<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
---------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14521
CONOCO INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 51-0370352
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
600 NORTH DAIRY ASHFORD ROAD
HOUSTON, TEXAS 77079
(Address of Principal Executive Offices)
(281) 293-1000
(Registrant's Telephone Number)
---------------------
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 [ ] No [X]
191,456,427 shares of Class A Common Stock, $0.01 par value, and
436,543,573 shares of Class B, Common Stock, $0.01 par value, were outstanding
as of November 11, 1998.
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<PAGE> 2
CONOCO
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Combined Statement of Income......................... 1
Combined Balance Sheet............................... 2
Combined Statement of Cash Flows..................... 3
Notes to Combined Financial Statements............... 4
Pro Forma Combined Statements of Income.............. 8
Pro Forma Combined Balance Sheet..................... 9
Notes to Pro Forma Combined Financial Statements..... 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(a) Financial Condition.............................. 13
(b) Results of Operations............................ 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 21
Part II Other Information
Item 1. Legal Proceedings................................. 24
Item 2. Changes in Securities and Use of Proceeds......... 24
Item 5. Other Information
(a) Disclosure Regarding Forward-Looking
Information......................................... 25
(b) Subsequent Event................................. 26
Item 6. Exhibits and Reports on Form 8-K.................. 26
Signature................................................... 27
Exhibit Index............................................... 28
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONOCO
COMBINED STATEMENT OF INCOME (NOTES 1 AND 2)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------- -----------------------------
1998 1997 1998 (NOTE 3) 1997 (NOTE 3)
------ ------ ------------- -------------
(IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C>
Revenues
Sales and Other Operating Revenues*................. $5,916 $6,671 $17,264 $19,146
Other Income........................................ 113 28 251 153
------ ------ ------- -------
Total Revenues.............................. 6,029 6,699 17,515 19,299
------ ------ ------- -------
Cost and Expenses
Cost of Goods Sold and Other Operating Expenses..... 3,624 4,321 10,378 11,988
Selling, General and Administrative Expenses........ 151 180 521 535
Exploration Expenses................................ 59 128 235 320
Depreciation, Depletion and Amortization............ 257 246 762 762
Taxes Other Than on Income*......................... 1,529 1,395 4,425 4,064
Interest and Debt Expense........................... 107 7 108 31
------ ------ ------- -------
Total Cost and Expenses..................... 5,727 6,277 16,429 17,700
------ ------ ------- -------
Income Before Income Taxes............................ 302 422 1,086 1,599
Provision for Income Taxes............................ 119 133 373 723
------ ------ ------- -------
Net Income............................................ $ 183 $ 289 $ 713 $ 876
====== ====== ======= =======
Pro Forma Earnings Per Share (Note 4)
Basic............................................... $ 0.29 $ 0.46 $ 1.14 $ 1.39
Diluted............................................. $ 0.29 $ 0.45 $ 1.12 $ 1.38
Pro Forma Weighted Average Shares Outstanding (Note 4)
Basic............................................... 628 628 628 628
Diluted............................................. 637 637 637 637
*Includes petroleum excise taxes...................... $1,489 $1,353 $ 4,295 $ 3,930
</TABLE>
See Notes to Combined Financial Statements
1
<PAGE> 4
CONOCO
COMBINED BALANCE SHEET (NOTES 1 AND 2)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
------------ -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Current Assets
Cash and Cash Equivalents................................. $ 406 $ 1,147
Marketable Securities..................................... 90 7
Accounts and Notes Receivable............................. 1,186 1,497
Notes Receivable -- Related Parties....................... 126 490
Inventories (Note 5)...................................... 1,000 830
Prepaid Expenses.......................................... 347 236
-------- --------
Total Current Assets.............................. 3,155 4,207
-------- --------
Property, Plant and Equipment............................... 22,012 21,229
Less: Accumulated Depreciation, Depletion and
Amortization.............................................. (10,660) (10,401)
-------- --------
Net Property, Plant and Equipment........................... 11,352 10,828
-------- --------
Investment in Affiliates.................................... 1,342 1,085
Long-Term Notes Receivable -- Related Parties............... -- 450
Other Assets................................................ 527 492
-------- --------
Total............................................. $ 16,376 $ 17,062
======== ========
LIABILITIES AND OWNER'S NET INVESTMENT AND
ACCUMULATED OTHER COMPREHENSIVE LOSS
Current Liabilities
Accounts Payable.......................................... $ 1,434 $ 1,090
Short-Term Borrowings -- Related Parties.................. 366 644
Other Short-Term Borrowings and Capital Lease
Obligations............................................ 51 72
Income Taxes.............................................. 203 545
Other Accrued Liabilities................................. 1,061 1,289
-------- --------
Total Current Liabilities......................... 3,115 3,640
Long-Term Borrowings -- Related Parties..................... 922 1,450
Long-Term Borrowings -- Other Related Party................. 7,500 --
Other Long-Term Borrowings and Capital Lease Obligations.... 105 106
Deferred Income Taxes....................................... 1,926 1,739
Other Liabilities and Deferred Credits...................... 1,954 1,922
-------- --------
Total Liabilities................................. 15,522 8,857
-------- --------
Commitments and Contingent Liabilities (Note 7)
Minority Interests.......................................... 309 309
Owner's Net Investment...................................... 714 8,087
Accumulated Other Comprehensive Loss........................ (169) (191)
-------- --------
Total Owner's Net Investment and Accumulated Other
Comprehensive Loss.............................. 545 7,896
-------- --------
Total............................................. $ 16,376 $ 17,062
======== ========
</TABLE>
See Notes to Combined Financial Statements
2
<PAGE> 5
CONOCO
COMBINED STATEMENT OF CASH FLOWS (NOTES 1 AND 2)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------
1998 1997
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Cash Provided by Operations
Net Income................................................ $ 713 $ 876
Adjustments to Reconcile Net Income to Cash Provided by
Operations:
Depreciation, Depletion and Amortization............... 762 762
Dry Hole Costs and Impairment of Unproved Properties... 79 111
Deferred Income Taxes.................................. 164 85
Income Applicable to Minority Interest................. 16 19
Other Noncash Charges and Credits -- Net............... (110) (47)
------- -------
Cash Provided by Operations -- Before Changes in
Operating Assets and Liabilities...................... 1,624 1,806
Decrease (Increase) in Operating Assets:
Accounts and Notes Receivable........................ 163 (45)
Inventories.......................................... (155) (119)
Other Operating Assets............................... (107) (153)
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Other Operating Liabilities..... 115 164
Accrued Interest and Income Taxes.................... (376) (112)
------- -------
Cash Provided by Operations.......................... 1,264 1,541
------- -------
Investment Activities
Purchase of Property, Plant and Equipment................. (1,412) (2,051)
Investment in Affiliates.................................. (315) (241)
Proceeds from Sales of Assets and Subsidiaries............ 389 171
Net Decrease (Increase) in Short-Term Financial
Instruments............................................ (76) (42)
------- -------
Cash Used for Investment Activities.................... (1,414) (2,163)
------- -------
Financing Activities
Short-Term Borrowings -- Receipts......................... -- 3
-- Payments..................... (18) (3)
Other Long-Term Borrowings -- Receipts.................... -- 20
-- Payments............... (3) (1)
Transactions with Related Parties:
Notes Receivable -- Receipts........................... 114 326
-- Payments......................... -- --
Borrowings -- Receipts................................. 927 376
-- Payments................................ (1,739) (327)
Net Contribution From Owner............................ 113 348
Increase (Decrease) in Minority Interests................. (16) (15)
------- -------
Cash Provided by (Used for) Financing Activities....... (622) 727
------- -------
Effect of Exchange Rate Changes on Cash..................... 31 (41)
------- -------
Increase (Decrease) in Cash and Cash Equivalents............ (741) 64
Cash and Cash Equivalents at Beginning of Year.............. 1,147 846
------- -------
Cash and Cash Equivalents at September 30................... $ 406 $ 910
======= =======
Supplemental Schedule of Noncash Financing Activities:
Dividends Paid to Owner (Note 2).......................... $(8,200) $ --
Promissory Note Payable -- DuPont (Note 2)................ 7,500 --
Notes Receivable -- DuPont (Note 2)....................... 700 --
------- -------
Total Noncash Financing Activities................... $ -- $ --
======= =======
</TABLE>
See Notes to Combined Financial Statements
3
<PAGE> 6
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1. BASIS OF PRESENTATION
The initial public offerings (the "Offerings") of the Class A Common Stock
of Conoco Inc., a subsidiary of E. I. DuPont de Nemours and Company ("DuPont"),
commenced on October 21, 1998. Conoco's Class A Common Stock began trading on
the New York Stock Exchange on October 22, 1998. The Offerings consisted of
191,456,427 shares of Class A Common Stock of Conoco Inc. issued at a price of
$23 per share, and represented DuPont's first step in the planned divestiture of
its entire petroleum business. Through its ownership of 100% of the Company's
Class B Common Stock (436,543,573 shares), DuPont owns approximately 70% of the
Company's Common Stock representing approximately 92% of the combined voting
power of all classes of voting stock of the Company. Holders of Class A Common
Stock are entitled to one vote per share and holders of the Class B Common Stock
are entitled to five votes per share on each matter submitted to a vote of
stockholders.
In connection with the Offerings, the Company and DuPont gave certain
current employees of the Company the option, subject to specific country tax and
legal requirements, to participate in a program ("Option Program") involving the
cancellation of all or part of their options to purchase DuPont common stock or
SARs with respect to DuPont common stock and the issuance by the Company upon
such cancellation of comparable options to acquire Class A Common Stock, or SARs
with respect to Class A Common Stock. The program was deemed a change in the
terms of certain awards granted to Conoco employees. As a result, the Company
will incur a non-cash charge to compensation expense in the fourth quarter of
1998 of $183 after-tax.
Throughout the period covered by the Combined Financial Statements,
operations were conducted by Conoco Inc. and subsidiaries of Conoco Inc. These
operations are collectively referred to herein as the Company or "Conoco". The
accompanying Combined Financial Statements are presented on a carve-out basis
and include the historical operations of entities owned by Conoco and operations
transferred to Conoco by DuPont. In this context, no direct ownership
relationship existed among all the various units comprising Conoco; accordingly,
DuPont and its subsidiaries' net investment in Conoco ("Owner's Net Investment")
is shown in lieu of Stockholder's Equity in the Combined Financial Statements.
The Combined Financial Statements included herein have been prepared from
DuPont's historical accounting records.
These Combined Financial Statements are unaudited, but reflect all
adjustments that, in the opinion of management, are necessary to provide a fair
presentation of the financial position, results of operations and cash flows for
the dates and periods covered. All such adjustments are of a normal recurring
nature. Interim period results are not necessarily indicative of results of
operations or cash flows for a full-year period. These statements should be read
in conjunction with the Audited Combined Financial Statements for the year ended
December 31, 1997 as presented in Conoco's Registration on Form S-1
(Registration No. 333-60119) as filed with the Securities and Exchange
Commission ("Form S-1".)
2. RELATED PARTY TRANSACTIONS
The Combined Financial Statements include significant transactions with
DuPont involving services (such as cash management, other financial services,
purchasing, legal, computer and corporate aviation) that were provided between
Conoco and centralized DuPont organizations. The costs of services have been
directly charged or allocated between Conoco and DuPont using methods management
believes are reasonable. Such charges and allocations are not necessarily
indicative of what would have been incurred if Conoco had been a separate
entity. Amounts charged and allocated to Conoco for these services were $36 and
$31 for the third quarter of 1998 and 1997 and $108 and $94 for the first nine
months of 1998 and 1997, respectively, and are principally included in Selling,
General and Administrative Expenses. Conoco provided DuPont services such as
computer, legal and purchasing, as well as certain technical and plant operating
services, which amounted to $12 and $15 for the third quarter of 1998 and 1997
and $37 and $46 in the first nine months of 1998 and
4
<PAGE> 7
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1997, respectively. These charges to DuPont were treated as reductions of Cost
of Goods Sold and Other Operating Expenses and Selling, General and
Administrative Expenses.
Interest expense charged by DuPont was $117 and $31 for the third quarter
of 1998 and 1997 and $172 and $96 for the first nine months of 1998 and 1997,
respectively, and reflects market-based interest rates. A portion of historical
related party interest cost and other interest expense of $12 and $25 for the
third quarter of 1998 and 1997 and $69 and $69 in the first nine months of 1998
and 1997, respectively, was capitalized as costs associated with major
construction projects. Interest income from DuPont was $12 and $1 for the third
quarter of 1998 and 1997 and $45 and $7 for the first nine months of 1998 and
1997, respectively, and also reflects market-based interest rates.
Sales and Other Operating Revenues include sales of products from Conoco to
DuPont, principally natural gas and gas liquids to supply several DuPont plant
sites. These sales totaled $108 and $89 in the third quarter of 1998 and 1997
and $317 and $320 for the first nine months of 1998 and 1997, respectively. Also
included are revenues from insurance premiums charged to DuPont for property and
casualty coverage outside the United States. These revenues totaled $4 and $5 in
the third quarter of 1998 and 1997 and $14 and $16 for the first nine months of
1998 and 1997, respectively. Purchases of products from DuPont during these
periods were not material. These intercompany arrangements between DuPont and
Conoco, excluding insurance coverage provided to DuPont, will continue after the
Offerings under transition service agreements or other long-term agreements. It
is not anticipated that a change, if any, in these costs and revenues would have
a material effect on the Company's results of operations or combined financial
position.
Accounts and Notes Receivable include amounts due from DuPont of $32 and
$79 at September 30, 1998, and December 31, 1997, respectively, representing
current month balances of transactions between Conoco and DuPont, mainly product
sales and net interest on borrowings. Accounts Payable include amounts due
DuPont of $108 and $4 at September 30, 1998, and December 31, 1997,
respectively.
Amounts representing notes receivable or borrowings from DuPont, including
its subsidiary organizations, are identified for related parties and presented
separately in the Combined Balance Sheet. The current portion of Notes
Receivable represents the accumulation of a variety of cash transfers and
operating transactions with DuPont. These balances are generally
interest-bearing and represent net amounts of cash transferred for funding and
cash management purposes and amounts charged between the companies for certain
product and service purchases and asset transfers. The long-term portion of
Notes Receivable and amounts shown for Short-Term and Long-Term Borrowings
represent borrowings between Conoco and DuPont with established due dates at
market-based interest rates, except for certain short-term non-interest bearing
borrowings due DuPont of $492 that existed at December 31, 1997.
In July 1998, a dividend was declared and paid by the Company in the form
of a promissory note (the "Note") to DuPont in the aggregate principal amount of
$7,500 bearing interest at a rate of 6.0125 percent per annum. The Note has a
maturity date of January 2, 2000. The Note may be voluntarily prepaid without
penalty or premium. The Note also provides for mandatory prepayments in the
event cash proceeds are realized by the Company from the incurrence of
indebtedness or the issuance of equity securities by the Company or its
subsidiaries. The Note includes certain covenants and customary events of
default, including failure to pay interest when due, certain events of
bankruptcy of the Company and change of control. The consent of DuPont is also
required prior to the Company entering into certain transactions. In September
1998, the Company declared a dividend of $700 representing a reduction of notes
receivable from DuPont.
5
<PAGE> 8
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
3. SPECIAL ITEMS
Net income for the first nine months of 1998 included a gain of $23 from
the sale of certain Upstream North Sea properties and a $31 tax benefit from the
sale of an international Upstream subsidiary, partly offset by a $28 charge for
U. S. Downstream litigation. Net income for the first nine months of 1997
included a gain of $24 from the sale of certain Upstream U. S. properties, a
gain of $30 from the sale of certain Upstream North Sea properties, a $23 charge
for U. S. Downstream litigation, and a $30 tax benefit for Upstream and
Downstream from a change in the U.K. tax rate.
4. EARNINGS PER SHARE
The Company's historical capital structure is not indicative of its
prospective structure since no direct ownership relationship existed among all
the various units comprising Conoco. Accordingly, historical earnings per share
have been presented on a pro forma basis in the Combined Financial Statements.
Unaudited pro forma basic earnings per share includes the shares of both
the Class A and Class B Common Stock deemed to be outstanding as of the date of
the Offerings. Unaudited pro forma diluted earnings per share includes the
dilutive effect of the 8.6 million shares of Conoco Class A Common Stock
issuable upon exercise of Conoco stock options, after applying the treasury
stock method, which will be issued upon cancellation of outstanding DuPont stock
options, using the weighted-average exercise price of $62.97 per share of the
outstanding options and the initial public offering price of $23 per share. In
accordance with SEC Staff Accounting Bulletin No. 98, pro forma basic and
diluted earnings per share have been presented.
5. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
------------ -----------
<S> <C> <C>
Crude oil and petroleum products............................ $ 845 $675
Other merchandise........................................... 25 25
Materials and supplies...................................... 130 130
------ ----
$1,000 $830
====== ====
</TABLE>
6. COMPREHENSIVE INCOME
The following sets forth the Company's comprehensive income for the periods
shown:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
------------- ------------
1998 1997 1998 1997
----- ----- ---- -----
<S> <C> <C> <C> <C>
Net Income.............................................. $183 $289 $713 $ 876
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustment............... 49 (26) 22 (139)
Minimum Pension Liability Adjustment.................. -- -- -- --
---- ---- ---- -----
Comprehensive Income.................................... $232 $263 $735 $ 737
==== ==== ==== =====
</TABLE>
7. COMMITMENTS AND CONTINGENT LIABILITIES
The Company has various purchase commitments for materials, supplies and
items of permanent investment incident to the ordinary conduct of business. In
the aggregate, such commitments are not at prices in excess of current market.
In addition, at September 30, 1998, the Company has international obligations to
6
<PAGE> 9
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
purchase, over periods up to twenty years, natural gas at prices that were in
excess of current market prices. No material annual loss is expected from these
long-term commitments, partially as a result of long-term sales contracts.
The Company is subject to various lawsuits and claims involving a variety
of matters including, along with other oil companies, actions challenging oil
and gas royalty and severance tax payments based on posted prices, and claims
for damages resulting from leaking underground storage tanks. As a result of the
Separation Agreement with DuPont, the Company has also assumed responsibility
for current and future claims related to certain discontinued chemicals and
agricultural chemicals businesses operated by the Company in the past. In
general, the effect on future financial results is not subject to reasonable
estimation because considerable uncertainty exists. The Company believes the
ultimate liabilities resulting from such lawsuits and claims may be material to
results of operations in the period in which they are recognized but will not
materially affect the combined financial position of the Company.
The Company is also subject to contingencies pursuant to environmental laws
and regulations that in the future may require the Company to take further
action to correct the effects on the environment of prior disposal practices or
releases of petroleum substances by the Company or other parties. The Company
has accrued for certain environmental remediation activities consistent with the
policy set forth in Note 2 to the Combined Financial Statements presented in
Conoco's Form S-1. The Company has assumed environmental remediation liabilities
from DuPont related to certain discontinued chemicals and agricultural chemicals
businesses operated by the Company in the past that are included in the
environmental accrual. At September 30, 1998, such accrual amounted to $135 and,
in management's opinion, was appropriate based on existing facts and
circumstances. Under adverse changes in circumstances, potential liability may
exceed amounts accrued. In the event future monitoring and remediation
expenditures are in excess of amounts accrued, they may be significant to
results of operations in the period recognized but management does not
anticipate they will have a material adverse effect on the combined financial
position of the Company.
The Company has indirectly guaranteed various debt obligations under
agreements with certain affiliated and other companies to provide specified
minimum revenues from shipments or purchases of products. At September 30, 1998,
these indirect guarantees totaled $19, and the Company or DuPont, on behalf of
the Company, had directly guaranteed $1,319 of the obligations of certain
affiliated companies and others. The Company, as of August 1, 1998, terminated
the multiparty account banking agreement which provided for the indirect
guarantee of bank account overdrafts of certain European DuPont subsidiaries.
The Company now has a new multiparty banking agreement that provides for the
indirect guarantee of bank account overdrafts for itself and its subsidiaries.
No material loss is anticipated by reason of such agreements and guarantees.
