first quarter 1998 compared to 18.0 percent in the 1997 period. OTHER In total, selling, general and administrative and research and development expense decreased $20 million, primarily due to the Company's cost reduction program. Other income of $8 million in 1998 compared to expense of $1 million in 1997. The $9 million improvement is primarily due to lower foreign exchange losses in the 1998 period. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1998, the Company had $39 million in cash and cash equivalents compared with $29 million at December 31, 1997. The Consolidated Statement of Cash Flows for the quarter ended March 31, 1998 shows that net cash flows provided by operating activities were $118 million, whereas net cash flows used by investment and financing activities were $40 million and $68 million, respectively. Investment activities for the first quarter 1998 included capital expenditures of $44 million. On March 2, 1998, the Company's Board of Directors gave approval to move forward with a new world-scale butanediol (BDO II) plant in Rotterdam, the Netherlands, with an annual capacity of 250 million pounds. The BDO II plant, in addition to the new PO 11 PO/SM plant in Rotterdam and a number of capacity additions at existing facilities, are part of the Company's five-year capacity expansion program. The Company has revised estimates of the cost of its five-year capital program from $2.3 billion to $2.0 billion, reflecting expected cost savings and efficiencies in the execution of the program. Financing activities for the first quarter 1998 included the payment of a dividend of $.70 per share, totaling $68 million. On April 16, 1998, the Board of Directors declared a dividend of $.70 per share on the Company's common stock, payable June 5, 1998. -11- In April 1998, the Company entered into foreign currency forward and "zero-cost" range forward option contracts, with maturities ranging from 1998 through 2001, in order to minimize its foreign exchange exposure relating to the planned BDO II plant construction in Rotterdam, the Netherlands. The total notional amount of foreign currency contracts outstanding, including such contracts, is approximately $580 million. The hypothetical loss in future cash flows of these new derivative instruments as of the date of their acquisition, assuming a hypothetical change of 10 percent versus the contractual exchange rates, was $17 million. Sensitivity analysis was used for this purpose, and assumed strengthening of the U.S. dollar versus the Netherlands guilder. The Company maintains a credit agreement under which it can borrow amounts up to $500 million. At March 31, 1998, the Company had no outstanding borrowing against the credit agreement, which is used to back up the Company's commercial paper borrowing. 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. FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." The statement will be effective for the Company's 1998 annual financial statements. SFAS No. 131 established standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." The Company currently reports one segment under SFAS No. 14 guidelines. It is still reviewing the impact SFAS No. 131 will have on its reportable operating segments. SFAS No. 131 affects disclosure only and will not affect reported earnings, cash flow or financial position. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 establishes criteria for determining which costs of developing or obtaining internal-use computer software should be charged to expense and which should be capitalized. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires costs of start-up activities and organization costs to be charged to expense as incurred. SOP 98-1 and 98-5 will affect the Company beginning in calendar year 1999; the Company does not plan to adopt them earlier. The Company does not anticipate that adoption of the new SOPs will have a material effect on its consolidated financial statements. -12- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to the disclosures on page 9 of the Company's 1997 Annual Report on Form 10-K. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.1 ARCO Chemical Company 1998 Long-Term Incentive Plan, effective as of February 19, 1998. 10.2 ARCO Chemical Company Change of Control Plan, effective as of February 19, 1998. 12 Computation of the Ratio of Earnings to Fixed Charges 27 Financial Data Schedule for the three months ended March 31, 1998. (b) Reports on Form 8-K: None. -13- SIGNATURE Pursuant to the requirements 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. ARCO CHEMICAL COMPANY (Registrant) /s/ Van Billet ------------------------------------ (Signature) Van Billet Vice President and Controller (Duly Authorized Officer and Chief Accounting Officer) Dated: April 29, 1998 -14- EXHIBIT INDEX Exhibit Number Description - ------- ----------- 10.1 ARCO Chemical Company 1998 Long-Term Incentive Plan, effective as of February 19, 1998. 10.2 ARCO Chemical Company Change of Control Plan, effective as of February 19, 1998. 12 Computation of the Ratio of Earnings to Fixed Charges 27 Financial Data Schedule for the three months ended March 31, 1998. EX-10.1 2 ARCO CHEMICAL COMPANY 1998 LONG-TERM INCENTIVE PLAN EXHIBIT 10.1 ------------ ARCO CHEMICAL COMPANY 1998 LONG-TERM INCENTIVE PLAN To record the adoption of the ARCO Chemical Company 1998 Long-Term Incentive Plan, effective as of February 19, 1998, the undersigned, being duly authorized to act on behalf of ARCO Chemical Company has executed this plan document at Newtown Square, Pennsylvania on the 10th day of April, 1998. ATTEST: ARCO CHEMICAL COMPANY BY: /s/ Valerie Harrison Perry BY: /s/ Francis W. Welsh -------------------------------- ------------------------------ Francis W. Welsh Vice President - Human Resources ARCO CHEMICAL COMPANY 1998 LONG-TERM INCENTIVE PLAN TABLE OF CONTENTS
ARTICLE I GENERAL PROVISIONS........................................................... 2 Section 1. Purpose of the Plan.......................................................... 2 Section 2. Overview of the Plan......................................................... 2 Section 3. Definitions.................................................................. 3 Section 4. Administration of the Plan................................................... 5 ARTICLE II STOCK OPTIONS................................................................ 7 Section 1. Grant of Stock Options....................................................... 7 Section 2. Terms and Conditions of Stock Options........................................ 7 ARTICLE III RESTRICTED STOCK............................................................. 10 Section 1. Grant of Contingent Restricted Stock......................................... 10 Section 2. Conversion of Contingent Restricted Stock into Performance-Based Restricted Stock........................................................... 10 Section 3. The End of the Performance Period............................................ 12 Section 4. The Performance Supplement................................................... 12 Section 5. Termination of Employment Prior to Completion of Performance Period.......... 14 Section 6. Vesting of Performance-Based Restricted Stock................................ 16 Section 7. Change of Control............................................................ 17 ARTICLE IV MISCELLANEOUS PROVISIONS..................................................... 19 Section 1. Option and Restricted Stock Limits........................................... 19 Section 2. Adjustment in Terms of Award................................................. 19 Section 3. Governmental Regulations..................................................... 20 Section 4. No Guaranty of Employment.................................................... 20 Section 5. Relation to Benefit Plans.................................................... 21 Section 6. Assignment or Transfer....................................................... 21 Section 7. Rights as Stockholder........................................................ 21 Section 8. Withholding Taxes............................................................ 22 Section 9. Amendment and Discontinuance of the Plan..................................... 22 Section 10. Effective Date............................................................... 23 Section 11. Term of Plan................................................................. 23 Section 12. Miscellaneous................................................................ 23
i ARTICLE I GENERAL PROVISIONS SECTION 1. PURPOSE OF THE PLAN The purpose of the Plan is to provide a select group of Company executives and other key employees with specific incentives to work for long- range value creation for the Company's stockholders and to enable the Company to attract, retain, and motivate employees of superior capability. SECTION 2. OVERVIEW OF THE PLAN The Plan encourages the creation of stockholder value over the long-term by measuring Return on Capital Managed (RCM) and Total Stockholder Return (TSR), and compensating executives and other key employees for differential performance. The Plan has two components: The Performance Share Plan (PSP) measures the Company's RCM generation and consists of a series of cumulative RCM goals for each Performance Period. Under the PSP, the recipients of awards of Contingent Restricted Stock become entitled to shares of Performance-Based Restricted Stock upon the achievement of RCM performance objectives during the Performance Period. Once all successive RCM objectives are achieved (or at the end of a period specified by the Subcommittee, if earlier), the prevailing Performance Period ends and a new period begins. The Stock Option Plan (SOP) provides for grants of non-qualified stock options of the Company at the Fair Market Value of a share of Common Stock of the Company on the date of grant. Typically, approximately one-half of each participant's Long-Term Incentive Target Value will be delivered by the PSP, and one-half will be delivered by the SOP. 2 SECTION 3. DEFINITIONS As used herein, the following terms shall have the following meanings: a. "Affiliate" means any entity directly or indirectly controlled by, controlling or under common control with the Company. b. "Board" and "Board of Directors" mean the Board of Directors of the Company. c. "Change of Control" means a change of control as defined in the Change of Control Plan. d. "Change of Control Plan" means the ARCO Chemical Company Change of Control Plan as adopted by the Compensation Committee of the Board of