-----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, GiqNVawQf8XGP9+zlBVdbjQnUHCgLPgdOWbiqRdedGAFArqdbBuIPKHY0Q5sJA2s ydKW5GUV7pt0POJfT0sfZQ== 0000899243-97-001575.txt : 19970814 0000899243-97-001575.hdr.sgml : 19970814 ACCESSION NUMBER: 0000899243-97-001575 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYONDELL PETROCHEMICAL CO CENTRAL INDEX KEY: 0000842635 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 954160558 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10145 FILM NUMBER: 97657724 BUSINESS ADDRESS: STREET 1: 1221 MCKINNEY ST STREET 2: STE 1600 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7136527200 MAIL ADDRESS: STREET 1: 1221 MCKINNEY ST STREET 2: SUITE 1600 CITY: HOUSTON STATE: TX ZIP: 77010 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 JUNE 30, 1997. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM . . . . . . . . . . TO . . . . . . . . . . COMMISSION FILE NUMBER 1-10145 --------------- LYONDELL PETROCHEMICAL COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- DELAWARE 95-4160558 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1221 MCKINNEY STREET, 77010 SUITE 1600, HOUSTON, TEXAS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 652-7200 --------------- 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 JUNE 30, 1997: 80,000,000 - -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION LYONDELL PETROCHEMICAL COMPANY CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ------------------------------ --------------------------- PRO PRO FORMA AS FORMA AS 1996 REPORTED 1996 REPORTED MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS 1997 (NOTE 1) 1996 1997 (NOTE 1) 1996 - -------------------------------------------- -------- --------- --------- ------ --------- -------- SALES AND OTHER OPERATING REVENUES: Unrelated parties $ 631 $ 497 $1,166 $1,226 $ 956 $2,267 Related parties 158 116 73 318 236 137 ----- ----- ------ ------ ------ ------ 789 613 1,239 1,544 1,192 2,404 OPERATING COSTS AND EXPENSES: Cost of sales Unrelated parties 462 426 1,071 972 829 2,057 Related parties 131 109 67 250 210 124 Selling, general and administrative expenses 50 40 56 97 85 117 ----- ----- ------ ------ ------ ------ 643 575 1,194 1,319 1,124 2,298 ----- ----- ------ ------ ------ ------ Operating income 146 38 45 225 68 106 Interest expense (20) (22) (23) (41) (42) (43) Interest income 3 -- 1 6 2 2 Minority interest (4) -- -- (8) -- (4) Income from equity investment 21 7 -- 27 33 -- ----- ----- ------ ------ ------ ------ Income before income taxes 146 23 23 209 61 61 Provision for income taxes 53 8 8 76 22 22 ----- ----- ------ ------ ------ ------ NET INCOME $ 93 $ 15 $ 15 $ 133 $ 39 $ 39 ===== ===== ====== ====== ====== ====== EARNINGS PER SHARE $1.17 $.19 $.19 $1.67 $.49 $.49 ===== ===== ====== ====== ====== ======
See notes to consolidated financial statements. 1 LYONDELL PETROCHEMICAL COMPANY CONSOLIDATED BALANCE SHEETS
PRO FORMA DECEMBER 31 AS REPORTED JUNE 30 1996 DECEMBER 31 MILLIONS OF DOLLARS 1997 (NOTE 1) 1996 - ------------------- --------- ----------- ------------ ASSETS Current assets: Cash and cash equivalents $ 42 $ 56 $ 68 Accounts receivable: Trade 301 259 394 Related parties 49 96 62 Inventories 206 196 294 Prepaid expenses and other current assets 14 12 13 ------- ------- ------- Total current assets 612 619 831 ------- ------- ------- Property, plant and equipment 2,135 2,109 4,313 Less accumulated depreciation and amortization (1,252) (1,216) (2,043) ------- ------- ------- 883 893 2,270 Investment in affiliate 59 83 -- Receivable from affiliate 226 177 -- Deferred charges and other assets 129 118 175 ------- ------- ------- Total assets $ 1,909 $ 1,890 $ 3,276 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable: Trade $ 135 $ 200 $ 474 Related parties 19 30 1 Notes payable 150 50 60 Current maturities of long-term debt 2 112 112 Other accrued liabilities 79 93 124 ------- ------- ------- Total current liabilities 385 485 771 ------- ------- ------- Long-term debt 742 744 1,194 Other liabilities and deferred credits 79 70 114 Deferred income taxes 170 157 157 Commitments and contingencies Minority interest 5 3 609 Stockholders' equity: Preferred stock, $.01 par value, 80,000,000 shares authorized, none outstanding Common stock, $1 par value, 250,000,000 shares authorized, 80,000,000 issued and outstanding 80 80 80 Additional paid-in capital 158 158 158 Retained earnings 290 193 193 ------- ------- ------- Total stockholders' equity 528 431 431 ------- ------- ------- Total liabilities and stockholders' equity $ 1,909 $ 1,890 $ 3,276 ======= ======= =======
See notes to consolidated financial statements. 2 LYONDELL PETROCHEMICAL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30 --------------------------------- PRO FORMA 1996 AS REPORTED MILLIONS OF DOLLARS 1997 (NOTE 1) 1996 - ------------------- -------- ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 133 $ 39 $ 39 Adjustments to reconcile net income to net cash provided by (used in) operating activities, net of the effects of deconsolidation of affiliate: Depreciation and amortization 44 33 49 Deferred income taxes 8 8 8 Minority interest 8 -- 4 Income from equity investment (27) (33) -- (Increase) decrease in accounts receivable 5 (28) (27) Increase in inventories (10) (44) (64) Increase (decrease) in accounts payable (76) 52 75 Net change in other working capital accounts (10) (36) (38) Other (7) (23) (24) ----- ----- ----- Net cash provided by (used in) operating activities 68 (32) 22 ----- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (28) (42) (356) Proceeds from sales of short-term investments -- 76 76 Purchases of short-term investments -- (76) (76) Contributions and advances to affiliate (50) (90) -- Distributions from affiliate 51 57 -- Deconsolidation of affiliate (12) (4) -- ----- ----- ----- Net cash used in investing activities (39) (79) (356) ----- ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES: Minority owner contributions (7) -- 79 (distributions) Net change in short-term debt 100 (13) (1) Borrowings of long-term debt -- 300 439 Repayments of long-term debt (112) (150) (150) Dividends paid (36) (36) (36) ----- ----- ----- Net cash provided by (used in) financing activities (55) 101 331 ----- ----- ----- DECREASE IN CASH AND CASH EQUIVALENTS (26) (10) (3) Cash and cash equivalents at beginning of period 68 10 10 ----- ----- ----- Cash and cash equivalents at end of period $ 42 $ -- $ 7 ===== ===== =====
See notes to consolidated financial statements. 3 LYONDELL PETROCHEMICAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PREPARATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal, recurring adjustments considered necessary for a fair presentation, have been included. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 1996 included in the Lyondell Petrochemical Company ("Company" or "Lyondell") 1996 Annual Report and the Annual Report on Form 10-K and prior quarterly reports on Form 10-Q pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. Certain amounts from prior periods have been reclassified to conform to the current period presentation. Pro Forma Financial Information - The unaudited pro forma financial information in the accompanying financial statements presents the financial position, results of operations and cash flows of the Company as of December 31, 1996 and for the six months ended June 30, 1996 using the equity method of accounting for Lyondell's investment in LYONDELL-CITGO Refining Company Ltd. ("LCR") as if the change in accounting method had been effective January 1, 1996 (see Note 3). This unaudited pro forma information may not be indicative of results that will be obtained in the future. The unaudited pro forma financial information also includes restatements to divide the petrochemicals segment into the petrochemicals and polymers segments. 2. COMPANY OPERATIONS The Company operates in the petrochemicals, polymers and refining segments. In 1996 and prior years, the results of the polymers business were included in the petrochemicals segment. The petrochemicals business, as reported in 1997, manufactures a wide variety of petrochemicals including olefins, methanol, methyl tertiary butyl ether ("MTBE") and aromatics produced at the Channelview petrochemical facility. In December 1996, the Company sold an undivided interest in its methanol facility to MCN Investment Corporation ("MCNIC") and created Lyondell Methanol Company L.P. ("Lyondell Methanol"), a partnership with the minority owner, to own and operate the methanol facility. The Company's petrochemical products are used primarily in the manufacture of other chemicals and products, including polymers. The polymers business manufactures polyolefins, including high-density polyethylene ("HDPE"), low-density polyethylene and polypropylene, which are used in the production of a wide variety of consumer and industrial products. The Company also operates in the refining segment through the Company's equity interest in LCR, a Texas limited liability company that is owned by subsidiaries of Lyondell and CITGO Petroleum Corporation ("CITGO"), which manufactures refined petroleum products, including gasoline, low sulfur diesel, jet fuel, aromatics and lubricants. 3. EQUITY INTEREST IN LYONDELL-CITGO REFINING COMPANY LTD. In July 1993, LCR was formed to own and operate the Company's refining business, including the full-conversion Houston, Texas refinery ("Refinery"). LCR completed a major upgrade project at the Refinery ("Upgrade Project") during the first quarter of 1997 which enables the facility to process substantial additional volumes of very heavy crude oil. As a result of the completion of the Upgrade Project, effective April 1, 1997 the participation interests changed from 86 percent and 14 percent to approximately 60 percent and 40 percent for Lyondell and 4 CITGO, respectively, to reflect CITGO's equity contribution in the Upgrade Project. CITGO has a one-time option to increase its participation interest in LCR up to 50 percent by making an additional equity contribution. Net income before depreciation expense for the period is allocated to LCR's owners based on participation interests. Depreciation expense is allocated to the owners based on contributed assets. Pursuant to contractual arrangements and concurrent with the completion of the Upgrade Project, the authority and responsibility for certain management decisions previously decided by majority vote, and therefore controlled by Lyondell, changed to unanimous vote resulting in expanded joint control of LCR by Lyondell and CITGO. Consequently, effective January 1, 1997, Lyondell began accounting for its investment in LCR under the equity method of accounting, meaning that the operations of LCR are no longer consolidated line by line with those of Lyondell. Lyondell's portion of LCR's net earnings are included in the consolidated statements of income as income from equity investment and Lyondell's portion of LCR's net assets appear on a single line in the consolidated balance sheets as investment in affiliate. Cash advances to and distributions from LCR are reflected as individual line items on the consolidated statements of cash flows. Cash distributions from LCR are treated as a return of investment until the Company recovers its investment. Summarized financial information for LCR is as follows (in millions of dollars).