7
<PAGE> 10
CONOCO
PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA OFFERINGS PRO FORMA
HISTORIC ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
-------- ----------- --------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C>
Revenues................................... $17,515 $ (45)(a) $17,461 $ (6)(j) $17,455
(9)(b)
Cost of Goods Sold and Other Operating
Expenses................................. 10,378 -- 10,378 -- 10,378
Selling, General and Administrative
Expenses................................. 521 -- 521 -- 521
Exploration Expenses....................... 235 -- 235 -- 235
Depreciation, Depletion and Amortization... 762 -- 762 -- 762
Taxes Other Than on Income................. 4,425 -- 4,425 -- 4,425
Interest and Debt Expense.................. 108 224(a) 332 (178)(k) 154
------- ----- ------- ----- -------
Income Before Income Taxes................. 1,086 (278) 808 172 980
Provision for Income Taxes................. 373 (53)(c) 320 50(k) 370
------- ----- ------- ----- -------
Net Income................................. $ 713 $(225) $ 488 $ 122 $ 610
======= ===== ======= ===== =======
Pro Forma Earnings Per Share:
Basic.................................... 0.97
Diluted.................................. 0.96
Pro Forma Weighted Average Shares
Outstanding:
Basic.................................... 628
Diluted.................................. 637
</TABLE>
PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA OFFERINGS PRO FORMA
HISTORIC ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
-------- ----------- --------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C>
Revenues................................... $19,299 $ (7)(a) $19,263 $ (46)(j) $19,217
(29)(b)
Cost of Goods Sold and Other Operating
Expenses................................. 11,988 -- 11,988 -- 11,988
Selling, General and Administrative
Expenses................................. 535 -- 535 -- 535
Exploration Expenses....................... 320 -- 320 -- 320
Depreciation, Depletion and Amortization... 762 -- 762 -- 762
Taxes Other Than on Income................. 4,064 -- 4,064 -- 4,064
Interest and Debt Expense.................. 31 300(a) 331 (178)(k) 153
------- ----- ------- ----- -------
Income Before Income Taxes................. 1,599 (336) 1,263 132 1,395
Provision for Income Taxes................. 723 (114)(c) 609 31(k) 640
------- ----- ------- ----- -------
Net Income................................. $ 876 $(222) $ 654 $ 101 $ 755
======= ===== ======= ===== =======
Pro Forma Earnings Per Share:
Basic.................................... 1.20
Diluted.................................. 1.19
Pro Forma Weighted Average Shares
Outstanding:
Basic.................................... 628
Diluted.................................. 637
</TABLE>
8
<PAGE> 11
CONOCO
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PRO OFFERINGS AS
HISTORIC ADJUSTMENTS FORMA ADJUSTMENTS ADJUSTED
-------- ----------- --------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash and Cash Equivalents................ $ 406 $(20)(d) $ 386 $4,228(e) $ 135
(4,046)(f)
126(h)
(559)(i)
Restricted Cash.......................... -- -- -- 559(i) 559
Marketable Securities.................... 90 -- 90 -- 90
Accounts and Notes Receivable............ 1,186 -- 1,186 -- 1,186
Notes Receivable -- Related Parties...... 126 -- 126 (126)(h) --
Inventories.............................. 1,000 -- 1,000 -- 1,000
Prepaid Expenses......................... 347 -- 347 -- 347
------- ---- ------- ------ -------
Total Current Assets........... 3,155 (20) 3,135 182 3,317
Net Property, Plant and Equipment........ 11,352 -- 11,352 -- 11,352
Investment in Affiliates................. 1,342 -- 1,342 -- 1,342
Other Assets............................. 527 (14)(d) 513 -- 513
------- ---- ------- ------ -------
Total Assets................... $16,376 $(34) $16,342 $ 182 $16,524
======= ==== ======= ====== =======
LIABILITIES AND OWNER'S NET INVESTMENT
Accounts Payable......................... $ 1,434 $ -- $ 1,434 $ (104)(f) $ 1,330
Short-Term Borrowings -- Related
Parties................................ 366 -- 366 (366)(f) --
Other Short-Term Borrowings and Capital
Lease Obligations...................... 51 -- 51 -- 51
Income Taxes............................. 203 -- 203 -- 203
Other Accrued Liabilities................ 1,061 -- 1,061 -- 1,061
------- ---- ------- ------ -------
Total Current Liabilities...... 3,115 -- 3,115 (470) 2,645
------- ---- ------- ------ -------
Long-Term Borrowings -- Related
Parties................................ 922 -- 922 (922)(f) 7
7(g)
Long-Term Borrowings -- Other Related
Party.................................. 7,500 -- 7,500 (2,654)(f) 4,846
Other Long-Term Borrowings and Capital
Lease Obligations...................... 105 -- 105 -- 105
Deferred Income Taxes.................... 1,926 1,926 -- 1,926
Other Liabilities and Deferred Credits... 1,954 -- 1,954 -- 1,954
------- ---- ------- ------ -------
Total Liabilities.............. 15,522 15,522 (4,039) 11,483
------- ---- ------- ------ -------
Minority Interests....................... 309 -- 309 -- 309
Total Owner's Net Investment and
Accumulated Other Comprehensive Loss... 545 (34)(d) 511 4,228(e) 4,732
(7)(g)
------- ---- ------- ------ -------
Total Liabilities and Owner's
Net Investment............... $16,376 $(34) $16,342 $ 182 $16,524
======= ==== ======= ====== =======
</TABLE>
See Notes to Pro Forma Combined Financial Statements
9
<PAGE> 12
CONOCO
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1. BASIS OF PRESENTATION
The unaudited Pro Forma Combined Statements of Income of the Company for
the nine months ended September 30, 1998 and September 30, 1997 and the
unaudited Pro Forma Combined Balance Sheet as of September 30, 1998
(collectively the "Pro Forma Combined Financial Statements") have been prepared
from Combined Financial Statements presented elsewhere in this Form 10-Q. The
Pro Forma Combined Financial Statements are based on numerous assumptions and
include the adjustments explained in Note 2 below. The unaudited Pro Forma
Combined Statements of Income have been prepared as if the Offerings, Separation
and Transactions (as defined below) had occurred as of the beginning of the
period presented. The unaudited Pro Forma Combined Balance Sheet has been
prepared as if the Offerings, Separation and Transactions had occurred as of
September 30, 1998. As used herein, (i) the term "Separation" refers to the
creation of a separate company composed of the oil and gas business and
operations, and the associated assets and liabilities of such businesses and
operations, previously owned by DuPont, all of which currently comprise the
Company, and (ii) the term "Separation Agreement" refers to the Restructuring,
Transfer and Separation Agreement between the Company and DuPont, which provides
for, among other things, the principal transactions required to effect the
Separation and the Offerings, including the transfer to the Company of oil and
gas assets, the division between DuPont and the Company of certain liabilities,
and certain other agreements governing the relationship between DuPont and the
Company following the Separation and the Offerings.
The Pro Forma Combined Financial Statements do not purport to represent
what the results of operations or financial position of the Company would
actually have been if the Offerings and Transactions had in fact occurred on
such dates or to project the results of operations or financial position of the
Company for any future date or period. These statements should be read in
conjunction with, and are qualified by reference to the Combined Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-Q.
In July 1998, a dividend of $7,500 was declared and paid in the form of a
promissory note by the Company to DuPont. In September 1998, the Company
declared a dividend of $700 representing a reduction of notes receivable from
DuPont. Prior to or concurrently with the consummation of the Offerings, the
following transactions occurred as provided for in the Separation Agreement: (a)
to structure the Company on a stand-alone basis, certain subsidiaries and assets
and liabilities were transferred between DuPont and Conoco; (b) intercompany
loans in existence prior to the Offerings were settled to the extent specified;
(c) the Company delivered a promissory note to DuPont as settlement for DuPont
stock options held by Conoco employees and other employee benefits related
liabilities; (d) the Company used the net proceeds of the Offerings to repay a
portion of indebtedness owed to DuPont; and (e) DuPont and Conoco entered into
certain agreements with respect to employee benefit arrangements, information
management, the provision of interim services, financing arrangements, tax
sharing, environmental liabilities and various commercial arrangements. The
transactions described above, excluding the Offerings, are referred to herein
collectively as the "Transactions."
The pro forma adjustments are based upon currently available information
and contain certain estimates and assumptions. Should DuPont's ownership
interest fall below 50 percent, pro forma Selling, General and Administrative
expenses and guarantee and letter of credit fees would increase by approximately
$15 to $20 on a full year basis. In addition, certain changes are scheduled to
be made in services historically provided to DuPont by the Company. These
changes primarily include ceasing to provide insurance coverage to DuPont which
historically has been provided through a Company-owned captive insurance company
and entering into new contractual commitments related to fees charged by Conoco
for services provided to DuPont such as research and development and securing
supplies of natural gas for various DuPont facilities. The effect of these
scheduled changes are not expected to be material to the Company's results of
operations and are not reflected in the Pro Forma Combined Financial Statements.
10
<PAGE> 13
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
In connection with the Offerings, the Company and DuPont gave certain
current employees of the Company the option, subject to specific country tax and
legal requirements, to participate in the Option Program, which involves the
cancellation of all or part of their options to purchase DuPont common stock or
SARs with respect to DuPont common stock and the issuance by the Company upon
such cancellation of comparable Class A Common Stock options, or SARs with
respect to Class A Common Stock. The Option Program was deemed a change in the
terms of certain awards granted to Conoco employees. As a result, the Company
will incur a non-cash charge to compensation expense in the fourth quarter of
1998 of $183 after-tax. Since the cancellation and issuance is a one-time event
occurring after the Offerings, the charge is not reflected in the Pro Forma
Combined Financial Statements. Approximately 81 percent of all outstanding
DuPont stock options and SARs held by Conoco employees were voluntarily canceled
in the Option Program.
Management believes the estimates and assumptions provide a reasonable
basis for presenting the significant effects of the Offerings and Transactions
as contemplated in the Separation Agreement, and that the pro forma adjustments
give appropriate effect to these estimates and assumptions and are properly
applied in the Pro Forma Combined Financial Statements.
2. PRO FORMA ADJUSTMENTS
Unaudited Pro Forma Combined Statements of Income
(a) Reflects a decrease in interest income due to settlement of Notes
Receivable -- Related Parties and incremental interest expense resulting from
the Company's new debt structure. The incremental interest expense was
calculated by multiplying the Long-Term Borrowings -- Related Parties ($922),
and Short-Term Borrowings -- Related Parties ($366) and the new Long-Term
Borrowings -- Other Related Party ($7,500) by an annual interest rate of 6.0125
percent on those borrowings and subtracting the historical related party
interest cost of $172 and $96 for the nine months ended September 30, 1998 and
1997, respectively. The historical related party interest cost is net of
capitalized interest of $69 in both periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Decrease to Interest Income................................. (45) (7)
Increase to Interest and Debt Expense....................... 224 300
</TABLE>
(b) Reflects the impact of changes in currency exchange rates on certain
intercompany loans denominated in foreign currencies purchased by the Company
from DuPont as part of the restructuring and settlement of notes prior to the
Offerings provided for in the Separation Agreement. These loans are to Western
European petroleum operations for which the local currency has been designated
as the functional currency.
(c) Reflects the impact of the Pro Forma Adjustments (primarily increased
interest expense resulting from the Company's new debt structure) and a separate
return income tax calculation method on the Provision for Income Taxes. The
historic tax provision was calculated on a loss benefit method (See Note 2 to
the Combined Financial Statements in Conoco's Form S-1). In accordance with SEC
Staff Accounting Bulletin No. 55, the Pro Forma Provision for Income Taxes is
calculated using a separate return method. The Pro Forma Combined Statements of
Income for the nine months ended September 30, 1998 and September 30, 1997
reflect an increase of $12 and a reduction of $19 respectively, in the Pro Forma
Provision for Income Taxes, due to the change to the separate return method of
presentation. The increase for the period ended September 30, 1998 is
attributable to a reduction in tax benefits resulting from the transfer of
international exploration subsidiaries from one tax jurisdiction to another,
partially offset by utilization of additional foreign credits against the
provision of U.S. taxes. The reduction for the period ended September 30, 1997
is attributable to the utilization of additional foreign tax credits against the
provision for
11
<PAGE> 14
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
U.S. taxes and an increase in tax benefits resulting from the transfer of
international exploration subsidiaries from one tax jurisdiction to another. See
also "Arrangements Between the Company and DuPont -- Tax Sharing Agreement" in
Conoco's Form S-1.
Unaudited Pro Forma Combined Balance Sheet as of September 30, 1998
(d) The Company's Insurance Subsidiaries will refund prepaid insurance
premiums of approximately $14 to DuPont. Additionally, an estimated $20 will be
used to acquire certain other assets from DuPont in connection with the
Offerings. As these assets are held under common control, they are accounted for
at their historical book value. As a result, their acquisition at estimated fair
value has been reflected as a charge to Owner's Net Investment. Any deferred tax
assets related to these acquisitions have been fully reserved.
Offering Adjustments
(e) Represents the receipt by Conoco of $4,228 in proceeds from the
Offerings (consisting of the sale of 191.5 million shares at $23 per share, net
of underwriting discounts and commissions of $176).
(f) Represents the use of net proceeds to repay the indebtedness to DuPont
as described in "Part II, Item 2. Changes in Securities and Use of Proceeds."
(g) The Separation Agreement provides that a subsidiary of the Company
leave a portion of the Long-Term Borrowings -- Related Parties outstanding equal
to the sum of: (i) an agreed level of future appreciation of DuPont stock
options or SARs held by active Conoco employees who do not participate in the
Option Program; (ii) an amount calculated to result in an approximately equal
sharing between the Company and DuPont of the after-tax cost that would result
from an assumed exercise of all DuPont stock options and SARs held by active
Conoco employees outstanding immediately prior to the Offerings (including those
to be cancelled upon issuance of Company stock options and SARs), based on the
appreciated value of the options at the time of the Offerings; and (iii) $10.4
in consideration for estimated other employee benefits related liabilities
assumed by DuPont for employees transferring between the two companies. Based on
the value at the date of the Offerings and approximately 81 percent of all
outstanding DuPont stock options and SARs being voluntarily cancelled in the
Option Program, the principal amount to remain outstanding is $7.
(h) Reflects the collection of the remaining balance in Notes
Receivable -- Related Parties.
(i) Represents a reclassification for restricted cash related to the excess
of net proceeds of $559 to be used to repay borrowings due DuPont incurred
subsequent to September 30, 1998. As provided in the Separation Agreement, the
Company will have cash and cash equivalents and marketable securities of $225
and Long-Term Borrowings -- Other Related Party of $4,846.
(j) Reflects the impact of changes in currency exchange rates on certain
intercompany loans denominated in foreign currencies purchased by the Company
from DuPont after the Offerings. These loans are to Western European petroleum
operations for which the local currency has been designated as the functional
currency.
(k) Represents the reduction of interest expense and the associated
increase in income taxes resulting from the payment to DuPont of the borrowings
described in (f) and the tax impact of the adjustment described in (j) above.
3. EARNINGS PER SHARE
Unaudited pro forma basic earnings per share includes both the shares of
Class A and Class B Common Stock deemed to be outstanding as of the date of the
Offerings. Pro forma diluted earnings per share includes the dilutive effect of
the 8.6 million shares of Class A Common Stock issuable upon exercise of Company
stock options, after applying the treasury stock method, which will be issued in
the Option Program upon cancellation of outstanding DuPont stock options, using
the weighted-average per share exercise price of $62.97 of the outstanding
options and the $23 price per share of the Offerings. In accordance with SEC
Staff Accounting Bulletin No. 98, pro forma basic and diluted earnings per share
have been presented.
12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(a) FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED BY OPERATIONS
Cash provided by operations in the first nine months of 1998 of $1,264
million was a decrease of $277 million versus the first nine months of 1997.
Cash provided by operations before changes in operating assets and liabilities
decreased $182 million compared to the first nine months of 1997, primarily due
to lower net realized crude oil and natural gas prices partially offset by
higher natural gas volumes and Downstream refining volumes. Negative changes to
net operating assets and liabilities of $95 million were due to higher tax
payments attributable to 1997 asset sales, a decrease in accounts payable
largely offset by a decrease in accounts receivable due to lower crude oil
prices and the timing of payments on other operating liabilities.
INVESTMENT ACTIVITIES
CAPITAL EXPENDITURES AND INVESTMENTS
The Company's capital expenditure program (including investments in
affiliated companies) promotes the Company's growth-oriented business strategy
by continuing to invest in existing core areas where efficiencies and
profitability can be enhanced and by targeting funds into new high potential
areas where long-term growth opportunities can be realized.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------
1998 1997
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Upstream.................................................... 1,352 2,040
Downstream.................................................. 355 299
Corporate and Other......................................... 10 0
----- -----
1,717 2,339
===== =====
United States............................................... 728 1,373
International............................................... 989 966
----- -----
1,717 2,339
===== =====
</TABLE>
Upstream
Upstream capital investments totaled $1,352 million in the first nine
months of 1998, down approximately 34 percent from the first nine months of 1997
which included the $929 acquisition of natural gas properties and transportation
assets in the Lobo Trend in South Texas (the "Lobo Acquisition"). The 1997 Lobo
Acquisition added significant reserves and 1,150 miles of natural gas gathering
and transportation pipeline, providing direct access to major Texas intrastate
and interstate pipelines. As a result, the Company is the largest natural gas
producer in the area, and one of the three largest natural gas producers in
Texas.
United States
During the first nine months of 1998, the Company spent $583 million on
capital projects in the United States, a decrease of 55 percent from the first
nine months of 1997 which included the Lobo Acquisition of $929 million.
Expenditures focused on development of the Lobo field, the Ursa field in
deepwater Gulf of Mexico, the acquisition of exploratory acreage, and the
expansion of onshore natural gas operations. The Ursa field development,
operated by Shell, represents a major development project in the Gulf of Mexico.
The project involves installing a new generation tension leg platform in
approximately 3,800 feet of water. First production is scheduled for 1999.
13
<PAGE> 16
International
International capital investments totaled $769 million in the first nine
months of 1998, an increase of one percent from the first nine months of 1997.
The Company completed its multi-year development program in the Britannia gas
field in the U.K. North Sea and production began in August 1998. The Britannia
gas field is one of the largest natural gas fields in the U.K. North Sea, and
the Company's proved reserves in the field include 1.1 trillion cubic feet of
natural gas and 52 million barrels of petroleum liquids at December 31, 1997.
Britannia development is an example of the Company's strategy to increase
production and reserves through large, long-lived projects. Other significant
capital investments were made for exploratory drilling and development projects
such as the Petrozuata joint venture in Venezuela, that began production in
August 1998, the Visund field in the Norwegian North Sea and the Viking Phoenix
project in the U.K. North Sea.
Downstream
Downstream capital investments totaled $355 million in the first nine
months of 1998, an increase of 19 percent versus the first nine months of 1997,
primarily reflecting the timing of expenditures in the United States for
continued operations.
United States
During the first nine months of 1998, the Company spent $135 million on
Downstream capital projects in the United States, up 48 percent from the first
nine months of 1997, with the majority of these funds being used to support
continuing operations and optimization of retail marketing operations. The
Company also invested additional funds of $5 for an increased equity interest in
Penreco, a joint venture with Pennzoil that produces and markets highly refined
specialty petroleum products.
International
During the first nine months of 1998, the Company spent $220 million on
Downstream international capital investments, up six percent from the first nine
months of 1997. Expenditures in 1998 focused on strengthening the Company's
retail marketing position in core markets such as Germany, Austria and the
Nordic countries, expanding in targeted retail growth markets in Central and
Eastern Europe, Spain, Turkey, and the Asia Pacific region, and completing the
construction of the Melaka refinery, a joint venture with Petronas and Statoil,
which began operations in the third quarter of 1998.
Corporate and Other
Corporate and Other capital expenditures totaled $10 million in the first
nine months of 1998 associated with new corporate software in accordance with
the Company's accounting policy for capitalization of computer software.
