<PAGE> 1
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CONOCO INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<S> <C> <C>
DELAWARE 2911 51-0370352
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
600 NORTH DAIRY ASHFORD
HOUSTON, TEXAS 77079
TEL: (281) 293-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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<TABLE>
<S> <C>
HOWARD J. RUDGE, ESQ. RICK A. HARRINGTON, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL SENIOR VICE PRESIDENT, LEGAL, AND
E. I. DU PONT DE NEMOURS GENERAL COUNSEL
AND COMPANY CONOCO INC.
1007 MARKET STREET 600 NORTH DAIRY ASHFORD
WILMINGTON, DELAWARE 19898 HOUSTON, TEXAS 77079
TEL: (302) 774-1000 TEL: (281) 293-1000
FAX: (302) 773-5176 FAX: (281) 293-1440
</TABLE>
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
<TABLE>
<S> <C> <C>
LOU R. KLING, ESQ. WALTER J. SMITH, ESQ. JOHN W. WHITE, ESQ.
MATTHEW J. MALLOW, ESQ. BAKER & BOTTS, L.L.P. CRAVATH, SWAINE & MOORE
EILEEN NUGENT SIMON, ESQ. ONE SHELL PLAZA 825 EIGHTH AVENUE
SKADDEN, ARPS, SLATE, 910 LOUISIANA NEW YORK, NEW YORK 10019
MEAGHER & FLOM LLP HOUSTON, TEXAS 77002 TEL: (212) 474-1000
919 THIRD AVENUE TEL: (713) 229-1234 FAX: (212) 474-3700
NEW YORK, NEW YORK 10022 FAX: (713) 229-1522
TEL: (212) 735-3000
FAX: (212) 735-2000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
completion of the exchange offer referred to in this document.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this Form is filed to register additional securities for an offering under
Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed under Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering: [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM AGGREGATE
TITLE OF SECURITIES BEING REGISTERED OFFERING PRICE (1)(2) AMOUNT OF REGISTRATION FEE
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<S> <C> <C>
Class B Common Stock, $.01 par value (3)............... $5,244,192,273 $1,457,886
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</TABLE>
(1) The maximum number of shares of Class B Common Stock of Conoco Inc.
("Conoco") offered in exchange for shares of Common Stock, $.30 par value
("DuPont Common Stock"), of E. I. du Pont de Nemours and Company ("DuPont"),
as described in the Offering Circular-Prospectus filed as part of this
Registration Statement.
(2) Estimated solely for purposes of calculating the registration fee and
computed under Rule 457(f)(1) under the Securities Act of 1933, as amended
(the "Securities Act"), based on $55.50, the average of the high and low
sale prices reported on the New York Stock Exchange Composite Tape on March
17, 1999 for the DuPont Common Stock to be received by DuPont in exchange
for shares of Class B Common Stock.
(3) Includes the associated Preferred Share Purchase Rights (the "Rights"),
which Rights (a) are not currently separable from the shares of Conoco Class
B Common Stock and (b) are not currently exercisable. See "Description of
Conoco Capital Stock -- Anti-Takeover Effects of Certain Certificate and
By-law Provisions."
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING UNDER SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
The information in this Offering Circular-Prospectus is not complete and may be
changed. Conoco Class B Common Stock may not be sold nor may offers to buy be
accepted until the registration statement filed with the Securities and Exchange
Commission is effective. This Offering Circular- Prospectus is not an offer to
sell these securities and it is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
OFFERING CIRCULAR-PROSPECTUS
<TABLE>
<S> <C>
(SUBJECT TO COMPLETION)
ISSUED MARCH 22, 1999 DUPONT
1007 MARKET STREET
WILMINGTON, DE 19898
CHARLES O. HOLLIDAY, JR.
[DUPONT LOGO] CHAIRMAN OF THE BOARD
(R)
</TABLE>
EXCHANGE OFFER -- IMPORTANT
Dear DuPont Common Stockholders:
I am pleased to inform you that we have initiated an exchange offer to
implement our previously announced plan to establish Conoco Inc. as a fully
independent company. We are offering you the opportunity to exchange on a
tax-free basis some or all of your DuPont Common Stock for shares of Conoco
Class B Common Stock. The exchange offer will enable you to adjust your
investment between DuPont's materials and life sciences businesses and Conoco's
oil and gas business. Important terms of this transaction include the following:
- EXCHANGE OFFER. DuPont stockholders who elect to participate will
receive shares of Conoco Class B Common Stock for each DuPont share
tendered. We will accept up to an aggregate of DuPont shares
under the exchange offer.
- PRORATION. If more than DuPont shares are tendered, the number of
DuPont shares to be accepted from each tendering stockholder will, in
most cases, be proportionately reduced among all tendering stockholders.
Proportionate allocation of Conoco shares among all stockholders is
called proration.
- CONDITIONS OF EXCHANGE OFFER. The exchange offer is subject to a number
of conditions, including that enough DuPont shares are tendered so that
at least Conoco shares will be exchanged. The exchange offer is
also conditioned on us receiving a ruling from the Internal Revenue
Service to the effect that the exchange offer and certain associated
transactions, if any, will generally be tax-free to DuPont and its
stockholders.
- ANTICIPATED PREMIUM. We anticipate that tendering stockholders will
receive Conoco shares that have a market value greater than the recent
market value of the DuPont shares tendered. We cannot, however, predict
what the premium, if any, will be or the prices at which Conoco or DuPont
shares will trade over time.
- LISTING. We expect that the Conoco Class B Common Stock will be listed
on the New York Stock Exchange.
- EXPIRATION. The exchange offer will expire at 12:00 Midnight, New York
City time, on , 1999, unless extended by DuPont.
THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER ARE DESCRIBED IN THIS
OFFERING CIRCULAR-PROSPECTUS. WE URGE YOU TO READ THIS DOCUMENT VERY CAREFULLY
BEFORE DECIDING WHETHER OR NOT TO TENDER YOUR DUPONT SHARES. YOU SHOULD ALSO
READ THE ENCLOSED LETTER OF TRANSMITTAL CAREFULLY BECAUSE IT EXPLAINS THE PROPER
PROCEDURE FOR TENDERING YOUR DUPONT SHARES. NEITHER DUPONT, CONOCO NOR ANY OF
THEIR RESPECTIVE DIRECTORS MAKES ANY RECOMMENDATION AS TO WHETHER OR NOT YOU
SHOULD TENDER YOUR SHARES. YOU MUST MAKE YOUR OWN DECISION AFTER READING THIS
DOCUMENT AND CONSULTING WITH YOUR ADVISORS BASED ON YOUR OWN FINANCIAL POSITION
AND REQUIREMENTS.
PLEASE PAY SPECIAL ATTENTION TO THE RISK FACTORS BEGINNING ON PAGE 20 TO
LEARN ABOUT IMPORTANT RISKS YOU SHOULD CONSIDER.
DuPont has retained the services of D.F. King & Co., Inc. as information
agent to assist you in connection with the exchange offer. You may call D.F.
King at - - (toll free) in the United States and Canada or at
- - (collect) elsewhere to request additional documents and to ask any
questions.
Sincerely,
Charles O. Holliday, Jr.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED
OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS OFFERING
CIRCULAR-PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The dealer manager for the exchange offer is:
MORGAN STANLEY & CO.
Incorporated
, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Questions and Answers About the
Exchange Offer........................... 4
Summary.................................... 9
E. I. du Pont de Nemours and Company..... 9
Conoco Inc. ............................. 10
Background and Reasons for the Exchange
Offer.................................. 10
Effects of the Exchange Offer............ 11
Determining Whether to Participate in the
Exchange Offer......................... 11
The Exchange Offer....................... 12
Summary Historical and Unaudited Pro
Forma Financial Data of DuPont......... 15
Summary Historical and Unaudited Pro
Forma Financial Data of Conoco......... 17
Risk Factors............................... 20
Tendering and nontendering stockholders
are affected differently by the
Transaction............................ 20
The IRS may treat the Transaction as
taxable to DuPont and its stockholders
if representations made to the IRS were
inaccurate or if undertakings to the
IRS are not complied with.............. 20
Tendering stockholders may not receive
any premium............................ 20
Market prices for Conoco Class B Common
Stock may vary from market prices for
Conoco Class A Common Stock............ 20
The split-off will cause DuPont's assets
and total capitalization to decrease... 21
Low oil and gas prices have hurt Conoco's
financial results and may continue to
do so in the future.................... 21
Global political and economic
developments may hurt Conoco's
operations............................. 21
Conoco and DuPont may have conflicts of
interest............................... 22
The oil and gas reserves data in this
document are only estimates, which may
prove to be inaccurate................. 22
Conoco's growth depends on finding new
reserves............................... 23
Conoco may incur costs related to
compliance with federal, state and
foreign government environmental
regulations............................ 23
Changes in government regulations may
impose price controls and limitations
on production of oil and gas........... 23
Potential year 2000 problems may
adversely affect Conoco's business..... 24
Provisions in Conoco's bylaws,
certificate of incorporation, and
Delaware law could deter takeover
attempts............................... 24
There is no public market for Conoco B
Common Stock and an active trading
market may not develop................. 24
Conoco may not pay dividends on its
Common Stock........................... 24
The Transaction............................ 25
Background and Purpose................... 25
Effects.................................. 25
No Appraisal Rights...................... 26
Regulatory Approvals..................... 26
Accounting Treatment..................... 26
The Exchange Offer......................... 27
Minimum Condition........................ 27
Terms of the Exchange Offer.............. 27
Proration................................ 27
Tenders for Exchange by Holders of Fewer
Than 100 Shares of DuPont Common
Stock.................................. 27
Fractional Shares........................ 28
Exchange of Shares of DuPont Common
Stock.................................. 28
Procedures for Tendering Shares of DuPont
Common Stock........................... 28
Lost or Destroyed Certificates........... 30
Guaranteed Delivery Procedure............ 30
Withdrawal Rights........................ 30
Extension of Tender Period; Termination;
Amendment.............................. 31
Conditions to Consummation of the
Exchange Offer......................... 32
Fees and Expenses........................ 33
Illegality............................... 34
Price Range of DuPont Common Stock and
Dividends................................ 35
Price Range of Conoco Class A Common Stock
and Dividends............................ 36
Special Note on Forward-Looking
Information.............................. 37
Selected Historical and Unaudited Pro Forma
Financial Data of DuPont................. 38
Selected Historical and Unaudited Pro Forma
Financial Data of Conoco................. 40
Unaudited Pro Forma Consolidated Financial
Statements of DuPont..................... 43
Unaudited Pro Forma Financial Statements of
Conoco................................... 49
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of Conoco..................... 56
Financing Activities..................... 60
Results of Operations.................... 61
Upstream Segment Results................. 64
Downstream Segment Results............... 66
Corporate and Other Segment Results...... 67
Environmental Expenditures............... 68
Tax Matters.............................. 69
Year 2000................................ 69
European Monetary Union.................. 71
Restructuring............................ 72
New Accounting Standards................. 72
Market Risks............................. 73
Business of DuPont......................... 76
</TABLE>
2
<PAGE> 4
<TABLE>
<S> <C>
General.................................. 76
Reportable Segments...................... 76
Recent Developments...................... 78
Business of Conoco......................... 79
General.................................. 79
Business Strategy........................ 79
Company History.......................... 80
Financial Information -- Operating
Segment and Geographic Information..... 80
Upstream................................. 80
Downstream............................... 94
Power.................................... 103
Core Values.............................. 104
Environmental Regulation................. 104
Sources of Supply........................ 107
Research and Development................. 107
Patent and Trademarks.................... 107
Operating Hazards and Insurance.......... 107
Properties............................... 108
Employees................................ 108
Legal Proceedings........................ 108
Management................................. 110
Directors and Executive Officers......... 110
Election and Compensation of Directors... 113
Committees of the Board of Directors..... 114
Stock Ownership of Directors and
Executive Officers..................... 115
Compensation of Executive Officers....... 116
Retirement Benefits...................... 118
Severance Arrangements................... 119
Principal Stockholders of Conoco Common
Stock.................................... 121
Principal Stockholders of DuPont Common
Stock.................................... 122
Shares Eligible for Future Sale............ 122
Description of Conoco Capital Stock........ 123
General.................................. 123
Common Stock............................. 123
Preferred Stock.......................... 124
Anti-Takeover Effects of Certain
Certificate and By-law Provisions...... 125
Contractual Relations among Conoco,
DuPont and Certain Related Entities.... 130
Delaware Business Combination Statute.... 130
Limitations on Directors' Liability...... 131
Listing.................................. 131
Transfer Agent and Registrar............. 131
Comparison of Rights of Holders of DuPont
Common Stock and Conoco Common Stock..... 132
Authorized Capital Structure and
Liquidation Rights..................... 132
Dividend Policy.......................... 132
Voting Rights............................ 132
Certain Anti-Takeover Provisions......... 133
Listing.................................. 134
Arrangements Between Conoco and DuPont..... 135
Restructuring, Transfer and Separation
Agreement.............................. 135
Intercompany Notes....................... 137
Tax Sharing Agreement.................... 137
Employee Matters Agreement............... 138
Transitional Services Agreements......... 139
Information Systems and Telecommunication
Carrier Transitional Services
Agreements and Facilities Lease
Agreements............................. 140
Natural Gas Supply Agreement............. 140
Feedstock for DuPont's Sabine River Works
Plant.................................. 140
Motor Carrier Agreement.................. 140
Registration Rights Agreement............ 140
Certain Federal Income Tax Consequences.... 141
Legal Matters.............................. 142
Experts.................................... 142
Where You Can Find More Information........ 143
Conoco Inc. Index to Consolidated Financial
Statements............................... F-1
Schedule A -- Transactions Concerning
Common Stock of DuPont................... A-1
</TABLE>
3
<PAGE> 5
QUESTIONS AND ANSWERS
ABOUT THE EXCHANGE OFFER
Q1. WHY HAS DUPONT DECIDED TO SEPARATE CONOCO FROM THE REST OF DUPONT?
A1. As part of our increased focus on our materials and life sciences
businesses, in September 1998 our board of directors approved a plan to separate
our oil and gas business, operated through Conoco, from our other businesses.
We believe that separating Conoco from DuPont will:
- allow each company to independently access the capital markets;
- permit DuPont to expand its life sciences business, while at the same
time allowing Conoco to pursue its investment program in new and
capital-intensive oil and gas projects;
- facilitate future partnerships, combinations and other arrangements
between Conoco and other entities in the oil and gas business;
- allow each company to offer incentives to its employees that are more
closely linked to its performance;
- permit each company to focus its managerial and financial resources on
the growth of its business; and
- enhance both DuPont's and Conoco's abilities to engage in future
acquisitions in which their own stock is issued as consideration.
Q2. WHY DID DUPONT CHOOSE THE EXCHANGE OFFER AS THE WAY TO SEPARATE
CONOCO?
A2. We believe the exchange offer is a tax efficient way to achieve the
goals outlined above, allows you to adjust your investment between DuPont and
Conoco on a tax-free basis and provides you with the opportunity to receive the
anticipated premium referred to in question 5.
Q3. WHAT IS THE "EXCHANGE RATIO"?
A3. The exchange ratio of represents the number of shares of
Conoco Class B Common Stock that DuPont stockholders will receive for each share
of DuPont common stock validly tendered in the exchange offer. In this document,
we refer to the Conoco Class B common stock offered through the exchange offer
as the "Conoco Class B Common Stock" or the "Conoco shares," and the shares of
DuPont common stock as the "DuPont Common Stock," or simply, the "DuPont
shares."
Q4. WHAT ARE THE PRINCIPAL DIFFERENCES BETWEEN THE CLASSES OF CONOCO
COMMON STOCK?
A4. Conoco has two classes of common stock. Class A common stock is
publicly held and traded on the New York Stock Exchange. We refer to this stock
as the "Conoco Class A Common Stock." The Conoco Class B Common Stock, all of
which is currently held by DuPont, is being offered to DuPont stockholders
through the exchange offer. Conoco is applying to have the Conoco Class B Common
Stock listed on the NYSE.
The holders of Conoco Class A Common Stock and Conoco Class B Common Stock
generally have identical rights, including dividend and liquidation rights,
except that holders of Conoco Class A Common Stock are entitled to one vote per
share, while holders of Conoco Class B Common Stock are entitled to five votes
per share. We refer to Conoco Class A Common Stock and Conoco Class B Common
Stock collectively in this document as the "Conoco Common Stock."
Q5. WHAT IS THE ANTICIPATED PREMIUM?
A5. Based on the closing trading prices for shares of DuPont Common Stock
(NYSE: DD) and Conoco Class A Common Stock (NYSE: COC) on , 1999,
and assuming that Conoco
4
<PAGE> 6
Class B Common Stock trades at the same or a greater price as Conoco Class A
Common Stock, the exchange ratio would result in a DuPont stockholder receiving
Conoco shares with a market value greater than the market value of the DuPont
shares tendered. We refer to this greater value as the "anticipated premium."
The Conoco Class B Company Stock may, however, trade at a different price than
the Conoco Class A Common Stock. Because of this and because market prices for
Conoco Class A Common Stock and DuPont Common Stock may fluctuate over the
course of the exchange offer, we cannot predict what the amount of the premium,
if any, will be at the closing of the exchange offer or the prices at which
Conoco or DuPont shares will trade over time.
You can calculate the anticipated premium using the following formula:
<TABLE>
<S> <C> <C> <C> <C> <C>
(Exchange ratio) X (price of one share of
Conoco Class A Common Stock) - 1) X 100%
----------------------------------------------------------------------
Price of one DuPont share
</TABLE>
For example: Assume a price of $ for a DuPont share and a price of
$ for a Conoco share (the closing trading prices on the NYSE for shares of
DuPont Common Stock and Conoco Class A Common Stock on , 1999).
At an exchange ratio of shares of Conoco Class B Common Stock for each
DuPont share, and assuming the Class B Common Stock trades at the same price as
Conoco Class A Common Stock, the anticipated premium would be approximately
percent.
Q6. CAN I TENDER ONLY A PORTION OF MY DUPONT SHARES IN THE EXCHANGE OFFER?
A6. Yes, you may tender some or all of your DuPont shares.
Q7. DO I DO ANYTHING IF I WANT TO RETAIN MY DUPONT SHARES?
A7. No. If you want to retain your DuPont shares, you do not need to take
any action.
Q8. HOW DO I PARTICIPATE IN THE EXCHANGE OFFER?
A8. If you hold DuPont stock certificates, complete and sign the letter of
transmittal designating the number of DuPont shares you wish to tender. Send it,
together with your DuPont stock certificates and any other documents required by
the letter of transmittal, by registered mail, return receipt requested, so that
it is received by the exchange agent at one of the addresses set forth on the
back cover of this Offering Circular-Prospectus before the expiration of the
exchange offer on , 1999. Do not send your certificates to DuPont,
Conoco, Morgan Stanley, D.F. King or any soliciting dealer.
If your shares are held by your broker and are not certificated in your
name (i.e., your shares are held in "street name"), you will receive
instructions from your broker on how to participate. In this situation, you do
not need to complete the letter of transmittal. Please contact your broker
directly if you have not yet received instructions regarding the exchange offer.
Persons holding DuPont shares in DuPont or DuPont affiliated company
savings plans, including Conoco savings plans, should see question 14 for
instructions on how they may participate in the exchange offer. Persons who hold
DuPont shares in a Blueprint brokerage account at Merrill Lynch should see
question 15.
Q9. CAN I CHANGE MY MIND AFTER I TENDER MY DUPONT SHARES?
A9. Yes. You may withdraw tenders of your shares any time before the
exchange offer expires. If you change your mind again, you can retender your
DuPont shares by following the tender procedures again prior to the expiration
of the exchange offer.
5
<PAGE> 7
Q10. ARE THERE ANY CONDITIONS TO DUPONT'S OBLIGATION TO COMPLETE THE
EXCHANGE OFFER?
A10. Yes. We do not have to complete the exchange offer unless the
conditions outlined on pages 32-33 are satisfied. In particular, we will not
close the exchange offer unless enough DuPont shares are tendered so that at
least shares of Conoco Class B Common Stock can be exchanged. We refer
to the number of DuPont shares that must be tendered to produce this result as
the "minimum condition." DuPont may at any time waive any or all of the
conditions to the exchange offer.
Q11. WHAT HAPPENS IF FEWER THAN DUPONT SHARES ARE TENDERED SUCH
THAT FEWER THAN 436.5 MILLION CONOCO SHARES WOULD BE EXCHANGED?
A11. We may choose from several alternatives, including divesting some or
all of our remaining shares in a "spin-off" or secondary sale, or retaining some
of our Conoco shares. In a spin-off, some or all of the Conoco shares still held
by DuPont after the exchange offer is completed would be distributed to the
remaining DuPont stockholders on a pro rata basis. In a secondary sale, we would
sell all or a portion of these shares in an offering that would close following
the exchange offer. Alternatively, we may retain all or a portion of these
shares for no longer than five years on terms consistent with the
representations made to the Internal Revenue Service in connection with the
ruling discussed in question 18.
Q12. WHAT HAPPENS IF MORE THAN DUPONT SHARES ARE TENDERED, I.E., THE
EXCHANGE OFFER IS OVERSUBSCRIBED?
A12. If the exchange offer is oversubscribed, all DuPont shares that are
properly tendered will be accepted for exchange on a pro rata basis, except for
"odd-lot" tenders, which will not be subject to proration. Proration will be
based on the number of DuPont shares each stockholder has tendered in the offer,
and not on the stockholder's aggregate ownership of DuPont. Any shares not
accepted for exchange will be returned to tendering stockholders. Special
procedures for odd-lot tenders are discussed in question 21.
Q13. WILL PARTICIPANTS IN DUPONT'S DIVIDEND REINVESTMENT PLAN BE ABLE TO
PARTICIPATE IN THE EXCHANGE OFFER?
A13. Yes. Each participant in the Dividend Reinvestment Plan may tender
some or all of the DuPont shares attributable to his or her plan account
according to the procedures described in question 8.
Q14. WILL PARTICIPANTS IN A DUPONT OR A DUPONT AFFILIATED COMPANY SAVINGS
PLAN BE ABLE TO PARTICIPATE IN THE EXCHANGE OFFER?
A14. Yes. Each participant in a DuPont or a DuPont affiliated company
savings plan may instruct the trustee of the plan to tender some or all of the
DuPont shares in his or her plan account. Separate instructions will be sent to
each plan participant for use in directing the trustee.
The DuPont or DuPont affiliated company savings plans are as follows:
<TABLE>
<S> <C>
DuPont Flooring Systems 401(k) Savings Plan Protein Technology International Inc. Savings
DuPont Photomasks, Inc. 401(k) Investment Plan
Retirement Plan Qualicon Retirement and Savings Plan
DuPont Savings and Investment Plan Thrift Plan for Employees of Conoco Inc.
Optimum Quality Grains, L.L.C. Retirement Thrift Plan for Retail Employees of Conoco Inc.
and Savings Plan Thrift Plan for Employees of Sentinel
Transportation Company
</TABLE>
Q15. WILL PERSONS HOLDING DUPONT SHARES IN A BLUEPRINT BROKERAGE ACCOUNT
AT MERRILL LYNCH BE ABLE TO PARTICIPATE IN THE EXCHANGE OFFER?
A15. Yes. Any person holding DuPont shares in a Blueprint brokerage
account may instruct Merrill Lynch to tender some or all of the DuPont shares in
his or her account. Separate instructions will be sent to each account holder
for use in directing Merrill Lynch.
6
<PAGE> 8
Q16. WHEN DOES THE EXCHANGE OFFER EXPIRE?
A16. The exchange offer period and withdrawal rights will expire at 12:00
midnight, New York City time, on , 1999, unless extended by DuPont.
You must tender your DuPont shares prior to this date if you wish to
participate.
If you are a participant in a DuPont or DuPont affiliated company savings
plan, including Conoco savings plans, or have a Blueprint account at Merrill
Lynch, you may have an earlier cut-off date to decide to tender your DuPont
shares to allow the trustees or Merrill Lynch sufficient time to process all the
instructions and submit them to the exchange agent prior to the exchange offer
expiration. Please carefully review the instructions being sent to you from the
trustees of the plans or Merrill Lynch to determine the cut-off date.
Q17. WHEN WILL TENDERING STOCKHOLDERS KNOW THE OUTCOME OF THE EXCHANGE
OFFER?
A17. We will announce the preliminary results of the exchange offer,
including any preliminary proration factor, by press release promptly after the
exchange offer expires. Announcement of the final proration factor should occur
approximately seven business days after the expiration date.
Q18. WILL I BE TAXED ON THE SHARES OF CONOCO THAT I RECEIVE IN THE
EXCHANGE OFFER?
A18. DuPont has requested a ruling from the Internal Revenue Service to
the effect that the exchange offer and any subsequent spin-off will generally be
tax-free to DuPont and its stockholders. You should consult your tax advisor as
to the particular tax consequences of the exchange offer and any spin-off.
Q19. WHAT WILL BE THE TAX BASIS AND HOLDING PERIOD OF CONOCO SHARES I
RECEIVE IN EXCHANGE FOR MY DUPONT SHARES?
A19. If you tender all of your DuPont shares, and they are all accepted
for exchange, the tax basis in Conoco shares you receive will equal your tax
basis in your DuPont shares before the exchange.
If you tender fewer than all of your DuPont shares, or fewer than all of
your DuPont shares are accepted for exchange, the total tax basis in the DuPont
and Conoco shares that you hold immediately after the exchange will equal your
tax basis in your DuPont shares before the exchange. The tax basis of Conoco
shares you receive, however, will not necessarily equal the tax basis of the
DuPont shares that are accepted for exchange. The portion of your total tax
basis allocated to Conoco shares you receive in the exchange offer will equal
your old tax basis in the DuPont shares multiplied by a fraction. The fraction
is equal to (a) the market value of Conoco shares you receive in the exchange
offer divided by (b) the market value of Conoco shares received in the exchange
offer plus the market value of the DuPont shares held immediately after the
exchange offer.
Stated as a formula, the basis in your Conoco shares received in the
exchange offer may be determined as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Market value of Conoco shares received
in the exchange offer
-------------------------------------------
Basis in Conoco Basis in DuPont Market value of Market value of
shares received in = shares prior to X Conoco shares + DuPont shares held
the exchange offer the exchange offer received in immediately after
the exchange offer the exchange offer
</TABLE>
( )
If you receive additional Conoco shares in a spin-off, the same calculation
must be repeated using the tax basis in the DuPont shares, as determined
following the exchange offer, as the starting point in the calculation.
Your holding period in Conoco shares you receive in the exchange offer
generally will include your holding period for DuPont shares.
7
<PAGE> 9
Q20. WHAT WILL BE THE TAX BASIS IN DUPONT SHARES THAT ARE NOT EXCHANGED
UNDER THE EXCHANGE OFFER?
A20. If you tender fewer than all of your DuPont shares, or fewer than all
of your DuPont shares are accepted for exchange, the aggregate tax basis in your
remaining DuPont shares will equal your aggregate tax basis in DuPont shares
before the exchange, less the basis allocated to Conoco shares as determined
under the calculation described in question 19.
Q21. IS THERE SPECIAL TREATMENT FOR ODD-LOT HOLDERS?
A21. Yes. If you own fewer than 100 shares of DuPont Common Stock and
tender all of these shares for exchange, you may request preferential treatment
by completing the box captioned "Odd-Lots" on the letter of transmittal and, if
applicable, on the notice of guaranteed delivery. If the exchange offer is
completed, all of your shares will be accepted for exchange, and you will not be
subject to proration.
If your odd-lot shares are held by a broker for your account, you can
contact the broker and request the preferential treatment.
DuPont shares you hold in a DuPont or DuPont affiliated company savings
plan (including Conoco plans) are not eligible for this preferential treatment.
However, DuPont shares you hold in a Blueprint account at Merrill Lynch are
eligible for this preferential treatment.
Q22. IF I CANNOT FIND MY DUPONT SHARE CERTIFICATES, WHAT SHOULD I DO TO
PARTICIPATE IN THE EXCHANGE OFFER?
A22. Please call the First Chicago Trust Company of New York at
- - . You will receive an affidavit to complete and you will be
informed of the amount needed to pay for a surety bond for your lost shares.
Upon receipt of the completed affidavit and surety bond payment, and the
completed letter of transmittal, your shares will be included in the exchange
offer. If you wish to participate in the exchange offer, you will need to act
quickly to ensure that the lost certificates can be replaced and delivered to
the exchange agent prior to expiration of the exchange offer.
Q23. HAVE OTHER COMPANIES PURSUED SIMILAR EXCHANGE OFFERS?
A23. Yes. Examples of similar exchange offers include transactions
involving Lockheed Martin, Eli Lilly, The Limited and Viacom International.
Q24. WHO SHOULD I CALL IF I HAVE QUESTIONS OR WANT COPIES OF ADDITIONAL
DOCUMENTS?
A24. You may call the information agent, D.F. King, at - - (toll
free) in the United States and Canada or - - (collect) elsewhere to ask
any questions or to request additional documents.
8
<PAGE> 10
SUMMARY
As used in this Offering Circular-Prospectus, unless the context requires
otherwise (1) "DuPont" or "we" means E. I. du Pont de Nemours and Company and
its consolidated subsidiaries and (2) "Conoco" means Conoco Inc., its
consolidated subsidiaries and its ownership interest in equity affiliates.
Unless the context otherwise indicates, we have assumed throughout this Offering
Circular-Prospectus that the exchange offer is fully subscribed and that all
shares of Conoco Class B Common Stock held by DuPont are distributed through the
exchange offer. This summary highlights selected information from the Offering
Circular-Prospectus but may not contain all the information that is important to
you. To fully understand the exchange offer and for a more complete description
of the legal terms of the exchange offer, you should read carefully this entire
document and the documents to which we have referred you. See "Where You Can
Find More Information" on page 143 . We have included page references in
parentheses to direct you to a more complete description of the topics presented
in this summary.
E. I. DU PONT DE NEMOURS AND COMPANY
DuPont is a world leader in science and technology in a range of
disciplines, including high-performance materials, specialty chemicals,
pharmaceuticals and biotechnology. DuPont has a portfolio of 2,000 trademarks
and brands, including such well-known consumer brands as Lycra(R), Teflon(R),
Stainmaster(R), Kevlar(R), Nomex(R), Tyvek(R), Dacron(R), Cordura(R), Corian(R),
SilverStone(R), and Mylar(R). DuPont operates 200 manufacturing and processing
facilities in 65 countries worldwide.
DuPont presents its results in eight reportable segments -- Agriculture &
Nutrition, Nylon Enterprise, Performance Coating & Polymers, Pharmaceuticals,
Pigments & Chemicals, Polyester Enterprise, Specialty Fibers, and Specialty
Polymers. The balance of DuPont's continuing operations is reported in an Other
segment and consists of DuPont's photomasks, safety resources and global
services businesses. DuPont also has petroleum operations conducted through
Conoco, which are reported in DuPont's financial statements as discontinued
operations. DuPont expects the petroleum business will be divested from DuPont's
operations if the exchange offer is completed. DuPont and its subsidiaries,
excluding Conoco, employ approximately 80,000 people worldwide and have annual
revenues of approximately $25 billion.
On March 10, 1999, DuPont announced the proposed creation of a "tracking
stock" for its life sciences businesses, which would be distributed to all of
its stockholders. The amendment of DuPont's certificate of incorporation to
create this tracking stock, which is intended to provide investors an
opportunity to invest in a security the terms of which more closely track the
economic performance of DuPont's life sciences businesses, must be approved by
DuPont stockholders. After the issuance of the tracking stock, the existing
DuPont Common Stock is expected to more closely mirror the performance of its
chemical businesses. DuPont anticipates that stockholder approval will be sought
in the first quarter of 2000. In February 1999, the Clinton Administration
proposed changes to the federal income tax laws, as part of its budget package,
that, if enacted, could adversely affect the tax consequences relating to the
issuance of tracking stock and, as a result, could adversely affect DuPont's
ability to issue the tracking stock for its life sciences businesses. It is
presently unclear whether this proposal will be enacted into law and, if so,
what form it would take.
On March 15, 1999, DuPont agreed to effect a business combination with
Pioneer Hi-Bred International, Inc., the world's largest seed company, in a
stock and cash merger valued at approximately $7.7 billion. DuPont currently has
a 20 percent equity interest in Pioneer, as well as certain joint venture and
other arrangements with Pioneer. The merger is expected to close during the
summer of 1999.
For more details about DuPont's business, see page 76.
DuPont's principal executive office is located at 1007 Market Street,
Wilmington, Delaware 19898 and its telephone number is (302) 774-1000.
9
<PAGE> 11
CONOCO INC.
Conoco is a major, integrated, global energy company operating in 40
countries worldwide. Conoco was founded in 1875 and acquired by DuPont in 1981
and is involved in both the "Upstream" and "Downstream" segments of the
petroleum business. Upstream activities include exploring for, and developing,
producing and selling crude oil, natural gas and natural gas liquids. Downstream
activities include refining crude oil and other feedstocks into petroleum
products, buying and selling crude oil and refined products and transporting,
distributing and marketing petroleum products. Conoco is also engaged in
developing and operating power facilities.
As of December 31, 1998, Conoco had proved worldwide reserves of 2,622
million barrels of oil equivalent ("BOE"), 39 percent of which were natural gas
(converted to BOE using a ratio of 6,000 cubic feet of natural gas to one
barrel-of-oil equivalent). Based on 1998 annual production of 213 million BOE,
excluding natural gas liquids from gas plant ownership, Conoco had a reserve
life of 12.3 years as of December 31, 1998. Over the last five years, Conoco has
replaced an average of 195 percent of the oil and gas it produced each year.
Conoco owns or has equity interests in nine refineries worldwide, with a total
crude oil and condensate processing capacity of approximately 807,000 barrels
per day. Conoco also has a marketing network of approximately 7,900 outlets in
the United States, Europe and Asia. Based on public filings, for the year ended
December 31, 1998, Conoco ranked eighth in the worldwide production of petroleum
liquids by U.S.-based companies, eleventh in the production of natural gas and
eighth in refining throughput. Over that same period, Conoco reported net income
of $450 million, which includes a net charge for special items of $271 million,
on total revenues of approximately $23 billion. For more details about Conoco's
business, see page 79.
Conoco's principal executive office is located at 600 North Dairy Ashford,
Houston, Texas 77079 and its telephone number is (281) 293-1000.
BACKGROUND AND REASONS FOR THE EXCHANGE OFFER
As part of DuPont's increased focus on its materials and life sciences
businesses, DuPont announced in May 1998 its intention to separate its oil and
gas business, operated through Conoco, from its other businesses.
Following a thorough review of the various alternatives for divesting its
oil and gas business, in September 1998 DuPont's board of directors approved an
initial public offering for Conoco. In October 1998, Conoco completed its
initial public offering, selling 191.5 million shares of Conoco Class A Common
Stock (entitled to one vote per share), representing approximately 30 percent of
its total shares outstanding, to the public. DuPont, through its ownership of
all of the 436.5 million shares of Conoco Class B Common Stock (entitled to five
votes per share), retained approximately 70 percent of the total shares in, and
approximately 92 percent of the total voting power of, Conoco.
DuPont now intends to divest its remaining ownership interest in Conoco
through the exchange offer, in which holders of DuPont Common Stock may exchange
some or all of their DuPont shares for the remaining Conoco shares held by
DuPont. If fewer than all of the Conoco shares held by DuPont are distributed
because too few DuPont shares are tendered, DuPont may choose from among several
alternatives, including spinning off, selling or retaining its remaining Conoco
shares. In a spin-off, DuPont would distribute some or all of the Conoco shares
still held by it pro rata to its remaining stockholders. In a secondary sale,
DuPont would sell some or all of the remaining shares in an offering that would
close following the exchange offer. Alternatively, DuPont may retain all or a
portion of these shares for no longer than five years on terms that would comply
with representations made to the IRS in connection with obtaining the ruling.
10
<PAGE> 12
DuPont believes that the separation of Conoco from the rest of the company
will:
- allow each company to independently access the capital markets;
- permit DuPont to expand its life sciences business, while at the same
time allowing Conoco to pursue its investment program in new and
capital-intensive oil and gas projects;
- facilitate future partnerships, combinations and other arrangements
between Conoco and other entities in the oil and gas business;
- allow each company to offer incentives to its employees that are more
closely linked to its performance;
- permit each company to focus its managerial and financial resources on
the growth of its business; and
- enhance both DuPont's and Conoco's abilities to engage in future
acquisitions in which their own stock is issued as consideration.
EFFECTS OF THE EXCHANGE OFFER
The exchange offer will affect DuPont stockholders whether or not they
tender their DuPont shares. Stockholders who tender all their DuPont shares
will, if all of these shares are accepted for exchange, no longer have an
ownership interest in DuPont and will no longer participate in any change in the
value of DuPont. Stockholders who exchange some, but not all, of their DuPont
shares in the exchange offer will have a diminished ownership interest in DuPont
and an increased ownership interest in Conoco. Stockholders who do not tender
any of their DuPont shares will have an increased ownership interest, on a
percentage basis, in DuPont.