BALANCE SHEETS JUNE 30 DECEMBER 31 1997 1996 ------------- ------------ Total current assets $ 190 $ 273 Property, plant and equipment, net 1,392 1,378 Deferred charges and other assets 51 56 --------- ------ Total assets $ 1,633 $1,707 ========= ====== Total current liabilities $ 218 $ 373 Long-term debt 695 627 Other liabilities and deferred credits 47 44 Members' equity 673 663 --------- ------ Total liabilities and members' equity $ 1,633 $1,707 ========= ====== INCOME STATEMENTS FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ------------------ --------------------- 1997 1996 1997 1996 ------- ------ --------- -------- Sales and other operating revenues $ 641 $ 710 $1,340 $1,398 Cost of sales 593 688 1,264 1,329 Selling, general and administrative expenses 16 16 33 33 ----- ----- ------ ------ Operating income $ 32 $ 6 $ 43 $ 36 ===== ===== ====== ====== Net income $ 21 $ 7 $ 28 $ 36 ===== ===== ====== ====== STATEMENTS OF CASH FLOWS Depreciation and amortization $ 25 $ 8 $ 42 $ 16 Net changes in working capital $ 18 $ 23 $ (65) $ 3 Net cash provided by operating activities $ 65 $ 38 $ 7 $ 54 ===== ===== ====== ====== Additions to property, plant and equipment $ (12) $(141) $ (51) $ (314) Net cash used in investing activities $ (12) $(141) $ (51) $ (314) ===== ===== ====== ====== Net cash provided by (used in) financing activities $ (61) $ 97 $ 63 $ 263 ====== ===== ====== ======
Included in sales and other operating revenues above are $47 million and $42 million in sales to Lyondell for the three months ended June 30, 1997 and 1996, respectively, and $107 million and $84 million in sales to Lyondell for the six months ended June 30, 1997 and 1996, respectively. In addition, LCR purchased $81 million and $44 million, primarily product purchases, from the Company for the three months ended June 30, 1997 and 1996, 5 respectively, and $175 million and $102 million from the Company for the six months ended June 30, 1997 and 1996, respectively, which is included in LCR's cost of sales. LCR has a long-term crude supply contract ("Crude Supply Contract") with Lagoven, S.A. ("LAGOVEN"), an affiliate of CITGO. The Crude Supply Contract incorporates a formula price based on the market value of a slate of refined products deemed to be produced from each particular crude oil or feedstock, less: (i) certain deemed refining costs, adjustable for inflation and energy costs; (ii) certain actual costs, including crude transportation costs, import duties and taxes; and (iii) a deemed margin, which varies according to the grade of crude oil or other feedstock delivered. Deemed margins and deemed costs are adjusted periodically. These adjustments are based on inflation rates and energy costs, however, deemed margin adjustments can be less than the rate of inflation. Because deemed operating costs and the slate of refined products deemed to be produced for a given barrel of crude oil or other feedstock do not necessarily reflect the actual costs and yields in any period and because the market value of the refined products used in the pricing formula does not necessarily reflect the actual price received for the refined products, the actual refining margin earned by LCR under the Crude Supply Contract will vary depending on, among other things, the efficiency with which LCR conducts its operations during such period. Despite the limitations discussed above, the Crude Supply Contract reduces the volatility of earnings and cash flow of the refining operations of LCR irrespective of market fluctuations of either crude oil or refined products. Specifically, if the market value of refined products "deemed" to be produced from the Venezuelan crude oil increases, the "deemed" cost of crude oil to LCR will also increase. Alternatively, if the market value of refined products "deemed" to be produced from the Venezuelan crude oil decreases, the "deemed" cost of crude oil to LCR will also decrease. This results in relatively stable "deemed" margins regardless of refined products market volatility. If the actual yields, costs or volumes differ substantially from those contemplated by the Crude Supply Contract, the benefits of this agreement to LCR could be substantially different than anticipated. In addition, under the terms of a long-term product sales agreement ("Products Agreement"), CITGO purchases substantially all of the refined products produced at the Refinery. Both LAGOVEN and CITGO are direct or indirect wholly-owned subsidiaries of Petroleos de Venezuela, S.A., the national oil company of Venezuela. LCR is required to purchase, and LAGOVEN is required to sell, sufficient crude oil to satisfy LCR's coking capacity, or a minimum of 200,000 barrels per day and up to 230,000 barrels per day of very heavy Venezuelan crude oil. LAGOVEN has the right, but not the obligation, to supply incremental amounts above 230,000 barrels per day. 4. INVENTORIES The categories of inventory and their recorded values at June 30, 1997 and December 31, 1996 were: PRO FORMA AS REPORTED JUNE 30 DECEMBER 31 DECEMBER 31 MILLIONS OF DOLLARS 1997 1996 1996 - ------------------- ------- ----------- ----------- Petrochemicals $ 113 $ 98 $ 172 Polymers 68 74 -- Crude oil and refined products -- -- 81 Materials and supplies 25 24 41 ----- ----- ----- Total inventories $ 206 $ 196 $ 294 ===== ===== ===== 6 5. CAPITALIZED INTEREST The Company's policy is to capitalize interest expense incurred on debt during the construction of major projects that exceed one year. Total interest expense incurred during the three months and the six months ended June 30, 1997 was approximately $20 million and $41 million, respectively, of which none was capitalized. Total interest expense incurred during the three months and the six months ended June 30, 1996 was approximately $30 million and $56 million, respectively. Approximately $7 million and $13 million was capitalized, $6 million and $11 million by LCR, during the three months and six months ended June 30, 1996, respectively. 6. COMMITMENTS AND CONTINGENCIES The Company has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business. In the aggregate, such commitments are not at prices in excess of current market. Depending on market conditions, breach or termination of the Crude Supply Contract could adversely affect the Company. Although the parties have negotiated alternative arrangements in the event of certain force majeure conditions, including governmental or other actions restricting or otherwise limiting LAGOVEN's ability to perform its obligations, any such alternative arrangements may not be as beneficial as the Crude Supply Contract. There can be no assurance that alternative crude oils with similar margins would be available for purchase by LCR. Furthermore, the breach or termination of the Crude Supply Contract would require LCR to return to the practice of purchasing all of its crude oil feedstocks in the merchant market and would again subject LCR to significant volatility and price fluctuations. In connection with the transfer of assets and liabilities from Atlantic Richfield Company ("ARCO") to the Company, the Company agreed to assume certain liabilities arising out of the operation of the Company's integrated petrochemicals and petroleum processing business prior to July 1, 1988. In connection with the transfer of such liabilities, the Company and ARCO entered into an agreement ("Cross-Indemnity Agreement") whereby the Company agreed to defend and indemnify ARCO against certain uninsured claims and liabilities which ARCO may incur relating to the operation of the business of the Company prior to July 1, 1988, including certain liabilities which may arise out of pending and future lawsuits. ARCO indemnified the Company under the Cross-Indemnity Agreement with respect to other claims or liabilities and other matters of litigation not related to the assets or business included in the consolidated financial statements. ARCO has also indemnified the Company for all federal taxes which might be assessed upon audit of the operations of the Company included in the consolidated financial statements prior to January 12, 1989, and for all state and local taxes for the period prior to July 1, 1988. The Company has reached an agreement-in-principle with ARCO to update the Cross-Indemnity Agreement ("Revised Cross-Indemnity Agreement"). For current and future cases related to Company products and Company operations, ARCO and the Company will bear a proportionate share of judgment and settlement costs according to a formula which allocates responsibility based on years of ownership during the relevant time period. The party with the most significant potential liability exposure will be responsible for case management and associated costs while providing some provisions to allow the non-case managing party to protect its interests. Under the Revised Cross-Indemnity Agreement, both ARCO and the Company waive any claim for reimbursement under the existing Cross-Indemnity Agreement for any prior defense and settlement costs associated with waste site matters, and the Company will assume responsibility for its proportionate share of future costs for waste site matters not covered by ARCO insurance. Subject to the uncertainty inherent in all litigation, management believes the resolution of the matters pursuant to the Revised Cross-Indemnity Agreement will not have a material adverse effect upon the consolidated financial statements or liquidity of the Company. In addition to lawsuits for which the Company has indemnified ARCO, the Company is also subject to various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material adverse effect upon the consolidated financial statements or liquidity of the Company. 