PROCEEDS FROM SALES OF ASSETS AND SUBSIDIARIES
The Company's Investment Activities also include proceeds of $389 million
for the first nine months of 1998, an increase of $218 million over the first
nine months of 1997. The 1998 proceeds included $156 million for various
Downstream assets in the U.S., as well as $91 million from the sale of certain
upstream North Sea properties. These and other proceeds are a result of the
Company's ongoing strategic portfolio upgrading and rationalization efforts.
FINANCING ACTIVITIES
The Company's ability to maintain and grow its operating income and cash
flow is dependent upon continued capital spending to replace depleting assets.
The Company believes its future cash flow from operations and its borrowing
capacity should be sufficient to fund its dividends, if any, debt service,
capital expenditures, and working capital requirements.
14
<PAGE> 17
Prior to the Separation, the businesses transferred to the Company were
funded through DuPont. Apart from limited recourse project financings related to
various joint ventures, equipment lease facilities and financing of certain
refinery equipment and other smaller financings, the Company has had limited
indebtedness to third parties. For a period, after the Offerings, the Company's
operations will be funded through related party debt with DuPont.
In July 1998, the Company issued a promissory note (the "Note") to DuPont
in the aggregate principal amount of $7,500 million bearing interest at a rate
of 6.0125 percent per annum. The Note has a maturity date of January 2, 2000.
The Note may be voluntarily prepaid without penalty or premium. The Note also
provides for mandatory prepayments in the event cash proceeds are realized by
the Company from the incurrence of indebtedness or the issuance of equity
securities by the Company or its subsidiaries. The Note includes certain
covenants and customary events of default, including failure to pay interest
when due, certain events of bankruptcy of the Company and change of control. The
consent of DuPont is also required prior to the Company entering into certain
transactions.
Total indebtedness owed to DuPont, following application of the net
proceeds of the Offerings and associated cash settlement as described in Part
II, Item 2, was $4,846 million outstanding under the Note and $7 million
outstanding under the $827 million note discussed in the first paragraph of Part
II, Item 2.
On October 27, 1998, the Company and DuPont entered into a Revolving Credit
Agreement under which DuPont will provide the Company with a revolving credit
facility in principal amount of up to $500 million. The term of DuPont's
commitment under this facility will begin upon satisfaction of certain
conditions and continue until the earlier of (i) October 11, 1999 or (ii) (a)
the date on which DuPont's direct or indirect voting power in the Company falls
below 50 percent of the outstanding voting power of the Company or (b) DuPont's
election to terminate its commitment as the result of an unremedied event of
default. Loans under the Revolving Credit Agreement will be subject to mandatory
prepayment to the extent the Company's cash and cash equivalents exceed $325
million or such higher amount as the Company and DuPont may agree. Loans under
this facility will bear interest at a rate equal to 30-day LIBOR plus 0.20
percent per annum and may be voluntarily prepaid without penalty or premium. To
date, the Company has not needed to borrow funds under this credit facility.
The Company is obligated to repay all outstanding debt owed to DuPont at
such time as DuPont's direct or indirect voting power in the Company falls below
50 percent of the outstanding voting power of the Company. The Company intends
to refinance outstanding related party debt owed to DuPont with a combination of
commercial paper, bank debt and public debt in 1999.
15
<PAGE> 18
(B) RESULTS OF OPERATIONS
COMBINED RESULTS
A summary of the Company's Sales and Other Operating Revenues and After-Tax
Operating Income, by business segment, is as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------- -----------------
1998 1997 1998 1997
------ ------ ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES
Upstream....................................... $1,103 $1,141 $ 3,578 $ 3,820
Downstream..................................... 4,470 5,291 13,004 14,940
Corporate and Other............................ 343 239 682 386
------ ------ ------- -------
Total Sales and Other Operating Revenues.... $5,916 $6,671 $17,264 $19,146
====== ====== ======= =======
AFTER TAX OPERATING INCOME
Upstream.......................................
United States............................... $ 48 $ 55 $ 192 $ 296
International............................... 70 134 285 347
------ ------ ------- -------
Total Upstream......................... $ 118 $ 189 $ 477 $ 643
Downstream.....................................
United States............................... $ 75 $ 69 $ 161 $ 199
International............................... 39 54 134 105
------ ------ ------- -------
Total Downstream....................... $ 114 $ 123 $ 295 $ 304
Corporate and Other............................ (9) (23) (48) (57)
------ ------ ------- -------
Total After-Tax Operating Income............ $ 223 $ 289 $ 724 $ 890
Interest and Other Non-Operating Expenses Net
of Tax...................................... (40) -- (11) (14)
------ ------ ------- -------
COMBINED NET INCOME.............................. $ 183 $ 289 $ 713 $ 876
====== ====== ======= =======
</TABLE>
SPECIAL ITEMS
Combined Net Income includes the following Special Items on an after-tax
basis:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
UPSTREAM
Asset sales........................................... $-- $ 30 $ 54 $ 54
Tax rate changes...................................... -- 19 -- 19
--- ---- ---- ----
Total Upstream Special Items................ -- $ 49 $ 54 $ 73
=== ==== ==== ====
DOWNSTREAM
Tax rate changes...................................... -- 11 -- 11
Litigation............................................ -- (23) (28) (23)
--- ---- ---- ----
Total Downstream Special Items.............. $-- $(12) $(28) $(12)
=== ==== ==== ====
TOTAL................................................. $-- $ 37 $ 26 $ 61
=== ==== ==== ====
</TABLE>
Special Items for the first nine months of 1998 reflect a $23 million gain
on the sale of North Sea properties and a $31 million benefit from the sale of
an international subsidiary, partly offset by $28 million charge for litigation
accruals. In the first nine months of 1997, Special Items include a $24 million
gain from the sale of certain U.S. assets, a $30 million gain from the sale of
North Sea properties and $30 million in tax benefits from the U.K. tax rate
change, offset by a $23 million charge for litigation accruals.
16
<PAGE> 19
THIRD QUARTER 1998 VERSUS THIRD QUARTER 1997
The Company had third quarter Combined Net Income of $183 million in 1998,
down 37 percent from $289 million in the third quarter of 1997. The Company had
Earnings Before Special Items of $183 million in the third quarter of 1998, down
27 percent from $252 million in the third quarter of 1997. Lower earnings
primarily reflect lower net realized crude oil and natural gas prices and higher
interest and debt expenses related to the $7,500 million promissory note, partly
offset by higher natural gas volumes and lower exploration costs.
Sales and Other Operating Revenues for the third quarter of 1998 were
$5,916 million, down 11 percent from the third quarter of 1997, primarily due to
lower crude oil and natural gas prices. The Company's worldwide net realized
crude oil price was $12.29 per barrel for the quarter, down $5.67 per barrel, or
32 percent, from $17.96 per barrel in the third quarter of 1997 as global excess
oil production continued to outpace the world's demand. Worldwide natural gas
prices averaged $2.08 per thousand cubic feet (mcf) for the quarter, compared
with $2.17 per mcf in the same period in 1997. Worldwide crude oil and
condensate production in the third quarter of 1998 was 292,000 barrels per day
versus 325,000 barrels per day in the third quarter 1997, a 10% decline
primarily attributable to natural production declines and prior year property
dispositions. Worldwide natural gas deliveries in the third quarter of 1998 were
up 14 percent to 1,374 million cubic feet per day from 1,205 million cubic feet
per day in the third quarter of 1997. U.S. natural gas deliveries were up 32
percent as a result of the Lobo Acquisition and related development drilling.
International gas deliveries were down 13 percent from natural production
declines, partly offset by new gas fields increasing production. Worldwide
refined product sales were 1,081,000 barrels per day, down 1 percent versus
1997. Crude oil and refined product buy/sell and natural gas and electric power
resale activities in the third quarter of 1998 totaled $1,384 million, down 13
percent compared to $1,600 million in the third quarter of 1997, primarily due
to lower crude oil prices.
Cost of Goods Sold and Other Operating Expenses for the third quarter of
1998 totaled $3,624 million, a decrease of $697 million, or 16 percent, compared
to $4,321 million in the third quarter of 1997, primarily due to lower feedstock
costs.
Selling, General and Administrative Expenses for the third quarter of 1998
totaled $151 million, a decrease of $29 million, or 16 percent, compared to $180
million in the third quarter of 1997, primarily due to lower overall
compensation expense.
Exploration Expenses for the third quarter of 1998 totaled $59 million, a
decline of $69 million, or 54 percent, compared to $128 million in the third
quarter of 1997, due to lower dry hole costs and lower overhead.
Provision for Income Taxes for the third quarter of 1998 totaled $119
million, down 11 percent compared to $133 million for the third quarter of 1997.
Income taxes are down primarily as a result of lower income in 1998, partially
offset by a larger adjustment in deferred taxes in 1997 reflecting a U.K. tax
rate change.
FIRST NINE MONTHS 1998 VERSUS FIRST NINE MONTHS 1997
The Company had first nine months Combined Net Income of $713 million in
1998, down 19 percent from $876 million in the first nine months of 1997. The
Company had Earnings Before Special Items of $687 million in the first nine
months of 1998, down 16 percent from $815 million in the first nine months of
1997. Lower earnings primarily reflect lower net realized crude oil and natural
gas prices, partly offset by increased U.S. natural gas volumes and refinery
inputs.
Sales and Other Operating Revenues for the first nine months of 1998 were
$17,264 million, down 10 percent from the first nine months of 1997, primarily
due to lower crude oil and natural gas prices and a decrease in worldwide
refined product volumes and prices. The Company's worldwide net realized crude
oil price was $12.82 per barrel for the first nine months of 1998, down $5.97
per barrel, or 32 percent, from $18.79 per barrel in the first nine months of
1997 as global excess oil production continued to outpace the world's demand.
Worldwide natural gas prices averaged $2.28 per thousand cubic feet (mcf) for
the first nine months
17
<PAGE> 20
of 1998, compared with $2.41 per mcf in the same period in 1997. The 1998
worldwide average gas price has improved after a very low realized price in the
first quarter. Worldwide crude oil and condensate production in the first nine
months of 1998 was 309,000 barrels per day versus 334,000 barrels per day in the
same period in 1997, down seven percent, primarily due to natural production
declines and prior year dispositions. Worldwide natural gas production in the
first nine months of 1998 was up 10 percent to 1,330 million cubic feet per day
from 1,208 million cubic feet per day in the first nine months of 1997 as a
result of higher U.S. natural gas production which amounted to 856 million cubic
feet, up 22 percent over the same period in 1997, attributed to the Lobo
Acquisition and related developmental drilling. International volumes were lower
due to natural production declines partly offset by new fields increasing
production. Worldwide refined product sales were 1,016,000 barrels per day, down
two percent versus 1997. Crude oil and refined product buy/sell and natural gas
and electric power resale activities in the first nine months of 1998 totaled
$3,788 million, down seven percent compared to $4,092 million in the first nine
months of 1997, primarily due to lower crude oil prices.
Cost of Goods Sold and Other Operating Expenses for the first nine months
of 1998 totaled $10,378 million, a decrease of $1,610 million, or 13 percent,
compared to $11,988 million in the first nine months of 1997, primarily due to
lower feedstock costs.
Selling, General and Administrative Expenses for the first nine months of
1998 totaled $521 million, a decrease of $14 million, or 3 percent, compared to
$535 million in the first nine months of 1997, primarily due to lower overall
compensation expense partially offset by higher costs in international
Downstream retail marketing expansion activities.
Exploration Expenses for the first nine months of 1998 totaled $235
million, a decline of $85 million, or 27 percent, compared to $320 million in
the first nine months of 1997, due to lower dry hole costs, lower amortization
of non-producing leasehold properties in the United States, and lower overhead
and operating costs, partially reflecting a shift in focus from geoseismic work
to drilling in the current year.
Provision for Income Taxes for the first nine months of 1998 totaled $373
million, down 48 percent compared to $723 million for the first nine months of
1997. Income taxes are down primarily due to lower income in 1998, increased oil
production in countries with lower effective tax rates, and the favorable
resolution of certain tax issues.
UPSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
------------- -------------
1998 1997 1998 1997
----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
After-Tax Operating Income.................................. $118 $189 $477 $643
Special Items............................................... -- (49) (54) (73)
---- ---- ---- ----
Earnings Before Special Items............................... $118 $140 $423 $570
==== ==== ==== ====
</TABLE>
THIRD QUARTER 1998 VERSUS THIRD QUARTER 1997
Upstream Earnings Before Special Items were $118 million in the third
quarter of 1998, down 16 percent from $140 million in the third quarter of 1997.
U.S. Upstream Earnings Before Special Items totaled $48 million in the third
quarter of 1998, down 13 percent from $55 million in the comparable period of
1997. Lower U.S. Upstream Earnings were due to lower crude oil and natural gas
prices and lower oil volumes due to prior asset dispositions and crude oil
production declines. These factors more than offset increased natural gas
production and lower exploration expenses. Natural gas volumes were up 32
percent, as production from the South Texas fields acquired in 1997 increased
more than natural gas production declined elsewhere. Outside the United States,
Upstream Earnings Before Special Items were $70 million, down 18 percent, from
18
<PAGE> 21
$85 million in the comparable period in 1997, primarily attributable to lower
prices for crude oil and natural gas, partly offset by lower exploration costs.
FIRST NINE MONTHS 1998 VERSUS FIRST NINE MONTHS 1997
Upstream Earnings Before Special Items were $423 million in the first nine
months of 1998, down 26 percent from $570 million in the first nine months of
1997. U.S. Upstream Earnings Before Special Items totaled $192 million in the
first nine months of 1998, down 29 percent from $272 million in the comparable
period of 1997. Lower U.S. Upstream Earnings were due to lower crude oil and
natural gas prices and lower oil volumes due to prior asset dispositions and
crude oil production declines. These factors more than offset the significant
increased natural gas production and lower exploration expenses. Natural gas
volumes were up 22 percent, as production from the South Texas fields acquired
in 1997 increased more than natural gas production declined elsewhere. Outside
the United States, Upstream Earnings Before Special Items were $231 million,
down 22 percent, from $298 million in the comparable period in 1997 as a result
of lower prices for crude oil and natural gas and lower natural gas volumes,
partly offset by lower exploration cost and lower taxes.
DOWNSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
------------- -------------
1998 1997 1998 1997
----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
After-Tax Operating Income............................... $114 $123 $295 $304
Special Items............................................ -- 12 28 12
---- ---- ---- ----
Earnings Before Special Items............................ $114 $135 $323 $316
==== ==== ==== ====
</TABLE>
THIRD QUARTER 1998 VERSUS THIRD QUARTER 1997
Downstream Earnings Before Special Items were $114 million in the third
quarter of 1998, down 16 percent from $135 million in the comparable period in
1997, due to lower refined product margins. U.S. Downstream Earnings Before
Special Items were $75 million in the third quarter of 1998, down 18 percent
from $92 million in the third quarter of 1997, from lower refined product
margins. Downstream Earnings Before Special Items outside the United States were
$39 million in the third quarter of 1998, down nine percent, from $43 million in
the comparable period in 1997, reflecting weaker refining and marketing margins.
FIRST NINE MONTHS 1998 VERSUS FIRST NINE MONTHS 1997
Downstream Earnings Before Special Items were $323 million for the first
nine months of 1998, up two percent from $316 million in the comparable period
in 1997. U.S. Downstream Earnings Before Special Items were $189 million for the
first nine months of 1998, down 15 percent from $222 million for the first nine
months of 1997, from lower refinery product margins. Downstream Earnings Before
Special Items outside the United States were $134 million for the first nine
months of 1998, up 43 percent from $94 million in the comparable period in 1997,
reflecting higher refinery and marketing volumes that were only partly offset by
slightly lower refining margins.
CORPORATE AND OTHER SEGMENT RESULTS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
------------- -------------
1998 1997 1998 1997
----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
After-Tax Operating Income............................... $(9) $(23) $(48) $(57)
</TABLE>
19
<PAGE> 22
THIRD QUARTER 1998 VERSUS THIRD QUARTER 1997
Corporate and Other Earnings were a loss of $9 for the third quarter of
1998, improved 61 percent from a loss of $23 for the comparable period in 1997,
resulting from lower administrative costs.
FIRST NINE MONTHS 1998 VERSUS FIRST NINE MONTHS 1997
Corporate and Other Earnings were a loss of $48 for the first nine months
of 1998, improved 16 percent from a loss of $57 for the comparable period in
1997, resulting from lower administrative costs.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
------------- -------------
1998 1997 1998 1997
----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
INTEREST AND OTHER CORPORATE NON-OPERATING EXPENSES NET OF
TAX
Net Interest Income (Expense).......................... $(53) $ 14 $(14) $ 24
Exchange Gains (Losses)................................ 27 12 32 17
Other Corporate Expenses(1)............................ (14) (26) (29) (55)
---- ---- ---- ----
Total........................................ $(40) $ -- $(11) $(14)
==== ==== ==== ====
</TABLE>
- ---------------
(1) Includes financing costs and other non-operating items.
THIRD QUARTER 1998 VERSUS THIRD QUARTER 1997
Non-Operating Expenses for the third quarter of 1998 were $40 million, an
increase of 100% versus the comparable period in 1997, primarily reflecting an
increase in interest expense due to the additional debt in the third quarter of
1998 versus 1997.
FIRST NINE MONTHS 1998 VERSUS FIRST NINE MONTHS 1997
Non-Operating Expenses for the first nine months of 1998 were $11 million,
an improvement of $3 million versus $14 million for the same period in 1997. The
improvement is primarily attributable to the lower general corporate expenses
and higher exchange gains, partly offset by increased interest expense related
to the $7,500 million promissory note.
TAX MATTERS
As a result of the Separation and the Offerings, the Company will no longer
be able to combine the results of its operations with those of DuPont in
reporting income for U.S. federal income tax purposes and for state and non-U.S.
income tax purposes in certain states and countries. The Company believes this
will not have a material adverse effect on its earnings.
YEAR 2000
Historically, certain computerized systems have had two digits rather than
four digits to define the applicable year, which could result in recognizing a
date using "00" as the year 1900 rather than the year 2000. This could result in
major failures or miscalculations and is generally referred to as the "Year 2000
issue."
The Company recognizes that the impact of the Year 2000 issue extends
beyond traditional computer hardware and software to automated plant systems and
instrumentation, as well as to third parties. The Year 2000 issue is being
addressed within the Company by its individual business units, and progress is
reported periodically to management.
The Company has committed resources to conduct risk assessments and to take
corrective action, where required, within each of the following
areas: information technology, plant systems and external parties. Information
technology includes telecommunications as well as traditional computer software
and hardware in
20
<PAGE> 23
the mainframe, midrange and desktop environments. Plant systems include all
automation and embedded chips used in plant operations. External parties include
any third party with whom the Company interacts.
In the information technology area, inventory and assessment audits in the
mainframe and midrange environments have been completed with corrective action
scheduled for completion in the fourth quarter of 1998, except for business
application software which is expected to be completed in the fourth quarter of
1999. Inventory and assessment audits of telecommunications have been completed,
with corrective action expected to be completed by the second quarter of 1999.
Finally, inventory and assessment audits in the desktop environment have been
completed, with corrective action expected to be completed in the third quarter
of 1999.
In the plant systems area, 75 percent of the Company's business units have
completed their inventory and assessments audits; the remaining units are
expected to complete this work in the fourth quarter of 1998. The Company is
relying on vendor testing and certification with validation through limited
internal testing and/or industry test results. Downtime for normally scheduled
plant maintenance will be used to conduct testing, with corrective action
expected to be completed in the second quarter of 1999.
With respect to external parties, 80 percent of the Company's business
units have completed their inventory audit of critical external parties. The
remaining business units are expected to have completed this work in the fourth
quarter of 1998. Risk assessment is expected to be completed in the fourth
quarter of 1998, and monitoring of risk in this area will continue into 1999, as
many external parties will not have completed their work.
The total cost of Year 2000 activities is not expected to be material to
the Company's operations, liquidity or capital resources. Costs are being
managed within each business unit. The total estimated cost for the Company's
Year 2000 work is $47 million. 1997 costs were $5 million, and 1998 costs
through September 1998 were $15 million. Costs exclude expenditures for
previously scheduled replacement systems.