Persons who remain DuPont stockholders after the exchange offer will own
shares in a company that no longer owns the Conoco oil and gas enterprise.
Conoco operations represented approximately 22 percent of total DuPont earnings
over the last five years.
Certain officers and directors of DuPont have indicated that they intend to
tender an aggregate of approximately DuPont shares in the
exchange offer. For further details, see "Schedule A -- Transactions Concerning
Common Stock of DuPont."
DETERMINING WHETHER TO PARTICIPATE IN THE EXCHANGE OFFER
Neither DuPont nor Conoco nor any of their respective directors makes any
recommendation as to whether you should tender your DuPont shares. You must make
your own decision whether to tender and, if so, how many shares to tender after
reading this Offering Circular-Prospectus and consulting with your advisors
based on your own financial position and requirements. We urge you to read this
document very carefully.
11
<PAGE> 13
THE EXCHANGE OFFER
Terms of the exchange offer
(see page 27)............... We are offering to exchange shares of
Conoco Class B Common Stock for each share of
DuPont Common Stock, up to an aggregate of
shares of DuPont Common Stock
tendered. You may tender all, some, or none of
your DuPont shares.
All DuPont shares properly tendered and not
withdrawn will be exchanged at the exchange
ratio, on the terms and subject to the
conditions of the exchange offer, including the
proration provisions. We will promptly return
to stockholders any DuPont shares not accepted
for exchange following the expiration of the
exchange offer.
Expiration date; Extension;
Termination (see page 31)... The exchange offer and withdrawal rights will
expire at 12:00 midnight, New York City time,
on , 1999, unless extended by
DuPont. You must tender your DuPont shares
prior to this date if you wish to participate.
We may also terminate the exchange offer in
certain circumstances.
Proration (see page 27)....... If more than DuPont shares are tendered,
we will accept all DuPont shares properly
tendered on a pro rata basis. We will announce
the preliminary proration factor by press
release promptly after the exchange offer
expires. We expect to announce any final
proration factor approximately seven business
days after the expiration date.
If you own fewer than 100 shares of DuPont
Common Stock as of , 1999, and tender
all of these shares for exchange, you may
request preferential treatment by completing
the box captioned "Odd-Lots" on the letter of
transmittal and, if applicable, on the notice
of guaranteed delivery. If your odd-lot shares
are held by a broker for your account, you can
contact the broker and request the preferential
treatment. All of your shares will be accepted
for exchange without proration if the exchange
offer is completed. You are not eligible for
this preferential treatment for DuPont shares
you own in a DuPont or a DuPont affiliated
company savings plan. However, any person
holding DuPont shares in a Blueprint brokerage
account at Merrill Lynch is eligible for this
preferential treatment.
Divestment of any remaining
Conoco shares................. If the number of DuPont shares tendered is such
that fewer than 436.5 million Conoco shares
would be exchanged for those DuPont shares,
some or all of the Conoco shares still held by
us after the exchange offer is completed may be
distributed to the remaining DuPont
stockholders on a pro rata basis through a
spin-off or sold in a secondary offering.
Alternatively, we may retain all or a portion
of any remaining Conoco shares for up to five
years on terms consistent with representations
made to the IRS.
12
<PAGE> 14
Withdrawal rights (see page
30)........................... You may withdraw tenders of your DuPont shares
at any time before the exchange offer expires.
If you change your mind again, you may retender
your DuPont shares by following the tender
offer procedures again prior to the expiration
of the exchange offer.
Conditions of the exchange
offer (see page 32)........... The exchange offer is subject to various
conditions, including that at least DuPont
shares are tendered and that we receive a
ruling from the Internal Revenue Service to the
effect that the exchange offer will generally
be tax-free to us and our stockholders.
Procedures for tendering (see
pages 29-30)................ If you hold certificates for DuPont shares, you
must complete and sign the letter of
transmittal designating the number of DuPont
shares you wish to tender. Send it, together
with your DuPont share certificates and any
other documents required by the letter of
transmittal, by registered mail, return receipt
requested, so that it is received by the
exchange agent at one of the addresses listed
on the back cover of this Offering Circular-
Prospectus before the expiration of the
exchange offer on , 1999.
If you hold DuPont shares through a broker
(i.e., your shares are in "street name"), you
should receive instructions from your broker on
how to participate. In this situation, you do
not need to complete the letter of transmittal.
Please contact your broker directly if you have
not yet received instructions. Certain
financial institutions may also effect tenders
by book-entry transfer through The Depository
Trust Company.
If you hold certificates for DuPont shares or
if you hold DuPont shares through a broker, you
may also comply with the procedures for
guaranteed delivery.
If you participate in a DuPont or a DuPont
affiliated company savings plan listed in
question 14 on page 6, or hold shares in a
Blueprint brokerage account at Merrill Lynch,
you will receive separate instructions from the
trustee or Merrill Lynch on how to tender these
DuPont shares. You may not use the letter of
transmittal to tender shares held under any
such plan.
Delivery of Conoco Class B
Common Stock................ We will deliver shares of Conoco Class B Common
Stock by book-entry transfer as soon as
practicable after acceptance of DuPont shares
for exchange.
Comparative per share market
price information (see pages
35 and 36).................. Conoco will apply to have the Conoco Class B
Common Stock listed on the NYSE under the
symbol "COC.B." Shares of DuPont and Conoco
Class A Common Stock are currently listed and
traded on the NYSE, under the symbols "DD" and
"COC," respectively. Upon the closing of the
exchange offer, the symbol for the Conoco Class
A Common Stock will be changed to "COC.A."
Because holders of Conoco Class A Common Stock
13
<PAGE> 15
and Class B Common Stock generally have
identical rights, including dividend and
liquidation rights but not voting rights, the
Conoco Class B Common Stock is anticipated to
trade in a similar price range as the Class A
Common Stock. We cannot, however, assure that
this will occur.
On March 19, 1999, the last trading day before
the initial filing of the registration
statement relating to the exchange offer, the
closing sale prices of DuPont shares and shares
of Conoco Class A Common Stock on the NYSE were
$56 5/8 and $24, respectively. On
, 1999, the last trading day
before the start of the exchange offer, the
closing sale prices of DuPont shares and shares
of Conoco Class A Common Stock on the NYSE were
$ and $ , respectively.
Certain federal income tax
consequences (see page
141)........................ We have requested a ruling from the IRS to the
effect that the exchange offer generally will
be tax-free to DuPont and its stockholders.
Each stockholder should consult his or her tax
advisor as to the particular tax consequences
of the exchange offer.
No appraisal rights........... No appraisal rights are available to
stockholders of DuPont or Conoco in connection
with the exchange offer.
Exchange agent................ First Chicago Trust Company of New York
Information agent............. D.F. King & Co., Inc.
Dealer manager................ Morgan Stanley & Co. Incorporated
Risk factors (see page 20).... You should consider carefully the matters
described under the caption "Risk Factors," as
well as the other information set forth in this
Offering Circular-Prospectus.
14
<PAGE> 16
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA OF DUPONT
The following table contains summary consolidated historical and unaudited
pro forma financial data of DuPont's continuing operations as of the dates and
for the periods indicated. The unaudited pro forma information is provided to
aid in your analysis of the financial aspects of the exchange offer. This
information may not necessarily reflect the results of operations, financial
position and cash flows of DuPont in the future. The information is only a
summary and you should read it together with the unaudited pro forma
consolidated financial statements of DuPont included elsewhere in this document
and with the audited consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
located in the DuPont 1998 Form 10-K, which we have filed with the SEC, and
which we have incorporated in this document by reference. See "Where You Can
Find More Information" on page 143.
The unaudited pro forma financial data for DuPont give effect to the
following transactions and events:
- the split-off of Conoco through an exchange of 100 percent of Conoco
Class B Common Stock held by DuPont for DuPont Common Stock; and
- the $4.6 billion loan due to DuPont from Conoco at December 31, 1998 and
receipt by DuPont of Conoco's initial public offering proceeds of $4.2
billion in repayment of a portion of Conoco's intercompany indebtedness
to DuPont.
The unaudited pro forma statement of income data for DuPont assumes that
these transactions occurred on January 1, 1998. The unaudited pro forma balance
sheet data assumes that these transactions occurred as of December 31, 1998.
<TABLE>
<CAPTION>
PRO FORMA AS
ADJUSTED FOR
YEAR ENDED DECEMBER 31, THE YEAR ENDED
------------------------------------------------ DECEMBER 31,
1998 1997 1996 1995 1994 1998
---- ---- ---- ---- ---- --------------
(IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales.............................. $24,767 $24,089 $23,644 $24,500 $22,518 $24,767
Other Income....................... 981 1,005 1,101 797 674 1,272
------- ------- ------- ------- ------- -------
Total......................... 25,748 25,094 24,745 25,297 23,192 26,039
Cost of Goods Sold and Other
Operating Charges................ 15,664 15,564 15,314 15,572 14,498 15,664
Selling, General and Administrative
Expenses......................... 2,115 2,061 2,119 2,283 2,215 2,115
Depreciation and Amortization...... 1,452 1,361 1,526 1,643 1,748 1,452
Research and Development Expense... 1,308 1,072 990 1,031 1,004 1,308
Interest Expense................... 520 389 409 449 343 716
Purchased In-Process Research and
Development...................... 1,443 1,478 -- -- -- 1,443
Employee Separation Costs and
Write-down of Assets............. 633 340 -- -- -- 633
------- ------- ------- ------- ------- -------
Total.................... 23,135 22,265 20,358 20,978 19,808 23,331
Income from Continuing Operations
Before Income Taxes and Minority
Interests........................ 2,613 2,829 4,387 4,319 3,384 2,708
Provision for Income Taxes......... 941 1,354 1,416 1,432 1,164 964
Minority Interests in Earnings of
Consolidated Subsidiaries........ 24 43 40 29 15 24
------- ------- ------- ------- ------- -------
Income from Continuing
Operations.................. $ 1,648(3) $ 1,432 $ 2,931 $ 2,858 $ 2,205 $ 1,720(3)
======= ======= ======= ======= ======= =======
</TABLE>
15
<PAGE> 17
DUPONT
<TABLE>
<CAPTION>
PRO FORMA AS
ADJUSTED AS OF
AND FOR THE
YEAR ENDED DECEMBER 31, YEAR ENDED
------------------------------------------------ DECEMBER 31,
1998 1997 1996 1995 1994 1998
---- ---- ---- ---- ---- --------------
(IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share of Common
Stock -- Continuing
Operations(1).................... $ 1.45(3) $ 1.26 $ 2.60 $ 2.43 $ 1.61
Diluted Earnings Per Share of
Common Stock -- Continuing
Operations(2).................... $ 1.43(3) $ 1.24 $ 2.56 $ 2.41 $ 1.60
Dividends Per Common Share......... $ 1.365 $ 1.23 $ 1.115 $ 1.015 $ .91
Weighted Average Number of Shares
Outstanding:
Basic(4)......................... 1,129 1,131 1,121 1,170 1,360
Diluted(4)....................... 1,145 1,150 1,140 1,183 1,371
OTHER DATA:
Cash Provided by Continuing
Operations....................... $ 4,132 $ 4,027 $ 4,109 $ 5,170 $ 3,697
Capital Expenditures............... 5,480 7,075 1,783 1,810 1,615
BALANCE SHEET DATA:
Cash and Cash Equivalents.......... $ 1,059 $ 1,004 $ 1,066 $ 1,408 $ 856 $ 1,024
Working Capital.................... (2,374) (2,110) 15 (2,116) 3,208 2,187
Net Property, Plant and
Equipment........................ 14,131 12,601 10,959 11,389 11,385 14,131
Total Assets....................... 38,536 36,689 32,342 32,748 32,577 34,680
Long-Term Borrowings and Capital
Lease Obligations................ 4,495 5,897 5,052 5,646 6,338 4,495
Minority Interests................. 407 361 315 223 192 407
Stockholders' Equity............... 13,954 11,270 10,593 8,323 12,743 10,098
</TABLE>
- ------------
(1) The pro forma basic earnings per share of DuPont Common Stock will be
determined at a later date based upon the pro forma weighted average number
of DuPont shares outstanding after the exchange offer.
(2) The pro forma diluted earnings per share of DuPont Common Stock will be
determined at a later date based upon the pro forma weighted average number
of outstanding and potentially issuable common shares of DuPont after the
exchange offer.
(3) Before extraordinary item.
(4) The pro forma weighted average number of shares outstanding will be
determined at a later date, based upon the number of DuPont shares received
in exchange for Conoco Class B Common Stock.
16
<PAGE> 18
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA OF CONOCO
The following table contains summary historical and unaudited pro forma
financial data of Conoco as of the dates and for the periods indicated. The
unaudited pro forma information is provided to aid in your analysis of the
financial aspects of the exchange offer. The information may not necessarily
reflect the results of operations, financial position and cash flows of Conoco
in the future or what the results of operations, financial position and cash
flows would have been had Conoco been a separate, stand-alone entity during the
periods presented. The information is only a summary and you should read it
together with the audited consolidated financial statements of Conoco, the
unaudited pro forma financial statements of Conoco and the other information
about Conoco included elsewhere in this document. You should also read the "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Conoco" and "Business of Conoco" sections of this
Offering Circular-Prospectus, which describe Conoco's business, as well as a
number of factors that have affected Conoco's financial results, including
declining crude oil and natural gas prices.
The unaudited pro forma financial data for Conoco give effect to the following
transactions and events:
- the exchange offer as described in this document; and
- the initial public offering, the separation from DuPont and related
transactions, all substantially completed in October 1998.
The unaudited pro forma statement of income of Conoco assumes that these
transactions occurred on January 1, 1998. The unaudited pro forma balance sheet
data assumes that these transactions occurred as of December 31, 1998.
17
<PAGE> 19
CONOCO
<TABLE>
<CAPTION>
PRO FORMA AS
ADJUSTED FOR
YEAR ENDED DECEMBER 31, THE YEAR ENDED
----------------------------------------------- DECEMBER 31,
1998 1997 1996 1995 1994 1998
---- ---- ---- ---- ---- --------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total Revenues(1).................... $23,168 $26,263 $24,416 $20,518 $19,433 $23,110
Cost of Goods Sold and Other
Operating Expenses................. 13,840 16,226 14,560 11,146 10,640 13,840
Selling, General and Administrative
Expenses........................... 736 726 755 728 679 736
------- ------- ------- ------- ------- -------
Stock Option Provision............... 236 -- -- -- -- 236
Exploration Expenses(2).............. 380 457 404 331 357 380
Depreciation, Depletion and
Amortization....................... 1,113 1,179 1,085 1,067 1,244 1,113
Taxes Other Than on Income(1)........ 5,970 5,532 5,637 5,823 5,477 5,970
Interest and Debt Expense............ 199 36 74 74 63 225
------- ------- ------- ------- ------- -------
Income Before Income Taxes........... 694 2,107 1,901 1,349 973 610
Provision for Income Taxes........... 244 1,010 1,038 774 551 218
------- ------- ------- ------- ------- -------
Net Income(3)................... $ 450 $ 1,097 $ 863 $ 575 $ 422 $ 392
======= ======= ======= ======= ======= =======
Segment Net Income:
Upstream:
United States...................... $ 219 $ 445 $ 314 $ 258 $ 248
International...................... 283 439 367 234 250
Downstream:
United States...................... 135 216 172 112 104
International...................... 156 91 117 121 137
Corporate and Other(3)............... (343) (94) (107) (150) (317)
------- ------- ------- ------- -------
$ 450 $ 1,097 $ 863 $ 575 $ 422
======= ======= ======= ======= =======
Earnings Per Share(4)
Basic.............................. $ .95 $ 2.51 $ 1.98 $ 1.32 $ .97 .62
Diluted............................ $ .95 $ 2.51 $ 1.98 $ 1.32 $ .97 .62
Weighted Average Shares
Outstanding(4)
Basic.............................. 474 437 437 437 437 628
Diluted............................ 475 437 437 437 437 637
OTHER DATA:
Cash Provided By Operations.......... $ 1,373 $ 2,876 $ 2,396 $ 1,924 $ 2,143
Capital Expenditures and
Investments........................ 2,516 3,114 1,944 1,837 1,665
Cash Exploration Expense............. 217 286 262 204 200
</TABLE>
- ------------
(1) Includes petroleum excise taxes of $5,801, $5,349, $5,461, $5,655, and
$5,291 for 1998, 1997, 1996, 1995 and 1994, respectively.
(2) Includes cash exploration overhead and operating expense, DD&A, dry hole
costs and impairments of unproved properties.
(3) Includes after-tax exchange gains (losses) of $32, $21, $(7), $(40) and
$(143) for 1998, 1997, 1996, 1995 and 1994, respectively, and $23 for the
pro forma as adjusted for 1998.
(4) Conoco's capital structure was established at the time of the Conoco initial
public offering. Earnings per share for the periods prior to the initial
public offering was calculated using only Conoco Class B Common Stock as
required by SFAS 128 (see note 8 to Conoco's consolidated financial
statements). Unaudited pro forma basic earnings per share include the shares
of Conoco Class A and Class B Common Stock outstanding immediately after the
initial public offering. Unaudited pro forma diluted earnings per share
includes the dilutive effect of certain stock option awards.
18
<PAGE> 20
CONOCO
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, AS ADJUSTED
----------------------------------------------- DECEMBER 31,
1998 1997 1996 1995 1994 1998
---- ---- ---- ---- ---- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents............... $ 394 $ 1,147 $ 846 $ 286 $ 319 $ 394
Working Capital......................... 45 567 862 999 1,790 (4,551)(1)
Net Property, Plant and Equipment....... 11,413 10,828 10,082 9,758 9,522 11,413
Total Assets............................ 16,075 17,062 15,226 14,229 15,271 16,075
Long-Term Borrowings -- Related
Parties............................... 4,596 1,450 2,287 2,141 2,279 --
Other Long-Term Borrowings and Capital
Lease Obligations..................... 93 106 101 65 342 93
Total Stockholders' Equity/Owner's Net
Investment............................ 4,438 7,896 6,579 6,754 7,274 4,438
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Proved Reserves at December 31(2):
Oil (MMbbls)(3)....................... 1,591 1,624 973 977 988
Natural Gas (Bcf)..................... 6,183 5,861 5,396 5,048 4,674
Total Proved Reserves (MMBOE)(4)...... 2,622 2,601 1,872 1,818 1,767
International Proved Reserves (% of
Total)................................ 73% 73% 65% 63% 61%
Reserve Replacement Ratio(2)............ 110% 448% 126% 127% 157%
Reserve Life (years)(2)(5).............. 12.3 12.4 8.9 9.3 8.2
Finding and Development Costs per
BOE(2)(4)(6).......................... $ 4.03 $ 3.63 $ 4.84 $ 5.39 $ 6.24
Average Daily Production(2):
Oil (Mbbls/day)(3).................... 348 374 374 346 367
Natural Gas (MMcf/day)................ 1,411 1,203 1,211 1,126 1,327
Total Production (MBOE/day)(4)........ 583 575 576 534 588
Average Production Costs per
BOE(4)(7)............................. $ 3.95 $ 4.21 $ 3.84 $ 3.92 $ 3.59
Refinery Capacity at December 31
(Mbbls/day)(2)(8)....................... 807 754 743 621 602
Refinery Utilization(8)................. 92% 91% 83% 97% 99%
Total Refinery Inputs
(Mbbls/day)(2)(9)..................... 823 780 732 721 697
Sales of Refined Products
(Mbbls/day)(2)........................ 1,049 1,048 998 983 931
Retail Marketing Outlets at December
31(10):
United States......................... 4,897 4,903 4,976 5,125 5,196
International......................... 3,023 2,971 2,874 2,390 2,438
</TABLE>
- ------------
(1) The working capital deficit is due to classifying the historic amount
outstanding for long-term borrowings -- related parties as a current
liability as a result of the exchange offer. Conoco expects to refinance
$4,596 of long-term borrowings -- related parties with long-term debt
securities; however, no agreements have been finalized. See Conoco's
unaudited pro forma financial statements.
(2) Includes Conoco's share of equity affiliates.
(3) Includes crude oil, condensate, and NGLs expected to be removed for
Conoco's account from its natural gas production.
(4) 6,000 cubic feet of natural gas = one barrel-of-oil-equivalent (BOE).
(5) Total proved reserves at December 31 divided by annual production,
excluding NGLs from gas plant ownership.
(6) Finding and development costs per BOE represent a trailing five-year
average for each year displayed.
(7) Excludes equity affiliates and processed NGLs.
(8) Based on rated capacity to process crude oil and condensate (excludes other
feedstocks).
(9) Includes crude oil, condensate and other feedstocks. This does not include
Conoco's indirect 1.2 percent interest in a 95,000 barrel per day refinery
in Mersin, Turkey, acquired as a result of Conoco's marketing joint venture
in Turkey.
(10) Represents outlets owned by Conoco and others that sell Conoco's refined
products.
19
<PAGE> 21
RISK FACTORS
You should consider carefully all of the information set forth in this
Offering Circular-Prospectus or incorporated in this document by reference and,
in particular, the following risk factors in considering whether or not to
tender your DuPont shares under the exchange offer. In addition, for a
discussion of certain additional uncertainties associated with (1) the
businesses of DuPont and Conoco and (2) forward-looking statements in this
Offering Circular-Prospectus, please see "Special Note on Forward-Looking
Information" on page 37. We refer to the exchange offer together with a
subsequent spin-off, if any, as the "Transaction."
TENDERING AND NONTENDERING STOCKHOLDERS ARE AFFECTED DIFFERENTLY BY THE EXCHANGE
OFFER
Your investment will be subject to different risks as a result of the
exchange offer, regardless of whether you tender your DuPont shares. DuPont will
no longer have access to the cash flow, assets and operations of Conoco, which
may adversely affect its ability to finance its research and development
activities, capital expenditures, working capital, dividends and other general
corporate requirements. Whether you tender your shares or not, the shares you
hold after the exchange offer will be in a company which is very different from
the company in which you held shares before the exchange offer.
THE IRS MAY TREAT THE TRANSACTION AS TAXABLE TO DUPONT AND ITS STOCKHOLDERS IF
REPRESENTATIONS MADE TO THE IRS WERE INACCURATE OR IF UNDERTAKINGS MADE TO THE
IRS ARE NOT COMPLIED WITH
DuPont has requested a ruling from the IRS to the effect that, for United
States federal income tax purposes, the Transaction will qualify under Section
355 of the Internal Revenue Code as a distribution that is generally tax-free to
DuPont stockholders and to DuPont. Obtaining the ruling is a condition to the
Transaction. Even if the ruling is obtained, it will be premised on a number of
representations and undertakings made by DuPont and Conoco to the IRS, including
with respect to each company's intention not to engage in certain transactions
in the future. The Transaction may be held to be taxable to DuPont and its
stockholders that receive Conoco shares if the IRS determines these
representations were not accurate or if DuPont or Conoco do not comply with
these undertakings. If DuPont completes the Transaction and, notwithstanding the
ruling, the Transaction is held to be taxable, both DuPont and its stockholders
that receive Conoco shares could be subject to a material amount of taxes as a
result of the Transaction. Conoco will be liable to DuPont for any such
corporate level taxes incurred by DuPont to the extent such taxes are
attributable to certain actions or failures to act by Conoco, or to certain
transactions involving Conoco following the Transaction. See "Certain Federal
Income Tax Consequences" and "Arrangements Between Conoco and DuPont -- Tax
Sharing Agreement."
TENDERING STOCKHOLDERS MAY NOT RECEIVE ANY PREMIUM
DuPont cannot predict whether there will be a premium at the end of the
exchange offer. The anticipated premium is based on the market price for Conoco
Class A Common Stock and DuPont stock immediately prior to the commencement of
the exchange offer. Any premium to be received by DuPont stockholders
participating in the exchange offer will depend on the prices for DuPont shares
and Conoco Class B Common Stock at the closing of the exchange offer. DuPont
also cannot predict the prices at which shares of Conoco or DuPont will trade
over time. Accordingly, if you tender your DuPont shares, you may not receive
any premium.
MARKET PRICES FOR CONOCO CLASS B COMMON STOCK MAY VARY FROM MARKET PRICES FOR
CONOCO CLASS A COMMON STOCK
Market prices for Conoco Class B Common Stock may not be the same as market
prices for Conoco Class A Common Stock. Although the Conoco Class B Common Stock
has substantially identical rights to the Class A Common Stock, other than
voting rights, it is nevertheless possible that market prices for the Conoco
Class B Common Stock could be lower than those of the Conoco Class A Common
Stock.
20
<PAGE> 22
THE SPLIT-OFF WILL CAUSE DUPONT'S ASSETS AND TOTAL CAPITALIZATION TO DECREASE
Conoco is currently one of DuPont's principal businesses. Assuming the
exchange offer is fully subscribed, DuPont will no longer own any of the
outstanding stock of Conoco. Accordingly, DuPont's balance sheet and income
statement will no longer reflect the assets and operations of Conoco, and the
total market capitalization of DuPont is expected to decrease considerably upon
completion of the exchange offer. DuPont will no longer have access to the cash
flow provided by Conoco. In the past, DuPont has utilized this cash flow to
finance research and development activities, capital expenditures, working
capital, dividends and for other general corporate purposes. For more
information, see "Unaudited Pro Forma Financial Statements -- DuPont."
LOW OIL AND GAS PRICES HAVE NEGATIVELY AFFECTED CONOCO'S FINANCIAL RESULTS AND
MAY CONTINUE TO DO SO IN THE FUTURE
Crude oil prices declined substantially in 1998, and Conoco expects these
depressed prices to continue in 1999. During 1998, West Texas Intermediate crude
oil prices fell to 12-year lows as measured in absolute dollars, and 25-year
lows as measured in inflation-adjusted dollars, and closed at $12.05 per barrel
on December 31, 1998. These lower prices had a significant negative impact on
Conoco's financial results in 1998, in which Conoco's net income fell 59 percent
compared to 1997. Conoco expects these prices to continue to negatively affect
1999 financial results.
Conoco's profitability is determined in large part by the difference
between the prices it receives for the crude oil, natural gas, natural gas
liquids and refined products it produces and the costs of finding, developing,
producing, refining and marketing these resources. Conoco has no control over
many factors affecting prices for its products. Prices for crude oil, natural
gas, and refined products may fluctuate widely in response to changes in global
and regional supply, political developments and the ability of the Organization
of Petroleum Exporting Countries and other producing nations to set and maintain
production levels and prices. Prices for crude oil, natural gas and refined
products are also affected by changes in demand for these products, which may
result from global events, as well as supply and demand in industrial markets,
such as the steel and aluminum markets.
Reduced Asian demand, as a result of the recent economic downturn in Asia,
has negatively affected worldwide crude oil and product prices. Decreases in
crude oil and natural gas prices and refined product margins may adversely
affect Conoco. Lower crude oil and natural gas prices may reduce the amount of
oil and natural gas reserves Conoco can produce economically, and existing
contracts that Conoco has entered into may become uneconomic.
GLOBAL POLITICAL AND ECONOMIC DEVELOPMENTS MAY HURT CONOCO'S OPERATIONS
Local political and economic factors in international markets may have a
material adverse effect on Conoco. Approximately 43 percent of Conoco's sales in
1998 was derived from markets outside the United States, and approximately 73
percent of Conoco's proved reserves at December 31, 1998 were located outside of
the United States.
There are many risks associated with operations in international markets,
including changes in foreign governmental policies relating to crude oil,
natural gas or refined product pricing and taxation, other political, economic
or diplomatic developments, changing political conditions and international
monetary fluctuations. These risks include:
- political and economic instability or war;
- the possibility that a foreign government may seize Conoco's property
with or without compensation;
- confiscatory taxation;
- a foreign government attempting to renegotiate or revoke existing
contractual arrangements; and
- fluctuating currency values, hard currency shortages and currency
controls.
21
<PAGE> 23
Recent turmoil in regions such as Russia, Southeast Asia and South America has
subjected Conoco's operations in these regions to increased risks.
Actions of the United States government can also expose Conoco's operations
to risk. The United States government can use tax and other legislation,
executive orders and commercial restrictions to prevent or restrict Conoco from
doing business in foreign countries. These restrictions and those of foreign
governments have in the past limited Conoco's ability to operate in or gain
access to opportunities in various countries. Actions of the United States
government through tax and other legislation, executive order and commercial
restrictions could adversely affect Conoco's operating profitability both in the
U.S. and overseas. Various agencies of the United States and other governments
have from time to time imposed restrictions on Conoco's ability to operate in or
gain attractive opportunities in various countries. Actions by both the United
States and host governments have affected operations significantly in the past
and will continue to do so in the future.
Conoco is also exposed to fluctuations in foreign currency exchange rates.
Conoco does not intend to comprehensively hedge its exposure to currency rate
changes, although it may choose to selectively hedge certain working capital
balances, firm commitments, cash returns from affiliates, or tax payments. These
efforts may not be successful.
CONOCO AND DUPONT MAY HAVE CONFLICTS OF INTEREST
Conflicts of interest may arise between Conoco and DuPont in a number of
areas relating to their past and ongoing relationships including the nature,
quality and pricing of services rendered by the parties to each other. A
majority of Conoco's board of directors are designees of DuPont. In addition,
Conoco's Chairman of the Board, Edgar S. Woolard, Jr., its President and Chief
Executive Officer, Archie W. Dunham, and its director, William K. Reilly,
currently serve as directors of DuPont, and Gary M. Pfeiffer is also an officer
of DuPont. These directors and officers who hold positions in both companies, as
well as the other directors designated by DuPont, may face conflicts of interest
with respect to such matters as acquisitions, finances and other corporate
opportunities that might be suitable for both Conoco and DuPont.
For purposes of governing their ongoing relationship, Conoco and DuPont
have entered into various agreements involving the provision of services such as
natural gas and gas liquids supply, technical, processing, purchasing, legal,
and computer services. It has been the policy of Conoco and DuPont that such
services generally be provided on terms and conditions comparable to those
granted to an unaffiliated third party for similar services. These agreements
were negotiated in the context of a parent-subsidiary relationship. As a result,
these agreements, or the transactions provided for therein, may have been on
terms less favorable to Conoco than could have been obtained from unaffiliated
third parties.
THE OIL AND GAS RESERVES DATA IN THIS DOCUMENT ARE ONLY ESTIMATES, AND MAY PROVE
TO BE INACCURATE
Estimating quantities of proved oil and natural gas reserves involves many
uncertainties. The reserve data included in this Offering Circular-Prospectus
represent estimates only. Reservoir engineering is a subjective and inexact
process of estimating underground accumulations of oil and natural gas that
cannot be measured in an exact manner. Conoco has based its estimates of
economically recoverable oil and natural gas reserves and future net cash flows
on many variables and assumptions related to reserve performance that require
evaluation by engineers interpreting the available geologic, engineering and
economic data, as well as price and other economic factors. Many of these
factors, assumptions and variables are beyond the control of Conoco, and some or
all of them may over time prove to be wrong.
The reliability of reserve estimates depends on the quality and quantity of
technical and economic data, the production performance of the reservoirs and
extensive engineering judgment. Results of drilling, testing and production
after the date of the estimates may require substantial upward or downward
revisions. Adverse changes in economic conditions, including a drop in oil or
gas prices, may render it uneconomical to produce certain reserves. Accordingly,
actual production, revenues and expenditures with respect to Conoco's reserves
will likely vary from estimates, and such variances may be material.
22
<PAGE> 24
CONOCO'S GROWTH DEPENDS ON FINDING NEW RESERVES
Conoco's ability to achieve its growth objectives depends upon its success
in finding, acquiring or gaining access to additional reserves. In general,
production from oil and natural gas properties declines as reserves are
depleted, with the rate of decline depending on reservoir characteristics.
Conoco's total proved reserves will decline as reserves are produced unless
Conoco conducts successful exploration and development activities or acquires
properties containing proved reserves, or both. Conoco's exploration and
development activities expose it to inherent drilling risks, including the risk
that it will encounter no economically productive natural gas or oil reservoirs.
The costs of drilling, completing and operating wells are often uncertain and
numerous factors beyond Conoco's control may cause drilling operations to be
curtailed, delayed or cancelled. Conoco's future drilling, exploration and
acquisition activities may not be successful. If these activities are
unsuccessful, this failure would have an adverse effect on Conoco's future
results of operations and financial condition.
CONOCO MAY INCUR MATERIAL COSTS TO COMPLY WITH ENVIRONMENTAL REGULATIONS
Conoco incurs, and expects to continue to incur, substantial capital and
operating costs to comply with increasingly complex laws and regulations
covering the protection of the environment, including costs to remediate
contamination at various owned and previously owned facilities and at
third-party sites where Conoco's products or wastes have been handled or
disposed. These regulatory requirements affect Conoco's operations with respect
to:
- the discharge of pollutants into the environment;
- the handling, use, storage, transportation, disposal and cleanup of
hazardous materials and wastes; and
- the dismantlement, abandonment and restoration of oil and gas properties
and Conoco facilities at the end of their useful lives.
The costs to comply with environmental laws and regulations, as well as
internal voluntary programs, are significant. Pre-tax environmental expenses
charged to current operations totaled about $131 million in 1998 and $136
million in 1997.
New laws and regulations, the imposition of tougher requirements in
permits, increasingly strict enforcement of existing laws and regulations or the
discovery of previously unknown contamination may require future expenditures to
modify operations, install pollution control equipment, perform site clean ups
or curtail Conoco's operations. For example, the European Union recently enacted
legislation to reduce the sulfur content of motor fuels produced and marketed by
Conoco. Conoco estimates that this legislation will require it to make capital
expenditures of approximately $100 million in 1999, $100 million in 2000, and
$50 million in 2001. The U.S. Environmental Protection Agency ("EPA") is
considering similar measures. These future expenditures, investments or
curtailments could have a material adverse effect on Conoco. For more
information about environmental risks, see "Business -- Environmental
Regulation," "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Conoco -- Environmental Expenditures" and note 26 to
Conoco's consolidated financial statements included elsewhere in this Offering
Circular-Prospectus.
CHANGES IN GOVERNMENT REGULATIONS MAY IMPOSE PRICE CONTROLS AND LIMITATIONS ON
PRODUCTION OF OIL AND GAS
Conoco's operations are subject to extensive government regulations, which
may change from time to time in response to economic or political conditions.
From time to time, regulatory agencies have imposed price controls and
limitations on production by restricting the rate of flow of oil and natural gas
wells below actual production capacity in order to conserve supplies of oil and
natural gas. Because legal requirements are frequently changed and subject to
interpretation, Conoco cannot predict how much it will cost to comply with these
requirements.
23
<PAGE> 25
POTENTIAL YEAR 2000 PROBLEMS MAY ADVERSELY AFFECT CONOCO'S BUSINESS
Many existing computer programs were designed and developed using only two
digits to represent the year of a date. This failure to consider the upcoming
change in the century could lead to the failure of computer applications or
create erroneous results by or at the year 2000. This issue is referred to as
the "Year 2000 Issue." The Year 2000 Issue extends beyond traditional computer
hardware and software to possible failure of automated plant systems and
instrumentation. The Year 2000 Issue also affects third parties with whom Conoco
does business. These third parties may not successfully reprogram or replace,
and test, all of their own computer hardware, software and process control
systems to ensure they are Year 2000 compliant. Failure by Conoco, its business
associates or other constituents, such as governments, to become Year 2000
compliant on a timely basis could have a material adverse effect on Conoco's
financial position and results of operations. For more information about Year
2000 risks, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Conoco -- Year 2000."
PROVISIONS IN CONOCO'S BY-LAWS, CERTIFICATE OF INCORPORATION, AND DELAWARE LAW
COULD DETER TAKEOVER ATTEMPTS
The following provisions of Conoco's certificate of incorporation and
by-laws may discourage, delay or prevent a merger or acquisition of control of
Conoco without the approval of Conoco's board of directors. Such provisions:
- authorize the issuance of "blank check" preferred stock, which could be
issued in connection with a contest for control and could contain
provisions with respect to matters, such as voting and conversion, that
could make a non-negotiated merger transaction more difficult to
complete;
- provide for a classified board of directors with staggered three-year
terms, which could delay a majority stockholder from gaining control of
the board of directors;
- prohibit cumulative voting in the election of directors, which makes it
more difficult for a minority stockholders to elect a director;
- require super-majority voting for certain amendments to Conoco's
certificate of incorporation and by-laws, which prevents a stockholder
with a simple majority from amending the certificate of incorporation to
remove impediments to control;
- limit the persons who may call special meetings of stockholders and
stockholder action by written consent, which makes it more difficult for
a majority stockholder to amend the certificate of incorporation to
remove impediments to control;
- establish advance notice requirements for nominations for election to the
board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings, which may impede a stockholder's
ability to propose nominees to the board or other proposals.
