<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------
USX CORPORATION
- --------------------------------------------------------------------------------
----
(Exact name of registrant as specified in its charter)
Delaware 1-5153 25-0996816
--------------- ------------ -------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
600 Grant Street, Pittsburgh, PA 15219-4776
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 433-1121
------------------------------
(Registrant's telephone number,
including area code)
- --------------------------------------------------------------------------------
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.....
Common stock outstanding at July 31, 1999 follows:
USX-Marathon Group - 308,744,772 shares
USX-U. S. Steel Group - 88,369,055 shares
<PAGE> 2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED June 30, 1999
---------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION
A. Consolidated Corporation
Item 1. Financial Statements:
Consolidated Statement of Operations 4
Consolidated Balance Sheet 6
Consolidated Statement of Cash Flows 8
Selected Notes to Consolidated
Financial Statements 9
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends and Ratio of
Earnings to Fixed Charges 21
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 30
Financial Statistics 32
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 33
Marathon Group Balance Sheet 34
Marathon Group Statement of Cash Flows 35
Selected Notes to Financial Statements 36
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 45
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 59
Supplemental Statistics 61
<PAGE> 3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED June 30, 1999
---------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION (Continued)
C. U. S. Steel Group
Item 1. Financial Statements:
U. S. Steel Group Statement of Operations 62
U. S. Steel Group Balance Sheet 63
U. S. Steel Group Statement of Cash Flows 64
Selected Notes to Financial Statements 65
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 72
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 83
Supplemental Statistics 85
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 86
Item 4. Submission of Matters to a Vote of Security Holders 87
Item 5. Other Information 88
Item 6. Exhibits and Reports on Form 8-K 89
<PAGE> 4
Part I - Financial Information
A. Consolidated Corporation
<TABLE>
<CAPTION>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $6,731 $7,182 $12,809 $14,082
Dividend and affiliate income 18 46 11 71
Gain (loss) on disposal of assets 9 30 (13) 44
Gain on ownership change in Marathon Ashland
Petroleum LLC - (2) - 246
Other income 8 4 13 17
------ ------ ------ ------
Total revenues 6,766 7,260 12,820 14,460
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 4,810 5,095 9,364 10,266
Selling, general and administrative expenses 37 67 89 152
Depreciation, depletion and amortization 301 281 609 628
Taxes other than income taxes 1,123 1,075 2,148 2,051
Exploration expenses 59 75 122 157
Inventory market valuation credits (66) (3) (415) (28)
------ ------ ------ ------
Total costs and expenses 6,264 6,590 11,917 13,226
------ ------ ------ ------
INCOME FROM OPERATIONS 502 670 903 1,234
Net interest and other financial costs 91 71 174 153
Minority interest in income of Marathon Ashland
Petroleum LLC 112 158 257 212
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS 299 441 472 869
Provision for estimated income taxes 110 143 173 301
------ ------ ------ ------
INCOME BEFORE EXTRAORDINARY LOSS 189 298 299 568
Extraordinary loss on extinguishment of debt,
net of income tax - - 5 -
------ ------ ------ ------
NET INCOME 189 298 294 568
Dividends on preferred stock 3 3 5 5
------ ------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $186 $295 $289 $563
====== ====== ====== ======
<FN>
Selected notes to financial statements appear on pages 9-20.
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited)
INCOME PER COMMON SHARE
------------------------------------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
APPLICABLE TO MARATHON STOCK:
Net income $134 $162 $253 $345
- Per share - basic and diluted .43 .56 .82 1.19
Dividends paid per share .21 .21 .42 .42
Weighted average shares, in thousands
- Basic 309,054 289,591 309,041 289,220
- Diluted 309,462 290,263 309,332 289,879
APPLICABLE TO STEEL STOCK:
Income before extraordinary loss $52 $133 $41 $218
- Per share - basic .60 1.53 .47 2.51
- diluted .59 1.46 .47 2.41
Extraordinary loss, net of income tax - - 5 -
- Per share - basic and diluted - - .06 -
Net income $52 $133 $36 $218
- Per share - basic .60 1.53 .41 2.51
- diluted .59 1.46 .41 2.41
Dividends paid per share .25 .25 .50 .50
Weighted average shares, in thousands
- Basic 88,387 86,953 88,378 86,777
- Diluted 92,647 94,507 88,379 94,314
<FN>
Selected notes to financial statements appear on pages 9-20.
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
----------------------------------------
ASSETS
June 30 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $99 $146
Receivables, less allowance for doubtful
accounts of $8 and $12 1,689 1,663
Inventories 2,607 2,008
Deferred income tax benefits 218 217
Other current assets 230 172
------ ------
Total current assets 4,843 4,206
Investments and long-term receivables,
less reserves of $3 and $10 1,175 1,249
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$16,632 and $16,238 12,723 12,929
Prepaid pensions 2,530 2,413
Other noncurrent assets 329 336
------ ------
Total assets $21,600 $21,133
====== ======
<FN>
Selected notes to financial statements appear on pages 9-20.
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Continued) (Unaudited)
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Current liabilities:
Notes payable $149 $145
Accounts payable 2,526 2,478
Distribution payable to minority shareholder of
Marathon Ashland Petroleum LLC - 103
Payroll and benefits payable 445 480
Accrued taxes 301 245
Accrued interest 103 97
Long-term debt due within one year 82 71
------ ------
Total current liabilities 3,606 3,619
Long-term debt, less unamortized discount 4,059 3,920
Long-term deferred income taxes 1,656 1,579
Employee benefits 2,858 2,868
Deferred credits and other liabilities 726 720
Preferred stock of subsidiary 250 250
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior
subordinated convertible debentures of USX 182 182
Minority interest in Marathon Ashland Petroleum LLC 1,744 1,590
STOCKHOLDERS' EQUITY
Preferred stock -
6.50% Cumulative Convertible issued - 2,767,787 shares
($138 liquidation preference) 3 3
Common stocks:
Marathon Stock issued - 308,722,152 shares and
308,458,835 shares 309 308
Steel Stock issued - 88,368,566 shares and
88,336,439 shares 88 88
Securities exchangeable solely into Marathon Stock
issued - 309,138 shares and 507,324 shares - 1
Additional paid-in capital 4,592 4,587
Deferred compensation (1) (1)
Retained earnings 1,582 1,467
Accumulated other comprehensive income (loss) (54) (48)
------ ------
Total stockholders' equity 6,519 6,405
------ ------
Total liabilities and stockholders' equity $21,600 $21,133
====== ======
<FN>
Selected notes to financial statements appear on pages 9-20.
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------------------
Six Months Ended
June 30
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $294 $568
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss 5 -
Minority interest in income of Marathon Ashland
Petroleum LLC - net of distributions 51 82
Depreciation, depletion and amortization 609 628
Exploratory dry well costs 62 97
Inventory market valuation credits (415) (28)
Pensions and other postretirement benefits (116) (101)
Deferred income taxes 98 180
Gain on ownership change in Marathon Ashland
Petroleum LLC - (246)
(Gain) loss on disposal of assets 13 (44)
Changes in:
Current receivables - sold 30 -
- operating turnover (301) 236
Inventories (221) (193)
Current accounts payable and accrued expenses 385 6
All other - net (33) (96)
------ ------
Net cash provided from operating activities 461 1,089
------ ------
INVESTING ACTIVITIES:
Capital expenditures (685) (686)
Disposal of assets 182 45
Restricted cash-withdrawals 39 202
- deposits (26) (390)
Affiliates -investments - net - (71)
- loans and advances (56) (58)
- repayments of loans and advances - 63
All other - net (3) 26
------ ------
Net cash used in investing activities (549) (869)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving credit
arrangements - net (51) (121)
Other debt - borrowings 459 842
- repayments (195) (100)
Common stock - issued 8 75
- repurchased - (195)
Dividends paid (179) (170)
------ ------
Net cash provided from financing activities 42 331
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) -
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (47) 551
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 146 54
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $99 $605
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(178) $(144)
Income taxes paid (12) (150)
<FN>
Selected notes to financial statements appear on pages 9-20.
</TABLE>
<PAGE> 9
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Certain reclassifications of prior year data have been made to
conform to 1999 classifications. Additional information is contained in
the USX Annual Report on Form 10-K for the year ended December 31, 1998.
2. On March 31, 1999, USX irrevocably deposited with a trustee the entire
5.5 million common shares it owned in RTI International Metals, Inc. (RTI).
The deposit of the shares resulted in the satisfaction of USX's obligation
under its 6-3/4% Exchangeable Notes (indexed debt) due February 1, 2000.
Under the terms of the indenture, the trustee will exchange the RTI shares
for the notes at maturity. The notes are exchangeable for shares of RTI
common stock on a variable basis up to one share per note depending on the
market price of RTI common stock at maturity. Ownership of any shares not
required for satisfaction of the indexed debt will revert to USX.
As a result of the above transaction, USX recorded in the first
quarter of 1999 an extraordinary loss of $5 million, net of a $3 million
income tax benefit, representing prepaid interest expense and the write-off
of unamortized debt issue costs, and a pretax charge of $22 million,
representing the difference between the carrying value of the investment in
RTI and the carrying value of the indexed debt, which is included in gain
(loss) on disposal of assets. This transaction represents a noncash
investing and financing activity of $56 million, which was the carrying
value of the indexed debt at March 31, 1999.
Additionally, a $13 million credit to adjust the indexed debt to
settlement value at March 31, 1999, is included in net interest and other
financial costs.
In December 1996, USX had issued $117 million of notes indexed to the
common share price of RTI. At maturity, USX would have been required to
exchange the notes for shares of RTI common stock, or redeem the notes for
the equivalent amount of cash. Since USX's investment in RTI was
attributed to the U. S. Steel Group, the indexed debt was also attributed
to the U. S. Steel Group. USX had a 26% investment in RTI and accounted
for its investment using the equity method of accounting.
3. Total comprehensive income for the second quarter of 1999 and 1998 was
$185 million and $294 million, respectively, and $288 million and
$565 million for the six months of 1999 and 1998, respectively.
<PAGE> 10
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. The Marathon Group's operations consists of three reportable operating
segments: 1) Exploration and Production (E&P) - explores for and produces
crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and
Transportation (RM&T) - refines, markets and transports crude oil and
petroleum products, primarily in the Midwest and southeastern United States
through Marathon Ashland Petroleum LLC (MAP); and 3) Other Energy Related
Businesses (OERB). OERB is an aggregation of two segments which fall below
the quantitative reporting thresholds: 1) Natural Gas and Crude Oil
Marketing and Transportation - markets and transports its own and third-
party natural gas and crude oil in the United States; and 2) Power
Generation - develops, constructs and operates independent electric power
projects worldwide. The U. S. Steel Group consists of one operating
segment, U. S. Steel (USS). USS is engaged in the production and sale of
steel mill products, coke and taconite pellets. USS also engages in the
following related business activities: the management of mineral
resources, domestic coal mining, engineering and consulting services, and
real estate development and management. The results of segment operations
are as follows:
<TABLE>
<CAPTION>
Total
Marathon
(In millions) E&P RM&T OERB Segments USS Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SECOND QUARTER 1999
Revenues:
Customer $689 $4,637 $113 $5,439 $1,292 $6,731
Intersegment (a) 34 4 6 44 - 44
Intergroup (a) 4 - 4 8 11 19
Equity in earnings (losses) of
unconsolidated affiliates 3 4 5 12 (10) 2
Other 13 10 6 29 11 40
----- ----- ----- ----- ----- -----
Total revenues $743 $4,655 $134 $5,532 $1,304 $6,836
===== ===== ===== ===== ===== =====
Segment income (loss) $124 $228 $19 $371 $(9) $362
===== ===== ===== ===== ===== =====
SECOND QUARTER 1998
Revenues:
Customer $499 $4,928 $66 $5,493$1,689 $7,182
Intersegment (a) 41 1 2 44 - 44
Intergroup (a) 2 - 1 3 - 3
Equity in earnings of
unconsolidated affiliates 2 3 1 6 28 34
Other 20 11 3 34 16 50
----- ----- ----- ----- ----- -----
Total revenues $564 $4,943 $73 $5,580 $1,733 $7,313
===== ===== ===== ===== ==== =====
Segment income $73 $397 $3 $473 $154 $627
===== ===== ===== ===== ===== =====
<FN>
(a)Intersegment and intergroup sales and transfers were conducted on an arm's-
length basis.
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
Total
Marathon
(In millions) E&P RM&T OERB Segments USS Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Revenues:
Customer $1,261 $8,816 $195 $10,272 $2,537 $12,809
Intersegment (a) 68 9 15 92 - 92
Intergroup (a) 7 - 8 15 12 27
Equity in earnings (losses) of
unconsolidated affiliates 4 7 13 24 (33) (9)
Other 19 16 9 44 21 65
----- ----- ----- ----- ----- -----
Total revenues $1,359 $8,848 $240 $10,447 $2,537 $12,984
===== ===== ===== ===== ===== =====
Segment income (loss) $160 $273 $34 $467 $(68) $399
===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Customer $1,017 $9,520 $162 $10,699 $3,358 $14,057
Intersegment (a) 84 2 4 90 - 90
Intergroup (a) 6 - 4 10 - 10
Equity in earnings of
unconsolidated affiliates 1 6 6 13 43 56
Other 21 24 5 50 28 78
----- ----- ----- ----- ----- -----
Total revenues $1,129 $9,552 $181 $10,862 $3,429 $14,291
===== ===== ===== ===== ==== =====
Segment income $197 $525 $17 $739 $260 $999
===== ===== ===== ===== ===== =====
<FN>
(a)Intersegment and intergroup sales and transfers were conducted on an arm's-
length basis.
</TABLE>
<PAGE> 12
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
The following schedules reconcile segment revenues and income (loss) to
amounts reported in the Marathon and U. S. Steel Groups' financial
statements:
<TABLE>
<CAPTION>
Marathon GroupU. S. Steel Group
Second Quarter Second Quarter
Ended Ended
June 30 June 30
(In millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Revenues of reportable segments $5,532 $5,580 $1,304 $1,733
Items not allocated to segments:
Loss on ownership change in MAP - (2) - -
Other (7) - - -
Elimination of intersegment revenues (44) (44) - -
Administrative revenues - (4) - -
------ ------ ----- -----
Total Group revenues $5,481 $5,530 $1,304 $1,733
====== ====== ====== ======
Income:
Income (loss) for reportable segments $371 $473 $(9) $154
Items not allocated to segments:
Loss on ownership change in MAP - (2) - -
Administrative expenses (31) (21) (8) (5)
Pension credits - - 140 93
Costs related to former business activities - - (20) (25)
Inventory market valuation adjustments 66 3 - -
Other (a) (7) - - -
------ ------ ------ ------
Total Group income from operations $399 $453 $103 $217
====== ====== ====== ======
<FN>
(a)Represents for the Marathon Group in 1999, estimated loss on sale of
Carnegie Natural Gas Company and affiliated subsidiaries (Carnegie).
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
Marathon GroupU. S. Steel Group
Six Months Six Months
Ended Ended
June 30 June 30
(In millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Revenues of reportable segments $10,447 $10,862 $2,537 $3,429
Items not allocated to segments:
Gain on ownership change in MAP - 246 - -
Other (23) 24 (22) -
Elimination of intersegment revenues (92) (90) - -
Administrative revenues - (1) - -
------ ------ ----- -----
Total Group revenues $10,332 $11,041 $2,515 $3,429
====== ====== ====== ======
Income:
Income (loss) for reportable segments $467 $739 $(68) $260
Items not allocated to segments:
Gain on ownership change in MAP - 246 - -
Administrative expenses (57) (59) (13) (14)
Pension credits - - 248 186
Costs related to former business activities - - (44) (53)
Inventory market valuation adjustments 415 28 - -
Other (a) (23) (99) (22) -
------ ------ ------ ------
Total Group income from operations $802 $855 $101 $379
====== ====== ====== ======
<FN>
(a) Represents for the Marathon Group in 1999, loss on sale of Scurlock
and Carnegie, and in 1998, international exploration and production
property impairments, MAP transition charges and gas contract settlement.
For the U. S. Steel Group in 1999, represents loss on investment in RTI
stock used to satisfy indexed debt obligations.
</TABLE>
5. In the second quarter of 1999, MAP sold Scurlock Permian LLC
(Scurlock), its crude oil gathering business, to Plains Marketing, L.P for
$136 million. During the first six months of 1999, MAP recorded a pretax
loss of $16 million related to the sale. Scurlock had been reported as
part of the Marathon Group's refining, marketing and transportation
operating segment.
On June 1, 1999, the Marathon Group announced that it had signed a
definitive agreement to sell Carnegie to Equitable Resources, Inc. The
transaction is expected to close later this year. Carnegie is engaged in
natural gas production, transmission, distribution, sales and storage
activities in Pennsylvania and West Virginia. At June 30, 1999, the net
assets held for sale have been included in other current assets in the
consolidated balance sheet. During the second quarter of 1999, USX
recorded an estimated pretax loss of $7 million related to the sale.
Carnegie has been reported as part of the Marathon Group's other energy
related businesses operating segment.
<PAGE> 14
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
6. The items below are included in both revenues and costs and expenses,
resulting in no effect on income.
<TABLE>
<CAPTION>
(In millions)
-------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consumer excise taxes on petroleum
products and merchandise $1,003 $958 $1,916 $1,834
Matching crude oil and refined product
buy/sell transactions settled in cash 698 994 1,570 1,982
</TABLE>
7. Income from operations includes net periodic pension credits of $83
million and $48 million in the second quarter of 1999 and 1998,
respectively, ($128 million and $98 million in the first six months of 1999
and 1998, respectively.) These pension credits are primarily noncash and
for the most part are included in selling, general and administrative
expenses.
In the second quarter of 1999, USX recognized a one-time pretax
settlement gain of $35 million, related mainly to pension costs of
employees who retired under the U. S. Steel Group 1998 voluntary early
retirement program. This noncash settlement gain is included in selling,
general and administrative expenses.
8. The provision for estimated income taxes for the periods reported is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities.
9. The method of calculating net income per share for the Marathon Stock
and Steel Stock reflects the USX Board of Directors' intent that the
separately reported earnings and surplus of the Marathon Group and the
U. S. Steel Group, as determined consistent with the USX Restated
Certificate of Incorporation, are available for payment of dividends on the
respective classes of stock, although legally available funds and
liquidation preferences of these classes of stock do not necessarily
correspond with these amounts. The financial statements of the Marathon
Group and the U. S. Steel Group, taken together, include all accounts which
comprise the corresponding consolidated financial statements of USX.
Basic net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and is based on the weighted
average number of common shares outstanding.
Diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
<PAGE> 15
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
9. (Continued)
<TABLE>
<CAPTION>
COMPUTATION OF INCOME PER SHARE
Second Quarter Ended
June 30
1999 1998
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marathon Group
Net income (millions) $134 $134 $162 $162
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 309,054 309,054 289,591 289,591
Effect of dilutive stock options - 408 - 672
------ ------ ------ ------
Average common shares and dilutive effect 309,054 309,462 289,591 290,263
====== ====== ====== ======
Net income per share $.43 $.43 $.56 $.56
====== ====== ====== ======
U. S. Steel Group
Net income (millions):
Net income $55 $55 $136 $136
Dividends on preferred stock 3 3 3 -
------ ------ ------ ------
Net income applicable to Steel Stock 52 52 133 136
Effect of dilutive convertible securities - 2 - 2
------ ------ ------ ------
Net income assuming conversions $52 $54 $133 $138
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,387 88,387 86,953 86,953
Effect of dilutive securities:
Trust preferred securities - 4,256 - 4,256
Preferred stock - - - 3,211
Stock options - 4 - 87
------ ------ ------ ------
Average common shares and dilutive effect 88,387 92,647 86,953 94,507
====== ====== ====== ======
Net income per share $.60 $.59 $1.53 $1.46
====== ====== ====== ======
</TABLE>
<PAGE> 16
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
9. (Continued)
<TABLE>
<CAPTION>
COMPUTATION OF INCOME PER SHARE
Six Months Ended
June 30
1999 1998
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marathon Group
Net income (millions) $253 $253 $345 $345
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 309,041 309,041 289,220 289,220
Effect of dilutive stock options - 291 - 659
------ ------ ------ ------
Average common shares and dilutive effect 309,041 309,332 289,220 289,879
====== ====== ====== ======
Net income per share $.82 $.82 $1.19 $1.19
====== ====== ====== ======
U. S. Steel Group
Net income (millions):
Income before extraordinary loss $46 $46 $223 $223
Dividends on preferred stock 5 5 5 -
Extraordinary loss 5 5 - -
------ ------ ------ ------
Net income applicable to Steel Stock 36 36 218 223
Effect of dilutive convertible securities - - - 4
------ ------ ------ ------
Net income assuming conversions $36 $36 $218 $227
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,378 88,378 86,777 86,777
Effect of dilutive securities:
Trust preferred securities - - - 4,256
Preferred stock - - - 3,211
Stock options - 1 - 70
------ ------ ------ ------
Average common shares and dilutive effect 88,378 88,379 86,777 94,314
====== ====== ====== ======
Per share:
Income before extraordinary loss $.47 $.47 $2.51 $2.41
Extraordinary loss .06 .06 - -
------ ------ ------ ------
Net income $.41 $.41 $2.51 $2.41
====== ====== ====== ======
</TABLE>
<PAGE> 17
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
10. During 1997, Marathon Oil Company (Marathon) and Ashland Inc.
(Ashland) agreed to combine the major elements of their refining, marketing
and transportation (RM&T) operations. On January 1, 1998, Marathon
transferred certain RM&T net assets to MAP, a new consolidated subsidiary.
Also on January 1, 1998, Marathon acquired certain RM&T net assets from
Ashland in exchange for a 38% interest in MAP. The acquisition was
accounted for under the purchase method of accounting. The purchase price
was determined to be $1.9 billion, based upon an external valuation. The
change in Marathon's ownership interest in MAP resulted in a gain of $246
million, which is included in the first six months 1998 revenues.
Effective August 11, 1998, Marathon acquired Tarragon Oil and Gas
Limited (Tarragon), a Canadian oil and gas exploration and production
company. Results for 1999 include the operations of Marathon Canada
Limited, formerly known as Tarragon.
11. Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
<TABLE>
<CAPTION>
(In millions)
------------------------
June 30 December 31
1999 1998
------- -----------
<S> <C> <C>
Raw materials $840 $916
Semi-finished products 368 282
Finished products 1,370 1,205
Supplies and sundry items 165 156
------ ------
Total (at cost) 2,743 2,559
Less inventory market valuation reserve 136 551
------ ------
Net inventory carrying value $2,607 $2,008
====== ======
</TABLE>
The inventory market valuation reserve reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. The reserve is decreased to reflect
increases in market prices and inventory turnover and increased to reflect
decreases in market prices. Changes in the inventory market valuation
reserve result in noncash charges or credits to costs and expenses. For
additional information, see discussion of results of operations in the
Marathon Group's Management's Discussion and Analysis of Financial
Condition and Results of Operations.
12. In 1997, USX sold its stock in Delhi Gas Pipeline Corporation and
other subsidiaries of USX that comprised all of the Delhi Group. The net
proceeds of the sale of $195 million were used to redeem all shares of USX-
Delhi Group Common Stock (Delhi Stock) and were distributed to the holders
thereof on January 26, 1998. After the redemption, 50,000,000 shares of
Delhi Stock remain authorized but unissued.
<PAGE> 18
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
13. At June 30, 1999, USX had $400 million in borrowings against its
$2,350 million long-term revolving credit agreement.
At June 30, 1999, MAP had no borrowings against its $500 million
revolving credit agreements with banks or its $190 million revolving credit
agreement with Ashland.
USX has a short-term credit agreement totaling $125 million at June
30, 1999. Interest is based on the bank's prime rate or London Interbank
Offered Rate (LIBOR), and carries a facility fee of .15%. Certain other
banks provide short-term lines of credit totaling $150 million which
require a .125% fee or maintenance of compensating balances of 3%. At June
30, 1999, there were no borrowings against these facilities. USX had other
outstanding short-term borrowings of $149 million.
In the event of a change in control of USX, debt obligations totaling
$3,571 million at June 30, 1999, may be declared immediately due and
payable.
14. In the first quarter of 1999, USX issued $300 million in aggregate
principal amount of 6.65% Notes due 2006.
On March 31, 1999, USX extinguished $117 million of indexed debt,
representing 6-3/4% Exchangeable Notes due February 1, 2000. See Note 2
for further discussion.
15. USX has an agreement (the program) to sell an undivided interest in
certain accounts receivable of the U. S. Steel Group. Payments are
collected from the sold accounts receivable; the collections are reinvested
in new accounts receivable for the buyers; and a yield, based on defined
short-term market rates, is transferred to the buyers. At June 30, 1999,
the amount sold under the program that had not been collected was $350
million, which will be forwarded to the buyers at the end of the agreement,
or in the event of earlier contract termination. If USX does not have a
sufficient quantity of eligible accounts receivable to reinvest in for the
buyers, the size of the program will be reduced accordingly. The buyers
have rights to a pool of receivables that must be maintained at a level of
at least 115% of the program's size. In the event of a change in control
of USX, as defined in the agreement, USX may be required to forward
payments collected on sold accounts receivable to the buyers.
16. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments involving a variety
of matters, including laws and regulations relating to the environment.
Certain of these matters are discussed below. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material to
the consolidated financial statements. However, management believes that
USX will remain a viable and competitive enterprise even though it is
possible that these contingencies could be resolved unfavorably. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
<PAGE> 19
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
16. (Continued)
USX is subject to federal, state, local and foreign laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At June 30, 1999, and December
31, 1998, accrued liabilities for remediation totaled $160 million and $145
million, respectively. It is not presently possible to estimate the
ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed. Receivables for recoverable costs from
certain states, under programs to assist companies in cleanup efforts
related to underground storage tanks at retail marketing outlets, were $47
million at June 30, 1999, and $41 million at December 31, 1998.
For a number of years, USX has made substantial capital expenditures
to bring existing facilities into compliance with various laws relating to
the environment. In the six months of 1999 and for the years 1998 and
1997, such capital expenditures totaled $42 million, $173 million and $134
million, respectively. USX anticipates making additional such expenditures
in the future; however, the exact amounts and timing of such expenditures
are uncertain because of the continuing evolution of specific regulatory
requirements.
At June 30, 1999, and December 31, 1998, accrued liabilities for
platform abandonment and dismantlement totaled $142 million and $141
million, respectively.
Guarantees by USX of the liabilities of affiliated entities totaled
$218 million at June 30, 1999. In the event that any defaults of
guaranteed liabilities occur, USX has access to its interest in the assets
of most of the affiliates to reduce losses resulting from these guarantees.
As of June 30, 1999, the largest guarantee for a single affiliate was $131
million.
At June 30, 1999, USX's pro rata share of obligations of LOOP LLC and
various pipeline affiliates secured by throughput and deficiency agreements
totaled $163 million. Under the agreements, USX is required to advance
funds if the affiliates are unable to service debt. Any such advances are
prepayments of future transportation charges.
Contract commitments to acquire property, plant and equipment and
long-term investments at June 30, 1999, totaled $983 million compared
with $812 million at December 31, 1998.
<PAGE> 20
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
17. On April 12, 1999, USX and Kobe Steel, Ltd. (Kobe Steel) announced
that they had entered into a letter of intent with Blackstone Capital
Partners II (Blackstone) to combine the steelmaking and bar producing
assets of USS/Kobe Steel Company (USS/Kobe) with companies controlled by
Blackstone, Republic Technologies International, Inc., Republic Engineered
Steels, Inc. and Bar Technologies, Inc. (collectively Republic). In
addition, on August 6, 1999, USX agreed to a $15 million equity
investment in Republic when the combination is consummated. USX
currently owns 50% of USS/Kobe and will own approximately 15% of
Republic. The seamless pipe business of USS/Kobe is excluded from this
transaction and will continue to operate as a joint venture between USX
and Kobe Steel.
The transaction was subject to numerous conditions, including financing.
As of the date of issuance of the accompanying financial statements, it was
uncertain whether several of these conditions would be resolved and the
transaction would be completed. Due to these uncertainties, neither USX
nor USS/Kobe recognized any financial effects of the transaction in the
second quarter 1999. On August 6, 1999, Republic received financing
commitments sufficient to complete the transaction, which is scheduled to
be closed on August 13, 1999.
The estimated fair value of USX's investment in Republic, based upon
preliminary information supplied by Republic, is approximately $80 million
less than USX's carrying value of its investment in the steelmaking and bar
producing assets of USS/Kobe. Based on the resolution of the uncertainties
and the anticipated closing of the transaction, USX expects to recognize an
estimated impairment of $80 million in the third quarter of 1999.
<PAGE> 21
<TABLE>
<CAPTION>
USX CORPORATION
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
----------------------------------------------------------
Six Months Ended
June 30 Year Ended December 31
- --------------------- -------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C>
3.89 5.48 3.36 3.92 3.62 1.49 2.01
==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
USX CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
-------------------------------------------------
Six Months Ended
June 30 Year Ended December 31
- --------------------- -------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C>
4.00 5.67 3.47 4.11 3.90 1.62 2.18
==== ==== ==== ==== ==== ==== ====
</TABLE>
<PAGE> 22
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX Corporation ("USX") is a diversified company that is principally
engaged in the energy business through its Marathon Group and in the steel
business through its U. S. Steel Group. The following discussion should be read
in conjunction with the second quarter and first six months of 1999 USX
Consolidated Financial Statements and selected notes. For income per common
share amounts applicable to USX's two classes of common stock, USX-Marathon
Group Common Stock ("Marathon Stock") and USX-U. S. Steel Group Common Stock
("Steel Stock"), see Consolidated Statement of Operations - Income per Common
Share. For Group results, see Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Marathon Group and the U. S. Steel
Group. For operating statistics, see Supplemental Statistics following
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the respective Groups.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting USX. These
statements typically contain words such as "anticipates", "believes",
"estimates", "expects" or similar words indicating that future outcomes are
uncertain. In accordance with "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, these statements are accompanied by cautionary
language identifying important factors, though not necessarily all such factors,
that could cause future outcomes to differ materially from those set forth in
the forward-looking statements. For additional risk factors affecting the
businesses of USX, see Supplementary Data - Disclosures About Forward-Looking
Statements in the USX 1998 Form 10-K.
<PAGE> 23
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the second quarter and the first six months of 1999 and 1998
are set forth in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
<C> <C> <C> <C> <C>
Revenues
Marathon Group $5,481 $5,530 $10,332 $11,041
U. S. Steel Group 1,304 1,733 2,515 3,429
Eliminations (19) (3) (27) (10)
------ ------ ------- -------
Total USX Corporation revenues $6,766 $7,260 $12,820 $14,460
Less:
Excise taxes (a)(b) 1,003 958 1,916 1,834
Matching buy/sell transactions (a)(c) 698 994 1,570 1,982
------ ------ ------ ------
Revenues excluding above items $5,065 $5,308 $9,334 $10,644
====== ====== ====== ======
- ------
<FN>
(a) Included in both revenues and costs and expenses for the Marathon Group and
USX consolidated.
(b) Consumer excise taxes on petroleum products and merchandise.
(c) Matching crude oil and refined products buy/sell transactions settled in
cash.
</TABLE>
Revenues (excluding excise taxes and matching buy/sell transactions)
decreased by $243 million in the second quarter of 1999 as compared with the
second quarter of 1998, reflecting a decrease of $429 million for the
U. S. Steel Group offset by an increase of $202 million for the Marathon Group.
For the first six months of 1999 revenues decreased $1,310 million as compared
with the same period of 1998, reflecting decreases of $379 million for the
Marathon Group and $914 million for the U. S. Steel Group.
For discussion of revenues by Group, see Management's Discussion and
Analysis of Financial Condition and Results of Operations for the Marathon Group
and the U. S. Steel Group.
<PAGE> 24
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations for the second quarter and the first six months of
1999 and 1998 are set forth in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Reportable segments
Marathon Group
Exploration & production $124 $73 $160 $197
Refining, marketing & transportation 228 397 273 525
Other energy related businesses 19 3 34 17
---- ---- ---- ----
Income for reportable segments - Marathon Group $371 $473 $467 $739
U. S. Steel Group
Income for reportable segment (9) 154 (68) 260
--- ---- ---- ----
Income for reportable segments - USX Corporation 362 627 399 999
Items not allocated to segments:
Marathon Group 28 (20) 335 116
U. S. Steel Group 112 63 169 119
---- ---- ---- ----
Total income from operations - USX Corporation $502 $670 $903 $1,234
</TABLE>
Income for reportable segments decreased by $265 million in the second
quarter of 1999 as compared with the second quarter of 1998, reflecting
decreases of $102 million for the Marathon Group reportable segments and $163
million for U. S. Steel Group reportable segment. Income for reportable segments
in the first six months of 1999 decreased by $600 million compared with the
first six months of 1998, reflecting decreases of $272 million for the Marathon
Group reportable segments and $328 million for U. S. Steel Group reportable
segment.
For discussion of income from operations see Management's Discussion and
Analysis of Financial Condition and Results of Operations for the Marathon Group
and the U. S. Steel Group.
<PAGE> 25
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net interest and other financial costs for the second quarter and first six
months of 1999 and 1998 are set forth in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net interest and other financial costs $91 $71 $174 $153
Less:
Favorable (unfavorable) adjustment to carrying
value of indexed debt (a) - - 13 (4)
----- ------ ------ ------
Net interest and other financial costs
adjusted to exclude above item $91 $71 $187 $149
===== ====== ====== ======
- ------
<FN>
(a) For discussion, see Note 2 to the USX Consolidated Financial Statements.
</TABLE>
Adjusted net interest and other financial costs increased by $20 million in
the second quarter of 1999 and $38 million in the first six months of 1999 as
compared with the same periods of 1998, due primarily to increased costs
resulting from higher average debt levels and lower interest income.
Provisions for estimated income taxes of $110 million and $173 million for
the second quarter and the first six months of 1999 were based on tax rates and
amounts that recognize management's best estimate of current and deferred tax
assets and liabilities. The U. S. Steel Group's provision for estimated income
taxes for the second quarter and first six months of 1998 included a $9 million
favorable foreign tax adjustment as a result of a favorable resolution of
foreign tax litigation.
Extraordinary loss on extinguishment of debt of $5 million, net of a $3
million income tax benefit, in the first six months of 1999 represents prepaid
interest expense and the write-off of unamortized debt issue costs resulting
from the satisfaction of USX's obligation of its indexed debt in the first
quarter of 1999. For further discussion, see Note 2 to the USX Consolidated
Financial Statements.
Net income was $189 million for the second quarter of 1999, a decrease of
$109 million from the second quarter of 1998 reflecting decreases of $28 million
for the Marathon Group and $81 million for the U. S. Steel Group. Net income
was $294 million for the first six months of 1999, a decrease of $274 million as
compared with the first six months of 1998, reflecting decreases of $92 million
for the Marathon Group and $182 million for the U. S. Steel Group.
<PAGE> 26
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Dividends to Stockholders
- -------------------------
On July 27, 1999, the USX Board of Directors (the "Board") declared
dividends of 21 cents per share on Marathon Stock and 25 cents per share on
Steel Stock, payable September 10, 1999, to stockholders of record at the close
of business on August 18, 1999. The Board also declared a dividend of $0.8125
per share on USX's 6.50% Cumulative Convertible Preferred Stock, payable
September 30, 1999, to stockholders of record at the close of business on August
31, 1999.
On July 27, 1999, Marathon Oil Canada Limited, an indirect subsidiary of
Marathon Oil Company, declared a dividend of CDN $0.3178 per share on its non-
voting Exchangeable Shares, payable September 10, 1999, to stockholders of
record at the close of business on August 18, 1999.
Cash Flows
- ----------
Cash and cash equivalents totaled $99 million at June 30, 1999, compared
with $605 million at June 30, 1998, a decrease of $506 million reflecting a $510
million decrease for the Marathon Group offset by a $4 million increase for the
U. S. Steel Group. The decrease for the Marathon Group was primarily the result
of a temporary change in excise tax payment patterns in 1998 that reversed
later in the year.
Net cash provided from operating activities totaled $461 million in the
first six months of 1999, a $628 million decrease from the first six months of
1998, reflecting a $510 million decrease for the Marathon Group and a $118
million decrease for the U. S. Steel Group. The decrease for the Marathon Group
mainly reflected lower profitability, unfavorable working capital changes and an
increase from the previous period in the amount distributed by MAP to Ashland.
Capital expenditures for property, plant and equipment in the first six
months of 1999 were $685 million compared with $686 million for the first six
months of 1998. For further details, see USX Corporation - Financial Statistics,
following Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Loans and advances to affiliates were $56 million in the first six months
of 1999 compared with $58 million in the first six months of 1998. Cash
outflows in both periods mainly reflected funding by the Marathon Group to
equity affiliates for capital projects, primarily the Sakhalin II project in
Russia.
Repayments of loans and advances from affiliates were $63 million in the
first six months of 1998 as a result of repayments by Sakhalin Energy Investment
Company, Ltd. of advances made by the Marathon Group in conjunction with the
Sakhalin II project in Russia.
Contract commitments to acquire property, plant and equipment and long-term
investments at June 30, 1999, totaled $983 million compared with $812 million at
December 31, 1998. The increase was primarily due to the pending acquisition
of certain Ultramar Diamond Shamrock refining, marketing and transportation.
USX's total long-term debt, preferred stock of subsidiary, USX obligated
preferred securities of a subsidary trust and notes payable, totaled $4,722
million at June 30, 1999, up $154 million from December 31, 1998 primarily due
to the issuance of the 6.65% Notes due 2006 and an increase in commercial paper
issuances partially offset by repayments on revolving credit agreements and the
settlement of the indexed debt.
<PAGE> 27
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Liquidity
- ---------
At June 30, 1999, USX had $400 million of borrowings against its $2,350
million long-term revolving credit agreement and $149 million of borrowings
against other short-term lines. There were no borrowings against the MAP
revolving credit agreements at June 30, 1999.
USX management believes that its short-term and long-term liquidity is
adequate to satisfy its obligations as of June 30, 1999, and to complete
currently authorized capital spending programs. Future requirements for USX's
business needs, including the funding of capital expenditures, debt maturities
for the balance of 1999 and years 2000 and 2001, and any amounts that may
ultimately be paid in connection with contingencies (which are discussed in Note
16 to the USX Consolidated Financial Statements), are expected to be financed by
a combination of internally generated funds, proceeds from the sale of stock,
borrowings and other external financing sources.
USX management's opinion concerning liquidity and USX's ability to avail
itself in the future of the financing options mentioned in the above forward-
looking statements are based on currently available information. To the extent
that this information proves to be inaccurate, future availability of financing
may be adversely affected. Factors that could affect the availability of
financing include the performance of each Group (as measured by various factors
including cash provided from operating activities), the state of worldwide debt
and equity markets, investor perceptions and expectations of past and future
performance, the overall U.S. financial climate, and, in particular, with
respect to borrowings, by levels of USX's outstanding debt and credit ratings by
rating agencies.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
USX has incurred and will continue to incur substantial capital, operating
and maintenance, and remediation expenditures as a result of environmental laws
and regulations. To the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of USX's products and services, operating
results will be adversely affected. USX believes that domestic competitors of
the U. S. Steel Group and substantially all the competitors of the Marathon
Group are subject to similar environmental laws and regulations. However, the
specific impact on each competitor may vary depending on a number of factors,
including the age and location of its operating facilities, marketing areas,
production processes and the specific products and services it provides.
USX has been notified that it is a potentially responsible party ("PRP") at
41 waste sites under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of June 30, 1999. In addition, there are 19 sites
where USX has received information requests or other indications that USX may be
a PRP under CERCLA but where sufficient information is not presently available
to confirm the existence of liability. There are also 140 additional sites,
excluding retail gasoline stations, where remediation is being sought under
other environmental statutes, both federal and state, or where private parties
are seeking remediation through discussions or litigation. Of these sites, 17
were associated with properties conveyed to MAP by Ashland for which Ashland has
retained liability for all costs associated with remediation. At many of these
sites,
<PAGE> 28
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX is one of a number of parties involved and the total cost of remediation, as
well as USX's share thereof, is frequently dependent upon the outcome of
investigations and remedial studies. USX accrues for environmental remediation
activities when the responsibility to remediate is probable and the amount of
associated costs is reasonably determinable. As environmental remediation
matters proceed toward ultimate resolution or as additional remediation
obligations arise, charges in excess of those previously accrued may be
required.
In October 1998, the National Enforcement Investigations Center and Region
V of the United States Environmental Protection Agency ("EPA")conducted a multi-
media inspection of MAP's Detroit refinery. Subsequently, in November 1998,
Region V conducted a multi-media inspection of MAP's Robinson refinery. These
inspections covered compliance with the Clean Air Act (New Source Performance
Standards, Prevention of Significant Deterioration, and the National Emission
Standards for Hazardous Air Pollutants for Benzene), the Clean Water Act (Permit
exceedances for the Waste Water Treatment Plant), reporting obligations under
the Emergency Planning and Community Right to Know Act and the handling of
process waste. Thus far, MAP has been served with two Notices of Violation
("NOV") and two Findings of Violation in connection with the multi-media
inspection at its Detroit refinery, and a NOV as a result of the inspection at
its Robinson refinery. MAP can contest the factual and the legal basis for the
allegations prior to the EPA taking enforcement action. At this time, it is not
known when complete findings on the results of these multi-media inspections
will be issued.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment (see Note 16 to the
USX Consolidated Financial Statements for a discussion of certain of these
matters). The ultimate resolution of these contingencies could, individually or
in the aggregate, be material to the USX Consolidated Financial Statements.
However, management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies could be resolved
unfavorably. See discussion of Liquidity herein.
Outlook
- -------
See Outlook in Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Marathon Group and the U. S. Steel Group.
Year 2000 Readiness Disclosure
- ------------------------------
See Year 2000 Readiness Disclosure in Management's Discussion and Analysis
of Financial Condition and Results of Operations for the Marathon Group and the
U. S. Steel Group.
<PAGE> 29
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Accounting Standard
- -------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This new standard requires recognition of
all derivatives as either assets or liabilities at fair value. This new
standard may result in additional volatility in both current period earnings and
other comprehensive income as a result of recording recognized and unrecognized
gains and losses resulting from changes in the fair value of derivative
instruments. At adoption this new standard requires a comprehensive review of
all outstanding derivative instruments to determine whether or not their use
meets the hedge accounting criteria. Upon adoption, there may be derivative
instruments employed by USX that do not meet all of the designated hedge
criteria and they will be reflected in income on a mark-to-market basis. Based
upon the strategies currently used by USX and the level of activity related to
forward exchange contracts and commodity-based derivative instruments in recent
periods, USX does not anticipate the effect of adoption to have a material
impact on either financial position or results of operations. The effective
date of SFAS No. 133 was amended by SFAS No. 137. USX plans to adopt the
standard effective January 1, 2001, as required.
<PAGE> 30
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Management Opinion Concerning Derivative Instruments
- --------------------------------------
USX utilizes derivative instruments principally in hedging activities,
whereby gains and losses are generally offset by price changes in the underlying
commodity. Recently, the Marathon Group's risk management policy was expanded to
include the use of derivative instruments for certain nonhedging and trading
activities. These instruments will be marked-to-market each period and the
related income or loss will be included in income from operations. Management
believes that use of derivative instruments along with risk assessment
procedures and internal controls does not expose USX to material risk. The use
of derivative instruments could materially affect USX's results of operations in
particular quarterly or annual periods. However, management believes that use
of derivative instruments will not have a material adverse effect on financial
position or liquidity.
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for open derivative
commodity instruments as of June 30, 1999 are provided in the following
table(a):
<TABLE>
<CAPTION>
Incremental Decrease
in Pretax Income
Assuming a Hypothetical
Price Change of(a)
(Dollars in millions) 10% 25%
- --------------------------------------------------------------------------------
<S> <C> <C>
Derivative Commodity Instruments
Marathon Group (b) (c)
Crude oil (price increase) (d) $21.8 $56.9
Natural gas (price decrease) (d) 9.6 24.8
Refined products (price increase) (d) .1 .2
U. S. Steel Group
Natural gas (price decrease) (d) $2.5 $6.3
Zinc (price decrease) (d) 3.0 7.6
Tin (price decrease) (d) .4 .7
Nickel (price decrease) (d) .1 .2
<FN>
(a) Gains and losses on derivative commodity instruments are generally
offset by price changes in the underlying commodity. Effects of these
offsets are not reflected in the sensitivity analyses. Amounts reflect
the estimated incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open contract position
at June 30, 1999. Marathon Group and U. S. Steel Group management
evaluate their portfolios of derivative commodity instruments on an
ongoing basis and add or revise strategies to reflect anticipated market
conditions and changes in risk profiles. Changes to the portfolios
subsequent to June 30, 1999, would cause future pretax income effects to
differ from those presented in the table.
</TABLE>
<PAGE> 31
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
(b) The number of net open contracts varied throughout second quarter
1999, from a low of 2,476 contracts at June 30, 1999, to a high of 34,199
contracts at April 16, 1999, and averaged 25,914 for the quarter. The
derivative commodity instruments used and hedging positions taken also
varied throughout second quarter 1999, and will continue to vary in the
future. Because of these variations in the composition of the portfolio
over time, the number of open contracts, by itself, cannot be used to
predict future income effects.
(c) The calculation of sensitivity amounts for basis swaps assumes that
the physical and paper indices are perfectly correlated. Gains and
losses on options are based on changes in intrinsic value only.
(d) The direction of the price change used in calculating the
sensitivity amount for each commodity reflects that which would result in
the largest incremental decrease in pretax income when applied to the
derivative commodity instruments used to hedge that commodity.
Interest Rate Risk
- ------------------
As of June 30, 1999, the discussion of USX's interest rate risk has not
changed materially from that presented in Quantitative and Qualitative
Disclosures About Market Risk included in USX's 1998 Form 10-K.
Foreign Currency Exchange Rate Risk
- -----------------------------------
As of June 30, 1999, the discussion of USX's foreign currency exchange rate
risk has not changed materially from that presented in Quantitative and
Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K.
Equity Price Risk
- -----------------
USX was subject to equity price risk resulting from its issuance in
December 1996 of $117 million of 6 3/4% Exchangeable Notes due February 1, 2000
("indexed debt"). However, on March 31, 1999, USX irrevocably deposited with a
trustee the entire 5.5 million shares it owned in RTI. The deposit of shares
resulted in the satisfaction of USX's obligation under the indexed debt. Under
the terms of the indenture, the trustee will exchange the RTI shares for the
notes at maturity. USX is no longer exposed to any negative risks associated
with changes in the value of RTI common stock. For further discussion, see Note
2 to the USX Consolidated Financial Statements.
Safe Harbor
- -----------
USX's Quantitative and Qualitative Disclosures About Market Risk include
forward-looking statements with respect to management's opinion about risks
associated with USX's use of derivative instruments. These statements are based
on certain assumptions with respect to market prices and industry supply and
demand for crude oil, natural gas, refined products, steel products and certain
raw materials. To the extent that these assumptions prove to be inaccurate,
future outcomes with respect to USX's derivative usage may differ materially
from those discussed in the forward-looking statements.
<PAGE> 32
<TABLE>
<CAPTION>
USX CORPORATION
FINANCIAL STATISTICS (Unaudited)
--------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
-------------- --------------
(Dollars in millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Marathon Group $5,481 $5,530 $10,332 $11,041
U. S. Steel Group 1,304 1,733 2,515 3,429
Eliminations (19) (3) (27) (10)
------- ------- ------- -------
Total $6,766 $7,260 $12,820 $14,460
INCOME FROM OPERATIONS
Marathon Group $399 $453 $802 $855
U. S. Steel Group 103 217 101 379
------ ------ ------ ------
Total $502 $670 $903 $1,234
CASH FLOW DATA
- --------------
CAPITAL EXPENDITURES
Marathon Group $336 $331 $532 $550
U. S. Steel Group 74 79 153 136
------ ------ ------ ------
Total $410 $410 $685 $686
INVESTMENTS (RETURNS) & OTHER AFFILIATE ACTIVITY - NET
Marathon Group $37 $(22) $56 $3
U. S. Steel Group - - - 63
------ ------ ------ ------
Total $37 $(22) $56 $66
</TABLE>
<PAGE> 33
Part I - Financial Information (Continued):
B. Marathon Group
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $5,447 $5,496 $10,287 $10,733
Dividend and affiliate income 28 18 44 28
Gain (loss) on disposal of assets (1) 13 (11) 16
Gain on ownership change in Marathon Ashland
Petroleum LLC - (2) - 246
Other income 7 5 12 18
------ ------ ------ ------
Total revenues 5,481 5,530 10,332 11,041
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 3,669 3,662 7,074 7,385
Selling, general and administrative expenses 132 120 254 251
Depreciation, depletion and amortization 222 209 459 479
Taxes other than income taxes 1,066 1,014 2,036 1,942
Exploration expenses 59 75 122 157
Inventory market valuation credits (66) (3) (415) (28)
------ ------ ------ ------
Total costs and expenses 5,082 5,077 9,530 10,186
------ ------ ------ ------
INCOME FROM OPERATIONS 399 453 802 855
Net interest and other financial costs 71 49 146 103
Minority interest in income of Marathon Ashland
Petroleum LLC 112 158 257 212
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 216 246 399 540
Provision for estimated income taxes 82 84 146 195
------ ------ ------ ------
NET INCOME $134 $162 $253 $345
====== ====== ====== ======
MARATHON STOCK DATA:
Net income per share
- Basic and diluted $.43 $.56 $.82 $1.19
Dividends paid per share .21 .21 .42 .42
Weighted average shares, in thousands
- Basic 309,054 289,591 309,041 289,220
- Diluted 309,462 290,263 309,332 289,879
<FN>
Selected notes to financial statements appear on pages 36-44.
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
June 30 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $79 $137
Receivables, less allowance for doubtful
accounts of $3 and $3 1,296 1,277
Inventories 1,839 1,310
Deferred income tax benefits 81 80
Other current assets 230 172
------ ------
Total current assets 3,525 2,976
Investments and long-term receivables 652 603
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$10,557 and $10,299 10,224 10,429
Prepaid pensions 203 241
Other noncurrent assets 301 295
------ ------
Total assets $14,905 $14,544
====== ======
LIABILITIES
Current liabilities:
Notes payable $132 $132
Accounts payable 1,940 1,980
Payroll and benefits payable 130 150
Distribution payable to minority shareholder of
Marathon Ashland Petroleum LLC - 103
Accrued taxes 173 99
Accrued interest 92 87
Long-term debt due within one year 67 59
------ ------
Total current liabilities 2,534 2,610
Long-term debt, less unamortized discount 3,568 3,456
Long-term deferred income taxes 1,482 1,450
Employee benefits 542 553
Deferred credits and other liabilities 411 389
Preferred stock of subsidiary 184 184
Minority interest in Marathon Ashland Petroleum LLC 1,744 1,590
COMMON STOCKHOLDERS' EQUITY 4,440 4,312
------ ------
Total liabilities and common
stockholders' equity $14,905 $14,544
====== ======
<FN>
Selected notes to financial statements appear on pages 36-44.
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
Six Months Ended
June 30
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $253 $345
Adjustments to reconcile to net cash provided from
operating activities:
Minority interest in income of Marathon Ashland
Petroleum LLC - net of distributions 51 82
Depreciation, depletion and amortization 459 479
Exploratory dry well costs 62 97
Inventory market valuation credits (415) (28)
Pensions and other postretirement benefits 27 6
Deferred income taxes 49 91
Gain on ownership change in Marathon
Ashland Petroleum LLC - (246)
(Gain) loss on disposal of assets 11 (16)
Changes in:
Current receivables (265) 161
Inventories (151) (160)
Current accounts payable and accrued expenses 333 105
All other - net (77) (69)
------ ------
Net cash provided from operating activities 337 847
------ ------
INVESTING ACTIVITIES:
Capital expenditures (532) (550)
Disposal of assets 178 30
Restricted cash -withdrawals 39 4
- deposits (20) (387)
Affiliates - investments - net - (8)
- loans and advances (56) (58)
- repayments of loans and advances - 63
All other - net - 13
------ ------
Net cash used in investing activities (391) (893)
------ ------
FINANCING ACTIVITIES:
Increase in Marathon Group's portion of USX
consolidated debt 119 292
Specifically attributed debt- borrowings 140 379
- repayments (140) -
Marathon Stock issued 8 50
Dividends paid (130) (122)
------ ------
Net cash provided from (used in)
financing activities (3) 599
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) -
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (58) 553
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 137 36
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $79 $589
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(136) $(105)
Income taxes paid, including settlements with the
U. S. Steel Group (7) (136)
<FN>
Selected notes to financial statements appear on pages 36-44.
</TABLE>
<PAGE> 36
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Certain reclassifications of prior year data have been made to
conform to 1999 classifications. Additional information is contained in
the USX Annual Report on Form 10-K for the year ended December 31, 1998.
2. The financial statements of the Marathon Group include the financial
position, results of operations and cash flows for the businesses of
Marathon Oil Company (Marathon) and certain other subsidiaries of USX, and
a portion of the corporate assets and liabilities and related transactions
which are not separately identified with ongoing operating units of USX.
These financial statements are prepared using the amounts included in the
USX consolidated financial statements. Corporate amounts reflected in
these financial statements are determined based upon methods which
management believes to be reasonable. The accounting policies applicable
to the preparation of the financial statements of the Marathon Group may be
modified or rescinded in the sole discretion of the Board of Directors of
USX (Board), although the Board has no present intention to do so. The
Board may also adopt additional policies depending on the circumstances.
Although the financial statements of the Marathon Group and the U. S.
Steel Group separately report the assets, liabilities (including contingent
liabilities) and stockholders' equity of USX attributed to each such Group,
such attribution of assets, liabilities (including contingent liabilities)
and stockholders' equity between the Marathon Group and the U. S. Steel
Group for the purpose of preparing their respective financial statements
does not affect legal title to such assets and responsibility for such
liabilities. Holders of USX-Marathon Group Common Stock (Marathon Stock)
and USX-U. S. Steel Group Common Stock (Steel Stock) are holders of common
stock of USX and continue to be subject to all the risks associated with an
investment in USX and all of its businesses and liabilities. Financial
impacts arising from one Group that affect the overall cost of USX's
capital could affect the results of operations and financial condition of
the other Group. In addition, net losses of either Group, as well as
dividends or distributions on any class of USX Common Stock or series of
Preferred Stock and repurchases of any class of USX Common Stock or series
of Preferred Stock at prices in excess of par or stated value, will reduce
the funds of USX legally available for payment of dividends on both classes
of Common Stock. Accordingly, the USX consolidated financial information
should be read in connection with the Marathon Group financial information.
<PAGE> 37
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
The financial statement provision for estimated income taxes and
related tax payments or refunds have been reflected in the Marathon Group
and the U. S. Steel Group financial statements in accordance with USX's tax
allocation policy for such groups. In general, such policy provides that
the consolidated tax provision and related tax payments or refunds are
allocated between the Marathon Group and the U. S. Steel Group for group
financial statement purposes, based principally upon the financial income,
taxable income, credits, preferences and other amounts directly related to
the respective groups.
The provision for estimated income taxes for the Marathon Group is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities. Differences between
the combined interim tax provisions of the Marathon and U. S. Steel Groups
and USX consolidated are allocated to each group based on the relationship
of the individual group provisions to the combined interim provisions.
3. The Marathon Group's total comprehensive income for the second quarter
of 1999 and 1998 was $134 million and $160 million, respectively, and $255
million and $344 million for the six months of 1999 and 1998, respectively.
4. In the second quarter of 1999, Marathon Ashland Petroleum LLC (MAP)
sold Scurlock Permian LLC (Scurlock), its crude oil gathering business, to
Plains Marketing, L.P for $136 million. During the first six months of
1999, MAP recorded a pretax loss of $16 million related to the sale.
Scurlock had been reported as part of the Marathon Group's refining,
marketing and transportation operating segment.
On June 1, 1999, the Marathon Group announced that it had signed a
definitive agreement to sell Carnegie Natural Gas Company and affiliated
subsidiaries (Carnegie) to Equitable Resources, Inc. The transaction is
expected to close later this year. Carnegie is engaged in natural gas
production, transmission, distribution, sales and storage activities in
Pennsylvania and West Virginia. At June 30, 1999, the net assets held for
sale have been included in other current assets in the balance sheet.
During the second quarter of 1999, the Marathon Group recorded an estimated
pretax loss of $7 million related to the sale. Carnegie has been reported
as part of the Marathon Group's other energy related businesses operating
segment.
5. The Marathon Group's operations consists of three reportable operating
segments: 1) Exploration and Production (E&P) - explores for and produces
crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and
Transportation (RM&T) - refines, markets and transports crude oil and
petroleum products, primarily in the Midwest and southeastern United States
through MAP; and 3) Other Energy Related Businesses (OERB). OERB is an
aggregation of two segments which fall below the quantitative reporting
thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation -
markets and transports its own and third-party natural gas and crude oil in
the United States; and 2) Power Generation - develops, constructs and
operates independent electric power projects worldwide. The results of
segment operations are as follows:
<PAGE> 38
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
<TABLE>
<CAPTION>
Total
(In millions) E&P RM&T OERB Segments
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECOND QUARTER 1999
Revenues:
Customer $689 $4,637 $113 $5,439
Intersegment (a) 34 4 6 44
Intergroup (a) 4 - 4 8
Equity in earnings of
unconsolidated affiliates 3 4 5 12
Other 13 10 6 29
------ ------ ------ ------
Total revenues $743 $4,655 $134 $5,532
====== ====== ====== ======
Segment income $124 $228 $19 $371
====== ====== ====== ======
SECOND QUARTER 1998
Revenues:
Customer $499 $4,928 $66 $5,493
Intersegment (a) 41 1 2 44
Intergroup (a) 2 - 1 3
Equity in earnings of
unconsolidated affiliates 2 3 1 6
Other 20 11 3 34
------ ------ ------ ------
Total revenues $564 $4,943 $73 $5,580
====== ====== ====== ======
Segment income $73 $397 $3 $473
====== ====== ====== ======
<FN>
(a) Intersegment and intergroup sales and transfers were conducted on an arm's-
length basis.
</TABLE>
<PAGE> 39
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
<TABLE>
<CAPTION>
Total
(In millions) E&P RM&T OERB Segments
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Revenues:
Customer $1,261 $8,816 $195 $10,272
Intersegment (a) 68 9 15 92
Intergroup (a) 7 - 8 15
Equity in earnings of
unconsolidated affiliates 4 7 13 24
Other 19 16 9 44
------ ------ ------ ------
Total revenues $1,359 $8,848 $240 $10,447
====== ====== ====== ======
Segment income $160 $273 $34 $467
====== ====== ====== ======
SIX MONTHS ENDED JUNE 30, 1998
Revenues:
Customer $1,017 $9,520 $162 $10,699
Intersegment (a) 84 2 4 90
Intergroup (a) 6 - 4 10
Equity in earnings of
unconsolidated affiliates 1 6 6 13
Other 21 24 5 50
------ ------ ------ ------
Total revenues $1,129 $9,552 $181 $10,862
====== ====== ====== ======
Segment income $197 $525 $17 $739
====== ====== ====== ======
<FN>
(a) Intersegment and intergroup sales and transfers were conducted on an arm's-
length basis.
</TABLE>
<PAGE> 40
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
The following schedules reconcile segment revenues and income to amounts
reported in the Marathon Group financial statements:
<TABLE>
<CAPTION>
Second Quarter Ended
June 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Revenues of reportable segments $5,532 $5,580
Items not allocated to segments:
Loss on ownership change in MAP - (2)
Other (7) -
Elimination of intersegment revenues (44) (44)
Administrative revenues - (4)
------ ------
Total Group revenues $5,481 $5,530
====== ======
Income:
Income for reportable segments $371 $473
Items not allocated to segments:
Loss on ownership change in MAP - (2)
Administrative expenses (31) (21)
Inventory market valuation adjustments 66 3
Other (a) (7) -
------ ------
Total Group income from operations $399 $453
====== ======
<FN>
(a)Represents estimated loss on sale of Carnegie.
</TABLE>
<PAGE> 41
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
<TABLE>
<CAPTION>
Six Months Ended
June 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Revenues of reportable segments $10,447 $10,862
Items not allocated to segments:
Gain on ownership in MAP - 246
Other (23) 24
Elimination of intersegment revenues (92) (90)
Administrative revenues - (1)
------ ------
Total Group revenues $10,332 $11,041
====== ======
Income:
Income for reportable segments $467 $739
Items not allocated to segments:
Gain on ownership in MAP - 246
Administrative expenses (57) (59)
Inventory market valuation adjustments 415 28
Other (a) (23) (99)
------ ------
Total Group income from operations $802 $855
====== ======
<FN>
(a)Represents in 1999, loss on sale of Scurlock and Carnegie, and in 1998,
international exploration and production property impairments, MAP
transition charges and gas contract settlement.
</TABLE>
6. The items below are included in both revenues and costs and expenses,
resulting in no effect on income.
<TABLE>
<CAPTION>
(In millions)
-------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consumer excise taxes on petroleum
products and merchandise $1,003 $958 $1,916 $1,834
Matching crude oil and refined product
buy/sell transactions settled in cash 698 994 1,570 1,982
</TABLE>
PAGE> 42
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. The method of calculating net income per common share for the Marathon
Stock and Steel Stock reflects the Board's intent that the separately
reported earnings and surplus of the Marathon Group and the U. S. Steel
Group, as determined consistent with the USX Restated Certificate of
Incorporation, are available for payment of dividends on the respective
classes of stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily correspond with
these amounts.
Basic net income per share is based on the weighted average number of
common shares outstanding.
Diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
See Note 9 of the Notes to USX Consolidated Financial Statements for
the computation of income per share.
8. Inventories are carried at the lower of cost or market. Cost of
inventories of crude oil and refined products is determined under the last-
in, first-out (LIFO) method.
<TABLE>
<CAPTION>
(In millions)
------------------------
June 30 December 31
1999 1998
----------- -----------
<S> <C> <C>
Crude oil and natural gas liquids $712 $731
Refined products and merchandise 1,153 1,023
Supplies and sundry items 110 107
------ ------
Total (at cost) 1,975 1,861
Less inventory market valuation reserve 136 551
------ ------
Net inventory carrying value $1,839 $1,310
====== ======
</TABLE>
The inventory market valuation reserve reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. The reserve is decreased to reflect
increases in market prices and inventory turnover and increased to reflect
decreases in market prices. Changes in the inventory market valuation
reserve result in noncash charges or credits to costs and expenses. For
additional information, see discussion of results of operations in the
Marathon Group's Management's Discussion and Analysis of Financial
Condition and Results of Operations.
9. At June 30, 1999, accounts payable includes an estimated income tax
payable to the U. S. Steel Group of $24 million, determined in accordance
with the tax allocation policy discussed in Note 2.
PAGE> 43
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
10. During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the
major elements of their refining, marketing and transportation (RM&T)
operations. On January 1, 1998, Marathon transferred certain RM&T net
assets to MAP, a new consolidated subsidiary. Also on January 1, 1998,
Marathon acquired certain RM&T net assets from Ashland in exchange for a
38% interest in MAP. The acquisition was accounted for under the purchase
method of accounting. The purchase price was determined to be
$1.9 billion, based upon an external valuation. The change in Marathon's
ownership interest in MAP resulted in a gain of $246 million, which is
included in the first six months 1998 revenues.
Effective August 11, 1998, Marathon acquired Tarragon Oil and Gas
Limited (Tarragon), a Canadian oil and gas exploration and production
company. Results for 1999 include the operations of Marathon Canada
Limited, formerly known as Tarragon.
11. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the
Marathon Group involving a variety of matters, including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the Marathon Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Marathon Group is subject to federal, state, local and foreign
laws and regulations relating to the environment. These laws generally
provide for control of pollutants released into the environment and require
responsible parties to undertake remediation of hazardous waste disposal
sites. Penalties may be imposed for noncompliance. At June 30, 1999, and
December 31, 1998, accrued liabilities for remediation totaled $59 million
and $48 million, respectively. It is not presently possible to estimate
the ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed. Receivables for recoverable costs from
certain states, under programs to assist companies in cleanup efforts
related to underground storage tanks at retail marketing outlets, were $47
million at June 30, 1999, and $41 million at December 31, 1998.
For a number of years, the Marathon Group has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In the first six months of 1999 and for the
years 1998 and 1997, such capital expenditures totaled $29 million, $124
million and $81 million, respectively. The Marathon Group anticipates
making additional such expenditures in the future; however, the exact
amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
<PAGE> 44
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
11. (Continued)
At June 30, 1999, and December 31, 1998, accrued liabilities for
platform abandonment and dismantlement totaled $142 million and $141
million, respectively.
Guarantees by USX and its consolidated subsidiaries of the liabilities
of an affiliated entity of the Marathon Group totaled $131 million at June
30, 1999, and December 31, 1998.
At June 30, 1999, the Marathon Group's pro rata share of obligations
of LOOP LLC and various pipeline affiliates secured by throughput and
deficiency agreements totaled $163 million. Under the agreements, the
Marathon Group is required to advance funds if the affiliates are unable to
service debt. Any such advances are prepayments of future transportation
charges.
The Marathon Group's contract commitments to acquire property, plant
and equipment and long-term investments at June 30, 1999, totaled $861
million compared with $624 million at December 31, 1998.
<PAGE> 45
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Marathon Group includes Marathon Oil Company ("Marathon") and certain
other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide
exploration and production of crude oil and natural gas; domestic refining,
marketing and transportation of petroleum products primarily through Marathon
Ashland Petroleum ("MAP"), owned 62% by Marathon; and other energy related
businesses. Net income and related per share amounts are net of Ashland Inc.'s
38% minority interest in MAP's income. The Management's Discussion and Analysis
should be read in conjunction with the Marathon Group's Financial Statements and
Notes to Financial Statements. The discussion of Results of Operations should
be read in conjunction with the Supplemental Statistics provided on page 61.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of the Marathon Group. These statements typically contain words such
as "anticipates", "believes", "estimates", "expects", "targets", "scheduled" or
similar words indicating that future outcomes are uncertain. In accordance with
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, these statements are accompanied by cautionary language identifying
important factors, though not necessarily all such factors, that could cause
future outcomes to differ materially from those set forth in forward-looking
statements. For additional risk factors affecting the businesses of the
Marathon Group, see Supplementary Data - Disclosures About Forward-Looking
Statements in the USX Annual Report on Form 10-K for the year ended December 31,
1998.
<PAGE> 46
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the second quarter and first six months of 1999 and 1998 are
summarized in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Exploration & production ("E&P") $743 $564 $1,359 $1,129
Refining, marketing & transportation 4,655 4,943 8,848 9,552
Other energy related businesses 134 73 240 181
------ ------ ------ ------
Revenues of reportable segments $5,532 $5,580 $10,447 $10,862
Items not allocated to segments:
Gain on ownership change in MAP - (2) - 246
Other (a) (7) - (23) 24
Elimination of intersegment revenues (44) (44) (92) (90)
Administrative revenues - (4) - (1)
------ ------ ------ ------
Total Group revenues $5,481 $5,530 $10,332 $11,041
====== ====== ====== ======
</TABLE>
Items included in both revenues and costs and expenses, resulting in no effect
on income:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Consumer excise taxes on petroleum
products and merchandise $1,003 $958 $1,916 $1,834
Matching crude oil and refined product
buy/sell transactions settled in cash 698 994 1,570 1,982
- ---------
<FN>
(a)Represents in 1999, loss on sale of Scurlock and Carnegie, and in 1998, a
gas contract settlement.
</TABLE>
E&P revenues increased by $179 million in the second quarter of 1999 from
the comparable prior-year period. The increase primarily reflected increased
domestic liquid hydrocarbon prices and volumes. For the first six months of
1999, E&P revenues increased by $230 million from the prior-year period due to
higher domestic liquid hydrocarbon volumes and prices and international gas
volumes, partially offset by lower worldwide natural gas prices.
Refining, marketing and transportation revenues decreased by $288 million
in the second quarter of 1999 from the comparable prior-year period. The
decrease primarily reflected the loss of revenues from Scurlock Permian LLC,
partially offset by higher volumes of refined product sales, increased refined
product prices and higher merchandise sales. For the first six months of 1999,
refining, marketing and transportation revenues decreased by $704 million from
the prior-year period primarily due to the factors discussed previously, except
for refined product prices, which decreased. Merchandise sales increased by $52
million and $108 million from last year's second quarter and first six months,
respectively.
<PAGE> 47
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Other energy related businesses revenues increased by $61 million in the
second quarter of 1999 from the comparable prior-year period. For the first six
months of 1999, revenues increased by $59 million from the prior-year period.
The increase in both periods primarily reflected increased oil and gas resale
activity and higher equity earnings from increased pipeline throughput.
Income from operations for the second quarter and first six months of 1999
and 1998 are set forth in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
E&P
Domestic $93 $41 $131 $115
International (a) 31 32 29 82
------ ------ ------ ------
Income for E&P reportable segment 124 73 160 197
Refining, marketing & transportation 228 397 273 525
Other energy related businesses (b) 19 3 34 17
------ ------ ------ ------
Income for reportable segments $371 $473 $467 $739
Items not allocated to segments:
Administrative expenses (c) $(31) $(21) $(57) $(59)
IMV reserve adjustment (d) 66 3 415 28
Estimated loss on sale of assets (e) (7) - (23) -
Gain on ownership change & trans. charges-MAP (f) - (2) - 223
E&P int'l impairment & dom. contract settlement (g)- - - (76)
------ ------ ------ ------
Total Group income from operations $399 $453 $802 $855
====== ====== ====== ======
- --------
<FN>
(a)Where applicable, second quarter and six months 1999 results include
Marathon Canada Limited, formerly Tarragon Oil and Gas Limited, which was
acquired by Marathon on August 11, 1998.
(b)Includes domestic natural gas and crude oil marketing and transportation,
and power generation.
(c)Includes the portion of the Marathon Group's administrative costs not
charged to the operating segments and the portion of USX corporate general
and administrative costs allocated to the Marathon Group.
(d)The inventory market valuation ("IMV") reserve reflects the extent to which
the recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. See Note 8 to the Marathon Group Financial
Statements.
(e)For additional information regarding the loss on the sale of Scurlock
Permian LLC and the estimated loss on the sale of Carnegie Natural Gas
Company and affiliated subsidiaries, see Note 4 to the Marathon Group
Financial Statements.
(f)The gain on ownership change and one-time transition charges relate to the
formation of MAP. For additional discussion of the gain on ownership change
in MAP, see Note 10 to the Marathon Group Financial Statements.
(g)This represents a write-off of certain non-revenue producing international
investments and the gain from the resolution of contract disputes with a
purchaser of the Marathon Group's natural gas production from certain
domestic properties.
</TABLE>
<PAGE> 48
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income for reportable segments in the second quarter of 1999 declined by
$102 million from last year's second quarter, due primarily to lower refined
product margins, partially offset by higher domestic liquid hydrocarbon prices
and production and increased refined product sales volumes. Income for
reportable segments in the first six months of 1999 decreased by $272 million
from the first six months of 1998, due primarily to lower refined product
margins and lower natural gas prices, partially offset by increased domestic
liquid hydrocarbon production and higher domestic liquid hydrocarbon prices.
Worldwide E&P ("upstream") segment income in the second quarter of 1999
increased by $51 million from last year's second quarter. Results in the first
six months of 1999 decreased by $37 million from the same period in 1998.
Domestic E&P income in the second quarter of 1999 increased by $52 million
from last year's second quarter. This increase was mainly due to higher liquid
hydrocarbon prices. Results in the first six months of 1999 increased by $16
million from the same period in 1998. The increase was primarily due to lower
exploration expense, increased liquid hydrocarbon and natural gas production and
increased liquid hydrocarbon prices, partially offset by lower natural gas
prices.
International E&P income in the second quarter of 1999 decreased by $1
million from last year's second quarter. Results in the first six months of
1999 decreased by $53 million from the same period in 1998. This decrease was
mainly due to lower liquid hydrocarbon and natural gas production in Europe,
higher exploration expense and lower natural gas prices.
Refining, marketing and transportation ("downstream") segment income in the
second quarter of 1999 decreased by $169 million from last year's second
quarter. Results in the first six months 1999 decreased by $252 million from
the same period in 1998. The decreases in both periods were mainly due to lower
refined product margins, partially offset by recognized mark-to-market
derivative gains from nonhedging activities, increased refined product sales
volumes and increased merchandise sales at Speedway SuperAmerica LLC.
Other energy related businesses segment income in the second quarter of
1999 increased by $16 million from last year's second quarter. Results in the
first six months of 1999 increased by $17 million from the same period in 1998.
The 1999 results included a reversal of abandonment accruals ($10 million)
resulting from revised cost estimates and higher equity earnings as a result of
increased pipeline throughput.
Items not allocated to segments
Administrative expenses in the second quarter of 1999 increased by $10
million from last year's second quarter. The increase was primarily due to
higher accruals for employee benefit plans.
IMV reserve adjustment - When U. S. Steel Corporation acquired Marathon Oil
Company in March 1982, crude oil and refined product prices were at historically
high levels. In applying the purchase method of accounting, the Marathon
Group's crude oil and refined product inventories were revalued by reference to
current prices at the time of acquisition, and this became the new LIFO cost
basis of the inventories. Generally accepted accounting principles require that
inventories be carried at lower of cost or market. Accordingly, the Marathon
Group has established an IMV reserve to reduce the cost basis of its inventories
to net realizable value. Quarterly adjustments to the IMV reserve result in
noncash charges or credits to income from operations.
<PAGE> 49
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
When Marathon acquired the crude oil and refined product inventories
associated with Ashland's RM&T operations on January 1, 1998, the Marathon Group
established a new LIFO cost basis for those inventories. The acquisition cost
of these inventories lowered the overall average cost of the Marathon Group's
combined RM&T inventories. As a result, the price threshold at which an IMV
reserve will be recorded has also been lowered. This acquisition resulted in a
one-time reduction in the IMV reserve, yielding a net favorable IMV reserve
adjustment of $25 million in the first quarter of 1998.
These adjustments affect the comparability of financial results from period
to period as well as comparisons with other energy companies, many of which do
not have such adjustments. Therefore, the Marathon Group reports separately the
effects of the IMV reserve adjustments on financial results. In management's
opinion, the effects of such adjustments should be considered separately when
evaluating operating performance.
Net interest and other financial costs in the first six months of 1999
increased by $43 million from the comparable 1998 period, mainly due to
increased costs resulting from higher average debt levels and lower interest
income.
The provision for estimated income taxes in the first six months of 1999
decreased by $49 million from the comparable 1998 period due to a decline in
income before taxes.
Net income for the second quarter and first six months decreased by $28
million and $92 million, respectively, in 1999 from 1998, primarily reflecting
the factors discussed above.
Cash Flows
- ----------
Net cash provided from operating activities was $337 million in the first
six months of 1999, compared with $847 million in the first six months of 1998.
The $510 million decrease mainly reflected lower profitability, unfavorable
working capital changes and distributions by MAP to Ashland of $206 million in
the first six months of 1999 as compared to $130 million in the comparable 1998
period. The favorable working capital change reported in the first six months
of 1998 was due to a temporary change in excise tax payment patterns, which
reversed later in the year.
Capital expenditures in the first six months of 1999 totaled $532 million,
compared with $550 million in the comparable 1998 period. For additional
information regarding capital expenditures, refer to the Supplemental Statistics
on page 61.
Cash from disposal of assets was $178 million in the first six months 1999,
compared with $30 million in the comparable 1998 period. Proceeds in 1999 were
mainly from the sale of Scurlock Permian LLC and domestic production properties.
<PAGE> 50
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The net change in restricted cash was a net withdrawal of $19 million in
the first six months of 1999, compared to a net deposit of $383 million in the
comparable 1998 period. The 1999 amount primarily represents net cash withdrawn
for the purchase of domestic production properties. The 1998 amount primarily
represents the proceeds from a Cdn$550 million loan agreement Marathon entered
into to finance a portion of the Tarragon Oil and Gas Limited acquisition, which
were restricted to collateralize a loan and invested in short-term investments.
Loans and advances to affiliates were $56 million in the first six months
of 1999, compared with $58 million in the comparable 1998 period. Cash outflows
in both periods mainly reflected funding provided to equity affiliates for
capital projects, primarily the Sakhalin II project in Russia.
Repayments of loans and advances to affiliates were $63 million in the
first six months of 1998 as a result of repayments by Sakhalin Energy Investment
Company, Ltd. of advances made by Marathon in conjunction with the Sakhalin II
project in Russia.
Contract commitments for property, plant and equipment acquisitions and
long-term investments at June 30, 1999 totaled $861 million compared with $624
million at December 31, 1998. The increase was primarily due to the pending
acquisition of certain Ultramar Diamond Shamrock refining, marketing and
transportation assets.
Financial obligations, which consist of the Marathon Group's portion of USX
debt and preferred stock of a subsidiary attributed to both groups, as well as
debt specifically attributed to the Marathon Group, increased by $119 million in
the first six months of 1999. Financial obligations increased primarily because
capital expenditures and dividend payments exceeded cash from operating
activities and proceeds from asset sales. These obligations were partially
funded by a reduction in cash of $58 million.
Derivative Instruments
- ----------------------
See Quantitative and Qualitative Disclosure About Market Risk for
discussion of derivative instruments and associated market risk for the Marathon
Group.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see Management's
Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and
Liquidity.
<PAGE> 51
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The Marathon Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. To the extent these expenditures, as with
all costs, are not ultimately reflected in the prices of the Marathon Group's
products and services, operating results will be adversely affected. The
Marathon Group believes that substantially all of its competitors are subject to
similar environmental laws and regulations. However, the specific impact on
each competitor may vary depending on a number of factors, including the age and
location of its operating facilities, marketing areas, production processes and
whether or not it is engaged in the petrochemical business, power business or
the marine transportation of crude oil and refined products.
USX has been notified that it is a potentially responsible party ("PRP") at
16 waste sites related to the Marathon Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30,
1999. In addition, there are 7 sites related to the Marathon Group where USX
has received information requests or other indications that USX may be a PRP
under CERCLA but where sufficient information is not presently available to
confirm the existence of liability.
There are also 108 additional sites, excluding retail marketing outlets,
related to the Marathon Group where remediation is being sought under other
environmental statutes, both federal and state, or where private parties are
seeking remediation through discussions or litigation. Of these sites, 17 were
associated with properties conveyed to MAP by Ashland for which Ashland has
retained liability for all costs associated with remediation.
At many sites, USX is one of a number of parties involved and the total
cost of remediation, as well as USX's share thereof, is frequently dependent
upon the outcome of investigations and remedial studies. The Marathon Group
accrues for environmental remediation activities when the responsibility to
remediate is probable and the amount of associated costs is reasonably
determinable. As environmental remediation matters proceed toward ultimate
resolution or as additional remediation obligations arise, charges in excess of
those previously accrued may be required.
<PAGE> 52
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In October 1998, the National Enforcement Investigations Center and Region
V of the United States Environmental Protection Agency ("EPA") conducted a
multi-media inspection of MAP's Detroit refinery. Subsequently, in November
1998, Region V conducted a multi-media inspection of MAP's Robinson refinery.
These inspections covered compliance with the Clean Air Act (New Source
Performance Standards, Prevention of Significant Deterioration, and the National
Emission Standards for
Hazardous Air Pollutants for Benzene), the Clean Water Act (Permit exceedances
for the Waste Water Treatment Plant), reporting obligations under the Emergency
Planning and Community Right to Know Act and the handling of process waste.
Although MAP has been advised as to certain compliance issues regarding MAP's
Detroit refinery, it is not known when complete findings on the results of the
inspections will be issued. Thus far, MAP has been served with two Notices of
Violation ("NOV") and two Findings of Violation in connection with the multi-
media inspection at its Detroit refinery, and a NOV as a result of the
inspection at its Robinson refinery. MAP can contest the factual and the legal
basis for the allegations prior to the EPA taking enforcement action. At this
time, it is not known when complete findings on the results of these multi-media
inspections will be issued.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Marathon Group
involving a variety of matters, including laws and regulations relating to the
environment. See Note 11 to the Marathon Group Financial Statements for a
discussion of certain of these matters. The ultimate resolution of these
contingencies could, individually or in the aggregate, be material to the
Marathon Group Financial Statements. However, management believes that USX will
remain a viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Outlook
- -------
The outlook regarding the Marathon Group's upstream revenues and income is
largely dependent upon future prices and volumes of liquid hydrocarbons and
natural gas. Prices have historically been volatile and have frequently been
affected by unpredictable changes in supply and demand resulting from
fluctuations in worldwide economic activity and political developments in the
world's major oil and gas producing and consuming areas. Any significant
decline in prices could have a material adverse effect on the Marathon Group's
results of operations. A prolonged decline in such prices could also adversely
affect the quantity of crude oil and natural gas reserves that can be
economically produced and the amount of capital available for exploration and
development.
<PAGE> 53
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Marathon's 1999 worldwide liquid hydrocarbon production is currently
estimated to average in the range of 215,000 to 220,000 barrels per day ("bpd").
Worldwide natural gas volumes for 1999 are expected to be approximately 1.35
billion cubic feet per day ("bcfpd"). These estimates reflect the anticipated
sale of Marathon fields in Egypt, as well as timing delays in both domestic and
international offshore developments. Marathon expects liquid hydrocarbon
production to increase approximately seven percent annually in 2000 and 2001.
Natural gas volumes in 2000 are expected to be flat with 1999 and up
approximately four percent in 2001. These projections are based on known
discoveries and do not include the impact of potential or future major
acquisitions, dispositions, or wildcat drilling.
On July 16, 1999, Marathon agreed to sell its interests in two fields in
Egypt. The transaction included a 50 percent interest in the Ashrafi oilfield
offshore in the southwest Gulf of Suez and a 25 percent interest in the El Qar'a
natural gas and condensate field in the Nile Delta. Marathon's second quarter
production was about 6,000 bpd from the two fields. The transaction is expected
to close in the third quarter of 1999 with an effective date of June 1, 1999.
The sale is subject to final approval by the Egyptian authorities, consents of
third parties and satisfaction of customary closing conditions.
On July 5, 1999, oil production commenced from the Piltun-Astokhskoye field
offshore Sakahlin Island in the Russian Far East Region. Marathon holds a 37.5%
interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"), which
is the first enterprise to develop and produce oil and gas resources in Russia
under a production sharing agreement. Production, limited to the ice-free
season of the year, is expected to reach 90,000 gross barrels of oil per day by
the start of the second producing season in 2000.
On May 27, 1999, Marathon was awarded a 10 percent equity interest in
Blocks 31 and 32 offshore Angola. The blocks, which are located approximately
90 miles northwest of Luanda in water depths between 5,400 and 9,200 feet, are
adjacent to Blocks 15 and 17 where major discoveries by others have been made.
Marathon, bidding with others, was recently awarded three parcels offshore
Nova Scotia. Marathon and its partners submitted high gross bids of $118
million with Marathon's share being approximately $39 million. The high bids
represent exploration expenditures which will be made during the initial five
years of a nine-year license. Marathon has a 30, 33.75 and 37.5 percent
interest in Parcels 11, 18 and 10, respectively and will be operator of Parcel
11.
<PAGE> 54
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The above discussion includes forward-looking statements with respect to
projected liquid hydrocarbon production levels and natural gas volumes for 1999,
2000 and 2001 and timing/levels of gross production for Sakhalin Energy. These
statements are based on a number of assumptions, including (among others)
prices, amount of capital available for exploration and development, worldwide
supply and demand for petroleum products, regulatory constraints, reserve
estimates, production decline rates of mature fields, timing of commencing
production from new wells, timing and results of future development drilling,
reserve replacement rates, and other geological, operating and economic
considerations. In addition, development of new production properties in
countries outside the United States may require protracted negotiations with
host governments and is frequently subject to political considerations, such as
tax regulations, which could adversely affect the
economics of projects. To the extent these assumptions prove inaccurate and/or
negotiations and other considerations are not satisfactorily resolved, actual
results could be materially different than present expectations.
Downstream income of the Marathon Group is largely dependent upon refining
crack spreads (the difference between light product prices and crude costs).
Refined product margins have been historically volatile and vary with the level
of economic activity in the various marketing areas, the regulatory climate and
the available supply of crude oil and refined products.
On May 24, 1999, MAP signed an agreement with Ultramar Diamond Shamrock
("UDS") to purchase 179 UDS owned-and-operated convenience stores, 5 product
terminals and an assignment of supply contracts for about 240 branded UDS jobber
stations in Michigan. Additionally, MAP will lease a sixth product terminal
from UDS. The transaction is expected to close later this year. This is a
forward-looking statement. Some factors that could potentially affect the
timing of the UDS closing include (among others) receipt of government
approvals, consents of third parties and satisfaction of customary closing
conditions.
On May 20, 1999, MAP reached an agreement with P.M.I. Comercio
Internacional, S.A. de C.V., (PMI), an affiliate of Petroleos Mexicanos,
(PEMEX), to purchase approximately 90,000 bpd of heavy Maya crude oil. The
multi-year contract will begin upon completion of a 34,500 bpd delayed-coking
project planned for MAP's refinery in Garyville, Louisiana. This work is
anticipated to be completed in fourth quarter 2001. This is a forward-looking
statement. Some factors that could potentially affect the completion of the
delayed-coking project include (among others) levels of cash flow from
operations, obtaining the necessary construction and environmental permits,
unforeseen hazards such as weather conditions and regulatory constraints.
On August 3, 1999, Marathon announced a voluntary early retirement
incentive program. Eligibility is extended to approximately 500 employees in
specific organizations and groups, which does not include MAP and Information
Technology employees. Retirement effective dates under this program will be
November 1, 1999.
<PAGE> 55
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Year 2000 Readiness Disclosure
- ------------------------------
The Marathon Group is executing Year 2000 action plans which include:
* prioritizing and focusing on those computerized and automated systems and
processes ("systems") critical to the Marathon Group's operations in terms of
material operational, safety, environmental and financial risk to the company.
* allocating and committing appropriate resources to fix the problem.
* developing detailed contingency plans for those systems critical to the
operations in terms of material operational, safety, environmental and
financial risk to the company.
* communicating with, and aggressively pursuing, critical third parties to
help ensure the Year 2000 readiness of their products and services through use
of mailings, telephone contacts, and the inclusion of Year 2000 readiness
language in purchase orders and contracts.
* performing rigorous Year 2000 tests of critical systems.
* participating in, and exchanging Year 2000 information with industry trade
associations, such as the American Petroleum Institute ("API").
* engaging qualified outside engineering and information technology
consulting firms to assist in the Year 2000 inventory, assessment and
readiness.
State of Readiness
Information Technology (IT) systems are 96% ready as of June 30, 1999. IT
systems are expected to be 100% ready by September 30, 1999 with minor
exceptions. The exceptions identified currently are third party software
vendors whose upgrade schedules have been delayed until fourth quarter 1999. In
these cases, contingency plans are scheduled to be in place by September 30,
1999 for the affected software to ensure there will be no significant business
impact.
Inventorying of Non-Information Technology (Non-IT) systems and assessment
of these inventoried systems was 99% complete as of June 30, 1999. Of the
inventory assessed, few systems require remediation. Non-IT systems are
scheduled to be Year 2000 ready by the end of third quarter 1999.
The following chart provides the percent of completion for the (i)
inventory of systems and processes that may be affected by the Year 2000 ("Y2K
Inventory"), (ii) analysis performed to determine the Year 2000 date impact of
inventoried systems and processes ("Y2K Impact Assessment") and (iii) overall
Year 2000 readiness of the Marathon Group's Year 2000 inventory ("Y2K Readiness
of Overall Inventory"). The percent of completion for Y2K Readiness of Overall
Inventory includes all inventory systems not date impacted, those systems
already Year 2000 ready and those corrected and made Year 2000 ready through the
renovation/replacement, testing and implementation activities; however, the
implementation of certain Year 2000 ready IT systems has been deferred until the
fourth quarter of 1999 due to third party software vendor upgrade schedules.
<PAGE> 56
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Percent Completed
Y2K
Y2K Readiness
As of June 30, 1999 Impact of
Y2K Assess- Overall
Inventory ment Inventory
------ ------ ------
<S> <C> <C> <C>
Information Technology 100% 100% 96%
Non-Information Technology 99% 99% 97%
</TABLE>
Third Parties
Third parties include suppliers, customers and vendors. Contacts have been
made with critical third parties to determine if they will be able to provide
their services to the Marathon Group after the Year 2000. Third party vendors'
responses have been graded in order to rate their Y2K readiness. Those with an
average or below average grade have been contacted directly by the appropriate
business units to discuss their Y2K readiness. Using a Year 2000 ready test
environment, testing is underway on third party software to validate that it is
Year 2000 ready. In addition, third party software that poses a risk to a
business unit is being included within the business unit's contingency plans.
The Costs to Address Year 2000 Issues
Total costs incurred as of June 30, 1999, were $25 million, including $11
million of incremental costs. The total estimated costs associated with Year
2000 readiness are expected to be $39 million, of which $20 million are
incremental costs. This reflects a decrease of $3 million from the previously
reported estimate.
The Risks of the Company's Year 2000 Issues
The most reasonably likely worst case Year 2000 scenario would be the
inability of critical third party suppliers, such as utility providers,
telecommunication companies, drilling equipment suppliers, platform suppliers,
crude oil suppliers and pipeline carriers, to continue providing their products
and services. This could pose the greatest material operational, safety,
environmental and/or financial risk to the company. These critical third party
suppliers have generally indicated that they are or expect to be Year 2000 ready
in a timely manner.
The lack of accurate and timely Year 2000 date impact information from
suppliers of automation and process control systems and processes is also a
concern. Without quality information from suppliers, specifically on embedded
chip technology, some Year 2000 problems could go undetected until after January
1, 2000. According to information received from suppliers of these systems,
oil and gas industry surveys and Marathon Group's own test results,
These embedded systems do not appear to pose significant problems or involve
the possibility of major failures that could affect vital operations.
An additional risk is the ability of some third party software vendors to
provide timely software upgrades to make their product Year 2000 ready.
Communication continues with these vendors to expedite the completion of
upgrades as much as possible. Contingency plans are being developed in case
timely upgrades are not available.
<PAGE> 57
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In a report issued February 24, 1999 by the United States Senate Special
Committee on the Year 2000 Technology Problem, the committee expressed concern
that many of the countries from which the United States imports oil are
significantly behind the United States in their Year 2000 remediation efforts
and oil production and transportation could be at some risk. In 1998, 64% or
577,000 bpd of the crude oil processed by MAP's refineries was from foreign
sources and acquired primarily from various foreign national oil companies,
producing companies and traders. Of this total, approximately 330,000 bpd was
acquired from the Middle East. According to a report by the American Petroleum
Institute and a February 1999 report by the United States Department of Energy,
the four largest exporters of petroleum to the United States expect all critical
systems to be Year 2000 ready by the end of 1999. If any country is unable to
export oil, other countries may be able to increase production and exports.
According to the API report, in any event, import deliveries of oil would not
stop immediately as there is always crude oil en route to the United States. In
addition, the United States government has a Strategic Petroleum Reserve to act
as a buffer to protect against temporary interruptions in foreign oil supplies.
The Marathon Group could be adversely affected by a disruption in supply if
alternate sources of supply are not available.
In the initial review of assets to be acquired from UDS, Marathon
determined that certain facilities and systems may not be completely Y2K ready.
Once the transaction is closed, Marathon will undertake thorough Y2K inventory,
assessment and remediation (where necessary) of acquired facilities. Marathon
expects this work can be completed by December 31, 1999. If the closing is
delayed or if the required remediation is greater than expected, there is a risk
some of the acquired facilities may not be Y2K ready. The completion
percentages in the chart on page 56 do not include UDS IT or Non-IT systems.
Contingency Planning
Marathon Group business units are reviewing their written contingency plans
within their business units and with other business units with which they
interact. Overall, contingency planning is 66% completed, which is slightly
ahead of schedule. These plans are to be completed and tested, when practical,
by the end of third quarter 1999. A multiple occurrence emergency response
drill for Year 2000 was conducted during the last week of July 1999.
Planning is progressing with the year-end Marathon Group Year 2000
monitoring center. Marathon will also be participating in the API Year 2000
monitoring center currently in development. These centers will be used to track
and report the Y2K impact as each time zone rolls over to January 1, 2000. As
Marathon Group business units and API member companies report problems and
related solutions, the information will be shared with other business units so
they can proactively prepare to deal with a similar situation.
This discussion includes forward-looking statements of the Marathon Group's
efforts and management's expectations and costs relating to Year 2000 readiness.
The Marathon Group's ability to achieve Year 2000 readiness and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to install or modify proprietary hardware and software and
unanticipated problems identified in the ongoing Year 2000 readiness review.
Also, the Marathon Group's ability to mitigate Year 2000 risks could be
adversely impacted by the effectiveness of contingency plans.
<PAGE> 58
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Accounting Standard
- --------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This new standard requires recognition of
all derivatives as either assets or liabilities at fair value. This new
standard may result in additional volatility in both current period earnings and
other comprehensive income as a result of recording recognized and unrecognized
gains and losses resulting from changes in the fair value of derivative
instruments. At adoption this new standard requires a comprehensive review of
all outstanding derivative instruments to determine whether or not their use
meets the hedge accounting criteria. Upon adoption, there may be derivative
instruments employed by USX that do not meet all of the designated hedge
criteria and they will be reflected in income on a mark-to-market basis. Based
upon the strategies currently used by USX and the level of activity related to
forward exchange contracts and commodity-based derivative instruments in recent
periods, USX does not anticipate the effect of adoption to have a material
impact on either financial position or results of operations of the Marathon
Group. The effective date of SFAS No. 133 was amended by SFAS No. 137. USX
plans to adopt the standard effective January 1, 2001, as required.
<PAGE> 59
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Management Opinion Concerning Derivative Instruments
- --------------------------------------
USX utilizes derivative instruments principally in hedging activities, whereby
gains and losses are generally offset by price changes in the underlying
commodity. Recently, the Marathon Group's risk management policy was expanded
to include the use of derivative instruments for certain nonhedging and trading
activities. These instruments will be marked-to-market each period and the
related income or loss will be included in income from operations. Management
believes that use of derivative instruments along with risk assessment
procedures and internal controls does not expose the Marathon Group to material
risk. The use of derivative instruments could materially affect the Marathon
Group's results of operations in particular quarterly or annual periods.
However, management believes that use of derivative instruments will not have a
material adverse effect on financial position or liquidity.
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for open derivative
commodity instruments as of June 30, 1999 are provided in the following
table(a):
<TABLE>
<CAPTION>
Incremental Decrease
in Pretax Income
Assuming a Hypothetical
Price Change of(a)
(Dollars in millions) 10% 25%
- --------------------------------------------------------------------------------
<S> <C> <C>
Derivative Commodity Instruments
Marathon Group (b) (c)
Crude oil (price increase) (d) $21.8 $56.9
Natural gas (price decrease) (d) 9.6 24.8
Refined products (price increase) (d) .1 .2
<FN>
(a) Gains and losses on derivative commodity instruments are generally
offset by price changes in the underlying commodity. Effects of these
offsets are not reflected in the sensitivity analyses. Amounts reflect
the estimated incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open contract position
at June 30, 1999. Marathon Group management evaluates its portfolio of
derivative commodity instruments on an ongoing basis and adds or revises
strategies to reflect anticipated market conditions and changes in risk
profiles. Changes to the portfolio subsequent to June 30, 1999 would
cause future pretax income effects to differ from those presented in the
table.
(b) The number of net open contracts varied throughout second quarter
1999 from a low of 2,476 contracts at June 30, 1999, to a high of 34,199
contracts at April 16, 1999, and averaged 25,914 for the quarter. The
derivative commodity instruments used and hedging positions taken also
varied throughout second quarter 1999, and will continue to vary in the
future. Because of these variations in the composition of the portfolio
over time, the number of open contracts, by itself, cannot be used to
predict future income effects.
(c) The calculation of sensitivity amounts for basis swaps assumes that
the physical and paper indices are perfectly correlated. Gains and
losses on options are based on changes in intrinsic value only.
<PAGE> 60
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
(d) The direction of the price change used in calculating the
sensitivity amount for each commodity reflects that which would result in
the largest incremental decrease in pretax income when applied to the
derivative commodity instruments used to hedge that commodity.
</TABLE>
Interest Rate Risk
- ------------------
As of June 30, 1999, the discussion of the Marathon Group's interest rate
risk has not changed materially from that presented in Quantitative and
Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K.
Foreign Currency Exchange Rate Risk
- -----------------------------------
As of June 30, 1999, the discussion of the Marathon Group's foreign
currency exchange rate risk has not changed materially from that presented in
Quantitative and Qualitative Disclosures About Market Risk included in USX's
1998 Form 10-K.
Equity Price Risk
- -----------------
As of June 30, 1999, the Marathon Group had no material exposure to equity
price risk.
Safe Harbor
- -----------
The Marathon Group's Quantitative and Qualitative Disclosures About Market
Risk include forward-looking statements with respect to management's opinion
about risks associated with the Marathon Group's use of derivative instruments.
These statements are based on certain assumptions with respect to market prices
and industry supply and demand for crude oil, natural gas and refined products.
To the extent that these assumptions prove to be inaccurate, future outcomes
with respect to the Marathon Group's derivative usage may differ materially from
those discussed in the forward-looking statements.
<PAGE> 61
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
------------------------------------------------
Second Quarter Six Months
Ended June 30 Ended June 30
(Dollars in millions) 1999(a) 1998 1999(a) 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME (LOSS) FROM OPERATIONS
Exploration & Production ("E&P")
Domestic $93 $41 $131 $115
International 31 32 29 82
----- ----- ----- -----
Income For E&P Reportable Segment 124 73 160 197
Refining, Marketing & Transportation 228 397 273 525
Other Energy Related Businesses(b) 19 3 34 17
----- ----- ----- -----
Income For Reportable Segments $371 $473 $467 739
Items Not Allocated To Segments:
Administrative Expenses $(31) $(21) $(57) $(59)
Inventory Market Val. Res. Adjustment 66 3 415 28
Estimated Loss on Sale of Assets (7) - (23) -
Gain on Ownership Change & Trans. Charges - MAP - (2) - 223
E&P Int'l Impairment & Dom. Contract Settlement - - - (76)
------ ------ ------ ------
Marathon Group Income From Operations $399 $453 $802 $855
CAPITAL EXPENDITURES
Exploration & Production $261 $256 $410 $423
Refining, Marketing & Transportation 73 69 119 119
Other (c) 2 6 3 8
----- ----- ----- -----
Total $336 $331 $532 $550
EXPLORATION EXPENSE
Domestic $44 $54 $66 $92
International (d) 15 21 56 65
----- ----- ----- -----
Total $59 $75 $122 $157
INVESTMENTS(RETURNS) & OTHER AFFILIATE
ACTIVITY-NET $37 $(22) $56 $3
OPERATING STATISTICS
Net Liquid Hydrocarbon Production (e):
United States 148.7 137.9 145.9 131.9
Europe 34.6 45.6 34.3 43.0
Other International 29.8 13.8 30.4 9.8
------ ------ ------ ------
Worldwide 213.1 197.3 210.6 184.7
Net Natural Gas Production (f):
United States 741.8 723.2 755.5 735.6
Europe (g) 346.9 402.8 373.1 428.0
Other International 171.0 12.7 180.2 12.9
------ ------ ------- -------
Total Consolidated 1259.7 1138.7 1308.8 1176.5
Equity Affiliate 35.6 36.6 35.6 39.6
------- ------- ------- -------
Worldwide 1295.3 1175.3 1344.4 1216.1
Average Equity Sales Prices (h):
Liquid Hydrocarbons (per Bbl)
Domestic $13.56 $9.97 $11.41 $10.98
International 14.87 12.85 12.80 13.24
Natural Gas (per Mcf)
Domestic $1.81 $1.87 $1.64 $1.89
International 1.77 2.05 1.82 2.11
Crude Oil Refined (e) 939.0 923.2 893.8 914.3
Refined Products Sold (e) 1259.3 1178.9 1190.5 1160.8
Matching buy/sell volumes included in refined
products sold (e).................... 56.0 32.1 47.1 39.8
- --------------
<FN>
(a) Where applicable, second quarter and six months 1999 results include
Marathon Canada Limited, formerly Tarragon Oil and Gas Limited, which was
acquired by Marathon on August 11, 1998.
(b) Includes domestic natural gas and crude oil marketing and
transportation, and power generation.
(c) Includes other energy related businesses and corporate capital
expenditures.
(d) Six months ended June 30, 1998 includes $30 million for impairment
in first quarter 1998.
(e) Thousands of barrels per day
(f) Millions of cubic feet per day
(g) Includes gas acquired for injection and subsequent resale of 16.1,
17.8, 24.5 and 25.2 mmcfd in the second quarters and six months year-to-
date 1999 and 1998, respectively.
(h) Prices exclude gains and losses from hedging activities.
</TABLE>
<PAGE> 62
Part I - Financial Information (Continued):
C. U. S. Steel Group
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $1,303 $1,689 $2,549 $3,359
Income (loss) from affiliates (10) 28 (33) 43
Gain (loss) on disposal of assets 10 17 (2) 28
Other income (loss) 1 (1) 1 (1)
------ ------ ------ ------
Total revenues 1,304 1,733 2,515 3,429
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 1,160 1,436 2,317 2,891
Selling, general and administrative
expenses (credits) (95) (53) (165) (99)
Depreciation, depletion and amortization 79 72 150 149
Taxes other than income taxes 57 61 112 109
------ ------ ------ ------
Total costs and expenses 1,201 1,516 2,414 3,050
------ ------ ------ ------
INCOME FROM OPERATIONS 103 217 101 379
Net interest and other financial costs 20 22 28 50
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 83 195 73 329
Provision for estimated income taxes 28 59 27 106
------ ------ ------ ------
INCOME BEFORE EXTRAORDINARY LOSS 55 136 46 223
Extraordinary loss on extinguishment of debt,
net of income tax - - 5 -
------ ------ ------ ------
NET INCOME 55 136 41 223
Dividends on preferred stock 3 3 5 5
------ ------ ------ ------
NET INCOME APPLICABLE TO STEEL STOCK $52 $133 $36 $218
====== ====== ====== ======
STEEL STOCK DATA:
Income before extraordinary loss $52 $133 $41 $218
- Per share - basic .60 1.53 .47 2.51
- diluted .59 1.46 .47 2.41
Extraordinary loss, net of income tax - - 5 -
- Per share - basic and diluted - - .06 -
Net income $52 $133 $36 $218
- Per share - basic .60 1.53 .41 2.51
- diluted .59 1.46 .41 2.41
Dividends paid per share .25 .25 .50 .50
Weighted average shares, in thousands
- Basic 88,387 86,953 88,378 86,777
- Diluted 92,647 94,507 88,379 94,314
<FN>
Selected notes to financial statements appear on pages 65-71.
</TABLE>
<PAGE> 63
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
June 30 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $20 $9
Receivables, less allowance for doubtful
accounts of $5 and $9 423 392
Inventories 768 698
Deferred income tax benefits 176 176
------ ------
Total current assets 1,387 1,275
Investments and long-term receivables,
less reserves of $3 and $10 620 743
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$6,075 and $5,939 2,499 2,500
Prepaid pensions 2,327 2,172
Other noncurrent assets 51 59
----- ------
Total assets $6,884 $6,749
====== ======
LIABILITIES
Current liabilities:
Notes payable $17 $13
Accounts payable 612 501
Payroll and benefits payable 315 330
Accrued taxes 132 150
Accrued interest 11 10
Long-term debt due within one year 15 12
------ ------
Total current liabilities 1,102 1,016
Long-term debt, less unamortized discount 491 464
Long-term deferred income taxes 174 129
Employee benefits 2,316 2,315
Deferred credits and other liabilities 474 484
Preferred stock of subsidiary 66 66
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior
subordinated convertible debentures of USX 182 182
STOCKHOLDERS' EQUITY
Preferred stock 3 3
Common stockholders' equity 2,076 2,090
------ ------
Total stockholders' equity 2,079 2,093
------ ------
Total liabilities and stockholders' equity $6,884 $6,749
====== ======
<FN>
Selected notes to financial statements appear on pages 65-71.
</TABLE>
<PAGE> 64
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
Six Months Ended
June 30
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $41 $223
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss 5 -
Depreciation, depletion and amortization 150 149
Pensions and other postretirement benefits (143) (107)
Deferred income taxes 49 89
(Gain) loss on disposal of assets 2 (28)
Changes in:
Current receivables - sold 30 -
- operating turnover (60) 94
Inventories (70) (33)
Current accounts payable and accrued expenses 76 (116)
All other - net 44 (29)
------ ------
Net cash provided from operating activities 124 242
------ ------
INVESTING ACTIVITIES:
Capital expenditures (153) (136)
Disposal of assets 4 15
Restricted cash -withdrawals - 3
- deposits (6) (3)
Affiliates - investments - net - (63)
All other - net (3) 13
------ ------
Net cash used in investing activities (158) (171)
------ ------
FINANCING ACTIVITIES:
Increase (decrease) in U. S. Steel Group's portion of USX
consolidated debt 105 (47)
Specifically attributed debt repayments (11) (3)
Steel Stock issued - 25
Dividends paid (49) (48)
------ ------
Net cash provided from (used in)
financing activities 45 (73)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11 (2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9 18
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $20 $16
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(42) $(39)
Income taxes paid, including settlements with
the Marathon Group (5) (14)
<FN>
Selected notes to financial statements appear on pages 65-71.
</TABLE>
<PAGE> 65
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Certain reclassifications of prior year data have been made to
conform to 1999 classifications. Additional information is contained in
the USX Annual Report on Form 10-K for the year ended December 31, 1998.
2. The financial statements of the U. S. Steel Group include the
financial position, results of operations and cash flows for all businesses
of USX other than the businesses, assets and liabilities included in the
Marathon Group and a portion of the corporate assets and liabilities and
related transactions which are not separately identified with ongoing
operating units of USX. These financial statements are prepared using the
amounts included in the USX consolidated financial statements. Corporate
amounts reflected in these financial statements are determined based upon
methods which management believes to be reasonable. The accounting
policies applicable to the preparation of the financial statements of the
U. S. Steel Group may be modified or rescinded in the sole discretion of
the Board of Directors of USX (Board), although the Board has no present
intention to do so. The Board may also adopt additional policies depending
on the circumstances.
Although the financial statements of the U. S. Steel Group and the
Marathon Group separately report the assets, liabilities (including
contingent liabilities) and stockholders' equity of USX attributed to each
such Group, such attribution of assets, liabilities (including contingent
liabilities) and stockholders' equity between the U. S. Steel Group and the
Marathon Group for purposes of preparing their respective financial
statements does not affect legal title to such assets and responsibility
for such liabilities. Holders of USX-U. S. Steel Group Common Stock (Steel
Stock) and USX-Marathon Group Common Stock (Marathon Stock) are holders of
common stock of USX and continue to be subject to all the risks associated
with an investment in USX and all of its businesses and liabilities.
Financial impacts arising from one Group that affect the overall cost of
USX's capital could affect the results of operations and financial
condition of the other Group. In addition, net losses of either Group, as
well as dividends or distributions on any class of USX Common Stock or
series of Preferred Stock and repurchases of any class of USX Common Stock
or series of Preferred Stock at prices in excess of par or stated value,
will reduce the funds of USX legally available for payment of dividends on
both classes of Common Stock. Accordingly, the USX consolidated financial
information should be read in connection with the U. S. Steel Group
financial information.
The financial statement provision for estimated income taxes and
related tax payments or refunds have been reflected in the U. S. Steel
Group and the Marathon Group financial statements in accordance with USX's
tax allocation policy for such groups. In general, such policy provides
that the consolidated tax provision and related tax payments or refunds are
allocated
<PAGE> 66
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
between the U. S. Steel Group and the Marathon Group for group
financial statement purposes, based principally upon the financial income,
taxable income, credits, preferences and other amounts directly related to
the respective groups.
The provision for estimated income taxes for the U. S. Steel Group is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities. Differences between
the combined interim tax provisions of the U. S. Steel and Marathon Groups
and USX consolidated are allocated to each group based on the relationship
of the individual group provisions to the combined interim provisions.
3. The U. S. Steel Group's total comprehensive income for the second
quarter of 1999 and 1998 was $51 million and $134 million, respectively,
and $33 million and $221 million for the six months of 1999 and 1998,
respectively.
4. The U. S. Steel Group consists of one operating segment, U. S. Steel.
U. S. Steel is engaged in the production and sale of steel mill products,
coke and taconite pellets. U. S. Steel also engages in the following
related business activities: the management of mineral resources, domestic
coal mining, engineering and consulting services, and real estate
development and management. The results of segment operations are as
follows:
<TABLE>
<CAPTION>
Second Quarter Ended
June 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Customer $1,292 $1,689
Intergroup (a) 11 -
Equity in earnings (losses) of
unconsolidated affiliates (10) 28
Other 11 16
------ ------
Total revenues $1,304 $1,733
====== ======
Segment income (loss) $(9) $154
====== ======
<FN>
(a) Intergroup sales and transfers were conducted on an arm's-length basis.
</TABLE>
<PAGE> 67
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. (Continued)
<TABLE>
<CAPTION>
Six Months Ended
June 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Customer $2,537 $3,358
Intergroup (a) 12 -
Equity in earnings (losses) of
unconsolidated affiliates (33) 43
Other 21 28
------ ------
Total revenues $2,537 $3,429
====== ======
Segment income (loss) $(68) $260
====== ======
<FN>
(a) Intergroup sales and transfers were conducted on an arm's-length basis.
</TABLE>
The following schedules reconcile segment revenue and income (loss) to
amounts reported in the U. S. Steel Group's financial statements:
<TABLE>
<CAPTION>
Second Quarter Ended
June 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues of reportable segment and Group revenues $1,304 $1,733
====== ======
Income (loss) for reportable segment $(9) $154
Items not allocated to segment:
Administrative expenses (8) (5)
Pension credits 140 93
Costs related to former business activities (20) (25)
------ ------
Total Group income from operations $103 $217
====== ======
</TABLE>
<PAGE> 68
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
4. (Continued)
Six Months Ended
June 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues of reportable segment $2,537 $3,429
Loss on investment in RTI stock used to satisfy
indexed debt obligations (22) -
------ ------
Total Group revenues $2,515 $3,429
====== ======
Income (loss) for reportable segment $(68) $260
Items not allocated to segment:
Administrative expenses (13) (14)
Pension credits 248 186
Costs related to former business activities (44) (53)
Loss on investment in RTI stock used to satisfy
indexed debt obligations (22) -
------ ------
Total Group income from operations $101 $379
====== ======
</TABLE>
5. The method of calculating net income per common share for the Steel
Stock and Marathon Stock reflects the Board's intent that the separately
reported earnings and surplus of the U. S. Steel Group and the Marathon
Group, as determined consistent with the USX Restated Certificate of
Incorporation, are available for payment of dividends on the respective
classes of stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily correspond with
these amounts.
Basic net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and is based on the weighted
average number of common shares outstanding.
Diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
See Note 9, of the Notes to USX Consolidated Financial Statements for
the computation of income per share.
6. On March 31, 1999, USX irrevocably deposited with a trustee the entire
5.5 million common shares it owned in RTI International Metals, Inc. (RTI).
The deposit of the shares resulted in the satisfaction of USX's obligation
under its 6-3/4% Exchangeable Notes (indexed debt) due February 1, 2000.
Under the terms of the indenture, the trustee will exchange the RTI shares
for the notes at maturity. The notes are exchangeable for shares of RTI
common stock on a variable basis up to one share per note depending on the
market price of RTI common stock at maturity. Ownership of any shares not
required for satisfaction of the indexed debt will revert to USX.
As a result of the above transaction, USX recorded in the first
quarter of 1999 an extraordinary loss of $5 million, net of a $3 million
income tax benefit, representing prepaid interest expense and the write-off
of unamortized debt issue costs, and a pretax charge of $22 million,
representing
<PAGE> 69
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. (Continued)
the difference between the carrying value of the investment in RTI and
the carrying value of the indexed debt, which is included in gain (loss) on
disposal of assets. This transaction represents a noncash investing and
financing activity of $56 million, which was the carrying value of the
indexed debt at March 31, 1999.
Additionally, a $13 million credit to adjust the indexed debt to
settlement value at March 31, 1999, is included in net interest and other
financial costs.
In December 1996, USX had issued $117 million of notes indexed to the
common share price of RTI. At maturity, USX would have been required to
exchange the notes for shares of RTI common stock, or redeem the notes for
the equivalent amount of cash. Since USX's investment in RTI was
attributed to the U. S. Steel Group, the indexed debt was also attributed
to the U. S. Steel Group. USX had a 26% investment in RTI and accounted
for its investment using the equity method of accounting.
7. Income from operations includes net periodic pension credits of $88
million and $51 million in the second quarter of 1999 and 1998,
respectively, ($141 million and $102 million in the first six months of
1999 and 1998, respectively.) These pension credits are primarily noncash
and for the most part are included in selling, general and administrative
expenses.
In the second quarter of 1999, the U. S. Steel Group recognized a one-
time pretax settlement gain of $35 million, related mainly to pension costs
of employees who retired under the U. S. Steel Group 1998 voluntary early
retirement program. This noncash settlement gain is included in selling,
general and administrative expenses.
8. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
<TABLE>
<CAPTION>
(In millions)
-------------------------
June 30 December 31
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $128 $185
Semi-finished products 368 282
Finished products 217 182
Supplies and sundry items 55 49
---- ----
Total $768 $698
==== ====
</TABLE>
<PAGE> 70
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. The U. S. Steel Group participates in an agreement (the program) to
sell an undivided interest in certain accounts receivable. Payments are
collected from the sold accounts receivable; the collections are reinvested
in new accounts receivable for the buyers; and a yield, based on defined
short-term market rates, is transferred to the buyers. At June 30, 1999,
the amount sold under the program that had not been collected was $350
million, which will be forwarded to the buyers at the end of the agreement,
or in the event of earlier contract termination. If the U. S. Steel Group
does not have a sufficient quantity of eligible accounts receivable to
reinvest in for the buyers, the size of the program will be reduced
accordingly. The buyers have rights to a pool of receivables that must be
maintained at a level of at least 115% of the program size. In the event
of a change in control of USX, as defined in the agreement, the U. S. Steel
Group may be required to forward payments collected on sold accounts
receivable to the buyers.
10. At June 30, 1999, accounts receivable includes an estimated income tax
receivable from the Marathon Group of $24 million, determined in accordance
with the tax allocation policy discussed in Note 2.
11. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the U.
S. Steel Group involving a variety of matters including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the U. S. Steel Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The U. S. Steel Group is subject to federal, state and local laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At June 30, 1999, and December
31, 1998, accrued liabilities for remediation totaled $101 million and $97
million, respectively. It is not presently possible to estimate the
ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed.
For a number of years, the U. S. Steel Group has made substantial
capital expenditures to bring existing facilities into compliance with
various laws relating to the environment. In the first six months of 1999
and for the years 1998 and 1997, such capital expenditures totaled $13
million, $49 million and $43 million, respectively. The U. S. Steel Group
anticipates making additional such expenditures in the future; however, the
exact amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
<PAGE> 71
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
11. (Continued)
Guarantees by USX of the liabilities of affiliated entities of the U.
S. Steel Group totaled $87 million at June 30, 1999. In the event that any
defaults of guaranteed liabilities occur, USX has access to its interest in
the assets of the affiliates to reduce U. S. Steel Group losses resulting
from these guarantees. As of June 30, 1999, the largest guarantee for a
single affiliate was $59 million.
The U. S. Steel Group's contract commitments to acquire property,
plant and equipment at June 30, 1999, totaled $122 million compared with
$188 million at December 31, 1998.
12. On April 12, 1999, USX and Kobe Steel, Ltd. (Kobe Steel) announced
that they had entered into a letter of intent with Blackstone Capital
Partners II (Blackstone) to combine the steelmaking and bar producing
assets of USS/Kobe Steel Company (USS/Kobe) with companies controlled by
Blackstone, Republic Technologies International, Inc., Republic Engineered
Steels, Inc. and Bar Technologies, Inc. (collectively Republic). In
addition, on August 6, 1999, USX agreed to a $15 million equity
investment in Republic when the combination is consummated. USX
currently owns 50% of USS/Kobe and will own approximately 15% of
Republic. The seamless pipe business of USS/Kobe is excluded from this
transaction and will continue to operate as a joint venture
between USX and Kobe Steel.
The transaction was subject to numerous conditions, including financing.
As of the date of issuance of the accompanying financial statements, it was
uncertain whether several of these conditions would be resolved and the
transaction would be completed. Due to these uncertainties, neither USX
nor USS/Kobe recognized any financial effects of the transaction in the
second quarter 1999. On August 6, 1999, Republic received financing
commitments sufficient to complete the transaction, which is scheduled to
be closed on August 13, 1999.
The estimated fair value of USX's investment in Republic, based upon
preliminary information supplied by Republic, is approximately $80 million
less than USX's carrying value of its investment in the steelmaking and bar
producing assets of USS/Kobe. Based on the resolution of the uncertainties
and the anticipated closing of the transaction, USX expects to recognize an
estimated impairment of $80 million in the third quarter of 1999.
<PAGE> 72
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------
The U. S. Steel Group includes U. S. Steel, which is engaged in the
production, transportation and sale of steel mill products, coke, and taconite
pellets; the management of mineral resources; domestic coal mining; real estate
development; and engineering and consulting services. Certain business
activities are conducted through joint ventures and partially owned companies,
such as USS/Kobe Steel Company ("USS/Kobe"), USS-POSCO Industries ("USS-POSCO"),
PRO-TEC Coating Company ("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B
Partnership, and VSZ U. S. Steel, s. r.o. Management's Discussion and Analysis
should be read in conjunction with the U. S. Steel Group's Financial Statements
and Notes to Financial Statements. The discussion of Results of Operations
should be read in conjunction with the Supplemental Statistics provided on page
85.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of the U. S. Steel Group. These statements typically contain words
such as "anticipates," "believes," "estimates," "expects" or similar words
indicating that future outcomes are not known with certainty and subject to risk
factors that could cause these outcomes to differ significantly from those
projected. In accordance with "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, these statements are accompanied by cautionary
language identifying important factors, though not necessarily all such factors,
that could cause future outcomes to differ materially from those set forth in
forward-looking statements. For additional risk factors affecting the businesses
of the U. S. Steel Group, see Supplementary Data -- Disclosures About Forward-
Looking Statements in USX 1998 Form 10-K.
Results of Operations
- ---------------------
Revenues for the second quarter and first six months of 1999 and 1998 are
set forth in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales $1,303 $1,689 $2,549 $3,359
Income (loss) from affiliates (10) 28 (33) 43
Gain (loss) on disposal of assets 10 17 (2) 28
Other income (loss) 1 (1) 1 (1)
----- ----- ----- -----
Total Revenues $1,304 $1,733 $2,515 $3,429
</TABLE>
Total revenues decreased by $429 million and $914 million in the second
quarter and first six months of 1999, respectively, compared with the same
periods in 1998. The decreases primarily reflected lower average steel product
prices (prices decreased $53/ton and $46/ton in the second quarter and first six
months of 1999, respectively), lower shipment volumes (shipments decreased
309,000 tons and 861,000 tons in the second quarter and first six months of
1999, respectively), and lower income from affiliates.
<PAGE> 73
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Income from operations for the U. S. Steel Group for the second quarter and
first six months of 1999 and 1998 is set forth in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Segment income (loss) for U. S. Steel
Operations (a) $(9) $154 $(68) $260
Items not allocated to segment:
Pension credits 140 93 248 186
Administrative expenses (8) (5) (13) (14)
Costs related to former business activities (b) (20) (25) (44) (53)
Loss on investment in RTI stock used to satisfy
indexed debt obligations (c) - - (22) -
----- ----- ----- -----
Total Group income from operations $103 $217 $101 $379
===== ===== ===== =====
- -----
<FN>
(a) Includes income (loss) from the production and sale of steel mill
products, coke and taconite pellets; the management of mineral resources;
domestic coal mining; real estate development; and engineering and
consulting services.
(b) Includes the portion of postretirement benefit costs and certain
other expenses principally attributable to former business units of the
U. S. Steel Group.
(c) For further details, see Note 6 to the U. S. Steel Group Financial
Statements.
</TABLE>
Segment income for U. S. Steel operations
Segment income for U. S. Steel operations decreased $163 million and $328
million in the second quarter and first six months of 1999, respectively,
compared with the same periods in 1998. The decreases in segment income were
primarily due to lower average steel prices, lower shipments and lower income
from affiliates. Segment income for the first six months included a $10 million
charge for environmental accruals. Results in second quarter 1998 included a
favorable $30 million (net of charges and reserves) insurance litigation
settlement pertaining to the Gary (Ind.) Works No. 8 blast furnace explosion.
Steel product prices and shipment volumes continue to be negatively
affected by the ongoing effects of steel imports, and the continued weakness in
tubular and plate markets.
Items not allocated to segment
Pension credits associated with pension plan assets and liabilities
allocated to pre-1987 retirees, former businesses, and certain corporate
activities are not included in segment income for U. S. Steel operations. These
pension credits, which are primarily noncash, totaled $140 million and $248
million in the second quarter and first six months of 1999, respectively,
compared to $93 million and $186 million in the same period in 1998. Pension
credits in the second quarter and first six months of 1999 included $35 million
for a one-time favorable settlement primarily related to the 1998 voluntary
early retirement program for salaried employees completed during the second
quarter 1999.
Pension credits, combined with pension costs included in segment income for
U. S. Steel operations, resulted in net pension credits of $88 million and $140
<PAGE> 74
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
million in the second quarter and first six months of 1999, respectively,
compared to $48 million and $97 million in the same periods in 1998. Future net
pension credits can be volatile depending upon the future marketplace
performance of plan assets, changes in actuarial assumptions regarding such
factors as a selection of a discount rate and rate of return on assets, changes
in the amortization levels of transition amounts or prior period service costs,
plan amendments affecting benefit payout levels and profile changes in the
beneficiary populations being valued. Changes in any of these factors could
cause net pension credits to change. To the extent net pension credits decline
in the future, income from operations would be adversely affected. For
additional information on pensions, see the discussion of "Outlook" below.
Net interest and other financial costs for the second quarter and first six
months of 1999 and 1998 are set forth in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net interest and other financial costs $20 $22 $28 $50
Less:
Favorable (unfavorable) adjustments to
carrying value of indexed debt (a) - - 13 (4)
----- ----- ----- -----
Net interest and other financial costs
adjusted to exclude above item $20 $22 $41 $46
===== ===== ===== =====
- -----
<FN>
(a) For discussion, see Note 6 to the U. S. Steel Group Financial
Statements.
</TABLE>
Adjusted net interest and other financial costs decreased by $2 million and
$5 million in the second quarter and first six months of 1999, respectively, as
compared with the same periods in 1998.
The provision for estimated income taxes in the second quarter and first
six months of 1999 decreased compared to the same periods in 1998 due to a
decline in income from operations. The provision for estimated income taxes for
the second quarter and first six months of 1998 included a $9 million favorable
foreign tax adjustment as a result of a favorable resolution of foreign tax
litigation.
The extraordinary loss on extinguishment of debt of $5 million (net of $3
million income tax benefit) in the first six months of 1999 represents prepaid
interest expense and the write-off of unamortized debt issue costs resulting
from the satisfaction of USX's obligation of its indexed debt. For further
discussion, see Note 6 to the U. S. Steel Group Financial Statements.
Net income decreased $81 million and $182 million in the second quarter and
first six months of 1999, respectively, compared to the same periods in 1998,
primarily reflecting the factors discussed above.
Operating Statistics
- --------------------
Second quarter and first six months of 1999 steel shipments of 2.5 million
tons and 4.9 million tons, decreased 11% and 15%, respectively, from the same
<PAGE> 75
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
periods in 1998. Raw steel production in the second quarter of 1999 of 3.1
million tons, increased 7% from the same period in 1998. Raw steel production in
the first six months of 1999 of 5.8 million tons, decreased 3% from the same
period in 1998. Raw steel capability utilization in the second quarter of 1999
averaged 96.9%, compared to 90.9% in the same period in 1998. Raw steel
capability utilization in the first six months of 1999 averaged 92.0%, compared
to 95.3% in the same period in 1998. Steel shipments, production and raw steel
capability utilization in the first six months of 1999 continued to be
negatively impacted by the ongoing effects of steel imports and weak plate and
tubular markets.
Cash Flows
- ----------
Net cash provided from operating activities in the first six months of 1999
was $124 million, compared with $242 million in the same period in 1998. The
first six months of 1998 included proceeds of $38 million for the insurance
litigation settlement pertaining to the 1995 Gary Works No. 8 blast furnace
explosion. Excluding this item, net cash provided from operating activities
decreased $80 million due mainly to decreased profitability.
Capital expenditures in the first six months of 1999 were $153 million,
compared with $136 million in the same period in 1998. Contract commitments for
capital expenditures at June 30, 1999, totaled $122 million, compared with $188
million at year-end 1998.
Net cash used in investments in equity affiliates in the first six months
of 1998 of $63 million primarily reflects funding for entry into a joint venture
in Slovakia with VSZ a.s.
Financial obligations (excluding the noncash satisfaction of the indexed
debt) increased by $94 million in the first six months of 1999. Financial
obligations consist of the U. S. Steel Group's portion of USX debt and preferred
stock of a subsidiary attributed to both groups, as well as debt and financing
agreements specifically attributed to the U. S. Steel Group. The increase in
financial obligations resulted from capital expenditures and dividend payments
exceeding cash from operating activities.
Derivative Instruments
See Quantitative and Qualitative Disclosures About Market Risk for
discussion of derivative instruments and associated market risk for U. S. Steel
Group.
Liquidity
For discussion of USX's liquidity and capital resources, see Management's
Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and
Liquidity.
Environmental Matters, Litigation and Contingencies
- ---------------------------------------------------
The U. S. Steel Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. In recent years, these expenditures have
been mainly for process changes in order to meet Clean Air Act obligations,
although ongoing compliance costs have also been significant. To the extent
these expenditures, as with all costs, are not ultimately reflected in the
prices of the U. S. Steel Group's products and services, operating results will
be adversely affected. The U. S. Steel Group believes that all of its domestic
competitors are subject to similar environmental laws and regulations. However,
the specific impact on each competitor may vary depending on a number of
factors, including the age and location of its operating facilities, marketing
areas, production processes and the specific products and services it provides.
To the extent that competitors are not
<PAGE> 76
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
required to undertake equivalent costs in their operations, the competitive
position of the U. S. Steel Group could be adversely affected.