Failure to address a Year 2000 issue could result in business interruption
that could materially affect the Company's operations, liquidity or capital
resources. The Company has contingency plans to address other issues such as oil
tanker spills and plant disruption. Typically these contingency plans address
the results of single events while the scope of Year 2000 issues may cause
multiple concurrent events for a longer duration. Development of contingency
plans for multiple concurrent events is expected to be completed by the first
quarter of 1999.
There is still uncertainty around the scope of the Year 2000 issue. At this
time the Company cannot quantify the impact of these potential failures. The
Company's Year 2000 program and contingency plans are being developed to address
issues within the Company's control. The program attempts to minimize, but does
not eliminate, the issues of external parties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
The Company operates in the worldwide crude oil, refined product, natural
gas and natural gas liquids markets and is exposed to fluctuations in interest
rates, foreign currency exchange rates and hydrocarbon prices that can affect
revenues and cost of operating, investing and financing. The Company's
management has and intends to use financial and commodity based derivative
contracts to reduce the risk in the Company's overall earnings and cash flow
when the benefits of avoiding disruption of the Company's value creation process
(primarily long-term exploration and capital investment programs) are
anticipated to more than offset the risk management costs involved.
The Company has established a Financial Risk Management Policy Framework
that provides guidelines for entering into contractual arrangements
(derivatives) to manage the Company's commodity price, foreign currency exchange
rate, and interest rate risks. The Conoco Risk Management Committee has ongoing
responsibility for the content of this policy and has principal oversight
responsibility for compliance with the policy framework by ensuring proper
procedures and controls are in place. These procedures establish derivative
control and valuation processes, routine monitoring and reporting requirements
and counterparty
21
<PAGE> 24
credit approval procedures. Additionally, the Company's internal audit group
conducts routine reviews of these risk management activities to assess the
adequacy of internal controls, and audit results are reviewed by the Conoco Risk
Management Committee and by operating management.
The counterparties to these contractual arrangements are limited to major
financial institutions and other major companies in the petroleum business.
Although the Company is exposed to credit loss in the event of nonperformance by
these counterparties, this exposure is managed through credit approvals, limits
and monitoring procedures, and limits to the period over which unpaid balances
are allowed to accumulate. The Company has not experienced nonperformance by
counterparties to these contracts and no material loss would be expected from
any such individual nonperformance.
Commodity Price Risk
The Company enters into energy-related futures, forwards, swaps and options
in various markets to balance its physical systems to meet customer needs and to
manage its exposure to price fluctuations on anticipated crude oil, natural gas,
refined product and electric power transactions. These instruments provide a
natural extension of the underlying cash market and are used to physically
acquire a portion of supply requirements and to manage pricing of near term
physical requirements. The commodity futures market has underlying principles of
increased liquidity and longer trading periods than the cash market and is one
method of managing price risk in the petroleum business.
From time to time, management may use derivatives to establish longer-term
positions to hedge the price risk for the Company's equity crude oil and natural
gas production as well as refinery margins.
Under the Company's policy, hedging includes only those transactions that
offset physical positions and reduce overall company exposure to prevailing
market price risk. Trading is defined as any transaction that does not meet the
definition of a hedge and is marked to market on a monthly basis. After-tax
gain/loss from risk trading has not been material.
The fair value gain (loss) of outstanding derivative commodity instruments
and the change in fair value that would be expected from a 10 percent adverse
price change are shown in the table below:
<TABLE>
<CAPTION>
CHANGE IN
FAIR VALUE
FROM
10% ADVERSE
FAIR VALUE PRICE CHANGE
---------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
AT SEPTEMBER 30, 1998
Crude Oil and Refined Products
Hedging................................................... (2) 0
Trading................................................... (9) (4)
--- ---
Combined.................................................. (11) (4)
Natural Gas
Hedging................................................... 10 (26)
Trading................................................... 1 0
--- ---
Combined.................................................. 11 (26)
AT DECEMBER 31, 1997
Crude Oil and Refined Products
Hedging................................................... (3) (8)
Trading................................................... (6) (18)
--- ---
Combined.................................................. (9) (26)
Natural Gas
Hedging................................................... 8 (9)
Trading................................................... -- --
--- ---
Combined.................................................. 8 (9)
</TABLE>
22
<PAGE> 25
The fair values of the futures contracts are based on quoted market prices
obtained from the New York Mercantile Exchange or the International Petroleum
Exchange of London. The fair values of swaps and other over-the-counter
instruments are estimated based on quoted market prices of comparable contracts
and approximate the gain or loss that would have been realized if the contracts
had been closed out at year end.
All hedge positions offset physical positions exposed to the cash market;
none of these offsetting physical positions is included in the above table.
Price-risk sensitivities were calculated by assuming a 10 percent adverse
change in prices regardless of term or historical relationships between the
contractual price of the instrument and the underlying commodity price. In the
event of an actual 10 percent change in prompt month crude or natural gas
prices, the fair value of the Company's derivative portfolio would typically
change less than that shown in the table due to lower volatility in out-month
prices.
Foreign Currency Exchange Rate Risk
The Company's operations in 40 countries expose it to foreign currency
exchange rate risk. The Company does not comprehensively hedge its exposure to
currency rate changes, although it may choose to selectively hedge certain
working capital balances, firm commitments, cash returns from subsidiaries and
affiliates and/or tax payments. There can be no assurance these efforts will be
successful. Historically, the Company has selectively hedged firm commitments.
At September 30, 1998, the Company had no open foreign currency hedged
positions. Cash balances are maintained principally in U.S. dollars, U.K.
Pounds, Deutsch Marks, Norwegian Kroner and Swedish Kroner.
Risk of Refinancing Debt Owed to DuPont
Upon the occurrence of the intended split-off from DuPont, mandatory
prepayment provisions will be triggered in the promissory notes representing the
debt owed by the Company to DuPont (the aggregate outstanding principal amount
of $4,853 million). As a result, the Company anticipates that it will be
required to refinance debt owed to DuPont within 12 months of the date hereof.
There can be no assurance that the Company will be able to refinance this debt
on terms as favorable as those existing with respect to the debt owed to DuPont.
23
<PAGE> 26
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1998, the Company settled an outstanding RCRA proceeding by
agreeing to pay the EPA $112,500 and the Colorado Department of Public Health
and Environment $72,500 and to perform several Supplemental Environmental
Projects (SEPs) at the refinery at a cost of $337,000.
On March 6, 1996, the Department of Justice filed a complaint in the United
States District Court for the District of Montana against Yellowstone Pipeline
Company ("YPL") and the Conoco Pipe Line Company as a part owner and operator of
YPL. The complaint alleges discharges of oil from a YPL pipeline in January 1993
and seeks civil penalties of up to $25,000 per day for each violation or up to
$1,000 for each barrel of oil discharged. Since the duration of the discharge is
in dispute, the penalty calculation is uncertain although it is expected to
exceed $100,000. The parties are attempting to negotiate a resolution of the
matter, including a supplemental environmental project that would constitute a
substantial part of a settlement with the government.
Conoco has been assessed a monetary penalty in the amount of $298,000 by
the New Mexico Environmental Department, Air Quality Bureau. The demand was made
on June 18, 1998. New Mexico alleges that Conoco failed to obtain a permit under
the CAA and violated certain permit conditions in the existing permits. Conoco
assets affected are the Maljamar Gas Plant and the MCA field. Conoco expects to
obtain settlement by payment of a lesser monetary penalty and performance of a
supplemental environmental project.
The Company is subject to various lawsuits and claims involving a variety
of matters including, along with other oil companies, actions challenging oil
and gas royalty and severance tax payments based on posted prices, and claims
for damages resulting from leaking underground storage tanks. As a result of the
Separation Agreement with DuPont, the Company has also assumed responsibility
for current and future claims related to certain discontinued chemicals and
agricultural chemicals businesses operated by the Company in the past. In
general, the effect on future financial results is not subject to reasonable
estimation because considerable uncertainty exists. The Company believes the
ultimate liabilities resulting from such lawsuits and claims may be material to
results of operations in the period in which they are recognized but will not
materially affect the combined financial position of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The net proceeds from the Offerings, after deducting the underwriting
discounts and commissions payable by the Company, were $4,228 million. The
Company used the net proceeds of the Offerings, plus a portion of its cash and
cash equivalents, to repay or purchase a portion of the indebtedness owed by
certain subsidiaries of the Company to DuPont under certain intercompany notes
(the "Intercompany Notes"). The Intercompany Notes consisted of (i) a promissory
note in the principal amount of $7,500 million, due January 2, 2000, and bearing
interest at a rate of 6.0125 percent per annum, (ii) a promissory note in the
principal amount of approximately $827 million, due January 2, 2000, and bearing
interest at a rate equal to the six-month LIBOR plus 0.375 percent per annum (or
5.965 percent per annum in the current period), (iii) several Norwegian Kroner
denominated promissory notes with an aggregate principal amount of approximately
$461 million after conversion to U.S. dollars at September 30, 1998, having
various maturity dates (ranging from October 1998 to January 2000 and having a
remaining weighted average maturity of 8 months as of September 30, 1998) and
bearing interest at a rate equal to the six-month NIBOR plus 0.375 percent per
annum (or 5.565 percent per annum in the current period) and (iv) a promissory
note (the principal amount of which was approximately $204 million at the end of
October 1998) due on demand, and bearing an interest rate during any calendar
month based on the interest rate on DuPont's commercial paper during the
preceding month (or 5.65% in October 1998).
24
<PAGE> 27
The net proceeds of the Offerings were applied, first, to pay accrued
interest on the $7,500 million promissory note and then to pay principal on such
promissory note to the extent necessary to reduce the principal amount to $4,846
million; second, to purchase the Kroner denominated notes described in clause
(iii) of the preceding paragraph and pay accrued interest thereon; third, to
repay, $820 million of principal and all accrued interest through October 26,
1998, on the $827 million note referred to in clause (ii) of the preceding
paragraph; and fourth, to repay, in part, the note referred to in clause (iv) of
the preceding paragraph. Since the net proceeds of the Offerings were
insufficient to repay in full the note referred to in clause (iv) of the
preceding paragraph, the Company will use its cash and cash equivalents and
marketable securities in excess of $225 million at the end of October 1998
(excluding $70 million of additional monetary assets held by the Company's
captive insurance company and its subsidiaries and cash and cash equivalents
held by Petrozuata) to repay, in whole or in part, the remaining balance of such
note. To the extent the note referred to in clause (iv) of the preceding
paragraph is not repaid in full according to the previous sentence, the holder
of such note will contribute the remaining balance of such note to the Company.
The $7,500 million promissory note was incurred in payment of a dividend in July
1998. The promissory note with a principal amount of approximately $827 million
was incurred to finance the purchase by the Company of certain loans made by
DuPont to the Company. The purchase loans, as well as the several promissory
notes with an aggregate principal amount of approximately $461 million, were
incurred to finance certain capital expenditures, acquisitions and working
capital. The promissory note referred to in clause (iv) of the preceding
paragraph was incurred to finance working capital needs of the Company.
Following the application of the net proceeds from the Offerings and the
utilization of a portion of the Company's cash and cash equivalents in
connection with the matters discussed in "Arrangements Between the Company and
DuPont -- Intercompany Notes," in Conoco's Form S-1, the Company will have
approximately $225 million in cash and cash equivalents and marketable
securities (excluding $70 million of additional monetary assets held by the
Company's captive insurance company and its subsidiaries and cash and cash
equivalents held by Petrozuata) at the end of October 1998.
ITEM 5. OTHER INFORMATION
(A) DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. Words such
as "expects," "intends," "plans," "projects," "believes," "estimates" and
similar expressions are used to identify such forward-looking statements.
Forward-looking statements relating to the Company's operations are based on
management's current expectations, estimates and projections about the Company
and the petroleum industry. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are
difficult to predict. Further, certain forward-looking statements are based upon
assumptions as to future events that may not prove to be accurate. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecast in such forward-looking statements.
Factors that could cause actual results or events to differ materially
include, but are not limited to, crude oil and natural gas prices; refining and
marketing margins; potential failure to achieve, and potential delays in
achieving, expected production from existing and future oil and gas development
projects; lack of exploration success; potential disruption or interruption of
the Company's production facilities due to accidents or political events;
international monetary conditions and exchange controls; potential liability for
remedial actions under existing or future environmental regulations; potential
disruption to the Company's operations due to untimely or incomplete resolution
of Year 2000 issues by the Company or other entities; and potential liability
resulting from pending or future litigation. In addition, such statements could
be affected by general domestic and international economic and political
conditions, as well as changes in tax and other laws applicable to the Company's
business.
25
<PAGE> 28
(B) SUBSEQUENT EVENT
Conoco completed the sale of its gas and oil properties in the Central
Rockies to Coastal Corporation in early November, 1998 for approximately $200
million. The properties sold represented 160 billion cubic feet equivalent of
proved developed gas reserves, seven percent of the Company's total U.S. gas
reserves, and about 200,000 barrels of oil reserves. Also included in the sale
was the Dragon Trail natural gas processing plant near Rangely, Colorado.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibit index filed with this Form 10-Q is on page 28.
26
<PAGE> 29
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONOCO INC.
(Registrant)
Date:
By: /s/ W. DAVID WELCH
----------------------------------
(As Duly Authorized Officer and
Principal Accounting Officer)
27
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Second Amended and Restated Certificate of Incorporation
of Conoco Inc.
3.2 -- By-laws of Conoco Inc. (amended as of October 29, 1998)
27 -- Financial Data Schedule (only filed electronically)
</TABLE>
28
<PAGE> 1
EXHIBIT 3.1
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CONOCO INC.
CONOCO INC., a Delaware corporation, (hereinafter the
"Corporation") hereby certifies as follows:
1. The name of the Corporation is CONOCO INC. The
original Certificate of Incorporation of the Corporation was filed with the
Secretary of State of the State of Delaware on November 2, 1995 under the name
Conoco Energy Company.
2. This Second Amended and Restated Certificate of
Incorporation of CONOCO INC. amends and restates the provisions of the
Certificate of Incorporation of the Corporation, filed with the Secretary of
State of the State of Delaware on November 2, 1995 and as amended on July 24,
1998 and October 19, 1998, and was duly adopted in accordance with Sections 242
and 245 of the General Corporation Law of the State of Delaware (the "DGCL") and
by written consent of its Stockholder in accordance with Section 228 of the DGCL
and the Amended and Restated Certificate of Incorporation as heretofore amended.
3. On October 19, 1998, the Corporation filed a
Certificate of Designation, Preferences and Rights of a series of Preferred
Stock designated "Series A Junior Participating Preferred Stock"; no shares of
such series of Preferred Stock have been issued. Pursuant to the authority
granted to the Board of Directors of the Corporation by Section 151(g) of the
Delaware General Corporation Law, on October 20, 1998 the Board of Directors of
the Corporation adopted the following resolution amending the terms of such
series of Preferred Stock:
RESOLVED, that pursuant to the authority granted to the Board of
Directors of the Corporation by Section 151(g) of the Delaware General
Corporation Law, the terms of the series of Preferred Stock, par value
$.01 per share, of the Corporation designated "Series A Junior
Participating Preferred Stock" are hereby amended by replacing the date
"October 18, 1998" in Section 2(A) of the Certificate of Designation,
Preferences and Rights for such Preferred Stock with "October 22,
1998".
Accordingly, effective upon the filing of this Second Amended and
Restated Certificate of Incorporation with the Secretary of State of the State
of Delaware (such time referred to herein as the "Effective Time"), the
Certificate of Designation, Preferences and Rights of Series A Preferred Stock
shall be amended in accordance with the foregoing resolution.
4. At the Effective Time, a reclassification (the
"Reclassification") of the Corporation's Class B Common Stock, par value $.01
per share (the "Class B Common Stock") shall occur as follows: the 455,500,000
(the "Initial Number") issued and outstanding shares of the Class B Common Stock
shall be reclassified, without any action on the part of the holder thereof,
into 430,000,000 (the "Aggregate Reclassified Number") shares of Class B Common
Stock, and accordingly each share of Class B Common Stock shall be reclassified
into a number of shares of Class B Common Stock equal to 430 divided by 455.5
(the "Reclassified Per Share Number"). From and after the Effective Time, the
holders of outstanding certificates which immediately prior to the Effective
Time represented the number of shares of Class B Common Stock prior to giving
effect to the Reclassification shall cease to have any rights with respect to
such shares and, until such certificates are surrendered and exchanged in the
manner provided for herein, each such certificate shall, after the Effective
Time, be deemed to represent only the number of shares of Class B Common Stock
after giving effect to the Reclassification. From and after the Effective Time,
the Corporation shall be entitled to treat any unsurrendered certificates as
evidencing the ownership of the number of shares of Class B Common Stock after
giving effect to the Reclassification, notwithstanding the failure to surrender
such certificates. Upon the surrender to the Corporation of all certificates
held by a holder of shares of Class B Common Stock, together with such stock
transfer powers and other documents reasonably requested by the Corporation, the
holder of such certificates shall receive therefor a certificate for the number
of shares of Class B Common Stock after giving effect to the Reclassification.
The rights, preferences and powers of the Class B Common Stock and the Class A
Common Stock shall be unaffected by the Reclassification.
The Corporation's Amended and Restated Certificate of
Incorporation, as heretofore amended, is hereby restated, integrated and amended
to read in its entirety as follows (with references herein to Certificate of
Incorporation to mean this Second Amended and Restated Certificate of
Incorporation):
FIRST: The name of the Corporation is Conoco
Inc. (hereinafter the "Corporation").
SECOND: The address of the registered office of the
Corporation in the State of Delaware is 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which a corporation may be organized under the
General Corporation Law of the State of Delaware as set forth in Title 8 of the
Delaware Code (the "GCL").
FOURTH: A. The total number of shares of stock that the
Corporation shall have authority to issue is 4,850,000,000 (four billion eight
hundred fifty million) of which (i) 3,000,000,000 (three billion) shares shall
be shares of Class A Common Stock, par value $.01 per share (the "Class A Common
Stock"), and 1,600,000,000 (one billion six hundred million) shares shall be
shares of Class B Common Stock, par value $.01 per share (the "Class B Common
Stock") (the Class A Common Stock and the Class B Common Stock being
collectively referred to herein as the "Common Stock"), and (ii) 250,000,000
(two hundred and fifty million) shares shall be shares of Preferred Stock, par
value $.01 per share (the "Preferred Stock").
B. Preferred Stock The Board of Directors is expressly authorized to
provide for the issuance of all or any shares of the Preferred Stock in one or
more classes or series, and to fix for each such class or series the voting
powers (if any) and such distinctive designations, preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof, as shall be stated
<PAGE> 2
and expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series and as may be permitted by
the GCL, including, without limitation, the authority to provide that any such
class or series may be (i) subject to redemption at such time or times and at
such price or prices; (ii) entitled to receive dividends (which may be
cumulative or non-cumulative) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the dividends
payable on any other class or classes or any other series; (iii) entitled to
such rights upon the dissolution of, or upon any distribution of the assets of,
the Corporation; or (iv) convertible into, or exchangeable for, shares of any
other class or classes of stock, or of any other series of the same or any other
class or classes of stock, of the Corporation at such price or prices or at such
rates of exchange and with such adjustments; all as may be stated in such
resolution or resolutions.
C. Common Stock The following is a statement of the relative powers,
preferences and participating, optional or other special rights, and the
qualifications, limitations and restrictions of the Class A Common Stock and
Class B Common Stock of the Corporation:
(1) Except as otherwise set forth below in this Article FOURTH, the
relative powers, preferences and participating, optional or other special
rights, and the qualifications, limitations or restrictions of the Class A
Common Stock and Class B Common Stock shall be identical in all respects.
(2) Subject to the rights of the holders of Preferred Stock, and
subject to any other provisions of this Certificate of Incorporation, holders of
Class A Common Stock and Class B Common Stock shall be entitled to receive such
dividends and other distributions in cash, stock of any corporation (other than
Common Stock of the Corporation) or property of the Corporation as may be
declared thereon by the Board of Directors from time to time out of assets or
funds of the Corporation legally available therefor and shall share equally on a
per share basis in all such dividends and other distributions. In the case of
dividends or other distributions payable in Common Stock, including
distributions pursuant to stock splits or divisions of Common Stock of the
Corporation,
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<PAGE> 3
only shares of Class A Common Stock shall be paid or distributed with respect to
Class A Common Stock and only shares of Class B Common Stock shall be paid or
distributed with respect to Class B Common Stock. The number of shares of Class
A Common Stock and Class B Common Stock so distributed on each share shall be
equal in number. Neither the shares of Class A Common Stock nor the shares of
Class B Common Stock may be reclassified, subdivided or combined unless such
reclassification, subdivision or combination occurs simultaneously and in the
same proportion for each class.