Provisions of Delaware law may also discourage, delay or prevent someone
from acquiring or merging with Conoco. For more information, see "Description of
Conoco Capital Stock -- Anti-Takeover Effects of Certain Certificate and By-law
Provisions."
THERE IS NO PUBLIC MARKET FOR CONOCO CLASS B COMMON STOCK AND AN ACTIVE TRADING
MARKET MAY NOT DEVELOP
Prior to the exchange offer, there has been no public market for the shares
of Conoco Class B Common Stock. Although Conoco is applying to list Conoco Class
B Common Stock on the NYSE, an active trading market may not develop.
CONOCO MAY NOT PAY DIVIDENDS ON ITS COMMON STOCK
The amount of cash dividends, if any, to be declared and paid will depend
upon declaration by Conoco's board of directors and upon Conoco's financial
condition, results of operations, cash flow, the level of its capital and
exploration expenditures, its future business prospects and other related
matters that Conoco's board of directors deems relevant. There can be no
assurance that any dividends will be declared or paid.
24
<PAGE> 26
THE TRANSACTION
BACKGROUND AND PURPOSE
As part of DuPont's increased focus on its materials and life sciences
businesses, in May 1998 DuPont announced its intention to separate its oil and
gas business, operated by Conoco, from its other businesses.
In September 1998, following a thorough review of the various alternatives
for divesting its oil and gas business, DuPont's board of directors approved an
initial public offering for Conoco. In October 1998, Conoco completed its
initial public offering, selling 191.5 million shares of Conoco Class A Common
Stock (entitled to one vote per share), representing approximately 30 percent of
its total shares outstanding, to the public. DuPont, through its ownership of
all of the 436.5 million shares of Conoco Class B Common Stock (entitled to five
votes per share), retained approximately 70 percent of the total shares in, and
approximately 92 percent of the total voting power of, Conoco.
DuPont now intends to divest its remaining ownership interest in Conoco
through the exchange offer in which holders of DuPont shares may exchange some
or all of their DuPont shares for the remaining Conoco shares held by DuPont. If
fewer than all of the Conoco shares held by DuPont are distributed because too
few DuPont shares are tendered, DuPont may pursue one of several alternatives,
including spinning off, selling or retaining some of its Conoco shares. In a
"spin-off," DuPont would distribute some or all of the remaining Conoco shares
pro rata still held by it to its remaining stockholders. In a secondary sale,
DuPont would sell some or all of the remaining shares in an offering that would
close following the exchange offer. Alternatively, DuPont could retain all or a
portion of these remaining shares for no longer than five years on terms that
would comply with the representations made to the IRS in connection with
obtaining the ruling. We refer to the exchange offer together with a subsequent
spin-off, if any, as the "Transaction."
EFFECTS
If the exchange offer is fully subscribed, DuPont will no longer own any of
the outstanding stock of Conoco. Conoco will thereby become a fully independent,
publicly held company. Accordingly, DuPont's balance sheet and income statement
will no longer reflect the assets and operations of Conoco and, the total market
capitalization of DuPont will decrease considerably. For more information, see
"Unaudited Pro Forma Consolidated Financial Statements of DuPont."
DuPont stockholders will be affected by the exchange offer as follows:
- holders who tender all of their shares will, if all such shares are
accepted for exchange, no longer have an ownership interest in DuPont and
will no longer participate in any change in the value of DuPont;
- holders who exchange some, but not all, of their shares will have a
diminished ownership interest in DuPont and an increased ownership
interest in Conoco; and
- holders who do not tender any of their shares for exchange under the
exchange offer will have an increased ownership interest, on a percentage
basis, in DuPont.
DuPont may re-issue any shares acquired by it in the exchange offer without
further stockholder action (except as required by applicable law or the rules of
the NYSE) for general or other corporate purposes, including stock splits or
dividends, acquisitions, the raising of additional capital for use in DuPont's
business and under DuPont savings plans.
25
<PAGE> 27
NO APPRAISAL RIGHTS
No appraisal rights are available to stockholders of DuPont in connection
with the exchange offer.
REGULATORY APPROVALS
No filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(the "HSR Act") are required in connection with the exchange offer generally. If
certain stockholders of DuPont decide to participate in the exchange offer and
consequently acquire enough Conoco shares to exceed any threshold stated in the
regulations under the HSR Act, and if an exemption under those regulations does
not apply, the stockholders and DuPont would be required to make filings under
the HSR Act. A filing requirement could delay exchanges with these stockholders
for several months or more.
ACCOUNTING TREATMENT
The DuPont shares received by DuPont in the exchange offer will be recorded
as a decrease in DuPont's stockholders' equity, reflecting the decrease in
DuPont Common Stock outstanding at the market value of the Conoco shares
distributed as of the expiration date. The exchange offer will result in a net
financial gain to DuPont, after direct expenses of the disposition, and will be
reported as a gain on the disposal of the discontinued business. The gain from
the exchange offer will result from the difference between the market value and
the carrying value of the shares of Conoco Class B Common Stock distributed.
Any remaining shares of Conoco Class B Common Stock that are distributed
through a possible spin-off will be accounted for as a dividend through a direct
charge to retained earnings. The amount of the dividend will be equal to
DuPont's carrying value of the shares of Conoco Class B Common Stock
distributed.
In the event DuPont sells any Conoco Class B Common Stock, the gain on the
sale will be the difference between sale proceeds and DuPont's basis in the
shares sold, net of applicable expenses and taxes.
DuPont's disposition of Conoco shares will not in and of itself affect the
financial position or results of operations of Conoco.
26
<PAGE> 28
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
DuPont is offering to exchange shares of Conoco Class B Common
Stock for each share of DuPont Common Stock that is validly tendered on the
terms and subject to the conditions described below by 12:00 Midnight, New York
City time, on , , 1999. DuPont may extend this deadline under
certain circumstances. The last day on which tenders will be accepted (whether
on or extended) is referred to as the "expiration date." DuPont
stockholders may tender all, some or none of their shares.
DuPont will accept up to shares of DuPont Common Stock for
exchange. This number of shares multiplied by the exchange ratio equals the
436,543,573 million shares of Conoco Class B Common Stock held by DuPont. If
more than DuPont shares are tendered, the tendered shares will be
subject to proration when the exchange offer expires.
In determining the exchange ratio, DuPont considered, among other things:
- recent market prices on the NYSE for DuPont shares and Conoco Class A
Common Stock; and
- advice from the dealer manager as to what exchange ratio might attract
enough DuPont stockholders to participate in the exchange offer.
DuPont is sending this Offering Circular-Prospectus and related documents
to persons who held DuPont Common Stock at the close of business on
, 1999. On that date, there were
shares of DuPont Common Stock outstanding, which were held of record by
approximately
stockholders. DuPont is also sending this Offering Circular-Prospectus to
persons eligible to participate in the DuPont or DuPont affiliated company
savings plans listed in question 14 on page 6. DuPont will also furnish this
Offering Circular-Prospectus and related documents to brokers, banks and similar
persons whose names or the names of whose nominees appear on DuPont's
stockholder list or, if applicable, who are listed as participants in a clearing
agency's security position listing for subsequent transmittal to beneficial
owners of shares of DuPont Common Stock.
MINIMUM CONDITION
DuPont will not complete the exchange offer unless at least DuPont
shares are validly tendered and not withdrawn. This number of shares, referred
to as the "minimum condition," represents approximately percent of the
outstanding DuPont shares as of , 1999 and enough shares to
result in at least shares of Conoco Class B Common Stock are exchanged
under the exchange offer.
PRORATION
If on the expiration date, DuPont stockholders have tendered more than
DuPont shares so that more than 436,543,573 million shares of Conoco
Class B Common Stock would be exchanged, DuPont will accept on a pro rata basis
all shares properly tendered and not withdrawn, except as described in
"-- Tenders for Exchange by Holders of Fewer Than 100 Shares of DuPont Common
Stock".
DuPont will announce preliminary results of the exchange offer including
proration, if any, by press release promptly after the expiration date. Because
of the difficulty in determining the number of DuPont shares validly tendered
for exchange, DuPont expects that the final proration factor, if any, will not
be determined until approximately seven business days after the expiration date.
TENDERS FOR EXCHANGE BY HOLDERS OF FEWER THAN 100 SHARES OF DUPONT COMMON STOCK
Holders, other than participants in DuPont or DuPont affiliated company
savings plans, of an aggregate of less than 100 DuPont shares who validly tender
all of these shares will not be subject to proration if the exchange offer is
oversubscribed. DuPont shares held in a DuPont or DuPont affiliated
27
<PAGE> 29
company savings plan (including Conoco plans) are not eligible for this
preferential treatment. However, DuPont shares held in a Blueprint account at
Merrill Lynch are eligible for this preferential treatment.
Partial tenders will not qualify for this preference. It is also not
available to beneficial holders of 100 or more DuPont shares, even if such
holders have separate stock certificates or accounts for fewer than 100 DuPont
shares. Any holder of less than 100 DuPont shares who wishes to tender all of
these shares must complete the box captioned "Odd-Lots" on the letter of
transmittal and, if applicable, on the notice of guaranteed delivery. If your
odd-lot shares are held by a broker for your account, you can contact the broker
and request the preferential treatment.
FRACTIONAL SHARES
Holders, including participants in DuPont or DuPont affiliated company
savings plans, may tender fractional DuPont shares in the exchange offer. Any
fractional shares of Conoco Class B Common Stock resulting from the exchange of
DuPont shares will be distributed to holders by book-entry transfer.
EXCHANGE OF SHARES OF DUPONT COMMON STOCK
If all of the conditions of the exchange offer are met, DuPont will
exchange shares of Conoco Class B Common Stock for each properly tendered DuPont
share that was not properly withdrawn or deemed withdrawn prior to the
expiration date, except as described in "-- Proration". DuPont may, subject to
the rules under the Securities Exchange Act, delay accepting or exchanging any
DuPont shares in order to comply in whole or in part with any applicable law.
For a description of DuPont's right to delay, terminate or amend the exchange
offer, see "-- Extension of Tender Period; Termination; Amendment" on page
.
If DuPont notifies the exchange agent that it has accepted the tenders of
DuPont shares for exchange, the exchange of these shares will be complete.
Promptly following the announcement by DuPont of any final proration factor, the
exchange agent will deliver the tendered DuPont shares to DuPont.
Simultaneously, the exchange agent will receive from DuPont, as agent for the
tendering stockholders, the shares of Conoco Class B Common Stock that
correspond to the number of DuPont shares tendered. The exchange agent will then
transmit these shares of Conoco Class B Common Stock to the tendering
stockholders. The date on which this occurs is referred to as the "exchange
date."
If any tendered DuPont shares are not exchanged for any reason, or if less
shares are exchanged due to proration, these unexchanged or untendered DuPont
shares will be returned promptly after the expiration date without cost to the
tendering stockholder.
Holders who tender their DuPont shares for exchange will generally not be
obligated to pay any transfer tax in connection therewith. Under no
circumstances will DuPont pay interest under the exchange offer, regardless of
any delay in making the exchange.
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<PAGE> 30
PROCEDURES FOR TENDERING DUPONT SHARES
To tender your DuPont shares, you must complete the following procedures
before the expiration date:
IF YOU HAVE STOCK CERTIFICATES FOR YOUR DUPONT SHARES, you should send to
the exchange agent by registered mail, return receipt requested, (1) a completed
and executed letter of transmittal and any other documents required by the
letter of transmittal, and (2) the actual certificates representing the DuPont
shares to be tendered. The exchange agent's address is listed on the back cover
of this document.
If a certificate representing DuPont shares is registered in the name of a
person other than the signer of a letter of transmittal, or if delivery of
shares of Conoco Class B Common Stock is to be made or DuPont shares not
accepted for exchange are to be returned to a person other than the registered
owner, the certificate must be endorsed or accompanied by an appropriate stock
power. The signature on the certificate or stock power must appear exactly as
the name of the registered owner appears on the certificate with the signature
on the certificate or stock power guaranteed by an eligible institution. An
"eligible institution" is a member of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or a correspondent in the
United States. Most banks and financial institutions are eligible institutions.
IF YOU HOLD YOUR DUPONT SHARES THROUGH A BROKER YOU SHOULD RECEIVE
INSTRUCTIONS FROM YOUR BROKER ON HOW TO PARTICIPATE AND YOU SHOULD NOT USE THE
LETTER OF TRANSMITTAL TO DIRECT THE TENDER OF YOUR DUPONT SHARES. Your broker
must notify The Depository Trust Company ("DTC") and ensure that the exchange
agent receives an "agent's message" from DTC confirming the book-entry transfer
of your DuPont shares. An "agent's message" is a message, transmitted by DTC and
received by the exchange agent that forms a part of a book-entry confirmation,
which states that DTC has received an express acknowledgment from the
participant in DTC tendering the shares that such participant has received and
agrees to be bound by the terms of the letter of transmittal.
IF YOU HOLD YOUR DUPONT SHARES AS A PARTICIPANT IN A DUPONT OR A DUPONT
AFFILIATED COMPANY SAVINGS PLAN (INCLUDING CONOCO SAVINGS PLANS) OR IN A
BLUEPRINT BROKERAGE ACCOUNT AT MERRILL LYNCH, you should follow the instructions
separately sent to you by either the plan trustees or Merrill Lynch. You may not
use the letter of transmittal to direct the tender of shares of DuPont Common
Stock but must instead follow the separate election instructions sent to you by
your plan trustee or Merrill Lynch. Holders of vested but unexercised options to
purchase DuPont Common Stock may exercise these options in accordance with the
terms of the stock option plans of DuPont and tender the DuPont shares received
upon such exercise under the general instructions for tendering shares discussed
in this section.
In addition, holders of vested but unexercised "incentive stock options"
(as defined in Section 422 of the Internal Revenue Code, as amended) to purchase
DuPont Common Stock may exercise these options in accordance with the terms of
the stock option plans of DuPont and tender the DuPont shares received upon such
exercise under the general instructions for tendering shares discussed in
"-- Procedures for Tendering Shares of DuPont Common Stock" on page .
Holders of shares of DuPont Common Stock that were acquired upon the
exercise of an incentive stock option generally will not be taxed at the time of
tender of such shares, but rather will be taxed at the time of the disposition
of the shares of Conoco Class B Common Stock that were acquired in exchange for
such shares of DuPont Common Stock.
Restricted shares of DuPont Common Stock are not eligible to participate in
the exchange offer.
Trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity who
sign the letter of transmittal, notice of guaranteed delivery or any
certificates or stock powers must indicate the capacity in which they are
signing, and submit evidence of their power to act in that capacity unless
waived by DuPont.
If you validly tender your DuPont shares and the shares are accepted by
DuPont, there will be a binding agreement between you and DuPont on the terms
and subject to the conditions set forth in this
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<PAGE> 31
document and in the accompanying letter of transmittal. A person who tenders
DuPont shares for his own account violates federal securities law unless the
person owns:
- DuPont shares;
- other securities convertible into or exchangeable for such DuPont shares;
or
- an option, warrant or right to purchase such DuPont shares and intends to
acquire DuPont shares for tender by conversion or exchange of such
securities or by exercise of such option, warrant or right.
Federal securities law provides a similar restriction applicable to the tender
or guarantee of a tender on behalf of another person.
DO NOT SEND LETTERS OF TRANSMITTAL AND CERTIFICATES FOR DUPONT SHARES TO
DUPONT, CONOCO, MORGAN STANLEY, D.F. KING OR ANY SOLICITING DEALER.
IT IS UP TO YOU TO DECIDE HOW TO DELIVER YOUR DUPONT SHARES AND ALL OTHER
REQUIRED DOCUMENTS. IT IS YOUR RESPONSIBILITY THAT ALL NECESSARY MATERIALS GET
TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE. IF THE EXCHANGE AGENT DOES
NOT RECEIVE ALL OF THE MATERIALS REQUIRED BY THIS SECTION BEFORE THE EXPIRATION
DATE, YOUR SHARES WILL NOT BE VALIDLY TENDERED.
DUPONT'S INTERPRETATIONS ARE BINDING
DuPont will determine at its own discretion all questions as to the form of
documents, including notices of withdrawal, and the validity, form, eligibility,
including time of receipt, and acceptance for exchange of any tender of DuPont
shares. This determination will be final and binding on all tendering
stockholders. DuPont reserves the absolute right to:
- reject any and all tenders of any DuPont shares not properly tendered,
- waive any defects or irregularities or conditions of the exchange offer
as to any DuPont shares either before or after the expiration date.
None of DuPont, Conoco, First Chicago Trust Company of New York, Morgan
Stanley, D.F. King, the soliciting dealers and any other person will be under
any duty to notify tendering stockholders of any defect or irregularity in
tenders or notices of withdrawal.
LOST OR DESTROYED CERTIFICATES
If your certificate representing DuPont shares has been mutilated,
destroyed, lost or stolen and you wish to tender your shares, you must
- furnish to the exchange agent evidence, satisfactory to it in its
discretion, of the ownership of and the destruction, loss or theft of
such certificate;
- furnish to the exchange agent indemnity, satisfactory to it in its
discretion; and
- comply with such other reasonable regulations as the exchange agent may
prescribe.
GUARANTEED DELIVERY PROCEDURE
If you wish to tender your DuPont shares but the shares are not immediately
available, or time will not permit the shares or other required documentation to
reach the exchange agent before the expiration
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<PAGE> 32
date, or the procedure for book-entry transfer cannot be completed on a timely
basis, you may still tender your DuPont shares if:
- the tender is made through an eligible institution;
- before the expiration date, the exchange agent receives from the eligible
institution a properly completed letter of transmittal, or a facsimile of
a letter of transmittal, and notice of guaranteed delivery, substantially
in the form provided by DuPont; and
- the exchange agent receives the certificates for all physically tendered
DuPont shares, in proper form for transfer, or a book-entry confirmation,
as the case may be, and all other documents required by the letter of
transmittal, within three NYSE trading days after the date of execution
of the notice of guaranteed delivery.
You may deliver the notice of guaranteed delivery by hand, telegram,
facsimile transmission or mail to the exchange agent and you must include a
guarantee by an eligible institution in the form set forth in the notice.
WITHDRAWAL RIGHTS
You may withdraw tenders of DuPont shares at any time prior to the
expiration date and, unless DuPont has accepted your tender as provided in this
Offering Circular-Prospectus, after the expiration of 40 business days from the
commencement of the exchange offer. If DuPont (1) delays its acceptance of
DuPont shares for exchange or (2) is unable to accept DuPont shares for exchange
under the exchange offer for any reason, then, without prejudice to DuPont's
rights under the exchange offer, the exchange agent may, on behalf of DuPont,
retain DuPont shares tendered, and such DuPont shares may not be withdrawn
except as otherwise provided in this Offering Circular-Prospectus, subject to
provisions under the Securities Exchange Act that provide that an issuer making
an exchange offer shall either pay the consideration offered or return tendered
securities promptly after the termination or withdrawal of the exchange offer.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent at one of its addresses set forth on the back
cover of this Offering Circular-Prospectus. The notice of withdrawal must:
- specify the name of the person having tendered the DuPont shares to be
withdrawn.
- identify number of the DuPont shares to be withdrawn, and
- if you have transmitted physical DuPont share certificates, specify the
name in which such shares are registered, if different from that of the
withdrawing holder.
If certificates for the DuPont shares have been delivered or otherwise
identified to the exchange agent, then, before the release of such certificates,
the withdrawing holder must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by an eligible institution unless such holder is an eligible
institution.
If the DuPont shares have been tendered pursuant to the procedure for
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at DTC to be credited with the withdrawn shares and otherwise
comply with the procedures of such facility.
Any DuPont shares withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the exchange offer. Any shares which have
been tendered for exchange but which are not exchanged for any reason will be
returned to the holder without cost to such holder. In the case of DuPont shares
tendered by book-entry transfer into the exchange agent's account at DTC under
the book-entry transfer procedures described above, the shares will be credited
to an account maintained with DTC for the shares. Any return or credit will
occur as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn shares may be retendered
by following one of the
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<PAGE> 33
procedures described under "-- Procedures for Tendering DuPont shares" above at
any time on or before the expiration date.
Except as otherwise provided above, any tender of DuPont shares made under
the exchange offer is irrevocable.
EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENT
DuPont expressly reserves the right, at any time or from time to time, in
its sole discretion, to extend the period of time during which the exchange
offer is open or to amend the exchange offer in any respect. In both cases,
DuPont will make a public announcement of the extension or amendment.
If DuPont materially changes the terms of or information concerning the
exchange offer, DuPont will extend the exchange offer. The SEC has stated that,
as a general rule, it believes that an offer should remain open for a minimum of
five business days from the date that notice of the material change is first
given. The length of time will depend on the particular facts and circumstances.
Subject to the preceding paragraph, if (1) DuPont increases or decreases the
number of Conoco shares offered in exchange for each DuPont share, the number of
DuPont shares eligible for exchange or the minimum condition, and (2) the
exchange offer is scheduled to expire within ten business days of announcing an
increase or decrease, the exchange offer will be extended until the expiration
of such period of ten business days.
DuPont will give oral or written notice of any extension, amendment,
non-acceptance or termination to holders of DuPont shares as promptly as
practicable. In the case of an extension, we will issue a press release or other
public announcement no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date.
CONDITIONS FOR COMPLETION OF THE EXCHANGE OFFER
DuPont shall be entitled to terminate or not complete the exchange offer
(subject to applicable law) if:
- the minimum condition is not reached;
- any action, proceeding or litigation seeking to enjoin, make illegal
or delay completion of the exchange offer or otherwise relating in any
manner to the exchange offer is instituted or threatened;
- any order, stay, judgment or decree is issued by any court,
government, governmental authority or other regulatory or administrative
authority and is in effect, or any statute, rule, regulation, governmental
order or injunction shall have been proposed, enacted, enforced or deemed
applicable to the exchange offer, any of which would or might restrain,
prohibit or delay completion of the exchange offer or impair the
contemplated benefits of the exchange offer to DuPont or Conoco;
- the IRS notifies DuPont that the ruling has been withdrawn or invalidated
or the DuPont board of directors determines that the representations and
assumptions underlying the ruling are not true and correct in all
respects.
- any of the following occurs and the adverse effect of such occurrence
shall, in the reasonable judgment of DuPont, be continuing:
-- any general suspension of trading in, or limitation on prices for,
securities on any national securities exchange or in the
over-the-counter market in the United States,
-- any extraordinary or material adverse change in U.S. financial
markets generally, including, without limitation, a decline of at
least twenty percent in either the Dow Jones Average of Industrial
stocks or the Standard & Poor's 500 Index from , 1999,
-- a declaration of a banking moratorium or any suspension of payments
in respect of banks in the United States,
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<PAGE> 34
-- any limitation, whether or not mandatory, by any governmental entity,
on, or any other event that would reasonably be expected to
materially adversely affect, the extension of credit by banks or
other lending institutions,
-- a commencement of a war or other national or international calamity
directly or indirectly involving the United States, which would
reasonably be expected to affect materially and adversely, or to
delay materially, the completion of the exchange offer, or
-- if any of the situations above exist at the time of commencement of
the exchange offer, the situation deteriorates materially;
- any tender or exchange offer (other than this exchange offer) with
respect to some or all of the outstanding Conoco Common Stock or DuPont
Common Stock, merger, acquisition or other business combination proposal
for DuPont or Conoco, shall have been proposed, announced or made by any
person or entity;
- any event or events occur that have resulted, or may result, in the sole
judgment of DuPont, in an actual or threatened change in the business,
condition (financial or other), income, operations, stock ownership or
prospects of DuPont and its subsidiaries, taken as a whole, or of Conoco
and its subsidiaries, taken as a whole; or
- (a) any person, entity or "group" (as that term is used in Section
13(d)(3) of the Exchange Act) acquires more than five percent of the
outstanding shares of DuPont Common Stock or Conoco Common Stock (other
than a person, entity or group which had publicly disclosed such
ownership with the SEC prior to , 1999), (b) any such
person, entity or group which had publicly disclosed such ownership prior
to such date shall acquire additional DuPont shares or Conoco Common
Stock constituting more than two percent of the outstanding DuPont shares
or Conoco Common Stock (options for and other rights to acquire DuPont
Common Stock or Conoco Common Stock which are so acquired, or proposed to
be acquired, being deemed for this purpose to be immediately exercisable)
or (c) any new group shall have been formed that beneficially owns more
than five percent of the outstanding shares of DuPont Common Stock or
Conoco Common Stock which in the reasonable judgment of DuPont in any
such case, and regardless of the circumstances, makes it inadvisable to
proceed with the Exchange Offer or with such acceptance for exchange of
shares.
If any the above events occur, DuPont may:
- terminate the exchange offer and as promptly as practicable return all
tendered DuPont shares to tendering stockholders;
- extend the exchange offer and, subject to the withdrawal rights described
in "-- Withdrawal Rights" on page 30, retain all tendered DuPont shares
until the extended exchange offer expires;
- amend the terms of the exchange offer; or
- waive the unmet condition and, subject to any requirement to extend the
period of time during which the exchange offer is open, complete the
exchange offer.
These conditions are for the sole benefit of DuPont. DuPont may assert
these conditions with respect to all or any portion of the exchange offer
regardless of the circumstances giving rise to them. DuPont may waive any
condition in whole or in part at any time in its reasonable discretion. Any
determination by DuPont concerning the conditions described above will be final
and binding upon all parties.
DuPont's failure at any time to exercise any of the foregoing rights does
not mean it waives that right.
If a stop order issued by the SEC shall be in effect with respect to the
registration statement, DuPont will not accept any DuPont shares tendered and
will not exchange Conoco shares for any DuPont shares.
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<PAGE> 35
FEES AND EXPENSES
Morgan Stanley is acting as the dealer manager in connection with the
exchange offer. Morgan Stanley will receive a fee of $ for its
services, in addition to being reimbursed by DuPont for their out-of-pocket
expenses, including attorneys' fees, in connection with the exchange offer.
Morgan Stanley has provided investment banking services to DuPont and Conoco in
the past, including acting as the lead manager of the Conoco initial public
offering, for which Morgan Stanley received customary compensation. DuPont and
Conoco have each agreed to indemnify Morgan Stanley against certain liabilities,
including civil liabilities under the federal securities laws, and to contribute
to payments which Morgan Stanley may be required to make in respect thereof.
Morgan Stanley may from time to time hold DuPont shares in its proprietary
accounts, and to the extent it owns shares in these accounts at the time of the
exchange offer, Morgan Stanley may tender these shares.
DuPont will pay each soliciting dealer a solicitation fee of per
share, for up to 1,000 shares per tendering stockholder, for each DuPont share
tendered and accepted for exchange under the exchange offer if that soliciting
dealer has affirmatively solicited and obtained the tender. DuPont will not pay
a solicitation fee in connection with a tender of DuPont Common Stock by a
stockholder who tenders (a) more than 10,000 DuPont shares, (b) from a country
outside of the United States, or (c) to Morgan Stanley. "Soliciting dealer"
includes (1) any broker or dealer in securities that is a member of any national
securities exchange in the United States or of the National Association of
Securities Dealers, Inc. or (2) any bank or trust company located in the United
States. In order for a soliciting dealer to receive a solicitation fee with
respect to the tender of shares of DuPont Common Stock, the exchange agent must
have received a properly completed and duly executed letter of transmittal with
respect to the tender, including a completed box entitled "Notice of Solicited
Tenders" (Box # ).
DuPont will not pay a solicitation fee to a soliciting dealer who for any
reason must transfer the fee to a tendering holder. Soliciting dealers are not
entitled to a solicitation fee with respect to DuPont shares beneficially owned
by them or with respect to any shares that are registered in the name of a
soliciting dealer unless the shares are held by such soliciting dealer as
nominee and are tendered for the benefit of beneficial holders identified in the
letter of transmittal. No broker, dealer, bank, trust company or fiduciary shall
be deemed to be the agent of DuPont, Conoco, First Chicago Trust Company of New
York, Morgan Stanley or D.F. King for purposes of the exchange offer.
DuPont has retained D.F. King to act as the information agent and the First
Chicago Trust Company of New York to act as the exchange agent in connection
with the exchange offer. The information agent may contact holders of DuPont
shares by mail, telephone, facsimile transmission and personal interviews and
may request brokers, dealers and other nominee stockholders to forward materials
relating to the exchange offer to beneficial owners. The information agent and
the exchange agent each will receive reasonable compensation for their
respective services, will be reimbursed for certain reasonable out-of-pocket
expenses and will be indemnified against certain liabilities in connection with
their services, including certain liabilities under the federal securities laws.
Neither the information agent nor the exchange agent has been retained to make
solicitations or recommendations. The fees they receive will not be based on the
number of DuPont shares tendered under the exchange offer; however, the exchange
agent will be compensated in part on the basis of the number of letters of
transmittal received and the number of statements and stock certificates
distributed.
DuPont will not pay any fees or commissions to any broker or dealer or any
other person (other than Morgan Stanley and the soliciting dealers) for
soliciting tenders of DuPont shares under the exchange offer. Brokers, dealers,
commercial banks and trust companies will, upon request, be reimbursed by DuPont
for reasonable and necessary costs and expenses incurred by them in forwarding
materials to their customers.
ILLEGALITY
DuPont is not making the exchange offer to, nor will it accept tenders from
or on behalf of, holders of DuPont Common Stock in any jurisdiction in which the
making or acceptance of the exchange offer would
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<PAGE> 36
be illegal. DuPont is not aware of any jurisdiction where the making or
acceptance of the exchange offer would not comply with applicable law. If DuPont
becomes aware of any such jurisdiction, DuPont will make a good faith effort to
comply with the law. If DuPont still cannot comply with the law, the exchange
offer will not be made to, nor will tenders be accepted from or on behalf of,
holders of DuPont shares in those jurisdictions. Following the expiration date
and DuPont's acceptance of shares for exchange, DuPont may, federal securities
laws permitting, exclude from the exchange offer any tendered shares as to which
a purchase by DuPont would then be unlawful.
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<PAGE> 37
PRICE RANGE OF DUPONT COMMON STOCK AND DIVIDENDS
DuPont Common Stock is listed and traded on the NYSE under the symbol "DD."
The following table contains, for the periods indicated, the high and low sale
prices per share of DuPont Common Stock as reported on the NYSE composite tape
and the cash dividends paid per share of DuPont Common Stock:
<TABLE>
<CAPTION>
CASH
HIGH LOW DIVIDENDS
---- --- ---------
<S> <C> <C> <C>
1997
First Quarter(1)............................... $57 5/8 $46 3/8 $0.285
Second Quarter(1).............................. 62 7/8 49 3/4 0.315
Third Quarter.................................. 69 3/4 60 11/16 0.315
Fourth Quarter................................. 64 15/16 50 3/16 0.315
1998
First Quarter.................................. $70 7/16 $52 5/8 $0.315
Second Quarter................................. 84 7/16 67 1/8 0.350
Third Quarter.................................. 79 1/2 52 1/4 0.350
Fourth Quarter................................. 66 1/2 51 11/16 0.350
1999
First Quarter (through March 15, 1999)......... $59 1/2 $50 1/4 $0.350
</TABLE>
- ------------
(1) Restated to reflect a two-for-one split of DuPont Common Stock effective May
15, 1997.
The number of holders of record of DuPont Common Stock as of March 15, 1999
was 144,370.
On March 19, 1999, the last full day of trading prior to the initial filing
of the registration statement, the closing price per DuPont share as reported on
the NYSE composite tape was $56 5/8. On , 1999, the last full day of
trading prior to commencement of the exchange offer, the last reported sale
price per DuPont share as reported on the NYSE composite tape was $ .
You should obtain current market quotations for the shares of DuPont Common
Stock before deciding to tender. No assurance can be given concerning the market
price of DuPont Common Stock in the future.
Stockholders who exchange shares of DuPont Common Stock under this exchange
offer will not be entitled to any dividends on such shares. DuPont stockholders
will continue to receive the regular quarterly dividend with respect to shares
of DuPont Common Stock that are not exchanged under the exchange offer.
The Board of Directors of DuPont may declare dividends on DuPont Common
Stock after considering many factors, including DuPont's competitive position,
available cash, financial conditions, earnings and capital requirements. DuPont
may choose not to pay dividends in the future.
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<PAGE> 38
PRICE RANGE OF CONOCO CLASS A COMMON STOCK AND DIVIDENDS
Conoco will apply for the listing of Conoco Class B Common Stock on the
NYSE under the symbol "COC.B." Conoco Class A Common Stock is currently listed
and traded on the NYSE under the symbol "COC." Upon the closing of the exchange
offer, the symbol for Conoco Class A Common Stock will be changed to "COC.A."
The following table contains, for the periods indicated, the high and low sale
prices per share of Conoco Class A Common Stock as reported on the NYSE
composite tape and the cash dividends paid per share of Conoco Class A Common
Stock:
<TABLE>
<CAPTION>
CASH
HIGH LOW DIVIDENDS
---- --- ---------
<S> <C> <C> <C>
1998
Fourth Quarter(1) (from October 22 through December 31,
1998).................................................. $25 3/4 $19 3/8 $ --
1999
First Quarter (through March 15, 1999).................... $24 $19 1/4 $.14(2)
</TABLE>
- ------------
(1) Conoco Class A Common Stock began trading on October 22, 1998 following the
Conoco initial public offering.
(2) On January 27, 1999, the Board of Directors of Conoco declared a quarterly
dividend of $.14 per share of Conoco Class A Common Stock payable on March
12, 1999, to stockholders of record on February 12, 1999. This was the first
dividend that Conoco declared since its initial public offering. This
initial dividend was determined on a pro rata basis covering the period from
October 27, 1998 (the closing date of the Conoco initial public offering) to
December 31, 1998, and is equivalent to $.19 per share for a full quarter.
The number of holders of record of Conoco's Class A Common Stock as of
March 15, 1999 was 1,707. DuPont currently owns all of the outstanding shares of
Conoco Class B Common Stock.
On March 19, 1999, the last full day of trading prior to the initial filing
of the Registration Statement relating to the exchange offer, the closing price
per share of Conoco Class A Common Stock as reported on the NYSE composite tape
was $24. On , 1999, the last full day of trading prior to
commencement of the exchange offer, the last reported sale price per share of
Conoco Class A Common Stock as reported on the NYSE composite tape was
$ . You should obtain current market quotations for the shares of
Conoco Class A Common Stock before deciding to tender DuPont Shares. No
assurance can be given concerning the market price of Conoco Class A or Class B
Common Stock in the future.
Conoco's Board of Directors may declare dividends on Conoco common stock
after considering many factors, including Conoco's competitive position,
available cash, financial condition, earnings and capital requirements. Conoco
may choose not to pay dividends in the future.
37
<PAGE> 39
SPECIAL NOTE ON FORWARD-LOOKING INFORMATION
This Offering Circular-Prospectus contains or incorporates by reference
statements which may constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. You can identify
forward-looking statements by the words "plans," "believes," "expects," "will,"
"anticipates," "intends," "projects," "estimates" or similar expressions,
including the kinds of statements in "Questions and Answers About the Exchange
Offer," "Summary," "-- Background and Purpose," "Business of DuPont,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Conoco" and "Business of Conoco". Forward-looking statements may
address, among other things, DuPont's or Conoco's strategy for growth, product
development, market position, expenditures and financial results.
For a discussion identifying some important factors that could cause actual
results to vary materially from those anticipated in the forward-looking
statements, see "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Conoco" included in this
document as well as DuPont's and Conoco's SEC filings, including the cautionary
statements included on page 39 of DuPont's 1998 Annual Report to Stockholders,
which were incorporated by reference into DuPont's Annual Report on Form 10-K
for the year ended December 31, 1998 and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 14 through 39 of
DuPont's 1998 Annual Report, which is incorporated by reference in this
document.
Conoco and DuPont caution that any forward-looking statements contained in
this Offering Circular-Prospectus or incorporated in this document by reference
or made by management of DuPont or Conoco involve risks and uncertainties, and
may change based on various important factors. Conoco and DuPont have based many
of these forward-looking statements on current expectations, estimates and
projections about each company and the petroleum, life sciences and chemical
industries in general. In addition, many of these forward-looking statements are
based on assumptions about future events that may prove to be inaccurate.
Accordingly, actual outcomes and results may differ materially from what Conoco
and DuPont have expressed or forecast in the forward-looking statements. Any
differences could result from a variety of factors including the following:
- fluctuations in crude oil and natural gas prices and refining and
marketing margins;
- failure or delays in achieving expected production from development
projects;
- uncertainties inherent in predicting oil and gas reserves and oil and gas
reservoir performance;
- lack of exploration success;
- disruption or interruption of production facilities due to accidents or
political events;
- international monetary conditions and exchange controls;
- liability for remedial actions under environmental regulation;
- disruption to operations due to untimely or incomplete resolution of Year
2000 issues;
- liability resulting from litigation;
- world economic and political conditions; or
- changes in tax and other laws.