Directors on February 19, 1998 and as amended from time to time. e. "Code" means the Internal Revenue Code of 1986, as amended. f. "Common Stock" means the common stock of the Company, having par value of $1.00 per share. g. "Company" means ARCO Chemical Company. h. "Comparison Group" means the S&P Chemicals group, as defined or redefined by Standard & Poors, or such other comparison group of peer companies as the Subcommittee may designate for a Performance Period. i. "Contingent Restricted Stock" means a contingent grant of shares, under the terms and conditions set forth in Article III, Section 1, that has no indicia of ownership of Common Stock, that is granted in connection with a Performance Period and that may be converted to an award of Performance-Based Restricted Stock, following the achievement of Performance Objectives under the terms and conditions set forth in Article III, Section 2. j. "Eligible Employee" means a member of a select group of executives or other key employees of the Company who, in the sole discretion of the Subcommittee, are in a position to contribute significantly to long-term stockholder value creation. k. "Employment" means continuous service with the Company from the most recent date of hire. l. "Exchange Act" means the Securities Exchange Act of 1934, as amended. m. "Fair Market Value" or "FMV" of a share of Common Stock means the mean of the highest and lowest sale prices, or the closing sale price, of a share of Common Stock, whichever is higher, on the date in question as reported on the composite tape for issues listed on the New York Stock Exchange. If no transaction was reported on the composite tape for the Common Stock on such 3 date, the FMV shall be computed using the prices reported on the nearest trading day preceding the date in question. If the Common Stock should not then be listed or admitted to trading on such Exchange, FMV shall be the mean of the closing bid and asked prices on the date in question as furnished by any member firm of the New York Stock Exchange selected from time to time by the Subcommittee for that purpose. n. "Long-Term Incentive Target Value" and "LTI Target Value" mean the dollar value of all restricted stock and stock options to be granted to an Eligible Employee. o. "Performance-Based Restricted Stock" means shares of Common Stock that have been converted from Contingent Restricted Stock and that remain subject to restriction on transfer and assignment and to other conditions during the applicable Restriction Period. p. "Performance Objective" means a specified level of Company performance, measured by cumulative RCM achievement. q. "Performance Period" means the period of time established by the Subcommittee at the time of a grant of Contingent Restricted Stock over which the Company's RCM performance will be measured and Performance-Based Restricted Stock may be earned. r. "Performance Ranking" means the ranking of the Company in Total Stockholder Return as measured among the Comparison Group over the applicable Performance Period. s. "Performance Supplement" means the share multiplier that may be applied to the shares of Performance-Based Restricted Stock at the end of a Performance Period. t. "Plan" means the ARCO Chemical Company 1998 Long-Term Incentive Plan, including any amendments hereof and rules and regulations hereunder. u. "Restricted Stock Target Value" means the target dollar value of Contingent Restricted Stock to be awarded to an Eligible Employee. v. "Restriction Period" means the period of time specified by the Subcommittee during which the restriction and forfeiture conditions of Performance-Based Restricted Stock apply. w. "Retirement Plan" means a retirement plan of the Company that provides a retirement allowance to an Eligible Employee, other than a Section 401(k) plan or other savings plan, as determined by the Subcommittee. x. "Return on Capital Managed" and "RCM" mean the financial measure equal to the difference between net operating profit after tax (NOPAT) and a capital charge, where the capital charge equals average capital multiplied by the Company's weighted average cost of capital rate, as determined by the Subcommittee. 4 y. "Stock Option Target Value" means the target dollar value of Stock Options to be awarded to an Eligible Employee. z. "Stock Options" means options to purchase Common Stock under the terms and conditions set forth in Article II of the Plan. aa. "Subcommittee" means the Long-Term Incentive Plan Administration Subcommittee of the Compensation Committee of the Board of Directors. bb. "Total Stockholder Return" and "TSR" mean the sum of the dividends and appreciation or depreciation of the price of a share of Common Stock over an applicable Performance Period. SECTION 4. ADMINISTRATION OF THE PLAN a. The Plan shall be administered by the Subcommittee. The Subcommittee shall have full power and authority to interpret the Plan, to adopt such rules and regulations as it may from time to time deem necessary for the effective operation of the Plan, to make factual determinations, to correct any defects in the Plan, to reconcile any inconsistencies, to supply any omissions and generally to act upon all matters relating to awards under the Plan. Without limiting the foregoing, the Subcommittee may (i) establish such vesting and other conditions with respect to awards under the Plan as it deems appropriate, (ii) accelerate the vesting and exercisability of any or all outstanding Stock Options and Performance- Based Restricted Stock at any time for any reason, (iii) provide that Stock Options may be transferable to family members, trusts of which family members are the only beneficiaries or partnerships or other entities of which family members are the only owners, on such terms as the Subcommittee deems appropriate, (iv) establish such terms for awards as may be appropriate to comply with applicable foreign laws, and (v) take any other actions consistent with the terms of the Plan. Any determination, interpretation, construction, or other action made or taken pursuant to the provisions of the Plan by or on behalf of the Subcommittee shall be final, binding, and conclusive for all purposes and upon all persons including, without limitation, the Company, the Company's stockholders and Eligible Employees, and their respective successors in interest. b. It is intended that the Subcommittee consist of "outside directors" as defined under Section 162(m) of the Code, and related Treasury regulations, and "non-employee directors" as defined under Rule 16b-3 under the Exchange Act. 5 c. All grants under the Plan shall be subject to the terms and conditions set forth herein and to such other terms and conditions consistent with this Plan as the Subcommittee deems appropriate and as are specified in writing by the Subcommittee to the individual in a grant instrument or an amendment to the grant instrument. The Subcommittee shall approve the form and provisions of each grant instrument. 6 ARTICLE II STOCK OPTIONS SECTION 1. GRANT OF STOCK OPTIONS The Subcommittee may make grants of Non-Qualified Stock Options to Eligible Employees in such amounts, at such times and upon such terms as the Subcommittee deems appropriate. SECTION 2. TERMS AND CONDITIONS OF STOCK OPTIONS All Stock Options granted under the Plan shall be subject to the following terms and conditions: a. Option Price. The option price per share with respect to each Stock Option shall be fixed by the Subcommittee, but shall not be less than the Fair Market Value of the Common Stock on the date the Stock Option is granted. b. Period of Option. A Stock Option shall expire and all rights thereunder shall end at the expiration of such period (not exceeding ten years) after the date the Stock Option is granted as shall be fixed by the Subcommittee at the time it grants the Stock Option. c. Exercise of Option. The Subcommittee may establish such vesting dates and other conditions on the exercise of Stock Options as the Subcommittee deems appropriate. Stock Options may be exercised during the term of the Options at any time after the vesting dates specified by the Subcommittee, subject to the provisions of Subsection 2(d) of this Article II and Section 7 of Article III. 7 d. Termination of Employment. i. If a participant's Employment terminates for any of the following reasons, but not for cause, the participant's Stock Options that are not vested shall continue to vest according to the applicable vesting schedule as if the participant's Employment with the Company had continued, and the participant (or his or her estate or distributee, in the event of death) may retain his or her outstanding Stock Options for the balance of the Option term: 1. Death, 2. Total and permanent disability, 3. Termination of Employment with a right to an immediate retirement allowance under a Retirement Plan of the Company, 4. Termination of employment as a result of a Change of Control, as described in Subsection (v) below, or 5. Any other termination of Employment in connection with which the Subcommittee, in its sole discretion, determines that the participant's Stock Options shall not be canceled. ii. If a participant's Employment terminates for one of the following reasons, but not for cause (and under circumstances not covered by Subsection (i) above), the participant may retain his or her vested Stock Options for the balance of the Option term, and the participant's non-vested Stock Options shall be canceled, unless the Subcommittee determines otherwise: 1. Resignation with the approval of the Company, or 2. Reduction in force. iii. If a participant's Employment terminates for cause or for any other reason not described in Subsection (i) or (ii) above, all of the participant's vested and non-vested Stock Options shall be canceled, unless the Subcommittee determines otherwise. 8 iv. If a participant transfers employment to an Affiliate, the participant's Stock Options shall not be canceled, and the participant's Stock Options shall continue to vest during the participant's employment with the Company and its Affiliates. If the participant's employment with the Company and its Affiliates subsequently terminates under circumstances that would require cancellation of the Stock Options pursuant to Subsection (ii) or (iii) above, the applicable Stock Options shall be canceled. v. For purposes of the Plan, a "termination of Employment as a result of a Change of Control" shall be considered to occur if a participant's employment terminates under circumstances that entitle the participant to receive plan benefits under the Change of Control Plan. e. Payment for Shares. Every share purchased through the exercise of a Stock Option shall be paid for in full, in cash, within ten business days following the time of exercise, or, if the Subcommittee so permits, in shares of Common Stock valued at their Fair Market Value on the date on which such Stock Option is exercised, or in a combination of cash and such shares. The participant may exercise a Stock Option through a broker. 