(3) (a) At every meeting of the stockholders of the Corporation
every holder of Class A Common Stock shall be entitled to one vote in person or
by proxy for each share of Class A Common Stock standing in his or her name on
the transfer books of the Corporation, and every holder of Class B Common Stock
shall be entitled to five votes in person or by proxy for each share of Class B
Common Stock standing in his or her name on the transfer books of the
Corporation in connection with the election of directors and all other matters
submitted to a vote of stockholders. Except as may be otherwise required by law
or by this Certificate of Incorporation, the holders of Class A Common Stock and
Class B Common Stock shall vote together as a single class and their votes shall
be counted and totaled together, subject to any voting rights which may be
granted to holders of Preferred Stock, on all matters submitted to a vote of
stockholders of the Corporation. Notwithstanding any other provision of this
Certificate of Incorporation to the contrary, holders of Class A Common Stock
shall not be eligible to vote on any alteration or change in the powers,
preferences, or special rights of the Class B Common Stock that would not
adversely affect the rights of the Class A Common Stock; provided that, for the
foregoing purposes, any provision for the voluntary, mandatory or other
conversion or exchange of the Class B Common Stock into or for Class A Common
Stock on a one for one basis shall be deemed not to adversely affect the rights
of the Class A Common Stock.
(b) Except as otherwise provided by law, and subject to any
rights of the holders of Preferred Stock, the provisions of this Certificate of
Incorporation shall not be modified, revised, altered or amended, repealed or
rescinded in whole or in part, without the
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<PAGE> 4
approval of a majority of the votes entitled to be cast by the holders of the
Class A Common Stock and the Class B Common Stock, voting together as a single
class (except as otherwise provided in paragraph (C)(3)(a) above); provided,
however, that with respect to any proposed amendment of this Certificate of
Incorporation which would alter or change the powers, preferences or special
rights of the shares of Class A Common Stock or Class B Common Stock so as to
affect them adversely, the approval of a majority of the votes entitled to be
cast by the holders of the shares affected by the proposed amendment, voting
separately as a class, shall be obtained in addition to the approval of a
majority of the votes entitled to be cast by the holders of the Class A Common
Stock and the Class B Common Stock voting together as a single class as
hereinbefore provided. The affirmative vote of shares representing (x) not less
than 66 2/3% (or, from and after the Second Trigger Date (as defined in
paragraph (C) of Article FIFTH), 80%) of the votes entitled to be cast by the
Voting Stock and (y) in addition, from and after the First Trigger Date (as
defined in paragraph (C) of Article FIFTH) (if there are at such time any shares
of Class B Common Stock outstanding), a majority of the votes entitled to be
cast by the holders of each class of Common Stock, voting separately by class,
shall be required to alter, amend or adopt any provision inconsistent with or
repeal Article FIFTH or Article EIGHTH or any provision of this paragraph
(C)(3)(b). "Voting Stock" shall mean the then outstanding shares of capital
stock entitled to vote generally on the election of directors and shall exclude
any class or series of capital stock only entitled to vote in the event of
dividend arrearages thereon, whether or not at the time of determination there
are any such dividend arrearages. To the fullest extent permitted by law, any
increase in the authorized number of shares of any class or classes of stock of
the Corporation or creation, authorization or issuance of any securities
convertible into, or warrants, options or similar rights to purchase, acquire or
receive, shares of any such class or classes of stock shall be deemed not to
affect adversely the powers, preferences or special rights of the shares of
Class A Common Stock or Class B Common Stock.
(c) Every reference in this Certificate of Incorporation to a
majority or other proportion of shares, or a majority or other proportion of the
votes of
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<PAGE> 5
shares, of Voting Stock, Common Stock, Class A Common Stock, or Class B Common
Stock shall refer to such majority or other proportion of the votes to which
such shares of Voting Stock, Common Stock, Class A Common Stock or Class B
Common Stock are entitled.
(d) At any meeting of stockholders, the presence in person or by
proxy of the holders of shares entitled to cast a majority of all the votes
which could be cast at such meeting by the holders of all of the outstanding
shares of stock of the Corporation entitled to vote on every matter that is to
be voted on at such meeting shall constitute a quorum.
(4) In the event of any dissolution, liquidation or winding up of
the affairs of the Corporation, whether voluntary or involuntary, after payment
in full of the amounts required to be paid to the holders of Preferred Stock,
the remaining assets and funds of the Corporation shall be distributed pro rata
to the holders of Common Stock, and the holders of Class A Common Stock and the
holders of Class B Common Stock will be entitled to receive the same amount per
share in respect thereof. For purposes of this paragraph (C)(4), the voluntary
sale, conveyance, lease, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the assets of
the Corporation or a consolidation or merger of the Corporation with one or more
other corporations (whether or not the Corporation is the corporation surviving
such consolidation or merger) shall not be deemed to be a liquidation,
dissolution or winding up, voluntary or involuntary.
(5) Except as shall otherwise be approved by a majority of the votes
entitled to be cast by the holders of each class of Common Stock voting
separately as a class, in case of any reorganization or any consolidation of the
Corporation with one or more other corporations or a merger of the Corporation
with another corporation in which shares of Class A Common Stock or Class B
Common Stock are converted into (or entitled to receive with respect thereto)
shares of stock and/or other securities or property (including cash), each
holder of a share of Class A Common Stock shall be entitled to receive with
respect to such share the same kind and amount of shares of stock and other
securities and property (including cash) receivable upon such reorganization,
consolidation
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<PAGE> 6
or merger by a holder of a share of Class B Common Stock and each holder of a
share of Class B Common Stock shall be entitled to receive with respect to such
share the same kind and amount of shares of stock and other securities and
property (including cash) receivable upon such reorganization, consolidation or
merger by a holder of a share of Class A Common Stock. In the event that the
holders of Class A Common Stock (or of Class B Common Stock) are granted rights
to elect to receive one of two or more alternative forms of consideration, the
foregoing provision shall be deemed satisfied if holders of Class A Common Stock
and holders of Class B Common Stock are granted substantially identical election
rights.
(6) (a) Prior to the date on which shares of Class B Common
Stock are transferred to stockholders of the DuPont Company in a Tax-Free
Spin-Off (as defined in paragraph (C)(6)(b) below), each record holder of shares
of Class B Common Stock may convert any or all of such shares into an equal
number of shares of Class A Common Stock by surrendering the certificates for
such shares, accompanied by any payment required for documentary, stamp or
similar issue or transfer taxes and by a written notice by such record holder to
the Corporation stating that such record holder desires to convert such shares
of Class B Common Stock into the same number of shares of Class A Common Stock
including for the purpose of the sale or other disposition of such shares of
Class A Common Stock, and requesting that the Corporation issue all of such
shares of Class A Common Stock to persons named therein, setting forth the
number of shares of Class A Common Stock to be issued to each such person and
the denominations in which the certificates therefor are to be issued. To the
extent permitted by law, such voluntary conversion shall be deemed to have been
effected at the close of business on the date of such surrender. Following a
Tax-Free Spin-Off, shares of Class B Common Stock shall no longer be convertible
into shares of Class A Common Stock.
(b) Prior to a Tax-Free Spin-Off, each share of Class B Common
Stock shall automatically be converted into one share of Class A Common Stock
upon the transfer of such share if, after such transfer, such share is not
beneficially owned by DuPont. Shares of Class B Common stock shall not convert
into shares of Class A Common Stock (i) in any transfer effected in
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<PAGE> 7
connection with a distribution of Class B Common Stock to security holders of
the DuPont Company in a transaction (including any distribution in exchange for
shares of capital stock or securities of the DuPont Company) in tended to
qualify as a tax-free distribution under Section 355 of the Internal Revenue
Code of 1986, as amended (the "Code"), or any successor provision (a "Tax-Free
Spin-Off") or (ii) in any transfer after a Tax-Free Spin- Off. For purposes of
this paragraph (C)(6), a Tax-Free Spin-Off shall be deemed to have occurred at
the time shares are first transferred to stockholders of the DuPont Company
following receipt of an affidavit described in clause (iii) of the first
sentence of paragraph (C)(6)(d) below. For purposes of this paragraph (C)(6),
each reference to a "person" shall be deemed to include not only a natural
person, but also a corporation, partnership, joint venture, association, or
legal entity of any kind; each reference to a "natural person" (or to a "record
holder" of shares, if a natural person) shall be deemed to include in his or her
representative capacity a guardian, committee, executor, administrator or other
legal representative of such natural person or record holder.
For purposes of this Certificate of Incorporation:
1. The "DuPont Company" shall mean E.I. du Pont de
Nemours & Company, Inc., a Delaware corporation, and
all its successors by way of merger, consolidation or
sale of all or substantially all of its assets;
2. The term "subsidiary" shall mean, as to any person or
entity, a corporation, partnership, joint venture,
association or other entity in which such person or
entity beneficially owns (directly or indirectly) 50%
or more of the outstanding voting stock, voting
power, partnership interests or similar voting
interests;
3. "DuPont" shall mean the DuPont Company and all its
subsidiaries, but shall not include the Corporation
and its subsidiaries; and
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<PAGE> 8
4. "affiliate" and "beneficial ownership" shall have the
respective meanings given to such terms in Rule 13d-3
promulgated under the Securities Exchange Act of
1934, as amended.
Each share of Class B Common Stock shall automatically be
converted into one share of Class A Common Stock on the date on which the
outstanding shares of Class B Common Stock owned by DuPont represent less than
50% of the aggregate number of shares of the then out standing Common Stock,
provided that a Tax-Free Spin-Off has not occurred. For the avoidance of doubt,
paragraph (C)(3)(c) of this Article FOURTH shall not apply to the preceding
sentence.
The Corporation will provide notice of any automatic
conversion of all outstanding shares of Class B Common Stock to holders of
record of the Common Stock as soon as practicable following such conversion;
provided, however, that the Corporation may satisfy such notice requirement by
providing such notice prior to such conversion. Such notice shall be provided
by mailing notice of such conversion first class postage prepaid, to each holder
of record of the Common Stock, at such holder's address as it appears on the
transfer books of the Corporation; provided, however, that no failure to give
such notice nor any defect therein shall affect the validity of the automatic
conversion of any shares of Class B Common Stock. Each such notice shall state,
as appropriate, the following:
(i) the automatic conversion date;
(ii) that all outstanding shares of Class B
Common Stock are automatically converted;
(iii) the place or places where certificates
for such shares may be surrendered in exchange for
certificates representing Class A Common
Stock.
Immediately upon such conversion, the rights of the holders of
shares of Class B Common Stock as such
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<PAGE> 9
shall cease and such holders shall be treated for all purposes as having become
the record owners of the shares of Class A Common Stock issuable upon such
conversion; provided, however, that such persons shall be entitled to receive
when paid any dividends declared on the Class B Common Stock as of a record date
preceding the time of such conversion and unpaid as of the time of such
conversion, subject to paragraph (C)(6)(f) below.
(c) Prior to a Tax-Free Spin-Off, holders of shares
of Class B Common Stock may (i) sell or other wise dispose of or transfer any or
all of such shares held by them, respectively, only in connection with a
transfer which meets the qualifications of paragraph (C)(6)(d) below, and under
no other circumstances, or (ii) convert any or all of such shares into shares of
Class A Common Stock, including for the purpose of effecting the sale or
disposition of such shares of Class A Common Stock to any person as provided in
paragraph (C)(6)(a) above. Prior to a Tax-Free Spin-Off, no one other than those
persons in whose names shares of Class B Common Stock become registered on the
original stock ledger of the Corporation by reason of their record ownership of
shares of common stock of the Corporation which are reclassified into shares of
Class B Common Stock as provided in paragraph (C)(6)(l) below, or transferees
or successive transferees who receive shares of Class B Common Stock in
connection with a transfer which meets the qualifications set forth in paragraph
(C)(6)(d) below, shall by virtue of the acquisition of a certificate for shares
of Class B Common Stock have the status of an owner or holder of shares of Class
B Common Stock or be recognized as such by the Corporation or be other wise
entitled to enjoy for his or her own benefit the special rights and powers of a
holder of shares of Class B Common Stock.
Holders of shares of Class B Common Stock may at any and all
times transfer to any person the shares of Class A Common Stock issuable upon
conversion of such shares of Class B Common Stock.
(d) Prior to a Tax-Free Spin-Off, shares of Class B
Common Stock shall be transferred on the books of the Corporation and a new
certificate therefor issued, upon presentation at the office of the Secretary of
the Corporation (or at such additional place or places as may
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<PAGE> 10
from time to time be designated by the Secretary or any Assistant Secretary of
the Corporation) of the certificate for such shares, in proper form for transfer
and accompanied by all requisite stock transfer tax stamps, only if such
certificate when so presented shall also be accompanied by any one of the
following:
(i) an affidavit from the DuPont Company
stating that such certificate is being presented to
effect a transfer by the DuPont Company of such
shares to a subsidiary of the DuPont Company; or
(ii) an affidavit from the DuPont Company
stating that such certificate is being presented to
effect a transfer by any subsidiary of the DuPont
Company of such shares to the DuPont Company or
another subsidiary of the DuPont Company; or
(iii) an affidavit from the DuPont Company
stating that such certificate is being presented to
effect a transfer by the DuPont Company of such
shares to the stockholders of the DuPont Company in
connection with a Tax-Free Spin-Off.
Each affidavit of a record holder furnished pursuant to this
paragraph (C)(6)(d) shall be verified as of a date not earlier than five days
prior to the date of delivery thereof, and, where such record holder is a
corporation or partnership, shall be verified by an officer of the corporation
or by a general partner of the partnership, as the case may be.
If a record holder of shares of Class B Common Stock shall
deliver a certificate for such shares, endorsed by him or her for transfer or
accompanied by an instrument of transfer signed by him or her, to a person who
receives such shares in connection with a transfer which does not meet the
qualifications set forth in this paragraph (C)(6)(d), then such person or any
successive transferee of such certificate may treat such endorsement or
instrument as authorizing him or her on behalf of such
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<PAGE> 11
record holder to convert such shares in the manner above provided for the
purpose of the transfer to himself or herself of the shares of Class A Common
Stock issuable upon such conversion, and to give on behalf of such record holder
the written notice of conversion above required, and may convert such shares of
Class B Common Stock accordingly.
If such shares of Class B Common Stock shall improperly have
been registered in the name of a person not meeting the qualifications set forth
in this paragraph (C)(6)(d)(or in the name of any successive transferee of
such certificate) and a new certificate therefor issued, such person or
transferee shall surrender such new certificate for cancellation, accompanied by
the written notice of conversion above required, in which case (A) such person
or transferee shall be deemed to have elected to treat the endorsement on (or
instrument of transfer accompanying) the certificate so delivered by such former
record holder as authorizing such person or transferee on behalf of such former
record holder so to convert such shares and so to give such notice, (B) the
shares of Class B Common Stock registered in the name of such former record
holder shall be deemed to have been surrendered for conversion for the purpose
of the transfer to such person or transferee of the shares of Class A Common
Stock issuable upon conversion, and (C) the appropriate entries shall be made
on the books of the Corporation to reflect such action.
In the event that the Board of Directors of the Corporation
(or any committee of the Board of Directors, or any officer of the Corporation,
designated for the purpose by the Board of Directors) shall determine, upon the
basis of facts not disclosed in any affidavit or other document accompanying the
certificate for shares of Class B Common Stock when presented for transfer, that
such shares of Class B Common Stock have been registered in violation of the
provisions of paragraph (C)(6), or shall determine that a person is enjoying for
his or her own benefit the special rights and powers of shares of Class B Common
Stock in violation of such provisions, then the Corporation shall take such
action at law or in equity as is appropriate under the circumstances. An
unforeclosed pledge made to secure a bona fide obligation shall not be deemed to
violate such provisions. Prior to the occurrence of a Tax-Free Spin-Off, no
transfer of
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<PAGE> 12
title to shares of Class B Common Stock to a pledgee or other person (other than
DuPont) may occur without compliance with the foregoing provisions of this
paragraph (C)(6)(d).
(e) Prior to the occurrence of a Tax-Free Spin-Off,
every certificate for shares of Class B Common Stock shall bear a legend on the
face thereof reading as follows:
"The shares of Class B Common Stock represented by this certificate may
not be transferred to any person in connection with a transfer that
does not meet the qualifications set forth in paragraph (C)(6)(d) of
Article FOURTH of the Certificate of Incorporation of this corporation
and no person who receives such shares in connection with a transfer
which does not meet the qualifications prescribed by paragraph
(C)(6)(d) of said Article FOURTH is entitled to own or to be registered
as the record holder of such shares of Class B Common Stock, but the
record holder of this certificate may at such time and in the manner
set forth in said Article FOURTH of the Certificate of Incorporation
convert such shares of Class B Common Stock into the same number of
shares of Class A Common Stock for purposes of effecting the sale or
other disposition of such shares of Class A Common Stock to any person.
Each holder of this certificate, by accepting the same, accepts and
agrees to all of the foregoing."
Upon and after the transfer of shares in a Tax-Free Spin-Off,
shares of Class B Common Stock shall no longer bear the legend set forth above
in this paragraph (C)(6)(e).
(f) Upon any conversion of shares of Class B Common
Stock into shares of Class A Common Stock pursuant to the provisions of this
paragraph (C)(6), any dividend, for which the record date or payment date shall
be subsequent to such conversion, which may have been declared on the shares of
Class B Common Stock so converted shall be deemed to have been declared, and
shall be payable, with respect to the shares of Class A Common Stock into or for
which such shares of Class B Common
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<PAGE> 13
Stock shall have been so converted, and any such dividend which shall have been
declared on such shares payable in shares of Class B Common Stock shall be
deemed to have been declared, and shall be payable, in shares of Class A Common
Stock.
(g) The Corporation shall not reissue or resell any
shares of Class B Common Stock which shall have been converted into shares of
Class A Common Stock pursuant to or as permitted by the provisions of this
paragraph (C)(6), or any shares of Class B Common Stock which shall have been
acquired by the Corporation in any other manner. The Corporation shall, from
time to time, take such appropriate action as may be necessary to retire such
shares and to reduce the authorized amount of Class B Common Stock accordingly.
The Corporation shall at all times reserve and keep available,
out of its authorized but unissued Common Stock, such number of shares of Class
A Common Stock as would become issuable upon the conversion of all shares of
Class B Common Stock then outstanding.
(h) In connection with any transfer or conversion of
any stock of the Corporation pursuant to or as permitted by the provisions of
this paragraph (c)(6), or in connection with the making of any determination
referred to in this paragraph (c)(6):
(i) the Corporation shall be under no obligation
to make any investigation of facts unless an
officer, employee or agent of the Corporation
responsible for making such transfer or determination
or issuing Class A Common Stock pursuant to such
conversion has substantial reason to believe, or
unless the Board of Directors (or a committee of the
Board of Directors designated for the purpose)
determines that there is substantial reason to
believe, that any affidavit or other document is
incomplete or incorrect in a material respect or
that an investigation would disclose facts upon which
any determination referred to in para-
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<PAGE> 14
graph (C)(6)(f) above should be made, in either of
which events the Corporation shall make or cause to
be made such investigation as it may deem necessary
or desirable in the circumstances and have a
reasonable time to complete such investigation; and
(ii) neither the Corporation nor any director,
officer, employee or agent of the Corporation shall
be liable in any manner for any action taken or
omitted in good faith.
(i) The Corporation will not be required to pay any
documentary, stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of shares of Class A Common Stock on the conversion of shares
of Class B Common Stock pursuant to this paragraph (C)(6), 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.