38
<PAGE> 40
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA OF DUPONT
The following table contains selected consolidated historical and unaudited
pro forma financial data of DuPont's continuing operations as of the dates and
for the periods indicated. The unaudited pro forma information is provided to
aid in your analysis of the financial aspects of the exchange offer. This
information may not necessarily reflect the results of operations, financial
position and cash flows of DuPont in the future. The information is only a
summary and you should read it together with the "Unaudited Pro Forma
Consolidated Financial Statements of DuPont" included elsewhere in this document
and the audited consolidated financial statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" located in the
DuPont 1998 Form 10-K, which we have filed with the SEC, and which we have
incorporated in this document by reference. See "Where You Can Find More
Information" on page 143.
The unaudited pro forma financial data for DuPont give effect to the
following transactions and events:
- the split-off of Conoco through an exchange of 100 percent of Conoco
Class B Common Stock held by DuPont for DuPont Common Stock; and
- the $4.6 billion loan due to DuPont from Conoco at December 31, 1998 and
receipt by DuPont of Conoco's initial public offering proceeds of $4.2
billion in repayment of a portion of Conoco's intercompany indebtedness
to DuPont.
The unaudited pro forma statement of income data for DuPont assumes that
these transactions occurred on January 1, 1998. The unaudited pro forma balance
sheet data assumes that these transactions occurred as of December 31, 1998.
39
<PAGE> 41
DUPONT
<TABLE>
<CAPTION>
PRO FORMA AS
ADJUSTED AS
OF AND FOR
YEAR ENDED DECEMBER 31, THE YEAR ENDED
----------------------------------------------- DECEMBER 31,
1998 1997 1996 1995 1994 1998
---- ---- ---- ---- ---- --------------
(IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales....................................... $24,767 $24,089 $23,644 $24,500 $22,518 $24,767
Other Income................................ 981 1,005 1,101 797 674 1,272
------- ------- ------- ------- ------- -------
Total.............................. 25,748 25,094 24,745 25,297 23,192 26,039
Cost of Goods Sold and Other Operating
Charges................................... 15,664 15,564 15,314 15,572 14,498 15,664
Selling, General and Administrative
Expenses.................................. 2,115 2,061 2,119 2,283 2,215 2,115
Depreciation and Amortization............... 1,452 1,361 1,526 1,643 1,748 1,452
Research and Development Expense............ 1,308 1,072 990 1,031 1,004 1,308
Interest Expense............................ 520 389 409 449 343 716
Purchased In-Process Research and
Development............................... 1,443 1,478 -- -- -- 1,443
Employee Separation Costs and Write-down of
Assets.................................... 633 340 -- -- -- 633
------- ------- ------- ------- ------- -------
Total.............................. 23,135 22,265 20,358 20,978 19,808 23,331
Income from Continuing Operations Before
Income Taxes and Minority Interests....... 2,613 2,829 4,387 4,319 3,384 2,708
Provision for Income Taxes.................. 941 1,354 1,416 1,432 1,164 964
Minority Interests in Earnings of
Consolidated Subsidiaries................. 24 43 40 29 15 24
------- ------- ------- ------- ------- -------
Income from Continuing Operations....... $ 1,648(3) $ 1,432 $ 2,931 $ 2,858 $ 2,205 $ 1,720(3)
======= ======= ======= ======= ======= =======
Basic Earnings Per Share of Common Stock --
Continuing Operations(1).................. $ 1.45(3) $ 1.26 $ 2.60 $ 2.43 $ 1.61
Diluted Earnings Per Share of Common
Stock -- Continuing Operations(2)......... $ 1.43(3) $ 1.24 $ 2.56 $ 2.41 $ 1.60
Dividends Per Common Share.................. $ 1.365 $ 1.23 $ 1.115 $ 1.015 $ .91
Weighted Average Number of Shares
Outstanding:
Basic(4).................................. 1,129 1,131 1,121 1,170 1,360
Diluted(4)................................ 1,145 1,150 1,140 1,183 1,371
OTHER DATA:
Cash Provided by Continuing Operations...... $ 4,132 $ 4,027 $ 4,109 $ 5,170 $ 3,697
Capital Expenditures........................ 5,480 7,075 1,783 1,810 1,615
BALANCE SHEET DATA:
Cash and Cash Equivalents................... $ 1,059 $ 1,004 $ 1,066 $ 1,408 $ 856 $ 1,024
Working Capital............................. (2,374) (2,110) 15 (2,116) 3,208 2,187
Net Property, Plant and Equipment........... 14,131 12,601 10,959 11,389 11,385 14,131
Total Assets................................ 38,536 36,689 32,342 32,748 32,577 34,680
Long-Term Borrowings and Capital Lease
Obligations............................... 4,495 5,897 5,052 5,646 6,338 4,495
Minority Interests.......................... 407 361 315 223 192 407
Stockholders' Equity........................ 13,954 11,270 10,593 8,323 12,743 10,098
</TABLE>
- ------------
(1) The pro forma basic earnings per share of DuPont Common Stock will be
determined at a later date, based upon the pro forma weighted average number
of DuPont shares outstanding after the exchange offer.
(2) The pro forma diluted earnings per share of DuPont Common Stock will be
determined at a later date, based upon the pro forma weighted average number
of outstanding common and potentially issuable common shares of DuPont after
the exchange offer.
(3) Before extraordinary item.
(4) The pro forma weighted average number of shares outstanding will be
determined at a later date, based upon the number of DuPont shares received
in exchange for Conoco Class B Common Stock.
40
<PAGE> 42
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA OF CONOCO
The following table contains summary historical and unaudited pro forma
financial data of Conoco as of the dates and for the periods indicated. The
unaudited pro forma financial information is provided to aid in your analysis of
the financial aspects of the exchange offer. This information may not
necessarily reflect the results of operations, financial position and cash flows
of Conoco in the future or what the results of operations, financial position
and cash flows would have been had Conoco been a separate, stand-alone entity
during the periods presented. The information is only a summary and you should
read it together with the audited consolidated financial statements of Conoco
and the unaudited pro forma financial statements of Conoco and the other
information about Conoco included elsewhere in this Offering
Circular-Prospectus. You should also read the "Risk Factors", "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Conoco" and "Business of Conoco" sections of this Offering Circular-Prospectus,
which describe Conoco's business, as well as a number of factors that have
affected Conoco's financial results, including declining crude oil and natural
gas prices.
The unaudited pro forma financial data for Conoco give effect to the
following transactions and events:
- the exchange offer as described in this document; and
- the initial public offering, the separation from DuPont and related
transactions, all substantially completed in October 1998.
The unaudited pro forma statement of income of Conoco assumes that these
transactions occurred on January 1, 1998. The unaudited pro forma balance sheet
assumes that these transactions occurred as of December 31, 1998.
41
<PAGE> 43
CONOCO
<TABLE>
<CAPTION>
PRO FORMA AS
ADJUSTED FOR
YEAR ENDED DECEMBER 31, THE YEAR ENDED
----------------------------------------------- DECEMBER 31,
1998 1997 1996 1995 1994 1998
---- ---- ---- ---- ---- --------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total Revenues(1).......................... $23,168 $26,263 $24,416 $20,518 $19,433 $23,110
Cost of Goods Sold and Other Operating
Expenses................................. 13,840 16,226 14,560 11,146 10,640 13,840
Selling, General and Administrative
Expenses................................. 736 726 755 728 679 736
Stock Option Provision..................... 236 -- -- -- -- 236
Exploration Expenses(2).................... 380 457 404 331 357 380
Depreciation, Depletion and Amortization... 1,113 1,179 1,085 1,067 1,244 1,113
Taxes Other Than on Income(1).............. 5,970 5,532 5,637 5,823 5,477 5,970
Interest and Debt Expense.................. 199 36 74 74 63 225
------- ------- ------- ------- ------- -------
Income Before Income Taxes................. 694 2,107 1,901 1,349 973 610
Provision for Income Taxes................. 244 1,010 1,038 774 551 218
------- ------- ------- ------- ------- -------
Net Income(3).............................. $ 450 $ 1,097 $ 863 $ 575 $ 422 $ 392
======= ======= ======= ======= ======= =======
Segment Net Income:
Upstream
United States............................ 219 445 314 258 248
International............................ 283 439 367 234 250
Downstream
United States............................ 135 216 172 112 104
International............................ 156 91 117 121 137
Corporate and Other(3)..................... (343) (94) (107) (150) (317)
------- ------- ------- ------- -------
$ 450 $ 1,097 $ 863 $ 575 $ 422
======= ======= ======= ======= =======
Earnings Per Share(4)
Basic.................................... $ .95 $ 2.51 $ 1.98 $ 1.32 $ .97 $ .62
Diluted.................................. $ .95 $ 2.51 $ 1.98 $ 1.32 $ .97 $ .62
Weighted Average Shares Outstanding(4)
Basic.................................... 474 437 437 437 437 628
Diluted.................................. 475 437 437 437 437 637
OTHER DATA:
Cash Provided By Operations................ $ 1,373 $ 2,876 $ 2,396 $ 1,924 $ 2,143
Capital Expenditures and Investments....... 2,516 3,114 1,944 1,837 1,665
Cash Exploration Expense................... 217 286 262 204 200
</TABLE>
- ------------
(1) Includes petroleum excise taxes of $5,801, $5,349, $5,461, $5,655 and $5,291
for 1998, 1997, 1996, 1995 and 1994, respectively.
(2) Includes cash exploration overhead and operating expenses, DD&A, dry hole
costs and impairments of unproved properties.
(3) Includes after-tax exchange gains (losses) of $32, $21, $(7), $(40) and
$(143) for 1998, 1997, 1996, 1995 and 1994, respectively, and $23 for the
pro forma as adjusted for 1998.
(4) Conoco's capital structure was established at the time of the Conoco initial
public offering. Earnings per share for the periods prior to the initial
public offering was calculated using only Conoco Class B Common Stock as
required by SFAS 128 (See note 8 to the consolidated financial statements).
Unaudited pro forma basic earnings per share include the shares of Conoco's
Class A and Class B Common Stock outstanding immediately after the initial
public offering. Unaudited pro forma diluted earnings per share includes the
dilutive effect of certain stock option awards.
42
<PAGE> 44
CONOCO
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, AS ADJUSTED
----------------------------------------------- DECEMBER 31,
1998 1997 1996 1995 1994 1998
---- ---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents................... $ 394 $ 1,147 $ 846 $ 286 $ 319 $ 394
Working Capital............................. 45 567 862 999 1,790 (4,551)(1)
Net Property, Plant and Equipment........... 11,413 10,828 10,082 9,758 9,522 11,413
Total Assets................................ 16,075 17,062 15,226 14,229 15,271 16,075
Long-Term Borrowings -- Related Parties..... 4,596 1,450 2,287 2,141 2,279 --
Other Long-Term Borrowings and Capital Lease
Obligations............................... 93 106 101 65 342 93
Total Stockholders' Equity/Owner's Net
Investment................................ 4,438 7,896 6,579 6,754 7,274 4,438
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Proved Reserves at December 31(2)
Oil (MMbbls)(3)........................... 1,591 1,624 973 977 988
Natural Gas (Bcf)......................... 6,183 5,861 5,396 5,048 4,674
Total Proved Reserves (MMBOE)(4).......... 2,622 2,601 1,872 1,818 1,767
International Proved Reserves (% of
Total).................................... 73% 73% 65% 63% 61%
Reserve Replacement Ratio(2)................ 110% 448% 126% 127% 157%
Reserve Life (years)(2)(5).................. 12.3 12.4 8.9 9.3 8.2
Finding and Development Costs per
BOE(2)(4)(6).............................. $ 4.03 $ 3.63 $ 4.84 $ 5.39 $ 6.24
Average Daily Production(2)
Oil (Mbbls/day)(3)........................ 348 374 374 346 367
Natural Gas (MMcf/day).................... 1,411 1,203 1,211 1,126 1,327
Total Production (MBOE/day)(4)............ 583 575 576 534 588
Average Production Costs per BOE(4)(7)...... $ 3.95 $ 4.21 $ 3.84 $ 3.92 $ 3.59
Refinery Capacity at December 31
(Mbbls/day)(2)(8)......................... 807 754 743 621 602
Refinery Utilization(8)..................... 92% 91% 83% 97% 99%
Total Refinery Inputs (Mbbls/day)(2)(9)..... 823 780 732 721 697
Sales of Refined Products (Mbbls/day)(2).... 1,049 1,048 998 983 931
Retail Marketing Outlets at December 31(10):
United States............................. 4,897 4,903 4,976 5,125 5,196
International............................. 3,023 2,971 2,874 2,390 2,438
</TABLE>
- ------------
(1) The working capital deficit is due to classifying the historic amount
outstanding for long-term borrowings--related parties as a current
liability as a result of the Transaction. Conoco expects to refinance
$4,596 of long-term borrowings--related parties with long-term debt
securities; however, no agreements have been finalized. See Conoco's
unaudited pro forma financial statements.
(2) Includes Conoco's share of equity affiliates.
(3) Includes crude oil, condensate, and NGLs expected to be removed for
Conoco's account from its natural gas production.
(4) 6,000 cubic feet of natural gas = one barrel-of-oil-equivalent (BOE).
(5) Total proved reserves at December 31 divided by annual production excluding
NGLs from gas plant ownership.
(6) Finding and development costs per BOE represent a trailing five-year
average for each year displayed.
(7) Excludes equity affiliates and processed NGLs.
(8) Based on rated capacity to process crude oil and condensate (excludes other
feedstocks).
(9) Includes crude oil, condensate and other feedstocks. This does not include
Conoco's indirect 1.2 percent interest in a 95,000 barrel per day refinery
in Mersin, Turkey, acquired as a result of Conoco's marketing joint venture
in Turkey.
(10) Represents outlets owned by Conoco and others that sell Conoco's refined
products.
43
<PAGE> 45
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF DUPONT
The following unaudited pro forma consolidated financial statements of
DuPont as of December 31, 1998, and for the year ended December 31, 1998, were
prepared by DuPont to illustrate the estimated effects of the exchange offer and
the transactions substantially completed in October 1998 directly associated
with the initial public offering and separation described in the notes to these
pro forma financial statements as if they had occurred as of the beginning of
the period presented, for purposes of the pro forma income statement, and as of
December 31, 1998, for purposes of the pro forma balance sheet.
The effect to DuPont of the exchange offer relates to the reduction in
DuPont Common Stock outstanding resulting from the exchange of 100 percent of
Conoco Class B Common Stock owned by DuPont for DuPont Common Stock and to the
dividend promissory note described in the notes to these pro forma financial
statements. The dividend promissory note provides that when DuPont's ownership,
in terms of aggregate voting power, is less than 50 percent, the outstanding
balance and any interest may become due and payable at the discretion of DuPont.
Conoco filed a registration statement in February 1999 to offer debt securities
for which it is the intention that the proceeds will be used to repay the note.
The outstanding balance of the dividend promissory note is reflected as a
current receivable in the accompanying pro forma balance sheet, since the
registration statement is not effective and no debt agreements have been
finalized. After closing and using the proceeds from the sale of the debt
securities to repay DuPont, the pro forma balance sheet and the pro forma income
statement will be revised to reflect this anticipated repayment.
The effect to DuPont of the initial public offering was the receipt by
DuPont of Conoco's initial public offering proceeds in repayment of a portion of
Conoco's intercompany indebtedness to DuPont as described in the notes hereto.
DuPont believes that the assumptions used provide a reasonable basis for
presenting the significant effects directly attributable to the exchange offer
and the transactions associated with the initial public offering and separation.
The pro forma consolidated financial statements do not purport to represent what
the results of operations or financial position of DuPont would actually have
been if the exchange offer and the transactions associated with the initial
public offering and separation had in fact occurred on such dates or to project
the results of operations or financial position of DuPont for any future period
or date. These statements should be read in connection with, and are qualified
by reference to, the Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
located in DuPont's 1998 Form 10-K, which we have filed with the SEC, and which
we have incorporated in this document by reference.
44
<PAGE> 46
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT OF DUPONT
YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Sales..................................................... $24,767 $24,767
Other Income.............................................. 981 $291(a) 1,272
------- ---- -------
Total................................................... 25,748 291 26,039
Cost of Goods Sold and Other Operating Charges............ 15,664 15,664
Selling, General & Administrative Expenses................ 2,115 2,115
Depreciation and Amortization............................. 1,452 1,452
Research and Development Expense.......................... 1,308 1,308
Interest Expense.......................................... 520 196(b) 716
Purchased In-Process Research and Development............. 1,443 1,443
Employee Separation Costs and Write-down of Assets........ 633 633
------- ---- -------
Total................................................... 23,135 196 23,331
------- ---- -------
Income from Continuing Operations Before Income
Taxes and Minority Interests............................ 2,613 95 2,708
Provision for Income Taxes................................ 941 23(c) 964
Minority Interests in Earnings of Consolidated
Subsidiaries............................................ 24 24
------- ---- -------
Income from Continuing Operations......................... $ 1,648 $ 72 $ 1,720
======= ==== =======
Earnings Per Share -- Continuing Operations Before
Extraordinary Item:
Basic................................................... $ 1.45 (d)
Diluted................................................. $ 1.43 (d)
Weighted Average Number of Shares Outstanding:
Basic................................................... 1,129 (d)
Diluted................................................. 1,145 (d)
</TABLE>
See notes to the Unaudited Pro Forma Consolidated Financial Statements.
45
<PAGE> 47
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET OF DUPONT
DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents............................... $ 1,059 $ (35)(b) $ 1,024
Marketable Securities................................... 10 10
Accounts and Notes Receivable........................... 4,201 4,201
Inventories............................................. 3,129 3,129
Prepaid Expenses........................................ 192 192
Deferred Income Taxes................................... 645 645
Notes Receivable Due in One Year -- Conoco.............. -- 4,596(a) 4,596
-------- -------- --------
Total Current Assets............................... 9,236 4,561 13,797
Property, Plant and Equipment........................... 34,728 34,728
Less: Accumulated Depreciation and Amortization......... 20,597 20,597
-------- -------- --------
Net Property, Plant and Equipment.................. 14,131 -- 14,131
Investment in Affiliates................................ 1,796 1,796
Other Assets............................................ 4,956 4,956
Net Assets of Discontinued Operations................... 8,417 (8,417)(a,b) --
-------- -------- --------
TOTAL ASSETS............................................ 38,536 (3,856) 34,680
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable........................................ 1,929 1,929
Short-Term Borrowings and Capital Lease Obligations..... 6,629 6,629
Income Taxes............................................ 130 130
Other Accrued Liabilities............................... 2,922 2,922
-------- -------- --------
Total Current Liabilities.......................... 11,610 11,610
Long-Term Borrowings and Capital Lease Obligations...... 4,495 4,495
Other Liabilities....................................... 7,640 7,640
Deferred Income Taxes................................... 430 430
-------- -------- --------
Total Liabilities.................................. 24,175 24,175
Minority Interests...................................... 407 407
Preferred Stock......................................... 237 237
Common Stock............................................ 342 342
Additional Paid-In Capital.............................. 7,854 7,854
Reinvested Earnings..................................... 6,705 6,366(b,c) 13,071
Accumulated Other Comprehensive Loss.................... (432) 255(c) (177)
Common Stock Held in Trust for Unearned Employee
Compensation and Benefits (Flexitrust), at Market..... (752) (752)
Treasury Stock.......................................... -- (10,477)(d) (10,477)
-------- -------- --------
Total Stockholders' Equity......................... 13,954 (3,856) 10,098
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $ 38,536 $ (3,856) $ 34,680
======== ======== ========
</TABLE>
See notes to the Unaudited Pro Forma Consolidated Financial Statements.
46
<PAGE> 48
DUPONT
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated income statement for the year ended
December 31, 1998 and the unaudited pro forma consolidated balance sheet as of
December 31, 1998 (collectively the "Pro Forma Financial Statements") have been
prepared from the consolidated financial statements of DuPont for the year ended
December 31, 1998, included in DuPont's Annual Report on Form 10-K for the year
ended December 31, 1998 (the "Form 10-K"). The Pro Forma Financial Statements
give effect to the exchange offer and, as described below, the transactions
substantially completed in October 1998 directly associated with the initial
public offering and separation. These Pro Forma Financial Statements are based
on numerous assumptions and include the adjustments explained in Note 2 below.
The unaudited pro forma consolidated income statement has been prepared as if
these matters which are further described in the following paragraphs had
occurred as of the beginning of the period presented. The unaudited pro forma
consolidated balance sheet has been prepared as if the exchange offer had
occurred as of December 31, 1998.
The financial statements of DuPont as set forth in its Form 10-K for the
year ended December 31, 1998, present Conoco's petroleum operations as
discontinued operations.
The registration statement on Form S-1 (No. 333-60119) with respect to the
initial public offering of the Class A Common Stock of Conoco, a subsidiary of
DuPont, commenced on October 21, 1998, and the Class A Common Stock began
trading on the New York Stock Exchange on October 22, 1998. The initial public
offering consisted of 191,456,427 shares of Class A Common Stock issued at a
price of $23 per share, for net proceeds of $4,228, after deducting the
underwriting discounts and commissions payable by Conoco. The initial public
offering represented DuPont's first step in the planned divestiture of its
entire petroleum business. Through DuPont's ownership of 100 percent of Conoco
Class B Common Stock (436,543,573 shares), DuPont owns approximately 70 percent
of Conoco's common stock representing approximately 92 percent of the combined
voting power of all classes of voting stock of Conoco at December 31, 1998.
In July 1998, a dividend of $7,500 was declared and paid in the form of a
promissory note by Conoco to DuPont. In September 1998, Conoco declared a
dividend of $700 representing a reduction of notes receivable from DuPont. In
connection with the initial public offering, DuPont transferred to Conoco the
ownership of certain subsidiaries, which consisted of oil and gas businesses and
operations including the associated assets and liabilities (the "separation").
The transactions related to the separation were included in the provisions of
the Separation Agreement between Conoco and DuPont and primarily included the
following: (a) structuring Conoco on a stand-alone basis by transferring between
DuPont and Conoco, certain subsidiaries and assets and liabilities; (b)
settling, to the extent specified, intercompany loans in existence prior to the
initial public offering; (c) delivering a promissory note to DuPont as
settlement for DuPont stock options held by Conoco employees and other employee
benefits related liabilities; (d) using the net proceeds of the initial public
offering to repay DuPont a portion of intercompany indebtedness; and (e)
entering into certain agreements with respect to employee benefit arrangements,
information management, provision of interim services, financing arrangements,
tax sharing, environmental liabilities and various commercial arrangements.
Conoco used the net proceeds from the initial public offering to repay
indebtedness owed to DuPont or to purchase a portion of the indebtedness owned
by certain subsidiaries of Conoco to DuPont as follows: (a) to pay accrued
interest ($124) on the $7,500 promissory notes and then to repay principal
($2,654) on the note to the extent necessary to reduce the principal amount to
$4,846; (b) to purchase certain intercompany notes denominated in Norwegian
Kroner with an aggregate principal amount of approximately $461 after conversion
to U.S. dollars, together with accrued interest ($9); (c) to pay
47
<PAGE> 49
DUPONT
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF
DUPONT --(CONTINUED)
accrued interest ($8) and a portion of the principal ($820) on another
intercompany note to the extent necessary to reduce the principal amount to $7;
and (d) to pay a portion of the principal ($152) on an intercompany demand note.
The sum of these payments to DuPont in October 1998 was $4,228. As of December
31, 1998, DuPont and Conoco had an intercompany receivable and payable,
respectively, of $4,596. The net assets of discontinued operations as set forth
in DuPont's Form 10-K for the year ended December 31, 1998 reflect this
intercompany item. As set forth in the Separation Agreement, Conoco is obligated
to repay all outstanding debt owed to DuPont at such time as DuPont's voting
power becomes less than 50 percent of Conoco.
Under the terms of the exchange offer, DuPont has offered to exchange the
436.5 million shares of Conoco Class B Common Stock owned by DuPont for
DuPont shares. This reflects a price of $ a share for DuPont
shares and $ a share for Conoco Class B Common Stock. The DuPont shares
received under the exchange offer will be recorded as an increase to treasury
stock at the market value of the shares of Conoco Class B Common Stock
distributed on the expiration date. The exchange offer will result in a net gain
to DuPont, after direct expenses of the disposition, and will be reported as a
component of the gain on disposal of discontinued business. The gain from the
exchange offer will result from the difference between the market value and the
carrying value of the shares of Conoco Class B Common Stock distributed.
The pro forma adjustments are based upon currently available information
and contain certain estimates and assumptions. DuPont believes the estimates and
assumptions provide a reasonable basis for presenting the significant effects of
the initial public offering, the separation, and the exchange offer, and that
the pro forma adjustments give appropriate effect to these estimates and
assumptions and are properly applied in the unaudited pro forma consolidated
financial statements.
2. PRO FORMA ADJUSTMENTS
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
(a) Reflects interest income on notes receivable from Conoco, bearing
interest at 6.0125 percent, which was assumed outstanding beginning January 1,
1998. Subsequent to the initial public offering, Conoco made a payment to DuPont
of $257 on the notes receivable. At December 31, 1998 the notes receivable
balance due from Conoco was $4,596.
(b) Interest expense for continuing operations in the historical income
statement reflected an allocation of total interest on borrowings to
discontinued operations. The pro forma basis eliminates this allocation net of a
reduction to interest expense assuming proceeds from the initial public offering
($4,228 less $22 in direct costs) were received from Conoco on January 1, 1998
and used to repay commercial paper borrowings.
(c) The pro forma provision for income taxes reflects an increase due to
the tax effect of higher pretax income. The effective tax rate on this income
reflects increased utilization of foreign tax credits related to allocation of
interest expense to foreign source earnings.
(d) The pro forma earnings per share and weighted average number of shares
outstanding will be determined at a later date, based upon the number of DuPont
shares received in exchange for Conoco Class B Common Stock.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(a) Reflects reclassification of notes receivable from Conoco outstanding
at December 31, 1998. It is assumed that DuPont will exercise its option to call
this note when DuPont's ownership, in terms of aggregate voting power, is less
than 50 percent. Conoco filed a registration statement in February 1999 to
48
<PAGE> 50
DUPONT
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF
DUPONT --(CONTINUED)
offer debt securities for which it is the intention that proceeds will be used
to repay the amount outstanding under the promissory note. Since the
registration statement is not yet effective and no debt agreements have been
finalized, net assets from discontinued operations have been reduced and the
notes receivable from Conoco are reflected as a current asset. After the closing
of the Conoco debt securities and prior to the effective date of this exchange
offer, it is anticipated that the pro forma consolidated financial statements
will be revised to reflect this repayment from Conoco in a subsequent amendment
to this filing.
(b) Reinvested earnings are adjusted by the anticipated net gain (net of
$35 in direct expenses) resulting from DuPont's exchange of
shares of Conoco Class B Common Stock. Consideration received is measured by the
assumed market value of the shares of Conoco Common Stock exchanged on the
expiration date (assumes 100 percent of the shares of Conoco common stock
offered hereby are exchanged at a share price of $24).
(c) Reflects the elimination from accumulated other comprehensive loss of
amounts pertaining to Conoco's operations as of December 31, 1998. Amounts
represent cumulative translation adjustment (loss) of $176 and minimum pension
liability adjustment (loss) of $79. The total adjustment reduces the gain on the
transaction by $255.
(d) The increase in treasury stock assumes 100 percent of the shares of
Conoco Class B Common Stock offered are exchanged at Conoco's assumed market
value ($24) on the expiration date.
49
<PAGE> 51
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF CONOCO
The following unaudited pro forma financial statements of Conoco as of
December 31, 1998 and for the year ended December 31, 1998, were prepared by
Conoco to illustrate the estimated effects of the exchange offer and the
transactions substantially completed in October 1998 directly associated with
the initial public offering and separation from DuPont described in the notes to
these pro forma financial statements as if they had occurred as of the beginning
of the period presented, for purposes of the pro forma statement of income, and
as of December 31, 1998, for purposes of the pro forma balance sheet. The effect
to Conoco of the exchange offer relates to the dividend promissory note
described in the notes to these pro forma financial statements. The dividend
promissory note provides that upon DuPont's ownership, in terms of aggregate
voting power, ceasing to be at least 50 percent, the outstanding balance and
related interest, if any, may become due and payable at the discretion of
DuPont. Conoco filed a registration statement in February 1999 to offer debt
securities for which the proceeds will be used to repay the note and any related
interest. The outstanding balance of the dividend promissory note is reflected
as a current liability in the accompanying pro forma balance sheet since the
registration statement is not effective and no debt agreements have been
finalized. After closing and using the proceeds from the sale of the debt
securities to repay DuPont, the amount outstanding for debt securities is
anticipated to have maturities in excess of one year and accordingly, will be
classified as long-term borrowings. However, there can be no assurance that
Conoco will be able to refinance this debt on terms as favorable as those with
respect to the debt owed to DuPont.
Conoco management believes that the assumptions used provide a reasonable
basis for presenting the significant effects directly attributable to the
exchange offer and the transactions associated with the initial public offering
and separation. The pro forma financial statements do not purport to represent
what the results of operations or financial position of Conoco would actually
have been if the exchange offer and the transactions associated with the initial
public offering and separation had in fact occurred on such dates or to project
the results of operations or financial position of Conoco for any future period
or date. These statements should be read in connection with, and are qualified
by reference to, Conoco's consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Conoco," included in this Offering Circular-Prospectus.
50
<PAGE> 52
PRO FORMA STATEMENT OF INCOME OF CONOCO
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
INITIAL
PUBLIC PRO FORMA
PRO FORMA OFFERING AS
HISTORIC ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED
-------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues.................................... 23,168 (43)(a) 23,116 (6)(d) 23,110
(9)(b)
Cost of Goods Sold and Other Operating
Expenses.................................. 13,840 -- 13,840 -- 13,840
Selling, General and Administrative
Expenses.................................. 736 -- 736 -- 736
Stock Option Provision...................... 236 -- 236 -- 236
Exploration Expenses........................ 380 -- 380 -- 380
Depreciation, Depletion and Amortization.... 1,113 -- 1,113 -- 1,113
Taxes Other Than on Income.................. 5,970 -- 5,970 -- 5,970
Interest and Debt Expense................... 199 263(a) 462 (237)(e) 225
------ ---- ------ ---- ------
Income Before Income Taxes.................. 694 (315) 379 231 610
Provision for Income Taxes.................. 244 (91)(c) 153 65(e) 218
------ ---- ------ ---- ------
Net Income.................................. 450 (224) 226 166 392
====== ==== ====== ==== ======
Pro Forma Earnings Per Share (Note 4):
Basic..................................... .95 .62
Diluted................................... .95 .62
Pro Forma Weighted Average Shares
Outstanding (Note 4):
Class A................................... 37 154 191
Class B................................... 437 -- 437
------ ---- ------
Total Basic............................ 474 154 628
Stock Options............................. 1 8 9
------ ---- ------
Total Diluted.......................... 475 162 637
====== ==== ======
</TABLE>
See Notes to Pro Forma Financial Statements.
51
<PAGE> 53
PRO FORMA BALANCE SHEET OF CONOCO
DECEMBER 31, 1998
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA AS
HISTORIC ADJUSTMENTS ADJUSTED
-------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents................................... 394 -- 394
Accounts and Notes Receivable............................... 1,191 -- 1,191
Inventories................................................. 807 -- 807
Prepaid Expenses............................................ 378 -- 378
------ ------ ------
Total Current Assets................................... 2,770 -- 2,770
Net Property, Plant and Equipment........................... 11,413 -- 11,413
Investment in Affiliates.................................... 1,363 -- 1,363
Other Assets................................................ 529 -- 529
------ ------ ------
TOTAL ASSETS................................................ 16,075 -- 16,075
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ 1,312 -- 1,312
Other Short-Term Borrowings and Capital Lease Obligations... 52 -- 52
Income Taxes................................................ 199 -- 199
Long-Term Borrowings Due in One Year -- Related Parties..... -- 4,596(f) 4,596
Other Accrued Liabilities................................... 1,162 -- 1,162
------ ------ ------
Total Current Liabilities.............................. 2,725 4,596 7,321
------ ------ ------
Long-Term Borrowings -- Related Parties..................... 4,596 (4,596)(f) --
Other Long-Term Borrowings and Capital Lease Obligations.... 93 -- 93
Deferred Income Taxes....................................... 1,714 -- 1,714
Other Liabilities and Deferred Credits...................... 2,200 -- 2,200
------ ------ ------
Total Liabilities...................................... 11,328 -- 11,328
------ ------ ------
Minority Interests.......................................... 309 -- 309
Stockholders' Equity........................................ 4,438 -- 4,438
------ ------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. 16,075 -- 16,075
====== ====== ======
</TABLE>
See Notes to Pro Forma Financial Statements.
52
<PAGE> 54
CONOCO
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1. BASIS OF PRESENTATION
The unaudited pro forma statement of income for the year ended December 31,
1998 and the unaudited pro forma balance sheet as of December 31, 1998 have been
prepared from the consolidated financial statements of Conoco Inc. for the year
ended December 31, 1998, as included in this Offering Circular-Prospectus. The
pro forma financial statements give effect to the exchange offer and, as
described below, the transactions substantially completed in October 1998
directly associated with the initial public offering and separation. These pro
forma financial statements are based on numerous assumptions and include the
adjustments explained in Note 3 below. The unaudited pro forma statement of
income has been prepared as if the transactions that are further described in
the following paragraphs had occurred as of the beginning of the period
presented. The unaudited pro forma consolidated balance sheet has been prepared
as if the Transaction had occurred as of December 31, 1998. The transactions
directly associated with the initial public offering and separation described
below are reflected in Conoco's consolidated balance sheet as of December 31,
1998.
The effect of the exchange offer relates primarily to the dividend
promissory note, described below, which contains a provision stating that the
outstanding balance and related interest may become due and payable at the
discretion of DuPont when a change in control occurs, which is defined as the
point DuPont's ownership, in terms of aggregate voting power, is less than 50
percent. Conoco filed a registration statement in February 1999 to offer debt
securities for which the proceeds will be primarily used to repay the amount
outstanding under the dividend promissory note. Since the registration statement
is not completed and no debt agreements have been finalized, the long-term
borrowings-related parties are classified as a current liability in the
accompanying unaudited pro forma balance sheet as of December 31, 1998. After
closing and using the proceeds from the sale of the debt securities to repay
DuPont, the amount outstanding for debt securities is anticipated to have
maturities in excess of one year and accordingly, will be classified as
long-term borrowings. However, there can be no assurance that Conoco will be
able to refinance this debt on terms as favorable as those with respect to the
debt owed to DuPont.
The pro forma financial statements do not purport to represent what the
results of operations or financial position of Conoco would actually have been
if the exchange offer and the transactions associated with the initial public
offering and separation had in fact occurred on such dates or to project the
results of operations or financial position of Conoco for any future date or
period. The pro forma financial statements should be read together with, and are
qualified by reference to, the consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Conoco," both included elsewhere in this Offering
Circular-Prospectus.
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 as a result of the exchange offer, pro forma
Selling, General and Administrative expenses and guarantee and letter of credit
fees would potentially increase by approximately $15 to $20 on a full year
basis. In addition, certain changes were made in services historically provided
to DuPont by Conoco. These changes included 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 changes is not expected to be material to Conoco's results
of operations and are not reflected in the pro forma statement of income.
Conoco management believes the estimates and assumptions provide a
reasonable basis for presenting the significant effects of the exchange offer,
initial public offering and separation of Conoco from DuPont
53
<PAGE> 55
CONOCO
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
and that the pro forma adjustments give appropriate effect to these estimates
and assumptions and are properly applied in the pro forma financial statements.
2. INITIAL PUBLIC OFFERING AND SEPARATION
The initial public offering of the Class A Common Stock of Conoco commenced
on October 21, 1998, and the Class A Common Stock began trading on the New York
Stock Exchange on October 22, 1998. The initial public offering consisted of
191,456,427 shares of Class A Common Stock issued at a price of $23 per share,
for net proceeds of $4,228, after deducting the underwriting discounts and
commissions payable by Conoco. Through DuPont's ownership of 100 percent of
Conoco Class B Common Stock (436,543,573 shares), DuPont owns approximately 70
percent of Conoco's Common Stock representing approximately 92 percent of the
combined voting power of all classes of voting stock of Conoco at December 31,
1998.
In July 1998, a dividend of $7,500 was declared and paid in the form of a
promissory note by Conoco to DuPont. In September 1998, Conoco declared a
dividend of $700 representing a reduction of notes receivable from DuPont. In
connection with the initial public offering, DuPont transferred to Conoco the
ownership of certain subsidiaries, which consisted of oil and gas businesses and
operations including the associated assets and liabilities. The transactions
related to the separation primarily included the following: (a) structuring
Conoco on a stand-alone basis by transferring between DuPont and Conoco certain
subsidiaries, assets and liabilities; (b) settling, to the extent specified,
intercompany loans in existence prior to the initial public offering; (c)
delivering a promissory note to DuPont as settlement for DuPont stock options
held by Conoco employees and other employee benefits related liabilities; (d)
using the net proceeds of the initial public offering to repay a portion of the
long-term borrowings-related parties; and (e) entering 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 initial public offering, are referred to herein
collectively as the "separation."