9 ARTICLE III RESTRICTED STOCK SECTION 1. GRANT OF CONTINGENT RESTRICTED STOCK a. At the commencement of each Performance Period, the Subcommittee may grant Contingent Restricted Stock to Eligible Employees in an amount approximately equal to the Eligible Employee's Restricted Stock Target Value as established by the Subcommittee. The Subcommittee may also make such other grants of Contingent Restricted Stock to Eligible Employees as it deems appropriate. b. Contingent Restricted Stock is only the potential right of an Eligible Employee to receive Performance-Based Restricted Stock. Contingent Restricted Stock is not vested and cannot vest. It can be converted, if earned, into Performance-Based Restricted Stock in accordance with Section 2 of this Article. Contingent Restricted Stock is non-transferable and may not be pledged or otherwise encumbered. SECTION 2. CONVERSION OF CONTINGENT RESTRICTED STOCK INTO PERFORMANCE-BASED RESTRICTED STOCK a. At the commencement of each Performance Period, the Subcommittee will establish, in its sole discretion, the term of the Performance Period, the RCM Performance Objectives for the Performance Period, the methodology to be used to compute RCM, and the other terms of the Contingent Restricted Stock grants and Performance-Based Restricted Stock grants. The Subcommittee will establish the methodology to be used to compute RCM, based on the methodology used by the Company to compute RCM for other corporate purposes. The Subcommittee may establish a basic Performance Period (for example, four years) and an extended period (for example, six years), in which case the Performance Objectives may be attained at any time during the extended period. However, the Performance Supplement, if any, as described in Section 4 of this Article will only be payable if the Performance Objectives are attained during the basic Performance Period. 10 b. The Subcommittee will establish the Performance Objectives and the terms of the Contingent Restricted Stock grants and Performance-Based Restricted Stock grants in writing either before the beginning of the Performance Period or during a period ending no later than the earlier of (i) 90 days after the beginning of the Performance Period or (ii) the date on which 25% of the Performance Period has been completed, or such other date as may be required or permitted under Section 162(m) of the Code. It is intended that the Performance Objectives and terms of the Contingent Restricted Stock and Performance-Based Restricted Stock shall satisfy the requirements for "qualified performance-based compensation" under Section 162(m) of the Code for employees covered by Section 162(m), including the requirement that the achievement of the Performance Objectives be substantially uncertain at the time the Performance Objectives are established and the Performance Objectives be established in such a way that a third party with knowledge of the relevant facts could determine whether and to what extent the Performance Objectives have been met. Except for the Performance Supplement (which shall be calculated based on the formula in Section 4 of this Article III), the Subcommittee shall not have discretion to increase the amount of compensation that is payable upon achievement of the Performance Objectives. c. RCM performance will be measured quarterly or on another schedule established by the Subcommittee to determine whether the Performance Objectives have been achieved. If specified Performance Objectives are achieved, the appropriate portion of Contingent Restricted Stock will be converted to Performance-Based Restricted Stock effective as of the date on which the Subcommittee determines that the Performance Objectives have been achieved. d. The Subcommittee will review the RCM performance of the Company according to its pre-established schedule and will certify in writing that the Performance Objectives have been met and that conversion is authorized before Contingent Restricted Stock is converted into Performance-Based Restricted Stock. e. The Subcommittee shall have the right, in its discretion, to modify, amend, or otherwise adjust the Performance Objectives or terminate a Performance Period, subject to compliance with the requirements of Section 162(m) with respect to awards covered by that Section, if it determines an adjustment or termination would be consistent with the objectives of the Plan, taking into account the interests of the participants and the stockholders of the Company. The Subcommittee may consider, without limitation, accounting changes which substantially affect the determination of the Performance Objectives, changes in applicable laws or regulations which affect the Performance Objectives, corporate reorganizations, including spin-offs or other distributions of assets or stock, or other material events which the Subcommittee determines require an adjustment to the Performance Objectives or termination of a Performance Period. 11 f. Notwithstanding the foregoing, the Subcommittee may make Contingent Restricted Stock and Performance-Based Restricted Stock grants that are not intended to satisfy the requirements for "qualified performance-based compensation," in which case the requirements of Subsection (b) above shall not apply to such grants. SECTION 3. THE END OF THE PERFORMANCE PERIOD a. A Performance Period ends at the earlier of the following: i. The time when all the pre-established Performance Objectives have been achieved, or ii. The end of the Performance Period (including for this purpose any extended period as described in Section 2(a) of this Article). b. At the end of a Performance Period (including for this purpose any extended period as described in Section 2(a) of this Article), the following shall occur: i. The portion of the initial grant of Contingent Restricted Stock that has not been earned and converted into Performance-Based Restricted Stock shall be canceled. ii. The Performance Supplement may be applied, as described in Section 4 of this Article, if all the Performance Objectives were met within the basic Performance Period as described in Section 2(a) of this Article, and iii. If the Subcommittee so determines, a new Performance Period shall begin, including the award of an initial grant of Contingent Restricted Stock applicable to the new Performance Period to Eligible Employees in accordance with this Article. SECTION 4. THE PERFORMANCE SUPPLEMENT a. If all the Performance Objectives are met within the basic Performance Period (excluding any extended period as described in Section 2(a) of this Article), immediately following the end of such Performance Period the Subcommittee shall apply the Performance Supplement. The Performance Supplement is a share multiplier between 0% and 50% used to supplement the shares of Performance-Based Restricted Stock previously earned and awarded to Eligible Employees under the Plan for the immediately concluded Performance Period in recognition of the Company's superior stockholder value creation. 12 b. To determine the Performance Supplement, the Total Stockholder Return during the elapsed Performance Period for the Company and for each company in the Comparison Group is measured. The TSR values are then ranked. Using the following table as an example, the Performance Supplement is determined as follows: Company TSR Rank Relative to Performance Comparison Group Supplement ---------------- ----------- 1 50% 2 40% 3 30% 4 20% 5 10% 6-11 0% The Performance Supplement will be calculated based on linear interpolation of the Company's TSR between the company ranked number 1 (100/th/ percentile, with a Performance Supplement of 50%) and the company ranked at the median (50/th/ percentile, with a Performance Supplement of 0%). If the number of companies in the Comparison Group is different from the number used in the foregoing table, the percentages between 50% and 0% will be adjusted to take into account the number of companies in the Comparison Group. c. If the TSR value for one or more companies from the Comparison Group is within one percentage point of the TSR value for the Company, the Performance Supplement percentages for such companies will be averaged with the Company's percentage to determine the Performance Supplement. d. For each Eligible Employee, the Performance Supplement is multiplied by the number of shares of Contingent Restricted Stock that were earned and converted into Performance-Based Restricted Stock during the Performance Period, resulting in the grant of additional shares of Performance-Based Restricted Stock. The additional shares of Performance- Based Restricted Stock will be granted to the Eligible Employee as soon as practical after calculation and certification by the Subcommittee and will begin to vest according to the same schedule as other Performance-Based Restricted Stock as determined by the Subcommittee (for example, fifty percent on the first anniversary of the grant of 13 the Performance-Based Restricted Stock pursuant to the Performance Supplement and fifty percent on the second anniversary of the grant). SECTION 5. TERMINATION OF EMPLOYMENT PRIOR TO COMPLETION OF PERFORMANCE PERIOD a. If, prior to the end of a Performance Period, a participant who has been granted Contingent Restricted Stock terminates Employment for one of the following reasons, but not for cause, the participant shall be entitled to receive a pro rata share (as described below) of Performance- Based Restricted Stock for the Performance Period: i. Death, ii. Total and permanent disability, iii. Termination of Employment with a right to an immediate retirement allowance under a Retirement Plan of the Company, or iv. Any other termination of Employment in connection with which the Subcommittee, in its sole discretion, determines that the participant should receive a pro rata share of Performance-Based Restricted Stock. Such a participant will be entitled to receive a conversion of the participant's Contingent Restricted Stock for the Performance Period into Performance-Based Restricted Stock as follows: i. If and when the Performance Objectives are attained during the Performance Period, the participant shall be entitled to receive a conversion of the participant's