7 The Company's policy is to be in compliance with all applicable environmental laws. The Company is subject to extensive environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, the Company cannot accurately predict future developments, such as increasingly strict requirements of environmental laws, inspection and enforcement policies and compliance costs therefrom which might affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. Subject to the terms of the Cross-Indemnity Agreement, the Company is currently contributing funds to the cleanup of one waste site (Brio, located near Houston, Texas) under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as amended and the Superfund Amendments and Reauthorization Act of 1986. The Company is also subject to certain assessment and remedial actions at the Refinery under the Resource Conservation and Recovery Act ("RCRA"). In addition, the Company has negotiated an order with the Texas Natural Resource Conservation Commission ("TNRCC") for assessment and remediation of groundwater and soil contamination at the Refinery. During July 1994, the Company reported results of an independent investigation conducted by the Audit Committee of the Board of Directors regarding the compliance status of two process waste-water streams under the applicable Benzene National Emissions Standard for Hazardous Air Pollutants ("NESHAPS") regulations and certain issues raised by an employee. Noncompliance with the Benzene NESHAPS regulations and the related reporting requirements can result in civil penalties and, under certain circumstances, substantial civil and, potentially, criminal penalties. The Company received a notice of violation from the TNRCC regarding the two streams and paid a fine of $10,200. In addition, the Company incurred approximately $2 million in capital costs in connection with these waste-water streams to achieve ongoing compliance with the Benzene NESHAPS regulations. Although the Criminal Enforcement Division of the EPA is conducting a formal investigation, the Company does not believe any aspects of the matters described above will subject the Company to criminal liability or have a material adverse effect on the consolidated financial statements or liquidity of the Company. As of June 30, 1997 the Company has accrued $13 million related to future CERCLA, RCRA and TNRCC assessment and remediation costs, of which $3 million is included in current liabilities while the remaining amounts are expected to be incurred over the next two to seven years. In the opinion of management, there is currently no material range of loss in excess of the amount recorded. However, it is possible that new information about the sites for which the reserve has been established, new technology or future developments such as involvement in other CERCLA, RCRA, TNRCC or other comparable state law investigations, could require the Company to reassess its potential exposure related to environmental matters. In the opinion of management, any liability arising from the matters discussed in this Note will not have a material adverse effect on the consolidated financial statements or liquidity of the Company. However, the adverse resolution in any reporting period of one or more of these matters discussed in this Note could have a material impact on the Company's results of operations for that period without giving effect to contribution or indemnification obligations of co-defendants or others, or to the effect of any insurance coverage that may be available to offset the effects of any such award. 7. STOCKHOLDERS' EQUITY Dividends - The Company paid regular quarterly dividends of $.225 per share of common stock during the first and second quarters of 1997. Additionally, on July 25, 1997, the Board of Directors declared a regular quarterly dividend of $.225 per share of common stock, payable September 15, 1997 to stockholders of record on August 25, 1997. Earnings per Share - Earnings per share for all periods presented are computed based on the weighted average number of shares outstanding for the periods, which was 80,000,000 shares. 8 8. SUBSEQUENT EVENT On July 28, 1997, the Company and Millennium Chemicals Inc. ("Millennium") announced an agreement to form a new joint venture company which will be operated as a partnership. The partnership will be owned 57 percent by the Company and 43 percent by Millennium and will own and operate the existing olefins and polymers businesses to be contributed by the two companies. Dan Smith, Lyondell's Chief Executive Officer, also will serve as Chief Executive Officer of the venture. The venture will be managed by a Partnership Governance Committee consisting of three representatives from each owner. Approval of the venture's strategic plan and other major decisions will require the consent of representatives of both parties. The partnership is expected to generate significant savings from cost reductions and operating efficiencies. The venture will consist of 13 manufacturing facilities on the U.S. Gulf Coast and in the U.S. Midwest, producing ethylene, propylene, polyethylene (high-density, low- density and linear low-density), polypropylene, ethyl alcohol, butadiene, aromatics, MTBE and other products. Not included in the venture are Lyondell's approximately 60 percent interest in LCR and its 75 percent interest in Lyondell Methanol. The venture will assume primary responsibility for $745 million of existing Lyondell debt. Lyondell also will remain liable on this debt. In addition, Lyondell will provide a $345 million note payable to the venture. The transaction, which has been unanimously approved by the Boards of Directors of both companies, is subject to approval by both companies' stockholders and satisfaction of certain other conditions. The joint venture is expected to commence operations by year-end. After closing, Lyondell will begin accounting for its investment in the venture under the equity method of accounting, similar to the accounting for its investment in LCR. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL In 1996, Lyondell Petrochemical Company ("Company" or "Lyondell") operated in two segments: the petrochemicals segment, which included the results of operations of the Company's petrochemicals and polymers business, and the refining segment. Beginning in 1997, the petrochemicals segment was split into the petrochemicals and polymers segments. The petrochemicals segment consists of olefins including ethylene, propylene, butadiene, butylenes and specialty products; aromatics produced at the Channelview, Texas petrochemicals facility ("Channelview Facility") including benzene and toluene; methanol; methyl tertiary butyl ether ("MTBE"); and refinery blending stocks. In December 1996, the Company sold an undivided interest in its methanol facility to MCN Investment Corporation ("MCNIC") and created Lyondell Methanol Company L.P. ("Lyondell Methanol"), a partnership with the minority owner, to own and operate the methanol facility. The polymers segment consists of polyolefins including high-density polyethylene ("HDPE"), low-density polyethylene and polypropylene produced at the production facilities in Matagorda ("Matagorda Facility") and Victoria ("Victoria Facility"), Texas and the Bayport facility in Pasadena, Texas ("Bayport Facility"). The Company's operations in the refining segment are conducted through its interest in LYONDELL-CITGO Refining Company Ltd. ("LCR"), a Texas limited liability company owned by subsidiaries of the Company and CITGO Petroleum Corporation ("CITGO"). The refining segment consists of refined petroleum products, including gasoline, low sulfur diesel, and jet fuel; aromatics produced at the full-conversion Houston, Texas refinery ("Refinery"), including benzene, toluene, paraxylene and orthoxylene; lubricants, including industrial lubricants, motor oils, white oils and process oils; carbon black oil; sulfur; residual oil; petroleum coke fuel; olefins feedstocks; and crude oil resales. LCR completed a major upgrade project at the Refinery ("Upgrade Project") during the first quarter of 1997 to enable the facility to process substantial additional volumes of very heavy crude oil. The following table sets forth sales volumes for the Company's major products for the periods indicated. Sales volumes, including intersegment sales, include production, purchases of products for resale, propylene production from the product flexibility unit, products received on exchange and draws from inventory. Refined products volumes include all activity at LCR.
FOR THE THREE FOR THE SIX MONTHS MONTHS ENDED JUNE 30 ENDED JUNE 30 -------------------------------------- 1997 1996 1997 1996 -------------------------------------- SELECTED PETROCHEMICAL PRODUCTS (MILLIONS) Ethylene, propylene and other olefins (lbs.) 2,242 2,007 4,260 4,011 Methanol (gallons) 63 57 121 108 Aromatics (gallons) 45 46 89 96 POLYMERS PRODUCTS (MILLIONS) Polyethylene and polypropylene (lbs.) 558 536 1,054 1,083 REFINED PRODUCTS (THOUSAND BARRELS PER DAY) Gasoline 105 110 107 110 Diesel and heating oil 79 43 65 46 Jet fuel 13 24 15 26 Aromatics 10 10 10 10 Other refined products 90 79 85 78 ----- ----- ----- ----- Total refined products volumes 297 266 282 270 ===== ===== ===== =====
10 Summarized below is the segment data for the Company. Intersegment sales from the petrochemicals segment to the polymers segment include ethylene and propylene produced at the Channelview Facility. Intersegment sales between the petrochemicals and refining segments in 1996 include olefins feedstocks and benzene produced at the Refinery and gasoline blending stocks and hydrogen produced at the Channelview Facility. Intersegment sales were made at prices based on current market values. Effective January 1, 1997, Lyondell began accounting for its investment in LCR under the equity method of accounting, meaning that the operations of LCR are no longer consolidated line by line with those of Lyondell. Lyondell's portion of LCR's net earnings are included in the consolidated statements of income as income from equity investment and Lyondell's portion of LCR's net assets appear on a single line in the consolidated balance sheets as investment in affiliate. Cash advances to and distributions from LCR are reflected as individual line items on the consolidated statements of cash flows. Therefore, the results of operations of the refining segment, which consists primarily of the Company's interest in LCR, do not appear line by line in the tables below for 1997. The following unaudited pro forma financial information presents the results of operations of the Company for the period ended June 30, 1996 using the equity method of accounting for Lyondell's investment in LCR as if the change in accounting method had been effective January 1, 1996. The unaudited pro forma financial information also includes restatements to split the petrochemicals segment into the petrochemicals and polymers segments. This unaudited pro forma information may not be indicative of results that will be obtained in the future. The narrative discussion which follows compares 1997 operating results to the pro forma financial information for the comparable periods in 1996 as comparisons to historical 1996 operating results are not considered meaningful.