USX has been notified that it is a potential responsible party (``PRP'') at
25 waste sites related to the U. S. Steel Group under the Comprehensive
Environmental Response, Compensation and Liability Act (``CERCLA'') as of June
30, 1999. In addition, there are 12 sites related to the U. S. Steel Group
where USX has received information requests or other indications that USX may be
a PRP under CERCLA but where sufficient information is not presently available
to confirm the existence of liability or make any judgment as to the amount
thereof. There are also 32 additional sites related to the U. S. Steel Group
where remediation is being sought under other environmental statutes, both
federal and state, or where private parties are seeking remediation through
discussions or litigation. At many of these sites, USX is one of a number of
parties involved and the total cost of remediation, as well as USX's share
thereof, is frequently dependent upon the outcome of investigations and remedial
studies. The U. S. Steel Group accrues for environmental remediation activities
when the responsibility to remediate is probable and the amount of associated
costs is reasonably determinable. As environmental remediation matters proceed
toward ultimate resolution or as additional remediation obligations arise,
charges in excess of those previously accrued may be required.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the U. S. Steel Group
involving a variety of matters, including laws and regulations relating to the
environment, certain of which are discussed in Note 11 to the U. S. Steel Group
Financial Statements. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group Financial
Statements. However, management believes that USX will remain a viable and
competitive enterprise even though it is possible that these contingencies could
be resolved unfavorably to the U. S. Steel Group.
Outlook
- -------
Shipment volumes in the third quarter for U. S. Steel Group are expected to
be higher than second quarter 1999. However, the favorable effects of increased
shipments are expected to be more than offset by lower price realizations due to
continued unfavorable product mix, including a substantial amount of semi-
finished sales, and continued weakness in plate and tubular markets. The third
quarter will also be impacted by higher benefit costs associated with the
recently ratified labor contract and unfavorable manufacturing costs related to
planned outages. In recent years, demand for steel in the United States has
been at high levels. Any weakness in the United States economy for capital goods
or consumer durables could further adversely impact U. S. Steel Group's product
prices and shipment levels.
On June 25, 1999, U. S. Steel reached an agreement with the United Steel
Workers of America ("USWA") on a new five-year labor contract covering
approximately 14,500 employees effective August 1, 1999. The union membership
ratified the contract on August 6, 1999. The new labor contract, which includes
$2.00 in hourly wage increases phased in over the term of the agreement
beginning in 2000 as well as pension and other benefit improvements for active
and retired employees and spouses, will result in higher labor and benefit costs
for the U. S. Steel Group each year throughout the term of the contract. Net
pension credits for the U. S. Steel Group are estimated to be reduced by
approximately $5 million per month beginning August 1, 1999 for the balance of
the year. As a result of the pension changes in the new labor contract, net
pension credits for 1999 are now expected to total approximately $225 million,
which includes the $35 million for the one-time favorable settlement recorded in
the second quarter of 1999. Management believes that this agreement is
competitive with labor agreements reached by U. S. Steel's major domestic
integrated competitors and thus does not believe that U. S. Steel's competitive
position with regard to such other competitors will be materially affected.
<PAGE> 77
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
During the third quarter of 1999, a number of minor outages are planned at
various U. S. Steel Group facilities that in aggregate are expected to result in
higher manufacturing costs.
Steel imports to the United States accounted for an estimated 25%, 30% and
24% of the domestic steel market in the first four months of 1999, and for the
years 1998 and 1997, respectively. Steel imports of cut-to-length plate and
cold-rolled increased 28% and 22%, respectively, in the first four months of
1999, compared to the same period in 1998.
On September 30, 1998, USX joined with 11 other producers, the USWA and the
Independent Steelworkers Union ("ISU") to file trade cases against Japan,
Russia, and Brazil. Those filings contended that millions of tons of unfairly
traded hot-rolled carbon sheet products have caused serious injury to the
domestic steel industry through rapidly falling prices and lost business. In the
case against Japan, on April 28, 1999, the U.S. Department of Commerce
("Commerce"), announced final antidumping ("AD") duty determinations and, on
June 11, 1999, the U.S. International Trade Commission ("ITC") announced its
final determination that the imports from Japan were injuring the domestic
industry. The final AD order against Japan was issued on June 23, 1999. In the
cases against Brazil, on July 7, 1999, Commerce announced final countervailing
("CVD") and AD duty determinations and, contemporaneously, announced that it had
entered into agreements with Brazil to
suspend the investigations. In the case against Russia, on July 13, 1999,
Commerce announced final AD duty determinations and, contemporaneously,
announced that it had entered into an agreement with Russia to suspend the
investigation. In addition, Commerce announced that it had also entered into a
comprehensive agreement concerning all steel product imports from Russia except
for plate products and hot-rolled products. Plate products from Russia are
subject to a suspension agreement signed in 1997. USX is evaluating whether to
appeal the recently announced suspension agreements with Brazil and Russia.
On February 16, 1999, USX joined with four other producers and the USWA to
file trade cases against eight countries (Japan, South Korea, India, Indonesia,
Macedonia, the Czech Republic, France, and Italy) concerning imports of cut-to-
length plate products. AD cases were filed against all the countries and CVD
duty cases were filed against six of the countries. On April 2, 1999, the ITC
issued its preliminary determination that the domestic industry was being
injured or threatened with injury as the result of imports from six of the
countries. The ITC determined that the volume of imports from Macedonia and the
Czech Republic were negligible and had declined in importance in the United
States market relative to the other countries. On July 20, 1999, Commerce
announced preliminary AD and CVD duty determinations. The preliminary injury
determination and the preliminary duty determinations are subject to further
investigation by the ITC and Commerce.
On June 2, 1999, USX joined with eight other producers and the USWA and the
ISU to file trade cases against twelve countries (Argentina, Brazil, China,
Indonesia, Japan, Russia, South Africa, Slovakia, Taiwan, Thailand, Turkey, and
Venezuela) concerning imports of cold-rolled products. AD cases were filed
against all the countries and CVD duty cases were filed against Brazil,
Indonesia, Thailand, and Venezuela. On July 19, 1999, the ITC issued its
preliminary determination that the domestic industry was being injured or
threatened with injury as the result of imports from all of the countries. The
ITC, by a divided vote, decided to discontinue the CVD investigations of
subsidized imports from Indonesia, Thailand, and Venezuela. Commerce is
expected to announce preliminary duty determinations later in the year. These
cases are subject to further investigation by both the ITC and Commerce.
On June 30, 1999, USX joined with four other producers and the USWA to file
trade cases against five countries (the Czech Republic, Japan, Mexico, Romania,
and
<PAGE> 78
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
South Africa) concerning imports of large and small diameter carbon and alloy
standard, line, and pressure pipe. On July 20, 1999, Commerce announced its
decision to initiate an investigation and the ITC's preliminary staff hearing
was conducted on July 21, 1999. The ITC's preliminary injury determination is
expected to be announced in mid-August and, assuming a preliminary determination
of injury, Commerce is expected to announce preliminary duty determinations
later in the year. Any preliminary injury determination and preliminary duty
determinations are subject to further investigation by the ITC and Commerce.
USX intends to file additional antidumping and countervailing duty
petitions if unfairly traded imports adversely impact, or threaten to adversely
impact, the results of the U. S. Steel Group.
The forgoing discussion includes statements concerning anticipated steel
pricing, product mix, and shipment levels are forward-looking and are based upon
assumptions as to future product demand, prices and mix, and levels of steel
production capability, production and shipments. These forward-looking
statements can be affected by imports, domestic and international economies,
domestic production capacity, and customer demand. In the event these
assumptions prove to be inaccurate, actual results may differ significantly from
those presently anticipated.
On April 12, 1999, USX and Kobe Steel, Ltd. (Kobe Steel) announced that they
had entered into a letter of intent with Blackstone Capital Partners II
(Blackstone) to combine the steelmaking and bar producing assets of USS/Kobe
Steel Company (USS/Kobe) with companies controlled by Blackstone, Republic
Technologies International, Inc., Republic Engineered Steels, Inc. and Bar
Technologies, Inc. (collectively Republic). In addition, on August 6, 1999, USX
agreed to a $15 million equity investment in Repubic when the combination is
consummated. USX currently owns 50% of USS/Kobe and will own approximately 15%
of Republic. The seamless pipe business of USS/Kobe is excluded from this
transaction and will continue to operate as a joint venture between USX and Kobe
Steel.
The transaction was subject to numerous conditions, including financing.
As of the date of the issuance of the accompanying financial statements, it was
uncertain whether several of these conditions would be resolved and the
transaction would be completed. Due to these uncertainties, neither USX nor
USS/Kobe recognized any financial effects of the transaction in the second
quarter 1999. On August 6, 1999, Republic received financing commitments
sufficient to complete the transaction, which is scheduled to be closed on
August 13, 1999.
The estimated fair value of USX's investment in Republic, based upon
preliminary information supplied by Republic, is approximately $80 million less
than USX's carrying value of its investment in the steelmaking and bar producing
assets of USS/Kobe. Based on the resolution of the uncertainties and the
anticipated closing of the transaction, USX expects to recognize an estimated
impairment of $80 million in the third quarter of 1999. The statement with
respect to the amount of the estimated impairment is forward-looking and is
based on a number of assumptions including but not limited to fair value
determination of Republic, equity investment and asset allocation. In the
event these assumptions prove to be inaccurate, the actual impairment may differ
significantly from the amount presently anticipated.
If the transaction closes as anticipated, Republic has stated that it
expects to incur operating losses through 2000, which will include restructuring
charges associated with the consolidation of the combined operations. USX will
recognize its share of any such losses under the equity method of accounting.
<PAGE> 79
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Year 2000 Readiness Disclosure
- ------------------------------
A multi-functional Year 2000 task force continues to execute a preparedness
plan which addresses readiness requirements for business computer systems,
technical infrastructure, end-user computing, third parties, manufacturing,
environmental operations, systems products produced and sold, and dedicated R&D
test facilities. The U. S. Steel Group is executing a Year 2000 readiness plan
which includes:
. prioritizing and focusing on those computerized and automated systems
and processes critical to the operations in terms of material safety,
operational, environmental, quality and financial risk to the company.
. allocating and committing appropriate resources to fix the problem.
. communicating with, and aggressively pursuing, critical third parties
to help ensure the Year 2000 readiness of their products and services
through use of mailings, telephone contacts, on-site assessments and
the inclusion of Year 2000 readiness language in purchase orders and
contracts.
. performing rigorous Year 2000 tests of critical systems.
. participating in, and exchanging Year 2000 information with industry
trade associations, such as the American Iron & Steel Institute,
Association of Iron & Steel Engineers and the Steel Industry Systems
Association.
. engaging qualified outside engineering and information technology
consulting firms to assist in the Year 2000 impact assessment and
readiness effort.
State of Readiness
The Year 2000 inventory and date impact assessment activities for both
information technology (IT) and non-IT systems/processes within the U. S. Steel
Group are complete. IT systems/processes are 98% Year 2000 ready as of June 30,
1999, and the non-IT area is 99% ready. Progress on achieving Year 2000
readiness for both critical and non-critical systems/processes is ahead of the
stated U. S. Steel Group objectives. All systems/processes for IT and non-IT are
targeted to be Year 2000 ready, including testing on the exchange of information
among systems/processes (integration testing), by the end of September, 1999.
There are several systems/processes which will be replaced and/or upgraded with
third-party Year 2000 ready products and services during the third quarter,
1999; however, implementation schedules have been established for such
systems/processes.
The remaining Year 2000 efforts in 1999 will primarily focus on (1)
tracking and verifying the readiness of third parties critical to the business
operations, (2) reviewing the effectiveness of the contingency plans that have
been developed, (3) establishing Year 2000 crisis management command centers,
(4) preparing and communicating final plans to the workforce and affected
entities for the transition to the new century and (5) conducting the final
round of Year 2000 assessments by the internal audit team.
<PAGE> 80
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
The following table provides the percent of completion for the inventory of
systems and processes that may be affected by the year 2000 ("Y2K Inventory"),
the analysis performed to determine the Year 2000 date impact on inventoried
systems and processes ("Y2K Impact Assessment") and the year 2000 readiness of
the U. S. Steel Group`s year 2000 inventory ("Y2K Readiness of Overall
Inventory"). The percent of completion for Y2K Readiness of Overall Inventory
includes all inventory items not date impacted, those items already Year 2000
ready and those corrected and made Year 2000 ready through the
renovation/replacement, testing and implementation activities.
<TABLE>
<CAPTION>
Percent Completed
Y2K
Y2K Readiness
Impact of
Y2K Assess- Overall
As of June 30, 1999 Inventory ment Inventory
------ ------ ------
<S> <C> <C> <C>
Information Technology 100% 100% 98%
Non-Information Technology 100% 100% 99%
</TABLE>
Third Parties
The U. S. Steel Group continues to review and track the Year 2000 readiness of
its third party relationships (including, but not limited to outside processors,
process control systems and hardware suppliers, telecommunication providers, and
transportation carriers) who are critical to its operations. The majority of
contacts have been made with critical third parties to determine if they will be
able to provide their products and services to the U. S. Steel Group after the
Year 2000. An aggressive follow-up process with those third parties not
responding or returning an unacceptable response is underway. Communications
with U. S. Steel Group's third parties is an on-going process which includes
mailings, telephone contacts and on-site visits. If it is determined that there
is a significant risk with a third party, an effort will be made to work with
those third parties to resolve the issue, or a new provider of the same products
or services will be investigated and secured. As of June 30, 1999, the U. S.
Steel Group has sent out approximately 900 inquiries and over 92% have
responded. Approximately 490 of these third parties are considered critical
vendors/suppliers or outside steel processors. The response rate for the
critical third parties is at 100%. Follow-up phone assessments have been made
on 74% (362) of the critical third parties. For over 95% of those assessed to
date, there is a medium to high level of assurance that the critical third
parties will be Year 2000 ready. In addition, on-site Year 2000 assessments have
also been made on several critical third parties to verify the effectiveness and
accuracy of their responses. Other on-site assessments are planned, as
conditions warrant. Additional phone and/or on-site assessments of critical
third parties, as deemed necessary, are scheduled for completion by the end of
third quarter, 1999; however, plans are to continue to monitor the readiness of
critical third parties for the remainder of 1999.
<PAGE> 81
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
The Costs to Address Year 2000 Issues
The current estimated cost associated with Year 2000 readiness, is
approximately $29 million, which includes $16 million in incremental cost. Total
costs incurred as of June 30, 1999, were $19 million, including $8 million of
incremental costs. In the third quarter, the estimated costs will be re-
evaluated in consideration of the remaining project activities including the
present state of readiness, implementation of contingency plans, continued
monitoring of critical third parties, preparations and transition to the new
century, and internal assessments of Year 2000 readiness.
Year 2000 Risks to the Company
The most reasonably likely worst case Year 2000 scenario would be the
inability of third party suppliers, such as utility providers, telecommunication
companies, outside processors, and other critical suppliers, to continue
providing
their products and services. This could pose the greatest material safety,
operational, environmental, quality and/or financial risk to the company.
In addition, the lack of accurate and timely Year 2000 date impact
information from suppliers of automation and process control systems and
processes is a concern to the U. S. Steel Group. Without timely and reliable
information from suppliers, specifically on embedded chip technology, schedules
for attaining readiness can be impacted and some Year 2000 problems could go
undetected during the transition to the year 2000.
Contingency Planning
Since no one can predict with certainty the outcome of this unprecedented
Year 2000 event, the U. S. Steel Group's primary strategy and defense against
Year 2000 related problems is to diligently continue to mitigate risks through
review and extensive testing of its critical systems/processes. From a Year
2000 contingency planning perspective, contingency plans have been developed and
documented to provide continuity in the key business operations and corollary
customer service. These plans were developed by contingency planning work
groups representing each business/producing location with an executive steering
committee overseeing the development process.
The contingency planning strategies generally being employed include; (1)
idle or shut down facilities for a short duration (minutes/hours in most cases
as opposed to days) over the critical period during the change of the century to
protect personnel and safeguard equipment and facilities, (2) curtail the
processing of hot metal during the highest period of risk, (3) schedule extra
key personnel over the critical turn of the century period to prepare the
processing environment, to monitor conditions and to evaluate when it is safe to
resume normal operations, (4) procure auxiliary power generation for critical
functions with consideration to both the potential impact of Year 2000 and
extreme inclement weather conditions, (5) establish strategically located
command centers with appropriate communication facilities to collect and
disseminate important information and to activate emergency escalation
procedures, (6) review and adjust inventory levels as business conditions
dictate to provide continuity in customer service, and (7) continue to evaluate
the readiness of regular and alternate third party suppliers and service
providers to help assure the availability and continuity of critical products
and services.
During the remainder of 1999, the contingency plans will be adjusted and
tested, as applicable, as business conditions warrant.
This discussion includes forward-looking statements of the U. S. Steel
Group's efforts and management's expectations relating to Year 2000 readiness.
The Steel
<PAGE> 82
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Group's ability to achieve Year 2000 readiness and the level of incremental
costs associated therewith, could be adversely impacted by, among other things,
the
availability and cost of programming and testing resources, vendors' ability to
install or modify proprietary hardware and software and unanticipated problems
identified in the ongoing Year 2000 readiness review. Also, the U. S. Steel
Group's ability to mitigate Year 2000 risks could be adversely impacted by the
effectiveness of contingency plans.
Accounting Standard
- --------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This new standard requires recognition of
all derivatives as either assets or liabilities at fair value. This new
standard may result in additional volatility in both current period earnings and
other comprehensive income as a result of recording recognized and unrecognized
gains and losses resulting from changes in the fair value of derivative
instruments. At adoption this new standard requires a comprehensive review of
all outstanding derivative instruments to determine whether or not their use
meets the hedge accounting criteria. Upon adoption, there may be derivative
instruments employed by USX that do not meet all of the designated hedge
criteria and they will be reflected in income on a mark-to-market basis. Based
upon the strategies currently used by USX and the level of activity related to
forward exchange contracts and commodity-based derivative instruments in recent
periods, USX does not anticipate the effect of adoption to have a material
impact on either financial position or results of operations for the U. S. Steel
Group. The effective date of SFAS No. 133 was amended by SFAS No. 137. USX
plans to adopt the standard effective January 1, 2001, as required.
<PAGE> 83
U. S. STEEL GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% decreases in commodity prices for open derivative
commodity instruments as of June 30, 1999 are provided in the following
table(a):
<TABLE>
<CAPTION>
Incremental Decrease
in Pretax Income
Assuming a Hypothetical
Price Change of(a)
(Dollars in millions) 10% 25%
- --------------------------------------------------------------------------------
<S> <C> <C>
Derivative Commodity Instruments
U. S. Steel Group
Natural gas (price decrease) $2.5 $6.3
Zinc (price decrease) 3.0 7.6
Tin (price decrease) .4 .7
Nickel (price decrease) .1 .2
<FN>
(a) Gains and losses on derivative commodity instruments are generally
offset by price changes in the underlying commodity. Effects of these
offsets are not reflected in the sensitivity analyses. Amounts reflect
the estimated incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open contract position
at June 30, 1999. U. S. Steel Group management evaluates its portfolio of
derivative commodity instruments on an ongoing basis and adds or revises
strategies to reflect anticipated market conditions and changes in risk
profiles. Changes to the portfolio subsequent to June 30, 1999, would
cause future pretax income effects to differ from those presented in the
table.
</TABLE>
<PAGE> 84
U. S. STEEL GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Interest Rate Risk
- ------------------
As of June 30, 1999, the discussion of the U. S. Steel Group's interest
rate risk has not changed materially from that presented in Quantitative and
Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K.
Foreign Currency Exchange Rate Risk
- -----------------------------------
As of June 30, 1999, the U. S. Steel Group had no material exposure to
foreign currency exchange rate risk.
Equity Price Risk
- -----------------
USX was subject to equity price risk resulting from its issuance in
December 1996 of $117 million of 6 3/4% Exchangeable Notes due February 1, 2000
("indexed debt"). However, on March 31, 1999, USX irrevocably deposited with a
trustee the entire 5.5 million shares it owned in RTI. The deposit of shares
resulted in the satisfaction of USX's obligation under the indexed debt. Under
the terms of the indenture, the trustee will exchange the RTI shares for the
notes at maturity. USX is no longer exposed to any negative risks associated
with changes in the value of RTI common stock. For further discussion, see Note
6 to the U.S. Steel Group Financial Statements.
Safe Harbor
- -----------
The U. S. Steel Group's Quantitative and Qualitative Disclosures About
Market Risk include forward-looking statements with respect to management's
opinion about risks associated with the U. S. Steel Group's use of derivative
instruments. These statements are based on certain assumptions with respect to
market prices and industry supply and demand for steel products and certain raw
materials. To the extent that these assumptions prove to be inaccurate, future
outcomes with respect to the U. S. Steel Group's hedging programs may differ
materially from those discussed in the forward-looking statements.
<PAGE> 85
<TABLE>
<CAPTION>
U.S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------
Second Quarter Six Months
Ended June 30 Ended June 30
(Dollars in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $1,304 $1,733 $2,515 $3,429
INCOME (LOSS) FROM OPERATIONS
U. S. Steel Operations (a) (b) $(9) $154 $(68) $260
Items not allocated to segment:
Pension Credits (c) 140 93 248 186
Administrative Expenses (8) (5) (13) (14)
Cost related to former business activities (d) (20) (25) (44) (53)
Loss on settlement of indexed debt with
RTI International Metals, Inc. Stock - - (22) -
---- ---- ---- ----
Total U. S. Steel Group 103 217 101 379
PENSION COSTS INCLUDED IN U. S. STEEL OPERATIONS $52 $45 $108 $89
CAPITAL EXPENDITURES $74 $79 $153 $136
OPERATING STATISTICS
Average steel price per ton $424 $477 $430 $476
Steel Shipments (e) 2,548 2,857 4,929 5,790
Raw Steel-Production (e) 3,091 2,902 5,840 6,045
Raw Steel-Capability Utilization (f) 96.9% 90.9% 92.0% 95.3%
Total iron ore shipments (e) 4,823 4,989 6,186 6,772
- ----------
<FN>
(a) Results in the first six months of 1999 included a $10 million
charge for environmental accruals. Results in second quarter and the
first six months of 1998 included approximately $30 million (net of
related charges and reserves) for the settlement of litigation against
company's property insurers to recover losses related to a 1995 explosion
at the Gary Works No. 8 blast furnace.
(b) Includes the production and sale of steel products, coke and
taconite pellets; domestic coal mining; the management of mineral
resources; engineering and consulting services; and equity income from
joint ventures and partially owned companies, such as USS/Kobe Steel
Company, USS-POSCO Industries, PRO-TEC Coating Company, Transtar Inc.,
and until March 31, 1999 RTI International Metals, Inc. (formerly RMI
Titanium Company). Also includes results of real estate development and
management, and leasing and financing activities.
(c) Includes $35 million for a pension settlement gain primarily related
to the early retirement program completed during the second quarter 1999.
(d) Includes other postretirement benefit costs and certain other
expenses principally attributable to former business units of the U. S.
Steel Group.
(e) Thousands of net tons
(f) Based on annual raw steel production capability of 12.8 million
tons.
</TABLE>
<PAGE> 86
Part II - Other Information
- ----------------------------
Item 1. LEGAL PROCEEDINGS
Marathon Group
Posted Price Litigation
The Marathon Group, alone or with other energy companies, has
been named in a number of lawsuits in State and Federal courts
alleging various causes of action related to crude oil royalty
payments based on posted prices, including underpayment of royalty
interests, underpayment of severance taxes, antitrust violations, and
violation of the Texas common purchaser statue. Plaintiffs in these
actions include governmental entities and private entities or
individuals, and some seek class action status. All of these cases
are in various states of preliminary activities. No class
certification has been determined as to Marathon in any case to date.
During November 1997, Marathon and over twenty other defendants
entered into a proposed class settlement agreement covering antitrust
and contract claims from January 1, 1986, through September 30, 1997,
excluding federal and Indian royalty claims, common purchaser claims
and severance tax claims. A new settlement agreement was filed with
the U.S. District Court in Texas on June, 26, 1998, which replaces the
November 1997 Settlement Agreement. The new settlement agreement
omits from the settlement class all State entities which receive
royalty payments and only covers private claimants. It will settle
all private claims, subject to opt-outs, for a period from January 1,
1986 to September 30, 1998. The agreement was approved by the Court
in April 1999. The approval of the settlement has been appealed to
the 5th Circuit Court of Appeals.
Marathon and approximately 20 other oil companies have settled a
claim by the state of Texas that the oil companies allegedly had
violated Texas's common purchaser statute and underpaid royalties on
oil produced from state lands. Under the settlement, the companies
will pay a total of $12.6 million.
Multi-media
In July, the U.S. Environmental Protection Agency ("EPA") served
MAP with one Notice of Violation and two Findings of Violation in
connection with its multimedia inspection of the Detroit Refinery.
These informal action notices allege violations of the Michigan State
Implementation Plan and the EPA New Source Performance Standards and
National Emission Standards for Hazardous Air Pollutants for benzene.
MAP has an opportunity to contest the factual and legal basis for the
allegations prior to the EPA taking enforcement action.
Other Environmental Cases
In July 1999, Speedway SuperAmerica LLC was assessed a
$112,000 penalty by the West Virginia Division of Environmental
Protection for the Resource Conservation and Recovery Act violations
including, among other things, the storing of ignitable and hazardous
waste and failing to correctly label hazardous waste containers and
properly characterize all waste.
<PAGE> 87
At the Robinson refinery the Department of Justice filed a
civil complaint in February 1999, alleging violation of the Clean Air
Act with respect to benzene releases at the Robinson refinery.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held April 27, 1999. In
connection with the meeting, proxies were solicited pursuant to the
Securities Exchange Act. The following are the voting results on
proposals considered and voted upon at the meeting, all of which were
described in the proxy statement.
1. All nominees for director listed in the proxy statement were elected.
2. PricewaterhouseCoopers LLP was elected as the independent accountants
for 1999. (For, 356,025,355; against, 683,304; abstained, 1,415,852).
<PAGE> 88
Part II - Other Information (Continued):
- ---------------------------
Item 5. OTHER INFORMATION (Continued)
Marathon Group
SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF MARATHON OIL COMPANY
Supplementary Data
---------------------------------------------------------------------
(Unaudited)
The following summarized consolidated financial information of Marathon Oil
Company, a wholly owned subsidiary of USX, is included in this Form 10-Q in
satisfaction of the reporting obligation of Marathon which has debt securities
registered under the Securities Exchange Act. All such securities are
guaranteed by USX.
<TABLE>
<CAPTION>
(In millions)
-------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
INCOME DATA:
<S> <C> <C> <C> <C>
Revenues $5,480 $5,524 $10,322 $11,026
Income from operations 415 460 823 868
Net income 143 148 254 321
</TABLE>
<TABLE>
<CAPTION>
(In millions)
-----------------------
June 30 December 31
1999 1998
-------- -----------
BALANCE SHEET DATA:
<S> <C> <C>
Assets:
Current assets $5,093 $4,742
Noncurrent assets 11,286 11,420
------ ------
Total assets $16,379 $16,162
====== ======
Liabilities and Stockholder's Equity:
Current liabilities $2,430 $2,543
Noncurrent liabilities 9,353 9,428
Preferred stock of subsidiary 10 17
Minority interest in consolidated subsidiary 1,744 1,590
Stockholder's equity 2,842 2,584
------- -------
Total liabilities and stockholder's equity $16,379 $16,162
======= =======
</TABLE>
<PAGE> 89
Part II - Other Information (Continued):
- ----------------------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 USX Restated Certificate of
Incorporation dated
May 1, 1999.................
3.2 USX By-Laws, effective as of
May 1, 1999................
4.1 Amended and Restated Rights
Agreement.................. Incorporated by reference
to USX's Form 8 Amendment to
Form 8-A filed on October 9,
1992 (File No. 1-5153).
10(h) Amended and Restated Limited
Liability Agreement of Marathon
Ashland Petroleum LLC, dated as
of December 31, 1998.
10(i) Amendment No. 1 dated as of
December 31, 1998, to the Put/Call
Registration Rights and Standstill
Agreement dated as of January 1, 1998
of Marathon Ashland Petroleum LLC.
12.1 Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred
Stock Dividends
12.2 Computation of Ratio of Earnings to Fixed Charges
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
NONE
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 chief accounting officer thereunto duly authorized.
USX CORPORATION
By /s/ Kenneth L. Matheny
Kenneth L. Matheny
Vice President &
Comptroller
August 13, 1999
Exhibit 12.1
<TABLE>
<CAPTION>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
----------------------------------------------------------
(Dollars in Millions)
Six Months
Ended Year Ended December 31
June 30 --------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Portion of rentals
representing interest $49 $50 $105 $82 $78 $76 $83
Capitalized interest 20 23 46 31 11 13 58
Other interest and fixed
charges 168 150 328 312 382 452 456
Pretax earnings which would
be required to cover
preferred stock dividend
requirements of parent 7 8 15 20 36 46 49
---- ---- ---- ---- ---- ---- ----
Combined fixed charges
and preferred stock
dividends (A) $244 $231 $494 $445 $507 $587 $646
==== ==== ==== ==== ==== ==== ====
Earnings-pretax income
with applicable
adjustments (B) $949 $1265 $1662 $1745 $1837 $877 $1300
==== ==== ==== ==== ==== ==== ====
Ratio of (B) to (A) 3.89 5.48 3.36 3.92 3.62 1.49 2.01
==== ==== ==== ==== ==== ==== ====
</TABLE>
Exhibit 12.2
<TABLE>
<CAPTION>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
-------------------------------------------------
(Dollars in Millions)
Six Months
Ended Year Ended December 31
June 30 --------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Portion of rentals
representing interest $49 $50 $105 $82 $78 $76 $83
Capitalized interest 20 23 46 31 11 13 58
Other interest and fixed
charges 168 150 328 312 382 452 456
---- ---- ---- ---- ---- ----- ----
Total fixed charges (A) $237 $223 $479 $425 $471 $541 $597
==== ==== ==== ==== ==== ==== ====
Earnings-pretax income
with applicable
adjustments (B) $949 $1265 $1662 $1745 $1837 $877 $1300
==== ==== ==== ==== ==== ==== ====
Ratio of (B) to (A) 4.00 5.67 3.47 4.11 3.90 1.62 2.18
==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 99
<SECURITIES> 0
<RECEIVABLES> 1697
<ALLOWANCES> 8
<INVENTORY> 2607
<CURRENT-ASSETS> 4843
<PP&E> 29355
<DEPRECIATION> 16632
<TOTAL-ASSETS> 21600
<CURRENT-LIABILITIES> 3606
<BONDS> 4059
182
3
<COMMON> 397<F1>
<OTHER-SE> 6119
<TOTAL-LIABILITY-AND-EQUITY> 21600
<SALES> 12809
<TOTAL-REVENUES> 12820
<CGS> 11917
<TOTAL-COSTS> 11917
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 174
<INCOME-PRETAX> 472
<INCOME-TAX> 173
<INCOME-CONTINUING> 299
<DISCONTINUED> 0
<EXTRAORDINARY> 5
<CHANGES> 0
<NET-INCOME> 294
<EPS-BASIC> 0<F2>
<EPS-DILUTED> 0<F3>
<FN>
<F1>Consists of Marathon Stock issued, $309; Steel Stock issued, $88.
<F2>Basic earnings per share applicable to Marathon Stock, $.82; Steel Stock,
$.41.
<F3>Diluted earnings per share applicable to Marathon Stock, $.82; Steel Stock,
$.41.
</FN>
</TABLE>
Exhibit 3.1
USX Corporation
Restated
Certificate of Incorporation
FILED IN OFFICE OF SECRETARY OF STATE,
STATE OF DELAWARE
MAY 1, 1999
Table of
Contents
Article First-Corporate Name 1
Article Second-Registered Office 1
Article Third-Corporate Purpose 1
Article Fourth-Capital Stock 1
Division I-Common Stock 1
1. Dividend Rights 1
2. Exchange and Redemption 2
3. Voting Rights 7
4. Liquidation Rights 9
5. Definitions 9
6.Determinations of the Board of Directors 12
Division II-Preferred Stock 12
Series A Junior Preferred Stock 13
6.50% Cumulative Convertible Preferred Stock 19
Article Fifth-Perpetual Existence 35
Article Sixth-Stockholder Liability 35
Article Seventh-Board of Directors 35
Article Eighth-By-laws 36
Article Ninth-Inspection of Accounts 36
Article Tenth-Dividends and Debt Obligations 36
Article Eleventh-Director Liability 36
Article Twelfth-Power and Authority 36
Article Thirteenth-Amendment of Certificate of Incorporation 37
Restated
Certificate of Incorporation
of
USX Corporation
(Originally incorporated under the name of U. S.
Steel Company on September 10, 1965)
First: The name of the Corporation (which is hereinafter
referred to as the "Corporation") is
USX Corporation
Second: Its registered office and place of business in the
State of Delaware is located at 1013 Centre Road, City of
Wilmington, County of New Castle. The registered agent in
charge thereof upon whom process against the Corporation
may be served is the Prentice-Hall Corporation System, Inc.
Third: The purposes of the Corporation are to engage in any
lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware, and without
limiting the foregoing to engage in integrated steel operations
and to develop, mine, produce, manufacture, construct, transport,
buy, hold, sell and generally deal in products, materials, property,
both tangible and intangible, and services of all kinds.
Fourth: The total number of shares of capital stock which the
Corporation shall have authority to issue is Eight Hundred Forty
Million (840,000,000), of which Forty Million (40,000,000) shares
shall be shares of Preferred Stock, without par value (hereinafter
called "Preferred Stock"), Five Hundred Fifty Million (550,000,000)
shares shall be shares of a class of common stock designated as
USX-Marathon Group Common Stock, par value $1.00 per share
("Marathon Stock"), Two Hundred Million (200,000,000) shares shall
be shares of a class of common stock designated as USX-U.S. Steel
Group Common Stock, par value of $1.00 per share ("Steel Stock"),
and Fifty Million (50,000,000) shares shall be shares of a class of
common stock designated as USX-Delhi Group Common Stock, par value
$1.00 per share ("Delhi Stock"). The Marathon Stock, the Steel Stock
and the Delhi Stock shall hereinafter collectively be called the
"Common Stock".
DIVISION I
The powers and rights of the shares of each class of Common Stock,
and the qualifications, limitations or restrictions therof, are
as follows:
1. Dividend Rights. Subject to the express terms of any outstanding
series of Preferred Stock, dividends may be declared and paid upon each
class of the Common Stock upon the terms provided for below with respect
to each such class solely in the discretion of the Board of Directors:
(a) Dividends on Marathon Stock. Dividends on the Marathon Stock
may be declared and paid out of funds of the Corporation legally
available therfor.
(b) Dividends on Steel Stock. Dividends on the Steel Stock may be
declared and paid only out of the lesser of (i) funds of the Corporation
legally available therfor and (ii) the Available Steel Dividend Amount.
(c) Dividends on Delhi Stock. Dividends on the Delhi Stock may be
declared and paid only out of the lesser of (i) funds of the Corporation
legally available therfor and (ii) the Available Delhi Dividend Amount.
(d) Discrimination Between Classes of Common Stock. The Board of
Directors, subject to the provisions of Sections 1(a), 1(b), 1(c), may
in its sole discretion, declare and pay dividends exclusively on any
class or classes of Common Stock in equal or unequal amounts,
notwithstanding the amounts of funds available for dividends on each
class, the respective voting and liquidation rights of each class, the
amount of prior dividends declared on each class or any other factor.
2. Exchange and Redemption. Shares of each class of Common Stock are
subject to exchange or redemption, as the case may be, upon the terms
provided below with respect to each such class; provided that no such class
may be exchanged or redeemed in its entirety if all of the other classes have
been, or are at the time being, exchanged or redeemed in their entirety:
(a) Exchange and Redemption of Marathon Stock.
(i) At any time on or after the date on which the Corporation has
transferred all of the assets and liabilities of the Marathon Group to
a wholly owned subsidiary of the Corporation (the ''Marathon Group
Subsidiary''), the Board of Directors may, in its sole discretion and
by a majority vote of the directors then in office, provided that there
are funds of the Corporation legally available therefor, declare that
all of the outstanding shares of Marathon Stock shall be exchanged on
an Exchange Date set forth in a notice to holders of Marathon Stock
pursuant to Section 2(d)(i), for all of the outstanding shares of
common stock of the Marathon Group Subsidiary, on a pro rata basis,
each of which shall, upon such issuance, be fully paid and
nonassessable.
(ii) After any Exchange Date for Marathon Stock, any share of
Marathon Stock that is issued on conversion or exercise of any
Convertible Securities shall, to the extent of funds of the Corporation
legally available therefor, immediately upon issuance pursuant to such
conversion or exercise and without any notice or any other action on
the part of the Corporation or its Board of Directors or the holder of
such share of Marathon Stock, be redeemed for $.01 in cash.
(b) Exchange and Redemption of Steel Stock.
(i) In the event of the Disposition, in one transaction or a series
of related transactions, by the Corporation of all or substantially all
of the properties and assets of the U.S. Steel Group (other than in
connection with the Disposition by the Corporation of all of its
properties and assets in one transaction) to any person, entity or
group (other than (A) the holders of all outstanding shares of Steel
Stock on a pro rata basis or (B) any person, entity or group in which
the Corporation, directly or indirectly, owns a majority equity
interest), the Corporation shall, on or prior to the first Business Day
following the 60th day following the consummation of such Disposition,
either:
(A) subject to paragraph 1(b) above, declare and pay a dividend in
cash and/or in securities or other property received as proceeds of
such Disposition to the holders of Steel Stock in an amount equal to
the Net Proceeds of such Disposition; or
(B) to the extent that there are funds of the Corporation legally
available therefor, redeem the number of whole shares of outstanding
Steel Stock that has an aggregate average Market Value, during the
ten-Business Day period beginning on the first Business Day
following such consummation, closest to the value of the Net
Proceeds of such Disposition, for cash and/or securities or other
property received as proceeds of such Disposition in an amount equal
to such Net Proceeds; or
(C) exchange each outstanding share of Steel Stock for a number of
fully paid and nonassessable shares of Marathon Stock or, if there
are no shares of Marathon Stock outstanding on the Exchange Date and
shares of Delhi Stock are then outstanding, of Delhi Stock equal to
110% of the average daily ratio (calculated to the nearest five
decimal places) of the Market Value of one share of Steel Stock to
the Market Value of one share of Marathon Stock or one share of
Delhi Stock, as the case may be, during such ten-Business Day
period.
For purposes of this Section 2(b)(i):
(x) as of any date, ''substantially all of the properties and assets
of the U.S. Steel Group'' shall mean a portion of such properties and
assets that represents at least 80% of either of the then-current
market value of, or the aggregate revenues for the immediately
preceding twelve fiscal quarterly periods of the Corporation derived
from, the properties and assets of the U.S. Steel Group as of such date
(excluding the properties and assets of any person, entity or group in
which the Corporation, directly or indirectly, owns less than a
majority equity interest);
(y) if immediately after any event, the Corporation, directly or
indirectly, owns less than a majority equity interest in any person,
entity or group in which the Corporation, directly or indirectly, owned
a majority equity interest immediately prior to the occurrence of such
event, a Disposition of all of the properties and assets of the U.S.
Steel Group owned by such person, entity or group shall be deemed to
have occurred; and
(z) in the case of a Disposition of properties and assets in a series
of related transactions, such Disposition shall not be deemed to have
been consummated until the consummation of the last of such
transactions.
(ii) The Board of Directors may, by a majority vote of the directors
then in office, at any time after a dividend or redemption pursuant to
clause (A) or (B), respectively, of Section 2(b)(i), declare that each
of the remaining outstanding shares of Steel Stock shall be exchanged,
on an Exchange Date set forth in a notice to holders of Steel Stock
pursuant to Section 2(d)(i), for a number of fully paid and
nonassessable shares of Marathon Stock or, if there are no shares of
Marathon Stock outstanding on such Exchange Date and shares of Delhi
Stock are then outstanding, of Delhi Stock, equal to 110% of the Market
Value Ratio as of the fifth Business Day prior to the date such notice
is mailed to such holders. For purposes of the preceding sentence,
''Market Value Ratio'', as of any date, shall mean the highest of the
following (calculated to the nearest five decimal places): (A) the
average ratio of S/X for the five-Business Day period ending on such
date, (B) the quotient of (1) the sum of (w) four times the average
ratio of S/X for the five-Business Day period ending on such date, (x)
three times the average ratio of S/X for the next preceding five-
Business Day period, (y) two times the average ratio of S/X for the
next preceding five-Business Day period and (z) the average ratio of
S/X for the next preceding five-Business Day period, divided by (2) ten
and (C) if the dividend pursuant to clause (A) of Section 2(b)(i) was
declared and paid or the redemption pursuant to (B) of Section 2(b)(i)
was made prior to the commencement of the most recently completed
fiscal quarter of the Corporation, the average ratio of S/X for such
fiscal quarter, where S is the Market Value of one share of Steel Stock
and X is the Market Value of one share of Marathon Stock or one share
of Delhi Stock, as the case may be.
(iii) At any time on or after the date on which the Corporation has
transferred all of the assets and liabilities of the U.S. Steel Group
(and no other assets or liabilities) to a wholly owned subsidiary of
the Corporation (the ''U.S. Steel Group Subsidiary''), the Board of
Directors may, in its sole discretion and by a majority vote of the
directors then in office, provided that there are funds of the
Corporation legally available therefor, declare that all of the
outstanding shares of Steel Stock shall be exchanged on an Exchange
Date set forth in a notice to holders of Steel Stock pursuant to
Section 2(d)(i), for all of the outstanding shares of common stock of
the U.S. Steel Group Subsidiary, on a pro rata basis, each of which
shall, upon such issuance, be fully paid and nonassessable.
(iv) After any Exchange Date or Redemption Date on which all
outstanding Steel Stock was exchanged or redeemed, any share of Steel
Stock that is issued on conversion or exercise of any Convertible
Securities shall, immediately upon issuance pursuant to such conversion
or exercise and without any notice or any other action on the part of
the Corporation or its Board of Directors or the holder of such share
of Steel Stock:
(A) in the event the then-outstanding Steel Stock was exchanged for
Marathon Stock or Delhi Stock on such Exchange Date pursuant to
Section 2(b)(i) or 2(b)(ii), be exchanged for the kind and amount of
shares of capital stock and other securities and property that a
holder of such Convertible Security would have been entitled to
receive pursuant to the terms of such Convertible Security had such
terms provided that the conversion privilege in effect immediately
prior to any exchange by the Corporation of any of its capital stock
for shares of any other capital stock of the Corporation would be
adjusted so that the holder of any such Convertible Security
thereafter surrendered for conversion would be entitled to receive
the number of shares of capital stock of the Corporation and other
securities and property he would have owned immediately following
such action had such Convertible Security been converted immediately
prior thereto; or
(B) in the event the then-outstanding Steel Stock was redeemed in
whole pursuant to clause (B) of Section 2(b)(i) or exchanged for
common stock of the U.S. Steel Group Subsidiary pursuant to Section
2(b)(iii), be redeemed, to the extent of funds of the Corporation
legally available therefor, for $.01 in cash.
The provisions of clause (A) of this Section 2(b)(iv) shall not
apply to the extent that equivalent adjustments are otherwise made
pursuant to the provisions of such Convertible Securities.
(c) Exchange and Redemption of Delhi Stock.
(i) In the event of the Disposition, in one transaction or a series
of related transactions, by the Corporation of all or substantially all
of the properties and assets of the Delhi Group (other than in
connection with the Disposition by the Corporation of all of its
properties and assets in one transaction) to any person, entity or
group (other than (A) the holders of all outstanding shares of Delhi
Stock on a pro rata basis or (B) any person, entity or group in which
the Corporation, directly or indirectly, owns a majority equity
interest), the Corporation shall, on or prior to the first Business Day
following the 60th day following the consummation of such Disposition,
either:
(A) subject to paragraph 1(c) above, declare and pay a dividend in
cash and/or in securities or other property received as proceeds of
such Disposition to the holders of Delhi Stock in an amount equal to
the product of the Delhi Fraction and the Net Proceeds of such
Disposition; or
(B) to the extent that there are funds of the Corporation legally
available therefor, redeem the number of whole shares of outstanding
Delhi Stock that has an aggregate average Market Value, during the
ten-Business Day period beginning on the first Business Day
following such consummation, closest to the value of the product of
the Delhi Fraction and the Net Proceeds of such Disposition, for
cash and/or securities or other property received as proceeds of
such Disposition in an amount equal to such product; or
(C) exchange each outstanding share of Delhi Stock for a number of
fully paid and nonassessable shares of Marathon Stock or, if there
are no shares of Marathon Stock outstanding on such Exchange Date
and shares of Steel Stock are then outstanding, of Steel Stock,
equal to 110% of the average daily ratio (calculated to the nearest
five decimal places) of the Market Value of one share of Delhi Stock
to the Market Value of one share of Marathon Stock or one share of
Steel Stock, as the case may be, during such ten-Business Day
period.
For purposes of this Section 2(c)(i):
(x) as of any date, ''substantially all of the properties and assets
of the Delhi Group'' shall mean a portion of such properties and assets
that represents at least 80% of either of the then-current market value
of, or the aggregate revenues for the immediately preceding twelve
fiscal quarterly periods of the Corporation derived from, the
properties and assets of the Delhi Group as of such date (excluding the
properties and assets of any person, entity or group in which the
Corporation, directly or indirectly, owns less than a majority equity
interest);
(y) if immediately after any event, the Corporation, directly or
indirectly, owns less than a majority equity interest in any person,
entity or group in which the Corporation, directly or indirectly, owned
a majority equity interest immediately prior to the occurrence of such
event, a Disposition of all of the properties and assets of the Delhi
Group owned by such person, entity or group shall be deemed to have
occurred; and
(z) in the case of a Disposition of properties and assets in a series
of related transactions, such Disposition shall not be deemed to have
been consummated until the consummation of the last of such
transactions.
(ii) The Board of Directors may, by a majority vote of the directors
then in office, at any time after a dividend or redemption pursuant to
clause (A) or (B), respectively, of Section 2(c)(i), declare that each
of the remaining outstanding shares of Delhi Stock shall be exchanged,
on an Exchange Date set forth in a notice to holders of Delhi Stock
pursuant to Section 2(d)(i), for a number of fully paid and
nonassessable shares of Marathon Stock or, if there are no shares of
Marathon Stock outstanding on such Exchange Date and shares of Steel
Stock are then outstanding, of Steel Stock equal to 110% of the Market
Value Ratio as of the fifth Business Day prior to the date such notice
is mailed to such holders.
(iii) The Board of Directors may, by a majority vote of the directors
then in office, at any time declare that each of the outstanding shares
of Delhi Stock shall be exchanged, on an Exchange Date set forth in a
notice to holders of Delhi Stock pursuant to Section 2(d)(i), for a
number of fully paid and nonassessable shares of Marathon Stock or, if
there are no shares of Marathon Stock outstanding on such Exchange
Date, of Steel Stock equal to 115% of the Market Value Ratio as of the
fifth Business Day prior to the date such notice is mailed to such
holders.
(iv) For purposes of Section 2(c)(ii) and (iii), the ''Market Value
Ratio'', as of any date, shall mean the highest of the following
(calculated to the nearest five decimal places): (A) the average ratio
of D/X for the five-Business Day period ending on such date, (B) the
quotient of (1) the sum of (w) four times the average ratio of D/X for
the five-Business Day period ending on such date, (x) three times the
average ratio of D/X for the next preceding five-Business Day period,
(y) two times the average ratio of D/X for the next preceding five-
Business Day period and (z) the average ratio of D/X for the next
preceding five-Business Day period, divided by (2) ten and (C) if the
dividend pursuant to clause (A) of Section 2(c)(i) was declared and
paid or the redemption pursuant to clause (B) of Section 2(c)(i) was
made prior to the commencement of the most recently completed fiscal
quarter of the Corporation, the average ratio of D/X for such fiscal
quarter, where D is the Market Value of one share of Delhi Stock and X
is the Market Value of one share of Marathon Stock or one share of
Steel Stock, as the case may be.
(v) At any time on or after the date on which the Corporation has
transferred all of the assets and liabilities of the Delhi Group (and
no other assets or liabilities) to a wholly owned subsidiary of the
Corporation (the ''Delhi Group Subsidiary''), the Board of Directors
may, in its sole discretion and by a majority vote of the directors
then in office, provided that there are funds of the Corporation
legally available therefor, declare that all of the outstanding shares
of Delhi Stock shall be exchanged on an Exchange Date set forth in a
notice to holders of Delhi Stock pursuant to Section 2(d)(i), for a
number of outstanding shares of common stock of the Delhi Group
Subsidiary equal to the product of the Delhi Fraction and the number of
all outstanding shares of common stock of the Delhi Group Subsidiary,
on a pro rata basis, each of which shall, upon such issuance, be fully
paid and nonassessable.
(vi) After any Exchange Date or Redemption Date on which all
outstanding Delhi Stock was exchanged or redeemed, any share of Delhi
Stock that is issued on conversion or exercise of any Convertible
Securities shall, immediately upon issuance pursuant to such conversion
or exercise and without any notice or any other action on the part of
the Corporation or its Board of Directors or the holder of such share
of Delhi Stock:
(A) in the event the then-outstanding Delhi Stock was exchanged for
Marathon Stock or Steel Stock on such Exchange Date pursuant to
Section 2(c)(i), 2(c)(ii) or 2(c)(iii), be exchanged for the kind
and amount of shares of capital stock and other securities and
property that a holder of such Convertible Security would have been
entitled to receive pursuant to the terms of such Convertible
Security had such terms provided that the conversion privilege in
effect immediately prior to any exchange by the Corporation of any
of its capital stock for shares of any other capital stock of the
Corporation would be adjusted so that the holder of any such
Convertible Security thereafter surrendered for conversion would be
entitled to receive the number of shares of capital stock of the
Corporation and other securities and property he would have owned
immediately following such action had such Convertible Security been
converted immediately prior thereto; or
(B) in the event the then-outstanding Delhi Stock was redeemed in
whole pursuant to clause (B) of Section 2(c)(i) or exchanged for
common stock of the Delhi Group Subsidiary pursuant to Section
2(c)(v), be redeemed, to the extent of funds of the Corporation
legally available therefor, for $.01 in cash.
The provisions of clause (A) of this Section 2(c)(vi) shall not apply
to the extent that equivalent adjustments are otherwise made pursuant
to the provisions of such Convertible Securities.
(d) General Exchange and Redemption Provisions.
(i) In the event of any exchange or redemption pursuant to this
Section 2 (other than Section 2(a)(ii), 2(b)(iv), or 2(c)(vi)), the
Corporation shall cause to be given to each holder of the class of
Common Stock to be so exchanged or redeemed a notice stating (A) that
shares of such class of Common Stock shall be exchanged or redeemed, as
the case may be, (B) the Exchange Date or the Redemption Date, (C) in
the event of a partial redemption of Steel Stock or Delhi Stock, as the
case may be, pursuant to clause (B) of Section 2(b)(i) or clause (B) of
Section 2(c)(i), respectively, the number of shares of Steel Stock or
Delhi Stock, as the case may be, to be redeemed, (D) the kind and
amount of shares of capital stock or cash and/or securities or other
property to be received by such holder with respect to each share of
such class of Common Stock held by such holder, including details as to
the calculation thereof, (E) the place or places where certificates for
shares of such class of Common Stock, properly endorsed or assigned for
transfer (unless the Corporation shall waive such requirement), are to
be surrendered for delivery of certificates for shares of such capital
stock or cash and/or securities or other property and (F) that, subject
to Section 2(d)(iv) hereof, dividends on such shares of Common Stock
will cease to be paid as of such Exchange Date or Redemption Date. Such
notice shall be sent by first-class mail, postage prepaid, not less
than 30 nor more than 60 days prior to the Exchange Date or Redemption
Date, as the case may be, and in any case to each holder of the class
of Common Stock to be exchanged or redeemed, at such holder's address
as the same appears on the stock transfer books of the Corporation.
Neither the failure to mail such notice to any particular holder of
such class of Common Stock nor any defect therein shall affect the
sufficiency thereof with respect to any other holder of such class of
Common Stock.
(ii) If less than all of the outstanding shares of Steel Stock or
Delhi Stock, as the case may be, are to be redeemed pursuant to clause
(B) of Section 2(b)(i) or clause (B) of Section 2(c)(i), respectively,
such shares shall be redeemed by the Corporation pro rata among the
holders of such class of Common Stock or by such other method as may be
determined by the Board of Directors to be equitable.
(iii) The Corporation shall not be required to issue or deliver
fractional shares of any class of capital stock or any fractional
securities to any holder of any class of Common Stock upon any
exchange, redemption, dividend or other distribution pursuant to this
Section 2. If more than one share of any class of Common Stock shall be
held at the same time by the same holder, the Corporation may aggregate
the number of shares of any class of capital stock that shall be
issuable or the amount of securities that shall be deliverable to such
holder upon any exchange, redemption, dividend or other distribution
(including any fractions of shares or securities). If the number of
shares of any class of capital stock or the amount of securities
remaining to be issued or delivered to any holder of any class of
Common Stock is a fraction, the Corporation shall, if such fraction is
not issued or delivered to such holder, pay a cash adjustment in
respect of such fraction in an amount equal to the fair market value of
such fraction on the fifth Business Day prior to the date such payment
is to be made. For purposes of the preceding sentence, ''fair market
value'' of any fraction shall be (i) in the case of any fraction of a
share of capital stock of the Corporation, the product of such fraction
and the Market Value of one share of such capital stock and (ii) in the
case of any other fractional security, such value as is determined by
the Board of Directors.
(iv) No adjustments in respect of dividends shall be made upon the
exchange or redemption of any shares of any class of Common Stock;
provided, however, that if the Exchange Date or Redemption Date with
respect to any class of Common Stock shall be subsequent to the record
date for the payment of a dividend or other distribution thereon or
with respect thereto, the holders of shares of such class of Common
Stock at the close of business on such record date shall be entitled to
receive the dividend or other distribution payable on or with respect
to such shares on the date set for payment of such dividend or other
distribution, notwithstanding the exchange or redemption of such shares
or the Corporation's default in payment of the dividend or distribution
due on such date.
(v) Before any holder of shares of any class of Common Stock shall be
entitled to receive certificates representing shares of any capital
stock or cash and/or securities or other property to be received by
such holder with respect to such shares of such class of Common Stock
pursuant to this Section 2, such holder shall surrender at such office
as the Corporation shall specify certificates for such shares of such
class of Common Stock, properly endorsed or assigned for transfer
(unless the Corporation shall waive such requirement). The Corporation
will as soon as practicable after such surrender of certificates
representing such shares of such class of Common Stock deliver to the
person for whose account such shares of such class of Common Stock were
so surrendered, or to his nominee or nominees, certificates
representing the number of whole shares of the kind of capital stock or
cash and/or securities or other property to which he shall be entitled
as aforesaid, together with any fractional payment contemplated by
Section 2(d)(iii). If less than all of the shares of any class of
Common Stock, represented by any one certificate are to be redeemed,
the Corporation shall issue and deliver a new certificate for the
shares of such class of Common Stock not redeemed.
(vi) From and after any applicable Exchange Date or Redemption Date,
all rights of a holder of shares of any class of Common Stock that were
exchanged or redeemed shall cease except for the right, upon surrender
of the certificates representing such shares of Common Stock, to
receive certificates representing shares of the kind and amount of
capital stock or cash and/or securities or other property for which
such shares were exchanged or redeemed, together with any fractional
payment contemplated by Section 2(d)(iii) and rights to dividends as
provided in Section 2(d)(iv). No holder of a certificate, that
immediately prior to the applicable Exchange Date for any class of
Common Stock represented shares of such class of Common Stock, shall be
entitled to receive any dividend or other distribution with respect to
shares of any kind of capital stock into which such class of Common
Stock was exchanged until surrender of such holder's certificate for a
certificate or certificates representing shares of such kind of capital
stock. Upon such surrender, there shall be paid to the holder the
amount of any dividends or other distributions (without interest) which
theretofore became payable with respect to a record date after the
Exchange Date, but that were not paid by reason of the foregoing, with
respect to the number of whole shares of the kind of capital stock
represented by the certificate or certificates issued upon such
surrender. From and after an Exchange Date for any class of Common
Stock, the Corporation shall, however, be entitled to treat the
certificates for such class of Common Stock that have not yet been
surrendered for exchange as evidencing the ownership of the number of
whole shares of the kind or kinds of capital stock for which the shares
of such class of Common Stock represented by such certificates shall
have been exchanged, notwithstanding the failure to surrender such
certificates.
(vii) The Corporation will pay any and all documentary, stamp or
similar issue or transfer taxes that may be payable in respect of the
issue or delivery of any shares of capital stock on exchange of shares
of any class of Common Stock pursuant hereto. The Corporation shall
not, however, be required to pay any tax that may be payable in respect
of any transfer involved in the issue and delivery of any shares of
capital stock in a name other than that in which the shares of the
class of Common Stock so exchanged were registered, and no such issue
or delivery shall be made unless and until the person requesting such
issue has paid to the Corporation the amount of any such tax, or has
established to the satisfaction of the Corporation that such tax has
been paid.
3. Voting Rights.
(a) Except as provided in clauses (c), (d) or (e) below, the holders of
all classes of Common Stock shall vote together as a single class on all
matters as to which holders of Common Stock are entitled to vote. On all
matters to be voted on by the holders of all classes of Common Stock
together as a single class, (i) each outstanding share of Marathon Stock
shall have one vote, (ii) each outstanding share of any other class of
Common Stock shall have a number of votes equal to the quotient
(calculated to the nearest three decimal places), as of the fifth Business
Day prior to the applicable record date or as of any other applicable
date, of (A) the sum of (1) four times the average ratio of X/Y for the
five-Business Day period ending on such fifth Business Day, (2) three
times the average ratio of X/Y for the next preceding five-Business Day
period, (3) two times the average ratio of X/Y for the next preceding five-
Business Day period and (4) the average ratio of X/Y for the next
preceding five-Business Day period, divided by (B) ten, where X is the
Market Value of such class of Common Stock and Y is the Market Value of
the Marathon Stock or if there are no shares of Marathon Stock outstanding
on such record or other applicable date or on any of the twenty-five
Business Days prior thereto, the sum of the Market Values of the Steel
Stock and of the Delhi Stock; provided that until the Delhi Stock has been
traded regular way on the New York Stock Exchange for at least twenty-five
Business Days, each outstanding share of the Delhi Stock shall have a
number of votes equal to the ratio of A/B (calculated to the nearest three
decimal places), where A is the average of the high and low reported sales
prices of a share of the Delhi Stock on the New York Stock Exchange, and B
is the average of the high and low reported sales prices of a share of
Marathon Stock or, if there are no shares of Marathon Stock outstanding,
the sum of the average of the high and low reported sales prices of a
share of the Steel Stock and a share of the Delhi Stock on such Exchange,
in each case on the Effective Date, or on the first Business Day
thereafter on which shares of the Delhi Stock are traded on such Exchange.
If shares of only one class of Common Stock are outstanding, each share of
that class shall have one vote.
(b) Unless the vote or consent of a greater number of shares shall then
be required by law, the vote or consent of the holders of a majority of
all of the shares of any class of Common Stock then outstanding, voting as
a separate class, shall be necessary for authorizing, effecting or
validating the merger or consolidation of the Corporation into or with any
other corporation if such merger or consolidation would adversely affect
the powers or special rights of such class of Common Stock either directly
by amendment of this Restated Certificate of Incorporation or indirectly
by requiring the holders of such class to accept or retain, in such merger
or consolidation, anything other than (i) shares of such class or (ii)
shares of the surviving or resulting corporation having, in either case,
powers and special rights identical to those of such class prior to such
merger or consolidation.
(c) Unless the vote or consent of a greater number of shares shall then
be required by law, the vote or consent of the holders of at least 662/3%
of all of the shares of Steel Stock then outstanding, voting as a separate
class, shall be necessary for:
(i) the declaration or payment of any dividend on, or the making of
any other payment or distribution with respect to any shares of any
other class of Common Stock, if such dividend, payment or distribution
is to be made with (A) proceeds from the Disposition of any of the
properties and assets of the U.S. Steel Group or (B) any portion of an
equity interest in a person, entity or group that owns any of the
properties or assets of the U.S. Steel Group; or
(ii) the use, or reservation for use, of any proceeds from the
Disposition of any of the properties and assets of the U.S. Steel
Group, or any of the properties and assets acquired with such proceeds,
in any business of the Corporation other than a business of the U.S.
Steel Group;
provided such vote shall not be required if such proceeds are loaned at a
rate or rates representative of actual borrowings and short-term
investments by the Corporation.
(d) Unless the vote or consent of a greater number of shares shall then
be required by law, the vote or consent of the holders of at least 662/3%
of all the shares of Marathon Stock then outstanding, voting as a separate
class, shall be necessary for:
(i) the declaration or payment of any dividend on, or the making of
any other payment or distribution with respect to, any shares of any
other class of Common Stock, if such dividend, payment or distribution
is to be made with (A) proceeds from the Disposition of any of the
properties and assets of the Marathon Group or (B) any portion of an
equity interest in a person, entity or group that owns any of the
properties and assets of the Marathon Group; or
(ii) the use, or reservation for use, of any proceeds from the
Disposition of any of the properties and assets of the Marathon Group,
or any of the properties and assets acquired with such proceeds, in any
business of the Corporation other than a business of the Marathon
Group;
provided such vote shall not be required to the extent such proceeds are
loaned at a rate or rates representative of actual borrowings and short-
term investments by the Corporation.
(e) Unless the vote or consent of a greater number of shares shall then
be required by law, the vote or consent of the holders of at least 662/3%
of all of the shares of Delhi Stock then outstanding, voting as a separate
class, shall be necessary for:
(i) the declaration or payment of any dividend on, or the making of
any other payment or distribution with respect to any shares of any
other class of Common Stock, if such dividend, payment or distribution
is to be made with (A) proceeds from the Disposition of any of the
properties and assets of the Delhi Group or (B) any portion of an
equity interest in a person, entity or group that owns any of the
properties or assets of the Delhi Group; or
(ii) the use, or reservation for use, of any proceeds from the
Disposition of any of the properties and assets of the Delhi Group, or
any of the properties and assets acquired with such proceeds, in any
business of the Corporation other than a business of the Delhi Group;
provided such vote shall not be required if such proceeds are loaned at a
rate or rates representative of actual borrowings and short-term
investments by the Corporation.
(f) The number of authorized shares of any class of Common Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of shares of Common
Stock having a majority of the votes entitled to be cast by the holders of
all classes of Common Stock, voting together as provided for in Section
3(a) and without a separate vote of the holders of any class.
4. Liquidation Rights. In the event of the dissolution, liquidation or
winding-up of the Corporation, whether voluntary or involuntary, after there
shall have been paid or set apart for the holders of Preferred Stock the full
preferential amounts to which they are entitled, the holders of the
outstanding shares of each class of Common Stock shall be entitled to receive
a fraction of the funds of the Corporation remaining for distribution to its
stockholders, where such fraction is equal to the quotient of (A) the sum of
(1) four times the average ratio of x/y for the five-Business Day period
ending on the Business Day prior to the date of the public announcement of
(I) a voluntary dissolution, liquidation or winding-up by the Corporation or
(II) the institution of the proceeding for the involuntary dissolution,
liquidation or winding-up of the Corporation, (2) three times the average
ratio of x/y for the next preceding five-Business Day period, (3) two times
the average ratio of x/y for the next preceding five-Business Day period and
(4) the average ratio of x/y for the next preceding five-Business Day period,
divided by (B) ten, where x is the Market Capitalization of such class of
Common Stock, and y is the aggregate Market Capitalization of all classes of
Common Stock. For purposes of the preceding sentence, ''Market
Capitalization'' of any class of Common Stock on any day shall mean the
product of (i) the Market Value of such class of Common Stock on such day and
(ii) the number of shares of such class of Common Stock outstanding on such
day.