Contingent Restricted Stock as if the participant had continued in Employment, provided that the total number of shares of Performance-Based Restricted Stock that the participant may receive during the Performance Period (including any shares previously received) shall not exceed the maximum amount described in subsection (ii) below. The remaining shares of Contingent Restricted Stock, if any, shall be forfeited. ii. The maximum number of shares of Performance-Based Restricted Stock that the participant may receive during the Performance Period (excluding any Performance Supplement under subsection (iii) below) shall be the number of shares of Contingent Restricted Stock awarded to the participant for the Performance Period, multiplied by a fraction, the numerator of which is the number of full months during which the participant was employed during the Performance Period and the denominator of which is the number of 14 months in the Performance Period (for this purpose, the Performance Period shall be the basic Performance Period as described in Section 2(a) of this Article III, unless the participant's termination occurs within the extended period described in that Section). However, if the number of shares of Performance-Based Restricted Stock previously received by the participant before his or her termination of Employment exceeds the maximum number of shares computed above, the participant shall not be required to return any such shares to the Company. iii. In addition to the foregoing, at the end of the Performance Period, if a Performance Supplement is payable for the Performance Period, the participant will be entitled to receive a Performance Supplement with respect to the Performance-Based Restricted Stock earned and awarded to the participant for the Performance Period. iv. Any Performance-Based Restricted Stock received by a participant after termination of employment shall vest according to the vesting schedule established by the Subcommittee pursuant to Section 6 of this Article III as if the participant's Employment with the Company had continued. b. If, prior to the end of a Performance Period, a participant who has been granted Contingent Restricted Stock terminates Employment for cause or for any other reason not described in Subsection (a) above, all Contingent Restricted Stock held on behalf of the participant shall be forfeited. c. If a participant transfers employment to an Affiliate, the participant will be entitled to receive a pro rata share of Performance-Based Restricted Stock for the Performance Period as described in Subsection (a) above. The participant's Performance-Based Restricted Stock shall vest during the participant's Employment with the Company and its Affiliates, as described in Section 6(f) of this Article III. 15 SECTION 6. VESTING OF PERFORMANCE-BASED RESTRICTED STOCK a. The Subcommittee shall determine the vesting schedule for Performance-Based Restricted Stock at the beginning of the Performance Period. Unless the Subcommittee determines otherwise, Performance-Based Restricted Stock shall become vested fifty percent on the first anniversary and fifty percent on the second anniversary after its conversion from Contingent Restricted Stock, if the Eligible Employee remains in Employment during each period. b. Dividends accrue on shares of Performance-Based Restricted Stock during the vesting period and are invested in additional shares of Performance-Based Restricted Stock, which become vested simultaneously with the underlying shares. c. During the period in which Performance-Based Restricted Stock is not vested, such stock shall be non-transferable and may not be pledged or otherwise encumbered. Each certificate for a share of Performance-Based Restricted Stock shall contain a legend giving appropriate notice of the restrictions in the grant. The participant shall be entitled to have the legend removed from the stock certificate covering the shares when all restrictions on such shares have lapsed. The Subcommittee may determine that the Company will not issue certificates for shares of Performance- Based Restricted Stock until all restrictions on such shares have lapsed, or that the Company will retain possession of certificates for shares of Performance-Based Restricted Stock until all restrictions on such shares have lapsed. d. If a participant's Employment terminates for one of the following reasons, but not for cause, before a grant of Performance-Based Restricted Stock has vested, the participant's non-vested shares of Performance-Based Restricted Stock shall continue to vest according to the applicable vesting schedule as if the participant's Employment with the Company had continued: i. Death, ii. Total and permanent disability, iii. Termination of Employment with a right to an immediate retirement allowance under a Retirement Plan of the Company, or iv. Any other termination of Employment in connection with which the Subcommittee, in its sole discretion, determines that the participant's Performance-Based Restricted Stock should continue to vest. e. If a participant terminates Employment within any vesting period following the grant of Performance-Based Restricted Stock for cause or for any other reason not described in Subsection (d) above, all of the participant's non-vested Performance-Based Restricted Stock shall be forfeited. 16 f. If a participant transfers employment to an Affiliate, the participant's Performance-Based Restricted Stock shall not be forfeited and the participant's Performance-Based Restricted Stock shall continue to vest during the participant's employment with the Company and its Affiliates. If the participant's employment with the Company and its Affiliates subsequently terminates under circumstances that would require forfeiture of the Performance-Based Restricted Stock pursuant to Subsection (e) above, the participant's non-vested Performance-Based Restricted Stock shall be forfeited. SECTION 7. CHANGE OF CONTROL a. In the event of a Change of Control, each participant's Contingent Restricted Stock for the next Performance Objective level shall be converted pro rata into Performance-Based Restricted Stock based on the Company's progress to the next Performance Objective level as of the date of the Change of Control. The Performance-Based Restricted Stock received upon such conversion shall be fully vested. The remaining shares of Contingent Restricted Stock, if any, shall be forfeited. b. Additionally, the Performance Supplement will be calculated and applied as of the effective date of the Change of Control, using the stock price on the effective date of the Change of Control, assuming the Change of Control occurs during the basic Performance Period (and not during an extended period as described in Section 2(a) of this Article). The Performance-Based Restricted Stock received pursuant to the Performance Supplement shall be fully vested. c. All Performance-Based Restricted Stock and Stock Options will become immediately vested upon the occurrence of a Change of Control. d. Upon a Change of Control where the Company is not the surviving corporation (or survives only as a subsidiary of another corporation), unless the Subcommittee determines otherwise, all outstanding Stock Options that are not exercised shall be assumed by, or replaced with comparable options by, the surviving corporation. 17 e. Notwithstanding anything in the Plan to the contrary, in the event of a Change of Control, no actions shall be taken under the Plan that would make the Change of Control ineligible for pooling of interests accounting treatment if, in the absence of such actions, the Change of Control would qualify for such treatment and the Company intends to use such treatment with respect to the Change of Control. 18 ARTICLE IV MISCELLANEOUS PROVISIONS SECTION 1. OPTION AND RESTRICTED STOCK LIMITS a. The maximum number of shares of Common Stock for which Stock Options may be granted and which may be the subject of a grant of Performance-Based Restricted Stock (including, without limitation, awards pursuant to the conversion of Contingent Restricted Stock and awards pursuant to Performance Supplements) under the Plan is in the aggregate 6,000,000 shares (subject to adjustment as described in Section 2 of this Article). The shares shall be made available from authorized Common Stock, issued or unissued, or from Common Stock issued and held in the treasury of the Company, as shall be determined by the Subcommittee. Shares of Common Stock subject to Stock Options that terminate, expire or are canceled without having been exercised, or shares of Performance-Based Restricted Stock that are canceled, may again be subject to grant under the Plan. b. No individual may be granted more than 300,000 shares of Performance-Based Restricted Stock (including, without limitation, awards pursuant to the conversion of Contingent Restricted Stock and awards pursuant to Performance Supplements) and/or Stock Options, regardless of the combination, in any calendar year. SECTION 2. ADJUSTMENT IN TERMS OF AWARD In the event of a reorganization, recapitalization, stock split, stock dividend, distribution of assets other than pursuant to a normal cash dividend, combination of shares, merger, consolidation, rights offering, split- up, split-off, spin-off or any other change in the corporate structure or shares of the Company, the Subcommittee may, in its discretion, after consultation with the Chairman of the Board and the President, make appropriate adjustments to reflect such event in respect of (a) the limitations in Section 1 of this Article IV, (b) the number of shares of Common Stock covered by, and the exercise price per share applicable to, outstanding Stock Options, and (c) the number of shares of Common Stock covered by outstanding awards of Contingent Restricted Stock or Performance-Based Restricted Stock. In the event that the Subcommittee, after consultation with the Chairman of the Board and the President, determines that, because of a change (other than a Change of Control) in the Company's 19 business, operations, corporate structure, capital structure, assets or manner in which it conducts business, which it deems to be extraordinary and material, the terms of awards theretofore made are no longer suitable to the objectives which the Subcommittee sought to achieve when it made such awards, it may modify the terms of any or all of such awards in such manner as it may decide is advisable; provided, however, that no award may be modified in a manner which would be inconsistent with Section 162(m) of the Code, with respect to awards covered by Section 162(m), or