(j) All rights to vote and all voting power
(including, without limitation thereto, the right to elect directors) shall be
vested exclusively in the holders of Common Stock, voting together as a single
class, except as otherwise expressly provided in this Certificate of
Incorporation, in a Certificate of Designation with respect to any Preferred
Stock or as other wise expressly required by applicable law.
(k) No stockholder shall be entitled to exercise any
right of cumulative voting.
(l) Immediately upon the effectiveness of this
Certificate of Incorporation, each share of Class B Common Stock issued and
outstanding immediately prior to such effectiveness, shall be changed into and
reclassified into a number of shares of Class B Common Stock equal to 430
divided by 455.5.
FIFTH: A. The business and affairs of the Corporation shall
be managed by or under the direction of a Board of Directors initially
consisting of nine direc-
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<PAGE> 15
tors, the exact number of directors to be not less than six nor more than
fifteen as determined from time to time by resolution adopted by affirmative
vote of a majority of the entire Board of Directors. The directors shall be
divided into three classes, designated Class I, Class II and Class III. Each
class shall consist, as nearly as may be possible, of one-third of the total
number of directors constituting the entire Board of Directors. Class I
directors shall be elected initially for a one-year term, Class II directors
initially for a two-year term and Class III directors initially for a
three-year term. At each succeeding annual meeting of stockholders beginning in
1999, successors to the class of directors whose term expires at that annual
meeting shall be elected for a three-year term. If the number of directors is
changed, any increase or decrease shall be apportioned among the classes so as
to maintain the number of directors in each class as nearly equal as possible,
and any additional director of any class elected to fill a vacancy resulting
from an increase in such class shall hold office for a term that shall coincide
with the remaining term of that class, but in no case will a decrease in the
number of directors shorten the term of any incumbent director. A director shall
hold office until the annual meeting of the year in which his term expires and
until his successor shall be elected and shall qualify, subject, however, to
prior death, resignation or removal from office. Any vacancy on the Board of
Directors may be filled by a majority of the directors then in office, even if
less than a quorum, or by a sole remaining director or by stockholders if such
vacancy was caused by the action of stockholders (in which event such vacancy
may not be filled by the directors or a majority thereof).
Any director elected to fill a vacancy not resulting from an
increase in the number of directors shall have the same remaining term as that
of his predecessor.
B. Any director or the entire Board of Directors may be removed, with
or without cause, by the affirmative vote of shares representing a majority of
the votes entitled to be cast by the Voting Stock; provided, how ever that
during the Trigger Period (as defined in para graph (C) below), a director may
be removed, with or without cause, only by the affirmative vote of shares
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<PAGE> 16
representing not less than 66 2/3% of the votes entitled to be cast by the
Voting Stock; provided, further, however, that from and after the Second Trigger
Date (as defined in paragraph (C) below), a director may only be removed for
cause, such removal to be by the affirmative vote of the shares representing a
majority of the votes entitled to be cast by the Voting Stock. Unless the Board
of Directors has made a determination that removal is in the best interests of
the Corporation (in which case the following definition shall not apply),
"cause" for removal of a director shall be deemed to exist only if (i) the
director whose removal is proposed has been convicted, or when a director is
granted immunity to testify when another has been convicted, of a felony by a
court of competent jurisdiction and such conviction is no longer subject to
direct appeal; (ii) such director has been found by the affirmative vote of a
majority of the Directors then in office at any regular or special meeting of
the Board of Directors called for that purpose, or by a court of competent
jurisdiction to have been guilty of willful misconduct in the performance of his
duties to the Corporation in a matter of substantial importance to the
Corporation; or (iii) such director has been adjudicated by a court of
competent jurisdiction to be mentally incompetent, which mental incompetency
directly affects his ability as a director of the Corporation. Notwithstanding
the foregoing, whenever holders of outstanding shares of one or more series of
Preferred Stock are entitled to elect directors of the Corporation pursuant to
the provisions applicable in the case of arrearages in the payment of dividends
or other defaults contained in the resolution or resolutions of the Board of
Directors providing for the establishment of any such series, any such director
of the Corporation so elected may be removed in accordance with the provisions
of such resolution or resolutions.
C. For purposes of this Certificate of Incorporation, "Trigger Period"
shall mean the period that begins on and after the day following the First
Trigger Date and ends on the Second Trigger Date: (i) "First Trigger Date" shall
mean the first date on which DuPont ceases to beneficially own shares
representing 50% or more of the votes entitled to be cast by the Voting Stock
and (ii) "Second Trigger Date" shall mean the first date on which DuPont ceases
to beneficially own shares representing 30% or more of the votes entitled to be
cast by the Voting Stock (First Trigger Date and Second Trigger Date, each a
"Trigger Date").
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D. Promptly upon becoming aware of the occurrence of a Trigger Date,
the Corporation shall promptly notify stockholders of such occurrence in any
reasonably practicable manner.
E. The following provisions are inserted for further definition,
limitation and regulation of the powers of the Corporation and of its directors
and stock holders:
(1) The By-Laws of the Corporation may be altered, amended or
repealed and new By-Laws may be adopted (i) by the affirmative vote of
the shares representing a majority of the votes entitled to be cast by
the Voting Stock; provided, however, that any proposed alteration,
amendment or repeal of, or the adoption of any By-Law inconsistent
with, Sections 3, 7, 10 or 11 of Article II of the By-Laws or Sections
1, 2 or 11 of Article III (in each case, as in effect on the date
hereof) of the By-Laws or this sentence, by the stockholders shall
require the affirmative vote of shares representing (x) not less than
662/3% (or, from and after the Second Trigger Date, 80%) of the votes
entitled to be cast by the Voting Stock and (y) in addition, from and
after the First Trigger Date (if there are any shares of Class B Common
Stock outstanding), a majority of the votes entitled to be cast by the
holders of each class of Common Stock, voting separately by class; and
provided, further, however, that in the case of any such stockholder
action at a special meeting of stockholders, notice of the proposed
alteration, amendment, repeal or adoption of the new By-Law or By-Laws
must be contained in the notice of such special meeting, or (ii) by
action of the Board of Directors of the Corporation.
(2) No director shall be personally liable to the Corporation or
any of its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability
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(i) for any 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 GCL or (iv) for any transaction
from which the director derived an improper personal benefit. Any
repeal or modification of this Article FIFTH by the stockholders of the
Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification with respect to acts or omissions occur ring prior to
such repeal or modification.
(3) In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby
empowered to exercise all such powers and do all such acts and things
as may be exercised or done by the Corporation, subject, nevertheless,
to the provisions of the GCL, this Certificate of Incorporation, and
any By-Laws adopted by the stockholders; provided, however, that no
By-Laws hereafter adopted by the stockholders shall invalidate any
prior act of the directors which would have been valid if such By-Laws
had not been adopted.
(4) So long as DuPont beneficially owns shares representing 10% or
more of the votes entitled to be cast by the Voting Stock, nominations
and shareholder proposals by DuPont shall not be subject to the advance
notice procedures (including the form, content, or timing requirements
contained therein) of Sections 10 and 11 of Article II of the By-Laws.
SIXTH: A. In anticipation that (i) the Corporation will cease
to be a wholly owned subsidiary of the DuPont Company, but that DuPont will
remain a stock holder of the Corporation and have continued contractual,
corporate and business relations with the Corporation, and in anticipation that
the Corporation and DuPont may enter into contracts or otherwise transact
business with each other and that the Corporation may derive benefits therefrom
and (ii) the Corporation may from time to time enter into contractual, corporate
or business relations with one or more of its directors, or one or more
corporations, partnerships, associations or other organizations in which one or
more of its directors have a financial interest (collectively, "Related
Entities"), the provisions of this Article SIXTH are set forth to regulate and
define certain contractual relations of the Corporation as they may involve
DuPont, Related Entities and their respective officers and directors, and the
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powers, rights, duties and liabilities of the Corporation and its officers,
directors and stockholders in connection therewith. The provisions of this
Article SIXTH are in addition to, and not in limitation of, the provisions of
the GCL and the other provisions of this Certificate of Incorporation. Any
contract or business relation which does not comply with the procedures set
forth in this Article SIXTH shall not by reason thereof be deemed void or
voidable or result in any breach of fiduciary duty or duty of loyalty or failure
to act in good faith or in the best interests of the Corporation or derivation
of any improper personal benefit, but shall be governed by the provisions of
this Certificate of Incorporation, the By-Laws, the GCL and other applicable
law.
B. No contract, agreement, arrangement or transaction (or any
amendment, modification or termination thereof) between the Corporation and
DuPont or between the Corporation and one or more of the directors or officers
of the Corporation, DuPont or any Related Entity or between the Corporation and
any Related Entity shall be void or voidable solely for the reason that DuPont,
any Related Entity or any one or more of the officers or directors of the
Corporation, DuPont or any Related Entity are parties thereto, or solely because
any such directors or officers are present at or participate in the meeting of
the Board of Directors or committee thereof which authorizes the contract,
agreement, arrangement or transaction (or the amendment, modification or
termination thereof), or solely because his or their votes are counted for such
purpose, and DuPont, any Related Entity and such directors and officers (a)
shall have fully satisfied and fulfilled their fiduciary duties to the
Corporation and its stockholders with respect thereto, (b) shall not be liable
to the Corporation or its stockholders for any breach of fiduciary duty by
reason of the entering into, performance or consummation of any such contract,
agreement, arrangement or transaction (or amendment, modification or
termination thereof), (c) shall be deemed to have acted in good faith and in a
manner such persons reasonably believe to be in and not opposed to the best
interests of the Corporation and (d) shall be deemed not to have breached their
duties of loyalty to the Corporation and its stockholders and not to have
derived in improper personal benefit therefrom, if:
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(i) the material facts as to the contract,
agreement, arrangement, transaction, amendment,
modification or termination are disclosed or are
known to the Board of Directors or the committee
thereof which authorizes the contract, agreement,
arrangement or transaction (or the amendment,
modification or termination thereof), and the Board
of Directors or such committee in good faith
authorizes the contract, agreement, arrangement or
transaction (or the amendment, modification or
termination thereof) by the affirmative vote of a
majority of the disinterested directors, even though
the disinterested directors be less than a quorum;
(ii) the material facts as to the contract,
agreement, arrangement or transaction (or the
amendment, modification or termination thereof) are
disclosed or are known to the holders of Voting Stock
entitled to vote thereon, and the contract,
agreement, arrangement, or transaction (or the
amendment, modification or termination thereof) is
specifically approved in good faith by vote of the
holders of a majority of the then outstanding Voting
Stock not owned by the DuPont Company or a Related
Entity, as the case may be; or
(iii) such contract, agreement, arrangement
or transaction (or the amendment, modification or
termination thereof) is fair as to the Corporation
as of the time it is authorized, approved or
ratified by the Board of Directors, a committee
thereof or the stockholders of the Corporation.
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C. Directors of the Corporation who are also directors or officers of
DuPont or any Related Entity may be counted in determining the presence of a
quorum at a meeting of the Board of Directors or of a committee which authorizes
the contract, agreement, arrangement or transaction (or the amendment,
modification or termination thereof). Voting Stock owned by DuPont and any
Related Entities may be counted in determining the presence of a quorum at a
meeting of stockholders which authorizes the contract, agreement, arrangement or
transaction.
D. Any person or entity purchasing or otherwise acquiring any interest
in any shares of capital stock of the Corporation will be deemed to have notice
of and to have consented to the provisions of this Article SIXTH.
E. For purposes of this Article SIXTH, any contract, agreement,
arrangement or transaction (or amendment, modification or termination thereof)
with any corporation, partnership, joint venture, association or other entity in
which the Corporation owns (directly or indirectly) 50% or more of the
outstanding voting stock, voting power, partnership interests or similar
ownership interests, or with any officer or director thereof, shall be deemed to
be a contract, agreement, arrangement or transaction with the Corporation.
SEVENTH: Meetings of stockholders may be held within or without the
State of Delaware, as the By-Laws may provide. The books of the Corporation may
be kept (subject to any provision contained in the GCL) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-Laws of the Corporation.
EIGHTH: Any action required or permitted to be taken by the
stockholders of the Corporation may be effected by a consent in writing by such
holders in accordance with Section 228 of the GCL; provided, however, that on
and after the Second Trigger Date, any action required or permitted to be taken
by the stockholders of the Corporation may be effected only at a duly called
annual or special meeting of such holders and may not be effected by a consent
in writing by such holders in lieu of such a meeting. Effective on and after the
Second Trigger Date, except as otherwise required by law, special meetings of
stockholders of the Corporation for
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any purpose or purposes may be called only by the Board of Directors pursuant to
a resolution stating the purpose or purposes thereof or by the Chairman of the
Board of Directors of the Corporation and, effective on and after the Second
Trigger Date, any power of stockholders to call a special meeting is
specifically denied. No business other than that stated in the notice of such
meeting shall be transacted at any special meeting.
NINTH: A. In addition to any affirmative vote that may be required
by law, this Certificate of Incorporation or the By-Laws of the
Corporation, and except as otherwise expressly provided in paragraph (B) of
this Article NINTH:
(i) any merger or consolidation of the Corporation or any subsidiary of
the Corporation with or into (A) any Related Person or (B) any Person that is an
Affiliate of a Related Person; or
(ii) any sale, lease, exchange, transfer or other disposition by the
Corporation to any Related Person or any Affiliate of any Related Person of all
or substantially all of the assets of the Corporation; or
(iii) any reclassification of securities (including any reverse stock
split) or recapitalization of the Corporation for which the approval of
shareholders of the Corporation is otherwise required, or any merger,
consolidation or share exchange of the Corporation with any of its subsidiaries
for which the approval of shareholders of the Corporation is otherwise
required, which has the effect, either directly or indirectly, of increasing by
more than 1% the proportionate share of the Class A Common Stock, Class B Common
Stock or Voting Stock Beneficially Owned by any Related Person or any Affiliate
of any Related Person; or
(iv) any dissolution of the Corporation voluntarily caused or proposed
by or on behalf of a Related Person or any Affiliate of any Related Person,
shall require the affirmative vote of shares representing (x) not less than 80%
of the votes entitled to be cast by the Voting Stock, (y) not less than
66 2/3% of the Voting Stock not Beneficially Owned, directly or indirectly, by
any Related Person and (z) in addition, from and
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after the First Trigger Date, a majority of the votes entitled to be cast by
the holders of each class of Common Stock (excluding all shares Beneficially
Owned, directly or indirectly, by any Related Person), voting separately as a
class, with respect to such Business Combination; provided that, at any time
prior to the Second Trigger Date, the required percentage in clause (x) shall be
66 2/3% and the required percentage in clause (y) shall be 50.01%. Such
affirmative vote shall be required, notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law, else where in
this Certificate of Incorporation, in the By-laws of the Corporation or in any
agreement with any national securities exchange or otherwise. Notwithstanding
anything to the contrary set forth herein, the provisions of this Article NINTH
shall not be applicable at such time as all shares of Class B Common Stock have
been converted into, or exchanged for, Class A Common Stock.
B. The provisions of paragraph (A) shall not be applicable to any
particular Business Combination, and such Business Combination shall require
only such affirmative vote as is required by law, the By-Laws of the Corporation
and any other provision of the Certificate of Incorporation, if all of the
conditions specified in either of the following paragraphs (B)(i) and (B)(ii)
are met:
(i) the cash, property, securities or other consideration to be
received per share by holders of the Class A Common Stock and Class B Common
Stock in the Business Combination is the same with respect to both classes and
is either (A) the same in form and amount per share as the highest consideration
paid by the Related Person in a tender or exchange offer in which such Related
Person acquired at least 50% of the outstanding stock of either the Class A
Common Stock or the Class B Common Stock and which was consummated not more than
one year prior to the date of such Business Combination, or if earlier, the
entering into of a definitive agreement providing therefor or (B) not less in
amount (as to cash) or Fair Market Value (as to consideration other than cash)
as of the date of the determination of the Highest Per Share Price (as to
property, securities or other consideration) than the Highest Per Share Price;
provided that, in the event of any Business Combination
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<PAGE> 24
in which the Corporation survives, any shares retained by the holders thereof
shall constitute consideration other than cash for purposes of this paragraph
(B)(i); or
(ii) a majority of the Continuing Directors shall have expressly
approved such Business Combination either in advance of or subsequent to such
Related Person's having become a Related Person.
In the case of any Business Combination with a Related Person to which
paragraph (B)(ii) above does not apply, a majority of the Continuing Directors,
promptly following the request of a Related Person, shall determine the Highest
Per Share Price for each class or series of stock of the Corporation. Such
determination shall be announced not less than five days prior to the meeting at
which holders of shares vote on the Business Combination. Such determination
shall be final, unless the Related Person becomes the Beneficial Owner of
additional shares of Common Stock after the date of the earlier determination,
in which case the Continuing Directors shall make a new determination as to the
Highest Per Share Price for each class or series of shares prior to the
consummation of the Business Combination.
A Related Person shall be deemed to have acquired a share at the time
that such Related Person became the Beneficial Owner thereof. With respect to
shares owned by Affiliates, Associates and other Persons whose ownership is
attributable to a Related Person, if the price paid by such Related Person for
such shares is not determinable by a majority of the Continuing Directors, the
price so paid shall be deemed to be the higher of (i) the price paid upon the
acquisition thereof by the Affiliate, Associate or other Person or (ii) the
Share Price of the shares in question at the time when the Related Person became
the Beneficial Owner thereof.
C. For purposes of this Article NINTH and notwithstanding anything to
the contrary set forth in this Certificate of Incorporation:
(i) The term "Affiliate," used to indicate a relationship to a
specified Person, shall mean a Person that directly, or indirectly through one
or more intermediaries, controls, is controlled by, or is under common control
with, such specified Person.
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(ii) The term "Associate," used to indicate a relationship with a
specified Person, shall mean (A) any corporation, partnership, limited liability
company, association, joint venture or other organization (other than the
Corporation or any wholly owned subsidiary of the Corporation) of which such
specified Person is an officer or partner or is, directly or indirectly, the
Beneficial Owner of 10% or more of any class of equity securities; (B) any trust
or other estate in which such specified Person has a beneficial interest of 10%
or more or as to which such specified Person serves as trustee or in a similar
fiduciary capacity; (C) any Person who is a director or officer of such
specified Person or any of its parents or subsidiaries (other than the
Corporation or any wholly owned subsidiary of the Corporation); and (D) any
relative or spouse of such specified Person or of any of its Associates, or any
relative of any such spouse, who has the same home as such specified Person or
such Associate.
(iii) A Person shall be a "Beneficial Owner" of any stock (A) which
such Person or any of its Affiliates or Associates beneficially owns, directly
or indirectly; or (B) which such Person or any of its Affiliates or Associates
has, directly or indirectly, (1) the right to acquire (whether such right is
exercisable immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, or (2) the right to
vote pursuant to any agreement, arrangement or understanding; or (C) which is
beneficially owned, directly or indirectly, by any other Person, with which such
Person or any of its Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of such
stock; or (D) of which such Person would be the Beneficial Owner pursuant to the
terms of Rule 13d-3 of the Exchange Act, as in effect on September 30, 1998.
Stock shall be deemed "Beneficially Owned" by the Beneficial Owner or Owners
thereof.
(iv) The term "Business Combination" shall mean any transaction which
is referred to in any one or more of clauses (i) through (iv) of paragraph (A)
of this Article NINTH.
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(v) The term "Continuing Director" shall mean, with respect to a
Business Combination with a Related Person, any director of the Corporation who
is unaffiliated with the Related Person and was a director prior to the time
that the Related Person became a Related Person, and any successor of a
Continuing Director who is unaffiliated with the Related Person and is
recommended or nominated to succeed a Continuing Director by a majority of the
Continuing Directors. Without limiting the generality of the foregoing, a
director shall be deemed to be affiliated with a Related Person if such
director (A) is an officer, director, employee or general partner of such
Related Person; (B) is an Affiliate or Associate of such Related Person; (C) is
a relative or spouse of such Related Person or of any such officer, director,
general partner, Affiliate or Associate; (D) performs services, or is a member,
employee, greater than 5% stockholder or other equity owner of any organization
(other than the Corporation and its subsidiaries) which performs services for
such Related Person or any Affiliate of such Related Person, or is a relative or
spouse of any such Person; or (E) was nominated for election as a director by
such Related Person. Notwithstanding anything to the contrary set forth herein,
any person nominated with the approval of the DuPont Company shall be deemed to
be a Continuing Director.