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ------------------------------------------------------- PRO AS PRO AS FORMA REPORTED FORMA REPORTED (MILLIONS OF DOLLARS) 1997 1996 1996 1997 1996 1996 - --------------------- ------- ------- -------- ------ ------ -------- SALES AND OTHER OPERATING REVENUES: Petrochemicals segment $ 688 $ 534 $ 614 $1,347 $1,029 $1,192 Polymers segment 223 185 -- 421 354 -- Refining segment -- -- 709 -- -- 1,396 Intersegment sales (122) (106) (84) (224) (191) (184) ----- ----- ------ ------ ------ ------ $ 789 $ 613 $1,239 $1,544 $1,192 $2,404 ===== ===== ====== ====== ====== ====== COST OF SALES: Petrochemicals segment $ 542 $ 490 $ 534 $1,111 $ 944 $1,036 Polymers segment 173 151 -- 335 286 -- Refining segment -- -- 688 -- -- 1,329 Intersegment purchases (122) (106) (84) (224) (191) (184) ----- ----- ------ ------ ------ ------ $ 593 $ 535 $1,138 $1,222 $1,039 $2,181 ===== ===== ====== ====== ====== ====== SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Petrochemicals segment $ 9 $ 7 $ 27 $ 16 $ 16 $ 55 Polymers segment 20 20 -- 40 39 -- Refining segment -- -- 16 -- -- 33 Unallocated 21 13 13 41 30 29 ----- ----- ------ ------ ------ ------ $ 50 $ 40 $ 56 $ 97 $ 85 $ 117 ===== ===== ====== ====== ====== ====== OPERATING INCOME: Petrochemicals segment $ 137 $ 37 $ 53 $ 220 $ 69 $ 101 Polymers segment 30 14 -- 46 29 -- Refining segment -- -- 5 -- -- 34 Unallocated (21) (13) (13) (41) (30) (29) ----- ----- ------ ------ ------ ------ $ 146 $ 38 $ 45 $ 225 $ 68 $ 106 ===== ===== ====== ====== ====== ====== INCOME FROM EQUITY INVESTMENT: Refining segment $ 21 $ 7 $ -- $ 27 $ 33 $ -- ===== ===== ====== ====== ====== ======
11 Summarized below are reported intersegment sales for Lyondell's segments.
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ------------------------------------------------------- PRO AS PRO AS FORMA REPORTED FORMA REPORTED (MILLIONS OF DOLLARS) 1997 1996 1996 1997 1996 1996 - --------------------- -------- ------ -------- ------- ------- -------- Petrochemicals segment to polymers segment $ 122 $ 106 $ 224 $ 191 Petrochemicals segment to refining segment -- -- $ 43 -- -- $ 101 Refining segment to petrochemicals segment -- -- 41 -- -- 83 ------- ----- ------ ------ ------ ------ $ 122 $ 106 $ 84 $ 224 $ 191 $ 184 ======= ===== ====== ====== ====== ======
RESULTS OF OPERATIONS OVERVIEW Net income for the second quarter of 1997 was $93 million or $1.17 per share compared to net income of $15 million or $.19 per share for the second quarter of 1996. The $78 million increase was primarily due to improved margins for olefins as a result of higher sales prices and lower feedstock costs. Operating income for LCR improved as a result of the completion of the Upgrade Project as higher volumes of very heavy crude oil were processed. In addition, the methanol business had significantly improved margins due to stronger demand. Net income for the first six months of 1997 was $133 million or $1.67 per share compared to net income of $39 million or $.49 per share for the first six months of 1996. The $94 million increase was primarily due to improved margins for olefins and polymers as a result of higher sales prices. Net income was $53 million higher for the second quarter of 1997 compared to the first quarter of 1997. The increase in net income was primarily due to improved margins for olefins caused by lower feedstock costs and due to improved operating income for LCR as a result of the completion of the Upgrade Project and improved margins from the higher volumes of very heavy crude oil which were processed. PETROCHEMICALS SEGMENT SELECTED PRICING INFORMATION The following graphs present industry pricing information for the periods shown below. Chart 1 - Month-end average delivered-contract, monthly low price agreement prices for Ethylene as reported by CMAI Monomers Market Report from January 1996 through June 1997. Chart indicates increasing prices in 1996 with an annual average of the month-end prices of 23.33 cents per pound. In 1997, prices rose slightly in February where they remained steady from February through May before returning in June to the levels seen in January. The six month average of the month-end prices in 1997 was 27.92 cents per pound, up 7 cents per pound from the same period in 1996. Selected month-end average prices are as follows: January 1996 - 19.75 cents per pound, June 1996 - 23.25 cents per pound, January 1997 - 27.25 cents per pound, June 1997 - 27.25 cents per pound. Chart 2 - Month-end average spot price WTS low prices for Crude Oil as reported by Platts Oilgram Price Report from January 1996 through June 1997. Chart indicates increasing prices for 1996 with the chart's peak occurring at $24.32 per barrel in December 1996. Prices decrease in 1997 through April, rise in May, and fall again in June. Both 1996 and 1997 saw volatile prices. Selected month-end average prices are as follows: January 1996 - $18.39 per barrel, June 1996 - $19.53 per barrel, January 1997 - $23.90 per barrel, June 1997 - $18.31 per barrel. OPERATING INCOME Operating income for the second quarter of 1997 increased $100 million compared to the second quarter of 1996. This increase was primarily due to improved margins for olefins as a result of higher industry sales prices. In addition, methanol performance improved as a result of higher sales margins generated by higher industry sales prices and slightly lower natural gas feedstock costs. 12 Operating income for the first six months of 1997 was $220 million compared to $69 million for the same period in 1996. This increase in operating income in 1997 was primarily due to improved margins for olefins as a result of increased olefins sales prices resulting from strong demand from the polyolefins markets. Methanol performance improved as a result of higher sales margins generated by higher industry sales prices. Operating income for the second quarter of 1997 increased $54 million over the first quarter of 1997 primarily due to improved olefins sales margins resulting from continued declines in olefins feedstock prices. Sales volumes for olefins also increased due to higher intersegment sales as a result of the completion of the first quarter 1997 turnaround at the Matagorda Facility. The methanol business contributed higher profitability to the petrochemical segment in the second quarter of 1997 due to improved sales margins as a result of lower natural gas prices, as well as higher sales volumes due to seasonal demand from downstream products in the gasoline end-use markets. Lyondell's olefins feedstocks are primarily condensates and other petroleum liquids which tend to follow the cost trends of crude oil. During 1996 the price of crude oil increased steadily which resulted in higher feedstock costs for the petrochemicals business, however, crude oil prices began dropping in 1997. The sales prices for various olefins products are primarily driven by two factors. The first factor is the demand for ethylene, propylene and other by- products as a result of economic conditions in end-use markets for these commodities such as the auto industry, housing construction and consumer durable and non-durable goods. The second factor driving sales prices is the underlying cost of the feedstock. Methanol is a component of products used by the housing and plastic packaging industry, as well as being a primary component of MTBE, a product used to blend low-emission reformulated gasoline. Methanol prices gradually increased throughout 1996 due to strong demand by the end-use markets and supply constraints due to industry operating problems. The price of natural gas, the principal methanol feedstock, increased throughout 1996 and into 1997 as a result of the tight supply and demand balance in the fuels market. Natural gas prices dropped significantly in the second quarter of 1997 compared to the first quarter of 1997 due to a decline from high winter seasonal demand. REVENUES Sales and other operating revenues, including intersegment sales, were $688 million in the second quarter of 1997 compared to $534 million in the second quarter of 1996, an increase of $154 million. Sales and other operating revenues for the first half of 1997 increased $318 million over the first six months of 1996. These increases were primarily due to increased olefins sales prices, which showed significant improvement from the second quarter of 1996 as strong demand from the polyolefins markets resulted in a tighter balance of supply and demand for olefins and also as cost increases for olefins feedstocks over the course of 1996 were reflected in olefins product prices in 1997. In addition, olefins sales volumes, primarily for propylene, increased due to strong demand in the downstream markets. Sales margins for methanol improved significantly due to increased sales prices resulting from a tighter supply and demand situation caused by unscheduled industry downtime. Methanol sales volumes increased in the first and second quarters of 1997 in response to higher demand generated for its downstream products by the gasoline end-use markets and the housing and plastic packaging industries. COST OF SALES Cost of sales was $542 million in the second quarter of 1997 compared to $490 million in the second quarter of 1996, an increase of $52 million. Cost of sales increased $167 million when comparing the first six months of 1997 to the same period in 1996. These increases were primarily due to increased sales volumes of olefins and methanol. Olefins feedstock costs fluctuated during the two six month periods, however, crude oil prices on average were nearly flat for the first six months of 1997 compared to 1996. Olefins feedstock costs dropped significantly from the first quarter of 1997 to the second quarter of 1997 due to declining prices for crude oil, which impact olefins feedstock costs. Natural gas feedstock costs for methanol were higher due to seasonal winter fuel demand which was stronger in the first six months of 1997 compared to the first half of 1996. SELLING EXPENSES Selling expenses were $2 million higher in the second quarter of 1997 compared to the second quarter of 1996 and flat when comparing the first half of 1997 and 1996. Selling expenses for the petrochemicals segment consist primarily of terminal expenses related to storage and distribution of finished goods and rail freight costs of finished product. The increase in the second quarter of 1997 was primarily due to increased freight costs related to higher sales volumes. The first half of 1997 as compared to the same period in 1996 was flat due to 13 lower rail freight costs as a result of renegotiation of sales contracts, offset by increased freight costs due to higher sales volumes. POLYMERS SEGMENT OPERATING INCOME Operating income for the second quarter of 1997 was $30 million compared to $14 million in the second quarter of 1996. The $16 million increase was primarily due to higher polymers sales margins due to increases in polymers sales prices as a result of strong demand and low industry inventories. Operating income for the first half of 1997 compared to the first six months of 1996 increased $17 million. This increase was primarily due to higher polymers sales margins as a result of increases in polymers sales prices offset by lower sales volumes and higher feedstock costs. Industry sales price increases became effective towards the end of the first quarter of 1997. Sales volumes were lower due to lower production levels at the Matagorda Facility as a result of the planned turnaround completed in March 1997. Feedstock costs were higher during the first six months of 1997 as compared to the first half of 1996 due to tighter supply and demand in the olefins markets. Operating income for the second quarter of 1997 improved by $14 million over the first quarter of 1997 due to sales price increases that became effective towards the end of the first quarter of 1997 as well as declining feedstock costs late in the second quarter of 1997. Lyondell's polymers feedstocks are primarily ethylene and propylene. During 1996 and 1997 the industry sales price of ethylene has increased steadily which resulted in higher feedstock costs for the polymers business. The sales prices for various polymers products are primarily driven by two factors. One is the supply and demand balance for the products as a result of economic conditions in end-use markets such as the auto industry, housing construction and consumer durable and non-durable goods. Secondarily, sales prices are driven by the underlying cost of the feedstock. REVENUES Sales and other operating revenues were $223 million in the second quarter of 1997 compared to $185 million in the second quarter of 1996, an increase of $38 million