the intent of Subsection 1(b) or Section 9 of this Article, or which would result in an increase in the shares of Performance-Based Restricted Stock. SECTION 3. GOVERNMENTAL REGULATIONS The Plan and the grant and exercise of Stock Options and the award of Contingent Restricted Stock and Performance-Based Restricted Stock hereunder shall be subject to all applicable rules and regulations of governmental or other authorities. With respect to persons subject to Section 16 of the Exchange Act, it is the intent of the Company that the Plan and all transactions under the Plan comply with all applicable provisions of Rule 16b-3 or its successors under the Exchange Act. In addition, it is the intent of the Company that the Plan and grants under the Plan to covered executives comply with the applicable provisions of Section 162(m) of the Code, except as provided in Section 2(f) of Article III. To the extent that any legal requirement of Section 16 of the Exchange Act or Section 162(m) of the Code as set forth in the Plan ceases to be required under Section 16 of the Exchange Act or Section 162(m) of the Code, that Plan provision shall cease to apply. The Subcommittee may revoke any grant if it is contrary to law or modify a grant to bring it into compliance with any valid and mandatory government regulation. SECTION 4. NO GUARANTY OF EMPLOYMENT The grant of a Stock Option or award of Contingent Restricted Stock or conversion to Performance-Based Restricted Stock under the Plan shall not confer upon a recipient any right to continue in the employ of the Company nor shall it interfere with or restrict in any way the right of the Company to discharge an Eligible Employee at any time for any reason, with or without good cause. 20 SECTION 5. RELATION TO BENEFIT PLANS Stock Options, Contingent Restricted Stock, Performance-Based Restricted Stock and dividends on Performance-Based Restricted Stock will not be considered as compensation for the purpose of any other benefit plans maintained by the Company. SECTION 6. ASSIGNMENT OR TRANSFER Unless the Subcommittee determines otherwise, no Stock Option or share of Contingent Restricted Stock or Performance-Based Restricted Stock shall be assignable or transferable by an Eligible Employee otherwise than by will or the laws of descent and distribution. SECTION 7. RIGHTS AS STOCKHOLDER a. An Eligible Employee under the Plan shall have no rights of a holder of Common Stock by virtue of an award of Stock Options or Contingent Restricted Stock hereunder, unless and until he or she becomes entitled to have shares of Common Stock or Performance-Based Restricted Stock issued to him or her pursuant to the Plan. b. An Eligible Employee who has received an award of Performance- Based Restricted Stock shall have the right to vote such stock. All dividends paid with respect to Performance-Based Restricted Stock shall be reinvested in additional shares of Restricted Stock, based on the Fair Market Value of Common Stock on the date the dividend is paid, and shall be subject to the same restrictions, including the date on which such restrictions lapse, as the shares of Performance-Based Restricted Stock with respect to which the dividends are paid. Stock received with respect to an award of Performance-Based Restricted Stock pursuant to a stock split, stock dividend, or other change in the capitalization of the Company will be held subject to the same restrictions on transferability that are applicable to such shares of Performance-Based Restricted Stock. c. No Common Stock shall be issued or transferred in connection with any grant hereunder unless and until all legal requirements applicable to the issuance or transfer of such Common Stock have been complied with to the satisfaction of the Subcommittee. The Subcommittee shall have the right to condition any grant hereunder on the participant's undertaking in writing to comply with such restrictions on his or her subsequent disposition of such shares of Common Stock 21 as the Subcommittee shall deem necessary or advisable as a result of any applicable law, regulation or official interpretation thereof, and certificates representing such shares may be legended to reflect any such restrictions. Certificates representing shares of Common Stock issued or transferred under the Plan will be subject to such stop-transfer orders and other restrictions as may be required by applicable laws, regulations and interpretations, including any requirement that a legend be placed thereon. SECTION 8. WITHHOLDING TAXES a. The Company shall have the right to withhold from salary or other compensation or to cause the employee (or the executor or administrator of his or her estate or his or her distributee) to make payment of any federal, state, local, or foreign taxes required to be withheld with respect to any exercise of a Stock Option or award or vesting or deemed vesting of Performance-Based Restricted Stock. b. In the case of an exercise of Stock Options or the vesting of Performance-Based Restricted Stock, an Eligible Employee may elect to have the withholding obligation satisfied by having the Company withhold shares of Common Stock received upon the exercise of the Stock Option or the vesting of Performance-Based Restricted Stock, as the case may be. SECTION 9. AMENDMENT AND DISCONTINUANCE OF THE PLAN The Subcommittee may amend or discontinue the Plan as it shall from time to time consider desirable, provided that: a. No amendment shall, without further approval by the holders of a majority of the shares which are represented in person or by proxy and entitled to vote on the subject at a meeting of stockholders of the Company, change the terms of the Plan so as to increase the maximum number of shares upon which Stock Options may be granted or which may be issued upon a grant of Performance-Based Restricted Stock from the amounts described in Subsections 1(a) and (b) of this Article, reduce the minimum Stock Option price, or extend the maximum Stock Option period; and b. No amendment, discontinuance, or termination shall deprive persons who hold shares of Contingent Restricted Stock or Performance-Based Restricted Stock, or who are entitled to exercise Stock Options pursuant to the terms and provisions of the Plan, of their rights with respect thereto. 22 c. If required by Section 162(m) of the Code, the Plan must be reapproved by the stockholders of the Company no later than the first stockholders meeting that occurs in the fifth year following the year in which the stockholders previously approved the Plan. SECTION 10. EFFECTIVE DATE The effective date of the Plan is February 19, 1998. SECTION 11. TERM OF PLAN The Plan will terminate at the end of the third consecutive Performance Period (including for this purpose any extended period as described in Section 2(a) of Article III), unless terminated earlier by the Subcommittee. SECTION 12. MISCELLANEOUS The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any grants under this Plan. The participants shall in all respects be unsecured creditors of the Company. The validity, construction, interpretation and effect of the Plan and grant instruments issued under the Plan shall exclusively be governed by and determined in accordance with the law of the Commonwealth of Pennsylvania. 23 EX-10.2 3 ARCO CHEMICAL COMPANY CHANGE OF CONTROL PLAN EXHIBIT 10.2 ------------ ARCO CHEMICAL COMPANY CHANGE OF CONTROL PLAN To record the adoption of the ARCO Chemical Company Change of Control Plan, effective February 19, 1998, the undersigned, being duly authorized to act on behalf of ARCO Chemical Company has executed this plan document at Newtown Square, Pennsylvania on the 9th day of April, 1998. ATTEST: ARCO CHEMICAL COMPANY BY: /s/ Valerie H. Perry BY: /s/ Francis W. Welsh ----------------------- ------------------------------ Francis W. Welsh Vice President - Human Resources ARCO CHEMICAL COMPANY CHANGE OF CONTROL PLAN ---------------------- WHEREAS, the Board of Directors (the "Board") of ARCO Chemical Company, a Delaware corporation (the "Company"), recognizes that the possibility of a merger, takeover or other change of control of the Company may occur and can significantly distract its executives and personnel because of the uncertainties inherent in such a situation; and WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its stockholders to be able to retain the services of its executives and personnel in the event of a Change of Control of the Company, during the pendency of a possible Change of Control, and following a Change of Control, to ensure their continued dedication and efforts in any such event without undue concern for their personal financial and employment security. NOW, THEREFORE, in order to fulfill the above purposes, the following plan has been developed and is adopted as of the Effective Date. ARTICLE I ESTABLISHMENT OF PLAN --------------------- Effective February 19, 1998, the Company establishes the ARCO Chemical Company Change of Control Plan as set forth in this document. ARTICLE II DEFINITIONS ----------- As used herein, the following words and phrases shall have the following respective meanings unless the context clearly indicates otherwise. 2.1 "Accrued Compensation" means any amounts (other than amounts -------------------- payable under this Plan) earned, accrued or otherwise payable to a Participant as of the Participant's Termination Date but not paid as of such Termination Date in respect of (i) base salary and (ii) bonus amounts for Plan Years prior to the Plan Year in which the Participant's Termination Date occurs. 2.2 "Affiliate" means with respect to any person or entity, any --------- entity, directly or indirectly, controlled by, controlling or under common control with such person or entity. 2.3 "Base Salary" means a Participant's annualized base salary (including ----------- any portion that the Participant may have elected to defer), calculated at the greater of the rate in effect (i) immediately prior to a Change of Control or (ii) as of the Participant's Termination Date. 2.4 "Bonus Amount" means an amount equal to the greater of (i) a ------------ Participant's target bonus amount (including any portion that the Participant may have elected to defer) under the Company's Annual Incentive Plan (or successor annual incentive plan) for the Plan Year in which the Change of Control occurs or for the Plan Year in which the Participant's Termination Date occurs, whichever is greater or (ii) the average bonus amount paid or payable to the Participant (including any portion that the Participant may have elected to defer) under the Company's Annual Incentive Plan (or successor annual incentive plan) for the three Plan Years preceding the Plan Year in which the Change of Control occurs. 