5. Definitions. As used in this Division I, the following terms shall have
the following meanings (with terms defined in the singular having comparable
meaning when used in the plural and vice versa), unless another definition is
provided or the context otherwise requires:
''Available Delhi Dividend Amount'', on any date, shall mean the product
of the Delhi Fraction and either (a) the greater of (i) an amount equal to
(x) $172.9 million, increased or decreased, as appropriate, to reflect,
from June 30, 1992, (A) Delhi Net Income, (B) any dividends or other
distributions declared or paid with respect to, or repurchases or
issuances of, any shares of Marathon Stock prior to the close of business
on the date Delhi Stock is first issued attributed to the Delhi Group, (C)
any dividends or other distributions declared or paid with respect to, or
repurchases or issuances of, any shares of Delhi Stock or any shares of
Preferred Stock attributed to the Delhi Group, (D) assets or properties of
the Delhi Group that are no longer included as part of the Delhi Group as
a result of any such dividend, distribution or repurchase pursuant to the
proviso to the definition of ''Delhi Group'' and (E) any other adjustments
to stockholders' equity of the Delhi Group made in accordance with
generally accepted accounting principles, less (y) the sum of the
aggregate stated capital of all outstanding Preferred Stock attributed to
the Delhi Group and the quotient of the aggregate par value of all
outstanding Delhi Stock divided by the Delhi Fraction and (ii) the excess
of the fair market value of the net assets of the Delhi Group over the sum
of the aggregate stated capital of all outstanding Preferred Stock
attributed to the Delhi Group, and the quotient of the aggregate par value
of all outstanding Delhi Stock divided by the Delhi Fraction, or (b) in
case there shall be no such amount, an amount equal to Delhi Net Income
(if positive) for the fiscal year in which the dividend is declared and/or
the preceding fiscal year.
''Available Steel Dividend Amount'', on any date, shall mean either (a)
the greater of (i) an amount equal to (x) $2.244 billion, increased or
decreased, as appropriate, to reflect (A) Steel Net Income from the close
of business on December 31, 1990, (B) any dividends or other distributions
declared or paid with respect to, or repurchases or issuances of, any
shares of common stock of the Corporation after December 31, 1990 and
prior to the close of business on May 6, 1991 attributed to the U.S. Steel
Group, (C) any dividends or other distributions declared or paid with
respect to, or repurchases or issuances of, any shares of Steel Stock or
any shares of Preferred Stock attributed to the U.S. Steel Group and (D)
any other adjustments to stockholders' equity of the U.S. Steel Group made
in accordance with generally accepted accounting principles, less (y) the
sum of the aggregate par value of all outstanding Steel Stock and the
aggregate stated capital of all outstanding Preferred Stock attributed to
the U.S. Steel Group and (ii) the excess of the fair market value of the
net assets of the U.S. Steel Group over the sum of the aggregate par value
of all outstanding Steel Stock and the aggregate stated capital of all
outstanding Preferred Stock attributed to the U.S. Steel Group, in the
case of each of clause (i) and clause (ii) increased by an amount equal to
any effects of the recognition of the transition obligation upon the
adoption of Statement of Financial Accounting Standards (SFAS) No. 106,
''Employer's Accounting for Postretirement Benefits Other than Pensions''
(including any amendments thereto) and any cumulative effects of the
adoption of SFAS No. 109, ''Accounting for Income Taxes'' (including any
amendments thereto) in the year of adoption or (b) in case there shall be
no such amount, an amount equal to Steel Net Income (if positive) for the
fiscal year in which the dividend is declared and/or the preceding fiscal
year.
''Business Day'' shall mean each weekday other than any day on which any
relevant class of Common Stock is not traded on any national securities
exchange or the National Association of Securities Dealers Automated
Quotations National Market System or in the over-the-counter market.
''Convertible Securities'' shall mean any securities of the Corporation
that are convertible into or evidence the right to purchase any shares of
any class of Common Stock, pursuant to antidilution provisions of such
securities or otherwise.
The ''Delhi Fraction'' as of any date is a fraction the numerator of
which shall be the number of shares of Delhi Stock outstanding on such
date and the denominator of which shall be initially 14,000,000 provided
that such fraction shall in no event be greater than one. The denominator
of the Delhi Fraction shall be adjusted from time to time as appropriate
to reflect (i) subdivisions (by stock split or otherwise) and combinations
(by reverse stock split or otherwise) of the Delhi Stock and stock
dividends payable in shares of Delhi Stock to holders of Delhi Stock and
other reclassifications of Delhi Stock, (ii) the issuance of Delhi Stock,
the proceeds of which are attributed to the Delhi Group and (iii)
repurchases by the Corporation of outstanding shares of Delhi Stock.
''Delhi Group'' shall mean, (i) all of the businesses in which any of
Delhi Gas Pipeline Corporation, The Nueces Company, Delhi Gasmark, Inc.
(previously Texas Gasmark, Inc.), Tonkawa Gas Processing Company, Delhi
Gas Marketing Corp. (previously TXO Gas Marketing Corp.), Delhi Gas
Ventures Corp. (previously TXO Gas Ventures Corp.), Red River Gas Pipeline
Corporation, Ozark Gas Pipeline Corporation, Sweetwater Pipeline
Corporation, Western Gas Transmission, Inc., and Western Gas Corporation
(or any of their predecessors or successors) is or has been engaged,
directly or indirectly, (ii) all assets and liabilities of the Corporation
to the extent attributed to any of such businesses, whether or not such
assets or liabilities are or were assets and liabilities of such
companies, and (iii) such businesses, assets and liabilities acquired by
the Corporation for the Delhi Group as determined by the Board of
Directors to be included in the Delhi Group; provided that, from and after
any dividend or distribution with respect to any shares of Delhi Stock, or
any repurchase of shares of Delhi Stock from holders of Delhi Stock
generally, the Delhi Group shall no longer include an amount of assets or
properties of the Delhi Group equal to the aggregate amount of such kind
of assets or properties so paid in respect of shares of Delhi Stock
multiplied by a fraction, the numerator of which is equal to one less the
Delhi Fraction and the denominator of which is equal to the Delhi
Fraction. From and after the date on which all of the outstanding shares
of Steel Stock are exchanged for shares of Delhi Stock pursuant to any
provision of Section 2, all of the businesses, assets and liabilities of
the U.S. Steel Group shall be included in the Delhi Group.
''Delhi Group Subsidiary'' shall have the meaning set forth in Section
2(c)(v).
''Delhi Net Income'' shall mean the net income or loss of the Delhi
Group determined in accordance with generally accepted accounting
principles, including income and expenses of the Corporation attributed to
the operations of the Delhi Group on a substantially consistent basis,
including, without limitation, corporate administrative costs, net
interest and other financial costs and income taxes.
''Disposition'' shall mean the sale, transfer, assignment or other
disposition (whether by merger, consolidation, sale or contribution of
assets or stock or otherwise) of properties or assets.
''Exchange Date'' shall mean any date fixed for an exchange of shares of
any class of Common Stock, as set forth in a notice to holders of such
class of Common Stock pursuant to Section 2(d)(i).
''Marathon Group'' shall mean, at any time, (i) all of the businesses in
which any of Marathon Oil Company, Texas Oil & Gas Corp., Carnegie Natural
Gas Company and Apollo Gas Company (or any of their predecessors or
successors) is or has been engaged, directly or indirectly, other than the
businesses of the Delhi Group after the date of the first issuance of
Delhi Stock, (ii) all assets and liabilities of the Corporation to the
extent attributed to any of such businesses, whether or not such assets or
liabilities are or were assets and liabilities of such companies, (iii) a
proportionate interest in the business, assets and liabilities of the
Delhi Group equal to one less the Delhi Fraction, and (iv) such
businesses, assets, and liabilities acquired by the Corporation for the
Marathon Group after May 6, 1991 and as determined by the Board of
Directors to be included in the Marathon Group; provided that, from and
after any dividend or distribution with respect to any shares of Delhi
Stock, or any repurchase of shares of Delhi Stock from holders of Delhi
Stock generally, the Marathon Group shall include an amount of assets or
properties of the Delhi Group equal to the aggregate amount of such kind
of assets or properties so paid in respect of shares of Delhi Stock
multiplied by a fraction, the numerator of which is equal to one less the
Delhi Fraction and the denominator of which is equal to the Delhi
Fraction. From and after the date on which there are no shares of Steel
Stock outstanding (other than as a result of an exchange for shares of
Delhi Stock pursuant to any provision of Section 2), all of the
businesses, assets and liabilities of the U.S. Steel Group shall be
included in the Marathon Group.
''Marathon Group Subsidiary'' shall have the meaning set forth in
Section 2(a)(i).
''Market Value'' of any class of capital stock of the Corporation on any
Business Day shall mean the average of the high and low reported sales
prices regular way of a share of such class on such Business Day or in
case no such reported sale takes place on such Business Day the average of
the reported closing bid and asked prices regular way of a share of such
class on such Business Day, in either case on the New York Stock Exchange
Composite Tape, or if the shares of such class are not listed or admitted
to trading on such Exchange on such Business Day, on the principal
national securities exchange in the United States on which the shares of
such class are listed or admitted to trading, or if not listed or admitted
to trading on any national securities exchange on such Business Day, on
the National Association of Securities Dealers Automated Quotations
National Market System, or if the shares of such class are not listed or
admitted to trading on any national securities exchange or quoted on such
National Market System on such Business Day, the average of the closing
bid and asked prices of a share of such class in the over-the-counter
market on such Business Day as furnished by any New York Stock Exchange
member firm selected from time to time by the Corporation, or if such
closing bid and asked prices are not made available by any such New York
Stock Exchange member firm on such Business Day, the market value of a
share of such class as determined by the Board of Directors; provided that
(i) for purposes of determining the ratios set forth in Sections 2(b)(i),
2(b)(ii), 2(c)(i), 2(c)(ii), 2(c)(iii), 3(a) and 4, the ''Market Value''
of any share of any class of Common Stock on any day prior to the ''ex''
date or any similar date for any dividend or distribution paid or to be
paid with respect to such class of Common Stock (other than a regular
quarterly cash dividend or a dividend or distribution in shares of such
class of Common Stock) shall be reduced by the fair market value of the
per share amount of such dividend or distribution and (ii) for purposes of
determining the ratios set forth in Sections 2(b)(i), 2(b)(ii), 2(c)(i),
2(c)(ii), 2(c)(iii) and 3(a), the ''Market Value'' of any share of any
class of Common Stock on any day prior to (A) the effective date of any
subdivision (by stock split or otherwise) or combination (by reverse stock
split or otherwise) of outstanding shares of such class of Common Stock or
(B) the ''ex'' date or any similar date for any dividend or distribution
with respect to either such class of Common Stock in shares of such class
of Common Stock shall be appropriately adjusted to reflect such
subdivision, combination, dividend or distribution. For the purposes of
the foregoing clause (i) the Board of Directors shall determine the fair
market value of any dividend or distribution.
''Net Proceeds'', as of any date, from any Disposition of any of the
properties and assets of the U.S. Steel Group or the Delhi Group, as the
case may be, shall mean an amount, if any, equal to the gross proceeds of
such Disposition after any payment of, or reasonable provision for, (i)
any taxes payable by the Corporation in respect of such Disposition, (ii)
any taxes payable by the Corporation in respect of any dividend or
redemption pursuant to clause (A) or (B), respectively, of Sections
2(b)(i) or 2(c)(i), respectively, (iii) any transaction costs, including,
without limitation, any legal, investment banking and accounting fees and
expenses and (iv) any liabilities (contingent or otherwise) of, or
allocated to, the U.S. Steel Group or the Delhi Group, as the case may be,
including, without limitation, any indemnity obligations incurred in
connection with the Disposition. For purposes of this definition, any
properties and assets of the Steel Group or the Delhi Group, as the case
may be, remaining after such Disposition shall constitute ''reasonable
provision'' for such amount of taxes, costs and liabilities (contingent or
otherwise) as can be supported by such properties and assets. To the
extent the proceeds of any Disposition include any securities or other
property other than cash, the Board of Directors shall determine the value
of such securities or property.
''Redemption Date'' shall mean any date fixed for a redemption of shares
of any class of Common Stock, as set forth in a notice to holders of such
class of Common Stock pursuant to Section 2(d)(i).
''Steel Net Income'' shall mean the net income or loss of the U.S. Steel
Group determined in accordance with generally accepted accounting
principles, including income and expenses of the Corporation attributed to
the operations of the Steel Group on a substantially consistent basis,
including, without limitation, corporate administrative costs, net
interest and other financial costs and income taxes.
''U.S. Steel Group'' shall mean, at any time, all of the businesses in
which the Corporation is or has been engaged, directly or indirectly, and
all assets and liabilities of the Corporation, other than any businesses,
assets or liabilities of the Marathon Group or the Delhi Group if any
shares of Marathon Stock or Delhi Stock are outstanding.
''U.S. Steel Group Subsidiary'' shall have the meaning set forth in
Section 2(b)(iii).
6. Determinations by the Board of Directors. Any determinations made by the
Board of Directors of the Corporation under any provision in this Division I
of Article Fourth shall be final and binding on all stockholders of the
Corporation.
DIVISION II
A statement of the designations of the Preferred Stock or of any series
thereof, and the powers, preferences and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions thereof,
or of the authority of the Board of Directors to fix by resolution or
resolutions such designations and other terms not fixed by the Certificate of
Incorporation, is as follows:
1. The Preferred Stock may be issued in one or more series, from time to
time, with each such series to have such designation, powers, preferences and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions providing for the issue of such
series adopted by the Board of Directors of the Corporation, subject to the
limitations prescribed by law and in accordance with the provisions hereof,
the Board of Directors being hereby expressly vested with authority to adopt
any such resolution or resolutions. The authority of the Board of Directors
with respect to each such series shall include, but not limited to, the
determination or fixing of the following:
(i) The distinctive designation and number of shares comprising such
series, which number may (except where otherwise provided by the Board
of Directors in creating such series) be increased or decreased (but
not below the number of shares then oustanding) from time to time by
like action of the Board of Directors;
(ii) The dividend rate of such series, the conditions and times upon
which such dividends shall be payable, the relation which such
dividends shall bear to the dividends payable on any other class or
classes of stock or series thereof, or any other series of the same
class, and whether dividends shall be cumulative or non-cumulative;
(iii) The conditions upon which the shares of such series shall be
subject to redemption by the Corporation and the times, prices and
other terms and provisions upon which the shares of the series may be
redeemed;
(iv) Whether or not the shares of the series shall be subject to the
operation of a retirement or sinking fund to be applied to the purchase
or redemption of such shares and, if such retirement or sinking fund be
established, the annual amount thereof and the terms and provisions
relative to the operation thereof;
(v) Whether or not the shares of the series shall be convertible into
or exchangeable for shares of any other class or classes, with or
without par value, or of any other series of the same class, and, if
provision is made for conversion or exchange, the times, prices, rates,
adjustments, and other terms and conditions of such conversion or
exchange;
(vi) Whether or not the shares of the series shall have voting
rights, in addition to the voting rights provided by law, and, if so,
subject to the limitation hereinafter set forth, the terms of such
voting rights;
(vii) The rights of the shares of the series in the event of
voluntary or involuntary liquidation, dissolution, or upon the
distribution of assets of the Corporation;
(viii) Any other powers, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, of the shares of such series, as the Board of
Directors may deem advisable and as shall not be inconsistent with the
provisions of this Certificate of Incorporation.
2. The holders of shares of the Preferred Stock of each series shall be
entitled to receive, when and as declared by the Board of Directors, out of
funds legally available for the payment of dividends, dividends at the rates
fixed by the Board of Directors for such series, and no more, before any
dividends, other than dividends payable in Common Stock, shall be declared
and paid, or set apart for payment, on the Common Stock with respect to the
same dividend period.
3. Whenever, at any time, dividends on the then outstanding Preferred Stock
as may be required with respect to any series outstanding shall have been
paid or declared and set apart for payment on the then outstanding Preferred
Stock, and after complying with respect to any retirement or sinking fund or
funds for any series of Preferred Stock, the Board of Directors may, subject
to the provisions of the resolution or resolutions creating any series of
Preferred Stock, declare and pay dividends on the Common Stock, and the
holders of shares of the Preferred Stock shall not be entitled to share
therein.
4. The holders of shares of the Preferred Stock of each series shall be
entitled upon liquidation or dissolution or upon the distribution of the
assets of the Corporation to such preferences as provided in the resolution
or resolutions creating such series of Preferred Stock, and no more, before
any distribution of the assets of the Corporation shall be made to the
holders of shares of the Common Stock.
5. Except as otherwise provided by a resolution or resolutions of the Board
of Directors creating any series of Preferred Stock or by the General
Corporation Law of Delaware, the holders of shares of the Common Stock issued
and outstanding shall have and possess the exclusive right to notice of
stockholders' meetings and the exclusive power to vote. The holders of shares
of the Preferred Stock issued and outstanding shall, in no event, be entitled
to more than one vote for each share of Preferred Stock held by them unless
otherwise required by law.
Terms of the Preferred Stocks are as follows:
Series A Junior Preferred Stock
Section 1. Designation and Amount. This resolution shall provide for a
single series of preferred stock, the designation of which shall be ''Series
A Junior Preferred Stock'', without par value, and the number of shares
constituting such series shall be Eight Million (8,000,000).
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the
shares of Series A Junior Preferred Stock with respect to dividends, the
holders of shares of Series A Junior Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds
legally available for the purpose, quarterly dividends payable in cash on
the first day of March, June, September and December in each year (each
such date being referred to herein as a ''Quarterly Dividend Payment
Date''), commencing on the first Quarterly Dividend Payment Date after the
first issuance of a share or fraction of a share of Series A Junior
Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $5.00 or (b) subject to the provision for
adjustment hereinafter set forth, 100 times the aggregate per share amount
of all cash dividends, and 100 times the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions other
than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), to
be or being declared on the Common Stock, par value $1.00 per share, of
the Corporation (the ''Common Stock'') with respect to the same dividend
period. If the Quarterly Dividend Payment Date is a Saturday, Sunday or
legal holiday then such Quarterly Dividend Payment Date shall be the first
immediately preceding calendar day which is not a Saturday, Sunday or
legal holiday. In the event the Corporation shall at any time after
October 10, 1989 (the ''Rights Declaration Date'') (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide
the outstanding Common Stock, or (iii) combine the outstanding Common
Stock into a smaller number of shares, then in each such case the amount
to which holders of shares of Series A Junior Preferred Stock were
entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such
event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Junior Preferred Stock as provided in paragraph (A) above
immediately prior to the time it declares a dividend or distribution on
the Common Stock (other than a dividend payable in shares of Common
Stock); provided that, in the event no dividend or distribution shall be
declared on the Common Stock with respect to a particular dividend period,
a dividend of $5.00 per share on the Series A Junior Preferred Stock shall
nevertheless be payable on such Quarterly Dividend Payment Date with
respect to such quarterly period.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Junior Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series A
Junior Preferred Stock, unless the date of issue of such shares is prior
to the record date for the first Quarterly Dividend Payment Date, in which
case dividends on such shares shall begin to accrue from the date of issue
of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of
holders of shares of Series A Junior Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series
A Junior Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the
time outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Series A Junior Preferred Stock
entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be no more than 30 days prior to the date
fixed for the payment thereof. Dividends in arrears may be declared and
paid at any time, without reference to any Quarterly Dividend Payment
Date, to holders of record on such date, not exceeding 45 days preceding
the payment date thereof, as may be fixed by the Board of Directors.
(D) Except as hereinafter provided, no dividends shall be declared or
paid or set apart for payment on the shares of Series A Junior Preferred
Stock for any period if the Corporation shall be in default in the payment
of any dividends (including cumulative dividends, if applicable) on any
shares of Preferred Stock ranking, as to dividends, prior to the Series A
Junior Preferred Stock, unless the same shall be contemporaneously
declared and paid.
(E) Dividends payable on the Series A Junior Preferred Stock for the
initial dividend period and for any period less than a full quarterly
period, shall be computed on the basis of a 360-day year of 30-day months.
Section 3. Voting Rights. The holders of shares of Series A Junior
Preferred Stock shall have the following voting rights:
(A) Each share of Series A Junior Preferred Stock shall entitle the
holder thereof to one vote on all matters submitted to a vote of the
stockholders of the Corporation. The holders of Series A Junior Preferred
Stock shall be entitled to notice of all meetings of the stockholders of
the Corporation.
(B) Except as otherwise provided herein or by law, the holders of shares
of Series A Junior Preferred Stock and the holders of shares of Common
Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation.
(C) If, on the date used to determine stockholders of record for any
meeting of stockholders for the election of directors, a default in
preference dividends on the Preferred Stock shall exist, the number of
directors constituting the Board of Directors of the Corporation shall be
increased by two, and the holders of the Preferred Stock of all series
(whether or not the holders of such series of Preferred Stock would be
entitled to vote for the election of directors if such default in
preference dividends did not exist), shall have the right at such meeting,
voting together as a single class without regard to series, to the
exclusion of the holders of Common Stock, to elect two directors of the
Corporation to fill such newly created directorships. Each director
elected by the holders of shares of Preferred Stock (herein called a
''Preferred Director''), shall continue to serve as such director for the
full term for which he shall have been elected, notwithstanding that prior
to the end of such term a default in preference dividends shall cease to
exist. Any Preferred Director may be removed by, and shall not be removed
except by, the vote of the holders of record of the outstanding shares of
Preferred Stock, voting together as a single class without regard to
series, at a meeting of the stockholders, or of the holders of shares of
Preferred Stock, called for the purpose. So long as a default in any
preference dividends on the Preferred Stock shall exist (i) any vacancy in
the office of a Preferred Director may be filled (except as provided in
the following clause (ii)) by an instrument in writing signed by the
remaining Preferred Director and filed with the Corporation and (ii) in
the case of the removal of any Preferred Director, the vacancy may be
filled by the vote of the holders of the outstanding shares of Preferred
Stock, voting together as a single class without regard to series, at the
same meeting at which such removal shall be voted. Each director appointed
as aforesaid by the remaining Preferred Director shall be deemed, for all
purposes hereof, to be a Preferred Director. Whenever the term of office
of the Preferred Directors shall end and no default in preference
dividends shall exist, the number of directors constituting the Board of
Directors of the Corporation shall be reduced by two. For the purposes of
this paragraph (C), a ''default in preference dividends'' on the Preferred
Stock shall be deemed to have occurred whenever the amount of accrued and
unpaid dividends upon any series of the Preferred Stock shall be
equivalent to six full quarterly dividends or more, and, having so
occurred, such default shall be deemed to exist thereafter until, but only
until, all accrued dividends on all shares of Preferred Stock of each and
every series then outstanding shall have been paid through the last
Quarterly Dividend Payment Date.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Junior
Preferred Stock outstanding shall have been paid in full, the Corporation
shall not:
(i) declare or pay dividends on, make any other distributions on
(other than a dividend in Common Stock or in any other stock of the
Corporation ranking junior to the Series A Junior Preferred Stock as to
dividends and upon liquidation, dissolution or winding up and other
than as provided in subparagraph (ii) of this section), or redeem or
purchase or otherwise acquire for consideration (except by conversion
into or exchange for stock of the Corporation ranking junior to the
Series A Junior Preferred Stock as to dividends and upon dissolution,
liquidation or winding up), any shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding up) to the
Series A Junior Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Preferred Stock, except dividends paid ratably on the Series A Junior
Preferred Stock and all stock ranking on a parity with the Series A
Junior Preferred Stock as to dividends on which dividends are payable
or in arrears in proportion to the total amounts to which the holders
of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Preferred Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such parity stock in
exchange for shares of any stock of the Corporation ranking junior (as
to dividends and upon dissolution, liquidation or winding up) to the
Series A Junior Preferred Stock;
(iv) purchase or otherwise acquire for consideration any shares of
Series A Junior Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board
of Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair
and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of
the Corporation unless the Corporation could, under paragraph (A) of this
Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any shares of Series A Junior Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of the Series A
Junior Preferred Stock shall be entitled to receive the greater of (a)
$100 per share, plus accrued dividends to the date of distribution,
whether or not earned or declared, or (b) an amount per share, subject to
the provision for adjustment hereinafter set forth, equal to 100 times the
aggregate amount to be distributed per share to holders of Common Stock
(the ''Series A Liquidation Preference''). In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide
the outstanding Common Stock or (iii) combine the outstanding Common Stock
into a smaller number of shares, then in each such case the amount to
which holders of shares of Series A Junior Preferred Stock were entitled
immediately prior to such event pursuant to clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such
event.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference
and the liquidation preferences of all other series of preferred stock, if
any, which rank on a parity with the Series A Junior Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such
parity shares in proportion to their respective liquidation preferences.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares
of Series A Junior Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to 100 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series A Junior Preferred Stock shall be
adjusted by multiplying such amount by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 8. Optional Redemption.
(A) The Corporation shall have the option to redeem the whole or any
part of the Series A Junior Preferred Stock at any time on at least 30
days notice in accordance with the provisions of paragraph (B) of this
Section 8 at a redemption price equal to, subject to the provision for
adjustment hereinafter set forth, 100 times the ''current per share market
price'' of the Common Stock on the date of the mailing of the notice of
redemption, together with unpaid accumulated dividends to the date of such
redemption. In the event the Corporation shall at any time after October
10, 1989 (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine
the outstanding Common Stock into a smaller number of shares, then in each
such case the amount to which holders of shares of Series A Junior
Preferred Stock were otherwise entitled immediately prior to such event
under the preceding sentence shall be adjusted by multiplying such amount
by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event. The ''current per share market price'' on
any date shall be deemed to be the average of the closing price per share
of such Common Stock for the 10 consecutive Trading Days (as such term is
hereinafter defined) immediately prior to such date. The closing price for
each day shall be the last sale price, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked
prices regular way, in either cases as reported in the principal
consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the
Common Stock is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the
principal national securities exchange on which the Common Stock is listed
or admitted to trading or, if the Common Stock is not listed or admitted
to trading on any national securities exchange, the last quoted price or,
if not so quoted the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotations System (''NASDAQ'') or such
other system then in use or, if on any such date the Common Stock is not
quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in the
Common Stock selected by the Corporation. If on such date no such market
maker is making a market in the Common Stock, the fair value of the Common
Stock on such date as determined in good faith by the Board of Directors
of the Corporation shall be used. The term ''Trading Day'' shall mean a
day on which the principal national securities exchange on which the
Common Stock is listed or admitted to trading is open for the transaction
of business or, if the Common Stock is not listed or admitted to trading
on any national securities exchange, a Monday, Tuesday, Wednesday,
Thursday or Friday on which banking institutions in the State of New York
are not authorized or obligated by law or executive order to close.
(B) Whenever shares of Series A Junior Preferred Stock are to be
redeemed, the Corporation shall mail a notice (''Notice of Redemption'')
by first-class mail, postage prepaid, to each holder of record of shares
of Series A Junior Preferred Stock to be redeemed and to the transfer
agent for the Series A Junior Preferred Stock. The Notice of Redemption
shall be addressed to the holder at the address of the holder appearing on
the stock transfer books of the Corporation maintained by the transfer
agent for the Series A Junior Preferred Stock. The Notice of Redemption
shall include a statement of (i) the redemption date, (ii) the redemption
price, (iii) the number of shares of Series A Junior Preferred Stock to be
redeemed, (iv) the place or places where shares of the Series A Junior
Preferred Stock are to be surrendered for payment of the redemption price,
(v) that the dividends on the shares to be redeemed will cease to accrue
on such redemption date, and (vi) the provision under which redemption is
made. No defect in the Notice of Redemption or in the mailing thereof
shall affect the validity of the redemption proceedings, except as
required by law. From the date on which a Notice of Redemption shall have
been given as aforesaid and the Corporation shall have deposited with the
transfer agent for the Series A Junior Preferred Stock a sum sufficient to
redeem the shares of Series A Junior Preferred Stock as to which Notice of
Redemption has been given, with irrevocable instructions and authority to
pay the redemption price to the holders thereof, or if no such deposit is
made, then upon such date fixed for redemption (unless the Corporation
shall default in making payment of the redemption price), all rights of
the holders thereof as stockholders of the Corporation by reason of the
ownership of such shares (except their right to receive the redemption
price thereof, but without interest), shall terminate including, but not
limited to, their right to receive dividends, and such shares shall no
longer be deemed outstanding. The Corporation shall be entitled to
receive, from time to time, from the transfer agent for Series A Junior
Preferred Stock the interest, if any, on such monies deposited with it and
the holders of any shares so redeemed shall have no claim to any such
interest. In case the holder of any shares so called for redemption shall
not claim the redemption price for his shares within one year after the
date of redemption, the transfer agent for the Series A Junior Preferred
Stock shall, upon demand, pay over to the Corporation such amount
remaining on deposit and the transfer agent for the Series A Junior
Preferred Stock shall thereupon be relieved of all responsibility to the
holders of such shares and such holder of the shares of the Series A
Junior Preferred Stock so called for redemption shall look only to the
Corporation for the payment thereof.
(C) In the event that fewer than all the outstanding shares of the
Series A Junior Preferred Stock are to be redeemed, the number of shares
to be redeemed shall be determined by the Board of Directors and the
shares to be redeemed shall be determined by lot or pro rata as may be
determined by the Board of Directors or by any other method as may be
determined by the Board of Directors in its sole discretion to be
equitable.
(D) If the Corporation shall be in default in the payment of any
dividends (including cumulative dividends, if applicable) on any shares of
Preferred Stock ranking, as to dividends, prior to the Series A Junior
Preferred Stock, then no shares of the Series A Junior Preferred Stock
shall be redeemed and the Corporation shall not purchase or otherwise
acquire any shares of the Series A Junior Preferred Stock.
Section 9. Ranking.
(A) The Series A Junior Preferred Stock shall rank junior to all other
series of the Corporation's Preferred Stock as to the payment of dividends
and the distribution of assets upon liquidation, dissolution or winding
up, unless the terms of any such series shall provide otherwise.
(B) For purposes of this resolution, any stock of any class or classes
of the Corporation shall be deemed to rank:
(i) prior to the shares of the Series A Junior Preferred Stock,
either as to dividends or upon liquidation, dissolution or winding up,
if the holders of such class or classes shall be entitled to the
receipt of dividends or of amounts distributable upon dissolution,
liquidation or winding up of the Corporation, whether voluntary or
involuntary, as the case may be, in preference or priority to the
holders of shares of the Series A Junior Preferred Stock. Each holder
of any share of the Series A Junior Preferred Stock, by his acceptance
thereof, expressly covenants and agrees that the rights of the holders
of any shares of any other series of Preferred Stock of the Corporation
to receive dividends or amounts distributable upon dissolution,
liquidation or winding up of the Corporation, whether voluntary or
involuntary, shall be and hereby are expressly prior to his rights
unless in the case of any particular series of Preferred Stock the
certificate or other instrument creating or evidencing the same
expressly provides that the rights of the holders of such series shall
not be prior to the shares of the Series A Junior Preferred Stock; and
(ii) on a parity with shares of the Series A Junior Preferred Stock,
either as to dividends or upon liquidation, whether or not the dividend
rates, dividend payment dates or redemption or liquidation prices per
share or sinking fund provisions, if any, be different from those of
the Series A Junior Preferred Stock, if the holders of such stock shall
be entitled to the receipt of dividends or of amounts distributable
upon dissolution, liquidation or winding up of the Corporation, whether
voluntary or involuntary, as the case may be, in proportion to their
respective dividend rates or liquidation prices, without preference or
priority, one over the other, as between the holders of such stock and
the holders of shares of the Series A Junior Preferred Stock; and
(iii) junior to shares of the Series A Junior Preferred Stock, either
as to dividends or upon liquidation, if such class or classes shall be
Common Stock or if the holders of shares of the Series A Junior
Preferred Stock shall be entitled to receipt of dividends or of amounts
distributable upon dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, as the case may be, in
preference or priority to the holders of shares of such class or
classes.
Section 10. Amendment. Except as otherwise set forth in this Certificate of
Designation, Preferences and Rights with respect to the Series A Junior
Preferred Stock, holders of Series A Junior Preferred Stock shall not have
any special powers and their consent shall not be required for taking any
corporate action, provided, however, that:
(A) Unless the vote or consent of the holders of a greater number of
shares shall then be required by law, the consent of the holders of at
least 662/3% of all of the shares of the Series A Junior Preferred Stock
at the time outstanding, given in person or by proxy, either in writing or
by a vote at a meeting called for the purpose at which the holders of
shares of the Series A Junior Preferred Stock shall vote together as a
separate class, shall be necessary for authorizing, effecting or
validating the amendment, alteration or repeal of any of the provisions of
the Restated Certificate of Incorporation or of any certificate amendatory
thereof or supplemental thereto (including any Certificate of Designation,
Preferences and Rights or any similar document relating to any series of
Preferred Stock) so as to affect adversely the powers, preferences, or
rights, of this Series A Junior Preferred Stock. The increase of the
authorized amount of the Preferred Stock, or the creation, authorization
or issuance of any shares of any other class of stock of the Corporation
ranking prior to or on a parity with the shares of the Series A Junior
Preferred Stock as to dividends or upon liquidation, or the
reclassification of any authorized or outstanding stock of the Corporation
into any such prior or parity shares, or the creation, authorization or
issuance of any obligation or security convertible into or evidencing the
right to purchase any such prior or parity shares shall not be deemed to
affect adversely the powers, preferences or rights of the Series A Junior
Preferred Stock.
Section 11. Fractional Shares. Series A Junior Preferred Stock may be
issued in fractions of a share which shall entitle the holder, in proportion
to such holder's fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the benefit of all other
rights of holders of Series A Junior Preferred Stock.
6.50% Cumulative Convertible Preferred Stock
(Without Par Value)
1. Designation. This resolution shall provide for a single series of
Preferred Stock, the designation of which shall be ''6.50% Cumulative
Convertible Preferred Stock'', without par value (hereinafter called this
''Series''), and the number of authorized shares constituting this Series is
3,000,000. Shares of this Series shall have a stated value of $1.00 per share
(which shall also be the stated capital of each share). The number of
authorized shares of this Series may be reduced by further resolution adopted
by the Board of Directors and by the filing of a certificate pursuant to the
provisions of the General Corporation Law of the State of Delaware stating
that such reduction has been so authorized, but the number of authorized
shares of this Series shall not be so increased.
2. Dividends.
(a) The holders of shares of this Series shall be entitled to receive
dividends payable in cash at a rate of 6.50% per annum per share on the
initial liquidation preference of $50.00 per share. Such dividends shall
be cumulative from the date of original issue of such shares, and shall be
payable, when, as and if declared by the Board of Directors, out of funds
legally available for such purpose, on the last calendar day of March,
June, September and December of each year, commencing June 30, 1993,
except that if such date is a Saturday, Sunday or legal holiday, then such
dividend shall be payable on the first immediately preceding calendar day
which is not a Saturday, Sunday or legal holiday.
(b) Each dividend on shares of this Series shall be paid to the holders
of record of such shares as they appear on the stock transfer books of the
Corporation on such record date, not exceeding 30 days preceding the
payment date thereof, as shall be fixed by the Board of Directors.
Dividends in arrears for any past dividend period or any part thereof may
be declared and paid at any time, without reference to any regular
dividend payment date, to holders of record on such date, not exceeding 45
days preceding the payment date thereof, as may be fixed by the Board of
Directors.
(c) Except as hereinafter provided, no dividends shall be declared or
paid or set apart for payment on the Preferred Stock of any series
ranking, as to dividends, on a parity with or junior to this Series for
any period unless full cumulative dividends have been or contemporaneously
are declared and paid on this Series for all past dividend periods. When
dividends are not paid in full, as aforesaid, upon the shares of this
Series and any other Preferred Stock ranking on a parity as to dividends
with this Series, all dividends declared upon shares of this Series and
any other Preferred Stock ranking on a parity as to dividends with this
Series shall be declared pro rata so that the amount of dividends declared
per share on this Series and such other Preferred Stock shall in all cases
bear to each other the same ratio that accrued dividends per share on the
shares of this Series and such other Preferred Stock bear to each other.
Holders of shares of this Series shall not be entitled to any dividends,
whether payable in cash, property or stock, in excess of full cumulative
dividends, as herein provided, on this Series. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend
payment or payments on this Series which may be in arrears.
(d) So long as any shares of this Series are outstanding, no dividend
(other than a dividend in Common Stock or in any other stock of the
Corporation ranking junior to this Series as to dividends and upon
liquidation and other than as provided in Section 2(c)) shall be declared
or paid or set aside for payment or other distribution declared or made
upon the Common Stock or any other stock of the Corporation ranking junior
to or on a parity with this Series as to dividends or upon liquidation,
nor shall any Common Stock nor any other stock of the Corporation ranking
junior to or on a parity with this Series as to dividends or upon
liquidation be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any shares of any such stock) by the
Corporation (except by conversion into or exchange for stock of the
Corporation ranking junior to this Series as to dividends and upon
liquidation) unless, in each case, the full cumulative dividends on all
outstanding shares of this Series shall have been paid or
contemporaneously are declared and paid for all past dividend periods.
(e) Dividends payable on this Series for each full quarterly dividend
period shall be computed by dividing the annual dividend rate by four and
multiplying by the initial liquidation preference of $50.00 per share.
Dividends payable on this Series for any period shorter or longer than a
full quarterly dividend period, including for the initial dividend period,
shall be computed on the basis of a 360-day year of twelve 30-day months.
3. Optional Redemption; Provision for U.S. Steel Group Special Events;
Related Provisions.
(a) Except as provided in Section 3(b), the shares of this Series shall
not be redeemable by the Corporation prior to April 1, 1996. On and after
April 1, 1996, shares of this Series may, subject to the satisfaction of
the condition set forth in the last sentence of this Section 3(a), be
redeemed, in whole at any time or in part from time to time, at the option
of the Corporation, out of funds legally available for such purpose, for
cash in an amount equal to the following redemption prices per share if
redeemed during the twelve-month period beginning April 1 of the year
indicated below, upon giving notice as provided below:
<TABLE>
<CAPTION>
Year Redemption Dollar
Price Equivalent
(As a
percentage of Per Share
initial
liquidation
preference)
<C> <C> <C>
1996 104.55% $52.275
1997 103.90 51.950
1998 103.25 51.625
1999 102.60 51.300
2000 101.95 50.975
2001 101.30 50.650
2002 100.65 50.325
2003 and
thereafter 100.00 50.000
</TABLE>
and thereafter at the initial liquidation preference of $50.00 per share,
plus, in each case, an amount equal to all accrued and unpaid dividends
thereon to the date fixed for redemption. No shares of this Series may be
redeemed in accordance with this Section 3(a) if the Corporation shall be
advised on or prior to the related Redemption Date by either Moody's
Investors Service, Inc. (''Moody's'') (provided that Moody's is then
rating the senior unsecured debt of the Corporation) or Standard & Poor's
Corporation (''S&P'') (provided that S&P is then rating the senior
unsecured debt of the Corporation) that such redemption would result in an
immediate lowering by Moody's or S&P, as the case may be, of the credit
rating on the Corporation's senior unsecured debt from its then existing
level, unless the Corporation shall have received from the issuance of
common stock of the Corporation, since the date which is two years prior
to the related Redemption Date, net proceeds in an aggregate amount at
least equal to the product of the initial liquidation preference of $50.00
per share times the number of shares of this Series to be redeemed.
(b) (i) The shares of this Series shall be redeemed by the Corporation,
in whole, out of funds legally available for such purpose, for cash in an
amount equal to the Redemption Price if any of the following events with
respect to the U.S. Steel Group occur (such events, collectively, the
''U.S. Steel Group Special Events''):
(A) (1) The Corporation exchanges all of the outstanding shares of
Steel Stock for all of the outstanding shares of common stock of the
U.S. Steel Group Subsidiary (as provided in Section 2(b)(iii) of
Division I of the Certificate of Incorporation) (the ''Steel Group
Subsidiary Exchange'') or (2) in the event of a Disposition of all or
substantially all of the properties and assets of the U.S. Steel Group,
the Corporation either pays a dividend on the Steel Stock in, or
redeems a number of shares of Steel Stock for, an amount equal to the
Net Proceeds of such Disposition (as provided in Section 2(b)(i)(A) or
Section 2(b)(i)(B), respectively, of Division I of the Certificate of
Incorporation) (the ''Steel Group Disposition Dividend'' or the ''Steel
Group Disposition Redemption'', respectively); or
(B) The Corporation pays a dividend on, or the Corporation or any of
its Subsidiaries consummates a tender offer or exchange offer for,
shares of Steel Stock and the aggregate amount of such dividend or the
consideration paid in such tender offer or exchange offer is an amount
equal to all or substantially all of the properties and assets of the
U.S. Steel Group (the ''Steel Group Special Dividend'' or the ''Steel
Group Tender or Exchange Offer'', respectively); provided that the
calculation of all or substantially all of the properties and assets of
the U.S. Steel Group shall be made without giving effect to any money
borrowed by the Corporation or any of its Subsidiaries in connection
with such dividend or tender offer or exchange offer, as the case may
be.
The Redemption Date of shares of this Series pursuant to this Section
3(b)(i) shall be, if the applicable U.S. Steel Group Special Event is (I)
the Steel Group Subsidiary Exchange, the date of such exchange, (II) the
Steel Group Disposition Dividend or the Steel Group Special Dividend, the
date such dividend is paid, (III) the Steel Group Disposition Redemption,
the date of such redemption or (IV) the Steel Group Tender or Exchange
Offer, the date such tender offer or exchange offer is consummated.
Notwithstanding anything to the contrary contained in this Section
3(b)(i), any redemption pursuant to this Section 3(b)(i) shall be
conditioned upon the actual exchange of Steel Stock for shares of common
stock of the U.S. Steel Group Subsidiary, payment of the Steel Group
Disposition Dividend or the amount due as a result of the Steel Group
Disposition Redemption (in each case in the required kind of capital
stock, cash, securities and/or other property), payment of the Steel Group
Special Dividend or the consummation of the Steel Group Tender or Exchange
Offer, as the case may be.
(ii) The shares of this Series shall be redeemed by the Corporation, in
whole, out of funds legally available for such purpose, for cash in an
amount equal to the Redemption Price if following the Disposition of all
or substantially all of the properties and assets of the U.S. Steel
Group, the Corporation exchanges all of the outstanding shares of Steel
Stock for Marathon Stock (as provided in Section 2(b)(i)(C) of Division I
of the Certificate of Incorporation) and, at any time subsequent to such
exchange, any of the following events with respect to the Marathon Group
occur (such events, collectively, the ''Marathon Group Special Events''):
(A) The Corporation exchanges all of the outstanding shares of
Marathon Stock for all of the outstanding shares of common stock of the
Marathon Group Subsidiary (as provided in Section 2(a)(i) of Division I
of the Certificate of Incorporation) (the ''Marathon Group Subsidiary
Exchange''); or
(B) The Corporation pays a dividend on, or the Corporation or any of
its Subsidiaries consummates a tender offer or exchange offer for,
shares of Marathon Stock and the aggregate amount of such dividend or
the consideration paid in such tender offer or exchange offer is an
amount equal to all or substantially all of the properties and assets
of the Marathon Group (the ''Marathon Group Special Dividend'' or the
''Marathon Group Tender or Exchange Offer'', respectively); provided
that the calculation of all or substantially all of the properties and
assets of the Marathon Group shall be made without giving effect to any
money borrowed by the Corporation or any of its Subsidiaries in
connection with such dividend or tender offer or exchange offer, as the
case may be; provided, further, that, at the time of the payment of
such dividend on, or the consummation of such tender or exchange offer
for, Marathon Stock, there is another class of common stock, other than
Marathon Stock, of the Corporation then outstanding.
The Redemption Date of shares of this Series pursuant to this Section
3(b)(ii) shall be, if the applicable Marathon Group Special Event is (I)
the Marathon Group Subsidiary Exchange, the date of such exchange, (II)
the Marathon Group Special Dividend, the date such dividend is paid or
(III) the Marathon Group Tender or Exchange Offer, the date such tender
offer or exchange offer is consummated. Notwithstanding anything to the
contrary contained in this Section 3(b)(ii), any redemption pursuant to
this Section 3(b)(ii) shall be conditioned upon the actual exchange of
Marathon Stock for shares of common stock of the Marathon Group
Subsidiary, payment of the Marathon Group Special Dividend or the
consummation of the Marathon Group Tender or Exchange Offer, as the case
may be.
(c) The following general redemption provisions shall apply, as the
context requires, to any redemption of any shares of this Series pursuant
to this Section 3:
(i) In the event that fewer than all the outstanding shares of this
Series are to be redeemed, the number of shares to be redeemed shall be
determined by the Board of Directors and the shares to be redeemed
shall be determined by lot or pro rata as may be determined by the
Board of Directors or by any other method as may be determined by the
Board of Directors in its sole discretion to be equitable, provided
that the Corporation may redeem any number of shares of this Series
owned by holders whose aggregate holdings of such shares do not exceed
100 as may be specified by the Corporation.
(ii) In the event the Corporation shall redeem shares of this Series
pursuant to this Section 3, notice of such redemption shall be given,
(x) if such redemption is a result of the Steel Group Tender or
Exchange Offer or the Marathon Group Tender or Exchange Offer, on the
date of the public announcement of such tender offer or exchange offer
by the Corporation or any of its Subsidiaries, but in any event not
less than 30 days prior to such redemption, and on the date of the
public announcement of any extension thereof, (y) if such redemption is
a result of the Steel Group Disposition Dividend or the Steel Group
Disposition Redemption, on a date not less than 45 days prior to the
date selected by the Board of Directors for the payment of such
dividend or such redemption and (z) otherwise, on a date at least 30
days but not more than 60 days prior to the date fixed for such
redemption by the Board of Directors, in each case to each holder of
record of the shares of this Series to be redeemed. Such notice shall
be given by first class mail, postage prepaid, at such holder's address
as the same appears on the stock transfer books of the Corporation.
Neither the failure to mail, to any particular holder, any notice
required by this Section 3(c)(ii) nor any defect therein or in the
mailing thereof, shall affect the sufficiency of the notice or the
validity of the proceedings for redemption with respect to any other
holder. Any notice which was mailed in the manner herein provided shall
be conclusively presumed to have been duly given on the date mailed
whether or not the holder receives the notice. Each such notice shall
state, as appropriate: (A) the Redemption Date; (B) the number of
shares of this Series to be redeemed and, if fewer than all the shares
held by such holder are to be redeemed, the number of such shares to be
redeemed from such holder; (C) the Redemption Price to be paid in
respect of the redemption; (D) the place or places where certificates
for such shares are to be surrendered for the payment of the Redemption
Price; (E) the then current Conversion Price and, if any event then
known to the Corporation will result in an adjustment to the Conversion
Price on or prior to the Redemption Date, such adjusted Conversion
Price and the date of such adjustment; (F) if such redemption of shares
of this Series is the result of a U.S. Steel Group Special Event or a
Marathon Group Special Event, that such redemption is conditioned upon
the occurrence of the applicable U.S. Steel Group Special Event or
Marathon Group Special Event and if that U.S. Steel Group Special Event
is the Steel Group Disposition Dividend or the Steel Group Disposition
Redemption, the last date on which the shares of this Series may be
converted into shares of Steel Stock, determined as set forth in
Section 4(a); and (G) that dividends on the shares of this Series to be
redeemed shall cease to accrue on the Redemption Date, provided that if
such redemption of shares of this Series is the result of a U.S. Steel
Group Special Event or a Marathon Group Special Event, the conditions
to such redemption shall have been satisfied.
(iii) Notice having been given as provided in Section 3(c)(ii), from
and after the Redemption Date (unless default shall be made by the
Corporation in providing an adequate amount of money for the payment of
the Redemption Price necessary to effect such redemption in accordance
with the terms hereof) (A) except if the redemption is the result of a
U.S. Steel Group Special Event or a Marathon Group Special Event and
the conditions to such redemption shall not have been satisfied,
dividends on the shares of this Series so called for redemption shall
cease to accrue, (B) such shares shall no longer be deemed to be
outstanding and (C) all rights of the holders thereof as holders of
shares of this Series shall cease (except the right to receive from the
Corporation the Redemption Price, without interest thereon, upon
surrender and endorsement of their certificates). Upon surrender in
accordance with said notice of the certificates for any shares so
redeemed (properly endorsed or assigned for transfer, unless the
Corporation shall waive such requirement), such shares shall be so
redeemed by the Corporation.
(iv) The Corporation's obligation to provide an adequate amount of
money for the payment of the Redemption Price necessary to effect any
redemption in accordance with this Section 3 shall be deemed fulfilled
if, on or before the applicable Redemption Date, the Corporation shall
deposit with a bank or trust company that has an office in the Borough
of Manhattan, City of New York, and that has, or is an affiliate of a
bank or trust company that has, a capital and surplus of at least
$50,000,000, an amount of money adequate for the payment of the
aggregate Redemption Price necessary for such redemption in accordance
with the terms hereof, in trust, with irrevocable instructions that
such money be applied to the redemption of the shares of this Series so
called for redemption. If such redemption is conditioned upon the
payment of the Steel Group Disposition Dividend or payment of the
amount due as a result of the Steel Group Disposition Redemption, the
Corporation shall deposit such moneys and give such irrevocable
instructions in respect of such redemption, subject to the payment of
such Steel Group Disposition Dividend or payment of the amount due as a
result of such Steel Group Disposition Redemption, not later than the
30th day prior to the date selected by the Board for the payment of
such dividend on, or the redemption of, Steel Stock, but in any event
prior to the date the Corporation declares such dividend or gives
notice of such redemption, each in accordance with Section 2 of
Division I of the Certificate of Incorporation. No interest shall
accrue for the benefit of the holders of shares of this Series to be
redeemed on any money so payable by the Corporation in respect of any
redemption. Subject to applicable escheat laws, any money unclaimed at
the end of two years from the related Redemption Date shall revert to
the general funds of the Corporation, after which reversion the holders
of such shares so called for redemption shall look only to the general
funds of the Corporation for the payment of such money. In case fewer
than all the shares of this Series represented by any such certificate
are redeemed, a new certificate shall be issued representing the
unredeemed shares without cost to the holder thereof.
(v) Any shares of this Series which shall at any time have been
redeemed shall, upon the taking of any action required by law, have the
status of authorized but unissued shares of Preferred Stock, without
designation as to series until such shares are once more designated as
part of a particular series by the Board of Directors.
(vi) Notwithstanding the foregoing provisions of this Section 3,
unless the full cumulative dividends on all outstanding shares of this
Series shall have been paid or contemporaneously are declared and paid
for all past dividend periods, no shares of this Series shall be
redeemed unless all outstanding shares of this Series are
simultaneously redeemed, and the Corporation shall not purchase or
otherwise acquire any shares of this Series; provided, however, that
the foregoing shall not prevent the purchase or acquisition of shares
of this Series pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding shares of this Series.
4. Conversion or Exchange. Holders of shares of this Series shall have the
right to convert all or a portion of such shares into shares of Steel Stock,
as follows:
(a) Subject to and upon compliance with the provisions of this Section
4, a holder of shares of this Series shall have the right, at such
holder's option, at any time, to convert such shares into the number of
fully paid and nonassessable shares of Steel Stock equal to the quotient
of (i) the product of the initial liquidation preference for shares of
this Series of $50.00 per share for such shares times the number of shares
of this Series to be converted, divided by (ii) the Conversion Price (as
in effect on the date provided for in the last paragraph of Section 4(b))
by surrendering the certificates representing such shares to be converted,
such surrender to be made in the manner provided in accordance with this
Section 4; provided that the right to convert shares of this Series called
for redemption pursuant to Section 3 shall terminate at the close of
business on the related Redemption Date, unless the Corporation shall
default in making payment of any moneys payable upon such redemption under
Section 3 or, if the redemption of shares of this Series is the result of
a Steel Group Special Event or a Marathon Group Special Event, the
conditions to such redemption shall not have been satisfied; and,
provided, further, that if the Corporation has given notice of a
redemption pursuant to Section 3(c) which is conditioned on the occurrence
of the Steel Group Disposition Dividend or the Steel Group Disposition
Redemption, the right to convert shares of this Series shall terminate on
the 31st day prior to the date selected by the Board of Directors for such
redemption. Any holder of any share or shares of this Series may only
convert whole shares of this Series and the Corporation shall not be
obligated to issue any fractional shares of this Series.
(b) In order to exercise the conversion right, the holder of any shares
of this Series to be converted shall surrender the certificate
representing such shares, duly endorsed or assigned to the Corporation or
in blank, at the office of the Transfer Agent, accompanied by written
notice to the Corporation that the holder thereof elects to convert such
shares or a specified portion thereof. Unless the shares issuable on
conversion are to be issued in the same name as the name in which such
shares of this Series are registered, any shares surrendered for
conversion shall be accompanied by instruments of transfer, in form
satisfactory to the Corporation, duly executed by the holder or such
holder's duly authorized attorney and an amount sufficient to pay any
transfer or similar tax (or evidence reasonably satisfactory to the
Corporation demonstrating that such taxes have been paid).
Holders of shares of this Series at the close of business on a record
date for determining stockholders entitled to receive a dividend shall be
entitled to receive the dividend payable on such shares on the
corresponding dividend payment date (except that holders of shares called
for redemption on a Redemption Date between such record date and the
dividend payment date shall not be entitled to receive such dividend on
such dividend payment date) notwithstanding the conversion thereof
following such dividend record date and prior to such dividend payment
date. However, shares of this Series surrendered for conversion during the
period between the close of business on any dividend record date and the
opening of business on the corresponding dividend payment date (except
shares called for redemption on a Redemption Date during such period) must
be accompanied by payment of an amount equal to the dividend payable on
such shares on such dividend payment date. A holder of shares of this
Series on a dividend record date who (or whose transferee) tenders any
such shares for conversion into shares of Steel Stock on a dividend
payment date will receive the dividend payable by the Corporation on such
shares of this Series on such date, and the converting holder need not
include payment of the amount of such dividend upon surrender of such
shares for conversion. Except as provided above, the Corporation shall
make no payment or allowance for unpaid dividends, whether or not in
arrears, on converted shares or for dividends on the shares of Steel Stock
issued upon such conversion.
As promptly as practicable after the surrender of certificates for
shares of this Series as aforesaid, the Corporation shall issue and shall
deliver at such office to such holder, or on such holder's written order,
a certificate or certificates for the number of full shares of Steel Stock
issuable upon the conversion of such shares in accordance with the
provisions of this Section 4, and any fractional interest in respect of a
share of Steel Stock arising upon such conversion shall be settled as
provided in Section 4(c).
Each conversion shall be deemed to have been effected immediately prior
to the close of business on the date on which the certificates for shares
of this Series shall have been surrendered and the notice referred to in
the third preceding paragraph (and, if applicable, payment of an amount
equal to the dividend payable on such shares as described in the second
preceding paragraph) received by the Corporation as aforesaid, and the
person or persons in whose name or names any certificate or certificates
for shares of Steel Stock shall be issuable upon such conversion shall be
deemed to have become the holder or holders of record of the shares
represented thereby at such time on such date and such conversion shall be
at the Conversion Price in effect at such time on such date.
(c) No fractional shares or scrip representing fractions of shares of
Steel Stock or any other common stock of the Corporation shall be issued
upon conversion of any share of this Series. Instead of any fractional
interest in a share of Steel Stock or such other common stock that would
otherwise be deliverable upon the conversion of a share of this Series,
the Corporation shall pay to the holder of such share an amount in cash
based upon the Closing Price of Steel Stock or such other common stock on
the Trading Day immediately preceding the date of conversion. If more than
one share shall be surrendered for conversion at one time by the same
holder, the number of full shares of Steel Stock or such other common
stock issuable upon conversion thereof shall be computed on the basis of
the aggregate number of shares of this Series so surrendered.
(d) The Conversion Price per share of Steel Stock shall be adjusted from
time to time as follows:
(i) If the Corporation shall after the date on which shares of this
Series are initially issued (A) pay a dividend or make a distribution
on any class of its capital stock in shares of Steel Stock, (B)
subdivide the outstanding Steel Stock into a greater number of shares
or (C) combine the outstanding Steel Stock into a smaller number of
shares, then the Conversion Price in effect at the opening of business
on the day next following the date fixed for the determination of
stockholders entitled to receive such dividend or distribution or at
the opening of business on the day next following the day on which such
subdivision or combination becomes effective, as the case may be, shall
be adjusted so that the holder of any share of this Series thereafter
surrendered for conversion shall be entitled to receive the number of
shares of Steel Stock that such holder would have owned or have been
entitled to receive after the happening of any of the events described
above had such share been converted immediately prior to the record
date in the case of a dividend or distribution or the effective date in
the case of a subdivision or combination. An adjustment made pursuant
to this Section 4(d)(i) shall become effective immediately after the
opening of business on the day next following the record date (except
as provided in Section 4(m)) in the case of a dividend or distribution
and shall become effective immediately after the opening of business on
the day next following the effective date in the case of a subdivision
or combination.
(ii) If the Corporation shall issue after the date on which shares of
this Series are initially issued rights or warrants (other than any
rights or warrants (including the Rights) referred to in Section
4(d)(iii) below) to all holders of Steel Stock entitling them (for a
period expiring within 45 days after the record date mentioned below)
to subscribe for or purchase Steel Stock at a price per share less than
the Current Market Price per share of Steel Stock on the record date
for the determination of stockholders entitled to receive such rights
or warrants, then the Conversion Price in effect at the opening of
business on the day next following such record date shall be adjusted
to equal the price determined by multiplying (I) the Conversion Price
in effect immediately prior to the opening of business on the day next
following the date fixed for such determination by (II) a fraction, the
numerator of which shall be the sum of (A) the number of shares of
Steel Stock outstanding on the close of business on the date fixed for
such determination and (B) the number of shares that the aggregate
proceeds to the Corporation from the exercise of such rights or
warrants for Steel Stock would purchase at such Current Market Price,
and the denominator of which shall be the sum of (A) the number of
shares of Steel Stock outstanding on the close of business on the date
fixed for such determination and (B) the number of additional shares of
Steel Stock offered for subscription or purchase pursuant to such
rights or warrants. Such adjustment shall become effective immediately
after the opening of business on the day next following such record
date (except as provided in Section 4(m)). In determining whether any
rights or warrants entitle the holders of Steel Stock to subscribe for
or purchase shares of Steel Stock at less than the Current Market Price
thereof, there shall be taken into account any consideration received
by the Corporation upon issuance and upon exercise of such rights or
warrants, the value of such consideration, if other than cash, to be
determined by the Board of Directors.
(iii) If the Corporation shall distribute to all holders of the Steel
Stock any shares of capital stock (other than common stock of the
Corporation), evidences of indebtedness, cash or other assets of the
Corporation (including securities, but excluding (w) any dividend or
distribution referred to in Section 4(d)(i), (x) any rights or warrants
referred to in Section 4(d)(ii) or in the second or third paragraph of
this Section 4(d)(iii), (y) any dividend or distribution paid
exclusively in cash or (z) any stocks, securities or other property
received as a result of a transaction referred to in Section 4(f)) (any
of the foregoing being hereinafter referred to in this Section
4(d)(iii) as the ''Securities''), then in each such case the Conversion
Price shall be adjusted so that it shall equal the price determined by
multiplying (I) the Conversion Price in effect immediately prior to the
close of business on the date fixed for the determination of
stockholders entitled to receive such distribution by (II) a fraction,
the numerator of which shall be the Current Market Price per share of
the Steel Stock on the record date mentioned below less the then fair
market value (as determined by the Board of Directors) of the portion
of the Securities so distributed to one share of Steel Stock, and the
denominator of which shall be the Current Market Price per share of the
Steel Stock on the record date mentioned below. Such adjustment shall
become effective immediately at the opening of business on the day next
following the record date for the determination of stockholders
entitled to receive such distribution (except as provided in Section
4(m)).
With respect to the Amended and Restated Rights Agreement, dated as of
October 1, 1992 (as amended or otherwise modified from time to time, the
''Restated Rights Agreement''), between the Corporation and Mellon Bank,
N.A. (terms used in this paragraph and not otherwise defined herein having
the meanings set forth in the Restated Rights Agreement), the Conversion
Price will be adjusted only when the Rights issuable pursuant thereto
become exercisable after the Corporation's right of redemption thereunder
has expired. Subject to the foregoing, upon the later to occur of the
Distribution Date and a Section 11(a)(ii) Event (the ''Adjustment Date''),
the Conversion Price in effect at the opening of business on the
Adjustment Date shall be adjusted to equal the price determined by
multiplying such Conversion Price by a fraction the numerator of which
shall be equal to the Current Market Price per share of the Steel Stock on
the Trading Day immediately prior to the Adjustment Date less an amount
equal to the quotient of (x) the aggregate fair market value on the
Adjustment Date (as determined by the Board of Directors) of the Rights
distributed under the Restated Rights Agreement divided by (y) the number
of shares of Steel Stock outstanding on such day prior to the Adjustment
Date and the denominator of which shall be equal to such Current Market
Price per share of the Steel Stock. Such adjustment shall become effective
immediately after the opening of business on the day next following such
Adjustment Date.
In case the Corporation shall (other than pursuant to the Restated
Rights Agreement) distribute rights or warrants to purchase Steel Stock
pro rata to all holders of Steel Stock which rights or warrants are not at
such time immediately exercisable but, upon the occurrence of a specified
event or events (''Exercise Trigger Date'') will become exercisable and
once they become exercisable will entitle, or upon the occurrence of an
additional specified event or events (''Price Trigger Date'') will
entitle, the holder thereof to purchase Steel Stock at a price per share
of Steel Stock less than the Current Market Price of the Steel Stock on
the Trading Day next succeeding the later of the Exercise Trigger Date or
the Price Trigger Date (''Adjustment Trigger Date'') and there shall have
occurred such Adjustment Trigger Date, thus permitting the holders of such
rights or warrants irrevocably to exercise any exchange, subscription or
purchase rights conferred by such rights or warrants at a price per share
of Steel Stock less than such Current Market Price, then the Conversion
Price in effect at the opening of business on the Adjustment Trigger Date
shall be adjusted by multiplying (I) such Conversion Price by (II) a
fraction, the numerator of which shall be equal to the Current Market
Price per share of the Steel Stock on the Trading Day immediately prior to
the Adjustment Trigger Date less an amount equal to the quotient of (x)
the aggregate fair market value on the Adjustment Trigger Date of the
rights or warrants so distributed (as determined by the Board of
Directors) divided by (y) the number of shares of Steel Stock outstanding
on such day prior to the Adjustment Trigger Date and the denominator of
which shall be equal to such Current Market Price per share of the Steel
Stock. Such adjustment shall become effective immediately after the
opening of business on the day next following such Adjustment Trigger
Date.
(iv) If the Corporation shall, by dividend or otherwise, at any time
distribute to all holders of the Steel Stock cash (excluding any
regular quarterly dividend payable solely in cash, any cash that is
distributed as part of a distribution requiring a Conversion Price
adjustment pursuant to Section 4(d)(iii) and cash that is distributed
in a merger or consolidation to which Section 4(f) applies) in an
aggregate amount that, together with (A) the aggregate amount of any
other distributions to all holders of the Steel Stock made exclusively
in cash (to which this Section 4(d)(iv) would otherwise apply) within
the 12 months preceding the date of payment of such distribution and in
respect of which no Conversion Price adjustment has been made and (B)
all Excess Purchase Payments in respect of each tender offer or
exchange offer or other negotiated purchase for Steel Stock concluded
by the Corporation or any of its Subsidiaries within the 12 months
preceding the date of payment of such distribution and in respect of
which no Conversion Price adjustment has been made, exceeds an amount
equal to 121/2% of the product of the Current Market Price per share of
Steel Stock on the date fixed for determination of holders of Steel
Stock entitled to receive such distribution times the number of shares
of Steel Stock outstanding on such date, then the Conversion Price
shall be adjusted so that it shall equal the price determined by
multiplying (I) such Conversion Price in effect immediately prior to
the Conversion Price adjustment contemplated by this Section 4(d)(iv)
by (II) a fraction the numerator of which shall be the Current Market
Price per share of the Steel Stock on the date fixed for determination
of holders of Steel Stock entitled to receive such distribution less
the combined amount of such cash and such Excess Purchase Payments so
distributed applicable to one share of Steel Stock and the denominator
of which shall be such Current Market Price per share of the Steel
Stock on such date of determination. Such adjustment shall become
effective immediately prior to the opening of business on the day next
following the date fixed for such determination.