(vi) The term "Fair Market Value" shall mean, in the case of
securities, the average of the closing sales prices during the 30-day period
immediately preceding the date in question of such security on the principal
United States securities exchange registered under the Exchange Act on which
such security is listed (or the composite tape therefor) or, if such securities
are not listed on any such exchange, the average of the last reported sales
price (if so reported) or the closing bid quotations with respect to such
security during the 30-day period preceding the date in question on the New
York Stock Exchange or, if no such quotations are available, the fair market
value on the date in question of such security as determined in good faith by a
majority of the Continuing Directors; and in the case of property other than
cash or securities, the fair market value of such property on the date in
question as determined in good faith by a majority of the Continuing Directors.
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(vii) The term "Highest Per Share Price" shall mean, with respect to a
Related Person, the highest price that can be determined to have been paid or
agreed to be paid for any share or shares of the Class A Common Stock, Class B
Common Stock, or Voting Stock by such Related Person in a transaction that
either (1) resulted in such Related Person's Beneficially Owning 15% or more of
the Class A Common Stock, Class B Common Stock, or Voting Stock outstanding or
(2) was effected at a time when such Related Person Beneficially Owned 15% or
more of the Class A Common Stock, Class B Common Stock, or Voting Stock
outstanding, in either case occurring not more than one year prior to the date
of the Business Combination. In determining the Highest Per Share Price,
appropriate adjustment will be made to take into account (w) distributions paid
or payable in stock, (x) subdivisions of outstanding stock, (y) combinations of
shares of stock into a smaller number of shares and (z) similar events.
(viii) The term "Person" shall mean any individual, corporation,
limited liability company, association, partnership, joint venture, trust,
estate or other entity or organization.
(ix) The term "Related Person" shall mean any Person (other than the
Corporation or any subsidiary of the Corporation and other than any profit
sharing, employee ownership or other employee benefit plan of the Corporation
or any subsidiary of the corporation or any trustee of or fiduciary with respect
to any such plan when acting in such capacity) who or which (A) is the
Beneficial Owner of 15% or more of the Class A Common Stock, Class B Common
Stock or Voting Stock outstanding; or (B) is an Affiliate of the Corporation and
at any time within the two-year period immediately prior to the date in question
was the Beneficial Owner of 15% or more of the Class A Common Stock, Class B
Common Stock or Voting Stock outstanding. For the purposes of determining
whether a Person is a Related Person, the number of shares of any class or
series deemed to be outstanding shall include shares of such class or series of
which the Person is deemed the Beneficial Owner, but shall not include any other
shares which may be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or options,
otherwise. Notwithstanding anything to the contrary herein, neither DuPont nor
its Affiliates or Associates shall be deemed to be Related Persons.
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<PAGE> 28
D. Nothing contained in this Article NINTH shall be construed to
relieve any Related Person from any fiduciary obligation imposed by law.
E. Notwithstanding any other provision of this Certificate of
Incorporation (and notwithstanding that a lesser percentage may be specified by
law), the affirmative vote of shares representing (x) not less than 80% of the
votes entitled to be cast by the Voting Stock, (y) not less than 66 2/3% of the
Voting Stock not Beneficially Owned, directly or indirectly, by any Related
Person and (z) in addition, from and after the First Trigger Date, a majority of
the votes entitled to be cast by the holders of each class of Common Stock
(excluding all shares Beneficially Owned, directly or indirectly, by any Related
Person), voting separately by class, shall be required to amend or re peal, or
adopt any provisions inconsistent with, this Article NINTH; provided that, at
any time prior to the Second Trigger Date, the required percentage in clause (x)
shall be 66 2/3% and the required percentage in clause (y) shall be 50.01%.
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IN WITNESS WHEREOF, this Second Amended and Restated Certificate of
Incorporation which restates, integrates and amends the provisions of the
Amended and Restated Certificate of Incorporation of the Corporation, and which
has been duly adopted in accordance with Sections 242 and 245 of the Delaware
General Corporation Law, has been executed by an authorized officer of the
Corporation this 20th day of October, 1998.
Conoco Inc.
By: /s/ R. A. HARRINGTON
----------------------------------
Name: R. A. Harrington
Title: Senior Vice President,
Legal and General Counsel
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
OF
CONOCO INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the Corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders for the election
of directors or for any other purpose shall be held at such time and place,
either within or without the State of Delaware, as shall be designated from time
to time by the Board of Directors.
Section 2. Annual Meetings. The annual meetings of stockholders for the
election of directors shall be held on such date and at such time as shall be
designated from time to time by the Board of Directors. Any other proper
business may be transacted at the annual meeting of stockholders.
Section 3. Special Meetings. Unless otherwise required by law or by the
certificate of incorporation of the Corporation, as amended and restated from
time to time (including any
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<PAGE> 2
Certificates of Designation with respect to any Preferred Stock, the
"Certificate of Incorporation"), special meetings of stockholders, for any
purpose or purposes, may be called by either (i) the Chairman, if there be one,
or (ii) the President, (iii) any Vice President, if there be one, (iv) the
Secretary or (v) any Assistant Secretary, if there be one, and shall be called
by any such officer at the request in writing of (i) the Board of Directors or
(ii) a committee of the Board of Directors that has been duly designated by the
Board of Directors and whose powers and authority include the power to call such
meetings, which request shall state the purpose or purposes of the proposed
meeting; provided, however, that effective on and after the Second Trigger Date
(as hereinafter defined), special meetings of stockholders may only be called by
the Board of Directors pursuant to a resolution stating the purpose or purposes
thereof or by the Chairman, if there be one, and, effective on and after the
Second Trigger Date, any power of stockholders to call a special meeting is
specifically denied. Written notice of a special meeting stating the place, date
and hour of the meeting and the purpose or purposes for which the meeting is
called shall be given not less than ten nor more than sixty days before the date
of the meeting to each stockholder entitled to vote at such meeting. Only such
business shall be conducted at a special meeting as shall be specified in the
notice of meeting (or any supplement thereto). For purposes of these By-Laws:
1. "Second Trigger Date" shall mean the first date on which DuPont ceases
to beneficially own shares representing 30% or more of the votes entitled to be
cast by the Voting Stock;
2. "Voting Stock" shall mean the shares of the then outstanding capital
stock entitled to vote generally on the election of directors and shall exclude
any class or series of capital stock only entitled to vote in the event of
dividend arrearages thereon, whether or not at the time of determination there
are any such dividend arrearages;
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3. "DuPont Company" shall mean E.I. du Pont de Nemours & Company, Inc., a
Delaware corporation, and all its successors by way of merger, consolidation or
sale of all or substantially all of its assets;
4. "DuPont" shall mean the DuPont Company and all its subsidiaries, but
shall not include the Corporation and its subsidiaries;
5. "subsidiary" shall mean, as to any person or entity, a corporation,
partnership, joint venture, association or other entity in which such person or
entity beneficially owns (directly or indirectly) 50% or more of the outstanding
voting stock, voting power, partnership interests or similar voting interests;
and
6. "affiliate" and "beneficial ownership" shall have the respective
meanings given to such terms in Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
Section 4. Adjournments. Any meeting of the stockholders may be adjourned
from time to time to reconvene at the same or some other place, and notice need
not be given of any such adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting, the Corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
Section 5. Quorum. Unless otherwise required by law or the Certificate of
Incorporation, the presence in person or by proxy of the holders of shares of
capital stock entitled to cast a majority of all the votes which could be cast
at such meeting by the holders of all of the outstanding shares of capital stock
entitled to vote on every matter that is to be voted on at such
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meeting shall constitute a quorum at all meetings of the stockholders for the
transaction of business. A quorum, once established, shall not be broken by the
withdrawal of enough votes to leave less than a quorum. If, however, such quorum
shall not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, in the manner
provided in Section 4, until a quorum shall be present or represented.
Section 6. Voting. Unless otherwise required by law, the Certificate of
Incorporation or these By-Laws, any question brought before any meeting of
stockholders, other than the election of directors, shall be decided by the vote
of the holders of a majority of the votes of shares of capital stock represented
and entitled to vote thereat, voting as a single class. Every reference in these
ByLaws to a majority or other proportion of shares, or a majority or other
proportion of the votes of shares, of capital stock shall refer to such majority
or other proportion of the votes to which such shares of capital stock are
entitled as provided in the Certificate of Incorporation. Votes of stockholders
entitled to vote at a meeting of stockholders may be cast in person or by proxy
but no proxy shall be voted on or after three years from its date, unless such
proxy provides for a longer period. The Board of Directors, in its discretion,
or the officer of the Corporation presiding at a meeting of stockholders, in
such officer's discretion, may require that any votes cast at such meeting shall
be cast by written ballot.
Section 7. Consent of Stockholders in Lieu of Meeting. Unless otherwise
provided in the Certificate of Incorporation, any action required or permitted
to be taken at any annual or special meeting of stockholders of the Corporation,
may be taken without a meeting, without prior notice and without a vote, if a
consent or consents in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that
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would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted and shall be delivered to
the Corporation by delivery to its registered office in the State of Delaware,
its principal place of business, or an officer or agent of the corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. Every written
consent shall bear the date of signature of each stockholder who signs the
consent and no written consent shall be effective to take the corporate action
referred to therein unless, within sixty days of the earliest dated consent
delivered in the manner required by this Section 8 to the Corporation, written
consents signed by a sufficient number of holders to take action are delivered
to the Corporation by delivery to its registered office in the state of
Delaware, its principal place of business, or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing and who, if the action had been
taken at a meeting, would have been entitled to notice of the meeting if the
record date for such meeting had been the date that written consents signed by a
sufficient number of holders to take the action were delivered to the
Corporation as provided above in this section. Notwithstanding anything to the
contrary set forth in these By-Laws, on and after the Second Trigger Date, any
action required or permitted to be taken by the stockholders of the Corporation
may be effected only at a duly called annual or special meeting of such holders
and may not be effected by a consent in writing by such holders in lieu of such
a meeting.
Section 8. List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before
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every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten days prior to the meeting either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
of the Corporation who is present.
Section 9. Stock Ledger. The stock ledger of the Corporation shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 8 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
Section 10. Nomination of Directors. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors of the Corporation, except as may be otherwise provided in the
Certificate of Incorporation of the Corporation with respect to the right of
holders of preferred stock of the Corporation to nominate and elect a specified
number of directors in certain circumstances. Nominations of persons for
election to the Board of Directors may be made at any annual meeting of
stockholders (a) by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (b) by any stockholder of the Corporation (i)
who is a stockholder of record on the date of the giving of the notice provided
for in this Section 10 and on the record date for the determination of
stockholders entitled to vote at such annual meeting and (ii) who complies with
the notice procedures set forth in this Section 10.
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In addition to any other applicable requirements, for a nomination to be
made by a stockholder (other than DuPont so long as DuPont beneficially owns
shares representing 10% or more of the votes entitled to be cast by the Voting
Stock), such stockholder must have given timely notice thereof in proper written
form to the Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the Corporation not
less than ninety (90) days nor more than one hundred and twenty (120) days prior
to the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure of the date of the annual meeting was made, whichever
first occurs.
To be in proper written form, a stockholder's notice to the Secretary must
set forth (a) as to each person whom the stockholder proposes to nominate for
election as a director (i) the name, age, business address and residence address
of the person, (ii) the principal occupation or employment of the person, (iii)
the class or series and number of shares of capital stock of the Corporation
which are owned beneficially or of record by the person that would be required
to be disclosed in a proxy statement or other filings required to be made in
connection with solicitations of proxies for election of directors pursuant to
Section 14 of the Exchange Act and the rules and regulations promulgated
thereunder; and (b) as to the stockholder giving the notice (i) the name and
record address of such stockholder, (ii) the class or series and number of
shares of capital stock of the Corporation which are owned beneficially or of
record by such stockholder, (iii) a description
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of all arrangements or understandings between such stockholder and each proposed
nominee and any other person or persons (including their names) pursuant to
which the nomination (s) are to be made by such stockholder, (iv) a
representation that such stockholder intends to appear in person or by proxy at
the annual meeting to nominate the persons named in its notice and (v) any other
information relating to such stockholder that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Exchange Act and the rules and regulations promulgated thereunder. Such notice
must be accompanied by a written consent of each proposed nominee to being named
as a nominee and to serve as a director if elected.
No person shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedures set forth in this Section 10.
If the chairman of the annual meeting determines that a nomination was not made
in accordance with the foregoing procedures, the chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall be
disregarded.
Notwithstanding anything to the contrary set forth herein, so long as
DuPont beneficially owns shares representing 10% or more of the votes entitled
to be cast by the Voting Stock, nominations by DuPont shall not be subject to
the notice procedures of this Section 10.
Section 11. Business at Annual Meetings. No business may be transacted at
an annual meeting of stockholders, other than business that is either (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors (or any duly authorized committee
thereof), (b) otherwise properly brought before the annual meeting by or at the
direction of the Board of Directors (or any duly authorized committee thereof)
or (c) otherwise properly brought before the annual meeting by any stockholder
of the Corporation (i) who
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is a stockholder of record on the date of the giving of the notice provided for
in this Section 11 and on the record date for the determination of stockholders
entitled to vote at such annual meeting and (ii) who complies with the notice
procedures set forth in this Section 11.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder (other than DuPont so
long as DuPont beneficially owns shares representing 10% or more of the votes
entitled to be cast by the Voting Stock), such stockholder must have given
timely notice thereof in proper written form to be Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the Corporation not
less than ninety (90) days nor more than one hundred and twenty (120) days prior
to the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure of the date of the annual meeting was made, whichever
first occurs.
To be in proper written form, a stockholder's notice to the Secretary must
set forth as to each matter such stockholder proposes to bring before the annual
meeting (i) 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, (ii) the name and record address of such stockholder, (iii) the class
or series and number of shares of capital stock of the Corporation which are
owned beneficially or of record by such stockholder, (iv) a description of all
arrangements or understandings between such
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stockholder and any other person or persons (including their names) in
connection with the proposal of such business by such stockholder and any
material interest of such stockholder in such business and (v) a representation
that such stockholder intends to appear in person or by proxy at the annual
meeting to bring such business before the meeting.
No business shall be conducted at the annual meeting of stockholders except
business brought before the annual meeting in accordance with the procedures set
forth in this Section 11, provided, however, that, once business has been
properly brought before the annual meeting in accordance with such procedures,
nothing in this Section 11 shall be deemed to preclude discussion by any
stockholder of any such business. If the Chairman of an annual meeting
determines that business was not properly brought before the annual meeting in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the business was not properly brought before the meeting and such
business shall not be transacted.
Notwithstanding anything to the contrary set forth herein, so long as
DuPont beneficially owns shares representing 10% or more of the votes entitled
to be cast by the Voting Stock, business brought before an annual meeting by
DuPont shall not be subject to the notice procedures of this Section 11.
Section 12. Conduct of Meetings. The Board of Directors of the Corporation
may adopt by resolution such rules and regulations for the conduct of the
meeting of the stockholders as it shall deem appropriate. Except to the extent
inconsistent with such rules and regulations as adopted by the Board of
Directors, the chairman of any meeting of the stockholders shall have the right
and authority to prescribe such rules, regulations and procedures and to do all
such acts as, in the judgment of such chairman, are appropriate for the proper
conduct of the meeting. Such rules, regulations or procedures, whether adopted
by the Board of Directors or prescribed by the chairman
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of the meeting, may include, without limitation, the following: (i) the
establishment of an agenda or order of business for the meeting; (ii) the
determination of when the polls shall open and close for any given matter to be
voted on at the meeting; (iii) rules and procedures for maintaining order at the
meeting and the safety of those present; (iv) limitations on attendance at or
participation in the meeting to stockholders of record of the corporation, their
duly authorized and constituted proxies or such other persons as the chairman of
the meeting shall determine; (v) restrictions on entry to the meeting after the
time fixed for the commencement thereof; and (vi) limitations on the time
allotted to questions or comments by participants.
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors. The Board of Directors shall
consist initially of nine members, the exact number of which shall be not less
than six nor more than fifteen as determined from time to time by the Board of
Directors as provided in the Certificate of Incorporation. The directors shall
be divided into three classes, designated Class I, Class II and Class III, as
provided in the Certificate of Incorporation. Any director may resign at any
time upon written notice to the Corporation. Directors need not be stockholders.
Section 2. Vacancies. Unless otherwise required by law or the Certificate
of Incorporation, vacancies arising through death, resignation, removal, an
increase in the number of directors or otherwise may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, or by the stockholders if such vacancy resulted from the action of
stockholders (in which event such vacancy may not be filled by the directors or
a majority thereof), and the directors so chosen shall hold office until the
next election for such class and until their successors are duly elected and
qualified, or until their earlier death, resignation or removal.
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Section 3. Duties and Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-Laws required to be exercised or done by the stockholders.
Section 4. Meetings. The Board of Directors may hold meetings, both regular
and special, either within or without the State of Delaware. Regular meetings of
the Board of Directors may be held without notice at such time and at such place
as may from time to time be determined by the Board of Directors. Special
meetings of the Board of Directors may be called by the Chairman, if there be
one, the President, or by any director. Notice thereof stating the place, date
and hour of the meeting shall be given to each director either by mail not less
than forty-eight (48) hours before the date of the meeting, by telephone or
telegram on twenty-four (24) hours' notice, or on such shorter notice as the
person or persons calling such meeting may deem necessary or appropriate in the
circumstances.
Section 5. Quorum. Except as otherwise required by law or the Certificate
of Incorporation, at all meetings of the Board of Directors, a majority of the
entire Board of Directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting of the time and place of the adjourned meeting,
until a quorum shall be present.
Section 6. Actions by Written Consent of the Board. Unless otherwise
provided in the Certificate of Incorporation, or these By-Laws, any action
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may be taken without a meeting,
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if all the members of the Board of Directors or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or committee.
Section 7. Meetings by Means of Conference Telephone. Unless otherwise
provided in the Certificate of Incorporation, members of the Board of Directors
of the Corporation, or any committee thereof, may participate in a meeting of
the Board of Directors or such committee by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to this
Section 7 shall constitute presence in person at such meeting.
Section 8. Standing Committees. The Board of Directors, by resolution
adopted by a majority of the entire Board, shall appoint from among its members
(i) an Audit and Compliance Committee and (ii) a Compensation Committee
(together, the "Standing Committees") each consisting of three (3) (or such
greater number as the Board of Directors may designate) directors, to perform
the functions traditionally performed by such Board committees; provided,
however that prior to the First Trigger Date (as hereinafter defined), a
majority of the Directors on each Standing Committee shall be directors
designated by the DuPont Company; and provided, further, however that on and
after the First Trigger Date but so long as DuPont beneficially owns shares
representing 10% or more of the votes entitled to be cast by all of the
outstanding shares of common stock of the Corporation, each Standing Committee
shall include at least one director designated by the DuPont Company. For
purposes of these By-Laws, "First Trigger Date" shall mean the first date on
which DuPont ceases to beneficially own shares representing 50% or more of the
votes entitled to be cast by the Voting Stock.
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Section 9. Committees. The Board of Directors may designate one or more
other committees (in addition to the mandatory Standing Committees as set forth
in Section 8 of this Article III), each such other committee to consist of one
or more of the directors of the Corporation; provided, however that on and after
the First Trigger Date but so long as DuPont beneficially owns shares
representing 10% or more of the votes entitled to be cast by all of the
outstanding shares of common stock of the Corporation, each such other committee
shall include at least one director designated by the DuPont Company. With
respect to all Board committees (including Standing Committees), the Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
any such committee. With respect to all Board committees (including Standing
Committees), in the absence or disqualification of a member of a committee, and
in the absence of a designation by the Board of Directors of an alternate member
to replace the absent or disqualified member, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any absent or
disqualified member. Any committee (including any Standing Committee), to the
extent permitted by law and provided in the resolution establishing such
committee, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it. Each committee (including each Standing Committee) shall keep
regular minutes and report to the Board of Directors when required.