Conoco used the net proceeds from the initial public offering to repay
indebtedness owed to DuPont or to purchase a portion of the indebtedness owned
by certain subsidiaries of Conoco to DuPont as follows: (a) to pay accrued
interest ($124) on the $7,500 promissory note and then to repay principal
($2,654) on such notes to the extent necessary to reduce the principal amount to
$4,846; (b) to purchase certain intercompany notes denominated in Norwegian
Kroner with an aggregate principal amount of approximately $461 after conversion
to U.S. dollars, together with accrued interest ($9); (c) to pay accrued
interest ($8) and a portion of the principal ($820) on a certain other
intercompany note to the extent necessary to reduce the principal amount to $7;
and (d) to pay a portion of the principal ($152) on an intercompany demand note.
In connection with the initial public offering, Conoco and DuPont gave
certain employees of Conoco 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
stock appreciation rights (SARs) with respect to DuPont common stock and the
issuance by Conoco, upon such cancellation, of comparable Conoco Class A Common
Stock options, or SARs with respect to Conoco Class A Common Stock. The option
program was deemed a change in the terms of certain awards granted to Conoco
employees. As a result, Conoco incurred a non-cash charge to compensation
expense in the fourth quarter of 1998 of $236 pretax or $183 after-tax.
54
<PAGE> 56
CONOCO
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
3. PRO FORMA ADJUSTMENTS
Unaudited Pro Forma Statement of Income
(a) Reflects a decrease in interest income due to settlement of notes
receivable -- related parties and incremental interest expense resulting from
Conoco's new debt structure. The incremental interest expense was calculated by
multiplying long-term borrowings-related parties ($7,500), certain intercompany
notes denominated in Norwegian Kroner ($461) and certain other intercompany
notes ($820) by an annual interest rate of 6.0125 percent on those borrowings
and subtracting the associated historical related party interest cost of $264
for the year ended December 31, 1998. The historical related party interest cost
excludes capitalized interest of $72.
(b) Reflects the impact of changes in currency exchange rates on certain
intercompany loans denominated in foreign currencies purchased by Conoco from
DuPont as part of the restructuring and settlement of notes prior to the initial
public offering as provided for in the separation. 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 Conoco's new debt structure) and a separate
return income tax calculation method on the provision for income taxes. The
historic tax provision for the period prior to the initial public offering was
calculated on a loss benefit method. 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 statement of income for the year
ended December 31, 1998 reflects an increase of $6 in the pro forma provision
for income taxes, due to the change to the separate return method presentation.
The increase 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.
Initial Public Offering Adjustments
(d) Reflects the impact of changes in currency exchange rates on certain
intercompany loans denominated in foreign currencies purchased by Conoco from
DuPont after the initial public offering. These loans are to Western European
petroleum operations for which the local currency has been designated as the
functional currency.
(e) Represents the reduction of interest expense and the associated
increase in income taxes resulting from the payment to DuPont of the borrowings
described in note 2 relating to the use of net proceeds and the tax impact of
the adjustment described in (d) above.
Unaudited Pro Forma Balance Sheet
Transaction Adjustment
(f) Represents the classification as a current liability of the dividend
promissory note owed to DuPont reflected as long-term borrowings-related parties
of $4,596. The dividend promissory note provides that when DuPont's ownership,
in terms of aggregate voting power, is less than 50 percent, the outstanding
balance and related interest may become due and payable at the discretion of
DuPont.
55
<PAGE> 57
CONOCO
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
4. EARNINGS PER SHARE
Unaudited pro forma basic earnings per share include the shares of Conoco
Class A and Class B Common Stock outstanding immediately after the initial
public offering. Pro forma diluted earnings per share includes the dilutive
effect of the 8.5 million shares of Class A Common Stock issuable upon exercise
of Conoco stock options, after applying the treasury stock method, which were
issued in the option program upon cancellation of outstanding DuPont stock
options. The adjustments for the basic and diluted pro forma weighted average
shares give effect to the above.
56
<PAGE> 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF CONOCO
The discussion and analysis of Conoco's financial condition and results of
operations should be read together with the Consolidated Financial Statements of
Conoco included in this Offering Circular-Prospectus.
Effective at the time of its initial public offering, Conoco's capital
structure was established and the transfer to Conoco of certain subsidiaries
previously owned by DuPont was substantially complete, resulting in direct
ownership of those subsidiaries. Accordingly, for periods subsequent to Conoco's
initial public offering, financial information is presented on a consolidated
basis.
Prior to the date of Conoco's initial public offering, operations were
conducted by Conoco Inc., subsidiaries of Conoco Inc. and, in some cases,
subsidiaries of DuPont. The accompanying Consolidated Financial Statements of
Conoco for these periods are presented on a carve-out basis prepared from
DuPont's historical accounting records, and include the historical operations of
both entities owned by Conoco and operations transferred to Conoco by DuPont at
the time of the initial public offering. 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 Stockholders' Equity in the Consolidated Financial
Statements.
Conoco's Consolidated Statement of Income includes all revenues and costs
directly attributable to Conoco, including costs for facilities, functions and
services used by Conoco at shared sites and costs for certain functions and
services performed by centralized DuPont organizations and directly charged to
Conoco based on usage. In addition, services performed by Conoco on DuPont's
behalf are directly charged to DuPont. The results of operations also include
allocations of DuPont's general corporate expenses through the date of the
initial public offering.
Prior to the date of the initial public offering, all charges and
allocations of cost for facilities, functions and services performed by DuPont
organizations for Conoco have been deemed to have been paid by Conoco to DuPont,
in cash, in the period in which the cost was recorded in Conoco's Consolidated
Financial Statements. Allocations of current income taxes receivable or payable
are similarly deemed to have been remitted, in cash, by or to DuPont in the
period the related income taxes were recorded. Subsequent to the initial public
offering, such costs are billed directly under transitional service agreements,
and income taxes are paid directly to the taxing authorities, or to DuPont, as
appropriate.
Conoco has four reporting segments for its Upstream and Downstream
operating segments, reflecting geographic division between the United States and
International. Activities of the Upstream operating segment include exploring
for, and developing, producing and selling, crude oil, natural gas and natural
gas liquids. Activities of the Downstream operating segment include refining
crude oil and other feedstocks into petroleum products, buying, selling crude
oil and refined products and transporting, distributing and marketing petroleum
products. Corporate and Other includes general corporate expenses, financing
costs and other non-operating items, and results for electric power and
related-party insurance operations.
Conoco considers portfolio optimization to be an ongoing business strategy
and continuously seeks to rationalize its investment portfolio in order to
maximize profitability. Over the past five years, Conoco has generated proceeds
of approximately $2,126 million, averaging about $425 million a year, through
the disposal of marginal and non-strategic producing properties, by upgrading
and redirecting its exploration portfolio and by increasing its ownership in
large scale properties. As a result, Conoco has maintained production
essentially constant on a BOE basis while undergoing this rationalization.
Conoco's policy is to report material gains and losses from individual asset
sales as special items when reporting Consolidated Net Income.
Conoco conducts its activities through wholly and majority owned
subsidiaries and, increasingly, through equity affiliates. This trend of
conducting business in the petroleum industry through equity affiliates is
expected to increase in the future as Conoco attempts to minimize either the
capital or political risks associated with new large-scale, high-impact
projects.
57
<PAGE> 59
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED BY OPERATIONS
Cash provided by operations in 1998 decreased $1,503 million to $1,373
million versus $2,876 million in 1997. Cash provided by operations before
changes in operating assets and liabilities decreased $303 million compared to
1997, primarily due to lower net realized crude oil and natural gas prices,
partially offset by higher natural gas volumes and improved international
Downstream margins. Negative changes to net operating assets and liabilities of
$1,200 million were due to higher tax payments attributable to 1997 asset sales
and a decrease in accounts payable, offset by a decrease in accounts receivable
due to lower crude oil prices.
Cash provided by operations increased $480 million, or 20 percent, to
$2,876 million during 1997 versus $2,396 million in 1996. Positive changes to
net operating assets and liabilities of $446 million were principally due to the
$303 million received from a contract for future sales of natural gas to
Centrica, a United Kingdom gas marketing company.
INVESTMENT ACTIVITIES
CAPITAL EXPENDITURES AND INVESTMENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Upstream:
United States............................................. $ 788 $1,534 $ 400
International............................................. 1,177 999 864
------ ------ ------
Total Upstream.................................... $1,965 $2,533 $1,264
Downstream:
United States............................................. $ 201 $ 227 $ 218
International............................................. 332 331 462
------ ------ ------
Total Downstream.................................. $ 533 $ 558 $ 680
Corporate and Other......................................... 18 23 --
------ ------ ------
Total Capital Expenditures and Investments........ $2,516 $3,114 $1,944
====== ====== ======
United States............................................... $1,007 $1,761 $ 618
International............................................... 1,509 1,353 1,326
------ ------ ------
Total............................................. $2,516 $3,114 $1,944
====== ====== ======
</TABLE>
Total capital investments in 1998, including investments in affiliates and
acquisitions, were $2,516 million, a decrease of 19 percent versus 1997 capital
investments of $3,114 million, which included a $929 million acquisition of
natural gas properties and transportation assets in the Lobo trend in South
Texas (the "Lobo acquisition"). Approximately 60 percent of 1998 capital
investments were outside the United States. About 78 percent of 1998 capital
investments were spent in Upstream, with a majority of this devoted to
development projects in South Texas, deepwater Gulf of Mexico, Venezuela, the
United Kingdom and Norway. Approximately $312 million was spent on exploratory
drilling and leasing. Downstream capital investments in 1998 included completion
of the Melaka refinery, expansion of retail marketing operations, particularly
in Europe, and upgrades and maintenance of existing facilities. Conoco also
spent approximately $18 million for corporate software in 1998.
Total capital investments, including investments in affiliates and
acquisitions, were $3,114 million in 1997, a 60 percent increase over 1996
capital investments of $1,944 million. This increase primarily reflects the Lobo
acquisition.
58
<PAGE> 60
UPSTREAM
--------
Upstream capital investments totaled $1,965 million in 1998, a decrease of
$568 million, or 22 percent, compared to $2,533 million in 1997, which included
the $929 million Lobo acquisition.
Upstream capital investments totaled $2,533 million in 1997, an increase of
$1,269 million, or 100 percent, compared to $1,264 million in 1996, primarily as
a result of the Lobo acquisition. The 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, Conoco is the largest natural gas producer in the area and the second
largest natural gas producer in Texas.
United States
In 1998, U.S. capital investments were $788 million, a decrease of $746
million, or 49 percent, compared to 1997 U.S. capital investments of $1,534
million, which included the $929 million Lobo acquisition. Expenditures in 1998
focused on continuing operations and development. This included the development
of the Lobo field, the Ursa field in deepwater Gulf of Mexico, the construction
of two deepwater drillships, the first of which went into service in January
1999 in the Gulf of Mexico, the acquisition of exploratory acreage, and the
expansion of onshore natural gas operations. The Ursa field development
represents a major development project in the Gulf of Mexico. The project
involved installing a new generation tension leg platform in approximately 3,900
feet of water. Initial production began in March 1999. Conoco has increased its
deepwater holdings in the Gulf of Mexico, and exploration within these holdings
will be carried out by a deepwater drillship.
During 1997, Conoco spent $1,534 million on capital projects in the United
States, an increase of $1,134 million, or 284 percent, compared to 1996 U.S.
capital investments of $400 million. Besides the $929 million Lobo acquisition
and exploratory drilling, expenditures focused on development of the
partner-operated Ursa field in deepwater Gulf of Mexico, construction of two
deepwater drillships, acquisition of additional reserves and exploratory acreage
in the San Juan Basin and expansion of onshore natural gas operations. In 1996,
U.S. capital investments focused on continuing operations and development.
International
In 1998, international capital investments were $1,177 million, an increase
of $178 million, or 18 percent, compared to $999 million in 1997. The 1998
increase reflects expenditures to complete the multi-year development program in
the Britannia gas field in the U.K. North Sea, with first production in August
1998. Other significant capital investments were made for exploratory drilling
and development projects such as the Petrozuata joint venture in Venezuela,
which also began production in August 1998, the Visund field in the Norwegian
North Sea and the Viking Phoenix project in the U.K. North Sea. Conoco increased
its natural gas holdings in the U.K. sector of the North Sea through its
acquisition of the British subsidiary of Canadian Occidental Petroleum Ltd.,
which held an interest in the South Valiant, Vulcan and Caister fields, as well
as interests in the Murdoch and Esmond gas transportation systems.
International capital investments totaled $999 million in 1997, an increase
of $135 million, or 16 percent, compared to international capital investments of
$864 million in 1996. Conoco continued to develop the Britannia gas field in the
U.K. North Sea. Other significant capital investments were made for exploratory
drilling and development projects such as the Petrozuata joint venture in
Venezuela, the Ukpokiti field offshore Nigeria, the Visund field in the
Norwegian North Sea, a methanol plant in Norway and the Boulton gas field in the
U.K. North Sea. In 1996, international capital investments were $864 million,
reflecting expenditures to develop the Britannia field and $67 million to fund
Conoco's share of losses incurred by a European gas marketing joint venture.
59
<PAGE> 61
DOWNSTREAM
--------
Downstream capital investments were $533 million in 1998, a decrease of $25
million, or four percent, versus $558 million in 1997, primarily as a result of
lower investments in equity affiliates.
Downstream capital investments totaled $558 million in 1997, a decrease of
$122 million, or 18 percent, versus $680 million in 1996, primarily reflecting
completion of the acidic crude vacuum unit at Conoco's Humber refinery in the
U.K., as well as the acquisition of an equity interest in two refineries in the
Czech Republic during 1996.
United States
Investments in 1998 totaled $201 million, a decrease of $26 million, or 11
percent, versus 1997 investments of $227 million. Investments in 1998 included
costs for continued operations and optimization of retail marketing operations.
Conoco also invested $8 million for an increased ownership interest in Penreco,
a joint venture with Pennzoil-Quaker State that produces and markets highly
refined specialty petroleum products.
During 1997, Conoco spent $227 million on Downstream capital projects in
the United States, an increase of $9 million, or four percent, compared to
investments of $218 million in 1996. The majority of the 1997 funds were used to
support continuing operations and optimization of retail marketing operations.
Conoco also invested funds for an initial equity interest in Penreco.
Capital investments in 1996 totaled $218 million. The most significant
investments related to the completion of the 45,000 barrel per day expansion of
the Lake Charles refinery's sour crude oil processing capability to support the
Excel Paralubes lube oil hydrocracker joint venture with Pennzoil. The lube oil
hydrocracker converts low quality, high sulphur vacuum gas oil into base oil of
extremely high purity and enhances the value of Conoco's finished lubricants
business by producing improved motor oils, transmission fluids and industrial
lubes blended from hydrocracked base oils.
International
In 1998, Conoco made capital investments of $332 million including
investments in Conoco's retail marketing position in core markets such as
Germany and Austria, and newer retail markets such as Thailand, as well as
investments for completing the construction of the Melaka refinery, a joint
venture with Petronas and Statoil, which began operation in the third quarter of
1998.
During 1997, Conoco spent $331 million on Downstream international capital
investments, a decrease of $131 million, or 28 percent, from 1996 capital
investments of $462 million. The decrease was due to expenditures in 1996
relating to costs for the acidic crude vacuum unit at Conoco's Humber refinery.
The installation of the vacuum unit at the Humber refinery allowed the refinery
to process acidic crude oil, including equity crude oil from the Heidrun field.
Expenditures in 1997 focused on strengthening Conoco'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 continuing the construction of the Melaka refinery.
Capital investments in 1996 totaled $462 million and included costs for the
acidic crude vacuum unit at Conoco's Humber refinery, construction expenditures
related to the Melaka refinery, acquisition of equity interests in two Czech
refineries, and expansion of retail marketing operations, particularly in
Eastern Europe. The acquisition of the equity interests in the two Czech
refineries supported the expansion of Conoco's retail marketing operations in
the emerging markets in Eastern Europe, including the Czech Republic, Poland,
Hungary and Slovakia.
CORPORATE AND OTHER
--------
Capital investments in 1998 were $18 million and were primarily associated
with corporate software.
60
<PAGE> 62
Capital investments in 1997 were $23 million, most of which represent
Conoco's investment in electric power generation projects in international
equity affiliates. Because of deregulation within this industry, Conoco expects
to continue to pursue projects which leverage the economic advantages of
Conoco's energy production activities and the demand for energy in DuPont or
third party manufacturing operations.
There were no capital investments in Corporate and Other during 1996.
PROCEEDS FROM SALES OF ASSETS AND SUBSIDIARIES
Conoco's 1998 investment activities included proceeds of $721 million, a 28
percent increase over $565 million in 1997. The 1998 proceeds included $245
million from the sale of certain Upstream U.S. and North Sea properties, $156
million from the sale of various Downstream assets in the U.S., as well as $54
million from the sale of an office building in Europe. These and other proceeds
are a result of Conoco's ongoing strategic portfolio upgrading and
rationalization efforts. 1997 proceeds were $565 million, an increase of $237
million versus 1996 proceeds of $328 million.
FINANCING ACTIVITIES
Conoco's ability to maintain and grow its operating income and cash flow
depends upon continued capital spending. Conoco believes its future cash flow
from operations and its borrowing capacity should be sufficient to fund
dividends, debt service, capital expenditures and working capital requirements.
Prior to the Separation, the businesses transferred to Conoco were funded
through DuPont. Apart from limited recourse project financing related to various
joint ventures, equipment lease facilities and financing of certain refinery
equipment and other small financings, Conoco has had limited indebtedness to
third parties. Since the time of its initial public offering, Conoco's
operations have been funded through internally generated funds and related party
debt with DuPont.
In July 1998, Conoco issued a promissory 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 matures on 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 Conoco from the
incurrence of indebtedness or the issuance of equity securities by Conoco 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 Conoco and change of control. The consent of DuPont is also
required prior to Conoco entering into certain transactions.
In October 1998, Conoco raised net proceeds of $4,228 million in its
initial public offering. The net proceeds from the initial public offering were
used to repay a portion of the $7,500 million promissory note and certain other
intercompany notes with DuPont. Total indebtedness owed to DuPont, following
application of the net proceeds of the initial public offering and the
determination of Conoco's cash and cash equivalents in excess of $225 million,
was $4,853 million, consisting of $4,846 million related to the $7,500 million
promissory note described in the above paragraph and $7 million remaining on an
$827 million promissory note, due January 2, 2000, and bearing interest at a
rate equal to the six-month LIBOR plus 0.375 percent per annum. As of December
31, 1998, total indebtedness owed to DuPont was $4,596 million.
On October 27, 1998, Conoco and DuPont entered into a revolving credit
agreement under which DuPont provides Conoco with a revolving credit facility in
principal amount of up to $500 million. Loans under the revolving credit
agreement will be subject to mandatory prepayment to the extent Conoco's cash
and cash equivalents exceed $325 million or such higher amount as Conoco 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. The outstanding balance under this credit facility
as of December 31, 1998 and March 15, 1999 was $0 and $330 million,
respectively.
Conoco is obligated to repay all outstanding debt owed to DuPont upon the
completion of the Transaction. The Company intends to refinance outstanding
related party debt owed to DuPont with a
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<PAGE> 63
combination of commercial paper and public debt in 1999. On February 12, 1999,
Conoco filed a "shelf" registration statement under the Securities Act under
which it may issue debt securities. Conoco intends to use the proceeds from
issuances of securities under the shelf registration statement to refinance a
portion of the outstanding debt owed to DuPont. Conoco may not be able to
refinance this debt on terms as favorable as those existing with respect to the
debt owed to DuPont.
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1998 1997 1996
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES
Upstream
United States.......................................... $ 3,200 $ 3,348 $ 2,783
International.......................................... 1,601 1,906 1,943
------- ------- -------
Total Upstream.................................... $ 4,801 $ 5,254 $ 4,726
Downstream
United States.......................................... $ 8,949 $11,394 $10,545
International.......................................... 8,297 8,639 8,880
------- ------- -------
Total Downstream.................................. $17,246 $20,033 $19,425
Corporate and Other....................................... 749 509 79
------- ------- -------
Total Sales and Other Operating Revenues.......... $22,796 $25,796 $24,230
======= ======= =======
AFTER-TAX OPERATING INCOME
Upstream
United States.......................................... $ 219 $ 445 $ 314
International.......................................... 283 439 367
------- ------- -------
Total Upstream.................................... $ 502 $ 884 $ 681
Downstream
United States.......................................... $ 135 $ 216 $ 172
International.......................................... 156 91 117
------- ------- -------
Total Downstream.................................. $ 291 $ 307 $ 289
Corporate and Other....................................... (271) (82) (74)
------- ------- -------
Total After-Tax Operating Income.................. $ 522 $ 1,109 $ 896
Interest and Other Non-Operating Expense
Net of Tax........................................ (72) (12) (33)
------- ------- -------
CONSOLIDATED NET INCOME........................... $ 450 $ 1,097 $ 863
======= ======= =======
</TABLE>
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<PAGE> 64
SPECIAL ITEMS
Consolidated net income includes the following non-recurring items
("Special Items") on an after-tax basis:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1998 1997 1996
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
UPSTREAM
Asset sales................................................. $ 95 $ 240 $ 16
Property impairments........................................ (38) (112) (63)
Tax rate changes............................................ -- 19 --
Employee separation costs................................... (42) -- (11)
Inventory write-downs....................................... (4) -- --
----- ----- ----
Total Upstream Special Items...................... $ 11 $ 147 $(58)
===== ===== ====
DOWNSTREAM
Asset sales................................................. $ 12 $ -- $ 19
Property impairments........................................ -- (55) --
Tax rate changes............................................ -- 11 --
Environmental insurance litigation recoveries............... -- -- 44
Employee separation costs................................... (10) -- (11)
Inventory write-downs....................................... (59) -- --
Environmental litigation charges............................ (28) (23) --
----- ----- ----
Total Downstream Special Items.................... $ (85) $ (67) $ 52
===== ===== ====
CORPORATE AND OTHER
Stock option provision...................................... $(183) $ -- $ --
Environmental litigation charges............................ (14) -- --
----- ----- ----
Total Corporate and Other Special Items........... $(197) $ -- $ --
===== ===== ====
TOTAL SPECIAL ITEMS......................................... $(271) $ 80 $ (6)
===== ===== ====
</TABLE>
Special Items in 1998 include $107 million in gains from several unrelated
asset sales. The gains consist of $54 million from the sale of producing and
non-producing international Upstream properties, $41 million from U.S. Upstream
producing properties and assets, and $12 million in Downstream from the sale of
an office building in Europe. The Upstream sales are a normal part of Conoco's
portfolio rationalization program designed to improve profitability by disposing
of marginal properties and concentrating operations on core properties.
Offsetting the gains were property impairments of $38 million, of which $32
million were in the U.S., made in accordance with Conoco's policy on impairment
of long-lived assets, inventory write-downs of $63 million to market prices,
restructuring and employee separation costs of $52 million, and other losses of
$42 million for environmental litigation charges. The $183 million stock option
provision is a one-time non-cash charge for stock option employee compensation
expenses related to the replacement of outstanding DuPont stock options held by
Conoco employees with Conoco stock options in connection with initial public
offering.
Upstream Special Items in 1997 include $240 million in gains from asset
sales consisting of $191 million associated with producing and non-producing
properties in the North Sea and $49 million in the United States. Such asset
sales are part of Conoco's rationalization program, designed to improve
profitability by disposing of marginal properties and concentrating operations
on core properties. A United Kingdom tax rate change also provided a $19 million
benefit in 1997. Offsetting these benefits were property impairments of $112
million relating to certain international non-revenue producing properties.
Downstream Special Items in 1997 include a United Kingdom tax rate change
benefit of $11 million. Offsetting this benefit were property impairments of $55
million attributable to the write-down of an office building held for sale in
Europe. Other losses of $23 million include environmental litigation charges.
63
<PAGE> 65
Upstream Special Items in 1996 include a gain of $16 million from the sale
of producing and non-producing properties in the United States. Offsetting this
gain was a $63 million impairment associated with a write-down of an investment
in a European gas marketing joint venture and employee separation costs of $11
million. Downstream Special Items in 1996 include a gain of $19 million
associated with the sale of Conoco's retail marketing business in Ireland.
Environmental insurance litigation recoveries also resulted in a $44 million
benefit. Offsetting these benefits were employee separation costs of $11
million.
Consolidated Net Income Before Special Items ("Earnings Before Special
Items") was $721 million in 1998, $1,017 million in 1997 and $869 million in
1996.
1998 Versus 1997
Consolidated Net Income for 1998 of $450 million was down 59 percent from
$1,097 million in 1997. Conoco had Earnings Before Special Items of $721 million
in 1998, down 29 percent from $1,017 million in 1997. Lower Earnings Before
Special Items primarily reflect lower net realizable crude oil and natural gas
prices and refined product prices. The lower prices were partly offset by higher
natural gas volumes, lower exploration expenses, improved international
Downstream marketing margins and the favorable resolution of certain tax issues.
Sales and Other Operating Revenues of $22,796 million in 1998 were down 12
percent compared to $25,796 million in 1997, primarily due to a decrease in
worldwide crude oil and natural gas prices and lower refined product prices.
Downstream Sales and Other Operating Revenues were $17,246 million, down 14
percent compared to $20,033 million in 1997. Crude oil and refined product
buy/sell and natural gas and electric power resale activities in 1998 totaled
$5,004 million, down 9 percent compared to $5,509 million in 1997.
Cost of Goods Sold and Other Operating Expenses in 1998 totaled $13,840
million, down 15 percent compared to $16,226 million in 1997. This reduction is
primarily due to lower feedstock prices.
Selling, General and Administrative Expenses for 1998 totaled $736 million,
an increase of $10 million, or one percent, compared to $726 million in 1997,
primarily due to environmental litigation charges related to a discontinued
business assumed by Conoco under the Separation Agreement with DuPont.
Included in 1998 is a pretax charge of $236 million, labeled "Stock Option
Provision" on the Income Statement. This expense is a one-time non-cash charge
for employee stock option compensation relating to the replacement of
outstanding DuPont stock options held by Conoco employees with Conoco stock
options in connection with the initial public offering.
Exploration Expenses in 1998 totaled $380 million, a decline of $77
million, or 17 percent, compared to $457 million in 1997. The decrease is
primarily a result of a more focused exploration program. Also contributing to
the decrease were lower amortization of non-producing leasehold properties in
the United States and lower exploration overhead and operating expenses compared
to 1997, which included seismic surveys conducted in the Gulf of Paria, located
between Venezuela and Trinidad, and in the Merida Andes foothills in Venezuela.
Depreciation, Depletion and Amortization for 1998 totaled $1,113 million, a
decrease of $66 million, or six percent, compared to $1,179 million in 1997.
Provision for Income Taxes for 1998 totaled $244 million, down 76 percent
compared to $1,010 million for 1997. This reflects an effective tax rate of
approximately 35 percent in 1998 compared to 48 percent in 1997. The lower
effective tax rate in 1998 is due to the increased impact of the U.S.
alternative fuels tax credit, realization of a tax benefit on the sale of a
subsidiary and a greater percentage of earnings in countries with lower
effective tax rates.
64
<PAGE> 66
1997 versus 1996
Consolidated Net Income for 1997 of $1,097 million was up 27 percent from
$863 million in the prior year. Conoco had Earnings Before Special Items of
$1,017 million in 1997, up 17 percent from $869 million in 1996. The increase
was attributable to improved U.S. natural gas prices and higher international
natural gas volumes in addition to stronger worldwide Downstream product margins
and increased worldwide refinery production.
Sales and Other Operating Revenues of $25,796 million in 1997 were up six
percent compared to $24,230 million in the prior year, as higher Downstream
product prices and volumes, increased international natural gas volumes and
stronger domestic natural gas prices more than compensated for lower crude oil
prices. Crude oil and refined product buy/sell and natural gas and electric
power resale activities in 1997 totaled $5,509 million, up 32 percent compared
to $4,167 million in 1996.
Cost of Goods Sold and Other Operating Expenses in 1997 totaled $16,226
million, up 11 percent compared to $14,560 million in 1996, due to higher
refined product volumes and crude oil and refined product buy/sell contract
activity and natural gas and electric power resale activities.
Selling, General and Administrative Expenses in 1997 totaled $726 million,
a decrease of $29 million, or four percent, compared to $755 million in 1996,
primarily due to one-time costs in 1996 for retail expansion activities in the
U.S.
Exploration Expenses in 1997 totaled $457 million, an increase of $53
million, or 13 percent, compared to $404 million in 1996, due to higher
international exploration overhead and operating costs primarily from seismic
surveys conducted in the Gulf of Paria, located between Venezuela and Trinidad,
and in the Merida Andes foothills in Venezuela, higher international dry hole
costs and an adjustment of certain non-producing U.S. leasehold properties.
Depreciation, Depletion and Amortization in 1997 totaled $1,179 million, an
increase of $94 million, or nine percent, compared to $1,085 million in 1996 due
to higher depreciation resulting from a write-down of an office building held
for sale in the United Kingdom and an impairment of certain international
non-revenue producing properties partially offset by lower depreciation in U.S.
Downstream operations.
Provision for Income Taxes totaled $1,010 million in 1997, down three
percent compared to $1,038 million in 1996. The lower provision reflects an
effective tax rate of approximately 48 percent in 1997 compared to 55 percent in
1996. The decrease in the effective tax rate was primarily due to a lower
proportion of earnings from operations in countries with higher effective tax
rates.
UPSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1998 1997 1996
----- ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
After-Tax Operating Income
United States............................................. $219 $ 445 $314
International............................................. 283 439 367
---- ----- ----
After-Tax Operating Income............................. $502 $ 884 $681
Special Items
United States............................................. $ 14 $ (49) $ (9)
International............................................. (25) (98) 67
---- ----- ----
Special Items.......................................... $(11) $(147) $ 58
Earnings Before Special Items
United States............................................. $233 $ 396 $305
International............................................. 258 341 434
---- ----- ----
Earnings Before Special Items.......................... $491 $ 737 $739
==== ===== ====
</TABLE>
65
<PAGE> 67
1998 versus 1997
Upstream After-Tax Operating Income was $502 million in 1998, down 43
percent from $884 million in 1997, principally due to lower crude oil and
natural gas prices. Upstream Earnings Before Special Items were $491 million in
1998, down 33 percent from $737 million in 1997.
Conoco's worldwide net realized crude oil price was $12.37 per barrel for
1998, down $6.21 per barrel, or 33 percent, from $18.58 per barrel in 1997.
Excess supply caused by weak Asian demand, higher crude oil production from OPEC
producing countries and warmer winter weather caused the sharp drop in crude oil
prices. Worldwide natural gas prices averaged $2.24 per thousand cubic feet
(mcf) for 1998, compared with $2.44 per mcf in 1997, primarily because of warmer
winter weather. Lower worldwide natural gas prices were primarily driven by
lower natural gas prices inside the United States. In the U.S., natural gas
prices averaged $1.96 per mcf, down 10 percent, while internationally they
remained steady at $2.72 per mcf. Worldwide crude oil and condensate production
in 1998 was 315,000 barrels per day versus 337,000 barrels per day in 1997.
Worldwide natural gas production in 1998 was up 17 percent to 1,411 million
cubic feet per day from 1,203 million cubic feet per day in 1997.
U.S. Upstream Earnings Before Special Items totaled $233 million in 1998,
down 41 percent from $396 million in 1997. Lower U.S. Upstream Earnings Before
Special Items were due to lower crude oil and natural gas prices and lower crude
oil volumes resulting from asset dispositions and crude oil production declines.
These reductions more than offset benefits from increased natural gas
production, gains on property sales and lower exploration expenses. Natural gas
volumes were up 22 percent as increased production from the holdings in the
South Texas Lobo trend, acquired in 1997, more than offset the decline in
natural gas production elsewhere. U.S. production costs were $3.69 per BOE, down
$0.54 per BOE, or 13 percent, compared to $4.23 per BOE in 1997, due to lower
production taxes and higher gas volumes.
Outside the United States, Upstream Earnings Before Special Items were $258
million, down 24 percent, from $341 million in the comparable period in 1997,
primarily due to lower crude oil and natural gas prices, offset by higher
natural gas volumes, lower exploration expenses and the favorable resolution of
certain tax issues. International crude volumes, which comprise over 80 percent
of Conoco's oil production, were down five percent to 265,000 barrels per day
due to the sale of the Company's interest in the mature Ula and Gyda fields in
Norway and natural production declines. However, earnings benefited from higher
production in countries with relatively lower tax rates (primarily the United
Kingdom and Nigeria). International gas volume was up nine percent.
International production costs were $4.13 per BOE, down $0.06 per BOE, or one
percent, compared to $4.19 per BOE in 1997, due to reduced costs from asset
dispositions and other operating costs in 1998, partly offset by lower
international crude oil production.
1997 versus 1996
Upstream After-Tax Operating Income was $884 million in 1997, up 30
percent, compared to $681 million in 1996. Upstream Earnings Before Special
Items totaled $737 million in 1997, essentially unchanged from the previous
year.
Worldwide natural gas prices were up 15 percent to $2.44 per mcf in 1997
from $2.12 per mcf in 1996, resulting primarily from higher U.S. industry
demand. Worldwide net realized crude oil prices were $18.58 per barrel, down
$1.53 per barrel, or eight percent, from $20.11 per barrel in 1996. Crude oil
prices declined despite higher crude oil demand and strong crude oil production
growth, which included initial exports of Iraqi crude oil. Worldwide crude oil
and condensate production averaged 337,000 barrels per day for the year, up
slightly versus 1996. Worldwide natural gas deliveries in 1997 of 1,203 million
cubic feet per day were essentially unchanged from 1,211 million cubic feet per
day in 1996 as higher international natural gas volumes were offset by lower
domestic natural gas volumes.
U.S. Upstream Earnings Before Special Items totaled $396 million, up 30
percent from $305 million in 1996, due to higher gas prices which more than
offset lower crude oil prices. U.S. production costs per
66
<PAGE> 68
BOE were $4.23, up $0.12 per BOE or 3 percent, compared to $4.11 per BOE in
1996, due to higher production taxes.
Outside the United States, Earnings Before Special Items were $341 million,
down 21 percent from $434 million in 1996 due to lower crude oil prices, partly
offset by increased crude oil and natural gas volumes associated with the first
year of oil production from Nigeria and increased production from the Heidrun
and Troll fields in Norway and the Canadian Foothills. International production
costs per BOE were $4.19 per BOE, up $0.51 per BOE, or 14 percent, compared to
$3.68 per BOE in 1996, resulting from floating production storage offtake lease
costs on new fields in the United Kingdom and costs incurred on development
projects that had not yet begun production.
DOWNSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
After-Tax Operating Income
United States............................................. $135 $216 $172
International............................................. 156 91 117
---- ---- ----
After-Tax Operating Income............................. $291 $307 $289
Special Items
United States............................................. $ 73 $ 23 $(36)
International............................................. 12 44 (16)
---- ---- ----
Special Items.......................................... $ 85 $ 67 $(52)
Earnings Before Special Items
United States............................................. $208 $239 $136
International............................................. 168 135 101
---- ---- ----
Earnings Before Special Items.......................... $376 $374 $237
==== ==== ====
</TABLE>
1998 versus 1997
Downstream After-Tax Operating Income was $291 million in 1998, down five
percent compared to $307 million in 1997. Downstream Earnings Before Special
Items totaled $376 million in 1998, up one percent from $374 million in 1997.
United States Downstream Earnings Before Special Items were $208 million in
1998, compared to $239 million in 1997, a decrease of 13 percent. The decline
was mainly attributable to weaker refinery margins, which were partly offset by
record refinery runs, lower feedstock and operating costs and higher marketing
margins.
International Downstream Earnings Before Special Items were $168 million in
1998, up 24 percent from $135 million in the comparable period in 1997,
reflecting higher European marketing margins, lower costs, and 11 percent higher
refinery runs.
Conoco's refineries, excluding the Melaka refinery, operated at 95 percent
capacity in 1998, four percent higher than 1997. The increase was primarily due
to refinery upgrades in Europe in 1997, increased reliability throughout the
system, and increased rates at the Lake Charles refinery subsequent to
debottlenecking work completed in February 1998.
1997 versus 1996
Downstream After-Tax Operating Income was $307 million, up six percent from
$289 million in 1996. Downstream Earnings Before Special Items increased 58
percent to $374 million in 1997, compared with $237 million in the prior year.
Worldwide refined product sales volumes were 1,048,000 barrels per day in 1997,
up five percent versus 1996.
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<PAGE> 69
In the United States, Downstream Earnings Before Special Items were $239
million versus $136 million in 1996, an increase of 76 percent. The improvement
was attributable to strong refining margins, reduced operating costs and higher
refined product volumes from the new Lake Charles, Louisiana, hydrocracker
expansion project.