(v) In case a tender offer or exchange offer or other negotiated
purchase made by the Corporation or any of its Subsidiaries for all or
any portion of the Steel Stock shall be consummated, if the aggregate
amount of any Excess Purchase Payment, together with (A) the aggregate
amount of any distributions made to all holders of Steel Stock made
exclusively in cash (excluding any regular quarterly dividend payable
solely in cash, any cash that is distributed as part of a distribution
requiring a Conversion Price adjustment pursuant to Section 4(d)(iii)
and cash that is distributed in a merger or consolidation to which
Section 4(f) applies) within the 12 months preceding the consummation
of such tender or exchange offer or other negotiated purchase and in
respect of which no Conversion Price adjustment has been made, and (B)
all other Excess Purchase Payments in respect of each tender or
exchange offer or other negotiated purchase for Steel Stock concluded
by the Corporation or any of its Subsidiaries within the 12 months
preceding the consummation of such tender or exchange offer or other
negotiated purchase and in respect of which no Conversion Price
adjustment has been made, exceeds an amount equal to 121/2% of the
product of the Current Market Price per share of Steel Stock on the
consummation date of such tender or exchange offer or other negotiated
purchase (any such date, the ''Purchase Date'') times the number of
shares of Steel Stock outstanding (including any tendered, exchanged or
purchased shares) on such Purchase Date, then the Conversion Price
shall be adjusted so that it shall equal the price determined by
multiplying (I) such Conversion Price in effect immediately prior to
such Purchase Date by (II) a fraction, the numerator of which shall be
the Current Market Price per share of the Steel Stock on such Purchase
Date less the combined amount of Excess Purchase Payments and such cash
so distributed applicable to one share of Steel Stock and the
denominator of which shall be such Current Market Price per share on
such Purchase Date. Such adjustment shall become effective immediately
prior to the opening of business on the day next following such
Purchase Date.
(vi) The Corporation from time to time may reduce the Conversion
Price by any amount for any period of at least 20 business days (or
such other period as may then be required by applicable law), provided
that the Board of Directors shall have determined that such reduction
is in the best interests of the Corporation. No reduction in the
Conversion Price pursuant to this Section 4(d)(vi) shall become
effective unless the Corporation shall have mailed a notice, at least
15 days prior to the date on which such reduction is scheduled to
become effective, to each holder of shares of this Series. Such notice
shall be given by first class mail, postage prepaid, at such holder's
address as the same appears on the stock transfer books of the
Corporation. Such notice shall state the amount per share by which the
Conversion Price will be reduced and the period for which such
reduction will be in effect.
(vii) The Corporation may make such reductions in the Conversion
Price, in addition to those required by Sections 4(d)(i) through (v),
as the Board determines to be necessary in order that any event treated
for Federal income tax purposes as a dividend of stock or stock rights
will not be taxable to the recipients; provided that any such reduction
shall not be effective until written evidence of the action of the
Board authorizing such reduction shall be filed with the Secretary of
the Corporation and notice thereof shall have been given by first class
mail, postage prepaid, to each holder of shares of this Series at such
holder's address as the same appears on the stock transfer books of the
Corporation.
(e) No adjustment in the Conversion Price shall be required unless such
adjustment would require a cumulative increase or decrease of at least 1%
in such price; provided, however, that any adjustments that by reason of
this Section 4(e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment until made; and provided,
further, that any adjustment shall be required and made in accordance with
the provisions of this Section 4 (other than this Section 4(e)) not later
than such time as may be required in order to preserve the tax-free nature
of a distribution to the holders of shares of Steel Stock or any other
common stock into which shares of this Series are convertible.
Notwithstanding any other provisions of this Section 4, the Corporation
shall not be required to make any adjustment of any Conversion Price
established hereunder for the issuance of any shares of common stock of
the Corporation (including Steel Stock) pursuant to any plan providing for
the reinvestment of dividends or interest payable on securities of the
Corporation and the investment of additional optional amounts in shares of
such common stock under such plan. All calculations under this Section 4
shall be made to the nearest 1/100 of a cent (with $.00005 being rounded
upward) or to the nearest 1/10,000 of a share (with .00005 of a share
being rounded upward), as the case may be.
(f) If the Corporation shall be a party to any transaction (including
without limitation a merger or consolidation of the Corporation and
excluding any transaction as to which Sections 4(d)(i) through (vi)
apply), in each case as a result of which shares of Steel Stock shall be
converted into the right to receive stock, securities or other property
(including cash or any combination thereof), (each of the foregoing being
referred to herein as a ''Transaction''), each share of this Series which
is not converted into the right to receive stock, securities or other
property in connection with such Transaction shall thereafter be
convertible into the kind and amount of shares of stock, securities and
other property (including cash or any combination thereof) receivable upon
the consummation of such Transaction by a holder of that number of shares
or fraction thereof of Steel Stock into which one share of this Series was
convertible immediately prior to such Transaction, assuming such holder of
Steel Stock (i) is not a person with which the Corporation consolidated or
into which the Corporation merged or which merged into the Corporation or
to which such sale or transfer was made, as the case may be (a
''Constituent Person''), or an affiliate of a Constituent Person and (ii)
failed to exercise his rights of election, if any, as to the kind or
amount of stock, securities and other property (including cash) receivable
upon such Transaction (provided that if the kind or amount of stock,
securities and other property (including cash) receivable upon such
Transaction is not the same for each share of Steel Stock of the
Corporation held immediately prior to such Transaction by other than a
Constituent Person or an affiliate thereof and in respect of which such
rights of election shall not have been exercised (''non-electing share''),
then for the purpose of this Section 4(f) the kind and amount of stock,
securities and other property (including cash) receivable upon such
Transaction by each non-electing share shall be deemed to be the kind and
amount so receivable per share by a plurality of the non-electing shares).
The Corporation shall not be a party to any Transaction unless the terms
of such Transaction are consistent with the provisions of this Section
4(f) and it shall not consent or agree to the occurrence of any
Transaction until the Corporation has entered into an agreement with the
other party or parties to such transaction for the benefit of the holders
of shares of this Series that will contain provisions enabling the holders
of such shares that remain outstanding after such Transaction to convert
into the consideration received by holders of Steel Stock at the
Conversion Price in effect immediately prior to such Transaction. The
provisions of this Section 4(f) shall similarly apply to successive
Transactions.
(g) The reclassification of common stock into which shares of this
Series are then convertible into securities which include securities other
than such common stock (other than any reclassification upon a
consolidation or merger to which Section 4(f) applies), shall be deemed to
involve (i) a distribution of such securities other than such common stock
to all holders of such common stock (and the effective date of such
reclassification shall be deemed to be ''the date fixed for the
determination of stockholders entitled to receive such distribution'') and
(ii) a subdivision or combination, as the case may be, of the number of
shares of such common stock outstanding immediately prior to such
reclassification into the number of shares of such common stock
outstanding immediately thereafter (and the effective date of such
reclassification shall be deemed to be the effective date of such
subdivision or combination).
(h) If the Corporation shall, by dividend or otherwise, distribute to
all holders of Steel Stock or other class of common stock into which
shares of this Series are then convertible shares of common stock other
than Steel Stock or any class of common stock into which shares of this
Series are then convertible, each share of this Series shall be
convertible, in addition to the number of shares of Steel Stock and/or
such other common stock into which such share is then convertible, into
the number of shares of such other common stock receivable upon payment of
such distribution to a holder of that number of shares or fraction thereof
of Steel Stock or such other common stock into which one share of this
Series was convertible immediately prior to the record date fixed for the
determination of stockholders entitled to receive such distribution.
Shares of this Series shall become so convertible immediately after the
opening of business on the day next following such record date (except as
provided in Section 4(m)). In addition, a Conversion Price shall be
established with respect to such common stock in an amount equal to the
quotient of (i) the initial liquidation preference of $50.00 per share of
this Series divided by (ii) the number of shares or fraction thereof of
such common stock that a holder of one share of Steel Stock or such other
common stock into which shares of this Series are then convertible would
be entitled to receive on the payment date for such distribution from and
after any such date of determination of stockholders entitled to receive
such distribution and, thereafter, Conversion Price adjustments as nearly
as equivalent in type as may be practicable to the adjustments pursuant to
Sections 4(d) through (f) which are to be made in respect of Steel Stock
shall be made in respect of shares of such common stock. Notwithstanding
the foregoing and the provisions of Section 4(d)(iii), if the Corporation
shall make such a distribution in common stock and, thereafter, all of the
shares of such common stock cease to be outstanding, on the date such
shares of common stock cease to be outstanding (x) the shares of this
Series shall cease to be convertible into shares of such common stock, (y)
a distribution of shares of such common stock shall be deemed to have
occurred on such date and (z) the Conversion Price for the class of common
stock upon which such distribution was made, or if no shares of such class
are then outstanding because shares of such class were exchanged for
shares of another class of common stock, of such other class of common
stock, shall be adjusted in the manner set forth in Section 4(d)(iii) to
the same extent as if shares of the common stock in which such
distribution was made were within the meaning of the term ''Securities''
in Section 4(d)(iii).
(i) After the date, if any, on which all outstanding shares of Steel
Stock or of any other common stock into which shares of this Series are
then convertible are exchanged for shares of another class of common stock
(as provided in the Certificate of Incorporation), each share of this
Series shall thereafter be convertible into the number of shares of such
other class of common stock receivable upon such exchange by a holder of
that number of shares or fraction thereof of Steel Stock and/or such other
common stock into which shares of this Series are then convertible into
which one share of this Series was convertible immediately prior to such
exchange. From and after any such exchange, Conversion Price adjustments
as nearly equivalent as may be practicable to the adjustments pursuant to
Sections 4(d) through 4(h) which, prior to such exchange, were made in
respect of Steel Stock and/or such other common stock into which shares of
this Series are then convertible shall instead be made pursuant to such
Sections 4(d) through 4(h) in respect of shares of such other class of
common stock.
(j) Subject to the provisions of Section 4(k), if:
(i) the Corporation takes any action that would require an adjustment
of the Conversion Price pursuant to Sections 4(d) through (i); or
(ii) there shall be any consolidation or merger to which the
Corporation is a party and for which approval of any stockholders of
the Corporation is required, or the sale or transfer of all or
substantially all of the assets of the Corporation or the U.S. Steel
Group; or
(iii) there shall occur the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; or
(iv) the Corporation or any of its Subsidiaries shall commence a
tender offer or exchange offer for all or a portion of the outstanding
shares of Steel Stock (or shall amend any such tender or exchange
offer),
then the Corporation shall cause to be filed with the Transfer Agent
and shall cause to be mailed to the holders of shares of this Series at
their addresses as shown on the stock transfer books of the
Corporation, as promptly as possible, but at least 15 days prior to the
earliest applicable date hereinafter specified, a notice stating, as
applicable, (A) the proposed record date for a dividend or distribution
or the proposed effective date of a consolidation, merger, sale,
transfer, liquidation, dissolution or winding up, (B) the date as of
which it is expected that holders of Steel Stock of record shall be
entitled to exchange their shares of Steel Stock for securities or
other property, if any, deliverable upon such consolidation, merger,
sale, transfer, liquidation, dissolution or winding up or (C) the date
on which such tender or exchange offer commenced, the date on which
such tender or exchange offer is scheduled to expire unless extended,
the consideration offered and the other material terms thereof (or the
material terms of any amendment thereto). Failure to give or receive
such notice or any defect therein shall not affect the legality or
validity of the related transaction.
(k) If the Corporation intends:
(i) to effect a U.S. Steel Group Special Event or a Marathon Group
Special Event; or
(ii) exchange shares of Steel Stock for Marathon Stock or Delhi Stock
following a Disposition of all or substantially all of the properties
and assets of the U.S. Steel Group,
then the Corporation shall cause to be filed with the Transfer Agent
and shall cause to be mailed to the holders of shares of this Series at
their addresses as shown on the stock transfer books of the
Corporation, not less than 45 days prior to the Steel Group Disposition
Dividend or the Steel Group Disposition Redemption and not less than 30
days prior to any other U.S. Steel Group Special Event, any Marathon
Group Special Event or any such exchange of Steel Stock for shares of
Marathon Stock or Delhi Stock, a notice stating, as applicable, (A) the
record date for any dividend that is a U.S. Steel Group Special Event
or a Marathon Group Special Event, (B) the date on which any redemption
or exchange that is a U.S. Steel Group Special Event, a Marathon Group
Special Event or an exchange of Steel Stock for shares of Marathon
Stock or Delhi Stock is expected to become effective, and the date as
of which it is expected that holders of record of Steel Stock or
Marathon Stock shall be entitled to exchange their shares of Steel
Stock or Marathon Stock, respectively, for securities or other property
deliverable upon such redemption or exchange or (C) the date on which
the Steel Group Tender or Exchange Offer or the Marathon Group Tender
or Exchange Offer commenced, the consideration offered and the other
material terms thereof (or the material terms of any amendment
thereto). In addition, from and after any exchange of Steel Stock for
Delhi Stock, effected in accordance with Section 2(b)(i) of Division I
of the Certificate of Incorporation, the Corporation shall give similar
notice of its intention to exchange Delhi Stock for shares of the Delhi
Group Subsidiary, if Steel Stock has been exchanged therefor, or to pay
a dividend on, or redeem shares of, Delhi Stock following the
Disposition of all or substantially all of the properties and assets of
the Delhi Group. Failure to give or receive any such notice or any
defect therein shall not affect the legality or validity of the related
transaction. In the event of any conflict between the notice provisions
of this paragraph (k) and paragraph (j) above, the notice provisions of
this paragraph (k) shall govern.
(l) Whenever the Conversion Price is adjusted as herein provided, the
Corporation shall promptly file with the Transfer Agent an officer's
certificate setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment,
which certificate shall be prima facie evidence of the correctness of such
adjustment. Promptly after delivery of such certificate, the Corporation
shall prepare a notice of such adjustment of the Conversion Price setting
forth the adjusted Conversion Price and the effective date of such
adjustment and shall send such notice of such adjustment of the Conversion
Price by first class mail, postage prepaid, to the holder of each share of
this Series at such holder's address as the same appears on the stock
transfer books of the Corporation.
(m) In any case in which Section 4(d) or 4(h) provides that an
adjustment shall become effective on the day next following a record date
for an event, the Corporation may defer until the occurrence of such event
(A) issuing to the holder of any share of this Series converted after such
record date and before the occurrence of such event the additional shares
of Steel Stock or any other common stock of the Corporation issuable upon
such conversion by reason of the adjustment required by such event over
and above the number of shares of Steel Stock or such other common stock
issuable upon such conversion before giving effect to such adjustment and
(B) paying to such holder any amount in cash in lieu of any fraction
thereof pursuant to Section 4(c).
(n) For purposes of this Section 4, the number of shares of Steel Stock
or any other common stock of the Corporation at any time outstanding shall
not include any shares of Steel Stock or such other common stock then
owned or held by or for the account of Corporation. The Corporation shall
not pay a dividend or make any distribution on shares of Steel Stock or
such other common stock held in the treasury of the Corporation.
(o) There shall be no adjustment of the Conversion Price in case of the
issuance of any stock of the Corporation in a reorganization, acquisition
or other similar transaction except as specifically set forth in this
Section 4. If any action or transaction would require adjustment of any
Conversion Price established hereunder pursuant to more than one paragraph
of this Section 4, only the adjustment which would result in the largest
reduction of such Conversion Price shall be made.
(p) The Corporation covenants that it will at all times reserve and keep
available, free from preemptive rights, out of the aggregate of its
authorized but unissued shares of Steel Stock and/or, if the shares of
this Series are then convertible into other common stock of the
Corporation, such other common stock, or its issued shares of Steel Stock
or such other common stock, as the case may be, held in its treasury, or
both, for the purpose of effecting conversion of shares of this series,
the full number of shares of Steel Stock or such other common stock
deliverable upon the conversion of all outstanding shares of this Series
not theretofore converted. For purposes of this Section 4(p), the number
of shares of Steel Stock or such other common stock that shall be
deliverable upon the conversion of all outstanding shares of this Series
shall be computed as if at the time of computation all such outstanding
shares were held by a single holder.
The Corporation covenants that any shares of Steel Stock or other common
stock of the Corporation issued upon conversion of shares of this Series
shall be validly issued, fully paid and nonassessable.
The Corporation shall endeavor to list the shares of Steel Stock or other
common stock of the Corporation required to be delivered upon conversion of
shares of this Series, prior to such delivery, upon each national securities
exchange, if any, upon which the outstanding Steel Stock or such other common
stock is listed at the time of such delivery.
Prior to the delivery of any securities that the Corporation shall be
obligated to deliver upon conversion of shares of this Series, the
Corporation shall endeavor to comply with all federal and state laws and
regulations thereunder requiring the registration of such securities with, or
any approval of or consent to the delivery thereof by, any governmental
authority.
(q) The Corporation will pay any and all documentary, stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of
shares of Steel Stock or other securities or property on conversion of
shares of this Series pursuant hereto; provided, however, that the
Corporation shall not be required to pay any tax that may be payable in
respect of any transfer involved in the issue or delivery of shares of
Steel Stock or other securities or property in a name other than that of
the holder of such shares to be converted and no such issue or delivery
shall be made unless and until the person requesting such issue or
delivery has paid to the Corporation the amount of any such tax or
established, to the reasonable satisfaction of the Corporation, that such
tax has been paid.
5. Voting. The shares of this Series shall not have any voting powers,
either general or special, except that:
(a) Unless the vote or consent of the holders of a greater number of
shares shall then be required by law, the consent of the holders of at
least 662/3% of all of the shares of this Series at the time outstanding,
given in person or by proxy, either in writing or by a vote at a meeting
called for the purpose at which the holders of shares of this Series shall
vote together as a separate class, shall be necessary for authorizing,
effecting or validating the amendment, alteration or repeal of any of the
provisions of the Certificate of Incorporation or of any certificate
amendatory thereof or supplemental thereto (including any Certificate of
Designation and Terms or any similar document relating to any series of
Preferred Stock) so as to affect adversely the powers, preferences, or
rights, of this Series. The increase of the authorized amount of the
Preferred Stock, or the creation or authorization of any shares of any
other class of stock of the Corporation ranking prior to or on a parity
with the shares of this Series as to dividends or upon liquidation, or the
reclassification of any authorized stock of the Corporation into any such
parity shares, or the creation or authorization of any obligation or
security convertible into or evidencing the right to purchase any such
prior or parity shares shall not be deemed to affect adversely the powers,
preferences or rights of this Series.
(b) Unless the vote or consent of the holders of a greater number of
shares shall then be required by law, the consent of the holders of at
least 662/3% of all of the shares of this Series and all other series of
Preferred Stock ranking on a parity with shares of this Series, either as
to dividends or upon liquidation, at the time outstanding, given in person
or by proxy, either in writing or by a vote at a meeting called for the
purpose at which the holders of shares of this Series and such other
series of Preferred Stock shall vote together as a single class without
regard to series, shall be necessary for authorizing, effecting or
validating the issuance of any shares of any class of stock of the
Corporation ranking prior to the shares of this Series as to dividends or
upon liquidation, or the reclassification of any outstanding stock of the
Corporation into any such prior shares, or the issuance of any obligation
or security convertible into or evidencing the right to purchase any such
prior shares.
(c) Unless the vote or consent of the holders of a greater number of
shares shall then be required by law, the consent of the holders of at
least a majority of all of the shares of this Series and all other series
of Preferred Stock ranking on a parity with this Series, either as to
dividends or upon liquidation, at the time outstanding, given in person or
by proxy, either in writing or by a vote at a meeting called for the
purpose at which the holders of shares of this Series and such other
series of Preferred Stock shall vote together as a single class without
regard to series, shall be necessary for authorizing, effecting or
validating the merger or consolidation of the Corporation into or with any
other corporation if such merger or consolidation would adversely affect
the powers, preferences or rights of this Series or such other series of
Preferred Stock or if, after such merger or consolidation, there shall be
outstanding any shares of any class of stock ranking prior to the shares
of this Series as to dividends or upon liquidation or any obligation or
security convertible into or evidencing the right to purchase any such
prior shares (except such stock, securities or obligations of the
Corporation as may have been outstanding immediately preceding such merger
or consolidation).
(d) If, on the date used to determine stockholders of record for any
meeting of stockholders for the election of directors, a default in
preference dividends on the Preferred Stock shall exist, the number of
directors constituting the Board of Directors shall be increased by two,
and the holders of the Preferred Stock of all series (whether or not the
holders of such series of Preferred Stock would be entitled to vote for
the election of directors if such default in preference dividends did not
exist), shall have the right at such meeting, voting together as a single
class without regard to series, to the exclusion of the holders of Common
Stock of the Corporation, to elect two directors of the Corporation to
fill such newly created directorships. Each director elected by the
holders of shares of Preferred Stock (herein called a ''Preferred
Director''), shall continue to serve as such director for the full term
for which such director shall have been elected, notwithstanding that
prior to the end of such term a default in preference dividends shall
cease to exist. Any Preferred Director may be removed without cause by,
and shall not be removed without cause except by, the vote of the holders
of record of the outstanding shares of Preferred Stock, voting together as
a single class without regard to series, at a meeting of the stockholders,
or of the holders of shares of Preferred Stock, called for the purpose. So
long as a default in any preference dividends on the Preferred Stock shall
exist (A) any vacancy in the office of a Preferred Director may be filled
(except as provided in the following clause (B)) by an instrument in
writing signed by the remaining Preferred Director and filed with the
Corporation and
(B) in the case of the removal of any Preferred Director, the vacancy may
be filled by the vote of the holders of the outstanding shares of
Preferred Stock, voting together as a single class without regard to
series, at the same meeting at which such removal shall be voted. Each
director appointed as aforesaid by the remaining Preferred Director shall
be deemed, for all purposes hereof, to be a Preferred Director. Whenever
the term of office of the Preferred Directors shall end and no default in
preference dividends shall exist, the number of directors constituting the
Board of Directors shall be reduced by two. For the purposes hereof, a
''default in preference dividends'' on the Preferred Stock shall be deemed
to have occurred whenever the amount of accrued and unpaid dividends upon
any series of the Preferred Stock shall be equivalent to six full
quarterly dividends or more (whether or not consecutive), and, having so
occurred, such default shall be deemed to exist thereafter until, but only
until, all accrued dividends on all shares of Preferred Stock of each and
every series then outstanding shall have been paid for all past dividend
periods.
6. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding up of the Corporation,
whether voluntary or involuntary, the holders of the shares of this Series
shall be entitled to receive out of the assets of the Corporation
available for distribution to stockholders, before any payment or
distribution shall be made on any class of the common stock of the
Corporation or on any other class of stock ranking junior to the Preferred
Stock upon liquidation, the amount of $50 per share, plus a sum equal to
all dividends (whether or not earned or declared) on such shares accrued
and unpaid thereon to the date of final distribution.
(b) Neither the sale, lease or exchange (for cash, shares of stock,
securities or other consideration) of all or substantially all the
property and assets of the Corporation nor the merger or consolidation of
the Corporation into or with any other corporation or the merger or
consolidation of any other corporation into or with the Corporation, shall
be deemed to be a dissolution, liquidation or winding up, voluntary or
involuntary, for the purposes of this Section 6.
(c) After the payment to the holders of the shares of this Series of the
full preferential amounts provided for in this Section 6, the holders of
shares of this Series as such shall have no right or claim to any of the
remaining assets of the Corporation.
(d) In the event the assets of the Corporation available for
distribution to the holders of shares of this Series upon any dissolution,
liquidation or winding up of the Corporation, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to which
such holders are entitled pursuant to Section 6(a), no such distribution
shall be made on account of any shares of any other class or series of
Preferred Stock ranking on a parity with the shares of this Series upon
such dissolution, liquidation or winding up unless proportionate
distributive amounts shall be paid on account of the shares of this
Series, ratably, in proportion to the full distributable amounts for which
holders of all such parity shares are respectively entitled upon such
dissolution, liquidation or winding up.
7. Ranking. For purposes of this resolution, any stock of any class or
classes of the Corporation shall be deemed to rank:
(a) prior to the shares of this Series, either as to dividends or upon
liquidation, if the holders of such class or classes shall be entitled to
the receipt of dividends or of amounts distributable upon dissolution,
liquidation or winding up of the Corporation, whether voluntary or
involuntary, as the case may be, in preference or priority to the holders
of shares of this Series;
(b) on a parity with the shares of this Series, either as to dividends
or upon liquidation, whether or not the dividend rates, dividend payment
dates or redemption or liquidation prices per share or sinking fund
provisions, if any, be different from those of this Series, if the holders
of such stock shall be entitled to the receipt of dividends or of amounts
distributable upon dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, as the case may be, in
proportion to their respective dividend rates or liquidation prices,
without preference or priority, one over the other, as between the holders
of such stock and the holders of shares of this Series; and
(c) junior to shares of this Series, either as to dividends or upon
liquidation, if such class or classes shall be the Series A Junior
Preferred Stock issued by the Corporation pursuant to the Restated Rights
Agreement or if such class or classes shall be any class of common stock
of the Corporation or if the holders of shares of this Series shall be
entitled to receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of the Corporation, whether
voluntary or involuntary, as the case may be, in preference or priority to
the holders of shares of such class or classes.
8. Determinations by the Board of Directors. Any determinations made by the
Board of Directors of the Corporation under any provision of this Resolution
shall be final and binding on all stockholders (including holders of shares
of this Series) of the Corporation.
9. Definitions. Unless otherwise defined herein, terms used herein shall
have the meanings assigned to them in Division I of the Certificate of
Incorporation and the following terms shall have the following meanings:
''Board of Directors'' or ''Board'' means, at any time, the duly elected or
acting board of directors (or duly authorized committee thereof) of the
Corporation at such time.
''Certificate of Incorporation'' means the Corporation's Restated
Certificate of Incorporation, as amended, supplemented or otherwise modified
from time to time.
''Closing Price'' of shares of any class of common stock of the Corporation
for any day shall mean the last reported sales price, regular way on such
day, or, if no reported sale takes place on such day, the average of the
reported closing bid and asked prices on such day, regular way, in either
case as reported on the New York Stock Exchange Composite Tape or, if such
common stock is not listed or admitted to trading on the NYSE, on the
principal national securities exchange on which such common stock is listed
or admitted to trading or, if not listed or admitted to trading on any
national securities exchange, on the National Market System of NASDAQ or, if
such common stock is not quoted on such National Market System, the average
of the closing bid and asked prices on such day in the over-the-counter
market as reported by NASDAQ or, if closing bid and asked prices for such
common stock on such day shall not have been reported through NASDAQ, the
average of the closing bid and asked prices on such day as furnished by any
NYSE member firm regularly making a market in such common stock selected for
such purpose by the Board of Directors.
''Conversion Price'' means the conversion price per share of Steel Stock
and/or other shares of common stock of the Corporation into which shares of
this Series are convertible, as such Conversion Price may be adjusted
pursuant to Section 4. The initial conversion price per share of Steel Stock
will be $46.125 (equivalent to a conversion rate of 1.084 shares of Steel
Stock for each share of this Series).
''Current Market Price'' shall mean, with respect to any class of common
stock of the Corporation, the average of the daily Closing Prices of a share
of such common stock during the five consecutive Trading Days selected by the
Corporation commencing not more than 20 Trading Days before, and ending not
later than, the date in question; provided, however, that (i) if the ''ex''
date for any event (other than the issuance or distribution requiring such
computation) that requires an adjustment to the Conversion Price pursuant to
Sections 4(d)(ii) through (v) occurs on or after the 20th Trading Day prior
to the day in question and prior to the ''ex'' date for the issuance or
distribution requiring such computation, the Closing Price for each Trading
Day prior to the ''ex'' date for such other event shall be adjusted by
multiplying such Closing Price by the same fraction by which the Conversion
Price is so required to be adjusted as a result of such other event, (ii) if
the ''ex'' date for any event (other than the issuance or distribution
requiring such computation) that requires an adjustment to the Conversion
Price pursuant to Sections 4(d) (ii) through (v) occurs on or after the
''ex'' date for the issuance or distribution requiring such computation and
on or prior to the day in question, the Closing Price for each Trading Day on
and after the ''ex'' date for such other event shall be adjusted by
multiplying such Closing Price by the reciprocal of the fraction by which the
Conversion Price is so required to be adjusted as a result of such other
event, and (iii) if the ''ex'' date for the issuance or distribution
requiring such computation is on or prior to the day in question, after
taking into account any adjustment required pursuant to clause (ii) of this
proviso, the Closing Price for each Trading Day on or after such ''ex'' date
shall be adjusted by adding thereto the amount of any cash and the fair
market value on the day in question (as determined by the Board of Directors
in a manner consistent with any determination of such value for purposes of
Section 4(d) (iii) or (iv)) of the evidences of indebtedness, shares of
capital stock or assets being distributed applicable to one share of the
applicable class of common stock of the Corporation as of the close of
business on the day before such ''ex'' date. For purposes of this definition,
the term ''ex'' date, with respect to any class of common stock of the
Corporation, (i) when used with respect to any issuance or distribution,
means the first date on which such common stock trades regular way on such
exchange or in the relevant market from which the Closing Price was obtained
without the right to receive such issuance or distribution, (ii) when used
with respect to any subdivision or combination of shares of such common
stock, means the first date on which such common stock trades regular way on
such exchange or in such market after the time at which such subdivision or
combination becomes effective, and (iii) when used with respect to any tender
or exchange offer means the first date on which such common stock trades
regular way on such exchange or in such market after the expiration time of
such tender or exchange offer.
''Excess Purchase Payment'' means the excess, if any, of (A) the aggregate
of the cash and the value (as determined by the Board of Directors) of all
other consideration paid by the Corporation or any of its Subsidiaries with
respect to the shares of the applicable class of common stock of the
Corporation acquired in a tender or exchange offer or other negotiated
purchase respectively, over (B) the product of the Current Market Price per
share of such common stock times the number of shares of such common stock
acquired in such tender or exchange offer or purchase .
''NASDAQ'' means the National Association of Securities Dealers, Inc.
Automated Quotations System or any successor thereto .
''NYSE'' means the New York Stock Exchange, Inc. or any successor thereto.
''Redemption Date'' means any date on which the Corporation redeems any
shares of this Series.
''Redemption Price'' means (i) with respect to any redemption pursuant to
Section 3(a), the applicable amount set forth in such Section and (ii) with
respect to any redemption pursuant to Section 3(b), an amount per share equal
to the sum of the initial liquidation preference of $50.00 per share of this
Series, plus an amount equal to all accrued and unpaid dividends thereon to
the date fixed for redemption .
''Restated Rights Agreement'' shall have the meaning given to it in the
second paragraph of Section
4(d)(iii).
''Rights'' shall mean the rights of the Corporation which are issuable
under the Corporation's stockholder rights plan adopted by the Board of
Directors, the terms and conditions of which are set forth in the Restated
Rights Agreement, or rights to purchase any capital stock of the Corporation
under any successor shareholder rights plan or plan adopted in replacement of
the Corporation's stockholder rights plan.
''Subsidiary'' means a corporation more than 50% of the outstanding voting
stock of which is owned, directly or indirectly, by the Corporation or by one
or more other Subsidiaries. For the purposes of this definition, ''voting
stock'' means stock which ordinarily has voting power for the election of
directors, whether at all times or only so long as no senior class of stock
has such voting power by reason of any contingency.
''substantially all of the properties and assets of the U.S. Steel Group''
and ''substantially all of the properties and assets of the Marathon Group''
shall mean a portion of such properties and assets that represents at least
80% of either of the then-current market value of, or the aggregate revenues
for the immediately preceding twelve fiscal quarterly periods of the
Corporation derived from, the properties and assets of the U.S. Steel Group
or the Marathon Group, respectively, as of such date (excluding the
properties and assets of any person, entity or group in which the
Corporation, directly or indirectly, owns less than a majority interest).
''Trading Day'' shall mean, with respect to any class of common stock of
the Corporation, any day on which such common stock is traded on the NYSE, or
if such common stock is not listed or admitted to trading on the NYSE, on the
principal national securities exchange on which such common stock is listed
or admitted, or if not listed or admitted to trading on any national
securities exchange, on the National Market System of the NASDAQ, or if such
common stock is not quoted on such National Market System, in the applicable
securities market in which such common stock is traded.
''Transfer Agent'' means the Corporation, through its Shareholder Services
Department, or such other agent or agents of the Corporation as may be
designated by the Board of Directors as the Transfer Agent for shares of this
Series.
Fifth: The existence of the Corporation is to be perpetual.
Sixth: The private property of the stockholders shall not be subject to the
payment of corporate debts to any extent whatever.
Seventh: The number of directors of the Corporation shall be fixed from time
to time by, or in the manner provided in, its by-laws and may be increased or
decreased as therein provided; but the number thereof shall not be less than
three.
The directors of the Corporation shall be divided into three classes: Class I,
Class II and Class III. Each class shall consist, as nearly as may be possible,
of one-third of the whole number of the Board of Directors. In the election of
directors at the 1984 annual meeting of the stockholders, the Class I directors
shall be elected to hold office for a term to expire at the first annual meeting
of the stockholders thereafter; the Class II directors shall be elected to hold
office for a term to expire at the second annual meeting of the stockholders
thereafter; and the Class III directors shall be elected to hold office for a
term to expire at the third annual meeting of the stockholders thereafter, and
in the case of each class, until their respective successors are duly elected
and qualified. At each annual election held after the 1984 annual meeting of the
stockholders the directors elected to succeed those whose terms expire shall be
identified as being of the same class as the directors they succeed and shall be
elected to hold office for a term to expire at the third annual meeting of the
stockholders after their election, and until their respective successors are
duly elected and qualified. If the number of directors is changed, any increase
or decrease in directors shall be apportioned among the classes so as to
maintain all classes as equal in number as possible, and any additional director
elected to any class shall hold office for a term which shall coincide with the
terms of the other directors in such class and until his successor is duly
elected and qualified.
In the case of any increase in the number of directors of the Corporation, the
additional director or directors shall be elected by the Board of Directors.
In the case of any vacancy in the Board of Directors from death, resignation,
disqualification or other cause, a successor to hold office for the unexpired
portion of the term of the director whose place shall be vacant, and until the
election of his successor, shall be elected by a majority of the Board of
Directors then in office, though less than a quorum.
Directors of the Corporation may be removed only for cause.
Eighth: The Board of Directors shall have power to adopt, amend and repeal the
by-laws at any regular or special meeting of the Board of Directors, provided
that notice of intention to adopt, amend or repeal the by-laws in whole or in
part shall have been included in the notice of meeting; or, without any such
notice, by a vote of two-thirds of the directors then in office.
Stockholders may adopt, amend and repeal the by-laws at any regular or special
meeting of the stockholders by an affirmative vote of two-thirds of the shares
outstanding and entitled to vote thereon, provided that notice of intention to
adopt, amend or repeal the by-laws in whole or in part shall have been included
in the notice of the meeting.
Any action required to be taken at any annual or special meeting of the
stockholders of the Corporation, or any action which may be taken at any annual
or special meeting of the stockholders or otherwise, may not be taken without a
meeting, prior notice and a vote, and stockholders may not act by written
consent.
Ninth: The Board of Directors from time to time shall determine whether and to
what extent, and at what times and places, and under what conditions and
regulations, the accounts and books of the Corporation, or any of them, shall be
open to the inspection of the stockholders, and no stockholder shall have any
right to inspect any account or book or document of the Corporation, except as
conferred by law or authorized by the Board of Directors, or by the
stockholders.
Tenth: The directors may from time to time declare such dividends as they
shall deem advisable and proper, subject to the provisions of Article Fourth and
to such restrictions as may be imposed by law, and pay the same to the
stockholders at such times as they shall fix.
The Board of Directors shall have power to issue bonds, debentures, or other
obligations, either non-convertible or convertible into the Corporation's stock,
subject to the provisions of Article Fourth and upon such terms, in such manner
and under such conditions in conformity with law, as may be fixed by the Board
of Directors prior to the issue of such bonds, debentures or other obligations.
Eleventh: No director shall be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty by such
director as a director, except (i) for breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this Article Eleventh shall apply to or
have any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.
Twelfth: The powers and authorities hereinbefore conferred upon the Board of
Directors are in furtherance and not in limitation of those conferred by the
laws of the State of Delaware.
Thirteenth: The Corporation reserves the right at any time and from time to
time to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation in the manner now or hereafter prescribed by law;
and all rights preferences and privileges of whatsoever nature conferred upon
stockholders, directors or any other persons whomsoever by and pursuant to this
Certificate of Incorporation in its present form or as hereafter amended are
granted subject to the rights reserved in this Article.
In Witness Whereof, this Restated Certificate of Incorporation, which restates
and integrates and does not further amend the provisions of the Corporation's
Certificate of Incorporation, as heretofore amended and supplemented, there
being no discrepancies between those provisions and the provisions of this
Restated Certificate of Incorporation, and having been duly adopted by the Board
of Directors of the Corporation in accordance with the provisions of Section 245
of the General Corporation Law of the State of Delaware, has been executed on
the 1st day of May, 1999.
USX CORPORATION
/s/ T. J. Usher
By: T. J. Usher
Chairman of the Board
of Directors
USX CORPORATION
BY-LAWS
MAY 1, 1999
BY-LAWS
of
USX CORPORATION
May 1, 1999
ARTICLE I.
Stockholders.
Section 1. Time and Place of Meetings of Stockholders. Unless the time and
place of the annual meeting of stockholders for the purpose of electing
directors and transacting such other business as may be brought before the
meeting are changed by the Board of Directors, as may be done from time to time,
provided that all legal requirements for such change and notice to stockholders
are observed, such annual meeting of stockholders of the Corporation shall be
held at 1013 Centre Road, City of Wilmington, County of New Castle, and State of
Delaware at 2 o'clock, p.m., on the last Tuesday in April in each year, if not a
legal holiday, and if a legal holiday, then on the next succeeding Tuesday which
is not a legal holiday.
Special meetings of the stockholders may be called by the Board of Directors
to be held at such time and place and for such purpose or purposes as are
specified in such call.
Neither the annual meeting nor any special meeting of stockholders need be
held within the State of Delaware.
Any action required to be taken at any annual or special meeting of the
stockholders of the Corporation, or any action which may be taken at any annual
or special meeting of the stockholders or otherwise, may not be taken without a
meeting, prior notice and a vote, and stockholders may not act by written
consent.
Section 2. Notice of Meetings of Stockholders. It shall be the duty of the
Secretary to cause notice of each annual or special meeting to be mailed to all
stockholders of record as of the record date as fixed by the Board of Directors
for the determination of stockholders entitled to vote at such meeting. Such
notice shall indicate briefly the action to be taken at such meeting and shall
be mailed to the stockholders at the addresses of such stockholders as shown on
the books of the Corporation at least 10 days but not more than 60 days
preceding the meeting.
Section 3. Nomination of Directors. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors. Nomination for election to the Board of Directors of the Corporation
at a meeting of stockholders may be made by the Board of Directors or by any
stockholder of record of the Corporation entitled to vote generally for the
election of directors at such meeting who complies with the notice procedures
set forth in this Section 3. Such nominations, other than those made by or on
behalf of the Board of Directors, shall be made by notice in writing delivered
or mailed by first class United States mail, postage prepaid, to the Secretary,
and received not less than 45 days nor more than 75 days prior to the first
anniversary of the date on which the Corporation first mailed its proxy
materials for the preceding year's annual meeting of stockholders; provided,
however, that if the date of the annual meeting is advanced more than 30 days
prior to or delayed by more than 30 days after the anniversary of the preceding
year's annual meeting, notice by the stockholder to be timely must be so
delivered not later than the close of business on the later of (i) the 90th day
prior to such annual meeting or (ii) the 10th day following the day on which
public announcement of the date of such meeting is first made. Such notice shall
set forth (a) as to each proposed nominee (i) the name, age, business address
and, if known, residence address of each such nominee, (ii) the principal
occupation or employment of each such nominee, (iii) the number of shares of
each class of the capital stock of the Corporation which are beneficially owned
by each such nominee, and (iv) any other information concerning the nominee that
must be disclosed as to nominees in proxy solicitations pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended (including such
person's written consent to be named as a nominee and to serve as a director if
elected); and (b) as to the stockholder giving the notice (i) the name and
address, as they appear on the Corporation's books, of such stockholder and (ii)
the number of shares of each
class of the capital stock of the Corporation which are beneficially owned by
such stockholder. The Corporation may require any proposed nominee to furnish
such other information as may reasonably be required by the Corporation to
determine the eligibility of such proposed nominee to serve as a director of the
Corporation.
The chairman of the meeting may, if the facts warrant, determine and declare
to the meeting that a nomination was not made in accordance with the foregoing
procedure, and if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.
Section 4. Notice of Business at Annual Meetings. At an annual meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before the meeting by a stockholder
of record. For business to be properly brought before an annual meeting by a
stockholder, if such business relates to the election of directors of the
Corporation, the procedures in Article I, Section 3 must be complied with. If
such business relates to any other matter, the stockholder must have given
timely notice thereof in writing to the Secretary. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the Corporation not less than 45 days nor more than 75 days prior to
the first anniversary of the date on which the Corporation first mailed its
proxy materials for the preceding year's annual meeting of stockholders;
provided, however, that if the date of the annual meeting is advanced more than
30 days prior to or delayed by more than 30 days after the anniversary of the
preceding year's annual meeting, notice by the stockholder to be timely must be
so delivered not later than the close of business on the later of (i) the 90th
day prior to such annual meeting or (ii) the 10th day following the day on which
public announcement of the date of such meeting is first made. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting (a) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (b) the name and address, as
they appear on the Corporation's books, of the stockholder proposing such
business, (c) the number of shares of each class of the capital stock of the
Corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. Notwithstanding anything
in the By-Laws to the contrary, no business shall be conducted at any annual
meeting except in accordance with the procedures set forth in this Section 4 and
in Section 3 of this Article I and except that any stockholder proposal which
complies with Rule 14a-8 of the proxy rules (or any successor provision)
promulgated under the Securities Exchange Act of 1934, as amended, and is to be
included in the Corporation's proxy statement for an annual meeting of
stockholders shall be deemed to comply with the requirements of this Section 4.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 4, and if he should so
determine, the chairman shall so declare to the meeting that any such business
not properly brought before the meeting shall not be transacted.
Section 5. Quorum. At each meeting of the stockholders the holders of one-
third of the voting power of the outstanding shares of stock entitled to vote
generally at the meeting, present in person or represented by proxy, shall
constitute a quorum, unless the representation of a larger number shall be
required by law, and, in that case, the representation of the number so required
shall constitute a quorum.
Except as otherwise required by law, a majority of the voting power of the
shares of stock entitled to vote generally at a meeting and present in person or
by proxy, whether or not constituting a quorum, may adjourn, from time to time,
without notice other than by announcement at the meeting. At any such adjourned
meeting at which a quorum shall be present, any business may be transacted which
might have been transacted at the meeting as originally notified.
Section 6. Organization. The Chairman of the Board, or in his absence the
Vice Chairman of the Board designated by the Chairman of the Board, or the
President in the order named, shall call meetings of the stockholders to order,
and shall act as chairman of such meeting; provided, however, that the Board of
Directors may appoint any person to act as chairman of any meeting in the
absence of the Chairman of the Board.
The Secretary of the Corporation shall act as secretary at all meetings of
the stockholders; but in the absence of the Secretary at any meeting of the
stockholders the presiding officer may appoint any person to act as secretary of
the meeting.
Section 7. Voting. At each meeting of the stockholders, every stockholder
shall be entitled to vote in person, or by proxy appointed by instrument in
writing, subscribed by such stockholder or by his duly authorized attorney, or,
to the extent permitted by law, appointed by an electronic transmission, and
delivered to the inspectors at the meeting; and he shall have the number of
votes for each share of capital stock standing registered in his name at the
date fixed by the Board of Directors pursuant to Section 4 of Article IV of
these By-Laws as may be determined in accordance with the Corporation's
Certificate of Incorporation, or as may be provided by law. The votes for
directors, and, upon demand of any stockholder, or where required by law, the
votes upon any question before the meeting, shall be by ballot.
At least ten days before each meeting of the stockholders, a full, true and
complete list, in alphabetical order, of all of the stockholders entitled to
vote at such meeting, showing the address of each stockholder, and indicating
the class and number of shares held by each, shall be furnished and held open
for inspection in such manner, as is required by law. Only the persons in whose
names shares of stock stand on the books of the Corporation at the date fixed by
the Board of Directors pursuant to Section 4 of Article IV of these By-Laws, as
evidenced in the manner provided by law, shall be entitled to vote in person or
by proxy on the shares so standing in their names.
Prior to any meeting, but subsequent to the date fixed by the Board of
Directors pursuant to Section 4 of Article IV of these By-Laws, any proxy may
submit his powers of attorney to the Secretary, or to the Treasurer, for
examination. The certificate of the Secretary, or of the Treasurer, as to the
regularity of such powers of attorney, and as to the class and number of shares
held by the persons who severally and respectively executed such powers of
attorney, shall be received as prima facie evidence of the class and number of
shares represented by the holder of such powers of attorney for the purpose of
establishing the presence of a quorum at such meeting and of organizing the
same, and for all other purposes.
Section 8. Inspectors. At each meeting of the stockholders, the polls shall
be opened and closed, the proxies and ballots shall be received and be taken in
charge, and all questions touching the qualification of voters and the validity
of proxies and the acceptance or rejection of votes, shall be decided by one or
more inspectors. Such inspector or inspectors shall be appointed by the Board of
Directors before the meeting. If for any reason any of the inspectors previously
appointed shall fail to attend or refuse or be unable to serve, inspectors in
place of any so failing to attend or refusing or unable to serve, shall be
appointed in like manner.
ARTICLE II.
Board of Directors.
Section 1. Number, Classes and Terms of Office. The business and affairs of
the Corporation shall be managed by or under the direction of the Board of
Directors.
The number of directors shall be fixed from time to time by resolution of the
Board of Directors, but the number thereof shall not be less than three.
The directors of the Corporation shall be divided into three classes: Class
I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the whole number of the Board of Directors. In the
election of directors at the 1984 annual meeting of the stockholders, the Class
I directors shall be elected to hold office for a term to expire at the first
annual meeting of the stockholders thereafter; the Class II directors shall be
elected to hold office for a term to expire at the second annual meeting of the
stockholders thereafter; and the Class III directors shall be elected to hold
office for a term to expire at the third annual meeting of the stockholders
thereafter, and in the case of each class, until their respective successors are
duly elected and qualified. At each annual election held after the 1984 annual
meeting of the stockholders, the directors elected to succeed those whose terms
expire shall be identified as being of the same class as the directors they
succeed and shall be elected to hold office for a term to expire at the third
annual meeting of the stockholders
after their election, and until their respective successors are duly elected and
qualified. If the number of directors is changed, any increase or decrease in
directors shall be apportioned among the classes so as to maintain all classes
as equal in number as possible, and any additional director elected to any class
shall hold office for a term which shall coincide with the terms of the other
directors in such class and until his successor is duly elected and qualified.
In the case of any increase in the number of directors of the Corporation,
the additional director or directors shall be elected only by the Board of
Directors.
Section 2. Vacancies. Except as otherwise provided by law, in the case of any
vacancy in the Board of Directors through death, resignation, disqualification
or other cause, a successor to hold office for the unexpired portion of the term
of the director whose place shall be vacant, and until the election of his
successor, shall be elected only by a majority of the Board of Directors then in
office, though less than a quorum.
Section 3. Removal. Directors of the Corporation may be removed only for
cause.
Section 4. Place of Meetings, etc. The Board of Directors may hold its
meetings, and may have an office and keep the books of the Corporation (except
as otherwise may be provided for by law) in such place or places in the State of
Delaware or outside of the State of Delaware, as the Board from time to time may
determine.
Section 5. Regular Meetings. Regular meetings of the Board of Directors shall
be held at such times as may be fixed by resolution of the Board of Directors.
The Secretary shall give notice, as provided for special meetings, for each
regular meeting.
Section 6. Special Meetings. Special meetings of the Board of Directors shall
be held whenever called by direction of the Chairman or a Vice Chairman of the
Board, or the President, or a majority of the directors then in office.
The Secretary shall give notice of each special meeting by mailing the same
at least two days before the meeting, or by telegraphing or telexing or by
facsimile transmission of the same at least one day before the meeting, to each
director; but such notice may be waived by any director. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting. At any meeting at which every director shall be present, even
though without any notice, any business may be transacted.
Section 7. Quorum. A majority of the total number of directors shall
constitute a quorum for the transaction of business; but if at any meeting of
the Board there be less than a quorum present, a majority of those present may
adjourn the meeting from time to time.
At any meeting of the Board of Directors all matters shall be decided by the
affirmative vote of a majority of directors then present, provided, that the
affirmative vote of at least one-third of all the directors then in office shall
be necessary for the passage of any resolution.
Section 8. Order of Business. At meetings of the Board of Directors business
shall be transacted in such order as, from time to time, the Board may determine
by resolution.
At all meetings of the Board of Directors, the Chairman of the Board or in
his absence the Vice Chairman of the Board designated by the Chairman of the
Board, or the President, in the order named, shall preside.
Section 9. Compensation of Directors. Each director of the Corporation who is
not a salaried officer or employee of the Corporation, or of a subsidiary of the
Corporation, shall receive such allowances for serving as a director and such
fees for attendance at meetings of the Board of Directors or any committee
appointed by the Board as the Board may from time to time determine.
Section 10. Election of Officers. At the first regular meeting of the Board
of Directors in each year (at which a quorum shall be present) held next after
the annual meeting, the Board of Directors shall proceed to the election of the
principal officers of the Corporation to be elected by the Board of Directors
under the provisions of Article III of these
By-Laws.
ARTICLE III.
Officers.
Section 1. Officers. The principal officers of the Corporation shall be a
Chairman of the Board of Directors, one or more Vice Chairmen of the Board of
Directors, a President, one or more Executive-Directors, one or more Executive
Vice Presidents, one or more Group Presidents, a Senior Vice President-Finance,
a General Counsel, a Treasurer, a Secretary and a Comptroller, none of whom need
be directors. All such principal officers shall be elected by the Board of
Directors. Each principal officer who shall be a member of the Board of
Directors shall be considered an Officer-Director.
The Board of Directors or any committee or officer designated by it may
appoint such other officers as it or he shall deem necessary, who shall have
such authority and shall perform such duties as from time to time may be
assigned to them by or with the authority of the Board of Directors.
One person may hold two or more offices.
In its discretion, the Board of Directors may leave unfilled any office.
All officers, agents and employees shall be subject to removal at any time by
the Board of Directors. All officers, agents and employees, other than officers
elected by the Board of Directors, shall hold office at the discretion of the
committee or of the officer appointing them.
Each of the salaried officers of the Corporation shall devote his entire
time, skill and energy to the business of the Corporation, unless the contrary
is expressly consented to by the Board of Directors.
Section 2. Powers and Duties of the Chairman of the Board. The Chairman of
the Board of Directors shall be the chief executive officer of the Corporation
and, subject to the Board of Directors, shall be in general charge of the
affairs of the Corporation. He shall preside at all meetings of the stockholders
and of the Board of Directors.
Section 3. Powers and Duties of the Vice Chairmen of the Vice Chairmen Board,
the President and the Executive-Directors. Subject to the Chairman of the Board
of Directors and the Board itself, the Vice Chairmen of the Board, the President
and the Executive-Directors shall have such duties as may be assigned to them by
the Chairman of the Board of Directors or the Board itself.
Section 4. Executive Vice Presidents, Group Presidents and Senior Vice
President-Finance. Each Executive Vice President, each Group President and the
Senior Vice President-Finance shall have such authority, and shall perform such
duties, as may be assigned to him.
Section 5. The General Counsel. The General Counsel shall be the chief
consulting officer of the Corporation in all legal matters, and, subject to the
Chairman of the Board of Directors and the Board itself, shall have general
control of all matters of legal import concerning the Corporation.
Section 6. Powers and Duties of Treasurer. Subject to the officer designated
by the Board of Directors, the Treasurer shall have custody of all the funds and
securities of the Corporation which may have come into his hands; when necessary
or proper he shall endorse, or cause to be endorsed, on behalf of the
Corporation, for collection, checks, notes and other obligations, and shall
cause the deposit of same to the credit of the Corporation in such bank or banks
or depositary as the Board of Directors may designate or as the Board of
Directors by resolution may authorize; he shall sign all receipts and vouchers
for payments made to the Corporation other than routine receipts and vouchers,
the signing of which he may delegate; he shall sign all checks made by the
Corporation; provided, however, that the Board of Directors may authorize and
prescribe by resolution the manner in which checks drawn on banks or
depositaries shall be signed, including the use of facsimile signatures, and the
manner in which officers, agents or employees shall be authorized to sign; he
may sign with the President or a vice president all certificates of shares in
the capital stock; whenever required by the Board of Directors, he shall render
a statement of his cash account; he shall enter regularly, in books of the
Corporation to be kept by him for the purpose, full and accurate account of all
moneys received and paid by him on account of the Corporation; he shall, at all
reasonable times, exhibit his books and accounts to any director of the
Corporation upon application at his office during business hours; and he shall
perform all acts incident to the position of treasurer.
He shall give a bond for the faithful discharge of his duties in such sum as
the Board of Directors may require.
Section 7. Powers and Duties of Secretary. The Secretary shall keep the
minutes of all meetings of the Board and the minutes of all meetings of the
stockholders, and also (unless otherwise directed by the Board of Directors) the
minutes of all committees, in books provided for that purpose; he shall attend
to the giving and serving of all notices of the Corporation; he may sign with an
Officer-Director or any other duly authorized person, in the name of the
Corporation, all contracts authorized by the Board of Directors, and affix the
seal of the Corporation thereto; he shall have charge of the certificate books,
transfer books and stock ledgers, and such other books and papers as the Board
of Directors may direct, all of which shall, at all reasonable times, be open to
the examination of any director, upon application at the Secretary's office
during business hours; and he shall in general perform all the duties incident
to the office of secretary, subject to the control of the Chairman of the Board
of Directors and the Board itself.
Section 8. Comptroller. Subject to the officer designated by the Board of
Directors, the Comptroller shall be in charge of the accounts of the
Corporation, and shall perform such duties as from time to time may be assigned
to him.
Section 9. Voting upon Stocks. Unless otherwise ordered by the Board of
Directors, any Officer-Director or any person or persons appointed in writing by
any of them, shall have full power and authority in behalf of the Corporation to
attend and to act and to vote at any meetings of stockholders of any corporation
in which the Corporation may hold stock, and at any such meeting shall possess
and may exercise any and all the rights and powers incident to the ownership of
such stock, and which, as the owner thereof, the Corporation might have
possessed and exercised if present. The Board of Directors, by resolution, from
time to time, may confer like powers upon any other person or persons.
ARTICLE IV.
Capital Stock - Seal.
Section 1. Certificates of Shares. The certificates for shares of each class
of the capital stock of the Corporation shall be in such form, not inconsistent
with the Certificate of Incorporation, as shall be prepared or be approved by
the Board of Directors. No certificate shall be valid unless it is signed by the
Chairman or a Vice Chairman of the Board of Directors or the President or a vice
president, and either the Treasurer or an assistant treasurer, or the Secretary
or an assistant secretary, but where such certificate is signed by a registrar
other than the Corporation or its employee the signatures of any such officer
and, where authorized by resolution of the Board of Directors, any transfer
agent may be facsimiles. In case any officer or transfer agent of the
Corporation who has signed, or whose facsimile signature has been placed upon,
any such certificate shall have ceased to be such officer or transfer agent of
the Corporation before such certificate is issued, such certificate may be
issued by the Corporation with the same effect as though the person or persons
were such officer or transfer agent of the Corporation at the date of issue.
All certificates for each class of capital stock of the Corporation shall be
consecutively numbered. The name of the person owning the shares represented
thereby, with the class and number of such shares and the date of issue, shall
be entered on the Corporation's books.
All certificates surrendered to the Corporation shall be cancelled, and no
new certificate shall be issued until the former certificate for the same class
and number of shares of the same class shall have been surrendered and
cancelled, except in accordance with procedures established by the Board of
Directors or where required by law.
Section 2. Transfer of Shares. Shares in the capital stock of the Corporation
shall be transferred only on the books of the Corporation by the holder thereof
in person, or by his attorney, upon surrender and cancellation of certificates
for a like class and number of shares.
Section 3. Regulations. The Board of Directors shall have power and authority
to make all such rules and regulations as respectively they may deem expedient,
concerning the issue, transfer and registration of certificates for shares of
the capital stock of the Corporation.
The Board of Directors may appoint one or more transfer agents or assistant
transfer agents and one or more registrars of transfers, and may require all
stock certificates to bear the signature of a transfer agent or assistant
transfer agent and a registrar of transfers. The Board of Directors may at any
time terminate the appointment of any transfer agent or any assistant transfer
agent or any registrar of transfers.
Section 4. Fixing Date for determination of Stockholders' Rights. The Board
of Directors is authorized from time to time to fix in advance a date, not
exceeding 60 days preceding the date of any meeting of stockholders, or the date
for the payment of any dividend, or the date for the allotment of rights, or the
date when any change or conversion or exchange of capital stock shall go into
effect, as a record date for the determination of the stockholders entitled to
notice of, and to vote at, any such meeting and any adjournment thereof, or
entitled to receive payment of any such dividend, or to any such allotment of
rights, or to exercise the rights in respect of any such change, conversion or
exchange of capital stock, and in such case such stockholders and only such
stockholders as shall be stockholders of record on the date so fixed shall be
entitled to such notice of, and to vote at, such meeting and any adjournment
thereof, or to receive payment of such dividend, or to receive such allotment of
rights, or to exercise such rights, as the case may be, notwithstanding any
transfer of any stock on the books of the Corporation after any such record date
fixed as aforesaid.
Section 5. Dividends. The Board of Directors may from time to time declare
such dividends as they shall deem advisable and proper, subject to such
restrictions as may be imposed by law and the Corporation's Certificate of
Incorporation.
Section 6. Facsimile Signatures. In addition to the provisions for the use of
facsimile signatures elsewhere specifically authorized in these By-Laws,
facsimile signatures of any officer or officers of this Corporation may be used
whenever and as authorized by the Board of Directors.
Section 7. Corporate Seal. The Board of Directors shall provide a suitable
seal, containing the name of the Corporation, which seal shall be in charge of
the Secretary. If and when so directed by the Board of Directors, duplicates of
the seal may be kept and be used by the Treasurer or by any assistant secretary
or assistant treasurer.
ARTICLE V.
Indemnification.
Section 1. Right to Indemnification. The Corporation shall indemnify and hold
harmless to the fullest extent permitted by law any person who was or is made or
is threatened to be made a party or is involved in any action, suit, or
proceeding whether civil, criminal, administrative or investigative
("proceeding") by reason of the fact that he, or a person for whom he is the
legal representative, is or was a director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust, enterprise or non-profit entity, including service with
respect to employee benefit plans, against all expenses, liability, and loss
reasonably incurred or suffered by such person. The Corporation shall indemnify
any person seeking indemnity in connection with a proceeding initiated by such
person only if the proceeding was authorized by the Board of Directors of the
Corporation.
Section 2. Prepayment of Expenses. The Corporation shall pay the expenses
reasonably incurred in defending any such proceeding in advance of its final
disposition provided however the payment of expenses incurred by a director or
officer in his capacity as a director or officer (except with regard to service
to an employee benefit plan or nonprofit entity) in advance of the final
disposition of the proceeding shall be made only upon the agreement by the
director or officer to repay all amounts advanced if it should be determined
that the director or officer is not entitled to be indemnified under this
Article or otherwise, and provided, further, that the Corporation shall have no
obligation to pay any expenses in advance
pursuant to this Section 2 to any person who is or was an employee or agent of
the Corporation (other than a director or an officer) or is or was serving at
the request of the Corporation as an employee or agent of another corporation or
of a partnership, joint venture, trust, enterprise or nonprofit entity, with
respect to any proceeding by or in the right of the Corporation to procure a
judgment in its favor.
Section 3. Claims. If a claim under this Article is not paid in full within
ninety days after a written claim has been received by the Corporation, the
claimant may file suit to recover the unpaid amount of such claim and, if
successful in whole or in part, shall be entitled to be paid in addition the
expense of prosecuting such claim. In any such action the Corporation shall have
the burden of proving that the claimant was not eligible for indemnification
under applicable law.
Section 4. Non-Exclusivity of Rights. The rights conferred on any person by
this Article shall not be exclusive of any other right which such person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, By-Law, agreement, vote of stockholders or disinterested
directors or otherwise.
ARTICLE VI.
Amendments.
Section 1. The Board of Directors shall have power to adopt, amend and repeal
the By-Laws at any regular or special meeting of the Board, provided that notice
of intention to adopt, amend or repeal the By-Laws in whole or in part shall
have been included in the notice of meeting; or, without any such notice, by a
vote of two-thirds of the directors then in office.
Stockholders may adopt, amend and repeal the By-Laws at any regular or
special meeting of the stockholders by an affirmative vote of holders of
outstanding shares of the capital stock of the Corporation having two-thirds of
the votes entitled to be cast thereon, provided that notice of intention to
adopt, amend or repeal the By-Laws in whole or in part shall have been included
in the notice of the meeting.
Exhibit 10(h)
1EXECUTION COPY
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
of
MARATHON ASHLAND PETROLEUM LLC
Dated as of December 31, 1998
AMENDED AND RESTATED LIMITED
LIABILITY COMPANY AGREEMENT dated as of
December 31, 1998, of MARATHON ASHLAND
PETROLEUM LLC (the "Company"), by and between
Marathon Oil Company, an Ohio corporation
("Marathon"), and Ashland Inc., a Kentucky
corporation ("Ashland"), as Members.
Preliminary Statement
WHEREAS, on June 11, 1997, Marathon and Emro
Marketing Company ("Emro Marketing") formed the Company
(formerly known as "Emro Supply, LLC") by filing a
Certificate of Formation of the Company with the Secretary
of State of the State of Delaware and executed the Limited
Liability Company Agreement of the Company pursuant to which
Marathon received a 60% interest in the Company and Emro
Marketing received a 40% interest in the Company;
WHEREAS, on July 18, 1997, Emro Marketing assigned
its interest in the Company to Marathon and Fuelgas Company,
Inc., a wholly owned subsidiary of Marathon ("Fuelgas"),
with Marathon receiving an additional 39% interest in the
Company and Fuelgas receiving a 1% interest in the Company,
which interest will be transferred to Marathon immediately
following the Closing (for purposes of this Agreement and
the other Transaction Documents, all references to
Marathon's interest in the Company shall be deemed to
include the 1% interest owned by Fuelgas);
WHEREAS, on July 18, 1997, Marathon and Fuelgas
executed the First Amended and Restated Limited Liability
Company Agreement of the Company and filed an Amended and
Restated Certificate of Formation of the Company with the
Secretary of State of the State of Delaware;
WHEREAS, on October 29, 1997, Marathon and Fuelgas
filed a Second Amended and Restated Certificate of Formation
of the Company with the Secretary of State of the State of
Delaware to change the name of the Company to Marathon
Ashland Petroleum LLC;
WHEREAS, on December 8, 1997, Marathon and Fuelgas
executed the Second Amended and Restated Limited Liability
Company Agreement of the Company which became effective on
December 10, 1997;
WHEREAS the parties hereto desire that the Company
(a) be a premier petroleum supply, refining, marketing and
transportation business, (b) create a highly efficient,
cost-effective and competitive petroleum supply, refining,
marketing and transportation system, (c) deliver to the
Members the highest possible economic value added, (d) be
customer-focused and market-driven in its business strategy,
(e) be a respected and responsible member of the communities
in which the Company will operate, with a high regard for
environmental responsibility and employee safety, and
(f) seek to maximize Distributable Cash to the Members
consistent with the foregoing, including capital spending
levels which over time are expected to be generally
equivalent to the level of non-cash charges; and
WHEREAS the Members entered into this Agreement on
January 1, 1998 to set forth the rights and responsibilities
of each of them with respect to the governance, financing
and operation of the Company;
WHEREAS, the Members have executed Amendment No. 1
to this Agreement as of August 21, 1998, and have executed
Amendment No. 2 to this Agreement as of September 1, 1998;
and
WHEREAS, the Members wish to make certain
additional amendments to this Agreement, and to restate this
Agreement incorporating such additional amendments as well
as the amendments contained in Amendment No. 1 and Amendment
No. 2.