2 2.5 "Cause" means ----- (a) for any Participant who is in Employee Classification A, B, C, D or E as set forth in Appendix A, (i) the willful and continued refusal by the Participant to perform substantially his or her reasonably assigned duties with the Company (other than any such failure resulting from his or her physical or mental incapacity) or (ii) the willful engaging by the Participant in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this definition, no act, or failure to act, on the Participant's part shall be deemed "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that his or her action or omission was in the best interest of the Company. 2.6 "Change of Control" means at any time after the Effective Date ----------------- and prior to the termination of the Plan: (a) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, in determining whether a Change of Control has occurred, - -------- ------- Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change of Control. A "Non-Control Acquisition" shall mean an acquisition (I) by Atlantic Richfield Company, (ii) by an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a "Subsidiary"), (iii) the Company or its Subsidiaries or (iv) by any Person in connection with a "Non-Control Transaction" (as hereinafter defined); (b) The individuals who, as of the Effective Date, are members of the Board (the "Incumbent Board") cease for any reason to constitute a majority of the members of the Board; provided, however, that if the election or nomination -------- ------- for election by the Company's common stockholders of any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (c) of this 3 definition) was approved by a vote of at least a majority of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided further, however, that no individual -------- ------- ------- shall be considered a member of the Incumbent Board if such individual initially assumed office through either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; (c) A merger, consolidation or reorganization of the Company, unless such merger, consolidation or reorganization is a "Non-Control Transaction." A "Non-Control Transaction" shall mean a merger, consolidation or reorganization of the Company where: (i) the stockholders of the Company immediately before such merger, consolidation or reorganization, own directly or indirectly immediately following such merger, consolidation or reorganization, at least sixty percent (60%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization, and (ii) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least a majority of the members of the board of directors of the Surviving Corporation, or a corporation beneficially directly or indirectly owning a majority of the Voting Securities of the Surviving Corporation; (d) A complete liquidation or dissolution of the Company; (e) The sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary); or (f) a "Change of Control" of Atlantic Richfield Company. For purposes of this Section 2.6(f) only, Change of Control shall mean Change of Control as defined in the Trust Agreement, to be entered into by and between Atlantic Richfield Company and State Street Bank and Trust Company. 4 Notwithstanding the foregoing, a Change of Control shall not be deemed to occur if the Change of Control occurs solely pursuant to Section 2.6(a) and results from an acquisition in a secondary offering of securities to the public by Atlantic Richfield Company. Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the then outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities then outstanding, increases the percentage of shares Beneficially Owned by the Subject Person, provided that -------- if a Change of Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change of Control shall occur. Notwithstanding anything to the contrary contained herein, if the employment of an Eligible Employee is terminated (i) at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control and who effectuates a Change of Control or (ii) otherwise in connection with, or in anticipation of, a Change of Control which actually occurs, then for purposes of this Plan the date of a Change of Control with respect to that Eligible Employee shall be deemed to be the date immediately prior to the Eligible Employee 's Termination Date. 2.7 "Compensation Committee" means the Compensation Committee of the Board ---------------------- as such committee may be constituted from time to time. 2.8 "Disability" means: ---------- (a) the term "Disability" as used in the Company's relevant long-term disability plan applicable to a Participant, if any; and (b) in all other cases, the term "Disability" means a physical or mental infirmity which impairs the Participant's ability to perform substantially his or her duties for a period of one hundred eighty (180) consecutive days. 5 2.9 "Effective Date" means February 19, 1998. -------------- 2.10 "Eligible Employee" means each regular full-time or regular part-time ----------------- employee of the Company or any of its Affiliates. 2.11 "Good Reason" means the occurrence after a Change of Control of any of ----------- the following events or conditions: (a) for any Participant who is in Employee Classification A as set forth in Appendix A, (i) a change in the Participant's status, title, position or responsibilities (including reporting responsibilities) which, in the Participant's reasonable judgment, represents an adverse change from his or her status, title, position or responsibilities as in effect immediately prior thereto; (ii) with respect to either the Participant's annual base salary or target bonus then in effect under the Company's Annual Incentive Plan (or successor annual incentive plan), a reduction by ten percent (10%) or more from the greater of such base salary or target, as the case may be, in effect (x) as of the date of the Change of Control or (y) on any date following the Change of Control; (iii) the relocation of the Participant's principal place of work, but only if the "moving expenses" incurred in connection with such relocation would be deductible under Section 217 of the Internal Revenue Code of 1986, as amended; (b) for any Participant who is in Employee Classification B, C or D as set forth in Appendix A, the events or conditions described in Sections 2.12(a)(ii) or (iii); and (c) for any Participant who is in Employee Classification E as set forth in Appendix A, (i) the event described in Section 2.12(a)(iii), or (ii) with respect to the Participant's annual base salary, a reduction by ten percent (10%) or more from the greater of such base salary in effect (x) as of the date of the Change of Control or (y) on any date following the Change of Control. 2.12 "Operating Unit" means any subsidiary, division, or other business -------------- unit of the Company or any of its Affiliates. 6 2.13 "Participant" means an Eligible Employee who meets the eligibility ----------- requirements of Article III. 2.14 "Plan" means this ARCO Chemical Company Change of Control Plan. ---- 2.15 "Plan Benefit" means the benefit payable in accordance with Article V ------------ of the Plan. 2.16 "Plan Year" means January 1 through December 31. --------- 2.17 "Salary Separation Payment" has the meaning ascribed to it in Section ------------------------- 5.2(b). 2.18 "Termination Date" means the date of termination of a Participant's ---------------- employment as set forth in Article VI. ARTICLE III ELIGIBILITY ----------- 3.1 Participation. For purposes of this Plan each individual who is an ------------- Eligible Employee as of the date of a Change of Control shall automatically be a Participant under this Plan. 3.2 Duration of Participation. Any individual who is a Participant shall ------------------------- continue as a Participant until he or she has received the entire amount of the Plan Benefit, if any, which such individual is entitled to under the Plan. ARTICLE IV CHANGE OF CONTROL BENEFITS -------------------------- 4.1 1990 ARCO Chemical Company Long-Term Incentive Plan (the "1990 LTIP"). -------------------------------------------------------------------- Notwithstanding the terms of the 1990 LTIP, the following shall occur under the 1990 LTIP upon the occurrence of a Change of Control: (a) all outstanding stock options granted thereunder shall 7 become immediately and fully vested and exercisable; (b) all dividend share credits accrued thereunder shall become immediately vested; and (c) all dividend share credits that would have been earned through the remainder of the term of the option granted thereunder (as determined in accordance with the formula set forth in Appendix B) shall be credited no later than the date of the Change of Control and be immediately vested. 4.2 1998 ARCO Chemical Company Long-Term Incentive Plan (the "1998 LTIP"). --------------------------------------------------------------------- The following shall occur pursuant to the 1998 LTIP upon the occurrence of a Change of Control: (a) each Participant shall receive a conversion of the Participant's Contingent Restricted Stock for the next Performance Objective level into Performance-Based Restricted Stock based on a proration of the Company's progress to the next Performance Objective level as of the date of the Change of Control. Participants will be entitled to receive a conversion of Contingent Restricted Stock for the next Performance Objective level, based on a calculation of the percentage of RCM achieved to the effective date of the Change of Control as compared to the total amount of RCM required to achieve the next Performance Objective. The remaining shares of Contingent Restricted Stock, if any, shall be forfeited; (b) the Performance Supplement will be calculated and applied as of the effective date of the Change of Control, using the stock price on the effective date of the Change of Control, assuming a Change of Control occurs during the basic Performance Period (and not during an extended period as described in Section 2(a) of Article III of the 1998 LTIP); (c) all Performance-Based Restricted Stock and Stock Options will become immediately vested; (d) where the Company is not the surviving corporation (or survives only as a subsidiary of another corporation), unless the Long-Term Incentive Plan Administration Subcommittee of the Compensation Committee determines otherwise, all outstanding Stock Options that are not exercised shall be assumed by, or replaced with comparable options by, the surviving corporation; and (e) no actions shall be taken under the 1998 LTIP that would make the Change of Control ineligible for pooling of interests accounting treatment if, in the absence of such actions, the Change of Control would qualify for such treatment and the Company intends to use such treatment with respect to the Change of Control. 