due to increased sales prices as a result of stronger demand and low industry inventories. Sales and other operating revenues for the first six months of 1997 compared to the first half of 1996 increased $67 million. This increase was primarily due to higher polymers sales prices offset slightly by decreased volumes as a result of the planned turnaround at the Matagorda Facility completed in March 1997. COST OF SALES Cost of sales was $173 million in the second quarter of 1997 compared to $151 million in the second quarter of 1996, an increase of $22 million. Cost of sales for the first half of 1997 compared to the first half of 1996 increased $49 million. These increases were primarily due to increased feedstock costs caused by tight supply and demand in the olefins markets. SELLING EXPENSES Selling expenses were flat in the second quarter of 1997 compared to the second quarter of 1996 and $1 million higher when comparing the first half of 1997 and 1996 due to higher sales volumes. For the polymers business, the cost of transporting finished products to customers by rail, including rail freight costs and rail car lease expense, is classified as selling expense. REFINING SEGMENT GENERAL At its inception, LCR entered into a long-term crude oil supply contract ("Crude Supply Contract") with Lagoven, S.A. ("LAGOVEN"), an affiliate of CITGO. LCR is required to purchase, and LAGOVEN is required to sell, sufficient crude oil to satisfy LCR's coking capacity, or a minimum of 200,000 barrels per day and up to 230,000 barrels per day of very heavy Venezuelan crude oil. LAGOVEN has the right, but not the obligation, to supply incremental amounts above 230,000 barrels per day. In addition, under terms of a long-term product sales agreement ("Products Agreement"), CITGO purchases substantially all of the refined products produced at the 14 Refinery. Both LAGOVEN and CITGO are direct or indirect wholly-owned subsidiaries of Petroleos de Venezuela, S.A., the national oil company of Venezuela. The Upgrade Project was completed one month ahead of schedule in the first quarter of 1997. The completion enabled LCR to begin to take full benefit of the Crude Supply Contract in March 1997. Beginning in March 1997 through the first half of June 1997, increasing volumes of very heavy crude oil were processed. The following table sets forth processing rates at the Refinery for the periods indicated. Refinery runs for the 1996 periods presented are primarily heavy crude oil, whereas the 1997 refinery runs reflect higher volumes of very heavy crude oil processed.
FOR THE THREE FOR THE SIX MONTHS MONTHS ENDED JUNE 30 ENDED JUNE 30 -------------------------------------- 1997 1996 1997 1996 -------------------------------------- REFINERY RUNS (THOUSAND BARRELS PER DAY) Blended crude oil: Crude Supply Contract - coked 195 120 168 121 Other crude oil - coked 17 -- 24 3 Other crude oil 17 112 20 113 --- --- --- --- Total blended crude oil 229 232 212 237 Unfinished stock 61 41 66 39 --- --- --- --- Total 290 273 278 276 === === === ===
INCOME FROM EQUITY INVESTMENT IN LYONDELL-CITGO REFINING COMPANY LTD. As a result of the completion of the Upgrade Project, the Company's participation interest changed to approximately 60 percent for the second quarter of 1997 from approximately 86 percent for the first quarter of 1997. This compares to approximately 87 percent for the first and second quarters of 1996. The income from equity investment in LCR represents the Company's share of the results of LCR's operations for the periods presented. Net income before depreciation expense for the period is allocated to LCR's owners based on participation interests. Depreciation expense is allocated to the owners based on contributed assets. Had the Company followed the equity method of accounting for its investment in LCR during 1996, the Company would have earned $7 million and $33 million in income from equity investment in LCR for the three months and six months ended June 30, 1996, respectively. In comparing the second quarter of 1997 to the second quarter of 1996, $8 million of the increase in income from equity investment in LCR is due to increased operating income of $26 million offset by higher interest expense and decreased participation percentage. The balance of the increase of $6 million represents a re-allocation of depreciation expense between the owners. The change in operating income reflects higher margins on increased volumes of crude oil coked under the Crude Supply Contract, offset by increased production costs and lower margins on paraxylene. With the completion of the Upgrade Project ahead of schedule, LCR began processing increased volumes of very heavy crude oil, which is purchased at a lower cost under the Crude Supply Contract resulting in higher margins. This trend continued through the middle of June 1997 until the Refinery experienced some operational problems with the new crude unit, as well as the fluid catalytic cracking unit. These problems, which were related in part to the startup of the new units, resulted in reduced crude processing rates for the last part of June 1997. Processing very heavy crude oil resulted in higher margins for the second quarter of 1997 despite lower revenues and higher production costs. Total revenues for the second quarter of 1997 compared to the second quarter of 1996 were down for LCR as a result of lower refined products and aromatics pricing. Production costs were higher in the second quarter of 1997 versus the same period in 1996 due to higher depreciation expense associated with the Upgrade Project, higher maintenance costs associated with the operating problems experienced near the end of June 1997 and higher personnel compensation primarily related to additional employees. Paraxylene margins were lower in 1997 primarily due to lower sales prices which began a downward trend in the second quarter of 1996 from the high prices seen in early 1996. LCR incurred $11 million of interest cost in the second quarter of 1997, all of which was expensed. 15 Income from equity investment in LCR for the first six months of 1997 compared to the same period in 1996 decreased $6 million primarily due to higher interest expense as described above which more than offset the improved operating income in comparing the two periods. LCR's operating income improved in the first six months of 1997 compared to 1996 due to improved margins caused primarily by higher volumes of crude oil coked upon the completion of the Upgrade Project. These improved margins were offset by higher production costs, primarily depreciation expense, and lower paraxylene margins. Income from equity investment in LCR increased $9 million for the second quarter of 1997 compared to the first quarter of 1997, excluding the non-recurring depreciation adjustment, due to increased operating income of $21 million offset by higher interest expense as described above. The increase in operating income was caused primarily by higher volumes of crude oil coked due to the completion of the Upgrade Project, offset by higher depreciation expense. UNALLOCATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $8 million higher comparing the second quarter of 1997 to the second quarter of 1996 and $11 million higher for the first six months of 1997 compared to the same period for 1996. These increases were primarily due to increased computer and telecommunications costs and related amortization as a result of the implementation of new software and other upgrades in 1997. Additionally, the second quarter and first six months of 1997 selling, general and administrative expenses include higher employee compensation costs. Expenses for the first six months of 1997 also increased due to higher non-recurring executive compensation in the first quarter of 1997. INTEREST EXPENSE Interest expense decreased comparing the second quarter and first six months of 1997 to the same periods in 1996 due to decreased levels of debt outstanding. Interest expense in the second quarter of 1997 decreased from the first quarter of 1997 as $100 million of medium-term notes were repaid in March 1997. INTEREST INCOME Interest income increased in the second quarter and first six months of 1997 as compared to the same periods in 1996 as more interest income was earned on loans to LCR. Interest income was unchanged from the first quarter of 1997 to the second quarter of 1997. MINORITY INTEREST Minority interest was $4 million and $8 million for the second quarter and first six months of 1997, respectively. This represents the allocated share of Lyondell Methanol net income to MCNIC, the minority owner of Lyondell Methanol. Minority interest of $4 million as reported for the first six months of 1996 represents the allocated share of LCR net income to CITGO. INCOME TAXES The effective income tax rates for the second quarter of 1997 and during the first six months of 1997 were 36.5 percent and 36.4 percent, respectively. The effective income tax rates for the same periods in 1996 were 35.1 percent and 36.4 percent, respectively. State income tax was the primary difference between the effective tax rates and the 35 percent federal statutory rate. FINANCIAL CONDITION Operating Activities - Lyondell's cash provided by operating activities was $68 million in the first six months of 1997 compared to cash used in operating activities of $32 million in the first six months of 1996. Net income in the first half of 1997 compared to the same period in 1996 increased by $94 million resulting in increased cash flow. Investing Activities - Cash used in investing activities during the first six months of 1997 consisted of capital expenditures of $28 million for projects at the various petrochemical facilities. In 1997 the Company loaned LCR $49 million for the Upgrade Project and working capital needs and made other equity contributions to LCR totaling $1 million. In 1996 the Company loaned LCR $84 million for the Upgrade Project and environmental and 16 other capital expenditures and made other equity contributions to LCR totaling $6 million for capital expenditures. LCR distributed cash of $51 million to the Company during the first six months of 1997. Financing Activities - Cash provided by financing activities consisted primarily of $100 million in short-term borrowings used to retire $112 million of long- term debt. Distributions to MCNIC, the minority owner of Lyondell Methanol, totaled $7 million for the first six months of 1997. The Company paid regular quarterly dividends of $.225 per share of common stock during the first and second quarters of 1997. Additionally, on July 25, 1997, the Board of Directors declared a regular quarterly dividend of $.225 per share of common stock, payable September 15, 1997 to stockholders of record on August 25, 1997. CURRENT BUSINESS OUTLOOK On July 28, 1997, the Company and Millennium Chemicals Inc. ("Millennium") announced an agreement to form a new joint venture which will be operated as a partnership. The partnership will be owned 57 percent by the Company and 43 percent by Millennium and will own and operate the existing olefins and polymers businesses to be contributed by the two companies. It will consist of 13 manufacturing facilities on the U.S. Gulf Coast and in the U.S. Midwest, producing ethylene, propylene, polyethylene (high-density, low-density and linear low-density), polypropylene, ethyl alcohol, butadiene, aromatics, MTBE and other products. The transaction, which has been unanimously approved by the Boards of Directors of both companies, is subject to approval by both companies' stockholders and satisfaction of certain other conditions. The joint venture is expected to commence operations by year-end. During the remainder of 1997, management expects that olefins supply and demand fundamentals will be more balanced than in 1996. Several turnarounds are scheduled in the industry in the third quarter of 1997 which, combined with an unscheduled production outage by a major producer, should maintain the current supply conditions of olefins and help maintain current pricing for olefins over the next few months. However, additional industry capacity is anticipated to start up late in the year which will add supply and may negatively impact pricing of olefins near year-end and into 1998. Feedstock costs appear stable at lower levels than experienced early in 1997, however, olefins profitability may be negatively impacted if feedstock costs rise. Domestic polymers demand was strong for the first half of 1997, although growth in 1997 has been weak relative to a strong 1996 growth rate due to higher sales prices and export demand that is significantly below levels experienced in the same period in 1996. Management expects margins to contract slightly in the third quarter due to competition from substitute products, putting pressure on prices. Additional industry polypropylene capacity is expected to start up in the second half of the year, which may negatively impact prices and margins for this product in the third and fourth quarters of 1997. The Company benefits from LCR's Crude Supply Contract which diminishes the impact of market volatility and stabilizes cash flows at attractive levels relative to historic performance. With the completion of the Upgrade Project, more than 90 percent of the crude oil purchases are made pursuant to the Crude Supply Contract which significantly reduces the crude oil volume which is sensitive to market conditions. The benefits of the Crude Supply Contract, following completion of the Upgrade Project, have resulted in increased profitability and cash flow. LCR is working to achieve maximum operating efficiencies from the Upgrade Project in order to realize the full benefits of the Crude Supply Contract. The operating problems encountered beginning in late June 1997 extended through July 1997 and will impact third quarter operating results; however, throughput rates returned to normal levels by the end of July. Methanol demand should remain strong, but new industry capacity expected to be added late in the third quarter and early fourth quarter of 1997 is expected to lead to price pressures that could continue into 1998. Natural gas feedstock prices dropped late in the first quarter of 1997 but strengthened again during the second quarter of 1997. 