NOW, THEREFORE, the parties hereto hereby agree as
follows:
ARTICLE I
Certain Definitions; Applicable GAAP
SECTION 1.01. Definitions. Defined terms used in
this Agreement shall have the meanings ascribed to them by
definition in this Agreement or in Appendix A. In addition,
when used herein the following terms have the following
meanings:
"Accounting Determination" has the meaning set
forth in Section 1.02.
"Acquisition Expenditures" means, in connection
with any acquisition by the Company and its subsidiaries,
without duplication (i) the purchase price paid or to be
paid for the net assets or capital stock or other equity
interests in connection with such acquisition, (ii) any
Indebtedness assumed by the Company and its subsidiaries in
connection with any such acquisition, (iii) any contingent
liabilities assumed or incurred by the Company and its
subsidiaries in connection with any such acquisition to the
extent that such contingent liabilities are required to be
reflected on the balance sheet of the Company and its
subsidiaries in accordance with Financial Accounting
Standard Number 5 (or any successor or superseding provision
of Applicable GAAP), and (iv) all other costs and expenses
incurred or to be incurred by the Company or any of its
subsidiaries in connection with any such acquisition to the
extent that such costs and expenses would be capitalized if
such acquisition were consummated.
"Adjustable Amount" has the meaning set forth in
Section 8.13.
"Additional Monetary Amount" has the meaning set
forth in Section 14.03(c).
"Additional Required Cash Amount" has the meaning
set forth in Section 14.01(a).
"Adjusted DD&A" means:
(i) for the twelve-month periods ended
December 31, 1995 and 1996, $348 million and
$346 million, respectively;
(ii) for the twelve-month period ended
December 31, 1997, the total combined depreciation,
depletion and amortization expense of the Marathon
Business and the Ashland Business during such
twelve-month period, including, without duplication,
(a) any gains (deductions from depreciation, depletion
and amortization) or losses (additions to depreciation,
depletion and amortization) on asset retirements during
such period and (b) pro forma depreciation, depletion
and amortization expense related to the Financed
Properties during such period (calculated in the same
manner such pro forma depreciation, depletion and
amortization expense was calculated in Schedule A,
which considers the placed-in-service dates of the
Financed Properties);
(iii) for the twelve-month period ended
September 30, 1998, the sum of:
(a) the total combined depreciation,
depletion and amortization expense of the Marathon
Business and the Ashland Business during the
period commencing on October 1, 1997, and ended on
the date immediately preceding the Closing Date,
including, without duplication, (1) any gains
(deductions from depreciation, depletion and
amortization) or losses (additions to
depreciation, depletion and amortization) on asset
retirements during such period and (2) pro forma
depreciation, depletion and amortization expense
related to the Financed Properties during such
period (calculated in the same manner such pro
forma depreciation, depletion and amortization
expense was calculated in Schedule A, which
considers the placed-in-service dates of the
Financed Properties); and
(b) the total depreciation, depletion and
amortization expense of the Company and its
subsidiaries for the period commencing on the
Closing Date and ended on September 30, 1998,
including (1) any gains (deductions from
depreciation, depletion and amortization) or
losses (additions to depreciation, depletion and
amortization) on asset retirements during such
period, (2) depreciation, depletion and
amortization expense related to the Garyville
Propylene Upgrade Project during such period and
(3) depreciation, depletion and amortization
expense related to all Company-funded Capital
Expenditures, but excluding (4) depreciation,
depletion and amortization expense related to
Member-Funded Capital Expenditures and (5) the
increase or decrease in such depreciation,
depletion and amortization expense related to the
Ashland Transferred Assets (including pro forma
depreciation, depletion and amortization expense
related to the Financed Properties) resulting from
the application of purchase accounting treatment
to the transactions contemplated by the
Transaction Documents (such purchase accounting
treatment causing an increase or decrease in the
estimated useful lives and the net book value of
the Ashland Transferred Assets); and
(iv) for the twelve-month period ended
September 30, 1999, and each twelve-month period ended
September 30 thereafter, the total depreciation,
depletion and amortization expense of the Company and
its subsidiaries for such twelve-month period,
including, without duplication, (a) any gains
(deductions from depreciation, depletion and
amortization) or losses (additions to depreciation,
depletion and amortization) on asset retirements during
such period, (b) depreciation, depletion and
amortization expense related to the Garyville Propylene
Upgrade Project during such period and (c)
depreciation, depletion and amortization expense
related to Company-funded Capital Expenditures but
excluding (d) depreciation, depletion and amortization
expense related to Member-Funded Capital Expenditures
and (e) the increase or decrease in such depreciation,
depletion and amortization expense related to the
Ashland Transferred Assets (including pro forma
depreciation, depletion and amortization expense
related to the Financed Properties) resulting from the
application of purchase accounting treatment to the
transactions contemplated by the Transaction Documents
(such purchase accounting treatment causing an increase
or decrease in the estimated useful lives and the net
book value of the Ashland Transferred Assets);
all as determined on a consolidated basis with respect to
(x) in the case of any period ending prior to the Closing
Date, Marathon and its subsidiaries or Ashland and its
subsidiaries, as applicable, or (y) in the case of any
period ending on or after the Closing Date, the Company and
its subsidiaries, in each case in accordance with
Applicable GAAP.
"Adjusted EBITDA" means:
(i) for the twelve-month periods ended
December 31, 1995 and 1996, $657 million and
$600 million, respectively;
(ii) for the twelve-month period ended
December 31, 1997, the sum of:
(a) Historical EBITDA for such twelve-month
period, plus
(b) $80 million, minus
(c) 38% of an amount equal to (1) the sum of
the amounts calculated pursuant to clauses (a) and
(b) above for such twelve-month period less
(2) the Adjusted DD&A for such twelve-month
period.
(iii) for the twelve-month period ended
September 30, 1998, the sum of:
(a) for the period commencing on October 1,
1997, and ended on the date immediately preceding
the Closing Date, the sum of:
(1) Historical EBITDA for such period, plus
(2) $20 million, minus
(3) 38% of an amount equal to (A) the sum of
the amounts calculated pursuant to clauses (1) and
(2) above with respect to such period less (B) the
Adjusted DD&A for such period; and
(b) for the period commencing on the Closing Date
and ended on September 30, 1998, the sum of:
(1) EBITDA of the Company and its
subsidiaries for such period, plus
(2) $12.4 million, minus
(3) the Tax Distribution Amounts paid or to
be paid in respect of each of the three Fiscal
Quarters (or portion thereof) included in such
period; and
(iv) for the twelve-month period ended
September 30, 1999 and each twelve-month period ended
September 30 thereafter, the sum of:
(a) EBITDA of the Company and its
subsidiaries for such twelve-month period, minus
(b) the Tax Distribution Amounts paid or to
be paid in respect of each of the four Fiscal
Quarters included in such twelve-month period;
all as determined on a consolidated basis with respect to
(x) in the case of any period ending prior to the Closing
Date, Marathon and its subsidiaries or Ashland and its
subsidiaries, as applicable, or (y) in the case of any
period ending on or after the Closing Date, the Company and
its subsidiaries, in each case in accordance with then
Current GAAP (other than Ordinary Course Lease Expenses
which shall be calculated in accordance with Applicable
GAAP).
"Advanced Amount" has the meaning set forth in
Section 14.01(b).
"Affiliate Transaction" means any agreement or
transaction between the Company or any of its subsidiaries
and any Member or any Affiliate of any Member that:
(a) for purposes of Section 7.03(a)(i), will
result or is reasonably anticipated will result in
expenditures, contingent or actual liabilities or
benefits to the Company and its subsidiaries in excess
of $2 million;
(b) for purposes of Section 7.03(b), is either
(i) outside the ordinary course of the Company and its
subsidiaries' business and results or will result in
contingent or actual liabilities or benefits to the
Company and its subsidiaries in excess of $100,000 in
the applicable Fiscal Year or (ii) within the ordinary
course of the Company and its subsidiaries' business
and results or will result in expenditures, contingent
or actual liabilities or benefits to the Company and
its subsidiaries (A) in excess of $2 million
individually in the applicable Fiscal Year or (B) when
taken together with all other agreements or
transactions entered into the same Fiscal Year as such
agreement or transaction which are either related to
such agreement or transaction or are substantially the
same type of agreement or transaction as such agreement
or transaction, in excess of $2 million in the
aggregate in the applicable Fiscal Year; and
(c) for purposes of Section 8.08(k)(i), is either
(i) outside the ordinary course of the Company and its
subsidiaries' business and will result or is reasonably
anticipated will result in expenditures, contingent or
actual liabilities or benefits to the Company and its
subsidiaries in excess of $2 million or (ii) within the
ordinary course of the Company and its subsidiaries'
business and will result or is reasonably anticipated
will result in expenditures, contingent or actual
liabilities or benefits to the Company and its
subsidiaries in excess of $25 million.
For purposes of this definition of Affiliate
Transaction, any guarantee by a Member or any Affiliate of
any Member of any obligations of the Company or any of its
subsidiaries that is provided by such Member or such
Affiliate without cost to the Company and its subsidiaries
shall not be deemed to be an Affiliate Transaction.
Notwithstanding the foregoing, the term "Affiliate
Transaction" shall not include any distributions of cash or
other property to the Members pursuant to Article V.
"Affiliate Transaction Dispute Notice" has the
meaning set forth in Section 8.11(b).
"Aggregate Tax Rate" has the meaning set forth in
Section 5.01(a)(i).
"Agreed Additional Capital Contributions" has the
meaning set forth in Section 4.02(c).
"Agreement" means this Limited Liability Company
Agreement of the Company, as the same may be amended,
restated, supplemented or otherwise modified from time to
time.
"Annual Capital Budget" has the meaning set forth
in Section 8.09(a).
"Applicable GAAP" has the meaning set forth in
Section 1.02.
"Approved Marathon Crude Oil Purchase Program" has
the meaning set forth in Section 8.12.
"Arbitratable Dispute" has the meaning set forth
in Section 13.04(a).
"Arbitration Payment Due Date" has the meaning set
forth in Section 14.03(a).
"Arbitration Proceeding" has the meaning set forth
in Section 14.01(a).
"Arbitration Tribunal" has the meaning set forth
in Appendix B.
"Arm's-Length Transaction" has the meaning set
forth in Section 8.11(a).
"Ashland Designated Sublease Agreements" shall
mean the Ashland Sublease Agreements attached as Exhibits L-
1, L-2, L-3 and L-4 to the Asset Transfer and Contribution
Agreement.
"Ashland-Funded Capital Expenditures" has the
meaning set forth in Section 4.02(a).
"Audited Financial Statements" has the meaning set
forth in Section 7.02(c).
"Average Annual DD&A" means:
(a) for Fiscal Year 1998, the average of the
Adjusted DD&A for the three twelve-month periods ended
December 31, 1995, 1996 and 1997;
(b) for Fiscal Year 1999, the average of the
Adjusted DD&A (i) for the two twelve-month periods
ended December 31, 1996 and 1997 and (ii) for the one
twelve-month period ended September 30, 1998;
(c) for Fiscal Year 2000, the average of the
Adjusted DD&A (i) for the twelve-month period ended
December 31, 1997 and (ii) for the two twelve-month
periods ending on September 30, 1998 and 1999; and
(d) for Fiscal Year 2001 and each Fiscal Year
thereafter, the average of the Adjusted DD&A for the
three twelve-month periods ending on September 30 in
each of the three Fiscal Years immediately preceding
such Fiscal Year.
"Average Adjusted EBITDA" means:
(a) for Fiscal Year 1998, the average of the
Adjusted EBITDA for the three twelve-month periods
ended December 31, 1995, 1996 and 1997;
(b) for Fiscal Year 1999, the average of the
Adjusted EBITDA (i) for the two twelve-month periods
ended December 31, 1996 and 1997 and (ii) for the one
twelve-month period ended September 30, 1998;
(c) for Fiscal Year 2000, the average of the
Adjusted EBITDA (i) for the twelve-month period ended
December 31, 1997 and (ii) for the two twelve-month
periods ending on September 30, 1998 and 1999; and
(d) for Fiscal Year 2001 and each Fiscal Year
thereafter, the average of the Adjusted EBITDA for the
three twelve-month periods ending on September 30 in
each of the three Fiscal Years immediately preceding
such Fiscal Year.
"Average Annual Level" means for any twelve-month
period ending on September 30 of any calendar year, the
average of the level of the Price Index ascertained by
adding the twelve monthly levels of the Price Index during
such twelve-month period and dividing the total by twelve.
"Bareboat Charters" has the meaning set forth in
Section 9.3(k) of the Asset Transfer and Contribution
Agreement.
"Base Level" means 161.2.
"Base Rate" has the meaning set forth in
Section 1.01 of the Put/Call, Registration Rights and
Standstill Agreement.
"Board of Managers" has the meaning set forth in
Section 8.02(a).
"Bulk Motor Oil Business" has the meaning set
forth in Section 14.03(h) of the Put/Call, Registration
Rights and Standstill Agreement.
"Business Plan" has the meaning set forth in
Section 8.10.
"Capital Account" has the meaning set forth in
Section 6.01.
"Capital Expenditures" means, for any period, the
aggregate of all expenditures incurred by the Company and
its subsidiaries during such period that, in accordance
with Applicable GAAP, are or should be included in
additions to property, plant or equipment or similar items
reflected in the consolidated statement of cash flows of
the Company and its subsidiaries; provided, however, that
Capital Expenditures shall not include (a) exchanges of
such items for other items, (b) expenditures of proceeds of
insurance settlements by the Company or any of its
subsidiaries in respect of lost, destroyed or damaged
assets, equipment or other property to the extent such
expenditures are made to replace or repair such lost,
destroyed or damaged assets, equipment or other property
within 18 months of such loss, destruction or damage,
(c) funds expended by a Member or an Affiliate of a Member
to purchase any Subleased Property that is contributed to
the Company or a subsidiary of the Company pursuant to
Section 4.01(c)(i)(A) or (d) Member-Funded Capital
Expenditures; all as determined on a consolidated basis
with respect to the Company and its subsidiaries in
accordance with Applicable GAAP.
"Capital Lease" means any lease of (or other
arrangement conveying the right to use) real or personal
property, or a combination thereof, which obligations are
required to be classified and accounted for as capital
leases on a consolidated balance sheet of the Company and
its subsidiaries in accordance with Applicable GAAP.
"Closing Date Affiliate Transactions" has the
meaning set forth in Section 8.08(k)(i)(A).
"Company Independent Auditors" has the meaning
set forth in Section 7.01.
"Company Investment Guidelines" has the meaning
set forth in Section 8.15.
"Company Leverage Policy" has the meaning set
forth in Section 8.14.
"Competitive Business" has the meaning set forth
in Section 14.01(a) of the Put/Call, Registration Rights
and Standstill Agreement.
"Competitive Third Party" has the meaning set
forth in Section 14.01(d) of the Put/Call, Registration
Rights and Standstill Agreement.
"Contracting Member" has the meaning set forth in
Section 8.11(b).
"Covered Person" means any Member, any Affiliate
of a Member or any officers, directors, shareholders,
partners, employees, representatives or agents of a Member
or their respective Affiliates, or any Representative, or
any employee, officer or agent of the Company or its
Affiliates.
"Critical Decision" means each Primary Critical
Decision and each Other Critical Decision.
"Critical Decision Termination Date" means (a) in
the case of any Other Critical Decision, the first
anniversary of the Closing Date or (b) in the case of any
Primary Critical Decision, the first anniversary of the
Closing Date or, if the Critical Decision Termination Date
shall be extended with respect to such Primary Critical
Decision as provided in Section 8.19(c), the fifteen-month
anniversary of the Closing Date.
"Crude Oil Purchases" means any purchase of crude
oil by the Company or any of its subsidiaries from Marathon
or any Affiliate of Marathon.
"Current GAAP" means, at any time, GAAP as in
effect at such time.
"Delinquent Member" has the meaning set forth in
Section 14.01(a).
"Designated Sublease Agreements" means the
Ashland Designated Sublease Agreements and the Marathon
Designated Sublease Agreements.
"Designated Sublease Amount" means any obligation
of a Member to the Company or a subsidiary of the Company
under Section 4.01(c) with respect to a Subleased Property
or a Designated Sublease Agreement.
"Dispute" has the meaning set forth in
Section 13.01.
"Dispute Notice" has the meaning set forth in
Section 13.02.
"Disputed Capital Contribution Amount" has the
meaning set forth in Section 13.04(a).
"Disputed Indemnification Amount" has the meaning
set forth in Section 14.01(a).
"Disputed Monetary Amount" has the meaning set
forth in Section 14.01(a).
"Distributable Cash" means, for each Fiscal
Quarter, without duplication:
(a) the Short-Term Investments of the Company and
its subsidiaries on the last day of such Fiscal
Quarter, minus
(b) the Ordinary Course Debt of the Company and
its subsidiaries on the last day of such Fiscal
Quarter, minus
(c) the Tax Distribution Amount to be paid in
respect of such Fiscal Quarter, minus
(d) funds held on the last day of such Fiscal
Quarter for financing Special Projects or Permitted
Capital Projects/Acquisitions, minus
(e) if the notional repayment of principal for
Special Project Indebtedness or Permitted Capital
Project/Acquisition Indebtedness during such Fiscal
Quarter calculated using a notional repayment schedule
established and approved by the Board of Managers in
accordance with the Company Leverage Policy was more
than the amount of actual principal repayments for such
Special Project Indebtedness or Permitted Capital
Project/Acquisition Indebtedness during such Fiscal
Quarter, the amount of such excess, plus
(f) if the amount of the actual principal
repayments for Special Project Indebtedness or
Permitted Capital Project/Acquisition Indebtedness
during such Fiscal Quarter was more than the notional
repayment of principal for such Special Project
Indebtedness or Permitted Capital Project/Acquisition
Indebtedness during such Fiscal Quarter (calculated in
the manner described in clause (e) above), the amount
of such excess, plus or minus
(g) any adjustments or reserves (including any
adjustments for minimum cash balance requirements,
including cash reserves for accrued or withheld Taxes
not yet due) in the amounts and for the time periods
established and approved by the Board of Managers
pursuant to a vote in accordance with Section 8.07(b).
"Distribution Date" has the meaning set forth in
Section 5.01(a).
"Distributions Calculation Statement" has the
meaning set forth in Section 5.01(c).
"EBITDA" means for any period:
(a) net income, plus
(b) to the extent deducted in computing such net
income, the sum of (i) estimated or actual Federal,
state, local and foreign income tax expense,
(ii) interest expense, (iii) depreciation, depletion
and amortization expense, (iv) non-cash charges
resulting from the cumulative effect of changes in
accounting principles, and (v) non-cash lower of cost
or market inventory or fixed asset writedowns; minus
(c) to the extent added in computing such net
income, (i) any interest income (excluding interest
income on accounts receivable related to marketing
programs), (ii) non-cash gains resulting from the
cumulative effect of changes in accounting principles
and (iii) non-cash lower of cost or market inventory or
fixed asset gains;
all as determined on a consolidated basis (x) in the case of
any period ended prior to the Closing Date, Marathon and its
subsidiaries or Ashland and its subsidiaries, as applicable,
or (y) in the case of any period ending on or after the
Closing Date, with respect to the Company and its
subsidiaries, in each case in accordance with then Current
GAAP. For purposes of this definition, depreciation,
depletion and amortization expense will include any gains
(deductions from depreciation, depletion and amortization)
or losses (additions to depreciation, depletion and
amortization) on asset retirements and excess purchase price
amortization adjustments. For the avoidance of doubt,
EBITDA shall not include any revenues or expenses
constituting Member-Funded Capital Expenditures or
Member-Indemnified Expenditures.
"Executive Officers" has the meaning set forth in
Section 9.01(a).
"Final Monetary Amount" has the meaning set forth
in Section 14.03(a).
"Financed Properties" means each of the properties
listed in Schedule 1.01.
"Fiscal Quarter" means the three-month period
ended March 31, June 30, September 30 and December 31 of
each Fiscal Year.
"Fiscal Year" has the meaning set forth in
Section 6.05.
"Fuelgas Interest" means the 1% interest in the
Company which is owned by Fuelgas.
"GAAP" means United States generally accepted
accounting principles applied on a consistent basis.
"Garyville Propylene Upgrade Project" means the
propylene splitter with a capacity of approximately
800 million pounds per year that is being constructed at the
Garyville refinery for the production of propylene.
"Historical EBITDA" means for any period ending
prior to the Closing Date the sum of:
(a) EBITDA of the Marathon Business for such
period as adjusted for each of the "EBIT Adjustment"
items set forth in lines 10-55 of Schedule B-1 and each
of the "Depreciation Adjustment" items set forth in
lines 133 through 150 of Schedule B-1, in each case
calculated for such period in the same manner that such
adjustments were calculated in Schedule B-1, plus
(b) EBITDA of the Ashland Business for such period
as adjusted for each of the "EBIT Adjustment" items set
forth in lines 11-56 of Schedule B-2 and each of the
"Depreciation Adjustment" items set forth in
lines 111-120 of Schedule B-2, in each case calculated
for such period in the same manner that such
adjustments were calculated in Schedule B-2;
all determined on a consolidated basis with respect to
Marathon and its subsidiaries or Ashland and its
subsidiaries, as applicable, in accordance with then Current
GAAP.
"Initial GAAP" has the meaning set forth in
Section 1.02.
"Initial Term" has the meaning set forth in
Section 2.03.
"Make-Up Expense" has the meaning set forth in
Section 6.02(d).
"Maralube Express Business" has the meaning set
forth in Section 14.03(d)(i) of the Put/Call, Registration
Rights and Standstill Agreement.
"Marathon Crude Oil Purchase Program" has the
meaning set forth in Section 8.12.
"Marathon Designated Sublease Agreements" shall
mean the Marathon Sublease Agreements attached as
Exhibits E-1, E-2 and E-3 to the Asset Transfer and
Contribution Agreement.
"Marathon-Funded Capital Expenditures" has the
meaning set forth in Section 4.02(a).
"Material Adverse Effect" has the meaning set
forth in the Asset Transfer and Contribution Agreement.
"Member-Funded Capital Expenditures" has the
meaning set forth in Section 4.02(a).
"Member-Indemnified Expenditures" has the meaning
set forth in Section 4.02(b).
"Monetary Dispute" has the meaning set forth in
Section 14.01(a).
"Non-Contracting Member" has the meaning set forth
in Section 8.11(b).
"Non-Delinquent Member" has the meaning set forth
in Section 14.01.
"Non-Terminating Member" has the meaning set forth
in the Put/Call, Registration Rights and Standstill
Agreement.
"Normal Annual Capital Budget Amount" means, for
each Fiscal Year, an amount equal to the sum of:
(i) an amount equal to 130% of the Average Annual
DD&A for such Fiscal Year, plus
(ii) if, with respect to any Fiscal Year, (a) the
Average Adjusted EBITDA for such Fiscal Year less the
amount calculated pursuant to clause (i) above for such
Fiscal Year exceeds (b) $240 million (such excess, the
"Excess EBITDA" for such Fiscal Year), the sum of
(1) the lesser of: (x) 10% of the Average Annual DD&A
for such Fiscal Year and (y) the Excess EBITDA for such
Fiscal Year and (2) 50% of the amount by which the
Excess EBITDA for such Fiscal Year exceeds an amount
equal to 10% of the Average Annual DD&A for such Fiscal
Year.
An example of the calculation of Adjusted DD&A, Adjusted
EBITDA, Average Annual DD&A, Average Adjusted EBITDA and the
Normal Annual Capital Budget Amount is shown in Schedule A.
In the event of any inconsistency between such Schedule A
and the language of this definition of Normal Annual Capital
Budget Amount, neither shall control over the other.
"Offer Notice" has the meaning set forth in
Section 10.04(a).
"Ordinary Course Debt" means, without duplication,
the aggregate outstanding principal amount of all loans and
advances under any committed or uncommitted credit
facilities (including any commercial paper borrowings or
borrowings under the Revolving Credit Agreement, but
excluding trade payables), provided that Ordinary Course
Debt shall not include any Permitted Intercompany Debt, any
Special Project Indebtedness or any Permitted Capital
Project Indebtedness.
"Ordinary Course Lease Expense" means, with
respect to any Fiscal Year, the rental or lease expense for
such Fiscal Year of assets rented or financed by operating
leases (as determined in accordance with Applicable GAAP).
"Original Lease" means the lease or charter
underlying a Marathon Designated Sublease Agreement or an
Ashland Designated Sublease Agreement in which Marathon or
Ashland, as applicable, is the lessee or charterer.
"Other Critical Decision" means each of the
Level III decisions set forth in paragraphs 2(c)(iii), (v),
(vii), (viii) and (ix) of the Retail Integration Protocol.
"Packaged Motor Oil Business" has the meaning set
forth in Section 14.03(h) of the Put/Call, Registration
Rights and Standstill Agreement.
"Percentage Interest" has the meaning set forth in
Section 3.01.
"Permitted Capital Project/Acquisition
Indebtedness" has the meaning set forth in the Company
Leverage Policy.
"Permitted Intercompany Debt" has the meaning set
forth in the Company Leverage Policy.
"Price Index" means the Consumer Price Index for
All Urban Consumers of the United States Department of Labor
Bureau of Labor Statistics for all Urban Areas (on the 1982-
84 equals 100 standard).
"Primary Critical Decision" means each of the
Level III decisions set forth in paragraphs 2(c)(i), (ii),
(iv) and (vi) of the Retail Integration Protocol.
"Prime Rate" means the rate of interest per annum
publicly announced from time to time by Citibank, NA, as its
prime rate in effect at its principal office in New York;
each change in the Prime Rate shall be effective on the date
such change is publicly announced as being effective.
"Private Label Packaged Motor Oil Business" has
the meaning set forth in Section 14.03(h) of the Put/Call
Registration Rights and Standstill Agreement.
"Profit and Loss", as appropriate, means, for any
period, the taxable income or tax loss of the Company and
its subsidiaries under Code Section 703(a) and Treasury
Regulation Section 1.703-1 for the Fiscal Year, adjusted as
follows:
(a) All items of income, gain, loss or deduction
required to be separately stated pursuant to Code
Section 703(a)(1) shall be included;
(b) Tax exempt income as described in Code
Section 705(a)(1)(B) realized by the Company during such
Fiscal Year shall be taken into account as if it were
taxable income;
(c) Expenditures of the Company described in Code
Section 705(a)(2)(B) for such Fiscal Year, including items
treated under Treasury Regulation
Section 1.704-1(b)(2)(iv)(i) as items described in Code
Section 705(a)(2)(B), shall be taken into account as if they
were deductible items;
(d) With respect to any property (other than
money) which has been contributed to the capital of the
Company, "Profit" and "Loss" shall be computed in accordance
with the provisions of Treasury Regulation
Section 1.704-1(b)(2)(iv)(g) by computing depreciation,
amortization, income, gain, loss or deduction based upon the
fair market value of such property at the date of
contribution. Book depreciation (as that term is used in
Treasury Regulation Section 1.704-(b)(2)(iv)(g)(3)) for any
asset contributed to the Company that was fully depreciated
for federal income tax purposes as of the date of its
contribution shall be based on the applicable recovery
period (as determined in Code Section 168(c)) for new assets
of the same type;
(e) With respect to any property of the Company
which has been revalued as required or permitted by Treasury
Regulations under Code Section 704(b), "Profit" or "Loss"
shall be determined based upon the fair market value of such
property as determined in such revaluation; and
(f) With respect to any property of the Company
which (i) is distributed in kind to a Member, or (ii) has
been revalued under Section 6.03 upon the occurrence of any
event specified in Treasury Regulation Section 1.704-
1(b)(2)(iv)(f), the difference between the adjusted basis
for federal income tax purposes and the fair market value
shall be treated as gain or loss upon the disposition of
such property.
"Qualified Candidate" has the meaning set forth in
Section 9.02(c).
"Quick Lube Business" has the meaning set forth in
Section 14.03(h) of the Put/Call, Registration Rights and
Standstill Agreement.
"Refundable Amount" has the meaning set forth in
Section 14.03(d).
"Representatives" has the meaning set forth in
Section 8.01
"Response" has the meaning set forth in
Section 13.02.
"Retail Integration Protocol" means the Speedway
SuperAmerica LLC Retail Integration Protocol attached hereto
as Exhibit A.
"Revolving Credit Agreement" has the meaning set
forth in Section 2.2(a) of the Master Formation Agreement.
"Section 8.11(b) Affiliate Transaction" has the
meaning set forth in Section 8.11(b).
"Security Interest" has the meaning set forth in
Section 14.05(a).
"Selling Member" has the meaning set forth in
Section 10.04(a).
"Senior Manager" has the meaning set forth in
Section 13.02.
"Shared Service" means an administrative service
that is provided to the Company or its subsidiaries by
Marathon, Ashland or any of their respective Affiliates
pursuant to the Shared Services Agreement or provided to
Marathon, Ashland or any of their respective Affiliates by
the Company or its subsidiaries pursuant to the Shared
Services Agreement.
"Shared Services Agreement" means the Shared
Services Agreement by and among Marathon, Ashland and the
Company, including the Schedules thereto, attached as
Exhibit U to the Asset Transfer and Contribution Agreement.
"Short-Term Investments" means, without
duplication, collected or available bank cash balances, the
fair market value of any investment made by the Company or
any of its subsidiaries pursuant to the Company's Investment
Guidelines and the fair market value of any investment made
by the Company or any of its subsidiaries that should have
been made pursuant to the Company's Investment Guidelines,
but excluding Incidental Cash and any cash balances that
represent uncollected funds.
"Significant Shared Service" means (a) any Shared
Service related to the Treasury and Cash Management function
and (b) any Shared Service (or group of related Shared
Services) that results or is reasonably anticipated to
result in the payment by or to the Company or any of its
subsidiaries of more than $2 million in any contract year in
the period during which such Shared Service will be
provided. For purposes of determining whether the
$2 million threshold of this definition has been satisfied,
payments for all Shared Services in each of the following
general administrative areas shall be aggregated within each
area specified below and considered related Shared Services:
Human Resources; Health, Environment and Safety; Law; Public
Affairs; Governmental Affairs; Finance and Accounting
(including Internal Audit); Administrative Services;
Information Technology Services; Procurement; Business
Development; Aviation; Engineering and Technology;
Economics; and Security.
"Sole Arbitrator" has the meaning set forth in
Appendix B.
"Special Project" has the meaning set forth in the
Company Leverage Policy.
"Special Project Indebtedness" has the meaning set
forth in the Company Leverage Policy.
"Special Termination Right" has the meaning set
forth in Section 2.01(a) of the Put/Call, Registration
Rights and Standstill Agreement.
"Subleased Property" has the meaning set forth in
Section 4.01(c).
"Super Majority Decision" has the meaning set
forth in Section 8.08.
"Surplus Cash" has the meaning assigned to such
term in the Company Leverage Policy.
"Tax Distribution Amount" has the meaning set
forth in Section 5.01(a).
"Tax Liability" means, with respect to a Fiscal
Year, a Member's liability for Federal, state, local and
foreign taxes attributable to taxable income allocated to
such Member pursuant to Section 6.03 and Section 10.03,
taking into account any Tax deduction or loss specifically
allocated to a Member pursuant to this Agreement or any
other Transaction Document.
"Term of the Company" has the meaning set forth in
Section 2.03.
"Terminating Member" has the meaning set forth in
Section 2.01(a) of the Put/Call, Registration Rights and
Standstill Agreement.
"Unaudited Financial Statements" has the meaning
set forth in Section 7.02(a).
"Valvoline Business" has the meaning set forth in
Section 14.03(h) of the Put/Call, Registration Rights and
Standstill Agreement.
SECTION 1.02. Applicable GAAP. In connection
with the calculation pursuant to this Agreement of Adjusted
DD&A, Capital Expenditures or Ordinary Course Lease
Expenses, the determination of whether a lease is a Capital
Lease or the determination of whether the Company has
entered into an operating lease for purposes of Section 8.16
(each such calculation or determination, an "Accounting
Determination"), the Company shall apply then Current GAAP;
provided, however, that if at any time after January 1,
1998, a change shall occur in GAAP which would result in any
Accounting Determination being different under Current GAAP
than such Accounting Determination would have been under
GAAP as in effect on January 1, 1998 ("Initial GAAP"), then
(a) the Members shall negotiate in good faith to make such
amendments to the relevant provisions of this Agreement as
shall be required to preserve the economic and other results
intended by the Members as of January 1, 1998 with respect
to such Accounting Determination and (b) unless and until
such time as the Members shall in good faith mutually agree
to such amendments, Initial GAAP shall be applied to make
such Accounting Determination or, if the Members shall have
previously amended the relevant provisions of this Agreement
pursuant to this Section 1.02 in response to a prior change
in GAAP, then GAAP as in effect at the time the most recent
such previous amendment was made shall be used to make such
Accounting Determination (the GAAP that is actually applied
by the Company in making any such Accounting Determination
pursuant to this Agreement being the "Applicable GAAP").
ARTICLE II
General Provisions
SECTION 2.01. Formation; Effectiveness. The
Company has been formed as a limited liability company
pursuant to the provisions of the Delaware Act by the filing
of the Certificate of Formation with the Secretary of State
of the State of Delaware. Pursuant to Section 18-201(d) of
the Delaware Act, the provisions of this Agreement shall be
effective as of the Closing Date. Each Member hereby
adopts, confirms and ratifies the Certificate of Formation
and all acts taken in connection therewith. Ashland shall
be admitted as a member of the Company upon its execution
and delivery of this Agreement. Except as provided in this
Agreement, the rights, duties, liabilities and powers of the
Members shall be as provided in the Delaware Act.
SECTION 2.02. Name. The name of the Company
shall be Marathon Ashland Petroleum LLC. The Board of
Managers may adopt such trade or fictitious names as it may
determine.
SECTION 2.03. Term. Subject to the provisions of
Article XV providing for early termination in certain
circumstances and the provisions of Article IX of the
Put/Call, Registration Rights and Standstill Agreement, the
initial term of the Company (the "Initial Term") began on
the date the Certificate of Formation was filed with the
Secretary of State of the State of Delaware, and shall
continue until the close of business on December 31, 2022
and, thereafter, the term of the Company shall be
automatically extended for successive 10-year periods unless
at least two years prior to the end of the Initial Term or
any succeeding 10-year period, as applicable, a Member
notifies the Board of Managers and the other Member in
writing that it wants to terminate the term of the Company
at the end of the Initial Term or such 10-year period, in
which event, the term of the Company shall not thereafter be
extended for a successive ten-year term. The President of
the Company shall notify each Member in writing at least six
months prior to each such two-year notification date that
the Term of the Company will be automatically extended
unless a Member provides a notice to the contrary pursuant
to this Section 2.03. The failure of the President of the
Company to give such notice, or any defect in any notice so
given, shall not affect the Members' rights to terminate the
Term of the Company pursuant to this Section 2.03, and shall
not result in a termination of the Term of the Company
unless a Member provides a notice to the contrary pursuant
to this Section 2.03. The Initial Term, together with any
such extensions, is hereinafter referred to as the "Term of
the Company". The existence of the Company as a separate
legal entity shall continue until the cancelation of the
Certificate of Formation in the manner provided in the
Delaware Act.
SECTION 2.04. Registered Agent and Office. The
name of the registered agent of the Company for service of
process on the Company in the State of Delaware is The
Corporation Trust Company, and the address of the registered
agent and the address of the office of the Company in the
State of Delaware is c/o The Corporation Trust Company,
1209 Orange Street, Wilmington, Delaware 19801. The Board
of Managers may change such office and such agent from time
to time in its sole discretion.
SECTION 2.05. Purpose. (a) The purpose of the
Company is to engage in any lawful act or activity for which
a limited liability company may be formed under the Delaware
Act (either directly or indirectly through one or more
subsidiaries). It is the Members' understanding and intent
that (i) the Company will be an independent, self-funding
entity, (ii) no additional capital contributions are
expected to be required by the Members and (iii) the
administrative requirements of the Company will generally be
provided by the Company's own employees. In furtherance of
this understanding and intent, and without limiting the
generality of the foregoing, unless the Members shall
mutually agree otherwise, the following administrative
functions and services shall be provided substantially by
the Company and its subsidiaries' employees (or by its
unaffiliated third party contractors) under the supervision
and control of the Company's officers: Human Resources;
Health, Environment and Safety; Law; Finance and Accounting;
Internal Audit; Treasury and Cash Management; and
Information Technology. For the avoidance of doubt, the
Members acknowledge and agree that the provision at any time
of the specific Shared Services identified and described in
Schedule 10.2(e) to the Marathon Asset Transfer and
Contribution Agreement Disclosure Letter and Schedule
10.2(e) to the Ashland Asset Transfer and Contribution
Agreement Disclosure Letter to the Company and its
subsidiaries by the Members shall not be deemed to violate
the requirements of the immediately preceding sentence.
(b) The Company, and the President on behalf of
the Company, may enter into and perform the Transaction
Documents and the Commercial Documents to which the Company
is a party without any further act, vote or approval of the
Board of Managers or the Members notwithstanding any other
provision of this Agreement, the Delaware Act or other
Applicable Law. The President of the Company is hereby
authorized to enter into such Transaction Documents and such
Commercial Documents on behalf of the Company, but such
authorization shall not be deemed a restriction on the power
of the Board of Managers to enter into other agreements on
behalf of the Company.
SECTION 2.06. Powers. In furtherance of its
purposes, but subject to all the provisions of this
Agreement, the Company shall have the power and is hereby
authorized to:
(a) acquire by purchase, lease, contribution of
property or otherwise, own, operate, hold, sell,
convey, transfer or dispose of any real or personal
property which may be necessary, convenient or
incidental to the accomplishment of the purpose of the
Company;
(b) act as a trustee, executor, nominee, bailee,
director, officer, agent or in some other fiduciary
capacity for any person or entity and to exercise all
the powers, duties, rights and responsibilities
associated therewith;
(c) take any and all actions necessary, convenient
or appropriate as trustee, executor, nominee, bailee,
director, officer, agent or other fiduciary, including
the granting or approval of waivers, consents or amend
ments of rights or powers relating thereto and the
execution of appropriate documents to evidence such
waivers, consents or amendments;
(d) borrow money and issue evidences of
indebtedness in furtherance of any or all of the
purposes of the Company, and secure the same by
mortgage, pledge or other lien on the assets of the
Company;
(e) invest any funds of the Company pending
distribution or payment of the same pursuant to the
provisions of this Agreement;
(f) prepay in whole or in part, refinance, recast,
increase, modify or extend any Indebtedness of the
Company and, in connection therewith, execute any
extensions, renewals or modifications of any mortgage
or security agreement securing such Indebtedness;
(g) enter into, perform and carry out contracts of
any kind, including, without limitation, contracts with
any person or entity affiliated with any of the
Members, necessary to, in connection with, convenient
to, or incidental to the accomplishment of the purposes
of the Company;
(h) employ or otherwise engage employees,
managers, contractors, advisors, attorneys and
consultants and pay reasonable compensation for such
services;
(i) enter into partnerships, limited liability
companies, trusts, associations, corporations or other
ventures with other persons or entities in furtherance
of the purposes of the Company; and
(j) do such other things and engage in such other
activities related to the foregoing as may be
necessary, convenient or incidental to the conduct of
the business of the Company, and have and exercise all
of the powers and rights conferred upon limited
liability companies formed pursuant to the Delaware
Act.
ARTICLE III
Members
SECTION 3.01. Members; Percentage Interests. The
names and addresses of the Members and their respective
percentage interests in the Company ("Percentage Interests")
are as follows:
<TABLE>
<CAPTION>
Percentage
Members Interests
<C> <C>
Marathon Oil Company 62%
5555 San Felipe
P.O. Box 3128
Houston, TX 77056-2723
Ashland Inc. 38%
50 East RiverCenter Boulevard
P.O. Box 391
Covington, KY 41012-0391
</TABLE>
Marathon's Percentage Interest shall be deemed to include
the Fuelgas Interest. Promptly after the Closing, Marathon
will cause Fuelgas to merge with and into Marathon.
SECTION 3.02. Adjustments in Percentage
Interests. Marathon's and Ashland's Percentage Interests,
and the Percentage Interests of each other Member, if any,
shall be adjusted (a) at the time of any Transfer of such
Member's Membership Interests pursuant to Section 10.02 and
(b) at the time of the admission of each new Member pursuant
to such terms and conditions as the Board of Managers from
time to time shall determine pursuant to a vote in
accordance with Section 8.07(b), in each case to take into
account such Transfer or admission of a new Member.
ARTICLE IV
Capital Contributions; Assumption of Assumed Liabilities
SECTION 4.01. Contributions. (a) On or before
the Closing Date, Marathon shall contribute, convey,
transfer, assign and deliver to the Company or shall have
contributed, conveyed, transferred, assigned and delivered
to the Company, the Marathon Transferred Assets, and Ashland
shall contribute, convey, transfer, assign and deliver to
the Company or shall have contributed, conveyed,
transferred, assigned and delivered to the Company, the
Ashland Transferred Assets, in each case pursuant to terms
and conditions of the Asset Transfer and Contribution
Agreement. In addition, any additional assets that Marathon
or Ashland are required to contribute, convey, transfer,
assign and deliver to the Company at a later date pursuant
to the terms and conditions of the Asset Transfer and
Contribution Agreement shall be so contributed at such later
date.
(b) The Company shall assume, as of the Closing
Date, the Assumed Liabilities pursuant to the terms of the
Asset Transfer and Contribution Agreement.
(c) Payments or Damages under Designated Sublease
Agreements as Contributions. (i) Each Member has agreed,
pursuant to the Designated Sublease Agreements to which it
is a party, to sublease to the Company or one of its
subsidiaries the assets or property listed on
Schedule 4.01(c) ("Subleased Property") for a nominal
consideration in lieu of transferring such property to the
Company or such subsidiary, free of any Liens, other than
Permitted Encumbrances, as a capital contribution.
(A) If at any time after January 1, 1998 a Member
in its capacity as a sublessor shall become the owner
of any Subleased Property, such Member shall promptly
contribute, convey, transfer, assign and deliver to the
Company (or, if the Company so directs, to one of its
subsidiaries) at no cost to the Company or such
subsidiary, and the Company hereby agrees to accept, or
to cause such subsidiary to accept, such Subleased
Property and the related Designated Sublease Agreement
shall be terminated with respect to such Subleased
Property, all as more specifically set forth in such
Designated Sublease Agreement. In addition, if at any
time after January 1, 1998 a Member assigns to the
Company (or a subsidiary of the Company) a purchase
option with respect to a Subleased Property pursuant to
a Designated Sublease Agreement and the Company or such
subsidiary exercises such purchase option and pays all
or a portion of the purchase price therefor, such
Member shall promptly reimburse the Company or such
subsidiary such amount so paid and, if not so
reimbursed, such amount shall be subject to set-off
pursuant to Section 14.04. Any such payment by the
Company shall be treated as a distribution to the
appropriate Member for capital account purposes, and
any such amount paid to the Company or such subsidiary
by a Member in connection with such reimbursement
obligation, or to the extent of a set-off applied
pursuant to Section 14.04 as a result of such failure
to so reimburse, shall be treated as a capital
contribution to the Company.
(B) Any amount paid by the Company or any of its
subsidiaries under a Designated Sublease Agreement to
cure or prevent a payment default by the sublessor
Member under the underlying Original Lease shall be
reimbursed to the Company or such subsidiary by such
Member, and if not so reimbursed, shall be subject to
set-off pursuant to Section 14.04. Any such payment by
the Company shall be treated as a distribution to the
appropriate Member for capital account purposes, and
any such amount paid to the Company or such subsidiary
by a Member in connection with a default of its payment
obligations under its respective Designated Sublease
Agreements, or to the extent of a set-off applied
pursuant to Section 14.04 as a result of such default,
shall be treated as a capital contribution to the
Company.
(C) None of the capital contributions pursuant to
(A) and (B) above shall result in any adjustment to the
Members' respective Percentage Interests in the
Company.
(ii) If (A) a Member commences a voluntary case
under any applicable bankruptcy, insolvency,
liquidation, receivership, reorganization or other
similar law now in effect, or an order for relief is
entered against such Member in an involuntary case
under any such law and (B) a trustee of such Member
rejects a Designated Sublease Agreement of such Member,
then (1) the Member shall be obligated to reimburse the
Company for the Loss to the Company as a result of such
rejected Designated Sublease Agreement, which Loss, if
not so reimbursed, shall be subject to set-off pursuant
to Section 14.04 prior to the interest of such Member
in any distributions hereunder and (2) the amount of
such Loss shall be deemed to be the loss of use of such
Subleased Property for the economic life thereof rather
than any other period.
SECTION 4.02. Additional
Contributions. (a) Member-Funded Capital Expenditures.
For each Capital Expenditure project identified on Schedule
4.02(a)-1, Marathon shall contribute to the Company the
amount of funds necessary to comply with its obligations
under Section 7.1(j) of the Asset Transfer and Contribution
Agreement with respect to such Capital Expenditure project
as, when and if the Company actually incurs Capital
Expenditures related to such Capital Expenditure project
(such Capital Expenditures, as, when and if they are funded
by Marathon, are referred to herein as the "Marathon-Funded
Capital Expenditures"). For each Capital Expenditure
project identified on Schedule 4.02(a)-2, Ashland shall
contribute to the Company the amount of funds necessary to
comply with its obligations under Section 7.2(k) of the
Asset Transfer and Contribution Agreement with respect to
such Capital Expenditure project as, when and if the Company
actually incurs Capital Expenditures related to such Capital
Expenditure project (such Capital Expenditures, as, when and
if they are funded by Ashland, are referred to herein as the
"Ashland-Funded Capital Expenditures", and together with the
Marathon-Funded Capital Expenditures, the "Member-Funded
Capital Expenditures"). Each Member-Funded Capital
Expenditure shall be treated as a capital contribution to
the Company, but shall not result in any adjustment to the
Members' respective Percentage Interests in the Company. To
the extent permitted by applicable Tax law, any Tax
deduction by the Company of a Member-Funded Capital
Expenditure shall be specially allocated so that each Member
will have the Tax benefit of its Member-Funded Capital
Expenditures.
(b) Indemnification Payments as Contributions.
Any indemnity amount paid by Marathon or Ashland to the
Company under Article IX of the Asset Transfer and
Contribution Agreement (each a "Member-Indemnified
Expenditure") shall be treated as a capital contribution to
the Company, but shall not result in any adjustment to the
Members' respective Percentage Interests in the Company. A
determination of whether the associated Loss will be
deducted or capitalized by the Company for Tax purposes
shall be made by the Company at the direction of the
Indemnifying Party. Any Tax deduction or loss claimed by
the Company with respect to the indemnified amount shall be
specially allocated to the Indemnifying Party.
(c) Other Additional Capital Contributions. The
Members shall make other additional capital contributions
("Agreed Additional Capital Contributions") pro rata based
on their respective Percentage Interests if and to the
extent such capital contributions are approved by the Board
of Managers pursuant to a vote in accordance with
Section 8.07(b).
(d) No Third-Party Beneficiaries. The provisions
of this Agreement, including without limitation, this
Section 4.02, are intended solely to benefit the Members
and, to the fullest extent permitted by Applicable Law,
shall not be construed as conferring any benefit upon any
creditor of the Company other than the Members, and no such
creditor of the Company other than the Members shall be a
third-party beneficiary of this Agreement, and no Member or
member of the Board of Managers shall have any duty or
obligation to any creditor of the Company to issue any call
for capital pursuant to this Agreement.
SECTION 4.03. Negative Balances; Withdrawal of
Capital; Interest. Neither of the Members shall have any
obligation to the Company or to the other Member to restore
any negative balance in its Capital Account. Neither Member
may withdraw capital or receive any distributions from the
Company except as specifically provided herein. No interest
shall be paid by the Company on any capital contributions.
ARTICLE V
Distributions
SECTION 5.01. Distributions. (a) Within 45 days
after the end of each Fiscal Quarter during each Fiscal
Year, the Company shall distribute to the Members (the date
of such distribution being a "Distribution Date") an amount
in cash (the "Tax Distribution Amount") determined as
follows:
(i) The maximum Tax Liability of each Member with
respect to its allocable portion (as provided in
Section 6.03) of the Company's estimated taxable income
for the portion of such Fiscal Year ending on the last
day of such Fiscal Quarter shall be determined, based
upon the highest aggregate marginal statutory Federal,
state and local income tax rate (determined taking into
account the deductibility, to the extent allowed, of
income-based taxes paid to governmental entities) to
which any Member may be subject for the related Fiscal
Year (and excluding any deferred taxes) (the "Aggregate
Tax Rate").
(ii) If the Tax Liability determined in
clause (i) is positive with respect to either Member,
there shall be a cash distribution to each of the
Members, in accordance with their Percentage Interests,
of an aggregate amount such that neither Member shall
have received distributions under this clause and
subsection (b) below for such portion of such Fiscal
Year in an amount less than its Tax Liability for such
portion of such Fiscal Year.
(iii) Following a determination by the Company of
the Company's actual net taxable income with respect to
a Fiscal Year, the maximum Tax Liability of each Member
with respect to its allocable portion (as provided in
Section 6.03) of the Company's net taxable income for
such Fiscal Year shall be determined, based upon the
Aggregate Tax Rate. If the maximum Tax Liability of
any Member for the Fiscal Year is in excess of the cash
distributions previously made to the Member for such
Fiscal Year under clause (ii) above and subsection (b)
below, the Company shall make a cash distribution to
all the Members, in accordance with their Percentage
Interests, of an aggregate amount such that the excess
is eliminated for all the Members. Such distribution
shall be made within 45 days of the date the Company's
actual net taxable income is determined.
(iv) In the event that the Company Independent
Auditors determine pursuant to Section 7.02(d) that the
Company's actual net taxable income with respect to a
Fiscal Year is greater than the amount determined by
the Company pursuant to clause (iii) above, the Company
shall make a determination of the amount of cash, if
any, required to be distributed to the Members, in
accordance with their Percentage Interests, such that,
after taking into account cash distributions previously
made to a Member under clauses (ii) and (iii) above and
subsection (b) below, no Member shall receive less than
its Tax Liability for such Fiscal Year based on such
higher net taxable income amount. The Company shall,
within 15 days after the determination is made,
distribute such additional amount of cash to the
Members, in accordance with their Percentage Interests.
(v) In the event that the Company Independent
Auditors determine pursuant to Section 7.02(d) that the
Company's actual net taxable income with respect to a
Fiscal Year is less than the amount determined by the
Company pursuant to clause (iii) above, a determination
shall be made of the excess Tax Distribution Amount
that was distributed to the Members in respect of such
Fiscal Year based on the Company's determination of its
actual net taxable income and the Company shall deduct
from the next Tax Distribution Amount payable to the
Members pursuant to this Section 5.01, the amount of
such excess distribution.
(b) In addition to the distributions pursuant to
Section 5.01(a), on each Distribution Date, the Company
shall distribute to the Members all Distributable Cash for
the Fiscal Quarter to which such Distribution Date relates
provided, however, that the distribution of
(i) Distributable Cash pursuant to this paragraph 5.01(b) or
(ii) cash pursuant to Section 5.01(a) above, in each case
with respect to any Fiscal Quarter may be made in such other
manner and in such other amount as the Members shall agree
with respect to such Fiscal Quarter; provided, further,
however, that any agreement by any Member with respect to
the distribution of either Distributable Cash pursuant to
this paragraph 5.01(b) or cash pursuant to Section 5.01(a)
for any Fiscal Quarter pursuant to the preceding proviso
shall not alter or waive any of the rights of either Member
under this Agreement with respect to distributions of
Distributable Cash pursuant to this paragraph 5.01(b) or
cash pursuant to Section 5.01(a) with respect to any
subsequent Fiscal Quarter. Subject to Section 5.02(b), each
such distribution shall be allocated between the Members
pro rata based upon their respective Percentage Interests.
(c) The Company shall prepare and distribute to
each Member within 45 days after the end of each Fiscal
Quarter a statement (a "Distributions Calculation
Statement") setting forth the calculations (in reasonable
detail) used by the Company for purposes of distributions
pursuant to this Section 5.01 of (i) the Tax Distribution
Amount for each Member for such Fiscal Quarter, (ii) the
amount of Distributable Cash for such Fiscal Quarter and
(iii) the allocation of such Distributable Cash between the
Members.
(d) Notwithstanding anything to the contrary in
this Agreement, any agreement reached between the Members to
distribute any amount of cash different from the amounts
which would be calculated in accordance with the methodology
set forth in Section 5.01(a) and Section 5.01(b) above shall
not alter or waive in any manner the obligations of the
Company to prepare and deliver the Distributions Calculation
Statement as set forth in Section 5.01(c) above, and after
any such agreement has been reached the Company shall
continue to prepare and deliver such Distribution
Calculation Statement with respect to each Fiscal Quarter as
if no such agreement had been reached.
SECTION 5.02. Certain General Limitations.
(a) Notwithstanding any provision to the contrary contained
in this Agreement, the Company, and the Board of Managers on
behalf of the Company, shall not be required to make a
distribution to either Member with respect to such Member's
Membership Interests if such distribution would violate
Section 18-607 of the Delaware Act or other applicable law.
(b) Notwithstanding any other provision of this
Article V, all amounts distributed to the Members in
connection with a dissolution of the Company or the sale or
other disposition of all or substantially all the assets of
the Company that results in a dissolution of the Company
shall be distributed to the Members in accordance with their
respective Capital Account balances, as adjusted pursuant to
Article VI for all Company operations up to and including
the date of such distribution.
SECTION 5.03. Distributions in Kind. The Company
shall not distribute to the Members any assets in kind
unless approved by the Board of Managers pursuant to a vote
in accordance with Section 8.07(b). If cash and property in
kind are to be distributed simultaneously, the Company shall
distribute such cash and property in kind in the same
proportion to each Member, unless otherwise approved by the
Board of Managers pursuant to a vote in accordance with
Section 8.07(b). For purposes of determining amounts
distributable to Members under Section 5.01, for purposes of
determining Profit and Loss under Section 1.01, for purposes
of making adjustments to Capital Accounts under Article VI
and for purposes of allocations under Article VI, any
property to be distributed in kind shall have the value
assigned to such property by the Board of Managers pursuant
to a vote in accordance with Section 8.07(b) and such value
shall be deemed to be part of and included in Distributable
Cash for purposes of determining distributions to the
Members under this Agreement.
SECTION 5.04. Distributions in the Event of an
Exercise of the Marathon Call Right, Ashland Put Right or
the Special Termination Rights. In the event of an exercise
by Marathon of its Marathon Call Right or its Special
Termination Right or the exercise by Ashland of its Ashland
Put Right or its Special Termination Right pursuant to the
Put/Call, Registration Rights and Standstill Agreement,
certain distributions to Ashland or Marathon, as applicable,
will be suspended in accordance with the provisions of
Section 5.01 thereof.
ARTICLE VI
Allocations and Other Tax Matters
SECTION 6.01. Maintenance of Capital Accounts.
An account (a "Capital Account") shall be established and
maintained in the Company's books for each Member in
accordance with Treasury Regulation Section 1.704-
1(b)(2)(iv) and to which the following provisions apply to
the extent not inconsistent with such Regulation:
(a) There shall be credited to each Member's
Capital Account (i) the amount of money contributed by such
Member to the Company (including liabilities of the Company
assumed by such Member as provided in Treasury Regulation
Section 1.704-1(b)(2)(iv)(c)), (ii) the fair market value of
any property contributed by the Member to the Company (net
of liabilities secured by such contributed property that the
Company is considered to assume or take subject to under
Code Section 752), and (iii) such Member's share of the
Company's Profit;
(b) There shall be debited from each Member's
Capital Account (i) the amount of money distributed to such
Member by the Company (including liabilities of such Member
assumed by the Company as provided in Treasury Regulation
Section 1.704-1(b)(2)(iv)(c)) other than amounts which are
in repayment of debt obligations of the Company to such
Member, (ii) the fair market value of property distributed
to such Member (net of liabilities secured by such property
that such Member is considered to assume or take subject to
under Code Section 752), and (iii) such Member's share of
the Company's Loss;
(c) To each Member's Capital Account there shall
be credited, in the case of an increase, or debited, in the
case of a decrease, such Member's share of any adjustment to
the adjusted basis of Company assets pursuant to Code
Section 734(b) or Code Section 743(b) to the extent provided
by Treasury Regulation Section 1.704-(b)(2)(iv)(m); and
(d) Upon the transfer of all or any part of the
Membership Interests of a Member, the Capital Account of the
transferee Member shall include the portion of the Capital
Account of the transferor Member attributable to such
transferred Membership Interest (or portion thereof).
SECTION 6.02. Allocations. (a) Except as
provided in Section 6.02(b), 6.02(c), 6.02(d) and 6.02(e),
Profit or Loss for any Fiscal Year shall be allocated
between the Members in proportion to their respective
Percentage Interests.
(b) To the extent any Tax deduction or loss is
specifically allocated to a Member pursuant to this
Agreement (other than pursuant to Section 6.03) or any other
Transaction Document, including any deduction or loss
indemnified by a Member, any Member-Funded Capital
Expenditure, any Member-Indemnified Expenditure and any
special allocations pursuant to Sections 6.12, 6.13, 6.14,
6.15 and 6.16 the associated Profit and Loss shall be
allocated to the same Member.
(c) Depreciation and amortization with respect to
any asset contributed by a Member to the Company shall be
allocated solely to such Member.
(d) If any asset contributed by a Member is sold
or otherwise disposed of prior to the time such asset has
been completely depreciated or amortized for Federal income
tax purposes, the Member contributing such property shall be
allocated an expense ("Make-Up Expense") equal to (i) the
remaining tax basis of the asset at the time of the sale or
other disposition, multiplied by (ii) the other Member's
Percentage Interest at the time of such sale or other
disposition. The contributing Member shall be allocated
Make-Up Expense over the remaining tax life of the asset at
the time of sale or other disposition at the same rate as
depreciation or amortization would have been allocated to
such Member if the sale or other disposition had not
occurred. Make-Up Expense allocated to a Member shall be
taken from and reduce the amount of expenses allocated to
the other Member. The purpose for this provision is to
allocate to a Member, with respect to depreciable or
amortizable assets contributed by such Member, a total
amount of deductions and cost recovery allowances equal to
100% of the basis of such assets at the time of
contribution.
(e) In the event that the Company sells or
otherwise disposes of all or substantially all its assets or
engages in any other transaction that will lead to a
liquidation of the Company, then, notwithstanding the
foregoing provisions of this Section 6.02, (i) any Profit or
Loss realized by the Company in such transaction and (ii),
to the extent necessary, any other Profit or Loss in the
Fiscal Year such transaction occurs or thereafter (and, in
each case, to the extent necessary, constituent items of
income, gain, loss, deduction and credit) shall be specially
allocated as between the Members as required so as to cause
in so far as possible each Member's Capital Account balance
to be proportionate to its Percentage Interest.
SECTION 6.03. Tax Allocations. (a) For income
tax purposes only, each item of income, gain, loss,
deduction and credit of the Company as determined for income
tax purposes shall be allocated between the Members in
accordance with the corresponding allocation in
Section 6.02, subject to the requirements of Section 704(c)
of the Code.
(b) The Members acknowledge and agree that
Section 704(c) shall be applied using the so-called
"traditional method with curative allocations" set forth in
Treasury Regulation Section 1.704-3(c). Curative
allocations of income, gain, loss or deduction shall, to the
extent possible, have substantially the same effect on each
Member's Federal income tax liability as the item of income,
gain, loss or deduction for which allocation is limited.
(c) By reason of the special allocation of book
depreciation and amortization with respect to the assets
contributed by the Members pursuant to Section 6.02(c), tax
depreciation and amortization with respect to each such
asset shall be allocated solely to the contributing Member.
(d) Items described in this Section 6.03 shall
neither be credited nor charged to the Members' Capital
Accounts.
SECTION 6.04. Tax Elections. (a) The Members
intend that the Company be treated as a partnership for
Federal income tax purposes. Accordingly, neither the Tax
Matters Partner nor either Member shall file any election or
return on its own behalf or on behalf of the Company that is
inconsistent with that intent.
(b) Any elections or other decisions relating to
tax matters that are not expressly provided for herein,
including the determination of the fair market value of
contributed property and the decision to adjust the Capital
Accounts to reflect the fair market value of the Company's
assets upon the occurrence of any event specified in
Treasury Regulation Section 1.704-1(b)(2)(iv)(f), shall be
made jointly by the Members in any manner that reasonably
reflects the purpose and intention of this Agreement.
SECTION 6.05. Fiscal Year. The fiscal year (the
"Fiscal Year") of the Company for tax and accounting
purposes shall be the 12-month (or shorter) period ending on
the last day of December of each year.
SECTION 6.06. Tax Returns. (a) The Company
shall cause to be prepared and timely filed all Federal,
state, local and foreign income tax returns and reports
required to be filed by the Company and its subsidiaries.
The Company shall provide copies of all the Company's
Federal, state, local and foreign tax returns (and any
schedules or other required filings related to such returns)
that reflect items of income, gain, deduction, loss or
credit that flow to separate Member returns, to the Members
for their review and comment prior to filing, except as
otherwise agreed by the Members. The Members agree in good
faith to resolve any difference in the tax treatment of any
item affecting such returns and schedules. However, if the
Members are unable to resolve the dispute, the position of
the Tax Matters Partner shall be followed if nationally
recognized tax counsel acceptable to both Members provides
an opinion that substantial authority exists for such
position. Substantial authority shall be given the meaning
ascribed to it in Code Section 6662. If the Members are
unable to resolve the dispute prior to the due date for
filing the return, including approved extensions, the
position of the Tax Matters Partner shall be followed, and
amended returns shall be filed if necessary at such time the
dispute is resolved. The costs of the dispute shall be
borne by the Company. The Members agree to file their
separate Federal income tax returns in a manner consistent
with the Company's return, the provisions of this Agreement
and in accordance with applicable Federal income tax law.
(b) The Company shall elect the most rapid method
of depreciation and amortization allowed under Applicable
Law, unless the Members agree otherwise. The failure of
either Member to agree that the Company should elect a less
rapid method of depreciation or amortization is not subject
to any dispute resolution provisions.
(c) The Members shall provide each other with
copies of all correspondence or summaries of other
communications with the Internal Revenue Service or any
state, local or foreign taxing authority (other than routine
correspondence and communications) regarding the tax
treatment of the Company's operations. No Member shall
enter into settlement negotiations with the Internal Revenue
Service or any state, local or foreign taxing authority with
respect to any issue concerning the Company's income, gains,
losses, deductions or credits if the tax adjustment
attributable to such issue (assuming the then current
Aggregate Tax Rate) would be $2 million or greater, without
first giving reasonable advance notice of such intended
action to the other Member.