8 Each capitalized term used in this Section 4.2 that is not a defined term under this Plan shall have the meaning ascribed to it under the 1998 LTIP. 4.3 ARCO Chemical Company Value Incentive Plan (the "VIP"). ------------------------------------------------------ Notwithstanding the terms of the VIP, the following shall occur under the VIP upon the occurrence of a Change of Control: (a) all outstanding phantom stock units granted thereunder shall become immediately and fully vested; (b) all dividend share credits granted thereunder related to outstanding phantom stock units shall become immediately and fully vested; and (c) all dividend share credits that would have been earned through the expiration date of the phantom stock units granted thereunder (as determined in accordance with the formula set forth in Appendix B) shall be credited no later than the date of the Change of Control and be immediately vested. 4.4 Incorporation. The plans referred to in this Article IV are hereby ------------- amended to incorporate, or upon their adoption will be deemed to incorporate, the relevant provisions of this Article IV. ARTICLE V PLAN BENEFITS ------------- 5.1 Right to Plan Benefit. --------------------- (a) A Participant shall be entitled to receive from the Company a Plan Benefit in the amount provided in Section 5.2 if (i) a Change of Control has occurred and (ii) within the two (2) year period commencing on the date of the Change of Control, the Participant's employment with the Company and its Affiliates terminates for any reason (including the sale, divestiture or other disposition of an Operating Unit employing the Participant), other than (A) a termination by the Company or any of its Affiliates for Cause, (B) a termination resulting from the Participant's Disability, (C) the Participant's death, or (D) a termination, voluntary resignation or retirement by the Participant without Good Reason. 5.2 Amount of Plan Benefit. If a Participant's employment is terminated ---------------------- under circumstances entitling him or her to a Plan Benefit, such Participant shall be entitled to the following: 9 (a) the Company shall pay to the Participant all Accrued Compensation within thirty (30) days after the Participant's Termination Date; (b) the Company shall pay to the Participant, as severance pay and in lieu of any further salary or bonus for periods subsequent to the Participant's Termination Date, in a single payment (without any discount for accelerated payment, but subject to applicable withholding taxes) within thirty (30) days after the Participant's Termination Date, an amount in cash equal to the amount determined in accordance with Appendix A (the "Salary Separation Payment"); provided, however, that if a Participant's employment is governed by laws, - -------- ------- statutes, or regulations outside of the United States that mandate the payment of separation benefits, the Participant shall be paid the greater of the Salary Separation Payment or the statutorily required separation payment. Under no circumstances shall a Participant be entitled to payment of both the Salary Separation Payment and a statutorily required separation payment; (c) the Company shall pay to a Participant who participates in the ARCO Chemical Company Annual Incentive Plan (the "AIP") an amount in cash equal to his or her bonus award as determined by the Compensation Committee under the AIP for the Plan Year in which the Change of Control occurs, pro rated for the number of full months of plan participation during such Plan Year; and (d) for the period commencing on the Participant's Termination Date and continuing for the Participant's Salary Separation Payment Period (as determined in accordance with Appendix A) (the "Continuation Period"), the Company shall continue on behalf of the Participant and his or her dependents and beneficiaries (i) medical and dental benefits, (ii) long-term disability coverage and (iii) life insurance and other death benefits coverage. The coverages and benefits (including deductibles, if any) provided under this Section 5.2(d) during the Continuation Period shall be no less favorable to the Participant and his or her dependents and beneficiaries than the most favorable of such coverages and benefits provided the Participant and his or her dependents and beneficiaries immediately preceding the Change of Control. Any period during which benefits are continued pursuant to this Section 5.2(d) shall be considered to be in satisfaction of the Company's obligation to provide "continuation coverage" pursuant to Section 4980B of the Internal Revenue Code of 1986, as amended, and the period of coverage required under said Section 4980B shall be reduced by the period during which benefits were provided pursuant to this Section 5.2(d). 5.3 Mitigation. The Participant shall not be required to mitigate the ---------- 10 amount of any payment or benefit provided for in this Plan by seeking other employment or otherwise and no such payment or benefit shall be offset or reduced by the amount of any compensation or benefits provided to the Participant in any subsequent employment. 5.4 Other Benefits; Non-Exclusivity of Rights. Nothing in this Plan shall ----------------------------------------- prevent or limit the Participant's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its Affiliates and for which the Participant may qualify, nor shall anything herein limit or reduce such rights as any Participant may have under any other agreements with the Company or any of its Affiliates. Nothing herein shall be deemed to limit, supersede or restrict any rights that any Participant may have to accelerated vesting of any right or benefit under change of control provisions of any plan, program, agreement or otherwise. 5.5 Incorporation. Each employee benefit plan pursuant to which a Plan ------------- Benefit shall be provided to a Participant pursuant to this Article V is hereby amended to incorporate, or upon its adoption will be deemed to incorporate, the relevant provisions of this Article V. ARTICLE VI EXCISE TAX PROVISIONS --------------------- 6.1 Excise Tax Limitation. This Section 6.1 shall apply only to --------------------- Participants with an Employee Classification of B, C, D or E as set forth in Appendix A. (a) In the event it shall be determined that any payment or distribution of any type to or for the benefit of a Participant, by the Company, any of its Affiliates, any Person (as defined in Section 2.6(a)) who acquires ownership or effective control of the Company or ownership of a substantial portion of the Company's assets (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the "Code")) or any Affiliate of such Person, whether paid or payable or distributed or distributable pursuant to the terms of this Plan or otherwise (the "Payments"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), then the Payments shall be reduced (but not below zero) if and to the extent that a 11 reduction in the Payments would result in the Participant retaining a larger amount, on an after-tax basis (taking into account federal, state and local income taxes and the Excise Tax), than if the Participant received the entire amount of such Payments. Unless the Participant shall have given prior written notice specifying a different order to the Company to effectuate the foregoing, the Company shall reduce or eliminate the Payments, by first reducing or eliminating the portion of the Payments which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments or benefits which are to be paid or provided latest in time. Any notice given by the Participant pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing the Participant's rights and entitlements to any benefits or compensation. (b) The determination of whether the Payments shall be reduced pursuant to Section 6.1(a) and the amount of such reduction shall be made, at the Company's expense, by an independent accounting firm selected by the Company and reasonably acceptable to the Participant which is one of the four largest accounting firms in the United States (the "Accounting Firm"). The Accounting Firm shall provide its determination, together with detailed supporting calculations and documentation to the Company and the Participant within ten (10) days of the date of the Change of Control or Termination Date, as the case may be. If the Accounting Firm determines that no Excise Tax is payable by the Participant with respect to the Payments, it or the Company shall furnish the Participant with an opinion that no Excise Tax will be imposed with respect to any such Payments. 6.2 Excise Tax Gross-Up. This Section 6.2 shall apply only to ------------------- Participants with an Employee Classification of A as set forth in Appendix A. (a) In the event it shall be determined that any Payments (as defined in Section 6.1(a)), other than the payment provided for in this Section 6.2(a), would be subject to the Excise Tax (as defined in Section 6.1(a)), then the Participant shall be entitled to receive from the Company an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Participant of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the Participant retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. 