International Downstream Earnings Before Special Items were $135 million,
up 34 percent from $101 million in the comparable period in 1996, primarily due
to higher European refining margins and increased refinery production from the
Humber refinery's new vacuum unit in the United Kingdom.
Conoco's refineries operated at 91 percent capacity in 1997, ten percent
higher than 1996. The increase was primarily due to less downtime incurred in
1997, compared to 1996 when major expansions were taking place at the Lake
Charles and Humber refineries.
CORPORATE AND OTHER SEGMENT RESULTS
CORPORATE AND OTHER OPERATING
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1998 1997 1996
------ ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
After-Tax Operating Income.................................. $(271) $(82) $(74)
Special Items............................................... 197 -- --
----- ---- ----
Earnings Before Special Items............................... $ (74) $(82) $(74)
===== ==== ====
</TABLE>
1998 versus 1997
Corporate and Other Segment After-Tax Operating Income was a loss of $271
million in 1998, an impairment of $189 million from a loss of $82 million in
1997, primarily as a result of the one-time stock option provision. Corporate
and Other Earnings Before Special Items were a loss of $74 million, an
improvement of $8 million from the 1997 loss of $82 million as a result of lower
compensation costs.
1997 versus 1996
Corporate and Other Segment After-Tax Operating Income was a loss of $82
million, an impairment of $8 million from a loss of $74 million in 1996 due to
higher compensation costs.
INTEREST AND OTHER CORPORATE NON-OPERATING EXPENSES NET OF TAX
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Net Interest Income (Expense)............................... $(62) $ 35 $ 28
Exchange Gains (Losses)..................................... 32 21 (7)
Other Corporate Expenses(1)................................. (42) (68) (54)
---- ---- ----
Total............................................. $(72) $(12) $(33)
==== ==== ====
</TABLE>
- ---------------
(1) Includes financing costs and other non-operating items.
1998 versus 1997
Interest and Other Corporate Non-Operating Expenses for 1998 were $72
million, an increase of $60 million versus $12 million in 1997. The increase is
primarily attributable to higher interest expense from debt incurred in the
second half of the year, which more than offset interest income earned in the
first half of the year.
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<PAGE> 70
1997 versus 1996
Interest and Other Corporate Non-Operating Expenses were a loss of $12
million in 1997, an improvement of $21 million from 1996 results. Net Interest
Income (Expense) in 1997 was improved by $7 million versus 1996, primarily due
to increased after-tax capitalized interest on major Upstream development
projects. Conoco incurred an after-tax exchange gain of $21 million in 1997
compared with a loss of $7 million in 1996, primarily reflecting the impact of
Norwegian Kroner and British Pound exchange rate movements on U.S.
dollar-denominated working capital balances. Other Corporate Expenses of $68
million in 1997 were $14 million higher than 1996.
ENVIRONMENTAL EXPENDITURES
The costs to comply with environmental laws and regulations, as well as
internal voluntary programs, are significant and will continue to be so in the
foreseeable future. Conoco anticipates substantial expenditures will be
necessary to comply with Maximum Achievable Control Technology ("MACT")
standards proposed by EPA under the Clean Air Act and specifications for motor
fuels designed to reduce emissions of certain pollutants from vehicles using
such fuels.
Estimated pre-tax environmental expenses charged to current operations
totaled about $131 million in 1998, as compared to approximately $136 million in
1997 and $162 million in 1996. These expenses include the remediation accruals
discussed below, operating, maintenance and depreciation costs for pollution
control facilities and the costs of certain other environmental activities. The
largest of these expenses resulted from the operation of pollution control
facilities. Approximately 80 percent of 1998 total environmental expenses
resulted from the operations of Conoco's business in the United States.
Capital expenditures for pollution control facilities totaled approximately
$53 million in 1998, as compared to approximately $50 million in 1997 and $78
million in 1996. Conoco estimates that capital expenditures will increase by
about $100 million in 1999 and $100 million in 2000 due to regulations in Europe
requiring cleaner burning fuels.
REMEDIATION EXPENDITURES
The Resource Conservation and Recovery Act ("RCRA") extensively regulates
the treatment, storage and disposal of hazardous waste and requires a permit to
conduct such activities. RCRA requires permitted facilities to undertake an
assessment of environmental conditions at the facility. If conditions warrant,
Conoco may be required to remediate contamination caused by prior operations. In
contrast to the Comprehensive Environmental Response, Compensation, and
Liability Act, as amended ("CERCLA"), often referred to as "Superfund," the cost
of remediation under RCRA is typically borne solely by Conoco. Conoco
anticipates that significant ongoing expenditures for RCRA remediation may be
required over the next decade, although Conoco does not expect that annual
expenditures for the near term will vary significantly from the range of such
expenditures over the past few years. Conoco's expenditures associated with RCRA
and similar remediation activities conducted voluntarily or under state law were
approximately $27 million in 1998, $31 million in 1997 and $34 million in 1996.
In the long term, expenditures are subject to considerable uncertainty and may
fluctuate significantly.
EPA and state environmental agencies from time to time allege that Conoco
is a potentially responsible party ("PRP") under CERCLA or an equivalent state
statute for contamination at various sites that typically are not owned by
Conoco but allegedly contain wastes attributable to Conoco's past operations.
These agencies and private parties have also sued Conoco on occasion for the
recovery of costs incurred to remediate the contaminated sites. As of December
31, 1998, Conoco had been notified of potential liability under CERCLA or state
law at about 13 sites in the United States, with active remediation under way at
six of those sites. Conoco received notice of potential liability at one new
site during 1998, which was resolved, compared with four similar notices in 1997
and one in 1996. Conoco's expenditures associated with CERCLA and similar state
remediation activities were not significant in 1998, 1997 or 1996.
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<PAGE> 71
For most Superfund sites, Conoco's costs likely will be significantly less
than the total site remediation costs, because the percentage of waste
attributable to Conoco versus that attributable to all other PRPs has been
relatively low. Other PRPs at sites where Conoco is a party typically have had
the financial strength to meet their obligations and, where they have not, or
where PRPs could not be located, Conoco's own share of liability has not
materially increased. There are relatively few sites where Conoco is a major
participant, and Conoco does not expect that remediation at those sites, or at
all CERCLA sites in the aggregate, will have a material adverse effect on
Conoco's financial condition, results of operation or liquidity.
Cash expenditures not charged against income for previously accrued
remediation activities under CERCLA, RCRA and similar state and foreign laws
were $17 million in 1998, $19 million in 1997 and $19 million in 1996. Although
future remediation expenditures in excess of current reserves are possible, the
effect of any such excess on future financial results is not subject to
reasonable estimation because of the considerable uncertainty regarding the cost
and timing of expenditures.
REMEDIATION ACCRUALS
Conoco accrues for remediation activities when it is probable that a
liability has been incurred and reasonable estimates of the liability can be
made. These accrued liabilities exclude claims against Conoco's insurers or
other third parties and are not discounted. Many of these liabilities result
from CERCLA, RCRA and similar state laws that require Conoco to investigate and
remediate contamination at sites where it conducts or once conducted operations
or at sites where company-generated waste was disposed. The accrual also
includes a number of sites identified by Conoco that may require environmental
remediation, but which are not currently the subject of CERCLA, RCRA or state
enforcement activities. Over the next decade, Conoco may incur significant costs
under both CERCLA and RCRA. Considerable uncertainty exists with respect to
these costs and under adverse changes in circumstances, potential liability may
exceed amounts accrued as of December 31, 1998.
Remediation activities vary substantially in duration and cost from site to
site depending on site characteristics, evolving remediation technologies,
diverse regulatory agencies, enforcement policies and the presence of
potentially liable third parties. Therefore, it is difficult to develop
reasonable estimates of future site remediation costs. At December 31, 1998,
Conoco's balance sheet included an accrued liability of $129 million as compared
to $144 million at year-end 1997. Approximately 89 percent of Conoco's
environmental reserve at December 31, 1998, was attributable to RCRA and similar
remediation liabilities (excluding voluntary remediations) and 11 percent to
CERCLA liabilities. During 1998, remediation accruals resulted in a $2 million
charge, compared to credits of $41 million in 1997 and $70 million in 1996, both
of which resulted from insurance recoveries. No significant additional
recoveries are expected.
TAX MATTERS
As a result of the separation from DuPont and the initial public offering,
Conoco was no longer 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 foreign countries. Conoco
believes this has not had and will not have a material adverse effect on its
earnings.
As of December 31, 1998, Conoco had deferred tax assets in the amount of
$1,238 million. Of this amount, $496 million related to tax benefits from
operating losses incurred in start-up operations, including exploration and U.S.
foreign tax credit carry forwards. These benefits were substantially offset by a
valuation reserve. Conoco believes it is more likely than not the balance of the
deferred tax assets will be realized in future years.
YEAR 2000
Historically, certain computerized systems have used 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
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<PAGE> 72
2000. This could result in major failures or miscalculations and is generally
referred to as the "Year 2000 issue."
Conoco 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 Conoco by its individual business units, and progress is
reported periodically to management and the Board of Directors.
Conoco 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 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 Conoco interacts. Most of the
resources committed to this work are internal.
Managing Year 2000 risk is being handled in three tiers -- through Year
2000 compliance plans, mitigation plans and emergency recovery plans. The Year
2000 compliance plans include inventorying and assessing risk, and outlining
action to be taken for each of these items. Year 2000 compliance plans have been
developed and are being implemented for all business units. Mitigation plans
outline a list of actions that will be taken on a specified date to further
minimize risk. These plans will be developed for areas in which the Year 2000
compliance plans do not adequately address all of the relevant risk issues. For
example, operations that rely heavily on external partners will develop
mitigation plans. Mitigation plans will be developed, as needed, for all
business units by the third quarter of 1999. Emergency recovery plans already
exist in many of Conoco's operations to address other issues such as oil tanker
spills and plant explosions.
Typically, the emergency recovery plans address the results of single
events. These plans are designed to facilitate the resumption of normal
operations following a disruption. In contrast to a "normal" disruption, the
scope of Year 2000 issues may cause multiple concurrent events, which may have a
longer duration. Accordingly, the Emergency Recovery Plans will be reviewed and
supplemented to address Year 2000 risks for all business units by the third
quarter of 1999. The progress reported below covers only the replacement or
upgrade of existing non-compliant systems. Replacement projects planned and
managed outside of the Year 2000 Program have been excluded. Approximately 73
percent of the work required to fix Year 2000 issues identified by the Year 2000
Program has been completed.
In the information technology area, inventory and assessment audits in the
mainframe and midrange environments are completed. Excluding business
applications, corrective action in the mainframe area will be completed by the
end of the first quarter of 1999. Corrective action in the midrange area will be
completed by the end of the first quarter of 1999 and business application
software is expected to be completed by the fourth quarter of 1999. Inventory
and assessment audits of telecommunications are completed, with corrective
action expected to be completed by the second quarter of 1999. Finally,
inventory and assessment audits in the desktop environment are completed, with
corrective action expected to be completed by the end of the third quarter of
1999.
In the plant systems area, all but two of Conoco's business units have
completed their inventory and assessment audits; the remaining units are
expected to complete this work by the end of the second quarter of 1999. Conoco
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 by the end of the third quarter of 1999.
With respect to external parties, the inventory of critical external
parties is essentially complete. Risks are being assessed, and monitoring of
risk in this area will continue throughout 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
Conoco's operations, liquidity or capital resources. Costs are being managed
within each business unit. The total estimated cost for
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Conoco's Year 2000 work is $47 million. 1997 costs were $5 million, and 1998
costs were $25 million. This includes costs for the replacement or upgrade of
existing non-compliant systems. Replacement projects planned and managed outside
of the Year 2000 program have been excluded.
There can be no guarantee that third parties of business importance to
Conoco will successfully reprogram or replace, and test, all of their own
computer hardware, software and process control systems to ensure such systems
are Year 2000 compliant. Failure to address a Year 2000 issue could result in
business disruption that could materially affect Conoco's operations, liquidity
or capital resources. There is still uncertainty around the scope of the Year
2000 issue. At this time Conoco cannot quantify the potential impact of these
failures. Conoco's Year 2000 program and contingency plans are being developed
to address issues within its control. The program minimizes, but does not
eliminate, the issues of external parties.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU")
introduced a new currency, the euro, on January 1, 1999. The new currency is in
response to the EMU's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services.
On January 1, 1999, 11 participating countries adopted the euro as their
local currency, initially available for currency trading on currency exchanges
and non-cash (banking) transactions. The existing local currencies, or legacy
currencies, will remain legal tender through January 1, 2002. Beginning on
January 1, 2002, euro-denominated notes and coins will be issued for cash
transactions. For a period of six months from this date, both legacy currencies
and the euro will be legal tender. On or before July 1, 2002, the participating
countries will withdraw all legacy currency and use the euro exclusively.
Conoco has recognized the introduction of the euro as a significant event
with potential implications for existing operations. Conoco currently operates
in a number of countries which are participating in the EMU, including Austria,
Belgium, Finland, Germany and Spain. Conoco expects non-participating European
Union countries, such as the United Kingdom, to eventually join the EMU.
Conoco has committed resources to conduct risk assessments and to take
corrective actions, where required, to ensure that it is prepared for the
introduction of the euro. Conoco has undertaken a review of the euro
implementation and has concentrated on areas such as operations, finance,
treasury, legal, information management, procurement and others, both in
participating and nonparticipating European Union countries where Conoco
operates. Also, existing legacy accounting and business systems and other
business assets have been reviewed for euro compliance, including assessing any
risks from third parties. Progress regarding euro implementation is reported
periodically to management.
Because of the staggered introduction of the euro regarding non-cash and
cash transactions, Conoco has developed its plans to address first its
accounting and business systems and second, its business assets. Conoco
undertook steps to be euro compliant within its accounting and business systems
by the end of 1998 relative to the conversion rules when performing translations
between EMU currencies. Conoco has an implementation plan to convert its
accounting and reporting systems from legacy currency to the euro by January 1,
2002, for those operations that are in EMU countries. The plan also incorporates
steps to ensure the corresponding business assets are fully compliant by that
date, in preparation for being able to conduct business involving euro notes and
coins. Compliance in participating and nonparticipating countries will be
achieved primarily through upgraded systems, which were previously planned to be
upgraded. Remaining systems will be modified to achieve compliance. Conoco does
not currently expect to experience any significant operational disruptions or to
incur any significant costs, including any currency risk, which could materially
affect its liquidity or capital resources. Conoco is preparing plans to address
issues within the transitional period when both legacy and euro currencies may
be tendered.
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Because of the competitive business environment within the petroleum
industry, Conoco does not anticipate any long-term competitive implications or
the need to materially change its mode of conducting business as a result of
increased price transparency.
RESTRUCTURING
In December 1998, Conoco announced that as a result of a comprehensive
review of assets and long-term strategy it was making organizational
realignments consistent with furthering the efficiency of operations and taking
advantage of synergies created by the upgrading of its asset portfolio. The
announced plans will be implemented in 1999 and result in a reduction of
approximately 775 Upstream positions and 200 Downstream positions worldwide.
About three quarters of the Upstream positions and about half of the Downstream
positions affected will be in the United States. These reductions largely
reflect the elimination of redundancies at all levels resulting from past and
ongoing consolidation of assets into operations requiring less employee support,
as well as better sharing of common services and functions across regions.
Implementation of the plans is being expedited in response to low oil prices and
operating margins that lingered through the end of 1998 and are expected to
continue in 1999. Associated with these announcements, Conoco recorded a charge
of $82 million pre-tax ($52 million after-tax), nearly all of which represents
termination payments and related employee benefits to be made to persons
affected. Payments will be made under existing company severance policies,
generally based on years of service up to a maximum varying by country. On an
after-tax basis, the charge is reflected as $19 million and $23 million in
Upstream United States and International results, respectively, and $5 million
each in Downstream United States and International results. The accrual is
reflected in fourth quarter Cost of Goods Sold and Other Operating Expenses. As
of December 31, 1998, none of the persons had yet been terminated and no related
payments had been made.
NEW ACCOUNTING STANDARDS
Conoco adopted Statement No. 131 for the year ended December 31, 1998, and
has disclosed segment information on the same basis used internally for
evaluating segment performance and deciding how to allocate resources to
segments. Conoco has assessed the effect of the new disclosure, and adoption of
Statement No. 131 had no financial impact.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosure About Pension and Other Postretirement
Benefits," which revised disclosure requirements for pension and other
postretirement benefits. It does not affect the measurement of the expense of
Conoco's pension and other postretirement benefits. Conoco adopted this
Statement for the year ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Conoco is required to adopt this Statement by the first quarter of 2000 and is
currently assessing the effect of the new standard.
Statement No. 133 provides, if certain conditions are met, that a
derivative may be specifically designated as (1) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment (fair value hedge), (2) a hedge of the exposure to variable cash
flows of a forecasted transaction (cash flow hedge) or (3) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction (foreign currency hedge).
Under Statement No. 133, the accounting for changes in fair value of a
derivative depends on its intended use and designation. For a fair value hedge,
the gain or loss is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item. For a cash flow hedge, the
effective portion of the derivative's gain or loss is initially reported as a
component of other comprehensive income and subsequently reclassified into
earnings when the forecasted transaction affects earnings. For a
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foreign currency hedge, the gain or loss is reported in other comprehensive
income as part of the cumulative translation adjustment. For all other items not
designated as hedging instruments, the gain or loss is recognized in earnings in
the period of change.
MARKET RISKS
Conoco operates in the worldwide crude oil, refined product, natural gas,
natural gas liquids and electric power markets and is exposed to fluctuations in
hydrocarbon prices, foreign currency rates, and interest rates that can affect
the revenues and cost of operating, investing and financing. Conoco's management
has used and intends to use financial and commodity-based derivative contracts
to reduce the risk in overall earnings and cash flow when the benefits provided
are anticipated to more than offset the risk management costs involved.
Conoco has established a financial risk management policy framework that
provides guidelines for entering into contractual arrangements (derivatives) to
manage Conoco's commodity price, foreign currency rate, and interest rate risks.
The Conoco risk management committee has ongoing responsibility for the content
of this policy and has principal oversight responsibility to ensure Conoco is in
compliance with the policy and that procedures and controls are in place for the
use of commodity, foreign currency and interest rate instruments. These
procedures clearly establish derivative control and valuation processes, routine
monitoring and reporting requirements and counterparty credit approval
procedures. Additionally, Conoco's internal audit group conducts reviews of
these risk management activities to assess the adequacy of internal controls.
The audit results are reviewed by the Conoco risk management committee and by
management.
The counterparties to these contractual arrangements are limited to major
financial institutions and other established companies in the petroleum
industry. Although Conoco 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. Conoco has not experienced
nonperformance by counterparties to these contracts, and no material loss would
be expected from any such nonperformance.
Commodity Price Risk
Conoco 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 price exposure 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 as well as 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 energy business.
Conoco policy is to generally be exposed to market pricing for commodity
purchases and sales. From time to time, management may use derivatives to
establish longer-term positions to hedge the price risk for Conoco's equity
crude oil and natural gas production as well as refinery margins.
Under Conoco's policy, hedging includes only those transactions that offset
physical positions and reduce overall company exposure to price risk. Trading is
defined as any transaction that does not meet the definition of hedging.
After-tax gain/loss from risk trading has not been material.
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The fair value gain (loss) of outstanding derivative commodity instruments
and the change in fair value that would be expected from a ten percent adverse
price change are shown in the table below:
<TABLE>
<CAPTION>
CHANGE IN FAIR VALUE
FROM 10% ADVERSE
FAIR VALUE PRICE CHANGE
---------- --------------------
(IN MILLIONS)
<S> <C> <C>
AT DECEMBER 31, 1998
Crude Oil and Refined Products
Hedging............................................... $ (1) $ (5)
Trading............................................... 3 3
---- ----
Combined.............................................. $ 2 $ (2)
Natural Gas
Hedging............................................... $(25) $(20)
Trading............................................... (2) (1)
---- ----
Combined.............................................. $(27) $(21)
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>
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 an across-the-board
ten 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 ten percent change in prompt month
crude or natural gas prices, the fair value of Conoco's derivative portfolio
would typically change less than that shown in the table due to lower volatility
in out-month prices.
Additional details regarding accounting policy for these financial
instruments are set forth in Note 2 to the Consolidated Financial Statements.
Foreign Currency Risk
Conoco has foreign currency exchange rate risk resulting from operations in
over 40 countries around the world. Conoco does not comprehensively hedge its
exposure to currency rate changes, although it may choose to selectively hedge
exposure to foreign currency exchange rate risk. Examples include firm
commitments for capital projects, certain local currency tax payments, and cash
returns from net investments in foreign affiliates to be remitted within the
coming year. At December 31, 1998, Conoco had no open forward exchange
contracts. At December 31, 1997, Conoco had open forward exchange contracts
designated as a hedge of firm foreign currency commitments. The notional amount
of these contracts was $50 million and the estimated fair value was $38 million.
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Interest Rate Risk
Prior to its initial public offering, Conoco had no material interest rate
risk to manage. Currently and in the future, however, Conoco intends to manage
any material risk arising from exposure to interest rates by using a combination
of financial derivative instruments as part of a program to manage the fixed and
floating interest rate mix of the total debt portfolio and related overall cost
of borrowing.
Risk of Refinancing Debt Owed to DuPont
Conoco is obligated to repay all outstanding debt owed to DuPont upon the
completion of the Transaction. Conoco intends to refinance outstanding related
party debt owed to DuPont with a combination of commercial paper and public debt
in 1999. On February 12, 1999, Conoco filed a "shelf" registration statement
under the Securities Act of 1933 under which it may issue debt securities.
Conoco intends to use the proceeds from issuances of securities under the shelf
registration statement to refinance a portion of the outstanding debt owed to
DuPont. There can be no assurance that Conoco will be able to refinance this
debt on terms as favorable as those existing with respect to the debt owed to
DuPont.
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BUSINESS OF DUPONT
GENERAL
DuPont is a world leader in science and technology in a range of
disciplines, including high-performance materials, specialty chemicals,
pharmaceuticals and biotechnology. DuPont has a portfolio of 2,000 trademarks
and brands, including such well-known consumer brands as Lycra(R), Teflon(R),
Stainmaster(R), Kevlar(R), Nomex(R), Tyvek(R), Dacron(R), Cordura(R), Corian(R),
SilverStone(R), and Mylar(R). DuPont operates 200 manufacturing and processing
facilities in 65 countries worldwide.
DuPont presents its results in eight reportable segments -- Agriculture &
Nutrition, Nylon Enterprise, Performance Coating & Polymers, Pharmaceuticals,
Pigments & Chemicals, Polyester Enterprise, Specialty Fibers, and Specialty
Polymers. The balance of DuPont's continuing operations is reported in an Other
segment and consists of DuPont's photomasks safety resources and global services
businesses. DuPont also has petroleum operations conducted through Conoco, which
are reported in DuPont's financial statements as discontinued operations. DuPont
expects the petroleum business will be divested from DuPont's operations if the
exchange offer is completed. DuPont and its subsidiaries, excluding Conoco,
employ approximately 80,000 people worldwide and have annual revenues of
approximately $25 billion.
REPORTABLE SEGMENTS
AGRICULTURE & NUTRITION
DuPont's agriculture & nutrition business consists of crop protection
products and the newly formed nutrition & health business. The agriculture &
nutrition business had revenues of approximately $3.2 billion in 1998. Crop
protection products includes herbicides, fungicides, and insect control sold
worldwide.
DuPont formed its nutrition & health business in 1998 to increase its
strong position in biotechnology across high value opportunities in animal
feeds, food ingredients, nutritional sciences and biosourced industrial
materials. Nutrition & health consists of both business and research development
efforts in agriculture, food and nutrition.
On March 15, 1999 DuPont has agreed to effect a business combination with
Pioneer Hi-Bred International, Inc., the world's largest seed company, in a
stock and cash merger valued at approximately $7.7 billion. DuPont currently has
a 20 percent equity interest in Pioneer, as well as certain joint venture and
other arrangements with Pioneer. The merger is expected to close during the
summer of 1999.
NYLON ENTERPRISE
DuPont's nylon enterprise business consists of nylon intermediates,
polymers and fibers for carpet and rug markets, apparel, tire reinforcement and
numerous other industrial applications. DuPont nylon had revenues of
approximately $4.6 billion in 1998 and includes the brands Stainmaster(R) and
Antron(R) fibers for carpets and Tactel(R) and Supplex(R) yarns for apparel. In
1998, DuPont completed investments to reduce emissions of nitrous oxide by more
than 90 percent at the five nylon sites worldwide that produce adipic acid, a
nylon intermediate chemical.
PERFORMANCE COATINGS & POLYMERS
DuPont's performance coatings & polymers business manufactures and markets
engineering materials for automotive, electrical, electronic, consumer and
industrial applications. The automotive and electrical/electronics industries
are its largest markets. The performance coatings & polymers business had
revenues of approximately $4.6 billion in 1998. Polymers (commonly known as
plastics) are large molecules formed by combining many smaller molecules in a
regular pattern. The business unit supplies six families of engineering
resins -- Zytel(R) nylon, Delrin(R) acetal, Rynite(R) polyester PET, Crastin(R)
polyester PBT, Hytrel(R) thermoplastic elastomer and Zenite(TM) liquid crystal
polymer-plus Vespel(R) polymide parts and shapes, Tribon composites and Tynex(R)
filaments. DuPont performance coatings are used in
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automotive original equipment coatings, automotive refinish and industrial
coatings, and high-performance coatings.
In February 1999, DuPont acquired Herberts GmbH, the coating business of
Hoechst AG, for about $1.9 billion. Herberts is the market leader in automotive
coatings in Europe with strong positions in the industrial coatings markets and
markets for emerging ultra-low emission powder coatings. The acquisition is
intended to add significant opportunities to increase worldwide market
penetration of powder and industrial coatings. Combined, the companies comprise
the world's third largest coatings company and are the leading automotive
coatings supplier with sales of about $4 billion.
PHARMACEUTICALS
DuPont pharmaceuticals focuses on research, development and delivery of
pharmaceuticals to treat HIV, cardiovascular disease, central nervous system
disorders, cancer and arthritis-related disorders. It is also a leader in
medical imaging. The pharmaceuticals business had revenues of approximately $1.1
billion in 1998. Pharmaceutical products include Sustiva(TM) for AIDS,
Coumadin(R) anticoagulant, Cozaar(R) for hypertension, Sinemet(R) for
Parkinson's disease, Symmetrol(R) antiviral and antiparkinsons, Cardilite(R)
cardiac imaging agents, and Neurolite(R) brain-imaging agents.
DuPont purchased Merck & Co. Inc.'s 50 percent interest in The DuPont Merck
Pharmaceutical Company in July 1998 for $2.6 billion. DuPont now owns 100
percent of the business, which operates as DuPont Pharmaceuticals.
PIGMENTS & CHEMICALS
DuPont's pigments & chemicals business manufactures and distributes a wide
range of commodity and specialty products, including titanium dioxide,
fluorochemicals and specialty chemicals used in the construction, oil and gas,
precious metal mining, transportation, paper, plastics, chemical processing,
refrigeration, textile and safety and environmental management industries. The
pigments & chemicals business had revenues of approximately $3.7 billion in
1998.
The pigments & chemicals business is the world's leading producer of
titanium dioxide (commonly referred to as white pigment) which imparts
whiteness, brightness and opacity to paper, paint and plastic. The
fluorochemicals segment of the pigments & chemicals business produces a wide
range of alternatives to chlorofluorocarbons, including refrigerants, foam
expansion agents, propellants and cleaning agents. The specialty chemicals
segment of the pigments & chemicals business produces a wide variety of
specialties, intermediates and industrial chemicals.
POLYESTER ENTERPRISE
DuPont's polyester enterprise includes DuPont Dacron(R) polyester,
high-performance polyester films and polyester resins and intermediates. The
polyester business had revenues of approximately $2.8 billion in 1998. DuPont's
polyester business produces polyester staples and fibers for apparel, home
furnishings, sleepwear, outdoor products, and transportation markets. DuPont's
Dacron(R) polyester includes the brands CoolMax(R) and ThermaStat(R)performance
fabrics, Comforel(R) sleep products, Thermolite(R) insulations,
Micromattique(TM) microfibers and the newest introduction, Supriva(TM) fabric.
The polyester business also includes specialty, industrial, packaging,
electrical and electronics markets. Brand names include Melinex(R), Mylar(R),
Kaladex(R), and Cronar(R). Polyester resins and intermediates are used in soft
drink bottles and custom containers, as well as applications for packaging and
cups, thermoforms and shrink wrap film.
SPECIALTY FIBERS
DuPont's speciality fibers business consists of DuPont Lycra(R) brand
elastane, nonwoven fibers and advanced fiber systems. The specialty fiber
business had revenues of approximately $3.3 billion in 1998. DuPont sells
Lycra(R) in its traditional markets of intimate apparel, swimwear, hosiery and
activewear as
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well as in new markets such as menswear, childrenswear, socks, sweater knits,
denims, wovens and shoes. Nonwoven products include Tyvek(R) brand products, as
well as Typar(R) and Sontara(R). Advanced fibers are Kevlar(R) brand fiber,
Nomex(R) brand fiber and paper, and Teflon(R) brand fluropolymer fiber. Advanced
fiber products are used in sporting goods and sporting shoes.
SPECIALTY POLYMERS
DuPont's specialty polymers includes photopolymer & electronic materials,
packaging & industrial polymers, fluropolymers, and DuPont Corian(R). The
specialty polymers business had revenues of approximately $4.1 billion in 1998.
The photopolymer & electronic materials business markets [photoresists],
laminates and photoimageable technology for the printed, flexible and
microcircuit segments of the electronics industry. It also markets flexographic
printing plates and color proofing systems for the printing industry. The
packaging & industrial polymers business offers specialized, high-value polymers
in packaging and selected industrial markets.
The trademarks of fluropolymers include Teflon(R) and Tefzel(R)
fluropolymers, and SilverStone(R) and Autograph(R) non-stick finishes while
DuPont Corian(R) is used in building materials.
RECENT DEVELOPMENTS
On March 10, 1999, DuPont announced the proposed creation of a "tracking
stock" for its life sciences businesses, which would be distributed to all of
its stockholders. The amendment of DuPont's certificate of incorporation to
create this tracking stock, which is intended to provide investors an
opportunity to invest in a security the terms of which more closely track the
economic performance of DuPont's life sciences businesses, must be approved by
DuPont stockholders. After the issuance of the tracking stock, the existing
DuPont Common Stock would be intended to more closely mirror the performance of
its chemical businesses. DuPont anticipates that stockholder approval will be
sought in the first quarter of 2000. In February 1999, the Clinton
Administration proposed changes to the federal income tax laws, as part of its
budget package, that, if enacted, could adversely affect the tax consequences
relating to the issuance of tracking stock and, as a result, could adversely
affect DuPont's ability to issue the tracking stock for its life sciences
businesses. It is presently unclear whether this proposal will be enacted into
law and, if so, what form it would take.
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BUSINESS OF CONOCO
GENERAL
Conoco, a major, integrated, global energy company, is involved in both the
Upstream and Downstream segments of the petroleum business. Upstream activities
include exploring for, and developing, producing and selling crude oil, natural
gas and natural gas liquids. Downstream activities include refining crude oil
and other feedstocks into petroleum products, buying and selling crude oil and
refined products and transporting, distributing and marketing petroleum
products. In addition to Upstream and Downstream operations, Conoco also is
engaged in developing and operating power facilities. Conoco operates in 40
countries worldwide.
As of December 31, 1998, Conoco had proved worldwide reserves of 2,622
million BOE, 39 percent of which were natural gas (converted to BOE using a
ratio of six thousand cubic feet of gas to one barrel of oil). Based on 1998
annual production of 213 million BOE (excluding natural gas liquids from gas
plant ownership), Conoco had a reserve life of 12.3 years as of December 31,
1998. Over the last five years, Conoco has replaced an average of 195 percent of
the oil and gas it has produced each year. Conoco owns or has equity interests
in nine refineries worldwide, with a total crude and condensate processing
capacity of approximately 807,000 barrels per day. Conoco has a marketing
network of approximately 7,900 outlets in the United States, Europe and Asia.
Based on public filings, for the year ended December 31, 1998, Conoco ranked
eighth in the worldwide production of petroleum liquids by U.S.-based companies,
eleventh in the production of natural gas, and eighth in refining throughput.
For that same period, Conoco reported net income of $450 million, which included
a net charge for Special Items of $271 million, on total revenues of $23,168
million.
BUSINESS STRATEGY
Conoco intends to pursue a growth-oriented business strategy by exploiting
growth opportunities where Conoco has existing major areas of operation,
creating at least two new major business areas in northern South America and the
Caribbean, and one of the Asia Pacific, West Africa, Middle East or Russia/
Caspian Sea regions, and continuing to improve the profitability, efficiency and
effectiveness of its existing operations. Specifically, Conoco intends to:
- manage its portfolio to increase the proportion of Upstream assets
relative to Downstream assets and the proportion of large-scale,
long-lived, early-life cycle assets relative to mature assets, which
could include forming joint ventures or alliances to optimize the
efficiency of operations or monetize a portion of the value of such
assets;
- achieve significant near-term production growth through large scale
projects such as Petrozuata, Britannia, Lobo and Ursa;
- seek opportunities created by worldwide privatizations and the opening of
new markets previously closed to private investment;
- apply its strengths in carbon upgrading, project management, deepwater
technology, natural gas processing, seismic processing and
interpretation, and the ability to present integrated Upstream/
Downstream solutions to host governments and other institutions in new
and emerging markets;
- pursue exploration activities that have significant value creation
potential by concentrating on areas that are under-explored;
- capitalize on its ability to convert low cost, heavy, high sulfur and
acidic crude oils into high value light oil products; and
- continuously rationalize its asset base, contain costs, optimize its
investment portfolio, and improve operating reliability.
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In all of its activities, Conoco will strive to act in accordance with its
core values of operating safely, protecting the environment, acting ethically
and valuing all people.
COMPANY HISTORY
Conoco was founded in 1875 in Ogden, Utah, as the Continental Oil and
Transportation Company. In 1885, it was reincorporated with a new name,
Continental Oil Company, as part of the nationwide Standard Oil Trust. In its
early years, its principal operations were marketing oil and petroleum related
products, primarily in the Rocky Mountain area and in California. In 1913, two
years after the U.S. Supreme Court dissolved the Standard Oil Trust, Conoco was
again independently incorporated. From 1913 to 1929, Conoco evolved into a fully
integrated oil company, with operations in most states west of the Mississippi
River.
By 1929, Conoco had approximately 1,800 producing wells and had become one
of the largest retailers of gasoline in the Rocky Mountain area. In that year,
it merged with the Marland Oil Company, an oil and gas company with wells and
marketing operations from Oklahoma to Maryland. After World War II, Conoco was
an early participant in Gulf of Mexico exploration and production activities and
moved aggressively overseas with Upstream assets in many parts of the world and
Downstream assets in Western Europe. In 1981, Conoco was acquired by DuPont.
FINANCIAL INFORMATION -- OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
See Note 27 to the Consolidated Financial Statements of Conoco for
Operating Segment and Geographic Information.
UPSTREAM
SUMMARY
Conoco is currently exploring for, developing or producing crude oil,
natural gas and/or natural gas liquids in 17 countries around the world. In
1998, production averaged 583,000 BOE per day, consisting of 348,000 barrels per
day of petroleum liquids (excluding natural gas liquids ("NGLs") from gas plant
ownership) and 1,411 million cubic feet of natural gas per day. The majority of
this production came from fields located in the United States, the United
Kingdom and Norway, with the remaining production coming from operations in
Canada, the United Arab Emirates, Indonesia, Nigeria, Russia and Venezuela.
In 1998, Conoco replaced nearly 110 percent of the oil and natural gas it
produced, adding 234 million BOE to Conoco's worldwide reserves while producing
213 million BOE (excluding NGLs from gas plant ownership), for a net addition of
21 million BOE. This marks the sixth consecutive year that Conoco has replaced
more reserves than it produced. Conoco replaced 163 percent of the natural gas
produced and 74 percent of the oil produced. On December 31, 1998, Conoco had
proved reserves of 2,622 million BOE, consisting of 1,591 million barrels of
petroleum liquids and 6,183 billion cubic feet of natural gas, representing an
increase of 48 percent on a BOE basis since December 31, 1994.
Conoco's capital investment in Upstream activities in 1998 was $1,965
million, including the continued development of the Lobo trend, Britannia, Ursa
and Petrozuata. These projects will contribute to Conoco's 1999 production and
significantly increase Conoco's production rates over current levels in future
years.
The majority of Conoco's exploration and production assets are located in
North America (United States and Canada) and Western Europe (United Kingdom and
Norway). The producing properties in these areas generate cash to fund growth
opportunities around the world. Outside of North America and Western Europe,
Conoco's investment activities are focused on areas that have the potential to
become major business areas in the future, such as northern South America and
the Caribbean, and the Asia Pacific, West Africa, Middle East and Russia/Caspian
Sea regions.