SECTION 6.07. Tax Matters Partner.
(a) Initially, Marathon shall be the "Tax Matters Partner"
of the Company within the meaning of Section 6231(a)(7) of
the Code, and shall act in any similar capacity under state,
local or foreign law, but only with respect to returns for
which items of income, gain, loss, deduction or credit flow
to the separate returns of the Members. In the event of a
transfer of any Member's interest in the Company, the Tax
Matters Partner shall be the Member with the largest
Percentage Interest following such transfer.
(b) The Tax Matters Partner shall incur no
liability (except as a result of the gross negligence or
willful misconduct of the Tax Matters Partner) to the other
Member including, but not limited to, liability for any
additional taxes, interest or penalties owed by the other
Member due to adjustments of Company items of income, gain,
loss, deduction or credit at the Company level.
SECTION 6.08. Duties of Tax Matters
Partner. (a) Except as provided in Section 6.08(b), the
Tax Matters Partner shall cooperate with the other Member
and shall promptly provide the other Member with copies of
notices or other materials from, and inform the other Member
of discussions engaged in with, the Internal Revenue Service
or any state, local or foreign taxing authority and shall
provide the other Member with notice of all scheduled
administrative proceedings, including meetings with agents
of the Internal Revenue Service or any state, local or
foreign taxing authority, technical advice conferences,
appellate hearings, and similar conferences and hearings, as
soon as possible after receiving notice of the scheduling of
such proceedings, but in any case prior to the date of such
scheduled proceedings.
(b) The duties of the Tax Matters Partner under
Section 6.08(a) shall not apply with respect to notices,
materials, discussions, proceedings, meetings, conferences,
or hearings involving any issue concerning the Company's
income, gains, losses, deductions or credits if the tax
adjustment attributable to such issue (assuming the then
current Aggregate Tax Rate) would be less than $2 million
except as otherwise required under Applicable Law.
(c) The Tax Matters Partner shall not extend the
period of limitations or assessments without the consent of
the other Member, which consent shall not be unreasonably
withheld.
(d) The Tax Matters Partner shall not file a
petition or complaint in any court, or file any claim,
amended return or request for an administrative adjustment
with respect to partnership items, after any return has been
filed, with respect to any issue concerning the Company's
income, gains, losses, deductions or credits if the tax
adjustment attributable to such issue (assuming the then
current Aggregate Tax Rate) would be $2 million or greater,
unless agreed by the other Member. If the other Member does
not agree, the position of the Tax Matters Partner shall be
followed if nationally recognized tax counsel acceptable to
both Members issues an opinion that a reasonable basis
exists for such position. Reasonable basis shall be given
the meaning ascribed to it for purposes of applying Code
Section 6662. The costs of the dispute shall be borne by
the Company.
(e) The Tax Matters Partner shall not enter into
any settlement agreement with the Internal Revenue Service
or any state, local or foreign taxing authority, either
before or after any audit of the applicable return is
completed, with respect to any issue concerning the
Company's income, gains, losses, deductions or credits,
unless any of the following apply:
(i) both Members agree to the settlement;
(ii) the tax effect of the issue if resolved
adversely would be, and the tax effect of settling the
issue is, proportionately the same for both Members
(assuming each otherwise has substantial taxable
income);
(iii) the Tax Matters Partner determines that the
settlement of the issue is fair to both Members and the
amount of the tax adjustment attributable to such issue
(assuming the then current Aggregate Tax Rate) would be
less than $2 million; or
(iv) nationally recognized tax counsel acceptable
to both Members determines that the settlement is fair
to both Members and is one it would recommend to the
Company if both Members were owned by the same person
and each had substantial taxable income.
In all events, the costs incurred by the Tax Matters Partner
in performing its duties hereunder shall be borne by the
Company in accordance with the Shared Services Agreement.
(f) The Tax Matters Partner may request
extensions to file any tax return or statement without the
written consent of, but shall so inform, the other Member.
SECTION 6.09. Survival of Provisions. The
provisions of this Agreement regarding the Company's tax
returns and Tax Matters Partner shall survive the
termination of the Company and the transfer of any Member's
interest in the Company and shall remain in effect for the
period of time necessary to resolve any and all matters
regarding the federal, state, local and foreign taxation of
the Company and items of Company income, gain, loss,
deduction and credit.
SECTION 6.10. Section 754 Election. In the event
that a Member purchases the Membership Interests of a
Selling Member pursuant to Section 10.04, the purchasing
Member shall have the right to direct the Tax Matters
Partner to make an election under Section 754 of the Code.
The purchasing Member shall pay all costs incurred by the
Company in connection with such election, including any
costs borne by the Company to maintain records required as a
result of such election. The purchasing Member, at its
option and expense, may maintain on behalf of the Company
any records required as a result of such election.
SECTION 6.11. Qualified Income Offset, Minimum
Gain Chargeback. Notwithstanding anything to the contrary
in this Agreement, there is hereby incorporated a qualified
income offset provision which complies with Treasury
Regulation Section 1.704-1(b)(2)(ii)(d) and minimum gain
chargeback and partner minimum gain chargeback provisions
which comply with the requirements of Treasury Regulation
Section 1.704-2 and such provisions shall apply to the
allocation of Profits and Losses.
SECTION 6.12. Tax Treatment of Designated
Sublease Agreements. (a) For purposes of Article VI,
Ashland or Marathon, as the case may be, shall be treated as
transferring to the Company all of its interest in Subleased
Property pursuant to an Ashland Designated Sublease
Agreement or a Marathon Designated Sublease Agreement, as if
the leasehold interest in such Subleased Property was an
Ashland Transferred Asset or a Marathon Transferred Asset.
(b) Payments under the Original Lease made by
Ashland or Marathon, as the case may be, after the effective
date of the Ashland Designated Sublease Agreement or
Marathon Designated Sublease Agreement, as the case may be,
shall be treated as made by the Company or its subsidiaries,
and then immediately reimbursed by Ashland or Marathon, as
the case may be.
(c) All items of loss, deduction and credit
attributable to payments under the Original Lease made by
Ashland or Marathon, as the case may be, including payments
by the Company or any of its subsidiaries that are charged
to Ashland or Marathon by set-off or other means, shall be
allocated entirely to the Member incurring such payments.
(d) Depreciation and amortization deductions, if
any, as well as any deductions or offsets to taxable income
or gain, attributable to property described in the Ashland
Designated Sublease Agreements or the Marathon Designated
Sublease Agreements, as the case may be, shall be allocated
entirely to Ashland or Marathon, as the case may be, except
to the extent such deductions or offsets are attributable to
amounts paid by the Company or any of its subsidiaries and
not reimbursed by Ashland or Marathon, as the case may be,
either directly or indirectly.
SECTION 6.13. Tax Treatment of Reimbursed
Liability Payments. Any tax deduction or loss attributable
to payments by the Company or any of its subsidiaries of
Assumed Liabilities, as described in Schedules 2.3(d) and
3.3(d) to the Asset Transfer and Contribution Agreement,
that are reimbursed by a Member either directly or
indirectly, shall be allocated entirely to such Member.
SECTION 6.14. Tax Treatment of Disproportionate
Payments. Except as otherwise provided in this Agreement or
in any other Transaction Document, any Tax deduction or loss
reflected on a Tax return, report or other Tax filing by the
Company, attributable to (i) payments made or costs incurred
by a Member, (ii) payments made or costs incurred by the
Company and reimbursed or to be reimbursed by a Member and
(iii) payments made or costs incurred by the Company and not
shared among the Members based on their Percentage
Interests, shall be allocated among the Members to take into
account the amounts paid, incurred, reimbursed or shared by
each.
SECTION 6.15. Allocation of Income, Gains, Losses
and Other Items from LOOP LLC and LOCAP, Inc. (a) Income,
gains, losses, deductions, credits, adjustments, tax
preferences and other distributive share items with respect
to the Company's interest in LOOP LLC, a tax partnership,
for periods beginning on or after the Closing, shall be
allocated between the Members in such a manner so that, when
such items are included with the same items allocated to
Ashland with respect to the Ashland LOOP/LOCAP Interest,
each Member is allocated all such items in proportion to its
respective Percentage Interest in the Company.
(b) In determining the Capital Account for each
Member, (i) Ashland shall be treated as contributing the
Ashland LOOP/LOCAP Interest to the Company, (ii) Profit and
Loss shall be treated as including taxable income, gain,
loss and distributions arising from Ashland's 4% interest in
LOOP LLC and (iii) dividends and distributions that Ashland
receives from LOOP LLC or LOCAP, Inc. in respect of the
Ashland LOOP/LOCAP Interest and paid to the Company pursuant
to Section 7.2(i) of the Asset Transfer and Contribution
Agreement shall be treated as being received directly by the
Company.
SECTION 6.16. Allocation of Income, Gain, Loss,
Deduction and Credits Attributable to Stock-Based
Compensation. Each item of income, gain, loss, deduction
(excluding deductions for administrative costs incurred by
the Company) and credit attributable to the grant to, or the
exercise by or on behalf of, an employee or retired employee
of the Company of a stock option, stock appreciation right,
or other stock-based incentive compensation involving the
stock of a Member or an Affiliate of a Member shall be
allocated to the Member whose stock or whose Affiliate's
stock is involved. Any exercise price paid by or on behalf
of the employee or retired employee to the Company shall be
paid over to the Member whose stock (or whose Affiliate's
stock) is involved. A Member's Capital Account shall be
(i) increased by the fair market value of its (or its
Affiliate's) stock delivered to or on behalf of an employee
or retired employee as aforesaid (without duplication to the
extent such stock is first contributed to the Company),
(ii) decreased (pursuant to Section 6.01(a)(iii) or
(b)(iii)) by the deduction allocated to such Member as
aforesaid and (iii) decreased by the amount of the exercise
price so paid over by the Company or deemed to be paid over
by the Company under principles analogous to those in
Treasury Regulation Section 1.83-6(d)(1).
ARTICLE VII
Books and Records
SECTION 7.01. Books and Records; Examination.
The Board of Managers shall keep or cause to be kept such
books of account and records with respect to the Company's
business as they may deem appropriate. Each Member and its
duly authorized representatives shall have the right at any
time to examine, or to appoint independent certified public
accountants (the fees of which shall be paid by such Member)
to examine, the books, records and accounts of the Company
and its subsidiaries, their operations and all other matters
that such Member may wish to examine, including, without
limitation, all documentation relating to actual or proposed
transactions with either Member or any Affiliate of either
Member. The Company, and the Board of Managers, shall not
have the right to keep confidential from the Members any
information that the Board of Managers would otherwise be
permitted to keep confidential from the Members pursuant to
Section 18-305(c) of the Delaware Act. The Company's books
of account shall be kept using the method of accounting
determined by the Board of Managers. The Company
Independent Auditors (the "Company Independent Auditors")
shall be an independent public accounting firm selected by
the Board of Managers pursuant to a vote in accordance with
Section 8.07(b) or Section 8.07(c), as applicable, and shall
initially be Price Waterhouse LLP.
SECTION 7.02. Financial Statements and
Reports. (a) Unaudited Monthly Financial
Statements. (i) The Company shall prepare and send to each
Member (at the same time) promptly, but in no event later
than noon on the 15th Business Day after the last day of
each month, the following unaudited financial statements
with respect to the Company and its subsidiaries: a balance
sheet, a statement of operations, a statement of cash flows
and a statement of changes in capital (collectively,
"Unaudited Financial Statements") as at the end of and for
such month.
(ii) The Company shall prepare and send to each
Member promptly, but in no event later than noon on the
20th Business Day after the last day of each month, an
unaudited financial summary booklet containing a
breakdown of such operating and financial information
by major department or division of the Company and its
subsidiaries as at the end of and for such month as
either Member shall reasonably request; provided that
each Member shall be provided with the same information
at the same time as the other Member.
(b) Unaudited Quarterly Financial Statements.
The Company shall prepare and send to each Member (at the
same time) promptly, but in no event later than the 30th day
after the last day of each Fiscal Quarter, (i) Unaudited
Financial Statements as at the end of and for such Fiscal
Quarter; (ii) a management's discussion and analysis of
financial condition and results of operations section
prepared in accordance with Rule 303 of Regulation S-K of
the Securities Act with respect to such Fiscal Quarter; and
(iii) an unaudited statement of changes in the Members'
capital accounts as at the end of and for such Fiscal
Quarter.
(c) Audited Annual Financial Statements. Within
75 days after the end of each Fiscal Year, the Board of
Managers shall cause (i) an examination to be made, at the
expense of the Company, by the Company Independent Auditors,
covering (A) the assets, liabilities and capital of the
Company and its subsidiaries, and the Company's and its
subsidiaries' operations during such Fiscal Year, (B) an
examination of the Distributions Calculation Statement for
such Fiscal Year, and (C) all other matters customarily
included in such examinations and (ii) to be delivered to
each Member (at the same time) a copy of the report of such
examination, stating that such examination has been
performed in accordance with generally accepted auditing
standards, together with (1) the following financial
statements with respect to the Company and its subsidiaries
certified by such accountants as having been prepared in
accordance with GAAP: a balance sheet, a statement of
operations, a statement of cash flows and a statement of
changes in capital as at the end of and for such Fiscal Year
(collectively, the "Audited Financial Statements") and (2) a
management's discussion and analysis of financial condition
and results of operations section prepared in accordance
with Rule 303 of Regulation S-K of the Securities Act with
respect to such Fiscal Year. The Company shall prepare the
Audited Financial Statements in such manner and form as is
necessary to enable Ashland to file such Audited Financial
Statements with the Commission in accordance with Item 3-09
of Regulation S-X under the Exchange Act.
(d) Schedule of Members' Capital
Accounts. (i) Preliminary Annual Capital Account Schedule.
The Company shall prepare and send to each Member (at the
same time) promptly, but in no event later than the 75th day
after the last day of each Fiscal Year, a schedule showing
the respective Capital Accounts of the Members based on the
Company's estimated taxable income for such Fiscal Year.
(ii) Examination. Unless otherwise agreed by the
Members, within 15 days after the date the Company
determines its net taxable income with respect to any
Fiscal Year, but in no event later than 7 months after
the end of such Fiscal Year, the Board of Managers
shall cause (i) an examination to be made, at the
expense of the Company, by the Company Independent
Auditors, covering (A) the determination of the
Company's taxable income with respect to such Fiscal
Year and (B) the respective Capital Accounts of the
Members based on the Company's taxable income for such
Fiscal Year and (ii) to be delivered to each Member (at
the same time) a copy of the report of such
examination, stating that such examination has been
performed in accordance with generally accepted
auditing standards.
(iii) Final Annual Capital Account Schedule. The
Company shall prepare and send to each Member (at the
same time) promptly, but in no event later than the
15th day after the date the Company files its federal
income tax return with respect to each Fiscal Year, a
schedule showing the respective Capital Accounts of the
Members based on the Company's actual taxable income
for such Fiscal Year.
(e) Other Financial Information. The Company
shall prepare and send to each Member (at the same time)
promptly such other financial information as a Member shall
from time to time reasonably request.
SECTION 7.03. Notice of Affiliate Transactions;
Annual List. (a) (i) The Company shall notify each Member
of any Affiliate Transaction (other than an Affiliate
Transaction that is a Significant Shared Service) that the
Company or any of its subsidiaries is considering entering
into or renewing or extending the term thereof (whether
pursuant to contractual provisions thereof or otherwise),
which notice shall be given, to the extent reasonably
possible, sufficiently in advance of the time that the
Company intends to enter into, renew or extend the term of
such Affiliate Transaction so as to provide the Members with
a reasonable opportunity to examine the documentation
related to such Affiliate Transaction.
(ii) The Company shall notify each Member of any
Affiliate Transaction that is a Significant Shared
Service that the Company or any of its subsidiaries is
considering entering into or renewing or extending the
term thereof (whether pursuant to contractual
provisions thereof or otherwise), which notice shall be
given, to the extent reasonably possible, sufficiently
in advance of the time that the Company intends to
enter into, renew or extend the term of such Affiliate
Transaction so as to provide the Members with a
reasonable opportunity to examine the documentation
related to such Affiliate Transaction.
(b) Within 60 days after the end of each Fiscal
Year, the Company shall prepare and distribute to each
Member a list setting forth a description of each Affiliate
Transaction entered into by the Company or any of its
subsidiaries during such Fiscal Year and identifying all of
the parties to such Affiliate Transactions; provided that if
two or more Affiliate Transactions either (i) constitute a
series of related transactions or agreements or (ii) are
substantially the same type of transaction or agreement, the
Company need not separately describe each such Affiliate
Transaction but instead can describe such related or similar
Affiliated Transactions as a group.
ARTICLE VIII
Management of the Company
SECTION 8.01. Managing Members. The business and
affairs of the Company shall be managed by the Members
acting through their respective representatives on the Board
of Managers ("Representatives"). The President and the
Representatives shall be deemed "managers" of the Company
within the meaning of the Delaware Act. Except for such
matters as may be delegated to a Member from time to time by
the Board of Managers pursuant to a vote in accordance with
Section 8.07(b), and subject to the provisions of
Sections 6.07 and 6.08, no Member shall act unilaterally on
behalf of the Company or any of its subsidiaries without the
approval of the other Member and no Member shall have the
power unilaterally to bind the Company or any of its
subsidiaries.
SECTION 8.02. Board of Managers. (a) The
Members shall exercise their management authority through a
board of managers (the "Board of Managers") consisting of
(i) the President of the Company, who shall not be deemed a
Representative hereunder and who shall not be entitled to
vote on any matter coming before the Board of Managers, and
(ii) eight Representatives, each of whom shall be entitled
to vote, five of whom shall be designated by Marathon and
three of whom shall be designated by Ashland. In the event
of a Transfer by a Member of its Membership Interests
pursuant to Article X, effective at the time of such
Transfer, (i) such Member's Representatives shall
automatically be removed from the Board of Managers and
(ii) the transferee of such Membership Interests shall be
permitted to designate the number of Representatives to the
Board of Managers as is equal to the number previously
designated by the transferor of such Membership Interests.
Such transferee shall promptly notify the other Member as to
the names of the persons who such transferee has designated
as its Representatives on the Board of Managers.
(b) Each Representative may be removed and
replaced, with or without cause, at any time by the Member
designating him or her, but, except as provided in
Section 8.02(a), may not be removed or replaced by any other
means. A Member who removes one or more of its
Representatives from the Board of Managers shall promptly
notify the other Member as to the names of its replacement
Representatives.
SECTION 8.03. Responsibility of the Board of
Managers. The Board of Managers shall be responsible for
overseeing the operations of the Company and shall, in
particular, have sole jurisdiction to approve each of the
following matters:
(i) hiring senior executives of the Company,
evaluating their performance and planning for their
succession;
(ii) reviewing and approving Company strategies,
Business Plans and Annual Capital Budgets;
(iii) reviewing and approving significant external
business opportunities for the Company, including
acquisitions, mergers and divestitures;
(iv) reviewing and approving policies of the
Company that maintain high standards in areas of
environmental responsibility, employee safety and
health, community, government, employee and customer
relations;
(v) reviewing external and internal audits and
management responses thereto; and
(vi) establishing compensation and benefits
policies for employees of the Company.
SECTION 8.04. Meetings. (a) Except as set forth
in Section 8.04(h), all actions of the Board of Managers
shall be taken at meetings of the Board of Managers in
accordance with this Section 8.04.
(b) As soon as practicable after the appointment
of the Representatives, the Board of Managers shall meet for
the purpose of organization and the transaction of other
business.
(c) Regular meetings of the Board of Managers
shall be held at such times as the Board of Managers shall
from time to time determine, but no less frequently than
once each Fiscal Quarter; provided that an annual meeting of
the Board of Managers (which annual meeting shall count as
one of the regular quarterly meetings) shall be held no
later than June 30 of each Fiscal Year.
(d) Special meetings of the Board of Managers
shall be held whenever called by any Member. Any and all
business may be transacted at a special meeting that may be
transacted at a regular meeting of the Board of Managers.
(e) The Board of Managers may hold its meetings
at such place or places as the Board of Managers may from
time to time by resolution determine or as shall be
designated in the respective notices or waivers of notice
thereof; however, the Board of Managers shall consider
holding meetings from time to time at each of the Member's
corporate headquarters and at the operational sites of the
Company.
(f) Notices of regular meetings of the Board of
Managers or of any adjourned meeting shall be given at least
two weeks prior to such meeting, unless otherwise agreed by
each Member. Notices of special meetings of the Board of
Managers shall be mailed by the Secretary or an Assistant
Secretary to each member of the Board of Managers addressed
to him or her at his or her residence or usual place of
business, so as to be received at least two Business Days
before the day on which such meeting is to be held, or shall
be sent to him or her by telegraph, cable, facsimile or
other form of recorded communication or be delivered
personally, by overnight courier or by telephone so as to be
received not later than two Business Days before the day on
which such meeting is to be held. Such notice shall include
the purpose, time and place of such meeting and shall set
forth in reasonable detail the matters to be considered at
such meeting. However, notice of any such meeting need not
be given to any member of the Board of Managers if such
notice is waived by him or her in writing or by telegraph,
cable, facsimile or other form of recorded communication,
whether before or after such meeting shall be held, or if he
or she shall be present at such meeting.
(g) Action by Communication Equipment. The
members of the Board of Managers may participate in a
meeting of the Board of Managers by means of video or
telephonic conferencing or similar communications equipment
by means of which all persons participating in the meeting
can hear each other, and such participation shall constitute
presence in person at such meeting.
(h) Unanimous Action by Written Consent. Any
action required or permitted to be taken at any meeting of
the Board of Managers may be taken without a meeting if all
the Representatives consent thereto in writing and such
writing is filed with the minutes of the proceedings of the
Board of Managers.
(i) Organization. Meetings of the Board of
Managers shall be presided over by a chair, who will be a
member of the Board of Managers selected by a majority of
the Board of Managers. The Secretary of the Company or, in
the case of his or her absence, any person whom the person
presiding over the meeting shall appoint, shall act as
secretary of such meeting and keep the minutes thereof.
SECTION 8.05. Compensation. Unless the Members
otherwise agree, no person shall be entitled to any
compensation from the Company in connection with his or her
services as a Representative.
SECTION 8.06. Quorum. (a) Quorum for Super
Majority Decisions. Subject to Section 14.01(e) of the
Put/Call, Registration Rights and Standstill Agreement and
Sections 14.01 and 14.05 and Section 5 of Schedule 8.14, at
all meetings of the Board of Managers, the quorum required
for the transaction of any business that constitutes a Super
Majority Decision shall be the presence, either in person or
by proxy, of (i) at least one Representative of each Member
and (ii) a majority of all the Representatives on the Board
of Managers (which may include the Representatives referred
to in the preceding clause (i)).
(b) Quorum for Other Decisions. Subject to
Sections 14.01 and 14.05 and Section 5 of Schedule 8.14, at
all meetings of the Board of Managers, the quorum required
for the transaction of any business that does not constitute
a Super Majority Decision shall be (i) in the case of all
matters that were described in the notice in reasonable
detail for such meeting delivered to the members of the
Board of Managers pursuant to Section 8.04(f), the presence,
either in person or by proxy, of a majority of all the
Representatives on the Board of Managers and (ii) in the
case of all matters that were not described in the notice in
reasonable detail for such meeting delivered to the members
of the Board of Managers pursuant to Section 8.04(f), the
presence, either in person or by proxy, of (A) at least one
Representative of each Member and (B) a majority of all the
Representatives on the Board of Managers (which may include
the Representatives referred to in the preceding
clause (A)).
(c) Rescheduled Meetings. The Company shall use
its reasonable best efforts to schedule the time and place
of each meeting of the Board of Managers so as to ensure
that a quorum will be present at each such meeting and that
at least one Representative of each Member will be present
at each such meeting. In the absence of a quorum at any
such meeting or any adjournment or adjournments thereof, a
majority in voting interest of those present in person or by
proxy and entitled to vote thereat may reschedule such
meeting from time to time until the Representatives
requisite for a quorum, as aforesaid, be present in person
or by proxy. At any such rescheduled meeting at which a
quorum is present, any business may be transacted that might
have been transacted at the meeting as originally called.
SECTION 8.07. Voting. (a) General. Each
Representative shall be entitled to cast one vote on all
matters coming before the Board of Managers. In exercising
their voting rights under this Agreement, the
Representatives may act by proxy.
(b) Super Majority Decisions. Subject to
Section 14.01(e) of the Put/Call, Registration Rights and
Standstill Agreement and Sections 14.01 and 14.05 and
Section 5 of Schedule 8.14, all Super Majority Decisions to
be decided by the Board of Managers shall be approved by the
unanimous affirmative vote of the votes cast by the
Representatives who are present, either in person or by
proxy, at a duly called meeting of the Board of Managers at
which a quorum is present. The parties acknowledge and
agree that all references in this Agreement, any other
Transaction Document and any appendices, exhibits or
schedules hereto or thereto to any determination, decision,
approval or other form of authorization by the Board of
Managers pursuant to a vote in accordance with
Section 8.07(b) shall be deemed to mean that such
determination, decision, approval or other form of
authorization shall constitute a Super Majority Decision
which requires the approval of the Board of Managers in
accordance with this Section 8.07(b).
(c) Other Decisions. Subject to Sections 14.01
and 14.05 and Section 5 of Schedule 8.14, all matters other
than Super Majority Decisions to be decided by the Board of
Managers shall be approved by the affirmative vote of a
majority of the votes cast by the Representatives who are
present, either in person or by proxy, at a duly called
meeting of the Board of Managers at which a quorum is
present, unless the vote of a greater number of
Representatives is required by Applicable Law or this
Agreement.
SECTION 8.08. Matters Constituting Super Majority
Decisions. Subject to the provisions of Section 8.07(b),
each of the following matters, and only the following
matters, shall constitute a "Super Majority Decision" which
requires the approval of the Board of Managers pursuant to
Section 8.07(b):
(a) (i) the purchase or investment by the Company
or any of its subsidiaries of or in any assets or
securities, or any group of assets or securities, that
have an aggregate purchase price or cost of more than
$20 million, if the purpose or effect of such purchase
or investment is to enable the Company to enter into a
line of business other than (A) the Company's Business
as such Business is conducted on the Closing Date or
(B) any other line of business that is approved after
the Closing Date by the Board of Managers as a Super
Majority Decision under this Section 8.08(a)(i)
pursuant to a vote in accordance with Section 8.07(b),
provided that any such purchase or investment by the
Company or any of its subsidiaries shall not require a
Super Majority Decision under this Section 8.08(a) if
and to the extent such purchase or investment is being
made to enable the Company to enter into the Bulk Motor
Oil Business, the Packaged Motor Oil Business, the
Private Label Packaged Motor Oil Business and/or the
Quick Lube Business and, at the time of such purchase
or investment, (1) the Company and its subsidiaries are
permitted to engage in such business under
Section 14.03(b) of the Put/Call, Registration Rights
and Standstill Agreement and (2) Ashland and its
Affiliates shall own (beneficially or otherwise) 20% or
more of the Valvoline Business (it being understood and
agreed that this proviso shall not limit or constitute
an exception to any other provision of Section 8.08);
and
(ii) the determination of whether any new line of
business approved by the Board of Managers as a Super
Majority Decision under Section 8.08(a)(i) should
constitute a "Competitive Business" for purposes of
Section 14.01 of the Put/Call, Registration Rights and
Standstill Agreement;
(b) (i) any reorganization, merger, consolidation
or similar transaction between the Company and any
person (other than a direct or indirect Wholly Owned
Subsidiary of the Company) or any sale or lease of all
or substantially all of the Company's assets to any
person (other than a direct or indirect Wholly Owned
Subsidiary of the Company);
(ii) any (A) reorganization, merger, consolidation
or similar transaction or series of transactions
between any of the Company's subsidiaries and any
person (other than the Company or a direct or indirect
Wholly Owned Subsidiary of the Company) or (B) sale or
lease of all or substantially all of any of the
Company's subsidiaries' assets to any person (other
than the Company or a direct or indirect Wholly Owned
Subsidiary of the Company) which in either case
involves an aggregate consideration of over
$50,000,000;
c) the admission of a new Member (other than as a
result of a Transfer of an existing Member's Membership
Interests pursuant to Article X) or the issuance of any
additional Membership Interests or other equity
interests to any person, including any existing Member;
(d) except as expressly provided in
Sections 4.01(c), 4.02(a) and 4.02(b), the acceptance
or requirement of any additional capital contributions
to the Company by either Member;
(e) the initial hiring of the following officers
of the Company: the President; the Executive Vice
President; the officers principally in charge of
(i) refining, (ii) wholesale and branded marketing,
(iii) retail marketing (two initially), (iv) supply and
transportation and (v) environmental health and safety
and human resources; the Senior Vice President-Finance
and Commercial Services of the Company; and the general
counsel of the Company;
(f) (i) the approval of Acquisition Expenditures,
Capital Expenditures and such other expenditures of the
type to be included in the Annual Capital Budget for
any Fiscal Year (other than (A) Ordinary Course Lease
Expenses, (B) up to $100 million in the aggregate for
all periods in Capital Expenditures of the Company and
its subsidiaries directly associated with the Garyville
Propylene Upgrade Project, (C) Member-Funded Capital
Expenditures, (D) Member-Indemnified Expenditures and
(E) Acquisition Expenditures or Capital Expenditures of
the Company and its subsidiaries directly associated
with Permitted Capital Projects/Acquisitions that are
funded with Permitted Capital Project/Acquisition
Indebtedness) that when taken together with (x) the
other expenditures already approved as part of the
Annual Capital Budget for such Fiscal Year and (y) all
other expenditures already made in such Fiscal Year,
would reasonably be expected to exceed the Normal
Annual Capital Budget Amount for such Fiscal Year; and
(ii) the incurrence of rentals or operating leases
which result in aggregate Ordinary Course Lease
Expenses (other than Ordinary Course Lease Expenses
incurred under the Bareboat Charters) for any Fiscal
Year that exceed $80 million; provided, however, in the
event the Company or one of its subsidiaries shall make
any acquisition or divestiture, the Members shall
negotiate in good faith to adjust the dollar amount set
forth in this Section 8.08(f)(ii) to take into account
the effect of such acquisition or divestiture;
(g) (i) except for any acquisition or capital
project related to the Bulk Motor Oil Business, the
Packaged Motor Oil Business, the Private Label Motor
Oil Business and/or the Quick Lube Business, any
acquisition, divestiture or individual capital project
(other than (i) Ordinary Course Lease Expenses, (ii) up
to $100 million in the aggregate for all periods in
Capital Expenditures of the Company and its
subsidiaries directly associated with the Garyville
Propylene Upgrade Project, (iii) Member-Funded Capital
Expenditures, (iv) Member-Funded Indemnified
Expenditures and (v) Acquisition Expenditures
or Capital Expenditures of the Company and its
subsidiaries directly associated with Permitted Capital
Projects/Acquisitions that are funded with Permitted
Capital Project/Acquisition Indebtedness) where the
liability or consideration involved is more than
$50 million in the aggregate (including contingent
liabilities only to the extent required to be reflected
on the balance sheet of the Company in accordance with
Financial Accounting Standard Number 5 (or any
successor or superseding provision of Current GAAP));
(ii) any acquisitions or individual capital
projects related to the Bulk Motor Oil Business, the
Packaged Motor Oil Business, the Private Label Motor
Oil Business and/or the Quick Lube Business during any
Fiscal Year where the liability or consideration
involved is more than $50 million in the aggregate in
such Fiscal Year (including contingent liabilities only
to the extent required to be reflected on the balance
sheet of the Company in accordance with Financial
Accounting Standard Number 5 (or any successor or
superseding provision of Current GAAP)); provided that
nothing in this Section 8.08(g)(ii) shall be deemed or
interpreted to permit the Company or any of its
subsidiaries to engage in any of such businesses except
as and to the extent expressly permitted under
Section 14.03 of the Put/Call, Registration Rights and
Standstill Agreement;
(iii) for the avoidance of doubt, acquisitions or
individual capital projects related to the Maralube
Express Business shall be subject to clause (i) of this
Section 8.08(g) and not clause (ii) of this
Section 8.08(g);
(h) the initiation or settlement of any action,
suit, claim or proceeding involving (i) an amount in
excess of $50 million (with respect to initiation) or
$25 million (with respect to settlement), (ii) material
non-monetary relief (including, without limitation,
entering into any consent decree that has or could
reasonably be expected to (A) impose any material
obligation on Ashland or any of its Affiliates or the
Company or any of its subsidiaries or (B) have a
material adverse effect on the business, operations,
assets, liabilities, results of operations, cash flows,
condition (financial or otherwise) or prospects of
Ashland or any of its Affiliates or the Company or any
of its subsidiaries) or (iii) the initiation or
settlement of any criminal action, suit, claim or
proceeding (other than a misdemeanor) if such criminal
action, suit or proceeding has or could reasonably be
expected to (A) impose any material obligation on
Ashland or any of its Affiliates or (B) have a material
adverse effect on the business, operations, assets,
liabilities, results of operations, cash flows,
condition (financial or otherwise) or prospects of
Ashland or any of its Affiliates;
(i) any change in the Company Independent Auditors
unless the new firm is one of the "Big Six" accounting
firms (or any successor thereto) or a firm of
comparable stature in Ashland's opinion;
(j) any modification, alteration, amendment or
termination of any Transaction Document to which the
Company or any of its subsidiaries is a party and all
Members are not a party;
(k) (i) in the case of any Affiliate Transaction
that is not a Crude Oil Purchase, a Significant Shared
Service or a Designated Sublease Agreement, (A) any
Affiliate Transaction (other than the Affiliate
Transactions listed on Schedule 8.08(k)(i)(A) (the
"Closing Date Affiliate Transactions")), (B) any
material amendment to or change in the terms or
provisions of any Affiliate Transaction that was either
a Closing Date Affiliate Transaction or previously
approved by the Board of Managers pursuant to
Section 8.08(k)(i)(A) (it being understood that a
renewal or extension of the term of an Affiliate
Transaction pursuant to contractual provisions that
were previously approved by the Board of Managers
pursuant to this Section 8.08(k)(i) or that were
included in a Closing Date Affiliate Transaction on the
Closing Date shall be deemed for purposes of this
Agreement not to constitute a new Affiliate Transaction
or a material amendment to or change in an Affiliate
Transaction) or (C) any amendment or change in the
terms or provisions of any agreement or transaction
between the Company or any of its subsidiaries and any
Member or any Affiliate of any Member which causes such
agreement or transaction to become an Affiliate
Transaction;
(ii) in the case of Crude Oil Purchases, the
approval of such Crude Oil Purchases in accordance with
Section 8.12(a);
(iii) in the case of any Significant Shared
Service, (A) any agreement or transaction constituting
a Significant Shared Service (other than the specific
Significant Shared Services identified and described in
Schedule 10.2(e) to the Asset Transfer and Contribution
Agreement), (B) any material amendment to or change in
the terms and provisions of any Significant Shared
Service identified and described in Schedule 10.2(e) to
the Asset Transfer and Contribution Agreement or
thereafter approved by the Board of Managers in
accordance with this Section 8.08(k)(iii), (C) subject
to the provisions of Section 8.11(b) and except as
expressly provided in Section 8.12(b), any cancelation
or failure by the Company or any of its subsidiaries to
renew any Significant Shared Service provided by
Ashland or any Affiliate of Ashland to the Company or
any of its subsidiaries or provided by the Company or
any of its subsidiaries to Ashland or any Affiliate of
Ashland and (D) the periodic review and approval of
Significant Shared Services in accordance with Section
8.12(b); and
(iv) any material amendment to or change in the
terms or provisions of, cancelation, termination or
failure to renew, any Designated Sublease Agreement or
any election by the Company to refuse or reject the
contribution of any Subleased Property to the Company
or any of its subsidiaries;
(l) the commencement of a voluntary case under any
applicable bankruptcy, insolvency or other similar law
now or hereafter in effect, or the consent to the entry
of an order for relief in an involuntary case under any
such law, or the consent to the appointment of or the
taking possession by a receiver, liquidator, assignee,
custodian, trustee or sequestrator (or similar
official) of the Company or any of its subsidiaries or
for any substantial part of the Company's or any of its
subsidiaries' property, or the making of any general
assignment for the benefit of creditors;
(m) (i) the modification, alteration or amendment
of the amount, timing, frequency or method of
calculation of distributions to the Members from that
provided in Article V or (ii) an adjustment to the
amount of Distributable Cash pursuant to clause (g) of
the definition of "Distributable Cash" in Section 1.01;
(n) (i) the modification, alteration or amendment
of the Company Leverage Policy, or (ii) the approval of
any matter which the Company Leverage Policy provides
is to be approved by the Board of Managers as a Super
Majority Decision;
(o) (i) the approval of any distribution by the
Company to the Members of any assets in kind, (ii) the
approval of any distribution by the Company to the
Members of cash and property in kind on a non-pro rata
basis, and (iii) the determination of the value
assigned to such assets in kind;
(p) each Critical Decision or material amendment
thereto made on or prior to the Critical Decision
Termination Date for such Critical Decision; and
(q) the delegation to a Member of the power to
unilaterally bind the Company or any of its
subsidiaries with respect to any matter.
SECTION 8.09. Annual Capital Budget. (a) In
Fiscal Year 1999 and in each Fiscal Year thereafter, the
Executive Officers of the Company shall timely prepare or
cause to be prepared a draft capital budget (the "Draft
Annual Capital Budget") for such Fiscal Year, which shall
set forth in reasonable line item detail the proposed
Acquisition Expenditures, Capital Expenditures and the
Ordinary Course Lease Expenditures of the Company and its
subsidiaries for such Fiscal Year, including all Ordinary
Course Lease Expenditures and all Capital Expenditures of
the Company and its subsidiaries directly associated with
the Garyville Propylene Upgrade Project. In addition, to
the extent that information can reasonably be obtained on
the nature of assets rented or financed by operating leases,
such information shall be presented along with the Annual
Capital Budget. Copies of the Draft Annual Capital Budget
shall be provided to each Member (at the same time) and to
the Board of Managers. No later than the last regular
meeting of the Board of Managers for a Fiscal Year, the
Executive Officers shall present to the Board of Managers
the Draft Annual Capital Budget for the following Fiscal
Year for the Board of Managers' review, consideration and
approval, with such additions, deletions and changes thereto
as the Board of Managers shall deem necessary. Upon its
approval by the Board of Managers (and taking into account
any additions, deletions or other changes deemed necessary
by the Board of Managers) the Draft Annual Capital Budget
for a Fiscal Year shall become the "Annual Capital Budget"
for such Fiscal Year.
(b) If the Board of Managers shall fail to
approve an Annual Capital Budget for any Fiscal Year, the
total expenditures provided for in the Annual Capital Budget
for such Fiscal Year shall be in an amount equal to the
Normal Annual Capital Budget Amount for such Fiscal Year.
(c) No later than August 30 of each Fiscal Year,
the Board of Managers shall review the Annual Capital Budget
for such Fiscal Year and shall make such additions,
deletions and changes thereto as the Board of Managers shall
deem necessary.
SECTION 8.10. Business Plan. In Fiscal Year 1999
and in each Fiscal Year thereafter, the Executive Officers
of the Company shall timely prepare or cause to be prepared
a draft business plan (the "Draft Business Plan") for the
next three Fiscal Years. Copies of the Draft Business Plan
shall be provided to each Member (at the same time) and to
the Board of Managers. No later than the last regular
meeting of the Board of Managers for a Fiscal Year, the
Executive Officers shall present to the Board of Managers
the Business Plan for their review, consideration and
approval, with such additions, deletions and changes thereto
as the Board of Managers shall deem necessary. Upon its
approval by the Board of Managers (and taking into account
any such additions, deletions or other changes deemed
necessary by the Board of Managers), the Draft Business Plan
for a Fiscal Year shall become the "Business Plan" for such
Fiscal Year.
SECTION 8.11. Requirements as to Affiliate
Transactions. (a) The Company and its subsidiaries shall
only be permitted to enter into or renew or extend the term
thereof (whether pursuant to contractual provisions thereof
or otherwise) an agreement or a transaction with a Member or
an Affiliate of a Member (which, solely for purposes of this
Section 8.11, shall be deemed to include any entity more
than 10% of the voting stock or other ownership interests
of, or economic interest in, which is owned by a Member
(other than the Company or any of its subsidiaries)) on the
same terms or on terms no less favorable to the Company or
such subsidiary than could be obtained from a third party on
an arm's-length basis (an "Arm's-Length Transaction").
(b) (i) If (A) the Company or any subsidiary of
the Company enters into, renews or extends the term of
(pursuant to contractual provisions thereof that were
previously approved by the Board of Managers or
otherwise) or materially amends or changes the terms or
provisions of, any agreement or transaction between the
Company or any of its subsidiaries and any Member or
any Affiliate of any Member (a "Section 8.11(b)
Affiliate Transaction") or proposes to do any of the
foregoing and (ii) not later than 90 days after
receiving written notice thereof from the Company
pursuant to Section 7.03 or otherwise (which notice
describes the material terms and conditions of such
transaction in reasonable detail), the Member that is
not (or whose Affiliate is not) a party to such
Section 8.11(b) Affiliate Transaction (the
"Non-Contracting Member") notifies the Company and the
Member that is (or whose Affiliate is) a party to such
Section 8.11(b) Affiliate Transaction (the "Contracting
Member") in writing that the Non-Contracting Member
believes in good faith that either such Affiliate
Transaction is not an Arm's-Length Transaction or that
the quality of the service being provided or to be
provided by the Contracting Member is inferior to that
which the Company and its subsidiaries could otherwise
obtain on comparable terms and conditions, then the
Company shall promptly (and, in any event within
30 days) provide the Non-Contracting Member with a
reasonably detailed explanation of the basis for the
Company's determination that such new, renewed or
extended Affiliate Transaction is an Arm's-Length
Transaction or the quality of the service being
provided or to be provided to the Company and its
subsidiaries is not inferior.
(ii) If following receipt of such evidence, the
Non-Contracting Member is not reasonably satisfied that
such Affiliate Transaction is an Arm's-Length
Transaction or the quality of the service being
provided or to be provided to the Company and its
subsidiaries is not inferior, then, at the written
request of the Non-Contracting Member (such written
request being an "Affiliate Transaction Dispute
Notice"), the Company shall (A) modify the terms of
such Affiliate Transaction so that it becomes an Arm's-
Length Transaction, (B) if the Company had given the
Members written notice pursuant to Section 7.03(a)
prior to entering into, renewing or extending such
Affiliate Transaction, not enter into, renew or extend
such Affiliate Transaction or (C) if the Company had
given the Members written notice pursuant to Section
7.03(a) prior to entering into, renewing or extending
such Affiliate Transaction, enter into, renew or extend
such Affiliate Transaction in which event the
determination of whether such Affiliate Transaction is
an Arm's Length Transaction and/or whether the quality
of the service being provided is inferior shall be in
accordance with the Dispute Resolution Procedures set
forth in Article XIII or (D) if the Company shall not
have given the Members written notice pursuant to
Section 7.03(a) prior to entering into, renewing or
extending such Affiliate Transaction, commence the
dispute resolution procedures set forth in Article
XIII.
(iii) For purposes of Article XIII, a Non-
Contracting Member's delivery of an Affiliate
Transaction Dispute Notice to the Company shall
constitute delivery of a Dispute Notice thereunder, and
the Company shall be required to deliver a Response to
the Non-Contracting Member within 30 days thereafter.
If it is finally determined pursuant to such Dispute
Resolution Procedures that such Affiliate Transaction
is an Arm's-Length Transaction and, if disputed, that
the quality of service being so provided is not
inferior, then the Company shall be permitted to enter
into, renew or extend such Affiliate Transaction. If
it is finally determined pursuant to such Dispute
Resolution Procedures that such Affiliate Transaction
is not an Arm's-Length Transaction or that the quality
of service being so provided is inferior, then the
Company shall either modify the terms of such Affiliate
Transaction so that it becomes an Arm's-Length
Transaction and, if disputed, with an adequate level of
quality of service or not enter into, renew or extend
such Affiliate Transaction. In the event that such
Affiliate Transaction has already been entered into,
renewed or extended, then (A) the Company and the
Contracting Member shall make such modifications to the
terms of such Affiliate Transaction as are necessary so
that such Affiliate Transaction becomes an Arm's-Length
Transaction and, if disputed, with an adequate level of
quality of service and (B) the Contracting Member shall
pay the Company an amount equal to the difference
between (I) the costs incurred by the Company under
such Affiliate Transaction since the time of such
entering into, renewal or extension and (II) the costs
that the Company would have incurred under such
Affiliate Transaction during such time period had such
Affiliate Transaction been an Arm's-Length Transaction
and, if disputed, with an adequate level of quality of
service at the time of such initial agreement, renewal
or extension.
SECTION 8.12. Review of Certain Affiliate
Transactions Related to Crude Oil Purchases and Shared
Services. (a) (i) Not less than 30 days prior to the
regular meeting of the Board of Managers during the fourth
Fiscal Quarter of each Fiscal Year (or, if no regular
meeting of the Board of Managers is scheduled during such
Fiscal Quarter, at a special meeting of the Board of
Managers during such Fiscal Quarter), the Company shall
submit to the Board of Managers a reasonably detailed
description of any proposed transactions or agreements
related to crude oil purchases by the Company and its
subsidiaries from Marathon or any Affiliate of Marathon that
are intended to remain in effect or to be put into effect
during such next Fiscal Year (collectively, the "Marathon
Crude Oil Purchase Program"). Following such submission,
the Company shall provide the Board of Managers promptly
with such information with respect to such Marathon Crude
Oil Purchase Program and the Company's other proposed crude
oil purchases and policies for such next Fiscal Year as any
Representative shall reasonably request. At each such
regular or special meeting during the fourth Fiscal Quarter
of each Fiscal Year, the Board of Managers shall review such
Marathon Crude Oil Purchase Program. During such next
Fiscal Year, the Company and its subsidiaries shall be
permitted to purchase crude oil from Marathon or any
Affiliate of Marathon only on the terms and conditions of
the proposed transactions and agreements submitted to and
approved by the Board of Managers at such regular or special
meeting pursuant to a vote in accordance with
Section 8.07(b) (the "Approved Marathon Crude Oil Purchase
Program"). Any purchase (or group of related purchases) of
crude oil by the Company or any of its subsidiaries from
Marathon or any Affiliate of Marathon during such Fiscal
Year that is an Affiliate Transaction for purposes of
Section 8.08(k) and is not made under or in accordance with
the Approved Marathon Crude Oil Purchase Program and any
material amendment to or change in the Approved Marathon
Crude Oil Purchase Program during such Fiscal Year shall be
made only with the prior approval of the Board of Managers
pursuant to a vote in accordance with Section 8.07(b).
(ii) The Company shall prepare and send to each
Member (at the same time) promptly, but in no event
later than the 30th day after the last day of each
Fiscal Quarter, (A) a summary of all Crude Oil
Purchases during such Fiscal Quarter, (B) a description
of any amendments to, changes in or deviations from the
Approved Marathon Crude Oil Purchase Program in effect
during such Fiscal Quarter, (C) a description of any
then known proposed amendments to, changes in or
deviations from the Approved Marathon Crude Oil
Purchase Program in effect during the remaining balance
of the Fiscal Year and (D) such other information with
respect to purchases of crude oil by the Company and
its subsidiaries as either Member shall reasonably
request.
(b)(i) All administrative services that Marathon,
Ashland and each of their respective Affiliates provide
to the Company or any of its subsidiaries, and that the
Company and its subsidiaries provide to Marathon,
Ashland or any of their respective Affiliates, shall be
pursuant to the Shared Services Agreement. To the
extent that there is a conflict between the Shared
Services Agreement, Schedule 10.2(e) to the Marathon
Asset Transfer and Contribution Agreement Disclosure
Letter or Schedule 10.2(e) to the Ashland Asset
Transfer and Contribution Agreement Disclosure Letter,
on the one hand, and this Agreement, on the other hand,
this Agreement shall control.
(ii) Not less than 90 days prior to each of the
annual meetings of the Board of Managers held in 2000,
2003 and every three years thereafter, the Company
shall submit to the Board of Managers the provisions of
the Shared Services Agreement that relate to each
Significant Shared Service then in effect or that is
proposed to be put into effect. Following such
submission, the Company shall provide the Board of
Managers promptly with such information with respect to
such Significant Shared Services and with respect to
any other Shared Services then being provided or
proposed to be provided as any Representative shall
reasonably request. At each such annual meeting,
unless all the Representatives otherwise agree, the
Board of Managers shall review each such Significant
Shared Service and shall determine pursuant to a vote
in accordance with Section 8.07(b) whether such
Significant Shared Service should be continued (or, in
the case of any proposed Significant Shared Service,
put into effect). Unless the Board of Managers
approves pursuant to a vote in accordance with
Section 8.07(b) the continuation or effectiveness of a
Significant Shared Service, the Shared Service
Agreement to the extent it relates to such Significant
Shared Service shall be terminated effective 90 days
after such annual meeting or at such later date as the
Board of Managers shall specify pursuant to a vote in
accordance with Section 8.07(b) and the Company shall
be deemed at the time of such annual meeting to have
given notice to the Member providing or receiving (or
whose Affiliate is providing or receiving) such
Significant Shared Service that the Company is
terminating the Shared Service Agreement with respect
to such Significant Shared Service.
SECTION 8.13. Adjustable Amounts. Within 30 days
following the date on which the United States Department of
Labor Bureau of Labor Statistics for all Urban Areas
publishes the Price Index for the month of September of each
Fiscal Year commencing September, 1998, the Company shall
determine whether the Average Annual Level for the
immediately preceding twelve-month period exceeds the Base
Level. If the Company determines that the Average Annual
Level for such twelve-month period exceeds the Base Level,
then the Company shall increase or decrease each of the
dollar amounts set forth in this Agreement (other than the
$348 million and $346 million amounts set forth in the
definition of Adjusted DD&A, the $657 million, $600 million,
$80 million, $20 million and $12.4 million amounts set forth
in the definition of Adjusted EBITDA, the $240 million
amount set forth in the definition of "Normal Annual Capital
Budget Amount" in Section 1.01, the $100 million amount set
forth in Section 8.08(f)(i) and any dollar amount set forth
in any Appendix, Exhibit or Schedule to this Agreement,
including Schedule 8.14) (each dollar amount that is
adjusted pursuant to this Section 8.13 being an "Adjustable
Amount"), including, without limitation, the following
amounts, to an amount calculated by multiplying the relevant
Adjustable Amount by a fraction whose numerator is the
Average Annual Level for such twelve-month period and whose
denominator is the Base Level: (i) the $100,000, $2 million
and $25 million amounts set forth in the definition of
"Affiliate Transaction" and the $2 million amount set forth
in the definition of "Significant Shared Service" in each
case in Section 1.01; (ii) the $2 million amount set forth
in Section 6.06(c); (iii) the $2 million amounts set forth
in Sections 6.08(b), (d) and (e); (iv) the $20 million
amount set forth in Section 8.08(a)(i); (v) the $80 million
amount set forth on Section 8.08(f)(ii) (or such other
dollar amount as shall be agreed pursuant to the proviso to
Section 8.08(f)(ii)); (vi) the $50 million amount set forth
in Section 8.08(g); (vii) the $50 million and $25 million
amounts set forth in Section 8.08(h)(i); and (viii) each
$7.5 million amount set forth in Section 14.01(a); provided
that in no event shall any Adjustable Amount be decreased
below the initial amount thereof set forth herein. Within
five Business Days after making such determinations, the
Company shall distribute to each Member a notice setting
forth: (A) the amount by which the Average Annual Level for
such Fiscal Year exceeded the Base Level and (B) the
calculations of any adjustments made to the Adjustable
Amounts pursuant to this Section 8.13. Any adjustment made
to the Adjustable Amounts pursuant to this Section 8.13
shall be effective as of January 1st of the next Fiscal
Year.
SECTION 8.14. Company Leverage Policy. The
leverage policy for the Company shall be the leverage policy
set forth on Schedule 8.14, with such modifications,
alterations or amendments thereto as the Board of Managers
shall from time to time approve pursuant to a vote in
accordance with Section 8.07(b) (such leverage policy, as so
modified, altered or amended, is referred to herein as the
"Company Leverage Policy").
SECTION 8.15. Company's Investment Guidelines.
The Company's Senior Vice President-Finance and Commercial
Services, Vice President-Finance and Controller and
Treasurer (or Treasury Manager) shall constitute an
Investment Policy Committee of the Company and shall
establish investment guidelines for the Company and its
subsidiaries (such investment guidelines, as they may be
modified, altered or amended by such Investment Policy
Committee from time to time, are referred to herein as the
"Company Investment Guidelines"). The initial Company
Investment Guidelines is set forth on Schedule 8.15. The
Company and its subsidiaries shall only make investments
that are permitted under the Company Investment Guidelines
at the time of such investments. In addition, the Company
and its subsidiaries shall invest all Surplus Cash (after
meeting daily cash requirements) in accordance with the
Company Investment Guidelines.
SECTION 8.16. Requirements as to Operating
Leases. The Company and its subsidiaries shall not enter
into any operating lease (as determined in accordance with
Applicable GAAP) if the purpose or intent of entering into
such operating lease is to circumvent the Company Leverage
Policy or the super majority voting requirement for Capital
Expenditures of the Company set forth in Section 8.08(f).
The lease by the Company and its subsidiaries of vehicles,
railcars and computers in accordance with the historical
practices of the Ashland Business and the Marathon Business
shall not be deemed to violate this Section 8.16, provided,
for the avoidance of doubt, that all Ordinary Course Lease
Expenses related to any such leases shall be considered
Ordinary Course Lease Expenses for the purposes of
Section 8.08(f)(ii).
SECTION 8.17. Limitations on Actions Relating to
the Calculation of Distributable Cash. Notwithstanding
anything to the contrary contained in this Agreement, the
Company shall not, and shall cause its subsidiaries not to
(a) modify, alter or amend the Company Investment
Guidelines, (b) accelerate the payment of the Company's and
its subsidiaries' accounts payable, (c) delay the collection
of the Company's and its subsidiaries' accounts receivable
or (d) take any other action, if the purpose or intent of
such action is to reduce the amount of Distributable Cash in
a manner that is inconsistent with the intent of the Members
to maximize the amount of Distributable Cash distributions
to the Members.
SECTION 8.18. Reliance by Third Parties. Persons
dealing with the Company are entitled to rely conclusively
upon the power and authority of the Board of Managers herein
set forth. Except as provided in this Agreement, neither
the President, nor a Representative, nor any Member shall
have any authority to bind the Company or any of its
subsidiaries.
SECTION 8.19. Integration of Retail
Operations. (a) Until the Critical Decision is made
regarding the location of the Company's retail operations'
headquarters, the Company's retail operations' business
shall have headquarters in both Enon, Ohio and Lexington,
Kentucky.
(b) (i) The Company shall make a formal
recommendation to the Board of Managers with respect to
each Critical Decision not later than the ten-month
anniversary of the Closing Date. Following receipt of
a formal recommendation with respect to any Critical
Decision, Marathon and Ashland shall negotiate in good
faith to reach an agreement with respect to such
Critical Decision not later than the first anniversary
of the Closing Date.
(ii) Each formal recommendation with respect to
any Critical Decision shall be accompanied by a report
on the business and economic analyses used by the
Company to arrive at such recommendation, including but
not limited to, a reasonably detailed description of
the risks and benefits of the recommended decision and
the anticipated impact of the recommended decision on
the Speedway and SuperAmerica brand images and business
models.
(iii) Following receipt of any formal
recommendation with respect to any Critical Decision,
each Member may request, and the Company shall promptly
provide to both Members, such additional information
and analyses (including studies by outside consultants)
as such Member may reasonably request; provided,
however, any additional information request shall not
extend the Critical Decision Termination Date.
(c) If any Primary Critical Decision shall not
have been agreed by the Board of Managers pursuant to a vote
in accordance with Section 8.07(b) prior to the first
anniversary of the Closing Date, the Critical Decision
Termination Date with respect to such Primary Critical
Decision shall be automatically, and without any further
action required by either Member, the Company or the Board
of Managers, extended until the fifteen-month anniversary of
the Closing Date. During the period of such extension, the
Company shall provide promptly to each Member such
additional information or analyses (including studies by
outside consultants) as either Member shall reasonably
request. Not later than 30 days prior to the fifteen-month
anniversary of the Closing Date, the Company shall, if
requested by either Member, again make a formal
recommendation to the Board of Managers with respect to such
Primary Critical Decision. Such formal recommendation shall
include a report on the supporting business and economic
analyses described in Section 8.19(b)(ii). Any request for
additional information shall not extend the Critical
Decision Termination Date.
(d) Until such time as the implementation of any
Critical Decision shall have been completed in all material
respects, the President of the Company shall report to the
Board of Managers at each regular meeting of the Board of
Managers on the implementation of such Critical Decision and
on any material modifications or changes to such Critical
Decision.
(e) To the extent there is any conflict between
the terms and provisions of this Agreement and the terms and
provisions of the Retail Integration Protocol, the terms and
provisions of this Agreement shall control.
ARTICLE IX
Officers
SECTION 9.01. (a) Election, Appointment and Term
of Office. The executive officers of the Company (the
"Executive Officers") shall consist solely of: a President;
an Executive Vice President; an officer principally in
charge of refining; an officer principally in charge of
wholesale and branded marketing; the officer or officers
(two initially) principally in charge of retail marketing;
an officer principally in charge of supply and
transportation; an officer who shall be the Senior Vice
President-Finance and Commercial Services of the Company;
and an officer who shall be the general counsel of the
Company; provided, however, that Marathon and Ashland may
make additions or deletions to the positions which shall be
considered executive officers of the Company by mutual
agreement. Schedule C sets forth a list of (i) the persons
who Marathon and Ashland have chosen to serve initially as
the Executive Officers of the Company, (ii) the executive
office for which each such person is to serve and
(iii) whether each such person was designated by Marathon or
Ashland. Marathon and Ashland agree that the composition of
the initial Executive Officers is intended to reflect their
respective Percentage Interests in the Company.
Accordingly, if any person identified on Schedule C is for
any reason unable or unwilling to serve as an Executive
Officer at the Closing Date, the Member who designated such
person shall have the right to designate a substitute
person, subject to the right of the other Member to consent
to such substitute nominee (which consent shall not be
unreasonably withheld). Marathon and Ashland shall cause
their respective Representatives to promptly approve the
appointment of each person listed on Schedule C to the
related executive office position listed on Schedule C.
(b) Except as otherwise determined by the Board
of Managers, each Executive Officer shall hold office until
his or her death or until his or her earlier resignation or
removal in the manner hereinafter provided. Except as
otherwise expressly provided herein, the Executive Officers
shall have such powers and duties in the management of the
Company as generally pertain to their respective offices as
if the Company were a corporation governed by the General
Corporation Law of the State of Delaware.
(c) The Board of Managers may elect or appoint
such other officers to assist and report to the Executive
Officers as it deems necessary. Subject to the preceding
sentence, each such officer shall have such authority and
shall perform such duties as may be provided herein or as
the Board of Managers may prescribe. The Board of Managers
may delegate to any Executive Officer the power to choose
such other officers and to prescribe their respective duties
and powers.
(d) Except as otherwise determined by the Board
of Managers, if additional officers are elected or appointed
during the year pursuant to Section 9.01(c), each such
officer shall hold office until his or her death or until
his or her earlier resignation or removal in the manner
hereinafter provided.
SECTION 9.02. Resignation, Removal and
Vacancies. (a) Any officer may resign at any time by
giving written notice to the President or the Secretary of
the Company, and such resignation shall take effect at the
time specified therein or, if the time when it shall become
effective shall not be specified therein, when accepted by
action of the Board of Managers. Except as aforesaid, the
acceptance of such resignation shall not be necessary to
make it effective.
(b) All officers and agents elected or appointed
by the Board of Managers shall be subject to removal at any
time by the Board of Managers with or without cause.
(c) Vacancies in all Executive Officer positions
may only be filled by the majority vote of the Representa
tives on the Board of Managers. In each instance where a
vacant Executive Officer position is to be filled, Marathon,
after consultation with the Company, shall first send
Ashland a notice which discloses the name and details of the
candidate for the vacant Executive Officer position that the
Representatives of Marathon will nominate and vote in favor
of for such position. Ashland shall thereafter have the
right, by notice to the Company and Marathon within ten days
after receipt of such notice from Marathon, to veto such
candidate. Each candidate that Marathon proposes for a
vacant Executive Officer position shall be a bona fide
candidate who is willing and able to serve and who Marathon
in good faith believes is qualified to fill such vacant
Executive Officer position (a "Qualified Candidate"). In
the event Ashland exercises its veto with respect to a
Qualified Candidate, the vacancy will be filled by the
majority vote of the Representatives on the Board of
Managers.
SECTION 9.03. Duties and Functions of Executive
Officers. (a) President. The President of the Company,
who shall be a non-voting member of the Board of Managers,
shall be in charge of the day-to-day operations of the
Company and shall preside at all meetings of the Board of
Managers and shall perform such other duties and exercise
such powers, as may from time to time be prescribed by the
Board of Managers.
(b) Executive Vice President. The Executive Vice
President of the Company initially shall report to the
President and be the officer principally in charge of all
supply, refining, marketing and transportation operations of
the Company other than the Company's retail operations.
(c) Other Executive Officers. The Executive
Officers of the Company other than the President and the
Executive Vice President shall perform such duties and
exercise such powers, as may from time to time be prescribed
by the President or the Board of Managers.
ARTICLE X
Transfers of Membership Interests
SECTION 10.01. Restrictions on
Transfers. (a) General. Except as expressly provided by
this Article X, neither Member shall Transfer all or any
part of its Membership Interests to any person without first
obtaining the written approval of the other Member, which
approval may be granted or withheld in its sole discretion.
Notwithstanding anything to the contrary contained in this
Agreement, no Transfer by a Member of its Membership
Interests to any person shall be made except to a permitted
assignee under Article XV of the Put/Call, Registration
Rights and Standstill Agreement.
(b) Transfer by Operation of Law. In the event a
Member shall be party to a merger, consolidation or similar
business combination transaction with a third party or sell
all or substantially all its assets to a third party, such
Member may Transfer all (but not part) of its Membership
Interests to such third party; provided, however, that such
Member shall not be permitted to Transfer its Membership
Interests to such third party as aforesaid if the purpose or
intent of such merger, consolidation, similar business
combination transaction or sale is to circumvent or avoid
the application of Sections 10.01(c) and 10.04 to the
Transfer of such Member's Membership Interests to such third
party.