12 (b) All determinations as to whether any of the Payments are "parachute payments" (within the meaning of Section 280G of the Code), including whether a Gross-Up Payment is required, the amount of such Gross-Up Payment and amounts relevant to the last sentence of this Subsection 6.2(b), shall be made by the Accounting Firm (as defined in Section 6.1(b)), which shall provide its determination (the "Determination"), together with detailed supporting calculations regarding the amount of any Gross-Up Payment and any other relevant matter, both to the Company and the Participant within ten (10) days of the date of the Change of Control or Termination Date, as the case may be, or such earlier time as is requested by the Company or the Participant (if the Participant reasonably believes that any of the Payments may be subject to the Excise Tax). If the Accounting Firm determines that no Excise Tax is payable by the Participant, it shall furnish the Participant with a written statement that such Accounting Firm has concluded that no Excise Tax is payable (including the reasons therefor) and that he or she has substantial authority not to report any Excise Tax on his or her federal income tax return. If a Gross-Up Payment is determined to be payable, it shall be paid to the Participant within five (5) days after the Determination is delivered to the Company or the Participant. Any determination by the Accounting Firm shall be binding upon the Company and the Participant, absent manifest error. As a result of uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments not made by the Company should have been made ("Underpayment"), or that Gross-Up Payments will have been made by the Company which should not have been made ("Overpayments"). In either such event, the Accounting Firm shall determine the amount of the Underpayment or Overpayment that has occurred. In the case of an Underpayment, the amount of such Underpayment shall be promptly paid by the Company to or for the benefit of the Participant. In the case of an Overpayment, the Participant shall, at the direction and expense of the Company, take such steps as are reasonably necessary (including the filing of returns and claims for refund), follow reasonable instructions from, and procedures established by, the Company, and otherwise reasonably cooperate with the Company to correct such Overpayment; provided, however, that (i) the Participant shall -------- ------- not in any event be obligated to return to the Company an amount greater than the net after-tax portion of the Overpayment that he has retained or has recovered as a refund from the applicable taxing authorities and (ii) this provision shall be interpreted in a manner consistent with the intent of Subsection 6.2(a), which is to make the Participant whole, on an after-tax basis, from the application of the Excise Tax, it being understood that the correction of an Overpayment may result in the Participant repaying to the Company an amount which is less than the Overpayment. 13 ARTICLE VII SUCCESSORS TO COMPANY --------------------- 7.1 Successors. ---------- (a) This Plan shall be binding upon the Company, its successors and assigns and the Company shall require any successor or assign to expressly assume and agree to perform this Plan in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. The term "Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company whether by operation of law or otherwise. (b) Neither this Plan nor any right or interest hereunder shall be assignable or transferable by a Participant or his or her beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Plan shall inure to the benefit of and be enforceable by a Participant's legal personal representative. ARTICLE VIII DURATION, AMENDMENT AND PLAN TERMINATION ---------------------------------------- 8.1 Duration. This Plan shall continue in effect until terminated in -------- accordance with Section 8.2. 8.2 Amendment and Termination. Prior to a Change of Control, the Plan may ------------------------- be amended or modified in any respect, and may be terminated, by resolution adopted by the Board. From and after the occurrence of a Change of Control, the Plan (i) may not be amended or modified in any manner that would in any way adversely affect the benefits or protections provided to any individual hereunder and (ii) may not be terminated until the later of (a) the third anniversary of the Change of Control or (b) the date that all Participants who have become entitled to Plan Benefits hereunder shall have received such payments in full. 14 8.3 Form of Amendment. Any amendment or termination of the Plan shall be ----------------- effected by a written instrument signed by a duly authorized officer or officers of the Company, certifying that the amendment or termination has been approved by the Board. ARTICLE IX MISCELLANEOUS ------------- 9.1 Administration. This Plan shall be administered by the Compensation -------------- Committee. 9.2 Employment Status. This Plan does not constitute a contract of ----------------- employment or impose on the Company any obligation to retain any Participant as an employee or to change any employment policies of the Company. 9.3 Validity and Severability. The invalidity or unenforceability of any ------------------------- provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan, which shall remain in full force and effect, and any prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9.4 Settlement of Claims. The Company's obligation to make the payments -------------------- provided for in this Plan and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, defense, recoupment, or other right which the Company may have against a Participant or others. 9.5 Governing Law. The validity, interpretation, construction and ------------- performance of the Plan shall in all respects be governed by the laws of the Commonwealth of Pennsylvania, without giving effect to the conflict of law principles thereof. 15 APPENDIX A ---------- Employee ---------- Classification Members -------------- ------- A CEO and Direct Reports B C3 and C4 Executives C C5 Executives D Key Managers (Grades A, B, C) E Grade D and below A Participant's Employee Classification shall be determined as set forth in the official records of the Company, and shall be based on his or her status as of the date immediately preceding the Participant's termination date, or, if it would entitle the Participant to a greater Salary Separation Payment or longer Salary Separation Period, as of the date immediately preceding the date on which the Change of Control occurs. Salary Separation Payment - ------------------------- The Salary Separation Payment to which a Participant is entitled shall be based on the Participant's Employee Classification as of the date immediately preceding the Participant's Termination Date, or, if it would entitle the Participant to a greater Salary Separation Payment, immediately preceding the date on which the Change of Control occurs, and shall equal the amount described in the table below. 16
Employee Classification Salary Separation Payment -------------- ------------------------- A Three times the sum of the Participant's (a) Base Salary plus (b) Bonus Amount. B Two times the sum of the Participant's (a) Base Salary plus (b) Bonus Amount. C One and one-half times the sum of the Participant's (a) Base Salary plus (b) Bonus Amount. D One times the sum of the Participant's (a) Base Salary plus (b) Bonus Amount. E Subject to a minimum of twelve weeks pay (one weeks pay to equal, as the case may be, one fifty-second of the Participant's annual base salary or forty times the Participant's hourly rate) and a maximum of fifty-two weeks pay, two weeks pay per year of service prorated for completed months of service.
Employee Salary Separation Classification Payment Period - --------------- ----------------- A 36 months B 24 months C 18 months D 12 months E The number of weeks in respect of which the amount of the Salary Separation Payment is determined.
17 APPENDIX B ---------- 1990 LTIP. For purposes of Section 4.1(c) of the Plan, the number --------- of dividend share credits to be issued under the 1990 LTIP shall be determined by compounding the number of dividend share credits issuable through the remainder of the term of the option granted thereunder based on the latest dividend declared by the Company prior to the date of the Change of Control and the fair market value of the Company's common stock as of the dividend record date of the quarterly dividend immediately preceding the Change of Control. Value Incentive Plan. For purposes of Section 4.3(c) of the Plan, the -------------------- number of dividend share credits to be issued under the VIP shall be determined by compounding the number of dividend share credits issuable through the expiration date of the phantom stock units granted thereunder based on the latest dividend declared by the Company prior to the date of the Change of Control and the fair market value of the Company's common stock as of the dividend record date of the quarterly dividend immediately preceding the Change of Control. EXAMPLE: Assume Change of Control occurs five years after grant, with five - -------- years, or twenty quarterly dividends, remaining to expiration. Assume further a $.70 per share per quarter dividend rate and a $50.00 stock price as of the dividend record date of the quarterly dividend immediately preceding the Change of Control. Assume further that Employee A's account balance at Change of Control is 5000 options originally granted at $42.00 per share with 1000 accrued DSC units. DSCs will be projected as if earned to expiration of the grant based upon the dividend rate and stock price in effect on the record date of the quarterly dividend immediately preceding the Change of Control. The computation of projected DSC units is as follows: PROJECTED DSC UNITS: 1000 DSC units (multiplied by) $.70 = $700.00 (divided by) $50.00 per share = 14 DSC units (14 + 1000 = 1014 DSC units upon first quarter projection) (1014 DSC units (multiplied by) $.70 = $709.80 (divided by) $50.00 per share = 14.196 DSC units (14.196 + 1014 = 1028.196 DSC units upon second quarter projection) Repeat the above analysis for 18 additional quarterly payments to expiration. 18 EX-12 4 COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 ------------- ARCO CHEMICAL COMPANY AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (MILLION OF DOLLARS)
Three Months Years Ended December 31, Ended March 31, ----------------------------------- --------------- 1993 1994 1995 1996 1997 1998 ----- ---- ---- ---- ---- ---- Pretax income from continuing operations $ 311 $ 416 $ 756 $ 487 $ 168 $ 135 Add: Interest expense....................... 105 85 89 86 80 18 Rental expense factor.................. 20 22 25 27 27 6 ----- ----- ----- ----- ----- ----- Earnings available for fixed charges...... $ 436 $ 523 $ 870 $ 600 $ 275 $ 159 ===== ===== ===== ===== ===== ===== Interest expense.......................... $ 105 $ 85 $ 89 $ 86 $ 80 $ 18 Add capitalized interest.................. - 3 1 3 9 2 Rental expense factor..................... 20 22 25 27 27 6 ----- ----- ----- ----- ----- ----- Fixed charges............................. $ 125 $ 110 $ 115 $ 116 $ 116 $ 26 ===== ===== ===== ===== ===== ===== Ratio of earnings to fixed charges........ 3.5 4.8 7.6 5.2 2.4 6.1 ===== ===== ===== ===== ===== =====
EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 39 0 614 0 467 1,149 4,124 1,629 4,069 731 773 0 0 100 1,702 4,069 934 934 720 720 0 0 18 135 43 92 0 0 0 92 0.95 0.95
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