17 Management expects margins to be reduced beginning late in the third quarter of 1997 and continuing into 1998 versus the first half of 1997. In August 1994, Atlantic Richfield Company ("ARCO") completed an offering of three-year debt securities ("Exchangeable Notes") which are exchangeable upon maturity on September 15, 1997 into Lyondell common stock or an equivalent cash value, at ARCO's option. On July 28, 1997, ARCO announced that it will deliver shares of Lyondell common stock at the maturity of the Exchangeable Notes. Following this conversion, ARCO's equity interest in the Company will be substantially reduced or eliminated. Management is unable to predict the impact the exchange of ARCO's shares may have on Lyondell's stock price. ARCO's 39,921,400 shares are currently outstanding and therefore the conversion will not have a dilution effect on earnings per share. Profitability and cash flows for the petrochemicals and refining businesses are affected by industry supply and demand, feedstock cost volatility, capital expenditures required to meet more stringent environmental standards, repair and maintenance costs and downtime of production units due to maintenance turnarounds. Turnarounds on major units can have significant financial impacts due to the associated loss of production, resulting in lower profitability. The Company completed a turnaround of its Matagorda Facility during the first quarter of 1997 and will commence a debottleneck project at the Victoria Facility late in 1997. Management believes business conditions will be such that cash balances, cash generated from operating activities and existing lines of credit will be adequate to meet future cash requirements for scheduled debt repayments, necessary capital expenditures and to sustain for the reasonably foreseeable future the regular quarterly dividend. Management anticipates, in general, increased cash flow from its businesses because of the creation of the new petrochemicals joint venture and the LCR venture which should provide greater financial flexibility to the Company. Management intends to accelerate cash flow from its investment in LCR by replacing the current construction financing with longer-term financing and distributing excess funds to the owners of LCR. Management intends that cash flow in excess of the amounts needed to fund operations, capital projects, fund debt repayments, including the $345 million note payable to the proposed new venture, and maintain an appropriate capital structure, would be used for attractive investment opportunities which meet the Company's value creation criteria or to enhance stockholder value through stock repurchases, increased dividends or some combinations thereof. FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report, including those regarding the Current Business Outlook, are "forward-looking statements" within the meaning of the federal securities laws. Although Lyondell believes the expectations reflected in such forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and Lyondell can give no assurance that such expectations will prove to have been correct. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the cyclical nature of the refining and petrochemical industries, uncertainties associated with the United States and worldwide economies, current and potential United States governmental regulatory actions, substantial petrochemical capacity additions resulting in oversupply and declining prices and margins, and operating interruptions (including leaks, explosions, fires, mechanical failure, unscheduled downtime, transportation interruptions, and spills and releases and other environmental risks). Many of such factors are beyond Lyondell's ability to control or predict. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. In addition, the ultimate benefit from the Millennium transaction will be dependent upon management's ability to close the transaction in a timely manner and to integrate the contributed businesses and implement the partnership's business plan. All subsequent written and oral forward-looking statements attributable to the Company and persons acting on its behalf are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report. 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 1. There have been no material developments with respect to the Company's legal proceedings previously reported in the 1996 Annual Report on Form 10-K or subsequent Quarterly Reports on Form 10-Q. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.2 Amended and Restated By-Laws of the Registrant effective as of July 25, 1997. 27 Financial Data Schedule. (b) Reports on Form 8-K The following Current Reports on Form 8-K were filed during the quarter ended June 30, 1997 and through the date hereof. Date of Report Item No. Financial Statements ---------------- -------- -------------------- July 28, 1997 5 None 19 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. Lyondell Petrochemical Company Dated: August 12, 1997 /s/ JOSEPH M. PUTZ ----------------------------- Joseph M. Putz Vice President and Controller (Duly Authorized Officer and Principal Accounting Officer) 20 EX-3.2 2 BY-LAWS EXHIBIT 3.2 BY-LAWS OF LYONDELL PETROCHEMICAL COMPANY (amended and restated as of July 25, 1997) ARTICLE I STOCKHOLDERS Section 1.1. Annual Meeting. The Board of Directors by resolution shall designate the time, place and date (which shall be not more than 13 months after the date of the last annual meeting of stockholders) of the annual meeting of stockholders for the election of directors and transactions of such other business as may come before it. Section 1.2. Notice. Written notice stating the place, day and hour of each meeting of stockholders and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be mailed either by the Secretary, or, in the case of a special meeting called by the stockholders in accordance with Article V of the Certificate of Incorporation, by the applicable stockholders, at least ten days and not more than sixty days before the meeting to each stockholder of record entitled to vote at the meeting to his address appearing on the books of the Company. Section 1.3. Special Meeting. Special meetings of stockholders of the Company may be called only as set forth in Article V of the Restated Certificate of Incorporation of the Company. At any special meeting of stockholders, only such business shall be conducted as shall have been set forth in the notice of special meeting. Section 1.4. Notification of Stockholder Business. At any annual or special meeting of stockholders, there shall be conducted only such business as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Company who is a stockholder of record at the time of the giving of the stockholder's notice provided for in this Section 1.4, who shall be entitled to vote at such meeting and who complies with the notice procedure set forth in this Section 1.4. For business to be properly brought before a meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal office of the Company not later than 90 days in advance of such meeting; provided, however, that in the event that the date of the meeting was not publicly announced by a mailing to stockholders, in a press release reported by the Dow Jones News Services, Associated Press or comparable national news service or in a filing with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934 more than 90 days prior to the meeting, such notice, to be timely, must be delivered to the Board of Directors not later than the close of business on the tenth day following the day on which the date of the meeting was first so publicly announced. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual or special meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting and, in the event that such business includes a proposal regarding the amendment of the By-Laws of the Company, the language of the proposed amendment; (b) the name and address, as they appear on the Company's books, of the stockholder intending to propose such business; (c) a representation of the stockholder as to the class and number of shares of capital stock of the Company which are beneficially owned by the stockholder, and the stockholder's intent to appear in person or by proxy at the meeting to present such business; and (e) any material interest of such stockholder in such proposal or business. Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at any meeting of the stockholders except in accordance with the procedures set forth in this Article I. The chairman of any annual or special meeting shall, if the facts warrant, determine and declare to the meeting that (i) the business proposed to be brought before the meeting was not a proper subject therefor and/or (ii) such business was not properly brought before the meeting in accordance with the provisions of this Article I, and, if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting or not a proper subject therefor shall not be transacted. Section 1.5. Quorum. The presence, in person or by proxy, of stockholders entitled to cast at least a majority of the votes which all stockholders are entitled to cast on a particular matter shall constitute a quorum for the purpose of considering such matter at a meeting of stockholders. If a quorum is not present in person or by proxy, those present may adjourn from time to time to reconvene at such time and place as they may determine without further notice to the stockholders. Section 1.6. Record Dates. The Board of Directors may fix a time not less than ten and not more than sixty days prior to the date of any meeting of stockholders as a record date and not more than sixty days prior to the date fixed for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the determination of the stockholders entitled to notice of and to vote at such meeting, a to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares or for the purpose of any other lawful action. In such case, only such stockholders as shall be stockholders of record at the close of business on the date so fixed shall be entitled to notice of or to vote at such meeting, or to receive payment of such dividend or distribution, or to receive such allotment of rights, or to exercise such rights in respect to any change, conversion or exchange of shares, as the case may be, notwithstanding any transfer of any shares on the books of the Company after the record date fixed as aforesaid. Section 1.7. Voting Rights of Stockholders and Proxies. Each stockholder of record entitled to vote in accordance with the laws of the State of Delaware, the Certificate of Incorporation or these By-Laws, shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of stock entitled to vote standing in his name on the books of the Company, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Section 1.8. Stockholder Actions by Written Consent. Any action required or permitted to be taken by the holders of the stock of the Company may be effected without a meeting of stockholders by consent in writing by such holders in accordance with this Section 1.8. In order 2 that the Company may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent, including without limitation the call of a special meeting of stockholders, shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten days after the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Company by delivery to its registered office in the State of Delaware, its principal place of business, or any officer or agent of the Company having custody of the book in which proceedings of stockholders meetings are recorded. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. In the event of the delivery to the Company of a written consent or consents purporting to authorize or take corporate action and/or related revocations (each such written consent and related revocation is referred to in this paragraph as a "Consent"), the Secretary of the Company shall provide for the safe-keeping of such Consent and shall conduct such reasonable investigation as he deems necessary or appropriate for the purpose of ascertaining the validity of such Consent and all matters incident thereto, including, without limitation, whether stockholders having the requisite voting power to authorize or take the action specified in the Consent have given consent; provided, however, that if the corporate action to which the Consent relates is the removal or replacement of one or more members of the Board of Directors, the Secretary of the Company shall designate two persons, who shall not be members of the Board of Directors or officers or employees of the Company, to serve as Inspectors with respect to such Consent, and such Inspectors shall discharge the functions of the Secretary of the Company under this paragraph. If after such investigation the Secretary or the Inspectors (as the case may be) shall determine that the Consent is valid, that fact shall be certified on the records of the Company for the purpose of recording the proceedings of meetings of the stockholders, and the Consent shall be filed with such records, at which time the Consent shall become effective as stockholder action. In conducting the investigation required by this Section 1.8, the Secretary or the Inspectors (as the case may be) may, but are not required to (a) at the expense of the Company, retain any necessary or appropriate professional advisors, and such other personnel as they may deem necessary or appropriate to assist them and (b) allow any officers and representatives of the Company, stockholders soliciting consents or revocations, and any other interested parties to 3 propose challenges and pose questions relating to the preliminary results of such investigation following the availability of such preliminary results. ARTICLE II DIRECTORS Section 2.1. Management of Business. The business of the Company shall be managed by its Board of Directors. Section 2.2. Number. The number of directors constituting the entire Board of Directors shall be such number as shall be fixed from time to time by resolution of the Board of Directors. Any such action by the Board of Directors shall require the vote of a majority of the Board of Directors then in office. Section 2.3. Age Qualification. No person who has reached seventy-two years of age prior to January 1 of any year shall be elected or re-elected a director in any year. Section 2.4. (a) Election and Term. The directors shall be elected at the annual meeting of the stockholders, and each director shall be elected to hold office until his successor shall be elected and qualified, or until his earlier resignation or removal. Section 2.4. (b) Notification of Nominations. Except for directors selected by or pursuant to the provisions of Section 2.6 hereof, only individuals nominated for election to the Board of Directors pursuant to and in accordance with the provision of this Section 2.4(b) may be elected to and may serve upon the Board of Directors of the Company. Subject to the rights of holders of any class or series of stock of the Company having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, nominations for the election of directors may be made (i) by the Board of Directors or (ii) by any stockholder of the Company who is a stockholder of record at the time of the giving of the stockholder's notice provided for in this Section 2.4(b), who is entitled to vote in the election of directors generally and who complies with the notice procedure set forth in this Section 2.4(b). For a nomination to comply with the notice provisions of this Section 2.4(b), the stockholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely a stockholder's notice must be delivered to or mailed and received at the principal office of the Company not later than 90 days in advance of such meeting; provided, however, that in the event that the date of the meeting was not publicly announced by a mailing to stockholders, in a press release reported by the Dow Jones News Services, the Associated Press or a comparable national news service or in a filing with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934 more than 90 days prior to the meeting, such notice, to be timely, must be delivered to the Board of Directors not later than the close of business on the tenth day following the day on which the date of the meeting was first so publicly announced. A stockholder's notice to the Secretary shall set forth (a) the name and address, as they appear on the Company's books, of the stockholder intending to make the nomination and of 4 the person or persons to be nominated; (b) a representation of the stockholder as to the class and number of shares of capital stock of the Company which are beneficially owned by the stockholder, and the stockholder's intent to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; and (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors. To be effective, each notice of intent to make a nomination given hereunder shall be accompanied by the written consent of each nominee to serve as a director of the Company if elected. The chairman of any annual or special meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not properly brought before the meeting in accordance with the provisions hereof and, if he should so determine, he shall so declare at the meeting that such nomination was not properly brought before the meeting and, as a result, shall not be considered. Section 2.5. Resignations. Any director of the Company may resign at any time by giving written notice to the Company, delivered to the Secretary. Such resignation shall take effect at the time specified therein, if any, or if no time is specified therein, then upon receipt of such notice by the Company; and, unless otherwise provided therein, the acceptance of such resignation shall not be necessary to make it effective. Section 2.6. Vacancies and Newly Created Directorships. Vacancies and newly created directorships resulting from any increase in the authorized number of directors or any vacancy on the Board of Directors resulting from death, resignation, disqualification, removal or other cause may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director or by the affirmative vote of the majority of all votes entitled to be cast by holders of stock of the Company at a duly called annual or special meeting of such holders or by consent in writing of such holders. Any director so chosen shall hold office until his or her successor shall be elected and qualified, or until his or her earlier resignation or removal. When one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as herein provided in the filling of other vacancies. Section 2.7. Annual Meeting. An annual meeting of the Board of Directors shall be held each year in conjunction with the annual meeting of stockholders, at the place where such meeting of stockholders was held or at such other place as the Board of Directors may determine, for the purposes of organization, election or appointment of officers and the transaction of such other business as shall come before the meeting. No notice of the meeting need be given. Section 2.8. Regular Meetings. Regular meetings of the Board of Directors may be held 5 without notice at such times and at such places in Delaware or elsewhere as the Board of Directors may determine. Section 2.9. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President or a majority of the directors in office, to be held at such time (as will permit the giving of notice as provided in this section) and at such place (in Delaware or elsewhere) as may be designated by the person or persons calling the meeting. Notice of the place, day and hour of each special meeting shall be given to each director by the Secretary by written notice mailed on or before the third full business day before the meeting or by notice received personally or by other means at least twenty-four hours before the meeting. The notice need not refer to the business to be transacted at the meeting. However, whenever notice is required to be given under these By-Laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice and the attendance of a person at a meeting shall constitute a waiver of notice of such meeting. Section 2.10. Quorum of Directors. Except as provided in Sections 2.6 and 2.13 hereof, a majority of the directors in office shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting of the directors to another time and place. Notice of any adjournment need not be given if such time and place are announced at the meeting. Section 2.11. Meeting by Telephone. One or more directors may participate in a meeting of the Board of Directors or of a committee of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Section 2.12. Compensation. Directors shall receive such compensation for their services and expenses for attendance as shall be determined by the Board of Directors; provided, however, that nothing herein contained shall be construed to preclude any director from serving the Company in any other capacity and receiving compensation therefore. Section 2.13. Committees. The Board of Directors may, by resolution adopted by a majority of the whole board then in office, appoint an Executive Committee of three or more directors. To the extent provided in such resolution, the Executive Committee shall have and may, subject to applicable law, exercise the authority of the Board of Directors in the management of the business and affairs of the Company (when the Board of Directors is not in session), except that the Executive Committee shall have no power (a) to elect directors; (b) to alter, amend or repeal these By-Laws or any resolution or resolutions of the directors designating an Executive Committee; (c) to declare any dividend or make any other distribution to the stockholders of the Company; or (d) to appoint any member of the Executive Committee. The Board of Directors may appoint such other committees as it may deem advisable, and each such committee shall have such authority and perform such duties as the Board of Directors may determine. At each meeting of the Board of Directors all action taken by each committee since the preceding meeting of the Board of Directors 6 shall be reported to it. Section 2.14. Consent Action. Any action required or permitted to be taken at any meeting of the Board of Directors, or any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing, and the writings are filed with the minutes of proceedings of the board or the committee. ARTICLE III Officers and Agents Section 3.1. Number; Compensation. The officers of the Company shall be chosen by the Board of Directors. The officers shall be a President, a Secretary, a Treasurer, and such number of Vice-Presidents, Assistant Secretaries and Assistant Treasurers, and such other officers, if any, as the Board of Directors may from time to time determine. The Board of Directors may choose such other agents as it shall deem necessary. Any number of offices may be held by the same person. The officers shall receive such compensation for their services as may be determined by the Board of Directors or in a manner approved by it. Section 3.2. Term. Each officer and each agent shall hold office until the next annual meeting of the Board of Directors or until that officer's or agent's successor is elected or appointed and qualified or until that officer or agent's earlier resignation or removal. Section 3.3. Removal. Any officer or agent may be removed from office at any time by the Board of Directors with or without cause pursuant to a resolution adopted by a majority of the whole Board then in office. Section 3.4. Authority. The officers and agents, if any, shall have the authority, perform the duties and exercise the powers in the management of the Company usually incident to the offices held by them, respectively, and/or such other authority, duties and powers as may be assigned to them from time to time by the Board of Directors. In addition to the authority to perform the duties and exercise the powers in the management of the Company usually incident to the office held by him or her, and/or such other authority, duties and powers as may be assigned to him or her from time to time by the Board of Directors, the Secretary shall record all of the proceedings of the meetings of the stockholders and directors in a book to be kept for that purpose. In the absence or disability of the Secretary, an Assistant Secretary shall have the authority and shall perform the duties of the Secretary. Section 3.5. Voting Securities Owned by the Company. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Company may be executed in the name of and on behalf of the Company by the Chairman of the Board, the President or any Vice-President and any such officer may, in the name of and on behalf of the Company, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Company may own 7 securities and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, the Company might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. Section 3.6. Corporate Seal. A corporate seal shall be prepared and shall be kept in the custody of the Secretary of the Company. The seal or a facsimile thereof may be impressed, affixed or reproduced, and attested to by the Secretary or an Assistant Secretary, for the authentication of documents or instruments requiring the seal and bearing the signature of a duly authorized officer or agent. ARTICLE IV CAPITAL STOCK Section 4.1. Stock Certificates. Every holder of stock in the Company shall be entitled to have a certificate signed by, or in the name of the Company by, the Chairman of the Board of Directors, or the President or a Vice- President, and by the Secretary or an Assistant Secretary of the Company, certifying the number of shares owned by him in the Company. Where such certificate is signed (1) by a transfer agent other than the Company or its employee, or (2) by a registrar other than the Company or its employee, the signatures of the officers of the Company may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Company with the same effect as if he were such officer at the date of issue. Section 4.2. Transfers. Stock of the Company shall be transferable in the manner prescribed by the laws of the State of Delaware. Section 4.3. Registered Holders. Prior to due presentment for registration of transfer of any security of the Company in registered form, the Company shall treat the registered owner as the person exclusively entitled to vote, to receive notifications and to otherwise exercise all the rights and powers of an owner, and shall not be bound to recognize any equitable or other claim to, or interest in, any security, whether or not the Company shall have notice thereof, except as otherwise provided by the laws of the State of Delaware. Section 4.4. New Certificates. The Company shall issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, if the owner: (1) so requests before the Company has notice that the shares of stock represented by that certificate have been acquired by a bona fide purchaser; (2) files with the Company a bond sufficient (in the judgment of the Secretary) to indemnify the Company against any claim that may be made against it on account of the alleged loss or theft of that certificate or the issuance of a new certificate; and (3) satisfies any other requirements imposed by the Secretary that are reasonable under the circumstances. A new certificate may be issued without requiring any bond when, in the judgment of directors, it is proper so to do. 8 ARTICLE V MISCELLANEOUS Section 5.1. Indemnification. (a) Indemnification of Officers and Directors. The Company shall indemnify the officers and directors of the Company with respect to all matters to which Section 145 of the General Corporation Law of the State of Delaware may in any way relate, to the fullest extent permitted or allowed by the laws of the State of Delaware, whether or not specifically required, permitted or allowed by said Section 145. Any repeal or modification of this Section shall not in any way diminish any rights to indemnification of such person or the obligations of the Company that may have previously arisen hereunder. (b) Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Company's Certificate of Incorporation, any By-Law, any agreement, a vote of Company stockholders or of disinterested Company directors or otherwise, both as to action in that person's official capacity and as to action in any other capacity by holding such office, and shall continue after the person ceases to serve the Company as a director or officer or to serve another entity at the request of the Company. (c) Insurance. The Company may maintain insurance, at its expense, to protect itself and any director or officer of the Company or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss,whether or not the Company would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of Delaware. (d) Indemnity Agreements. The Company may from time to time enter into indemnity agreements with the persons who are members of its Board of Directors, its elected officers and with such other persons as the Board of Directors may designate, the form of such indemnity agreements to be approved by a majority of the Board then in office. (e) Indemnification of Employees and Agents of the Company. The Company may, under procedures authorized from time to time by the Board of Directors, grant rights to indemnification, and to be paid by the Company the expenses incurred in defending any proceeding in advance of its final disposition to any employee or agent of the Company to the fullest extent of the provisions of this Article V. Section 5.2. Fiscal Year and Annual Report. (a) Fiscal Year. The fiscal year of the Company shall be the calendar year. 9 (b) Annual Report. The Board of Directors shall cause an annual report to be prepared and mailed to the stockholders in accordance with the rules and regulations of the Securities and Exchange Commission and the New York Stock Exchange. Section 5.3. Offices. The registered office of the Company in the State of Delaware shall be at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The Company may also have offices at other places within and/or without the State of Delaware. Section 5.4. Waivers of Notice; Dispensing with Notice. Whenever any notice whatever is required to be given under the provisions of the General Corporation Law of the State of Delaware, of the Certificate of Incorporation of the Company, or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. Attendance of a person at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Whenever any notice whatever is required to be given under the provisions of the General Corporation Law of the State of Delaware, of the Certificate of Incorporation of the Company, or of these By-Laws, to any person with whom communication is made unlawful by any law of the United States of America, or by any rule, regulation, proclamation or executive order issued under any such law, then the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person; and any action or meeting which shall be taken or held without notice to any such person or without giving or without applying for a license or permit to give any such notice to any such person with whom communication is made unlawful as aforesaid, shall have the same force and effect as if such notice had been given as provided under the provisions of the General Corporation Law of the State of Delaware, or under the provisions of the Certificate of Incorporation of the Company or of these By- Laws. In the event that the action taken by the Company is such as to require the filing of a certificate under any of the other sections of this title, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. Section 5.5. Amendment of Bylaws. These By-Laws may be altered, amended or repealed at any meeting of the Board of Directors. Any such action shall require a vote of the majority of the Board of Directors then in office. Section 5.6. Section Headings and Statutory References. The headings of the Articles and Sections of these By-Laws have been inserted for convenience of reference only and shall not be deemed to be a part of these By-Laws. 10 ARTICLE VI Emergency By-laws Section 6.1. When Operative. The emergency By-Laws provided by the following sections shall be operative during any emergency resulting from an attack on the United States, any nuclear disaster, earthquake, or other natural disaster or during the existence of any catastrophe, as a result of which a quorum of the Board of Directors or the Executive Committee thereof cannot be readily convened for action notwithstanding any different provision in the preceding sections of the By-Laws or in the Certificate of Incorporation of the Company or in the General Corporation Law of the State of Delaware. To the extent not inconsistent with the emergency By-Laws, the By-Laws provided in the preceding sections shall remain in effect during such emergency and upon the termination of such emergency, the emergency By-Laws shall cease to be operative unless and until another such emergency shall occur. Section 6.2. Meetings. During any such emergency: (a) Any meeting of the Board of Directors may be called by any director. Whenever any officer of the Company who is not a director has reason to believe that no director is available to participate in a meeting, such officer may call a meeting to be held under the provisions of this section. (b) Notice of each meeting called under the provisions of this section shall be given by the person calling the meeting or at his request by any officer of the Company. The notice shall specify the time and the place of the meeting, which shall be the principal office of the Company at the time if feasible and otherwise any other place specified in the notice. Notice need be given only to such of the directors as it may be feasible to reach at the time and may be given by such means as may be feasible at the time, including publication or radio. If given by mail, messenger, telephone or telegram, the notice shall be addressed to the director at his residence or business address or such other place as the person giving the notice shall deem suitable. In the case of meetings called by an officer who is not a director, notice shall also be given similarly, to the extent feasible, to the persons named on the list referred to in part (c) of this section. Notice shall be given at least two days before the meeting if feasible in the judgment of the person giving the notice and otherwise the meeting may be held on any shorter notice that he shall deem to be suitable. (c) At any meeting called under the provisions of this section, the director or directors present shall constitute a quorum for the transaction of business. If no director attends a meeting called by an officer who is not a director and if there are present at least three of the persons named on a numbered list of personnel approved by the Board of Directors before the emergency, those present (but not more than nine appearing highest in priority on such list) shall be deemed directors for such meeting and shall constitute a quorum for the transaction of business. Section 6.3. Lines of Succession. The Board of Directors, during as well as before any 11 such emergency, may provide, and from time to time modify, lines of succession in the event that during such an emergency any or all officers or agents of the Company shall for any reason be rendered incapable of discharging their duties. Section 6.4. Offices. The Board of Directors, during as well as before any such emergency, may, effective during the emergency, change the principal office or designate several alternative principal offices or regional offices, or authorize the officers so to do. Section 6.5. Liability. No officer, director or employee acting in accordance with these emergency By-Laws shall be liable except for willful misconduct. Section 6.6. Repeal or Change. The emergency By-Laws shall be subject to repeal or change by action of the Board of Directors or by the affirmative vote of at least 66-2/3% of all votes entitled to be cast by the holders of Capital Stock of the Company entitled to vote generally in the election of directors, except that no such repeal or change shall modify the provisions of the next preceding section with regard to action or inaction prior to the time of such repeal or change. 12 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 42 0 304 3 206 612 2,135 1,252 1,909 385 742 80 0 0 448 1,909 1,544 1,544 1,222 1,222 97 0 41 209 76 133 0 0 0 133 1.67 1.67
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