(c) Transfer by Sale to Third Party. At any time
after December 31, 2002, a Member may sell all (but not
part) of its Membership Interests (and, in the case of
Ashland, the Ashland LOOP/LOCAP Interest) to any person
(other than a Transfer by operation of law pursuant to
Section 10.01(b), a Transfer to a Wholly Owned Subsidiary
pursuant to Section 10.01(d) or a Transfer by Ashland to
Marathon pursuant to Section 10.01(e)) if (i) it shall first
have offered the other Member the opportunity to purchase
such Membership Interests (and, in the case of Ashland, the
Ashland LOOP/LOCAP Interest) pursuant to the right of first
refusal procedures set forth in Section 10.04, (ii) such
sale is completed within the time periods specified in
Section 10.04, (iii) the other Member shall have approved
the purchaser of such Membership Interests (and, in the case
of Ashland, the Ashland LOOP/LOCAP Interest), which approval
shall not be unreasonably withheld or delayed and (iv) it
shall use its commercially reasonable best efforts to
(A) terminate the outstanding Original Lease underlying each
of its Designated Sublease Agreements on or prior to the
date of such Transfer and (B) contribute the related
Subleased Property to the Company or one of its subsidiaries
at no cost to the Company or such subsidiary on or prior to
the date of such Transfer; provided, however, that (i) such
Member shall not be obligated to pay more than a reasonable
amount as consideration therefor to, or make more than a
reasonable financial accommodation in favor of, or commence
litigation against, a third party lessor with respect to any
such underlying Original Lease in order to obtain any
consent required from such lessor and (ii) any additional
cost associated with exercising an option under the Original
Lease to purchase Subleased Property or to terminate the
Original Lease shall be deemed not to constitute an
obligation to pay more than a reasonable amount. In the
event that such Member is unable to terminate an outstanding
Original Lease in accordance with this Section 10.02(b),
then (i) the Company shall be entitled to continue to
sublease the Subleased Property pursuant to the related
Designated Sublease Agreement until the term of the Original
Lease expires, (ii) the Member shall continue to use its
commercially reasonable best efforts to terminate the
Original Lease and contribute the Subleased Property to the
Company as provided above; provided, however that (A) such
Member shall not be obligated to pay more than a reasonable
amount as consideration therefor to, or make more than a
reasonable financial accommodation in favor of, or commence
litigation against, a third party lessor with respect to any
such Original Lease in order to obtain any consent required
from such lessor and (b) any additional cost associated with
exercising an option under the Original Lease to purchase
Subleased Property or to terminate the Original Lease shall
be deemed not to constitute an obligation to pay more than a
reasonable amount and (iii) if such Member subsequently
acquires fee title to the Subleased Property, such Member
shall contribute such Subleased Property to the Company or
one of its subsidiaries at no cost to the Company or such
subsidiary at such time. It is expressly understood and
agreed that, in determining whether to reasonably withhold
its approval of a proposed purchaser of Marathon's
Membership Interests pursuant to this Section 10.01(c),
Ashland shall be entitled to consider the creditworthiness
of such proposed purchaser, including whether such proposed
purchaser is likely to be able to perform all of Marathon's
and USX's respective obligations under the Put/Call,
Registration Rights and Standstill Agreement.
(d) Transfer to Wholly Owned Subsidiary. A
Member may Transfer all (but not part) of its Membership
Interests at any time to a Wholly Owned Subsidiary of such
Member if (i) such Member shall have received an opinion
from nationally recognized tax counsel acceptable to both
Members that such Transfer will not result in a termination
of the status of the Company as a partnership for Federal
income tax purposes and (ii) the transferring Member enters
into an agreement with the other Member providing that so
long as such Wholly Owned Subsidiary holds such transferring
Member's Membership Interests, such Wholly Owned Subsidiary
shall remain a Wholly Owned Subsidiary of such transferring
Member.
(e) Transfer Pursuant to Put/Call, Registration
Rights and Standstill Agreement. Ashland may Transfer all
of its Membership Interests to Marathon in connection with
the exercise by Marathon of its Marathon Call Right or its
Special Termination Right or the exercise by Ashland of its
Ashland Put Right. In addition, Marathon may Transfer all
of its Membership Interests to Ashland in connection with
the exercise by Ashland of its Special Termination Right.
(f) Consequences of Permitted Transfers. (i) In
connection with any Transfer by a Member to a third party
transferee pursuant to Section 10.01(b), (A) such third
party transferee shall at the time of such Transfer become
subject to all of such transferring Member's obligations
hereunder and shall succeed to all of such transferring
Member's rights hereunder and (B) such transferring Member
shall be relieved of all of its obligations hereunder other
than with respect to any default hereunder by such
transferring Member or any of its Affiliates hereunder that
occurred prior to the time of such Transfer.
(ii) In connection with any Transfer by a Member
to a third party transferee or to the other Member
pursuant to Section 10.01(c), (A) such third party
transferee or such other Member shall at the time of
such Transfer become subject to all of such
transferring Member's obligations hereunder and shall
succeed to all of such transferring Member's rights
hereunder and (B) such transferring Member shall at the
time of such Transfer be relieved of all of its
obligations hereunder other than with respect to any
default hereunder by such transferring Member or any of
its Affiliates that occurred prior to the time of such
Transfer.
(iii) In connection with any Transfer by a Member
to a Wholly Owned Subsidiary of such Member pursuant to
Section 10.01(d), (A) such Wholly Owned Subsidiary
shall at the time of such Transfer become subject to
all of such Member's obligations hereunder and shall
succeed to all of such Member's rights hereunder and
(B) such Member shall not be relieved of its
obligations hereunder without the prior written consent
of the other Member, which consent shall not be
unreasonably withheld or delayed.
(iv) In connection with any Transfer by Ashland
to Marathon pursuant to Section 10.01(e), (A) Marathon
shall at the time of such Transfer become subject to
all of Ashland's obligations hereunder and shall
succeed to all of Ashland's rights hereunder and (B)
Ashland shall at the time of such Transfer be relieved
of all of its obligations hereunder other than with
respect to any default hereunder by Ashland or any of
its Affiliates that occurred prior to the Exercise Date
(as such term is defined in the Put/Call, Registration
Rights and Standstill Agreement).
(v) In connection with any Transfer by Marathon
to Ashland pursuant to Section 10.01(e), (A) Ashland
shall at the time of such Transfer become subject to
all of Marathon's obligations hereunder and shall
succeed to all of Marathon's rights hereunder and (B)
Marathon shall at the time of such Transfer be relieved
of all of its obligations hereunder other than with
respect to any default hereunder by Marathon or any of
its Affiliates that occurred prior to the Special
Termination Exercise Date (as such term is defined in
the Put/Call, Registration Rights and Standstill
Agreement).
(vi) In connection with any Transfer by Ashland
to a third party transferee pursuant to Section
10.01(b), 10.01(c) or 10.01(d), such third party
transferee shall at the time of such Transfer succeed
to all of Ashland's veto rights under Section 9.02(c);
provided, that if Ashland Transfers its Membership
Interests to a third party transferee pursuant to
Section 10.01(c), such third party transferee shall not
thereafter be permitted to transfer its veto rights
under Section 9.02(c) to another third party transferee
pursuant to Section 10.01(c).
(vii) In connection with any Transfer by a Member
to a third party transferee pursuant to this Article X,
such transferring Member shall retain all of the rights
granted to a Member under Article VII to examine the
books and records of the Company and to receive
financial statements and reports prepared by the
Company until such time following such Transfer as such
transferring Member ceases to have any liability under
Article IX of the Asset Transfer and Contribution
Agreement.
(g) Consequences of an Unpermitted Transfer. Any
Transfer of a Member's Membership Interests made in
violation of the applicable provisions of this Agreement
shall be void and without legal effect.
SECTION 10.02. Conditions for Admission. No
transferee of all of the Membership Interests of any Member
shall be admitted as a Member hereunder unless (a) such
Membership Interests are Transferred to a person in
compliance with the applicable provisions of this Agreement,
(b) such transferee shall have executed and delivered to the
Company such instruments as the Board of Managers deems
necessary or desirable in its reasonable discretion to
effectuate the admission of such transferee as a Member and
to confirm the agreement of such transferee or recipient to
be bound by all the terms and provisions of this Agreement
with respect to the Membership Interests acquired by such
transferee and (c) such transferee shall have executed and
delivered an assignment and assumption agreement pursuant to
Section 15.04 of the Put/Call, Registration Rights and
Standstill Agreement.
SECTION 10.03. Allocations and Distributions.
Subject to applicable Treasury Regulations, upon the
Transfer of all the Membership Interests of a Member as
herein provided, the Profit or Loss of the Company
attributable to the Membership Interests so transferred for
the Fiscal Year during which such Transfer occurs shall be
allocated between the transferor and transferee as of the
date set forth on the written assignment, and such
allocation shall be based upon any permissible method agreed
to by the Members that is provided for in Code Section 706
and the Treasury Regulations issued thereunder. Except as
otherwise expressly provided in Section 5.01 of the
Put/Call, Registration Rights and Standstill Agreement,
distributions shall be made to the holder of record of the
Membership Interests on the date of distribution.
SECTION 10.04. Right of First Refusal. (a) If a
Member (the "Selling Member") shall desire to sell all (but
not part) of its Membership Interests (which, for purposes
of this Section 10.04, shall be deemed to include, in the
case of Ashland, the Ashland LOOP/LOCAP Interest) pursuant
to Section 10.01(c), then the Selling Member shall give
notice (the "Offer Notice") to the other Member, identifying
the proposed purchaser from whom it has received a bona fide
offer and setting forth the proposed sale price (which shall
be payable only in cash or purchase money obligations
secured solely by the Membership Interests being sold) and
the other material terms and conditions upon which the
Selling Member is proposing to sell such Membership
Interests to such proposed purchaser. No such sale shall
encompass or be conditioned upon the sale or purchase of any
property other than such Membership Interests (other than,
in the case of Ashland, the Ashland LOOP/LOCAP Interest).
The other Member shall have 30 days from receipt of the
Offer Notice to elect, by notice to the Selling Member, to
purchase the Membership Interests offered for sale on the
terms and conditions set forth in the Offer Notice.
(b) If a Member makes such election, the notice
of election shall state a closing date not later than
60 days after the date of the Offer Notice. If such Member
breaches its obligation to purchase the Membership Interests
of the Selling Member on the same terms and conditions as
those contained in the Offer Notice after giving notice of
its election to make such purchase (other than where such
breach is due to circumstances beyond such Member's
reasonable control), then, in addition to all other remedies
available, the Selling Member may, at any time for a period
of 270 days after such default, sell such Membership
Interests to any person at any price and upon any other
terms without further compliance with the procedures set
forth in Section 10.04.
(c) If the other Member gives notice within the
30-day period following the Offer Notice from the Selling
Member that it elects not to purchase the Membership
Interests, the Selling Member may, within 120 days after the
end of such 30-day period (or 270 days in the case where
such parties have received a second request under HSR), sell
such Membership Interests to the identified purchaser
(subject to clause (iii) of Section 10.01(c)) on terms and
conditions no less favorable to the Selling Member than the
terms and conditions set forth in such Offer Notice. In the
event the Selling Member shall desire to offer the
Membership Interests for sale on terms and conditions less
favorable to it than those previously set forth in an Offer
Notice, the procedures set forth in this Section 10.04 must
again be initiated and applied with respect to the terms and
conditions as modified.
SECTION 10.05. Restriction on Resignation or
Withdrawal. Except in connection with a Transfer permitted
pursuant to Section 10.01, neither Member shall resign or
withdraw from the Company without the consent of the other
Member. Any purported resignation or withdrawal from the
Company in violation of this Section 10.05 shall be null and
void and of no force or effect.
ARTICLE XI
Liability, Exculpation and Indemnification
SECTION 11.01. Liability. Except as otherwise
provided by the Delaware Act, the debts, obligations and
liabilities of the Company, whether arising in contract,
tort or otherwise, shall be solely the debts, obligations
and liabilities of the Company, and no Covered Person shall
be obligated personally for any such debt, obligation or
liability of the Company solely by reason of being a Covered
Person.
SECTION 11.02. Exculpation. (a) No Covered
Person shall be liable to the Company or any other Covered
Person for any cost, expense, loss, damage, claim or
liability incurred by reason of any act or omission
performed or omitted by such Covered Person in such
capacity, whether or not such person continues to be a
Covered Person at the time of such cost, expense, loss,
damage, claim or liability is incurred or imposed, if the
Covered Person acted in good faith and in a manner the
Covered Person reasonably believed to be in or not opposed
to the best interests of the Company, and if, with respect
to any criminal action or proceeding, such Covered Person
had no reasonable cause to believe its conduct was unlawful,
except that a Covered Person shall be liable for any such
cost, expense, loss, damage, claim or liability incurred by
reason of such Covered Person's breach of Section 12.02.
(b) A Covered Person shall be fully protected in
relying in good faith upon the records of the Company and
upon such information, opinions, reports or statements
presented to the Company by any person as to any matters the
Covered Person reasonably believes are within such other
person's professional or expert competence and who has been
selected with reasonable care by or on behalf of the
Company, including information, opinions, reports or
statements as to the value and amount of the assets,
liabilities, profits, losses, or any other facts pertinent
to the existence and amount of assets from which
distributions to Members might properly be paid.
SECTION 11.03. Indemnification. (a) To the
fullest extent permitted by Applicable Law, a Covered Person
shall be entitled to indemnification from the Company for
any reasonable cost and expense, loss, damage, claim or
liability incurred by such Covered Person in connection with
any pending, threatened or completed claim, action, suit or
proceeding by reason of being a Covered Person or by reason
of any act or omission performed or omitted by such Covered
Person in such capacity, whether or not such person
continues to be a Covered Person at the time such cost,
expense, loss, damage, claim or liability is incurred or
imposed, if the Covered Person (i) has been successful on
the merits or otherwise with respect to such claim, action,
suit or proceeding, or (ii) acted in good faith and in a
manner the Covered Person reasonably believed to be in or
not opposed to the best interests of the Company, and if,
with respect to any criminal action or proceeding, such
Covered Person had no reasonable cause to believe its
conduct was unlawful, except that no Covered Person shall be
entitled to be indemnified in respect of any such cost,
expense, loss, damage, claim or liability incurred by such
Covered Person by reason of such Covered Person's breach of
Section 12.02 with respect to such acts or omissions;
provided, however, that any indemnity under this Section
11.03 shall be provided out of and to the extent of Company
assets only, and no Covered Person shall have any personal
liability on account of such indemnification of any other
Covered Person, and provided further that, in the case of
officers, employees and agents of the Company, such right to
indemnification shall be subject to any further limitations
or requirements that may be adopted by the Board of
Managers, provided such limitations or requirements were
adopted prior to the events that gave rise to the claim for
indemnification.
(b) Expenses incurred with respect to any claim,
action, suit or proceeding of the character described in
Section 11.03(a) shall be advanced to a Covered Person by
the Company prior to the final disposition thereof, but the
Covered Person shall be obligated to repay such advances if
it is ultimately determined that the Covered Person is not
entitled to indemnification under Section 11.03(a). As a
condition to advancing expenses hereunder, the Company may
require the Covered Person to sign a written instrument
acknowledging his obligation to repay any advances hereunder
if it is ultimately determined he is not entitled to such
indemnity.
(c) Notwithstanding anything in this Section
11.03 to the contrary, no Covered Person shall be
indemnified in respect of any claim, action, suit or
proceeding initiated by such Covered Person or his personal
or legal representative, or which involved the voluntary
solicitation or intervention of such person or his personal
or legal representative (other than an action to enforce
indemnification rights hereunder or any action initiated
with the approval of a majority of the Board of Managers).
(d) The rights of indemnification provided in
this Section 11.03 shall be in addition to any other rights
to which any Covered Person may otherwise be entitled to by
contract or otherwise; and in the event of any Covered
Person's death, such rights shall extend to such Covered
Person's heirs and personal representatives.
ARTICLE XII
Fiduciary Duties
SECTION 12.01. Duties and Liabilities of Covered
Persons. To the extent that, at law or in equity, a Covered
Person has duties (including fiduciary duties) and
liabilities relating thereto to the Company or to any other
Covered Person, a Covered Person acting under this Agreement
shall not be liable to the Company or to any other Covered
Person for its good faith reliance on the provisions of this
Agreement. The provisions of this Agreement, to the extent
that they expand or restrict the duties and liabilities of a
Covered Person otherwise existing at law or in equity, are
agreed by the parties hereto to replace such other duties
and liabilities of such Covered Person.
SECTION 12.02. Fiduciary Duties of Members of the
Company and Members of the Board of Managers. Each Member
and each member of the Board of Managers shall have the
fiduciary duties of loyalty and care (similar to the
fiduciary duties of loyalty and care of directors of a
business corporation governed by the General Corporation Law
of the State of Delaware) to the Company and all of the
Members. Notwithstanding any provision of this Agreement to
the contrary, each Member and each member of the Board of
Managers agrees to and shall exercise good faith, fairness
and loyalty to the Company and to all of the Members, and
shall make all decisions in a manner that such Member or
such member of the Board of Managers reasonably believes to
be in the best interest of the Company and all of the
Members. Notwithstanding the foregoing, this Section 12.02
is not intended to limit a Member's ability to exercise or
enforce any of its rights and remedies under this Agreement
and the other Transaction Documents in good faith,
including, without limitation, Article IX of the Asset
Transfer and Contribution Agreement.
ARTICLE XIII
Dispute Resolution Procedures
SECTION 13.01. General. All controversies,
claims or disputes between the Members or between the
Company and either Member that arise out of or relate to
this Agreement or the construction, interpretation,
performance, breach, termination, enforceability or validity
of this Agreement, or the commercial, economic or other
relationship of the parties hereto, whether such claim is
based on rights, privileges or interests recognized by or
based upon statute, contract, tort, common law or otherwise
and whether such claim existed prior to or arises on or
after January 1, 1998 (a "Dispute") shall be resolved in
accordance with the provisions of this Article XIII (except
as otherwise expressly provided in Sections 6.06 and 6.08).
Notwithstanding anything to the contrary contained in this
Article XIII, nothing in this Article XIII shall limit the
ability of the directors and officers of either Member from
communicating directly with the directors and officers of
the other Member.
SECTION 13.02. Dispute Notice and Response.
Either Member may give the other Member written notice
(a "Dispute Notice") of any Dispute which has not been
resolved in the normal course of business. Within fifteen
Business Days after delivery of the Dispute Notice, the
receiving Member shall submit to the other Member a written
response (the "Response"). The Dispute Notice and the
Response shall each include (i) a statement setting forth
the position of the Member giving such notice, a summary of
the arguments supporting such position and, if applicable,
the relief sought and (ii) the name and title of a senior
manager of such Member who has authority to settle the
Dispute and will be responsible for the negotiations related
to the settlement of the Dispute (the "Senior Manager").
SECTION 13.03. Negotiation Between Senior
Managers. (a) Within 10 days after delivery of the
Response provided for in Section 13.02, the Senior Managers
of both Members shall meet or communicate by telephone at a
mutually acceptable time and place, and thereafter as often
as they reasonably deem necessary, and shall negotiate in
good faith to attempt to resolve the Dispute that is the
subject of such Dispute Notice. If such Dispute has not
been resolved within 45 days after delivery of the Dispute
Notice, then the Members shall attempt to settle the Dispute
pursuant to Section 13.04.
(b) All negotiations between the Senior Managers
pursuant to this Section 13.03 shall be treated as
compromise and settlement negotiations. Nothing said or
disclosed, nor any document produced, in the course of such
negotiations which is not otherwise independently
discoverable shall be offered or received as evidence or
used for impeachment or for any other purpose in any current
or future arbitration or litigation.
SECTION 13.04. Negotiation Between Chief
Executive Officer and President. (a) If the Dispute has
not been resolved by negotiation between the Senior Managers
pursuant to Section 13.03, then within 10 Business Days
after the expiration of the 45 day period provided in
Section 13.03, the Chief Executive Officer of Ashland and
the President of Marathon shall meet or communicate by
telephone at a mutually acceptable time and place, and
thereafter as often as they reasonably deem necessary, and
shall negotiate in good faith to attempt to resolve the
Dispute that is the subject of such Dispute Notice. If such
Dispute has not been resolved within 20 Business Days after
the expiration of the 45 day period provided in
Section 13.03, then (i) if the Dispute relates solely to
(A) a claim by a Member or the Board of Managers that the
other Member has failed to pay the Company a Designated
Sublease Amount or an amount in respect of a Member-Funded
Capital Expenditure, a Member-Funded Indemnity Expenditure
or an Agreed Additional Capital Contribution required to be
made by it pursuant to Section 4.02 (a "Disputed Capital
Contribution Amount"), (B) the determination of any of the
following amounts with respect to any period: distributions
pursuant to Article V; the Aggregate Tax Rate; Adjusted
DD&A; Adjusted EBITDA; EBITDA; Distributable Cash; the
Average Annual Level and adjustments to Adjustable Amounts;
the Normal Annual Capital Budget Amount; Ordinary Course
Lease Expenses; Profit and Loss; the Tax Distribution
Amount; the Tax Liability of any Member; and the
determination of fair market value of property distributed
in kind under Section 15.03, (C) the resolution of any
dispute arising under Section 8.11(b) with respect to
Affiliate Transactions or (D) the resolution of any dispute
arising under Section 8.12 with respect to certain Affiliate
Transactions related to Crude Oil Purchases and Shared
Services (any Dispute relating to any of the matters set
forth in clause (A), (B), (C) or (D) above being referred to
herein as an "Arbitratable Dispute"), such Dispute shall be
settled pursuant to the arbitration procedures set forth in
Appendix B and (ii) if the Dispute does not relate primarily
to an Arbitratable Dispute, each party hereto shall be
permitted to take such actions at law or in equity as it is
otherwise permitted to take or as may be available under
Applicable Law.
(b) All negotiations between the Chief Executive
Officer of Ashland and the President of Marathon pursuant
to this Section 13.04 shall be treated as compromise and
settlement negotiations. Nothing said or disclosed, nor any
document produced, in the course of such negotiations which
is not otherwise independently discoverable shall be offered
or received as evidence or used for impeachment or for any
other purpose in any current or future arbitration or
litigation.
SECTION 13.05. Right to Equitable Relief
Preserved. Notwithstanding anything in this Agreement or
Appendix B to the contrary, either Member or the Company may
at any time seek from any court of the United States located
in the State of Delaware or from any Delaware state court,
any interim, provisional or injunctive relief that may be
necessary to protect the rights or property of such party or
maintain the status quo before, during or after the pendency
of the negotiation process or the arbitration proceeding or
any other proceeding contemplated by Section 13.03 or 13.04.
ARTICLE XIV
Rights and Remedies with Respect to Monetary Disputes
SECTION 14.01. Ability of Company to Borrow to
Fund Disputed Monetary Amounts. (a) If the Company or a
Member on behalf of the Company (a "Non-Delinquent Member")
claims that the other Member (a "Delinquent Member") owes
the Company a monetary amount in respect of either (i) a
Disputed Capital Contribution Amount or (ii) an
indemnification obligation under Article IX of the Asset
Transfer and Contribution Agreement that the Company or the
Non-Delinquent Member claims the Delinquent Member owes the
Company and is either (A) past due or (B) in dispute
(a "Disputed Indemnification Amount") (each such claim
described in clauses (i) and (ii) above being a "Monetary
Dispute", and each such claimed amount being a "Disputed
Monetary Amount"), and if (1) the Disputed Monetary Amount
itself, or when added together all other Disputed Monetary
Amounts, exceeds $7.5 million; (2) the Board of Managers (by
vote of a majority of the Representatives of the
Non-Delinquent Member at a special or regular meeting of the
Board of Managers (which majority shall constitute a quorum
for purposes of the transaction of such business)) has
determined that an out-of-pocket disbursement of such
Disputed Monetary Amount or any portion thereof by the
Company or one of its subsidiaries within the next twelve
months is reasonably necessary for the operation and conduct
of the Company's Business and, accordingly, that such amount
should be paid within the next twelve months; (3) the
aggregate amount of all Disputed Monetary Amounts (or
portions thereof) that the Board of Managers shall have
determined pursuant to clause (2) above should be paid
within the next twelve months (such aggregate amount being
the "Additional Required Cash Amount") exceeds $7.5 million;
(4) postponement by the Company or such subsidiary of such
disbursement until such time as the Monetary Dispute is
reasonably likely to be finally resolved pursuant to an
arbitration proceeding in accordance with Appendix B to this
Agreement or Appendix B to the Asset Transfer and
Contribution Agreement, as applicable (an "Arbitration
Proceeding"), would have, or would reasonably be expected to
have, a Material Adverse Effect on the Company's Business;
and (5) the Delinquent Member has not paid the Company the
Disputed Monetary Amount pursuant to Section 14.02 or
otherwise, then the Board of Managers (by vote of a majority
of the Representatives of the Non-Delinquent Member at a
special or regular meeting of the Board of Managers (which
majority shall constitute a quorum for purposes of the
transaction of such business)) shall be permitted to cause
the Company to incur an amount of Indebtedness equal to such
Additional Required Cash Amount, which Indebtedness may be
borrowed from a third party or the Non-Delinquent Member.
(b) If the Non-Delinquent Member lends the Company
the Additional Required Cash Amount pursuant to Section
14.01(a), then (i) the amount actually lent by the
Non-Delinquent Member (the "Advanced Amount") and all
accrued interest thereon shall be due and payable on the
Arbitration Payment Due Date (provided that the Company
shall be permitted to prepay the Advanced Amount in whole or
in part at any time prior to such date); and (ii) the
Advanced Amount shall bear interest at the Base Rate from
the date on which such advance is made until the date that
the Advanced Amount, together with all interest accrued
thereon, is repaid to the Non-Delinquent Member.
SECTION 14.02. Interim Payment of Disputed
Monetary Amount. In order to reduce the amount of
liquidated damages that a Delinquent Member would be
required to pay to the Company pursuant to Section 14.03 in
the event that such Delinquent Member loses in an
Arbitration Proceeding with respect to a Monetary Dispute,
the Delinquent Member shall be permitted to pay the Company
the related Disputed Monetary Amount prior to the
commencement of such Arbitration Proceeding. The
Arbitration Tribunal or Sole Arbitrator, as applicable,
shall not take into consideration in determining the
liability of the Delinquent Member, a decision by such
Delinquent Member to pay the Disputed Monetary Amount prior
to the commencement of the Arbitration Proceeding.
SECTION 14.03. Liquidated Damages. (a) No
Interim Payment of Disputed Monetary Amount--Delinquent
Member is Found Liable for Final Monetary Amount. If (i) it
is finally determined in an Arbitration Proceeding that a
Delinquent Member owes the Company a monetary amount in
respect of (A) a Disputed Capital Contribution Amount or
(B) a Disputed Indemnification Amount (each such finally
determined amount being a "Final Monetary Amount") and
(ii) the Delinquent Member had not paid the Company the
Disputed Monetary Amount prior to the commencement of such
Arbitration Proceeding pursuant to Section 14.02, then the
Delinquent Member shall promptly, and in any event on or
before the tenth Business Day following the date on which
the Arbitration Tribunal or Sole Arbitrator makes its final
determination (such tenth Business Day being the
"Arbitration Payment Due Date"), pay to the Company (A) the
Final Monetary Amount, together with interest, accrued from
the commencement of the Arbitration Proceeding to the date
that the Delinquent Member pays the Final Monetary Amount to
the Company, on the Final Monetary Amount, at a rate per
annum equal to (1) during the period from the commencement
of the Arbitration Proceeding to the Arbitration Payment Due
Date, the Prime Rate and (2) at any time thereafter, 150% of
the Prime Rate, in each case, with daily accrual of
interest, plus (B) an amount equal to 25% of the Final
Monetary Amount.
(b) Interim Payment of Disputed Monetary Amount--
Delinquent Member is Found Liable for the Same Amount. If
(i) it is finally determined in an Arbitration Proceeding
that a Delinquent Member owes the Company a Final Monetary
Amount, (ii) the Final Monetary Amount is equal to the
Disputed Monetary Amount and (iii) the Delinquent Member had
paid the Company the Disputed Monetary Amount prior to the
commencement of such Arbitration Proceeding pursuant to
Section 14.02, then if the Final Monetary Amount is equal to
the Disputed Monetary Amount, the Delinquent Member shall
not owe the Company any other amount in respect of the
Monetary Dispute.
(c) Interim Payment of Disputed Monetary Amount--
Delinquent Member is Found Liable for a Greater Amount. If
(i) it is finally determined in an Arbitration Proceeding
that a Delinquent Member owes the Company a Final Monetary
Amount, (ii) the Final Monetary Amount is greater than the
Disputed Monetary Amount and (iii) the Delinquent Member had
paid the Company the Disputed Monetary Amount prior to the
commencement of such Arbitration Proceeding pursuant to
Section 14.02, then the Delinquent Member shall promptly,
and in any event on or before the Arbitration Payment Due
Date, pay to the Company an amount (an "Additional Monetary
Amount") equal to (A) the Final Monetary Amount less (B) the
Disputed Monetary Amount, together with interest, accrued
from the commencement of the Arbitration Proceeding to the
date that the Delinquent Member pays the Additional Monetary
Amount to the Company, on the Additional Monetary Amount, at
a rate per annum equal to (1) during for the period from the
commencement of the Arbitration Proceeding to the
Arbitration Payment Due Date, the Prime Rate and (2) at any
time thereafter, 150% of the Prime Rate, in each case, with
daily accrual of interest.
(d) Interim Payment of Disputed Monetary Amount--
Delinquent Member is Found Liable for a Lesser Amount. If
(i) it is finally determined in an Arbitration Proceeding
that a Delinquent Member owes the Company a Final Monetary
Amount, (ii) the Final Monetary Amount is less than the
Disputed Monetary Amount and (iii) the Delinquent Member had
paid the Company the Disputed Monetary Amount prior to the
commencement of such Arbitration Proceeding, then the
Company shall promptly, and in any event on or before the
Arbitration Payment Due Date, repay to the Delinquent Member
an amount (a "Refundable Amount") equal to (A) the Disputed
Monetary Amount less (B) the Final Monetary Amount, together
with interest, accrued from the commencement of the
Arbitration Proceeding to the date that the Company repays
the Refundable Amount to the Delinquent Member, on the
Refundable Amount, at a rate per annum equal to (1) during
the period from the commencement of the Arbitration
Proceeding to the Arbitration Payment Due Date, the Prime
Rate and (2) at any time thereafter, 150% of the Prime Rate,
in each case, with daily accrual of interest.
(e) Interim Payment of Disputed Monetary Amount--
Delinquent Member is Found Not Liable for Disputed Monetary
Amount. If (i) it is finally determined in an Arbitration
Proceeding that a Delinquent Member does not owe the Company
the related Disputed Monetary Amount and (ii) the Delinquent
Member had paid the Company the Disputed Monetary Amount
prior to the commencement of such Arbitration Proceeding,
then the Company shall promptly, and in any event on or
before the Arbitration Payment Due Date, repay to the
Delinquent Member an amount equal to the Disputed Monetary
Amount, together with interest, accrued from the
commencement of the Arbitration Proceeding to the date that
the Company repays the Disputed Monetary Amount to the
Delinquent Member, on the Disputed Monetary Amount, at a
rate per annum equal to (A) during the period from the
commencement of the Arbitration Proceeding to the
Arbitration Payment Due Date, the Prime Rate and (B) at any
time thereafter, 150% of the Prime Rate, in each case, with
daily accrual of interest.
SECTION 14.04. Right of Set-Off. Notwithstanding
any provision to the contrary contained in this Agreement,
if at the time of a Distribution Date a Delinquent Member
has failed to pay the Company an amount that it was required
pursuant to Section 14.03 to pay to the Company on or before
such Distribution Date, then on such Distribution Date, the
Company shall be permitted to set off from the distribution
that it would otherwise be required to make to such
Delinquent Member pursuant to Section 5.01 on such
Distribution Date, an amount equal to such unpaid amount.
If the amount of the distribution that such Delinquent
Member was otherwise entitled to receive pursuant to
Section 5.01 on such Distribution Date is less than the
aggregate amount that such Delinquent Member owes to the
Company pursuant to Section 14.03, then the Company shall be
permitted to set off from subsequent distributions that it
would otherwise make to such Delinquent Member pursuant to
Section 5.01 the remaining unpaid amount until such time as
such remaining unpaid amount shall have been paid in full.
A Delinquent Member's interest in distributions to be made
to such Delinquent Member pursuant to Section 5.01 shall be
reduced by any amount set off by the Company against such
distributions pursuant to this Section 14.04(a).
SECTION 14.05. Security Interest. (a) Each
Member hereby agrees that if (i) it has failed to pay the
Company an amount that it was required to pay to the Company
pursuant to Section 14.03 on or prior to the related
Arbitration Payment Due Date, and (ii) the Board of Managers
(by vote of a majority of the Representatives of the other
Member at a special or regular meeting of the Board of
Managers (which majority shall constitute a quorum for
purposes of the transaction of such business) so requests,
such Member shall (A) on the Business Day next following
such Arbitration Payment Due Date, grant to the Company, as
security for the performance of its obligation to pay the
Company such amount owed (but for no other amount), a first
priority security interest in its Membership Interests and
the proceeds thereof (a "Security Interest"), all under the
Uniform Commercial Code of the State of Delaware and (ii)
promptly thereafter, execute and deliver to the Company all
financing statements and other instruments that the Board of
Managers (by vote of a majority of the Representatives of
the other Member at a special or regular meeting of the
Board of Managers (which majority shall constitute a quorum
for purposes of the transaction of such business)) may
request to effectuate and carry out the preceding provisions
of this Section 14.05(a). The Company shall be entitled to
all the rights and remedies of a secured party under the
Uniform Commercial Code of the State of Delaware with
respect to any Security Interest granted by such Member. At
the option of the Company, this Agreement or a carbon,
photographic, or other copy hereof may serve as a financing
statement with respect to any such Security Interest. For
purposes of perfecting a Security Interest, a Member's
Membership Interests shall be deemed to be a "security"
governed by Chapter 8 of the Delaware Uniform Commercial
Code and as such term is therein defined in Section 8-102(c)
thereunder.
(b) If the Company incurs Indebtedness pursuant
to Section 14.01 by borrowing from a Non-Delinquent Member,
the Company shall be permitted to assign all its rights with
respect to a Security Interest granted to it pursuant to
Section 14.05(a) to such Non-Delinquent Member as security
for such Indebtedness; provided that such Non-Delinquent
Member shall not be permitted to assign such Security
Interest to a third party.
ARTICLE XV
Dissolution and Termination
SECTION 15.01. Dissolution. The Company shall be
dissolved and its business and affairs wound up upon the
earliest to occur of any one of the following events:
(a) the expiration of the Term of the Company;
(b) the sale or other disposition of all or
substantially all the property of the Company;
(c) the written consent of both Members;
(d) the unanimous agreement of all Representatives
on the Board of Managers;
(e) the bankruptcy, involuntary liquidation or
dissolution of either Member; or
(f) the entry of a decree of judicial dissolution
pursuant to Section 18-802 of the Delaware Act.
The bankruptcy, involuntary liquidation of dissolution of a
Member shall cause a Member to cease to be a member of the
Company. Notwithstanding the foregoing, the Company shall
not be dissolved and its business and affairs shall not be
wound up upon the occurrence of any event specified in
(i) clause (e) above if within 90 days after the date on
which such event occurs, the remaining Member elects in
writing to continue the business of the Company or (ii)
clause (a) above if a Non-Terminating Member purchases the
Membership Interests of the Terminating Member pursuant to
its Special Termination Right. Except as provided in this
paragraph and Section 15.01(e), and to the fullest extent
permitted by the Delaware Act, the occurrence of an event
that causes a Member to cease to be a member of the Company
shall not cause the Company to be dissolved or its business
or affairs to be wound up, and upon the occurrence of such
an event, the business of the Company shall continue without
dissolution.
SECTION 15.02. Winding Up of Company. Upon
dissolution, the Company's business shall be liquidated in
an orderly manner. The Board of Managers shall act as the
liquidating trustee (unless the Board of Managers elects to
appoint a liquidating trustee) to wind up the affairs of the
Company pursuant to this Agreement. In performing its
duties, the liquidating trustee is authorized to sell,
distribute, exchange or otherwise dispose of the assets of
the Company in accordance with the Delaware Act and in any
reasonable manner that the liquidating trustee shall
determine to be in the best interest of the Members or their
successors-in-interest.
SECTION 15.03. Distribution of Property. In the
event the Board of Managers determines that it is necessary
in connection with the liquidation of the Company to make a
distribution of property in kind, such property shall be
transferred and conveyed to the Members so as to vest in
each of them as a tenant in common an undivided interest in
the whole of such property equal to their interests in the
property based upon the amount of cash that would be
distributed to each of the Members in accordance with
Article V if such property were sold for an amount of cash
equal to the fair market value of such property, as
determined and approved by the Board of Managers pursuant to
a vote in accordance with Section 8.07(b).
SECTION 15.04. Time Limitation. Any liquidating
distribution pursuant to this Article XV shall be made no
later than the later of (a) the end of the taxable year
during which such liquidation occurs and (b) 90 days after
the date of such liquidation.
SECTION 15.05. Termination of Company. The
Company shall terminate when all assets of the Company,
after payment of or due provision for all debts, liabilities
and obligations of the Company, shall have been distributed
to the Members in the manner provided for in this Agreement,
and the Certificate of Formation shall have been canceled in
the manner provided by the Delaware Act.
ARTICLE XVI
Miscellaneous
SECTION 16.01. Notices. Any notice, consent or
approval to be given under this Agreement shall be in
writing and shall be deemed to have been given if delivered:
(i) personally by a reputable courier service that requires
a signature upon delivery; (ii) by mailing the same via
registered or certified first-class mail, postage prepaid,
return receipt requested; or (iii) by telecopying the same
with receipt confirmation (followed by a first-class mailing
of the same) to the intended recipient. Any such writing
will be deemed to have been given: (a) as of the date of
personal delivery via courier as described above; (b) as of
the third calendar day after depositing the same into the
custody of the postal service as evidenced by the
date-stamped receipt issued upon deposit of the same into
the mails as described above; and (c) as of the date and
time electronically transmitted in the case of telecopy
delivery as described above, in each case addressed to the
intended party at the address set forth below:
To the Board of Managers:
Marathon Ashland Petroleum LLC
539 South Main Street
Findlay, Ohio 45840
Attn: General Counsel
Phone: (419) 422-2121
Fax: (419) 421-4115
To Marathon:
Marathon Oil Company
5555 San Felipe
P.O. Box 3128
Houston, TX 77056-2723
Attn: General Counsel
Phone: (713) 296-4137
Fax: (713) 296-4171
To Ashland:
Ashland Inc.
50 E. RiverCenter Boulevard
P.O. Box 391
Covington, KY 41012-0391
Attn: General Counsel
Phone: (606) 815-4711
Fax: (606) 815-3823
Any party may designate different addresses or telecopy
numbers by notice to the other parties.
SECTION 16.02. Merger and Entire Agreement. This
Agreement (including the Exhibits, Schedules and Appendices
attached hereto), together with the other Transaction
Documents (including the exhibits, schedules and appendices
thereto) and certain other agreements executed
contemporaneously with the Master Formation Agreement
constitutes the entire Agreement of the parties hereto and
supersedes any prior understandings, agreements, or
representations by or among the parties hereto, written or
oral, to the extent they relate in any way to the subject
matter hereof.
SECTION 16.03. Assignment. A party hereto shall
not assign all or any of its rights, obligations or benefits
under this Agreement to any third party otherwise than
(i) in connection with a Transfer of its Membership
Interests pursuant to Article X, (ii) with the prior written
consent of the other party hereto, which consent may be
withheld in such party's sole discretion, (iii) the granting
by a Member of a Security Interest to the Company pursuant
to Section 14.05 or (iv) pursuant to Article V of the
Put/Call, Registration Rights and Standstill Agreement, and
any attempted assignment not in compliance with this
Section 16.03 shall be void ab initio.
SECTION 16.04. Parties in Interest. This
Agreement shall inure to the benefit of, and be binding
upon, the parties hereto and their respective successors,
legal representatives and permitted assigns.
SECTION 16.05. Counterparts. This Agreement may
be executed in counterparts, each of which shall be deemed
an original, but all of which together shall constitute one
and the same instrument.
SECTION 16.06. Amendment; Waiver. This Agreement
may not be amended except in a written instrument signed by
each of the parties hereto and expressly stating it is an
amendment to this Agreement. Any failure or delay on the
part of any party hereto in exercising any power or right
hereunder shall not operate as a waiver thereof, nor shall
any single or partial exercise of any such right or power
preclude any other or further exercise thereof or the
exercise of any other right or power hereunder or otherwise
available at law or in equity.
SECTION 16.07. Severability. If any term,
provision, covenant, or restriction of this Agreement or the
application thereof to any person or circumstance, at any
time or to any extent, is held by a court of competent
jurisdiction or other Governmental Authority to be invalid,
void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement (or
the application of such provision in other jurisdictions or
to persons or circumstances other than those to which it was
held invalid or unenforceable) shall in no way be affected,
impaired or invalidated, and to the extent permitted by
Applicable Law, any such term, provision, covenant or
restriction shall be restricted in applicability or reformed
to the minimum extent required for such to be enforceable.
This provision shall be interpreted and enforced to give
effect to the original written intent of the parties hereto
prior to the determination of such invalidity or
unenforceability.
SECTION 16.08. GOVERNING LAW. THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO THE
PRINCIPLES OF CONFLICTS OF LAW THEREOF. THIS AGREEMENT
SHALL BE CONSTRUED IN ACCORDANCE WITH SECTION 18-1101 OF THE
DELAWARE ACT. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO
ANY CLAIM OR PROCEEDING RELATED TO OR ARISING OUT OF THIS
AGREEMENT, OR ANY TRANSACTION OR CONDUCT IN CONNECTION
HEREWITH, IS WAIVED.
SECTION 16.09. Enforcement. The parties hereto
agree that irreparable damage would occur in the event that
any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties hereto
shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the
terms and provisions of this Agreement in the Delaware
Chancery Court; provided that if the Delaware Chancery Court
does not have jurisdiction with respect to such matter, the
parties hereto shall be entitled to enforce specifically the
terms and provisions of this Agreement in any court of the
United States located in the State of Delaware or in
Delaware state court, this being in addition to any other
remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (i) consents to submit
itself to the personal jurisdiction of the Delaware Chancery
Court in the event that any dispute arises out of this
Agreement or any of the transactions contemplated by this
Agreement; provided that if the Delaware Chancery Court does
not have jurisdiction with respect to any such dispute, such
party consents to submit itself to the personal jurisdiction
of any Federal court located in the State of Delaware or any
Delaware state court, (ii) agrees to appoint and maintain an
agent in the State of Delaware for service of legal process,
(iii) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave
from any such court, (iv) agrees that it will not plead or
claim in any such court that any action relating to this
Agreement or any of the transactions contemplated by this
Agreement in any such court has been brought in an
inconvenient forum and (v) agrees that it will not initiate
any action relating to this Agreement or any of the
transactions contemplated by this Agreement in any court
other than (1) the Delaware Chancery Court, or (2) if the
Delaware Chancery Court does not have jurisdiction with
respect to such action, a Federal court sitting in the State
of Delaware or a Delaware state court.
SECTION 16.10. Creditors. None of the provisions
of this Agreement shall be for the benefit of or enforceable
by any creditor of the Company or of any Member.
SECTION 16.11. No Bill for Accounting. In no
event shall either Member have any right to file a bill for
an accounting or any similar proceeding.
SECTION 16.12. Waiver of Partition. Each Member
hereby waives any right to partition of the Company
property.
SECTION 16.13. Table of Contents, Headings and
Titles. The table of contents and section headings of this
Agreement and titles given to Exhibits and Schedules to this
Agreement are for reference purposes only and are to be
given no effect in the construction or interpretation of
this Agreement.
SECTION 16.14. Use of Certain Terms; Rules of
Construction. As used in this Agreement, the words
"herein", "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to
any particular paragraph, subparagraph, section, subsection
or other subdivision. Whenever the context may require, any
pronoun used in this Agreement shall include the corres
ponding masculine, feminine or neuter forms, and the
singular form of nouns, pronouns and verbs shall include the
plural and vice versa. Each party hereto agrees that any
rule of construction to the effect that any ambiguities are
to be resolved against the drafting party shall not be
employed in the interpretation or construction of this
Agreement or any Transaction Document.
SECTION 16.15. Holidays. Notwithstanding any
deadline for payment, performance, notice or election under
this Agreement, if such deadline falls on a date that is not
a Business Day, then the deadline for such payment, perform
ance, notice or election will be extended to the next
succeeding Business Day.
SECTION 16.16. Third Parties. Nothing herein
expressed or implied is intended or shall be construed to
confer upon or give any person and their respective
successors, legal representatives and permitted assigns any
rights, remedies or basis for reliance upon, under or by
reason of this Agreement.
SECTION 16.17. Liability for Affiliates. Except
where and to the extent that a contrary intention otherwise
appears, where a Member undertakes to cause its Affiliates
to take or abstain from taking any action, such undertaking
shall mean (i) in the case of any Affiliate that is
controlled by such Member, that such Member shall cause such
Affiliate to take or abstain from taking such action and
(ii) in the case of an Affiliate that controls or is under
common control with such Member, that such Member shall use
its commercially reasonable best efforts to cause such
Affiliates to take or abstain from taking such action;
provided, however, that such Member shall not be required to
violate, or cause any director of such Affiliate to violate,
any fiduciary duty to minority shareholders of such
Affiliate.
IN WITNESS WHEREOF, this Agreement has been duly
executed by the Members as of the day and year first above
written.
MARATHON OIL COMPANY
by /s/ Victor G. Beghini
Name: Victor G. Beghini
Title: President
ASHLAND INC.
by /s/Paul W. Chellgren
Name: Paul W. Chellgren
Title: Chairman of the
Board and Chief
Executive Officer
TABLE OF CONTENTS
Page
ARTICLE I
Certain Definitions; Applicable GAAP
SECTION 1.01. Definitions 2
SECTION 1.02. Applicable GAAP 21
ARTICLE II
General Provisions
SECTION 2.01. Formation; Effectiveness 22
SECTION 2.02. Name 22
SECTION 2.03. Term 22
SECTION 2.04. Registered Agent and Office 23
SECTION 2.05. Purpose 23
SECTION 2.06. Powers 24
ARTICLE III
Members
SECTION 3.01. Members; Percentage Interests 25
SECTION 3.02. Adjustments in Percentage Interests 26
ARTICLE IV
Capital Contributions; Assumption of Assumed
Liabilities
SECTION 4.01. Contributions 26
SECTION 4.02. Additional Contributions 28
SECTION 4.03. Negative Balances; Withdrawal
of Capital; Interest 29
ARTICLE V
Distributions
SECTION 5.01. Distributions 29
SECTION 5.02. Certain General Limitations 32
SECTION 5.03. Distributions in Kind 32
SECTION 5.04. Distributions in the Event of an
Exercise of the Marathon Call Right,
Ashland Put Right or the Special
Termination Rights 33
ARTICLE VI
Allocations and Other Tax Matters
SECTION 6.01. Maintenance of Capital Accounts 33
SECTION 6.02. Allocations 34
SECTION 6.03. Tax Allocations 35
SECTION 6.04. Tax Elections 35
SECTION 6.05. Fiscal Year 36
SECTION 6.06. Tax Returns 36
SECTION 6.07. Tax Matters Partner 37
SECTION 6.08. Duties of Tax Matters Partner 37
SECTION 6.09. Survival of Provisions 39
SECTION 6.10. Section 754 Election 39
SECTION 6.11. Qualified Income Offset,
Minimum Gain Chargeback 39
SECTION 6.12. Tax Treatment of Designated Sublease
Agreements 39
SECTION 6.13. Tax Treatment of Reimbursed Liability
Payments 40
SECTION 6.14. Tax Treatment of Disproportionate
Payments 40
SECTION 6.15. Allocation of Income, Gains, Losses
and Other Items from LOOP LLC and
LOCAP, Inc 41
SECTION 6.16. Allocation of Income, Gain, Loss,
Deduction and Credits Attributable
to Stock-Based Compensation 41
ARTICLE VII
Books and Records
SECTION 7.01. Books and Records; Examination 42
SECTION 7.02. Financial Statements and Reports 42
SECTION 7.03. Notice of Affiliate Transactions;
Annual List 44
ARTICLE VIII
Management of the Company
SECTION 8.01. Managing Members 45
SECTION 8.02. Board of Managers 45
SECTION 8.03. Responsibility of the Board of
Managers 46
SECTION 8.04. Meetings 46
SECTION 8.05. Compensation 48
SECTION 8.06. Quorum 48
SECTION 8.07. Voting 49
SECTION 8.08. Matters Constituting Super Majority
Decisions 50
SECTION 8.09. Annual Capital Budget 56
SECTION 8.10. Business Plan 56
SECTION 8.11. Requirements as to Affiliate
Transactions 57
SECTION 8.12. Review of Certain Affiliate Transactions
Related to Crude Oil Purchases
and Shared Services 59
SECTION 8.13. Adjustable Amounts 61
SECTION 8.14. Company Leverage Policy 62
SECTION 8.15. Company's Investment Guidelines 62
SECTION 8.16. Requirements as to Operating Leases 63
SECTION 8.17. Limitations on Actions Relating to the
Calculation of Distributable Cash 63
SECTION 8.18. Reliance by Third Parties 63
SECTION 8.19. Integration of Retail Operations 63
ARTICLE IX
Officers
SECTION 9.01. Election, Appointment and Term
of Office 65
SECTION 9.02. Resignation, Removal and Vacancies 66
SECTION 9.03. Duties and Functions of Executive
Officers 67
ARTICLE X
Transfers of Membership Interests
SECTION 10.01. Restrictions on Transfers 67
SECTION 10.02. Conditions for Admission 71
SECTION 10.03. Allocations and Distributions 72
SECTION 10.04. Right of First Refusal 72
SECTION 10.05. Restriction on Resignation
or Withdrawal 73
ARTICLE XI
Liability, Exculpation and Indemnification
SECTION 11.01. Liability 73
SECTION 11.02. Exculpation 73
SECTION 11.03. Indemnification 74
ARTICLE XII
Fiduciary Duties
SECTION 12.01. Duties and Liabilities
of Covered Persons 75
SECTION 12.02. Fiduciary Duties of Members
of the Company and Members
of the Board of Managers 76
ARTICLE XIII
Dispute Resolution Procedures
SECTION 13.01. General 76
SECTION 13.02. Dispute Notice and Response 76
SECTION 13.03. Negotiation Between Senior
Managers 77
SECTION 13.04. Negotiation Between Chief Executive
Officer and President 77
SECTION 13.05. Right to Equitable Relief
Preserved 78
ARTICLE XIV
Rights and Remedies with Respect to Monetary Disputes
SECTION 14.01. Ability of Company to Borrow to Fund
Disputed Monetary Amounts 79
SECTION 14.02. Interim Payment of Disputed Monetary
Amount 80
SECTION 14.03. Liquidated Damages 80
SECTION 14.04. Right of Set-Off 82
SECTION 14.05. Security Interest 83
ARTICLE XV
Dissolution and Termination
SECTION 15.01. Dissolution 84
SECTION 15.02. Winding Up of Company 84
SECTION 15.03. Distribution of Property 85
SECTION 15.04. Time Limitation 85
SECTION 15.05. Termination of Company 85
ARTICLE XVI
Miscellaneous
SECTION 16.01. Notices 85
SECTION 16.02. Merger and Entire Agreement 86
SECTION 16.03. Assignment 87
SECTION 16.04. Parties in Interest 87
SECTION 16.05. Counterparts 87
SECTION 16.06. Amendment; Waiver 87
SECTION 16.07. Severability 87
SECTION 16.08. GOVERNING LAW 88
SECTION 16.09. Enforcement 88
SECTION 16.10. Creditors 89
SECTION 16.11. No Bill for Accounting 89
SECTION 16.12. Waiver of Partition 89
SECTION 16.13. Table of Contents, Headings and
Titles 89
SECTION 16.14. Use of Certain Terms;
Rules of Construction 89
SECTION 16.15. Holidays 89
SECTION 16.16. Third Parties 89
SECTION 16.17. Liability for Affiliates 89
Appendix A Certain Definitions
Appendix B Procedures for Dispute Resolution
Exhibit A Speedway SuperAmerica LLC Retail Integration
Protocol
Schedule 1.01 Financed Properties
Schedule 4.01(c) Subleased Property
Schedule 4.02(a)-1 Marathon Capital Expenditures
Schedule 4.02(a)-2 Ashland Capital Expenditures
Schedule 8.01(k)(i)(A) Closing Date Affiliate Transactions
Schedule 8.14 Company Leverage Policy
Schedule 8.15 Company Investment Guidelines
Schedule A Calculations re: Normal
Annual Capital Budget Amount
Schedule B-1 Adjustments to Historical
EBITDA (Marathon)
Schedule B-2 Adjustments to Historical
EBITDA (Ashland)
Schedule C Initial Executive Officers
_______________________________
1NOTE: THIS DOCUMENT (VERSION 5) HAS BEEN MARKED FOR
AUTOMATIC TABLE OF CONTENTS GENERATION
Exhibit 10(i)
EXECUTION COPY
AMENDMENT NO. 1, dated as of
December 31, 1998 (this "Amendment") to the
PUT/CALL, REGISTRATION RIGHTS AND STANDSTILL
AGREEMENT dated as of January 1, 1998 (the
"Agreement") among MARATHON OIL COMPANY, an
Ohio corporation, USX CORPORATION, a Delaware
corporation, ASHLAND INC., a Kentucky
corporation and MARATHON ASHLAND PETROLEUM
LLC, a Delaware limited liability company
(collectively, the "Parties").
WHEREAS, the Parties have heretofore entered into
the Agreement (capitalized terms used in this Amendment and
not defined herein shall have the meanings given such terms
in the Agreement); and
WHEREAS, the Parties wish to amend the Agreement
to reflect certain changes to the prices set forth therein.
NOW, THEREFORE, in consideration of the mutual
agreements herein contained and other good and valuable
consideration, the sufficiency and receipt of which are
hereby acknowledged, the Parties agree as follows:
Section 1. Amendments:
(a) Section 1.01 of the Agreement is amended to
insert the following definition after the definition of
"Price Index" and prior to the definition of "Private Label
Packaged Motor Oil Business":
"'Price Reduction' shall have the meaning set
forth in Section 2.02(b) of the Put/Call, Registration
Rights and Standstill Agreement."
(b) Section 2.02(a) of the Agreement is amended
to read in its entirety as follows:
"(a) Amount. The Special Termination Price shall
be an amount equal to (i) the product of (x) 100% of
the Appraised Value of the Company multiplied by
(y) the Terminating Member's Percentage Interest, less
(ii) if the Terminating Member is Ashland, the Price
Reduction."
(c) Sections 2.02(b) and 2.02(c) as numbered in
the Agreement are numbered Sections 2.02(c) and 2.02(d)
respectively and a new Section 2.02(b) of the Agreement is
added to read in its entirety as follows:
"(b) Price Reduction. Price Reduction means an
amount equal to the excess of (i) $14,139,519, which is
the agreed present value at January 1, 1998, of the tax
cost to Ashland ("Present Value Tax Cost") of
allocating to it depreciation deductions as shown in
Chart A in Schedule 2.02(b)(1) ("Chart A
Depreciation"), as compared to allocating to Ashland
depreciation deductions as shown in Chart B in
Schedule 2.02(b)(1) ("Chart B Depreciation"), over
(ii) the present value at January 1, 1998, of the tax
cost to Ashland of allocating to it Chart A
Depreciation as compared to Chart B Depreciation,
taking into account Ashland's decreased taxable gain or
increased taxable loss on the sale of all of its
Membership Interest in the Company when Chart A
Depreciation as compared to Chart B Depreciation is
allocated to it ("Present Value Tax Cost on Sale").
"Chart A Depreciation represents the agreed
depreciation deductions with respect to property
contributed by Ashland on the Closing of the Asset
Transfer and Contribution Agreement allocated to it
through the depreciable life of such property as set
forth in Section 6.03 of the LLC Agreement as amended
and restated as of December 31, 1998. Chart B
Depreciation represents the agreed depreciation
deductions with respect to property contributed by
Ashland on the Closing of the Asset Transfer and
Contribution Agreement allocated to it through the
depreciable life of such property as set forth in
Sections 6.03, 6.12 and 4.01(c) of such agreement as in
effect prior to such restatement as if it were in
effect through such depreciable life, but treating the
assets comprising the Merrill Lynch Master Lease
Program as Subleased Property listed on Schedule
4.01(c) for purposes of Sections 4.01(c) and 6.12.
Chart A Depreciation and Chart B Depreciation shall not
be revised to reflect the actual amount of depreciation
deductions with respect to property contributed by
Ashland on the Closing of the Asset Transfer and
Contribution Agreement allocated to Ashland, or to take
into account the sale or other disposition by the
Company of any of the property contributed by Ashland
on the Closing of the Asset Transfer and Contribution
Agreement.
"Solely for purposes of determining the Present
Value Tax Cost and the Present Value Tax Cost on Sale,
the following factors and assumptions have been and
will be used: (i) discount rate of 9% per annum,
(ii) combined Federal/State income tax rate of 39%,
(iii) the cash flow impact of a reduction in Ashland's
income taxes for a year as the result of Chart A or
Chart B Depreciation is realized on the last day of
that year and (iv) the cash flow impact of Ashland's
income tax expense or benefit arising from a sale of
all of its membership interest in the Company is
incurred or realized on the last day of the year of
sale.
"Schedule 2.02(b)(2) reflects, for purposes of
illustration, the Present Value Tax Cost on Sale if
Ashland sells all of its 38% membership interest in the
Company on January 1, 2005. The Present Value Tax Cost
on Sale with respect to Ashland's sale of all of its
interest in the Company at a date different than
January 1, 2005, shall be computed in the same manner
as the Present Value Tax Cost on Sale illustrated in
Schedule 2.02(b)(2).
"Consistent with the foregoing principle, if
Ashland sells all or part of its Membership Interest to
Marathon in a transaction not otherwise described in
this Agreement, the price paid by or on behalf of
Marathon for such interest shall be appropriately
reduced."
(d) Attached new Schedules 2.02(b)(1) and
2.02(b)(2) are inserted between Schedule 1.03(d) and
Schedule 14.01(a).
(e) Section 3.02(a) of the Agreement is amended
to read in its entirety as follows:
"(a) Amount. The Marathon Call Price shall be an
amount equal to (i) the product of (x) 115% of the
Appraised Value of the Company multiplied by
(y) Ashland's Percentage Interest, less (ii) the Price
Reduction."
(f) Section 4.02(a) of the Agreement is amended
to read in its entirety as follows:
"(a) Amount. The Ashland Put Price shall be an
amount equal to the sum of (i) for that portion of the
Ashland Put Price to be paid to Ashland in Cash or in
Marathon Debt Securities, an amount equal to the
product of (1) the excess of (x) the product of (A) 85%
of the Appraised Value of the Company multiplied by
(B) Ashland's Percentage Interest over (y) the Price
Reduction, multiplied by (2) the percentage of the
Ashland Put Price to be paid to Ashland in Cash and/or
in Marathon Debt Securities, plus (ii) for that portion
of the Ashland Put Price to be paid to Ashland in
Marathon Equity Securities the same as above but
substituting 90% for 85% in Clause (A) and substituting
Marathon Equity Securities for Cash and/or Marathon
Debt Securities in clause (2)."
Section 2. Parties in Interest. This Amendment
shall inure to the benefit of, and be binding upon, the
Parties hereto and their respective successors, legal
representatives and permitted assigns.
Section 3. Counterparts. This Amendment may be
executed in counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and
the same instrument.
Section 4. Governing Law. THIS AMENDMENT SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO THE
PRINCIPLES OF CONFLICTS OF LAW THEREOF. ANY RIGHT TO TRIAL
BY JURY WITH RESPECT TO ANY CLAIM OR PROCEEDING RELATED TO
OR ARISING OUT OF THIS AMENDMENT, OR ANY TRANSACTION OR
CONDUCT IN CONNECTION HEREWITH, IS WAIVED.
IN WITNESS WHEREOF, the parties hereto have caused
this Amendment to be duly executed as of the day and year
first above written.
MARATHON OIL COMPANY ASHLAND INC.
By:/s/ V. G. Beghini By:/s/Paul W. Chellgren
Name:V. G. Beghini Name:Paul W. Chellgren
Title: President Title: Chairman of the Board and
Chief Executive Officer
USX CORPORATION MARATHON ASHLAND PETROLEUM,
LLC
By:/s/ Thomas J. Usher By: /s/ J. L. Frank
Name:Thomas J. Usher Name:J. L. Frank
Title:Chairman of the Board Title:President
and Chief Executive
Officer
Put/Call, Registration Rights and Standstill Agreement
Schedule 2.02(b)(1)
Chart A and Chart B Depreciation
<TABLE>
<CAPTION>
Chart A
Calendar Depreciation Combined Present Value
Year Allocated Fed. & State Tax Effect
to Ashland Inc. Tax @ 39% @ 9%
<S> <C> <C> <C>
1998 $ 116,601,400 $ 45,474,546 $ 41,719,767
1999 209,882,520 81,854,183 68,895,028
2000 167,906,016 65,483,346 50,565,158
2001 134,324,816 52,386,678 37,112,044
2002 107,506,491 41,927,531 27,250,019
2003 85,935,232 33,514,740 19,983,745
2004 76,373,917 29,785,828 16,293,868
2005 76,373,917 29,785,828 14,948,502
2006 76,373,917 29,785,828 13,714,222
2007 76,373,917 29,785,828 12,581,855
2008 38,361,861 14,961,126 5,797,928
Totals $1,166,014,004 $ 454,745,462 $ 308,862,136
</TABLE>
<TABLE>
<CAPTION>
Chart B
Calendar Depreciation Combined Present Value
Year Allocated Fed. & State Tax Effect
to Ashland Inc. Tax @ 39% @ 9%
<S> <C> <C> <C>
1998 $ 134,434,575 $ 52,429,484 $ 48,100,444
1999 213,507,942 83,268,097 70,085,092
2000 171,643,459 66,940,949 51,690,695
2001 138,302,064 53,937,805 38,210,901
2002 111,275,746 43,397,541 28,205,424
2003 89,884,379 35,054,908 20,902,096
2004 77,757,082 30,325,262 16,588,957
2005 77,057,057 30,052,252 15,082,212
2006 77,057,057 30,052,252 13,836,892
2007 77,057,057 30,052,252 12,694,396
2008 50,315,315 19,622,973 7,604,547
Totals $1,218,291,733 $ 475,133,776 $ 323,001,655
Present Value tax cost $ 14,139,519
</TABLE>
Put/Call, Registration Rights and Standstill Agreement
Schedule 2.02(b)(2)
Present Value Tax Cost on Sale
Illustration
<TABLE>
<CAPTION>
Sale of 100% Interest 1/1/2005
Calendar Decr. Gain/
Year Depreciation Allocated Incr. Loss
to Ashland
Chart A Chart B Difference Chart A vs. B
<S> <C> <C> <C> <C>
1998 $116,601,400 $134,434,575 $17,833,175
1999 209,882,520 213,507,942 3,625,422
2000 167,906,016 171,643,459 3,737,443
2001 134,324,816 138,302,064 3,977,248
2002 107,506,491 111,275,746 3,769,255
2003 85,935,232 89,884,379 3,949,147
2004 76,373,917 77,757,082 1,383,165
2005 - - - (38,274,855)(1)
2006 - - -
2007 - - -
2008 - - -
Totals $ 898,530,392 $936,805,247 $38,274,855 $(38,274,855)
</TABLE>
<TABLE>
<CAPTION>
Increase
(Decrease) Combined
Taxable Federal/State Present
Calendar Income Income Tax Value
Year Chart A @ 39% Tax Cost on
vs. B Sale
<C> <C> <C> <C>
1998 $17,833,175 $6,954,938 $6,380,677
1999 3,625,422 1,413,915 1,190,064
2000 3,737,443 1,457,603 1,125,537
2001 3,977,248 1,551,127 1,098,857
2002 3,769,255 1,470,009 955,405
2003 3,949,147 1,540,167 918,351
2004 1,383,165 539,434 295,089
2005 (38,274,855) (14,927,193) (7,491,455)
2006 - - -
2007 - - -
2008 - - -
Totals $ - $ - $4,472,526
Present Value Tax Cost (Schedule
2.02 (b)(1)) $14,139,519
Price Reduction $ 9,666,993
<FN>
(1) 100% of cumulative difference between Chart A and Chart B depreciation
through 2004.
</TABLE>