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Conoco is exploring for oil and/or natural gas in 15 countries. Since 1996,
Conoco has pursued and continues to implement an exploration strategy focused on
acquiring large acreage positions in areas that are relatively under-explored.
The purpose of these acreage acquisitions has been to establish Conoco at an
early stage in areas that have the potential for large discoveries. During the
same period, Conoco acquired significant acreage positions in the deepwater Gulf
of Mexico, the Atlantic Margin of Northwest Europe, northern South America and
the Caribbean, and selected basins in the Asia Pacific region. In 1998, Conoco's
exploratory, success rate was its best in 15 years. Approximately 30 percent of
the exploratory wells Conoco drilled, excluding appraisal wells, were
potentially commercial.
Conoco intends to manage its asset portfolio to increase the proportion of
Upstream assets relative to Downstream assets and the proportion of large-scale,
long-lived, early-life cycle assets relative to mature assets. In the course of
implementing such strategy, Conoco has in the past, and may from time to time in
the future, purchase or sell producing Upstream assets. Conoco may also consider
forming alliances or joint ventures to hold and operate selected Upstream
assets, either to optimize the efficiency of such operations through achieving
economies of scale or, in certain circumstances, to monetize a portion of the
value of such assets.
The following table sets forth certain information regarding Conoco's
producing properties.
<TABLE>
<CAPTION>
PROVED RESERVES
AS OF DECEMBER 31, 1998
1998 PRODUCTION
NATURE OF INTEREST (MMBOE)(1) (MBOE PER DAY)(1)
------------------ ------------------ -----------------
<S> <C> <C> <C>
REGION
UNITED STATES
Lobo................................... Lease 162 70
Gulf of Mexico (including Ursa)........ Lease 80 28
San Juan Basin......................... Lease 185 53
Permian Basin.......................... Lease 133 31
Central Appalachian Basin.............. Partnership 63 2
Other.................................. 88 43
----- ---
Total United States............ 711 227
WESTERN EUROPE
Britannia.............................. License 242 18
Heidrun................................ License 146 39
Statfjord.............................. License 100 54
Troll.................................. License 114 9
Other.................................. 317 111
----- ---
Total Western Europe........... 919 231
NORTHERN SOUTH AMERICA AND THE CARIBBEAN
Petrozuata............................. Equity Company 678 5
OTHER.................................... 314 120
----- ---
Total.......................... 2,622 583
===== ===
</TABLE>
- ---------------
(1) Includes crude oil, condensate, and NGLs expected to be removed for Conoco's
account from its natural gas production.
UNITED STATES
Production operations in the United States are principally located in the
Lobo trend in South Texas, the Gulf of Mexico, the San Juan Basin in New Mexico,
the Permian Basin in West Texas and the Central Appalachian Basin in Virginia.
In 1998, United States operations contributed approximately 23 percent of
Conoco's worldwide petroleum liquids production and 63 percent of its worldwide
natural gas
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production. Proved reserves as of December 31, 1998, were 711 million BOE,
consisting of 261 million barrels of petroleum liquids and 2,700 billion cubic
feet of natural gas.
In recent years, Conoco has consolidated its exploration and production
operations in the United States in order to increase profitability. Conoco sold
hundreds of smaller, less efficient properties, while acquiring an increased
interest in its largest producing areas such as the San Juan Basin and the Lobo
trend. As a result, Conoco has reduced the number of fields in its portfolio
from approximately 700 in 1990 to 104 as of December 31, 1998, while maintaining
production essentially constant on a BOE basis. Conoco has also focused its
exploration activities by reducing the number of exploration plays being pursued
in the United States from over 30 in 1995 to less than ten as of December 31,
1998. Exploration activity in the United States is concentrated in the deepwater
Gulf of Mexico.
Conoco's objectives are to increase production from the Lobo trend and the
deepwater Gulf of Mexico, while maintaining production from other United States
assets and focusing on natural gas processing capabilities.
Lobo Trend in South Texas
Conoco is the largest natural gas producer in the Lobo trend, and a leading
producer, marketer and transporter of natural gas in South Texas. Conoco has 20
years of operating and drilling experience in the Lobo trend and currently holds
approximately 450,000 acres in the area under oil and gas leases. In 1997, in
accordance with its strategy to rapidly increase production through
participation in large development projects, Conoco substantially increased its
holdings in South Texas through the acquisition of $929 million of natural gas
properties and transportation assets. Assets acquired by Conoco in this
transaction included approximately 215,000 acres of leases, 800 wells and 1,150
miles of natural gas gathering and transportation pipeline, providing direct
access to major Texas intrastate and interstate pipeline systems. As a result of
the Lobo acquisition, Conoco is currently the second largest natural gas
producer in Texas.
Conoco's average working interest in its leases in the Lobo trend is 92
percent. A large number of the producing wells acquired in the Lobo acquisition
were acquired subject to volumetric production payments. The holders of these
production payments are entitled to a specific volume of production from these
wells (averaging approximately 91 million cubic feet per day in 1998) until the
last of the production payments terminates in 2002.
With most of its expanded Lobo holdings still undeveloped, Conoco has
significantly increased drilling activity and, as of December 31, 1998, had 13
rigs working continuously in the region. This development activity has resulted
in an increase in gross natural gas production in the region from approximately
510 million cubic feet per day for December 1997 to approximately 750 million
cubic feet per day for December 1998, an increase of approximately 47 percent.
Conoco anticipates spending $600 million between 1999 and 2002 to further
develop its leases in the Lobo trend. Conoco's 1998 Lobo trend development
program included the acquisition of new 3D seismic data and the drilling of over
200 wells.
Lobo Pipeline Company, a wholly owned subsidiary of Conoco, owns a 1,150
mile intrastate natural gas pipeline system in South Texas and expects to
implement an expansion plan designed to provide transportation for Conoco's gas
production and that of third party producers, laying 100 miles of pipeline per
year for the next five years. During the first two years, most of the pipeline
added will be high-pressure trunklines to support regional development.
Gulf of Mexico
Conoco's current portfolio of producing properties in the Gulf of Mexico
includes ten fields operated by Conoco and 14 operated by other companies. The
properties are in various stages of development, ranging from properties that
are fully developed to ones with considerable additional development potential.
Conoco also holds interests in various offshore platforms, pipelines and other
infrastructure.
Conoco currently has 13 leases in production or under development in the
deepwater Gulf of Mexico. Conoco's most important current development project in
the Gulf of Mexico is the Ursa field development.
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Ursa, operated by Shell, is one of the largest discoveries to date in the
deepwater Gulf of Mexico. Conoco holds a 16 percent interest in the field, along
with Shell (45 percent), BP Amoco (23 percent) and Exxon (16 percent). The Ursa
tension leg platform was installed in late 1998 in approximately 3,900 feet of
water. Initial production from Ursa began in March 1999, and Conoco projects
that peak gross production from the Ursa field will reach 150,000 barrels per
day of petroleum liquids and 400 million cubic feet of gas per day by 2001.
Conoco's most important exploration program in the United States is in the
deepwater Gulf of Mexico. Conoco is the seventh largest deepwater leaseholder in
the Gulf, with interests in 295 leases. Conoco has a 100 percent interest in 104
of these leases, and jointly owns 76 of the remaining leases on a 50-50 basis
with Shell and 60 of the remaining leases on a 50-50 basis with Exxon. Since
1996, Conoco has acquired 3D seismic data over large portions of the deepwater
Gulf of Mexico to identify acreage to lease and to select prospects for
drilling. Seismic interpretation is now underway on many leases and preparations
for a multi-well drilling program are being made.
Conoco will carry out its deepwater Gulf of Mexico drilling program in
large part with a recently completed deepwater drillship. This vessel went into
service in January 1999, commencing a five-year, $400 million drilling program
in the Gulf of Mexico. This highly sophisticated drillship is capable of
drilling in water depths of up to 10,000 feet and provides Conoco with the
ability to explore in areas that were previously inaccessible.
Other U.S. Producing Properties
Outside of South Texas and Gulf of Mexico, Conoco's largest producing
properties in the United States are located in the San Juan Basin of New Mexico,
the Permian Basin in West Texas and the Central Appalachian Basin in Virginia.
Conoco also has producing properties in the Williston Basin and the Hugoton
complex in the Oklahoma/Texas Panhandle.
Conoco has a significant acreage position in the San Juan Basin. Conoco's
average daily net production from the San Juan Basin in 1998 was approximately
15,500 barrels of petroleum liquids and 226 million cubic feet of natural gas.
Conoco believes significant additional hydrocarbons lie below the basin's
traditional producing formations, and Conoco is actively exploring for new
reserves. In 1998, Conoco conducted a 300-square-mile 3D seismic survey covering
the most promising deep areas of the basin. Early results have identified
several high-potential prospects, and two wells are planned to be drilled in
1999. Conoco will also continue to consider potential acquisitions in this basin
to take advantage of synergies resulting from its large asset base and gas plant
in the area.
Conoco has an interest in 29 fields in the Permian Basin, which is one of
the largest producing areas in the United States. In the Permian Basin, Conoco's
average daily net production in 1998 was approximately 23,500 barrels of
petroleum liquids and approximately 44 million cubic feet of gas. Conoco is
using 3D seismic technology, horizontal wells and other innovative extraction
technologies in an effort to extend the productive life of many of the mature
fields in the Permian Basin.
Pocahontas Gas Partnership is a 50/50 partnership between Conoco and Consol
Energy Inc. Pocahontas produces and gathers coal bed methane prior to and during
coal mining operations in Virginia. Pocahontas produced and gathered
approximately 34 million cubic feet per day (gross) of coal bed methane from the
existing active mining area in 1998. Conoco recently approved an expansion of
the Pocahontas project to develop coal bed methane outside of the existing
mining area, which is expected to increase total Pocahontas production to
approximately 40 million cubic feet per day (gross) in 1999.
NATURAL GAS AND GAS PRODUCTS
In the United States, Conoco owns interests in 23 natural gas processing
plants located in Louisiana, New Mexico, Oklahoma and Texas as well as
approximately 10,000 miles of gathering lines. Conoco operates sixteen of the
plants.
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Conoco gathers natural gas, extracts NGLs and sells the remaining residual
gas. Most of Conoco's raw gas liquids are supplied to its processing operations,
which further separate them into NGL products that are used as feedstocks for
gasoline and chemicals production. Conoco provides service to approximately 800
natural gas producers and sells more than 500 million cubic feet per day of
residue gas to approximately 120 customers.
Conoco's share of total NGLs from natural gas processed at the 23 plants in
which it owns an interest averaged 66,300 barrels per day in 1998, of which
approximately 11,000 barrels per day of NGLs were from Conoco owned reserves,
which were reported, net of royalties, as United States NGL production. In 1998,
approximately 28,200 barrels per day of additional NGLs were attributable to
processing of Conoco's natural gas liquids in third-party-operated plants.
Furthermore, Conoco's 50 percent-owned equity affiliate, C&L Processors
Partnership, has five natural gas processing plants in Oklahoma and Texas.
Conoco's pro rata share of C&L's NGL production was approximately 7,600 barrels
per day in 1998.
Conoco's other natural gas and gas products facilities in the United States
include Lobo Pipeline Company's 1,150-mile intrastate natural gas pipeline
system in South Texas, an 800-mile intrastate natural gas pipeline system in
Louisiana operated by Conoco's wholly owned subsidiary, Louisiana Gas System,
Inc., natural gas and NGL pipelines in several other states, three underground
NGL storage facilities, a natural gas liquids fractionating plant in Gallup, New
Mexico with a capacity of 25,000 barrels per day, and a 22.5 percent equity
interest in Gulf Coast Fractionators, which owns a natural gas liquids
fractionating plant in Mt. Belvieu, Texas with a capacity of 104,000 barrels per
day.
In 1998 Conoco sold approximately 3.3 billion cubic feet per day of natural
gas, which included 873 million cubic feet per day of its U.S. natural gas
production.
WESTERN EUROPE
Conoco has a significant portfolio of producing properties in the United
Kingdom and Norway. Proved Western Europe reserves, as of December 31, 1998,
were 919 million BOE, consisting of 410 million barrels of petroleum liquids and
3,053 billion cubic feet of natural gas. In 1998, operations in Western Europe
contributed 44 percent of Conoco's worldwide petroleum liquids production and 33
percent of its natural gas production.
Britannia Field
Conoco has a 42.4 percent interest in the Britannia field, which is one of
the largest natural gas/ condensate fields in the United Kingdom sector of the
North Sea. Britannia is a centerpiece of Conoco's strategy to increase
production and reserves through large, long-lived projects. First production
from Britannia occurred in August 1998 and Conoco estimates that the field will
have a production life of approximately 30 years. Conoco's proved reserves in
Britannia include 1.1 trillion cubic feet of natural gas and 56 million barrels
of petroleum liquids at December 31, 1998. Britannia is currently producing 740
million cubic feet of gas per day (gross) and production is expected to
fluctuate due to seasonal demand. Conoco and Chevron, the two largest interest
holders in the field, jointly operate Britannia.
Southern North Sea Producing Properties
Conoco has various equity interests in 13 producing gas fields in the
Southern North Sea, a major gas producing area on the United Kingdom continental
shelf. These fields mostly feed into the Conoco-operated Theddlethorpe gas
processing facility through three Conoco-operated pipeline systems (Viking,
LOGGS and CMS). In 1998, Conoco's net production from the Southern North Sea was
98 billion cubic feet of natural gas.
Conoco believes there are additional development opportunities in the
Southern North Sea. One example is the Viking Phoenix project, in which Conoco
targeted the development of additional reserves using existing infrastructure
and new drilling and completion technology. In November 1998, Conoco
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started production from this development, for which its proved reserves were 73
billion cubic feet of gas as of December 31, 1998. Conoco holds a 50 percent
interest in the Viking Field.
At year-end 1998, Conoco acquired Canadian Petroleum UK Ltd., the British
subsidiary of Canadian Occidental Petroleum Ltd. The acquisition included (1)
interests in the Vulcan (7.9 percent), South Valiant (12.5 percent), and Caister
(30 percent) gas producing fields; (2) a 15 percent interest in the Caister
Murdoch gas pipeline; (3) a ten percent interest in the Eagles gas pipeline; and
(4) interests in eight exploration blocks. As a result of this acquisition,
Conoco increased its interest in the Vulcan and South Valiant Fields to 50
percent from 42.1 percent and 37.5 percent, respectively, and increased its
stake in the Caister Murdoch gas pipeline to 42.25 percent. Conoco currently
operates the Vulcan and South Valiant fields.
Other United Kingdom Properties and Discoveries
Conoco also has interests in the Miller (30 percent), Alba (12 percent),
Statfjord (4.8 percent in the United Kingdom/10.3 percent in the Norwegian
sector), MacCulloch (40 percent), and Banff (32 percent) fields, and the Clair
discovery (21 percent). Conoco operates the MacCulloch and Banff fields, both of
which will employ floating production, storage and offtake technology. BP Amoco
operates the Miller field and the Clair discovery, which is one of the largest
undeveloped oil discoveries in Western Europe.
Interconnector Pipeline and Gas Sales
The Interconnector pipeline, which connects the United Kingdom and Belgium,
will facilitate marketing throughout Europe of the natural gas Conoco produces
in the United Kingdom. This pipeline commenced operation in October 1998.
Conoco's ten percent share of the Interconnector pipeline allows Conoco to ship
approximately 200 million cubic feet of gas per day to the markets in
continental Europe. Conoco has long-term contracts (seven to ten years) to
supply natural gas to Gasunie in the Netherlands and Wingas in Germany, which
fully utilizes this capacity. Because the Interconnector pipeline provides
flexibility to flow in either direction, Conoco will be able to take advantage
of the long-term and short-term market conditions in both the United Kingdom and
continental Europe.
Norwegian Producing Fields
Conoco is the sixth largest oil producer in Norway. Conoco has an ownership
interest in three of the largest fields in the country: Heidrun, Statfjord and
Troll. Conoco also has an interest in the Oseberg South (7.7 percent), Visund
(9.1 percent), Jotun (3.75 percent), and Huldra (23.3 percent) discoveries,
which are in development, as well as the PL 203 (20 percent) discovery.
Production from the Heidrun field began in 1995 and is currently averaging
196,000 barrels of petroleum liquids per day (gross). Conoco's share of the
proved reserves in the field, based on its 18.125 percent interest, is 119
million barrels of petroleum liquids and 159 billion cubic feet of natural gas.
Conoco was the operator for the construction and installation of Heidrun's
tension leg platform. Upon first production, Statoil assumed operatorship in
accordance with a pre-agreed arrangement. Associated gas from the Heidrun field
currently serves as feedstock for a methanol plant that became operational in
Norway in 1997. The plant, in which Conoco holds an 18.125 percent interest, is
operated by Statoil.
Conoco, which holds 10.3 and 4.8 percent interests in the Norwegian and
United Kingdom sectors of the Statfjord field, respectively, had net proved
reserves of 84 million barrels of petroleum liquids and 98 billion cubic feet of
natural gas in the field as of December 31, 1998 (total for Norway and the
United Kingdom). Conoco is supporting work by Statoil, the operator of
Statfjord, to determine ways to slow the natural decline of the field and
increase reserves. Conoco also owns a 1.66 percent interest in the Troll gas
field, operated by Statoil, and has net proved reserves in the field of 576
billion cubic feet of natural gas and 18 million barrels of petroleum liquids.
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<PAGE> 88
Exploration -- The Atlantic Margin
Exploration activity in Western Europe is focused on the deepwater Atlantic
Margin fairway, which runs from the Voring Basin off the coast of Norway to the
Porcupine Basin off the west coast of Ireland. Along the Atlantic Margin, Conoco
has significant acreage positions in the Voring Basin, the West of Shetlands and
North Rockall Trough areas in the United Kingdom and the Porcupine Basin. In
1997, the United Kingdom government awarded Conoco and three partners
exploration licenses for two deepwater blocks, Block 204/14 and 204/15, in the
West of Shetlands area. These blocks are adjacent to a discovery in BP
Amoco-operated Block 204/19. Conoco, as operator of Blocks 204/14 and 204/15,
drilled two wells in 1998 to test the potential of this acreage. The results of
the wells are being currently evaluated by Conoco and its partners.
NORTHERN SOUTH AMERICA AND THE CARIBBEAN
Petrozuata
Petrozuata is a key component of Conoco's strategy to increase production
and reserves through implementation of long-lived, large development projects
and to utilize its proprietary coking technology in other areas of its business.
Petrozuata is a joint venture between Conoco, which holds a 50.1 percent non-
controlling equity interest (subject to an option that expires May 31, 1999,
held by the Venezuelan investment entity SOFIP, to purchase one percent of the
joint venture from Conoco), and PDVSA Petroleo y Gas S.A., a subsidiary of
Petroleos de Venezuela ("PDVSA"), the national oil company of the Republic of
Venezuela, which holds the remaining interest. Petrozuata, the first venture of
its kind in Venezuela, is developing an integrated operation to produce extra
heavy crude oil from known reserves in the Zuata region of the Orinoco Belt,
transport it to the Jose industrial complex on the north coast of Venezuela and
upgrade it into a lighter, partially processed refinery feedstock similar to
crude oil (synthetic crude), with associated by-products of liquified petroleum
gas, sulfur, petroleum coke and heavy gas oil. Conoco's recorded proved reserves
related to its interest in this project as of December 31, 1998, were 678
million barrels of oil. Drilling began in 1997 and at December 31, 1998,
approximately 60 horizontal wells were in various stages of development, with
another 40 wells planned by year-end 1999. The joint venture agreement has a
35-year term, commencing upon the completion of the upgrading facility in 2000,
and requires approval of both Conoco and PDVSA Petroleo y Gas S.A. for major
Petrozuata decisions.
The upgrading facility, which will employ Conoco's proprietary delayed
coking technology, is currently under construction. The upgrading facility will
be located at Jose and is projected to become operational in 2000. Diluted extra
heavy crude oil will be transported via a 36-inch pipeline from the field to the
Jose industrial complex. An adjacent 20-inch pipeline will return naphtha from
the upgrading facility to the field for use as a diluent. Petrozuata has also
begun construction of field processing and support facilities and marine
facilities for shipping synthetic crude and by-products.
Petrozuata began early production of extra heavy crude oil in August 1998,
and Conoco expects that Petrozuata's production will rise to 120,000 barrels
(gross) per day by the time the project's upgrading facility becomes
operational. Prior to completion of the upgrading facility, the extra heavy
crude will be blended with lighter oils and sold on world markets. Following
completion of the upgrading facility, the synthetic crude produced by Petrozuata
will either be used as a feedstock for Conoco's Lake Charles refinery and a
refinery operated by PDVSA, or will be sold to third parties. Conoco has entered
into an agreement to purchase up to 104,000 barrels per day of the Petrozuata
synthetic crude for a formula price over the term of the joint venture if
Petrozuata is unable to sell the production to third parties for higher prices.
All synthetic crude sales will be denominated in United States dollars.
By-products produced by the upgrading facility (principally coke and sulfur)
will be sold to a variety of domestic and foreign purchasers. The loading
facilities at Jose will transfer synthetic crude and some of the by-products to
ocean tankers for export. Synthetic crude sales are expected to comprise more
than 90 percent of the project's revenues.
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<PAGE> 89
The La Luna Trend
Exploration activity in northern South America and the Caribbean is focused
on a geologic trend known as La Luna. In Venezuela, Conoco conducted seismic
surveys in 1997 on the shallow water Gulf of Paria West block, and on the
Guanare block in the Merida Andes foothills. Conoco drilled two prospects, one
on each block resulting in one dry hole in the Guanare block and one well in the
Gulf of Paria West block on which a drill stem test was performed in early 1999.
Additional exploration and appraisal work is currently planned for 1999. Conoco
currently holds a 50 percent working interest in both the Gulf of Paria West
block, which it operates, and the Guanare block, which is operated by Elf
Aquitane (in each case subject to dilution to 32.5 percent at the option of a
PDVSA affiliate).
In northwestern Colombia, seismic surveys have been completed in
partnership with Texaco on three tracts that Conoco acquired through a 50
percent farm-in. In 1998, Texaco drilled two wells on the acreage (both dry
holes) and plans to drill two additional wells in 1999. In addition, Conoco and
Texaco acquired a fourth tract in a joint bid in 1998.
In 1997, Conoco signed a production sharing contract for Blocks 4a and 4b,
two large prospective blocks off Trinidad's east coast. A 3D seismic survey was
acquired over the acreage in 1997, and Conoco is currently drilling a well to
test the potential of this acreage. Conoco is operator of both blocks and has a
50 percent working interest; Texaco holds the remaining working interest in both
blocks.
Seeking additional opportunities in the La Luna Trend, Conoco has conducted
a two-year study of the hydrocarbon potential of the entire offshore Barbados
area. Encouraged by the study, Conoco has entered into a commitment to acquire
seismic data over 50 percent of the original study area and has the option to
enter a drilling program to test the potential of this largely unexplored area.
Phoenix Park
Conoco holds a 39 percent equity interest in Phoenix Park Gas Processors
Limited, a joint venture with the National Gas Company of Trinidad and Tobago
Limited, that processes gas in Trinidad and markets in the eastern Caribbean.
Phoenix Park owns a gas processing plant, a fractionator producing propane,
mixed butane and natural gasoline, storage tanks and a liquified petroleum gas
marine loading dock. These facilities produce over 11,000 barrels per day
(gross) of NGLs. Phoenix Park is currently expanding its facilities to process
up to 1.4 billion cubic feet of gas per day, increase fractionation capacity to
33,000 barrels per day, and add additional storage and marine export facilities.
This expansion is expected to be completed in mid-1999.
ASIA PACIFIC
Conoco has a 30-year operating history in Indonesia. The focus of Conoco's
effort in the Asia Pacific region is its operations in the Indonesian sector of
the Natuna Sea. In this area, Conoco is the operator of the Block B and North
West Natuna Sea Block II production sharing contracts. Conoco also has interests
in exploration blocks in Cambodia, Vietnam and New Zealand.
West Natuna Gas Project
In 1996, Conoco, as operator of the South Natuna Sea Block B PSC, along
with the other participants in Block B and the interest holders in the Block A
and Kakap production sharing contracts, formed the "West Natuna Group", with the
aim of jointly marketing gas from the West Natuna Area to Singapore. In January
1999, Pertamina (the Indonesian state-owned oil and gas company), Sembgas (a
company owned by Sembcorp Industries, Temasek and Tracetebel, which will act as
buyers of the gas) and the West Natuna Group entered into a definitive set of
agreements, providing for the sale and purchase of natural gas from specified
fields in the production sharing contracts operated by the West Natuna Group.
These agreements provide for gas deliveries to begin by mid-2001 that will
rise to a sales rate of 325 million cubic feet per day. Sembgas will sell the
gas to a series of end users (including Tuas Power,
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<PAGE> 90
Sembcorp Cogen and Esso Chemicals) who will use the gas for industrial purposes,
primarily power generation. The West Natuna Group has entered into a gas supply
agreement with Pertamina in which they have undertaken to develop a series of
fields and to supply the gas produced to Pertamina for the sale to Sembgas. In
addition, each of the production sharing contracts has been extended to allow
the West Natuna Group to support Pertamina for the expected 22 year life of the
contract with Sembgas.
A 300-mile 28-inch submarine pipeline (along with smaller gathering
pipelines) will be built by the West Natuna Group to transport the gas from the
West Natuna Sea fields to Singapore. Conoco will be the operator of the pipeline
system (including the receiving terminal in Singapore). Contractual arrangements
between the West Natuna Group, Pertamina and Sembgas to govern the construction
and operation of the pipeline are in place. An engineering, procurement,
construction and installation contract to build the pipeline is currently being
bid. The agreements provide for the supply of approximately one trillion cubic
feet of natural gas from fields in Block B to Sembgas. Block B's share of
production will reach 140 million cubic feet of gas daily. Block B constitutes
43.1 percent of the West Natuna Group and Conoco owns a 40 percent interest in
Block B and has net proved reserves of 197 billion cubic feet of natural gas.
Belida and Sembilang Fields, Indonesia
Conoco holds a 40 percent interest in and serves as operator of the Belida
and Sembilang oil fields in the Block B PSC. An ongoing infill drilling program
in the Belida Field maintained gross production for the Indonesian fields in the
range of 85,000 barrels per day in 1998.
CANADIAN ROCKIES
Conoco has had significant exploration success in the 1990's in the
foothills east of the Canadian Rockies. In this area, Conoco has an interest in
209,000 net acres, much of which has yet to be developed. Development plans for
1999/2000 include bringing on-stream two more of the foothills discoveries. In
addition to the discoveries in the foothills trend, Conoco has a significant
interest in the Peco Gas Field, located just east of the foothills. Conoco also
owns 100 percent of the Peco gas processing plant, which processes gas from the
Peco Field and two of the foothills discoveries.
RUSSIA
Conoco holds a 50 percent direct (plus a 4.7 percent indirect) ownership
interest in Polar Lights Company, a Russian limited liability company
established in January 1992. Polar Lights, the first Russian-Western joint
venture to develop a major new oil field, was established to develop the Ardalin
oil field discovered in 1988 by the Russian state enterprise GP
Arkhangelskgeologia. Ardalin is located in the Arctic tundra approximately 1,000
miles northeast of Moscow. As of December 31, 1998, Conoco's share of proved
reserves was 42 million barrels of petroleum liquids, with an additional eight
million barrels of net proved reserves at the adjacent oil fields -- Kolva and
Dusushev. Polar Lights started producing oil in August 1994 and gross production
has increased from an average 21,000 barrels per day in 1994 to an average
35,000 barrels per day in 1998. Oil is transported through the existing Russian
pipeline system and is then exported or sold on the domestic market.
In March 1998, Conoco signed a memorandum of understanding with OAO Lukoil,
Russia's largest oil company, to jointly study the development of petroleum
reserves in the 1.2 million acre block known as the Northern Territories in the
Timan-Pechora region in northern Russia, which includes the large undeveloped
Yuzhno Khilchuyu oil field. The memorandum of understanding followed Lukoil's
purchase in December 1997 of a majority interest in OAO Arkhangelskgeoldobycha
(successor to GP Arkhangelskgeologia), Conoco's original partner in the Northern
Territories. In November 1998, Conoco and Lukoil signed a second memorandum of
understanding to work together to draw up and submit all documents required by
the Russian government to develop the Northern Territories under production
sharing agreement terms, to secure funding for the project and to work together
to resolve other outstanding issues.
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<PAGE> 91
In July 1998, Conoco acquired a 15.667 percent interest in OAO
Arkhangelskgeoldobycha for approximately $33 million. OAO Arkhangelskgeoldobycha
owns a 30 percent interest in Polar Lights.
WEST AFRICA
In 1997, Conoco, in partnership with Express Petroleum and Gas Company Ltd.
of Nigeria, announced the production of first oil from the shallow water
Ukpokiti field, located offshore in the western Niger delta. Conoco currently
has a 90 percent revenue interest in the field. Total production from the field
is currently 20,000 barrels per day of oil, and Conoco's net proved reserves as
of December 31, 1998 were 13.2 million barrels of oil. Express operates
Ukpokiti, and Conoco provides technical and operational assistance in the
field's development, which included three remote caisson-type structures, five
wells, and the conversion of the Conoco tanker "Independence" into a floating
production and storage offtake vessel. With a 1.7 million barrel storage
capacity, the vessel also serves as an export terminal.
In addition to its interest in the Ukpokiti field, Conoco has a 47.5
percent working interest in the deepwater OPL 220 license off the coast of
Nigeria, which is operated by Conoco and encompasses 600,000 acres. Conoco has
acquired a 3D seismic survey and drilled two wells on this license. The first
well, which was drilled in 1997, found only gas and was non-commercial. The
second well was drilled in 1998 and encountered both oil and gas-filled sands.
Conoco and its partner, Exxon, are currently evaluating results from this second
well.
MIDDLE EAST
In Dubai, United Arab Emirates, Conoco has operated four fields since their
discovery between 1966 and 1973. Currently, Conoco is using horizontal drilling
techniques and advanced reservoir drainage technology to enhance the efficiency
of the offshore production operations and improve recovery rates.
OIL AND NATURAL GAS RESERVES
Conoco's estimated proved reserves at December 31, 1998 were 2,622 million
BOE, consisting of 1,591 million barrels of oil and 6,183 billion cubic feet of
natural gas.
Oil and gas proved reserves cannot be measured precisely. The reserve data
set forth in this report is only an estimate. Reservoir engineering is a
subjective and inexact process of estimating underground accumulations of oil
and natural gas. Reserve estimates are based on many factors related to
reservoir performance which require evaluation by engineers interpreting the
available data, as well as price and other economic factors. The reliability of
these estimates at any point in time depends on both the quality and quantity of
the technical and economic data, the production performance of the reservoirs as
well as extensive engineering judgment. Consequently, reserve estimates are
subject to revision as additional data become available during the producing
life of a reservoir. When a commercial reservoir is discovered, proved reserves
are initially determined based on limited data from the first well or wells.
Subsequent data may better define the extent of the reservoir and additional
production performance. Well tests and engineering studies will likely improve
the reliability of the reserve estimate.
At lower prices for crude oil and natural gas, it may no longer be economic
to produce certain reserves. Actual production, revenues and expenditures with
respect to Conoco's reserves will likely vary from estimates, and such variances
may be material.
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<PAGE> 92
The following table sets forth by region Conoco's proved oil reserves at
year-end for the past five years:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1998 1997 1996 1995 1994
----- ----- ---- ---- ----
(MILLIONS OF BARRELS)
<S> <C> <C> <C> <C> <C>
PROVED OIL RESERVES(1)
CONSOLIDATED COMPANIES
United States.............................................. 261 277 299 294 336
Europe..................................................... 410 421 413 408 394
Other Regions.............................................. 192 195 214 231 223
----- ----- --- --- ---
Worldwide................................................ 863 893 926 933 953
SHARE OF EQUITY AFFILIATES
Europe..................................................... 50 51 47 44 35
Other Regions(2)........................................... 678 680 -- -- --
----- ----- --- --- ---
Total Proved Oil Reserves........................ 1,591 1,624 973 977 988
===== ===== === === ===
</TABLE>
- ---------------
(1) Proved oil reserves comprise crude oil, condensate and NGLs expected to be
removed for Conoco's account from its natural gas production.
(2) Represents Conoco's equity share of the Petrozuata venture in Venezuela.
The following table sets forth by region Conoco's proved natural gas
reserves at year-end for the past five years:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
(BILLIONS OF CUBIC FEET)
<S> <C> <C> <C> <C> <C>
PROVED NATURAL GAS RESERVES
CONSOLIDATED COMPANIES
United States.......................................... 2,319 2,235 1,822 1,891 1,749
Europe................................................. 3,053 3,060 3,068 2,649 2,431
Other Regions.......................................... 430 196 173 169 150
----- ----- ----- ----- -----
Worldwide............................................ 5,802 5,491 5,063 4,709 4,330
SHARE OF EQUITY AFFILIATES
United States.......................................... 381 370 333 339 344
----- ----- ----- ----- -----
Total Proved Natural Gas Reserves............ 6,183 5,861 5,396 5,048 4,674
===== ===== ===== ===== =====
</TABLE>
PRODUCTION DATA
Conoco's oil and natural gas production, excluding NGLs from gas plant
ownership, averaged 583,000 BOE per day in 1998, compared with 575,000 BOE per
day in 1997. As a percentage of total production, natural gas production was 40
percent and 35 percent in 1998 and 1997, respectively.
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<PAGE> 93
The table below shows Conoco's interests in average daily oil production
and natural gas production for the past three years. Oil production comprises
crude oil and condensate produced for Conoco's account, plus its share of NGLs
removed from natural gas production from owned leases. Natural gas production
represents Conoco's share of production from leases in which it has an ownership
interest. Natural gas liquids processed represents Conoco's share of NGLs
acquired through gas plant ownership.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(THOUSANDS OF BARRELS
PER DAY)
<S> <C> <C> <C>
NET AVERAGE DAILY OIL PRODUCTION
CONSOLIDATED COMPANIES
United States.......................................... 79 90 91
Europe................................................. 152 176 182
Other Regions.......................................... 95 92 88
--- --- ---
Total Net Production -- Consolidated Companies.... 326 358 361
SHARE OF EQUITY AFFILIATES
Europe................................................. 17 16 13
Other Regions.......................................... 5 -- --
--- --- ---
Total Net Production -- Equity Affiliates......... 22 16 13
--- --- ---
Total Net Oil Production Per Day.................. 348 374 374
=== === ===
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(MILLIONS OF CUBIC FEET
PER DAY)
<S> <C> <C> <C>
NET AVERAGE DAILY NATURAL GAS PRODUCTION
CONSOLIDATED COMPANIES
United States.......................................... 873 709 738
Europe................................................. 470 432 416
Other Regions.......................................... 53 46 41
----- ----- -----
Total Net Production -- Consolidated Companies.... 1,396 1,187 1,195
SHARE OF EQUITY AFFILIATES
United States.......................................... 15 16 16
----- ----- -----
Total Net Natural Gas Production Per Day.......... 1,411 1,203 1,211
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(THOUSANDS OF BARRELS
PER DAY)
<S> <C> <C> <C>
NET AVERAGE DAILY NATURAL GAS LIQUIDS PROCESSED
CONSOLIDATED COMPANIES
United States(1)....................................... 55 55 58
SHARE OF EQUITY AFFILIATES
United States.......................................... 8 8 8
Other Regions.......................................... 4 5 5
----- ----- -----
Total Net Processed -- Equity Affiliates.......... 12 13 13
----- ----- -----
Total Net Natural Gas Liquids Processed Per Day... 67 68 71
===== ===== =====
</TABLE>
- ---------------
(1) 1997 and 1996 were restated to include only NGLs received as a processing
fee.
See the Supplemental Petroleum Data in the Consolidated Financial
Statements of Conoco included in this Offering Circular -- Prospectus for the
annual production volumes of oil (crude oil, condensate and natural gas liquids)
and natural gas from proved reserves. Proved oil production volumes exclude
natural gas liquids from plant ownership.
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<PAGE> 94
The following table sets forth Conoco's average production costs per BOE
produced, average sales prices per barrel of crude oil and condensate sold and
average sales prices per mcf of natural gas sold for the three-year period ended
December 31, 1998.