Section 10. Compensation. The directors may be paid their expenses, if any,
of attendance at each meeting of the Board of Directors and shall receive such
compensation for their
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services as directors as shall be determined by the Board of Directors. No such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
Section 11. Removal. Any director or the entire Board of Directors may be
removed, with or without cause, by the affirmative vote of shares representing a
majority of the votes entitled to be cast by the Voting Stock; provided, however
that during the Trigger Period (as defined below), a director may be removed,
with or without cause, only by the affirmative vote of shares representing not
less than 66 2/3% of the votes entitled to be cast by the Voting Stock;
provided, further, however that from and after the Second Trigger Date, a
director may only be removed for cause, such removal to be by the affirmative
vote of the shares representing a majority of the votes entitled to be cast by
the Voting Stock. Unless the Board of Directors has made a determination that
removal is in the best interests of the Corporation (in which case the following
definition shall not apply), "cause" for removal of a director shall be deemed
to exist only if (i) the director whose removal is proposed has been convicted,
or when a director is granted immunity to testify when another has been
convicted, of a felony by a court of competent jurisdiction and such conviction
is no longer subject to direct appeal; (ii) such director has been found by the
affirmative vote of a majority of the Directors then in office at any regular or
special meeting of the Board of Directors called for that purpose, or by a court
of competent jurisdiction to have been guilty of willful misconduct in the
performance of his duties to the Corporation in a matter of substantial
importance to the Corporation; or (iii) such director has been adjudicated by a
court of competent jurisdiction to be mentally incompetent, which mental
incompetency directly affects his ability as a director of the Corporation. As
used herein, "Trigger Period" shall mean the period that begins on and after the
day following the First Trigger
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Date and ends on the Second Trigger Date. Notwithstanding the foregoing,
whenever holders of outstanding shares of one or more series of Preferred Stock
are entitled to elect directors of the Corporation pursuant to the provisions
applicable in the case of arrearages in the payment of dividends or other
defaults contained in the resolution or resolutions of the Board of Directors
providing for the establishment of any such series, any such director of the
Corporation so elected may be removed in accordance with the provisions of such
resolution or resolutions.
ARTICLE IV
OFFICERS
Section 1. General. The officers of the Corporation shall be chosen by the
Board of Directors and shall be a President, a Secretary and a Treasurer. The
Board of Directors, in its discretion, also may choose a Chairman of the Board
of Directors (who must be a director) and one or more Vice Presidents, Assistant
Secretaries, Assistant Treasurers and other officers. Any number of offices may
be held by the same person, unless otherwise prohibited by law or the
Certificate of Incorporation. The officers of the Corporation need not be
stockholders of the Corporation nor, except in the case of the Chairman of the
Board of Directors, need such officers be directors of the Corporation.
Section 2. Election. The Board of Directors, at its first meeting held
after each Annual Meeting of Stockholders (or action by written consent of
stockholders in lieu of the Annual Meeting of Stockholders, if permitted by the
Certificate of Incorporation) shall elect the officers of the Corporation who
shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the Board of
Directors; and all officers of the Corporation shall hold office until their
successors are chosen and qualified, or until their earlier death, resignation
or removal. Any officer elected by the Board of Directors may be
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removed at any time by the affirmative vote of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by the Board
of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of attorney,
proxies, waivers of notice of meeting, consents and other instruments relating
to securities owned by the Corporation may be executed in the name of and on
behalf of the Corporation by the President or any Vice President or any other
officer authorized to do so by the Board of Directors and any such officer may,
in the name of and on behalf of the Corporation, take all such action as any
such officer may deem advisable to vote in person or by proxy at any meeting of
security holders of any corporation in which the Corporation may own securities
and at any such meeting shall possess and may exercise any and all rights and
power incident to the ownership of such securities and which, as the owner
thereof, the Corporation might have exercised and possessed if present. The
Board of Directors may, by resolution, from time to time confer like powers upon
any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of the Board of
Directors, if there be one, shall preside at all meetings of the stockholders
and of the Board of Directors. Except where by law the signature of the
President is required, the Chairman of the Board of Directors shall possess the
same power as the President to sign all contracts, certificates and other
instruments of the Corporation which may be authorized by the Board of
Directors. During the absence or disability of the President, the Chairman of
the Board of Directors shall exercise all the powers and discharge all the
duties of the President. The Chairman of the Board of Directors shall also
perform such other duties and may exercise such other powers as may from time to
time be assigned by these By-Laws or by the Board of Directors.
Section 5. President. The President shall be the chief executive officer of
the Corporation and, subject to the control of the Board of Directors, shall
have general supervision of
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the business of the Corporation and shall see that all orders and resolutions of
the Board of Directors are carried into effect. The President shall execute all
bonds, mortgages, contracts and other instruments of the Corporation requiring a
seal, under the seal of the Corporation, except where required or permitted by
law to be otherwise signed and executed and except that the other officers of
the Corporation may sign and execute documents when so authorized by these
By-Laws, the Board of Directors or the President. In the absence or disability
of the Chairman of the Board of Directors, or if there be none, the President
shall preside at all meetings of the stockholders and the Board of Directors.
The President shall also perform such other duties and may exercise such other
powers as may from time to time be assigned to such officer by these By-Laws or
by the Board of Directors.
Section 6. Vice Presidents. At the request of the President or in the
President's absence or in the event of the President's inability or refusal to
act (and if there be no Chairman of the Board of Directors), the Vice President,
or the Vice Presidents if there is more than one (in the order designated by the
Board of Directors), shall perform the duties of the President, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the President. Each Vice President shall perform such other duties and have such
other powers as the Board of Directors from time to time may prescribe. If there
be no Chairman of the Board of Directors and no Vice President, the Board of
Directors shall designate the officer of the Corporation who, in the absence of
the President or in the event of the inability or refusal of the President to
act, shall perform the duties of the President, and when so acting, shall have
all the powers of and be subject to all the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all meetings of the Board
of Directors and all meetings of stockholders and record all the proceedings
thereat in a book or books
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to be kept for that purpose; the Secretary shall also perform like duties for
committees of the Board of Directors when required. The Secretary shall give, or
cause to be given, notice of all meetings of the stockholders and special
meetings of the Board of Directors, and shall perform such other duties as may
be prescribed by the Board of Directors, the Chairman of the Board of Directors
or the President, under whose supervision the Secretary shall be. If the
Secretary shall be unable or shall refuse to cause to be given notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
if there be no Assistant Secretary, then either the Board of Directors or the
President may choose another officer to cause such notice to be given. The
Secretary shall have custody of the seal of the Corporation and the Secretary or
any Assistant Secretary, if there be one, shall have authority to affix the same
to any instrument requiring it and when so affixed, it may be attested by the
signature of the Secretary or by the signature of any such Assistant Secretary.
The Board of Directors may give general authority to any other officer to affix
the seal of the Corporation and to attest to the affixing by such officer's
signature. The Secretary shall see that all books, reports, statements,
certificates and other documents and records required by law to be kept or filed
are properly kept or filed, as the case may be.
Section 8. Treasurer. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors. The Treasurer
shall disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the President and the Board of Directors, at its regular meetings, or when the
Board of Directors so requires, an account of all transactions as Treasurer and
of the financial condition of the Corporation. If required by the
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Board of Directors, the Treasurer shall give the Corporation a bond in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of the office of the
Treasurer and for the restoration to the Corporation, in case of the Treasurer's
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in the Treasurer's
possession or under the Treasurer's control belonging to the Corporation.
Section 9. Assistant Secretaries. Assistant Secretaries, if there be any,
shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Secretary, and in the absence of the Secretary or in the
event of the Secretary's disability or refusal to act, shall perform the duties
of the Secretary, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if there be any,
shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Treasurer, and in the absence of the Treasurer or in the
event of the Treasurer's disability or refusal to act, shall perform the duties
of the Treasurer, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Treasurer. If required by the Board of
Directors, an Assistant Treasurer shall give the Corporation a bond in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of the office of Assistant
Treasurer and for the restoration to the Corporation, in case of the Assistant
Treasurer's death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in
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the Assistant Treasurer's possession or under the Assistant Treasurer's control
belonging to the Corporation.
Section 11. Other Officers. Such other officers as the Board of Directors
may choose shall perform such duties and have such powers as from time to time
may be assigned to them by the Board of Directors. The Board of Directors may
delegate to any other officer of the Corporation the power to choose such other
officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
Section 1. Form of Certificates. Every holder of stock in the Corporation
shall be entitled to have a certificate signed, in the name of the Corporation
(i) by the President or a Vice President and (ii) by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation, certifying the number of shares owned by such stockholder in the
Corporation.
Section 2. Signatures. Any or all of the signatures on a certificate may be
a facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of issue.
Section 3. Lost Certificates. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the
21
<PAGE> 22
owner of such lost, stolen or destroyed certificate, or the owner's legal
representative, to advertise the same in such manner as the Board of Directors
shall require and/or to give the Corporation a bond in such sum as it may direct
as indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed or the
issuance of such new certificate.
Section 4. Transfers. Stock of the Corporation shall be transferable in the
manner prescribed by law and in these By-Laws. Transfers of stock shall be made
on the books of the Corporation only by the person named in the certificate or
by such person's attorney lawfully constituted in writing and upon the surrender
of the certificate therefor, which shall be cancelled before a new certificate
shall be issued. No transfer of stock shall be valid as against the Corporation
for any purpose until it shall have been entered in the stock records of the
Corporation by an entry showing from and to whom transferred.
Section 5. Record Date.
(a) In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, the board of directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors, and which record date shall not be more than sixty
nor less than ten days before the date of such meeting. If no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held. A determination of stockholders of record
entitled to notice of or to vote at a
22
<PAGE> 23
meeting of stockholders shall apply to any adjournment of the meeting;
providing, however, that the Board of Directors may fix a new record date for
the adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled
to consent to corporate action in writing without a meeting, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than ten days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in this State, its principal
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to a corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the Board of Directors and prior action by the Board of Directors is required by
law, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting shall be at the close of business
on the day on which the Board of Directors adopts the resolutions taking such
prior action.
(c) In order that the Corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is
adopted, and which
23
<PAGE> 24
record date shall be not more than sixty days prior to such action. If no record
date is fixed, the record date for determining stockholders for any such purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
Section 6. Record Owners. The Corporation shall be entitled to recognize
the exclusive right of a person registered on its books as the owner of shares
to receive dividends, and to vote as such owner, and to hold liable for calls
and assessments a person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise required by law.
ARTICLE VI
NOTICES
Section 1. Notices. Whenever written notice is required by law, the
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at such
person's address as it appears on the records of the Corporation, with postage
thereon prepaid, and such notice shall be deemed to be given at the time when
the same shall be deposited in the United States mail. Written notice may also
be given personally or by telegram, telex or cable.
Section 2. Waivers of Notice. Whenever any notice is required by law, the
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed, by
the person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. Attendance of a person at a
meeting, present in person or represented by proxy, shall constitute a waiver of
notice
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<PAGE> 25
of such meeting, except where the person attends the meeting for the express
purpose of objecting at the beginning of the meeting to the transaction of any
business because the meeting is not lawfully called or convened.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the Corporation,
subject to the requirements of the DGCL and the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors at any regular
or special meeting of the Board of Directors (or any action by written consent
in lieu thereof in accordance with Section 6 of Article III hereof), and may be
paid in cash, in property, or in shares of the Corporation's capital stock.
Before payment of any dividend, there may be set aside out of any funds of the
Corporation available for dividends such sum or sums as the Board of Directors
from time to time, in its absolute discretion, deems proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the Corporation, or for any proper purpose, and the
Board of Directors may modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal
25
<PAGE> 26
may be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
ARTICLE VIII
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings other than
Those by or in the Right of the Corporation. Subject to Section 3 of this
Article VIII, the Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that such person is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director or officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe such person's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that such
person's conduct was unlawful.
26
<PAGE> 27
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in the
Right of the Corporation. Subject to Section 3 of this Article VIII, the
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that such person is or was a director or officer of the Corporation, or is
or was a director or officer of the Corporation serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit
if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the Corporation;
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification under this
Article VIII (unless ordered by a court) shall be made by the Corporation only
as authorized in the specific case upon a determination that indemnification of
the director or officer is proper in the circumstances because such person has
met the applicable standard of conduct set forth in Section 1 or Section 2 of
this Article VIII, as the case may be. Such determination shall be made, with
respect to a person who is a director or officer at the time of such
determination, (i) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a
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<PAGE> 28
quorum, or (ii) by a committee of such directors designated by a majority vote
of such directors, even though less than a quorum, or (iii) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion or (iv) by the stockholders. Such determination shall be made,
with respect to former directors and officers, by any person or persons having
the authority to act on the matter on behalf of the Corporation. To the extent,
however, that a present or former director or officer of the Corporation has
been successful on the merits or otherwise in defense of any action, suit or
proceeding described above, or in defense of any claim, issue or matter therein,
such person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith, without
the necessity of authorization in the specific case.
Section 4. Good Faith Defined. For purposes of any determination under
Section 3 of this Article VIII, a person shall be deemed to have acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the Corporation, or, with respect to any criminal action
or proceeding, to have had no reasonable cause to believe such person's conduct
was unlawful, if such person's action is based on good faith reliance on the
records or books of account of the Corporation or another enterprise, or on
information supplied to such person by the officers of the Corporation or
another enterprise in the course of their duties, or on the advice of legal
counsel for the Corporation or another enterprise or on information or records
given or reports made to the Corporation or another enterprise by an independent
certified public accountant or by an appraiser or other expert selected with
reasonable care by the Corporation or another enterprise. The term "another
enterprise" as used in this Section 4 shall mean any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise of
which such person is or was serving at the request of the Corporation as a
director, officer, employee
28
<PAGE> 29
or agent. The provisions of this Section 4 shall not be deemed to be exclusive
or to limit in any way the circumstances in which a person may be deemed to have
met the applicable standard of conduct set forth in Section 1 or 2 of this
Article VIII, as the case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article VIII, and
notwithstanding the absence of any determination thereunder, any director or
officer may apply to the Court of Chancery in the State of Delaware for
indemnification to the extent otherwise permissible under Sections 1 and 2 of
this Article VIII. The basis of such indemnification by a court shall be a
determination by such court that indemnification of the director or officer is
proper in the circumstances because such person has met the applicable standards
of conduct set forth in Section 1 or 2 of this Article VIII, as the case may be.
Neither a contrary determination in the specific case under Section 3 of this
Article VIII nor the absence of any determination thereunder shall be a defense
to such application or create a presumption that the director or officer seeking
indemnification has not met any applicable standard of conduct. Notice of any
application for indemnification pursuant to this Section 5 shall be given to the
Corporation promptly upon the filing of such application. If successful, in
whole or in part, the director or officer seeking indemnification shall also be
entitled to be paid the expense of prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a director or
officer in defending any civil, criminal, administrative or investigative
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the Corporation as authorized in this Article VIII.
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<PAGE> 30
Section 7. Nonexclusivity of Indemnification and Advancement of Expenses.
The indemnification and advancement of expenses provided by or granted pursuant
to this Article VIII shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
the Certificate of Incorporation, any By-Law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office, it being the policy of the Corporation that indemnification of the
persons specified in Sections 1 and 2 of this Article VIII shall be made to the
fullest extent permitted by law. The provisions of this Article VIII shall not
be deemed to preclude the indemnification of any person who is not specified in
Section 1 or 2 of this Article VIII but whom the Corporation has the power or
obligation to indemnify under the provisions of the General Corporation Law of
the State of Delaware, or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain insurance
on behalf of any person who is or was a director or officer of the Corporation,
or is or was a director or officer of the Corporation serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against any liability asserted against such person and incurred by
such person in any such capacity, or arising out of such person's status as
such, whether or not the Corporation would have the power or the obligation to
indemnify such person against such liability under the provisions of this
Article VIII.
Section 9. Certain Definitions. For purposes of this Article VIII,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or
30
<PAGE> 31
officers, so that any person who is or was a director or officer of such
constituent corporation, or is or was a director or officer of such constituent
corporation serving at the request of such constituent corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, shall stand in the
same position under the provisions of this Article VIII with respect to the
resulting or surviving corporation as such person would have with respect to
such constituent corporation if its separate existence had continued. For
purposes of this Article VIII, references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director or officer with
respect to an employee benefit plan, its participants or beneficiaries; and a
person who acted in good faith and in a manner such person reasonably believed
to be in the interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to the best
interests of the Corporation" as referred to in this Article VIII.
Section 10. Survival of Indemnification and Advancement of Expenses. The
indemnification and advancement of expenses provided by, or granted pursuant to,
this Article VIII shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
Section 11. Limitation on Indemnification. Notwithstanding anything
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5 hereof),
the Corporation shall not be obligated to indemnify any director or officer in
connection with a proceeding (or part thereof) initiated by such person unless
31
<PAGE> 32
such proceeding (or part thereof) was authorized or consented to by the Board of
Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The
Corporation may, to the extent authorized from time to time by the Board of
Directors, provide rights to indemnification and to the advancement of expenses
to employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
Section 1. Amendments. These By-Laws may be altered, amended or repealed,
in whole or in part, and new By-Laws may be adopted (i) by the affirmative vote
of the shares representing a majority of the votes entitled to be cast by the
Voting Stock; provided, however, that any proposed alteration, amendment or
repeal of, or the adoption of any By-Law inconsistent with, Sections 3, 7, 10 or
11 of Article II of these By-Laws or Sections 1, 2 or 11 of Article III of these
By-Laws or this sentence, by the stockholders shall require the affirmative vote
of shares representing (x) not less than 662/3% (or, from and after the Second
Trigger Date, 80%) of the votes entitled to be cast by the Voting Stock and, in
addition, from and after the First Trigger Date (if there are any shares of
Class B Common Stock outstanding), (y) a majority of the votes entitled to be
cast by the holders of each class of Common Stock, voting separately by class;
and provided further, however, that in the case of any such stockholder action
at a meeting of stockholders, notice of the proposed alteration, amendment,
repeal or adoption of the new By-Law or By-Laws must be contained in the notice
of such meeting, or (ii) by action of the Board of Directors of the Corporation.
The provisions of this Section 1 are subject to any contrary provisions and any
provisions requiring a greater vote that are set forth in the Certificate of
Incorporation.
32
<PAGE> 33
Section 2. Entire Board of Directors. As used in these By-Laws generally,
the term "entire Board of Directors" means the total number of directors which
the Corporation would have if there were no vacancies.
* * *
Adopted as of : October 18, 1998
Last Amended as of: October 29, 1998
33
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule Contains Summary Financial Information Extracted From Form 10-Q
For The Quarterly Period Ended September 30, 1998, And Is Qualified In Its
Entirety By Reference To Such Financial Statements
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 406
<SECURITIES> 90
<RECEIVABLES> 1,312<F1>
<ALLOWANCES> 0
<INVENTORY> 1,000
<CURRENT-ASSETS> 3,155
<PP&E> 22,012
<DEPRECIATION> 10,660
<TOTAL-ASSETS> 16,376
<CURRENT-LIABILITIES> 3,115
<BONDS> 8,527<F2>
0
0
<COMMON> 0
<OTHER-SE> 545
<TOTAL-LIABILITY-AND-EQUITY> 16,376
<SALES> 17,264
<TOTAL-REVENUES> 17,515
<CGS> 10,378<F3>
<TOTAL-COSTS> 16,321<F4>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108
<INCOME-PRETAX> 1,086
<INCOME-TAX> 373
<INCOME-CONTINUING> 713
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 713
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.12<F5>
<FN>
<F1>Includes Notes Receivable - Related Parties
<F2>Includes Long-Term borrows-Related Parties of $8,422
<F3>Includes Other Expenses
<F4>Cost of Goods Sold and Other Expenses; Depreciation, Depletion and
Amortization; Exploration Expenses, Including Dry-Hole Costs and Impairment of
Unproved Properties; Selling, General and Administrative Expenses; and
Taxes Other Than On Income
<F5>Proforma Basic Earnings Per Share and Fully Diluted Earnings Per Share
</FN>
</TABLE>