<TABLE>
<CAPTION>
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(UNITED STATES DOLLARS)
<S> <C> <C> <C> <C>
For the year ended December 31, 1998(1)
Average production costs per barrel of oil equivalent
of petroleum produced(2)............................ $ 3.95 $ 3.69 $ 4.54 $ 3.21
Average sales prices of produced petroleum(3)
Per barrel of crude oil and condensate sold......... 12.37 12.17 12.61 12.12
Per mcf of natural gas sold......................... 2.24 1.96 2.86 1.42
For the year ended December 31, 1997(1)
Average production costs per barrel of oil equivalent
of petroleum produced(2)............................ 4.21 4.23 4.51 3.40
Average sales prices of produced petroleum(3)
Per barrel of crude oil and condensate sold......... 18.58 17.93 18.93 18.35
Per mcf of natural gas sold(4)...................... 2.44 2.18 3.25 1.41
For the year ended December 31, 1996(1)
Average production costs per barrel of oil equivalent
of petroleum produced(2)............................ 3.84 4.11 4.13 2.50
Average sales prices of produced petroleum(3)
Per barrel of crude oil and condensate sold......... 20.11 18.68 20.94 19.47
Per mcf of natural gas sold(4)...................... 2.12 1.70 2.92 1.24
</TABLE>
- ---------------
(1) Excludes Conoco's share of equity affiliates.
(2) Average production costs per barrel of equivalent liquids, with natural gas
converted to liquids at a ratio of 6,000 cubic feet of gas to one barrel of
liquid.
(3) Excludes proceeds from sales of interest in oil and gas properties.
(4) 1997 and 1996 restated from wet gas price to dry gas price.
DRILLING AND PRODUCTIVE WELLS
The following table sets forth Conoco's drilling wells and productive wells
by region as of December 31, 1998.
<TABLE>
<CAPTION>
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(NUMBER OF WELLS)
<S> <C> <C> <C> <C>
Number of wells drilling(1)(3)
Gross................................................... 56 33 11 12
Net..................................................... 23 16 2 5
Number of productive wells(2)(3)
Oil wells -- gross...................................... 7,553 6,989 236 328
-- net........................................ 2,659 2,517 22 120
Gas wells -- gross...................................... 8,593 8,364 159 70
-- net....................................... 4,370 4,267 43 60
</TABLE>
- ---------------
(1) Includes wells being completed.
(2) Approximately 182 gross (31 net) oil wells and 742 gross (275 net) gas wells
have multiple completions.
(3) Excludes Conoco's share of equity affiliates.
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<PAGE> 95
DRILLING ACTIVITY
The following table sets forth Conoco's net exploratory and development
wells drilled by region for the three-year period ended December 31, 1998.
<TABLE>
<CAPTION>
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(NUMBER OF NET WELLS COMPLETED)
<S> <C> <C> <C> <C>
For the year ended December 31, 1998(1)
Exploratory -- productive............................... 7.3 2.2 1.1 4.0
-- dry..................................... 14.0 5.4 1.9 6.7
Development -- productive............................... 234.8 215.9 2.8 16.1
-- dry................................... 13.0 13.0 0.0 0.0
For the year ended December 31, 1997(1)
Exploratory -- productive............................... 7.1 3.7 1.6 1.8
-- dry..................................... 18.4 11.7 4.9 1.8
Development -- productive............................... 142.6 126.9 5.4 10.3
-- dry................................... 10.2 7.2 0.0 3.0
For the year ended December 31, 1996(1)
Exploratory -- productive............................... 42.8 1.6 2.0 39.2
-- dry..................................... 20.5 10.3 4.0 6.2
Development -- productive............................... 89.9 73.1 6.1 10.7
-- dry................................... 17.3 13.5 0.3 3.5
</TABLE>
- ---------------
(1) Excludes Conoco's share of equity affiliates.
DEVELOPED AND UNDEVELOPED PETROLEUM ACREAGE
The following table sets forth Conoco's developed and undeveloped petroleum
acreage by region as of December 31, 1998.
<TABLE>
<CAPTION>
TOTAL UNITED OTHER
WORLDWIDE STATES EUROPE REGIONS
--------- ------ ------ -------
(THOUSANDS OF ACRES)
<S> <C> <C> <C> <C>
Developed acreage(1)
Gross................................................... 7,691 3,253 1,023 3,415
Net..................................................... 3,121 1,534 265 1,322
Undeveloped acreage(1)
Gross................................................... 93,254 3,613 4,829 84,812
Net..................................................... 61,564 2,428 1,588 57,548
</TABLE>
- ---------------
(1) Excludes Conoco's share of equity affiliates.
Conoco is not required to file, and has not filed on a recurring basis,
estimates of its total proved net oil and gas reserves with any U.S. or non-U.S.
governmental regulatory authority or agency other than the Department of Energy
and the SEC. The estimates furnished to the DOE have been consistent with those
furnished to the SEC. They are not necessarily directly comparable, however, due
to special DOE reporting requirements such as requirements to report in some
instances on a gross, net or total operator basis, and requirements to report in
terms of smaller units. In no instance have the estimates for the DOE differed
by more than five percent from the corresponding estimates reflected in total
reserves reported to the SEC.
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<PAGE> 96
DOWNSTREAM
SUMMARY
Downstream operations encompass refining crude oil and other feedstocks
into petroleum products, buying and selling crude oil and refined products and
transporting, distributing and marketing petroleum products. Downstream
operations are organized regionally with operations in the United States, Europe
and the Asia Pacific region. United States and European operations each provided
about one-half (55 and 56 percent, respectively) of total Downstream earnings in
1998, partially offset by a small loss resulting from start-up activities in
Asia Pacific. Downstream's objective is to continue to provide an appropriate
return on investment by improving the competitiveness of the core business,
while providing free cash flow to fund growth in Upstream, as well as in new
Downstream businesses. Consistent with such objectives, Conoco has in the past,
and may from time to time in the future, purchase or sell Downstream assets.
Conoco may also consider forming alliances or joint ventures to hold and operate
all or a selected part of its Downstream assets, either to optimize the
efficiency of such operations through achieving economies of scale or, in
certain circumstances, to monetize a portion of the value of such assets.
Conoco has made capital investments in Downstream activities averaging
approximately $600 million per year for the last three years. 1998 capital
investments in Downstream activities were approximately $530 million.
Downstream's strengths are in processing heavy, high sulfur and acidic
crudes, upgrading bottom-of-the barrel feedstocks via coking technology,
maintaining low cost, high volume retail marketing operations and developing
specialty products. Approximately 50 percent of Conoco's worldwide refining
capacity is designed to process heavy, high sulfur crude. The Humber refinery in
the United Kingdom can process about 44 percent acidic crudes in its crude
slate. Conoco has applied its coking technology to nearly all of its refining
operations throughout the world. This has enabled Conoco to become a world
leader in producing petroleum coke products, such as high value graphite and
anode coke, which are used in the production of electrodes and anodes for the
steel and aluminum industries, respectively. Conoco has also licensed its fuel
coking technology around the world, which has in turn created other business
development opportunities.
Conoco produces and markets a full range of refined petroleum products,
including gasolines, diesel fuels, heating oils, aviation fuels, heavy fuel
oils, asphalts, lubricants, petroleum coke products and petrochemical
feedstocks. Conoco owns and operates, or is a partner in the operation of nine
refineries worldwide with a total crude and condensate capacity of 807,000
barrels per calendar day. Refining capacity is distributed 62 percent in the
United States, 33 percent in Europe and 5 percent in the Asia Pacific region.
Capacity has risen by over 185,000 barrels per day, or 30 percent, since
year end 1995 as a result of the expansion of the Lake Charles refinery, the
upgrade of the Humber refinery, the acquisition of an interest in two refineries
in the Czech Republic and an investment in the new Melaka refinery in Malaysia.
In the United States, Conoco primarily markets through low cost wholesale
operations. Conoco has a growing marketing presence in Europe and Asia Pacific,
where it is a leader in operating low cost, high volume retail stations. In
1998, refined product sales averaged 1,049,000 barrels per day, distributed 68
percent, 31 percent and one percent in the United States, Europe and the Asia
Pacific region, respectively.
UNITED STATES
Conoco's four U.S. refineries are high conversion facilities with design
capacity to process over 50 percent high sulfur crude oils, much of which is
also heavy crude. A principal factor affecting the profitability of Conoco's
U.S. operations is the price of refined products in relation to the cost of
crude oils and other feedstocks processed. Because Conoco is able to process a
relatively large portion of heavy, high sulfur crude oil, the cost advantage of
these crude oils, such as those from Mexico, Venezuela and Canada, over lighter,
low sulfur crude oils, such as West Texas Intermediate, is particularly
significant.
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<PAGE> 97
Over half of Conoco's U.S. refining capacity is located in inland markets and
therefore benefits from the price differential for products produced and sold
inland versus those produced and sold on the Gulf Coast.
Integration of refining, transportation and marketing, and continuous
improvement initiatives have provided increased profitability through
improvements in refinery reliability, utilization, product yield and energy
usage. Since the end of 1994, Conoco has increased refining input at its four
U.S. refineries by approximately 14 percent, while lowering average operating
expenses by approximately $2.00 per barrel of refinery input. Conoco has
improved market share through geographic concentration of markets.
Conoco intends to limit future capital investments in Downstream United
States, excluding large, non-discretionary, regulatory-driven projects and
selected growth projects, to a level that is less than half of Downstream United
States' operating cash flow. Capital expenditures were approximately $201
million in 1998, a decline of approximately $26 million compared to $227 million
in 1997, reflecting the completion of major projects. Conoco is positioned to
make the necessary clean fuels investments at its refineries over the next five
years in support of changing motor fuel specifications. Conoco also plans to
make investments at the Lake Charles refinery to facilitate processing of
Petrozuata synthetic crude.
Refining
Conoco operates four wholly owned refineries in the United States. The
following tables outline the rated crude and condensate distillation capacity as
of December 31 for each of the past five years, and the average daily crude,
condensate and other inputs for each of the past five years.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
<S> <C> <C> <C> <C> <C>
REFINERY CRUDE AND CONDENSATE CAPACITY
Lake Charles, Louisiana..................................... 226 226 226 191 182
Ponca City, Oklahoma........................................ 168 155 155 150 140
Denver, Colorado............................................ 58 58 58 58 58
Billings, Montana........................................... 52 52 52 49 49
--- --- --- --- ---
Total............................................. 504 491 491 448 429
=== === === === ===
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
<S> <C> <C> <C> <C> <C>
REFINERY INPUTS(1)
Lake Charles, Louisiana
Crude and condensate(2)................................... 216 211 177 179 183
Other feedstocks.......................................... 24 23 21 23 24
Ponca City, Oklahoma
Crude and condensate(2)................................... 167 161 150 151 144
Other feedstocks.......................................... 4 2 2 5 2
Denver, Colorado
Crude and condensate(2)................................... 50 53 49 49 47
Other feedstocks.......................................... 0 0 0 0 0
Billings, Montana
Crude and condensate(2)................................... 52 51 51 45 48
Other feedstocks.......................................... 3 3 3 3 3
Total crude and condensate........................ 485 476 426 424 422
Total other feedstocks............................ 31 27 26 31 30
</TABLE>
- ---------------
(1) Includes feedstocks in addition to crude and condensate on which rated
capacity is based.
(2) Includes actual crude and condensate runs, which may exceed rated capacity.
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Conoco's U.S. consolidated refined product yields by volume in 1998 were 49
percent motor gasoline, 40 percent middle distillates, including jet and diesel
fuel, 11 percent residual fuel oil and asphalt and other products, including
petroleum coke, lubricants and liquified petroleum gases.
Lake Charles Refinery and Related Facilities
Conoco's Lake Charles refinery, located in Westlake, Louisiana, is a fully
integrated, high conversion facility which has a crude and condensate capacity
of 226,000 barrels per day and processes both heavy, high sulfur crude oil and
low sulfur crude oil. The refinery's Gulf Coast location provides access to
numerous cost effective domestic and international crude oil sources. The crude
design capacity is approximately 170,000 barrels per day of heavy, high sulfur
crudes with the remaining 56,000 barrels per day of local, domestically supplied
low sulfur crudes. While the types and origins of these lower priced, heavy,
high sulfur crudes can vary, the majority consists of Venezuelan and Mexican
crudes delivered via tanker. The Lake Charles refinery products can be delivered
by truck, rail or major common carrier product pipelines partially owned by
Conoco which serve the eastern and mid-continent United States. In addition,
refinery products can be sold into export markets through the refinery's marine
terminal.
The ability to refine both low sulfur and heavy, high sulfur crudes at the
Lake Charles refinery provides a competitive advantage to Conoco by enabling the
refinery to produce from relatively low-cost feedstocks a full range of products
including gasolines, jet fuel, diesel fuel, petroleum coke, lube oils, LPG and
other specialty products. The refinery facilities include fluid catalytic
cracking, delayed coking and hydrodesulfurization units which enable it to
maximize its upgrade of heavier crude oil. A crude unit expansion and a new
catalytic reformer were completed in conjunction with the Excel Paralubes
project to take advantage of synergies generated between the two facilities.
Conoco is making investments in the Lake Charles refinery so that in the future
it will be able to process Petrozuata synthetic crude.
Integration of fuels and specialty products plays an important role in
maximizing product value at the refinery. Intermediates produced from low sulfur
crude processing allow the refinery to supply the heaviest, highest boiling
range material in the crude to the Cit-Con lube plant (owned 35 percent by
Conoco) for base oils, finished lubes and wax production. Other intermediates
are exchanged with a neighboring chemical plant complex for further processing.
The refinery supplies high sulfur gas oil to Excel Paralubes (a 50/50 joint
venture between Conoco and Pennzoil-Quaker State), which owns a hydrocracked
lubricating base oil facility. Excel Paralubes' state-of-the-art lube oil
facility produces approximately 17,000 barrels per day of high quality
hydrocracked base oils, representing approximately ten percent of U.S.
lubricating base oil production. Hydrocracked base oils are second in quality
only to synthetic base oils, but are produced at a much lower cost. The refinery
produces other specialty intermediates for making solvents to supply the
recently formed Penreco joint venture company (also a joint venture with
Pennzoil-Quaker State). Penreco manufactures and markets highly refined
specialty petroleum products for global markets.
The Lake Charles facilities also include a specialty coker and calciner
that manufacture the more highly valued graphite and anode petroleum cokes for
the steel and aluminum industries, and provide a substantial increase in light
oils production by converting the heaviest part of the crude barrel into diesel
fuel and gasoline. In addition, green petroleum coke is supplied to a nearby
coke calcining venture.
Ponca City Refinery
Conoco's refinery located in Ponca City, Oklahoma has a crude and
condensate capacity of 168,000 barrels per day of light, high sulfur and light,
low sulfur crudes. Both foreign and domestic crudes are delivered by pipeline
from offshore, Oklahoma, Kansas, and North and West Texas fields. Finished
products are shipped by truck, rail and company-owned and common carrier
pipelines to markets throughout the mid-continent region.
The Ponca City refinery is a high conversion facility that produces a full
range of products, including gasoline, jet fuel, diesel, LPG and anode and fuel
grade petroleum cokes. The refinery's facilities include
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fluid catalytic cracking, delayed coking and hydrodesulfurization units, which
enable it to produce high ratios of gasoline and diesel fuel from crude oil.
Denver Refinery
Conoco's Denver refinery, located in Commerce City, Colorado, has a crude
and condensate capacity of 58,000 barrels per day, processing a mixture of
Canadian heavy, high sulfur crudes, and domestic heavy, high sulfur crude oils
and low sulfur crude oils. Almost all crude oil processed at the refinery is
transported via pipeline. Products are delivered predominantly through a local
truck loading terminal to the east side of the Rockies but also by rail and
pipelines to other Colorado markets. The refined gasoline products from the
Denver refinery help supply Conoco's marketing operations in the Rocky Mountain
states.
The Denver refinery is a high conversion refinery that produces a full
range of products including gasolines, jet fuels, diesel and asphalt. The
refinery's upgrading units enable it to process a crude slate containing nearly
50 percent heavy, high sulfur crude. Conoco has a processing agreement with a
refinery located in Cheyenne, Wyoming, that has coking capabilities from which
the refinery receives intermediate feedstocks for processing into finished
products. The Denver refinery also supplies KC Asphalt (a 50/50 joint venture
between Conoco and Koch Industries) with high quality asphalt products. Both of
these ventures enable Conoco to turn relatively low value intermediates into
higher margin products.
Billings Refinery
Conoco's Billings, Montana refinery has a crude and condensate capacity of
52,000 barrels per day, processing a mixture of over 80 percent Canadian heavy,
high sulfur crude plus domestic high sulfur and low sulfur crude oils all
delivered by pipeline. Products from the refinery are delivered via
company-owned pipelines, rail, and trucks, thereby supplying Conoco's extensive
branded marketing operations in eastern Washington and the northern Rocky
Mountain states. The refinery's proximity to its primary source of crude and its
ability to refine both low sulfur and heavy sulfur crudes provides Conoco with
significant competitive advantages.
The Billings refinery is a high conversion refinery that produces a full
range of products including gasolines, jet fuels, diesel and fuel grade
petroleum coke. The Billings refinery has a very high conversion rate and the
capability to process less expensive, very heavy, high sulfur crudes. A delayed
coker converts heavy, high sulfur residue into higher value light oils. A gas
oil hydrotreating unit and hydrogen plant improve the light oil production
yields and remove the additional sulfur contained in these heavy, high sulfur
crudes.
Marketing
In the United States, Conoco markets gasoline, utilizing the Conoco brand,
in 33 states (20 of which represent primary markets) in the southeast,
mid-continent and Rocky Mountain regions. Market growth continues to be targeted
to those areas where Conoco can obtain a strong market share and areas that
leverage supply from its U.S. refineries and those distribution systems in which
it has an ownership position. Increasing operating market share has resulted in
particularly strong brand recognition in the Rocky Mountain and mid-continent
markets.
Conoco gasoline is sold through approximately 4,900 branded stations in the
United States, 95 percent through retail outlets owned by independent wholesale
marketers and five percent through 255 company-owned stores at year end 1998.
Conoco markets gasoline primarily through the wholesale channel in the United
States because it requires a lower capital investment than company-owned retail
stations but still provides a secure, branded outlet for Conoco's products.
Conoco operates retail stations to establish brand standards and image as well
as to better understand the independent distributors in order to provide
programs and services to them and the consumer. Building on this knowledge,
Conoco has recently introduced "breakplace(R)," a new concept in convenience
store design. This new format, involving the complete redesign of an outlet's
exterior and interior, is designed to increase the frequency and transaction
size of customer visits by catering to the needs of the "convenience
connoisseur." There were 34
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breakplace(R) locations as of December 31, 1998, and Conoco is licensing the
trademark to marketers. Many more stores in the network have adopted
comprehensive offerings patterned after the format, thereby supporting wholesale
marketing and elevating Conoco's brand perception to the consumer.
At year-end 1998, CFJ Properties, a 50/50 joint venture between the Company
and Flying J, owned and operated 83 truck travel plazas that carry both the
Conoco and Flying J brands and provide a secure outlet for the Company's diesel
production. In addition, bulk sales of all refined petroleum products are made
to commercial, industrial and spot market customers.
Transportation
Conoco has approximately 6,500 miles of crude and product mainline
pipelines in the United States, including those partially owned and/or operated
by affiliates. Conoco also owns and operates 38 finished product terminals, six
liquified petroleum gas terminals, one crude terminal and one coke-exporting
facility. Conoco's crude pipeline interests and terminals provide integral
logistical links between crude sources and refineries to lower crude costs. The
product pipelines serve as secure links between refineries and key products
markets. Conoco's U.S. pipeline system transported an average of 909,000 barrels
per day in 1998. Conoco's equity share of shipments on affiliate pipelines was
an additional 383,000 barrels per day.
Conoco currently operates a fleet of seven seagoing crude oil tankers,
principally of Liberian registry, including five double-hulled tankers. Conoco
operates a 100 percent double-hulled tanker and barge fleet in United States
waters. Four vessels are used to provide secure transportation to the Lake
Charles refinery, two others are in use in the Asia Pacific market (currently
slated for disposition later this year) and another is on lease to a third party
for use as a shuttle tanker for the Heidrun field in the North Sea, in which
Conoco has an interest. An eighth vessel is being used as a floating production
storage and offtake vessel off the coast of Nigeria. Two additional
double-hulled tankers are currently under construction and will be joining the
fleet in the Gulf of Mexico in 1999.
EUROPE
Conoco's European refining and marketing activities are conducted in 17
countries. Conoco's primary European markets are in the United Kingdom and
Germany, which together accounted for 96 percent of its European Downstream
after-tax earnings in 1998. Conoco also has marketing operations in Austria,
Belgium, Denmark, Finland, France, Luxembourg, Norway, Sweden, and Switzerland.
More recently Conoco has entered the faster growing markets in the Czech
Republic, Hungary, Poland, Slovakia, Spain and Turkey. The marketing operations
in Central and Eastern Europe are complemented by an equity interest in two
refineries in the Czech Republic.
Conoco's European Downstream strategy has been to operate low cost, high
volume retail outlets in selected key markets where it has a competitive
advantage, pursue opportunities in growth regions, and maintain its Humber
refinery and the Mineraloel Raffinerie Oberrhein GmbH ("MiRO") joint venture
refinery, in the United Kingdom and Germany, respectively, as top performers in
Europe. Conoco plans to redirect cash generated by its mature European
businesses to other parts of Upstream and Downstream operations and to the
identified European growth markets.
Conoco invested approximately $180 million in its Downstream European
operations in both 1997 and 1998 and expects to invest about $225 million in
1999. Conoco continues to implement relatively low-cost projects in its refining
operations designed to increase production and yields, while reducing feedstock
costs and operating expenses. Conoco plans to continue to direct capital
expenditures for marketing operations, which are expected to be approximately 50
percent of the European Downstream total capital expenditures, toward
construction of new stations in growth markets, primarily in Central and Eastern
Europe and also in its areas of competitive strength in Germany, Austria and the
Nordic countries.
Conoco's European Downstream profitability is affected by several factors.
As with all refining operations, the difference between the market price of
refined products and the cost of crude oil is the major factor. Conoco's
European refineries are able to process lower cost crudes or upgrade other
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feedstocks into high value finished products. In addition, since the United
Kingdom refinery also processes fuel oil as a feedstock, the price difference
between low sulfur fuel oil and finished products is important to earnings.
European operations also include significant retail marketing volumes, and
therefore earnings are driven by retail margins, fuel and convenience product
sales and operating expenses in the various countries where Conoco operates.
Refining
Conoco's principal European refining operations are located in the United
Kingdom, Germany and the Czech Republic. Since early 1996, the expansion of
Conoco's Humber refinery in the United Kingdom, the formation of the MiRO joint
venture through consolidation with a neighboring German refinery and the
purchase of a share in a joint venture owning two Czech Republic refineries have
increased Conoco's European crude refining capacity by approximately 52 percent
(90,000 barrels per day). Conoco has continuously upgraded its refineries in
Europe since the early 1990's and the configuration and output of the refineries
are two of Conoco's primary sources of competitive advantage.
Conoco has undertaken a major capital investment program totaling
approximately $350 million from 1994 through 1998 to process lower cost
feedstocks and increase conversion capacity, product quality and energy
efficiency at the Humber refinery. Conoco plans to make in excess of $100
million in capital expenditures at the Humber refinery in 1999 in order to
continue to improve reliability and efficiency and to make investments to meet
clean fuel specifications. Conoco is also participating in upgrading projects at
its joint venture owned refineries in Germany and the Czech Republic.
The following tables outline the rated crude and condensate distillation
capacity as of December 31 for each of the past five years and the annual
average daily crude and condensate and other inputs for each of the past five
years.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
<S> <C> <C> <C> <C> <C>
REFINERY CRUDE AND CONDENSATE CAPACITY
Humber, United Kingdom................................ 180 180 180 130 130
MiRO, Germany(1)...................................... 54 54 43 43 43
Czech Republic(2)..................................... 29 29 29 -- --
--- --- --- --- ---
Total(3).................................... 263 263 252 173 173
=== === === === ===
</TABLE>
- ---------------
(1) The 1998 and 1997 figures represent Conoco's 18.75 percent interest in the
MiRO refinery complex at Karlsruhe, Germany. For the years 1996 and earlier,
Conoco's interest was 25 percent of the OMW refinery.
(2) Represents Conoco's 16.33 percent interest in two Czech Republic refineries.
(3) Does not include Conoco's indirect 1.2 percent interest in a 95,000 barrel
per day refinery in Mersin, Turkey acquired as a result of its marketing
joint venture in Turkey.
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<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS OF BARRELS PER DAY)
<S> <C> <C> <C> <C> <C>
REFINERY INPUTS(1)
Humber, United Kingdom(2)
Crude and condensate(3)................................... 165 137 121 133 125
Other feedstocks.......................................... 57 56 76 74 59
MiRO, Germany(4)
Crude and condensate(3)................................... 54 51 47 46 46
Other feedstock........................................... 3 11 13 13 15
Czech Republic(5)
Crude and condensate(3)................................... 20 21 22 -- --
Other feedstocks.......................................... 1 1 1 -- --
Total crude and condensate(6)..................... 239 209 190 179 171
Total other feedstocks............................ 61 68 90 87 74
</TABLE>
- ---------------
(1) Includes feedstocks in addition to crude and condensate on which rated
capacity is based.
(2) The tie-in of a major expansion project and a major refinery maintenance
turnaround significantly affected the Humber Refinery's utilization in 1997
and 1996, respectively.
(3) Includes actual crude and condensate runs, which may exceed rated capacity.
(4) The 1998 and 1997 figures represent Conoco's 18.75 percent interest in the
MiRO refinery complex at Karlsruhe, Germany. For 1996 and earlier, Conoco's
interest was 25 percent of the OMW refinery.
(5) Represents Conoco's 16.33 percent interest in two refineries in the Czech
Republic.
(6) Does not include Conoco's 1.2 percent interest in a 95,000 barrel per day
refinery in Mersin, Turkey.
The yield of Conoco's European refineries by product and country for the
year ended December 31, 1998, was as follows:
<TABLE>
<CAPTION>
UNITED
KINGDOM GERMANY CZECH REPUBLIC
------- ------- --------------
<S> <C> <C> <C>
PERCENT OF TOTAL YIELD(1)
Motor gasoline.............................................. 37 40 19
Middle distillate........................................... 42 44 31
Residual fuel oil and asphalt............................... 9 8 23
Other(2).................................................... 12 8 27
</TABLE>
- ---------------
(1) Percentages are volume based, not weight based.
(2) Other products primarily include petroleum coke, lubricants and liquified
petroleum gases.
United Kingdom Refinery
Conoco's wholly owned Humber refinery is located in North Lincolnshire,
England, and has a crude and condensate capacity of 180,000 barrels per day.
Crude processed at the refinery is exclusively low or medium sulfur, supplied
primarily from the North Sea and includes lower cost, acidic crudes. The
refinery also processes up to 60,000 barrels per day of other intermediate
feedstocks, mostly vacuum gas oils and residual fuel oil, which many other
European refineries are not able to process. The refinery's location on the east
coast of England provides for cost-effective North Sea crude imports and product
exports to European and world markets. The Humber refinery, one of the most
sophisticated refineries in Europe, is a fully integrated, high conversion
refinery that produces a full slate of light products and minimal fuel oil. In
1996, Conoco increased crude capacity at the refinery and added a vacuum unit
that allows the refinery to process up to 80,000 barrels per day of the less
expensive, acidic North Sea crudes. The refinery also has two coking units with
associated calcining plants, which upgrade the heavy "bottoms" and imported
feedstocks into light oil products and high value graphite and anode petroleum
cokes. Approximately 50
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percent of the light oils produced in the refinery are marketed in the United
Kingdom while the other products are exported to the rest of Europe and the
United States. This gives the refinery the flexibility to take full advantage of
inland and global export market opportunities.
Germany Refinery
The MiRO refinery in Karlsruhe, Germany, is a joint venture refinery with a
crude and condensate capacity of 285,000 barrels per day. The MiRO joint venture
arose from the combination in 1996 of the existing OMW refinery, in which Conoco
had a 25 percent share, with an adjacent Esso refinery. Conoco has an 18.75
percent interest in MiRO and Conoco's capacity share is 54,000 barrels per day.
The other owners of MiRO are DEA Mineraloel AG, Esso AG and Ruhr Oel GmbH (a
50/50 joint venture between Veba and PDVSA). Approximately 55 percent of the
refinery's crude feedstock is low cost, high sulfur crude. The MiRO refinery
complex is a fully integrated, high conversion refinery producing gasoline,
middle distillates, residual fuel oil and other products. The refinery has a
high capacity to convert lower cost feedstocks into high value products
primarily with a fluid catalytic cracker and delayed coker. The coker produces
both fuel grade and specialty calcined cokes.
The creation of the MiRO joint venture has improved the refinery's
competitiveness and was driven by the synergy that existed between the two
facilities. Integrated operations have yielded improved product slates, which
better match local demand, and increased processing efficiency, while retaining
operational flexibility for the partners. The refinery processes crude and
feedstock supplied by each of the partners in proportion to their respective
ownership interests. Streamlining the two operations has allowed Conoco to
eliminate less efficient processing units in both refineries, resulting in lower
operating costs.
Czech Republic Refineries
In late 1995, Conoco, through participation in the newly formed Czech
Refining Company ("CRC"), acquired an interest in two refineries in the Czech
Republic. The other owners of CRC are Unipetrol A.S., Agip Petroli, and Shell
Overseas Investment B.V. The refinery at Litvinov has a crude and condensate
capacity of 109,800 barrels per day, and the Kralupy refinery has a crude and
condensate capacity of 67,500 barrels per day. Conoco's 16.33 percent ownership
share of the combined capacity is 29,000 barrels per day. Both refineries
process mostly high sulfur crude, with a large portion being Russian export
blend delivered by pipeline at an advantageous cost. The refineries have an
alternative crude supply via a pipeline from the Mediterranean.
Conoco expects that completion of a visbreaker project at the Litvinov
refinery scheduled for the year 2000 will increase conversion rates and
significantly reduce fuel oil production. The Kralupy refinery is currently a
hydroskimming facility, but CRC has approved an investment in major conversion
facilities, to reduce fuel oil production and increase light oil yields. The two
Czech refineries are operated as a single entity with intermediate streams
moving between the two facilities. CRC markets finished products both inland and
abroad. Conoco intends to use its share of the light oil production to support
an expanding retail marketing network in Central and Eastern Europe.
Marketing
Conoco has marketing operations in 17 European countries. Conoco's European
marketing strategy is to sell primarily through owned, leased or joint venture
retail sites using a low cost, high volume, low price strategy. Conoco intends
to expand into identified growing markets, while concurrently strengthening its
market share in core markets such as Germany, Austria and the Nordic countries.
Conoco is standardizing its European retail operations in order to capture cost
savings and prepare for a more integrated Europe. Conoco is continuing to reduce
its cost structure for marketing activities while also optimizing the growing
income in the non-fuels sector. Conoco also markets aviation fuels, liquid
petroleum gases, heating oils, transportation fuels and marine bunkers to
commercial accounts and into the bulk or spot market.
Conoco uses the "Jet" brand name to market its retail products in its
wholly owned operations in Austria, Czech Republic, Denmark, Finland, Germany,
Hungary, Norway, Poland, Slovakia, Sweden and
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the United Kingdom. In Belgium and Luxembourg, it markets under the "SECA"
brand. Stations throughout Europe also display the "Conoco" brand. In addition,
various joint ventures in which Conoco has an equity interest market products in
Spain, Switzerland and Turkey under the "Jet," "OK Co-op" and "Tabas" or
"Turkpetrol" brand names, respectively.
As of December 31, 1998, Conoco had 1,960 marketing outlets in its wholly
owned European operations, of which 1,424 were company-owned. Through its joint
venture operations in Turkey, Spain and Switzerland, Conoco also has an interest
in another 963 retail sites. The largest branded site networks are in Germany
and the United Kingdom, which account for 60 percent of the total branded units.
In Germany and Austria, 21 outlets were added during 1998. In the Nordic
countries, Conoco has expanded from its base of unmanned sites in Sweden and
Denmark into Norway and Finland with 11 new stations in the region. In response
to weak fuel margins in the United Kingdom over the past several years, Conoco
has restructured its operations, reducing the number of stations and focusing on
locations where Conoco has a competitive advantage, which has reduced its unit
breakeven cost structure.
Conoco has been expanding in targeted growth markets in Central and Eastern
Europe (Czech Republic, Poland, Hungary and Slovakia) and has added 25 stations
in the last year for a total of 126 stations at December 31, 1998. Conoco
expects to continue this expansion in order to capture the demand growth and
rising margins expected in these inland markets. This marketing expansion allows
Conoco to obtain further integration with products produced at the Czech
refineries. Similarly, Conoco has invested in the growing markets of Spain and
Turkey, where at the end of 1998, it had an interest through its joint ventures
in 115 and 761 sites, respectively. The joint venture marketing operation in
Turkey also provides Conoco with a strategic position and opportunity for
Upstream ventures in this region.
ASIA PACIFIC
Conoco is looking to the Asia Pacific region for much of its long-term
Downstream growth. Despite the recent economic downturn, Conoco expects the
Asian market, in the long-term, to grow faster than comparable markets. Conoco
intends to establish at least 100,000 barrels per day of equity refining
capacity in the region long-term and expand its marketing operations to
integrate with the refining supply and capitalize on market deregulation and
long-term regional demand growth.
The refinery in Melaka, Malaysia was built by a joint venture which is 40
percent owned by Conoco (with partners Petronas, the Malaysian state oil
company, and Statoil) and has a rated crude capacity of 100,000 barrels per day
(Conoco's share of which is 40,000 barrels per day). Start-up of the Melaka
refinery was initiated in August 1998 with the commissioning of the crude unit.
Conoco's share of refinery inputs was about 2.6 million barrels for the start-up
period from August 1998 to the end of the year. This volume accounts for 7,000
barrels per day (full-year basis) of Conoco's total refinery inputs for 1998.
Initial crude unit operation was followed shortly thereafter by the start-up of
the reformer, hydrocracker and coker units. The joint venture has a five-year
tax holiday commencing with initial operation. The feedstocks for the refinery
will consist of up to approximately 70 percent high sulfur crude and 30 percent
sweet crude.
This refinery capitalizes on Conoco's proprietary coking technology to
upgrade low-cost feedstocks to higher-margin products. Initial refinery units,
in addition to the fuels delayed coker, include a crude and vacuum distillation
unit, a vacuum gas oil hydrocracker, naphtha and diesel hydrotreater, catalytic
reformer, and an isomerization unit. The refinery is a high conversion facility
that will produce a full range of refined petroleum products.
Conoco intends to use its share of refined products from the refinery to
continue growing its retail marketing operations in Thailand, Malaysia and
throughout the Asia Pacific region. The balance of Conoco's share of production
will be sold primarily in the spot market. Conoco has its regional crude and
product supply and disposition operations centrally located in Singapore.
Conoco began marketing motor fuels in Thailand in 1993. Using a high
volume, low price strategy and marketing concepts and strategies that were new
to Thailand, Conoco has already established a
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significant presence in the Thai retail market. At the end of 1998, Conoco had
approximately 100 stores in operation. Conoco plans to build an additional 100
new retail outlets.
Conoco has launched a retail marketing joint venture in Malaysia with Sime
Darby Bhd., a company that has a major presence in the Malaysian business
sector. Capitalizing on the cost benefits of direct supply, the benefits of
being the first licensees since 1969 to establish retail marketing in Malaysia,
and the currently depressed prices of premium Malaysian real estate, Conoco will
initially target major markets within 125 miles of the Melaka refinery. Conoco
plans to have six stores operating by the end of 1999.
SPECIALTY PRODUCTS
Conoco sells a variety of high value lubricants and specialty products to
commercial, industrial and wholesale accounts worldwide, including lubes (such
as automotive and industrial lubricants and waxes), petroleum coke, solvents and
pipeline flow improvers. Conoco's experience has been that specialty products
are attractive because their premium prices generate higher margins and their
markets are generally less cyclical than commodity markets.
Conoco began marketing the HYDROCLEAR(R) brand of lubricants with the
start-up of the Excel Paralubes (a 50/50 joint venture with Pennzoil-Quaker
State) plant in 1997. The HYDROCLEAR(R) lubricants, which are non-toxic, were
designed to compete with synthetics for a range of applications with difficult
operating conditions. Conoco also produces specialty petroleum products for
global markets through its Penreco joint venture company with Pennzoil-Quaker
State.
Conoco's technical expertise in carbon upgrading positions it as a leader
in manufacturing and marketing specialty coke and coke products. Conoco
manufactures high quality graphite coke at its Lake Charles and Humber
refineries for use in the global steel industry. It also globally markets anode
and fuel coke produced at its Lake Charles, Ponca City, Billings and Humber
refineries. In addition, Conoco participates in the Asia Pacific coke market by
providing technical and marketing expertise to Conoco's PetroCokes joint venture
with Sumitomo and Japan Energy. In 1998, Conoco granted seven licenses for this
technology to other companies. Today Conoco's technology is used by more than
two dozen coking facilities -- a third of the world's delayed coking capacity.
Conoco is a leader in the worldwide market for pipeline flow improvers.
Conoco's "LiquidPower(R)" product is a flow improver for increasing petroleum
pipeline capacity by reducing friction loss. Conoco also uses "LiquidPower(R)"
in its own pipeline systems.
POWER
Conoco Global Power was founded in 1995 to leverage the economic advantages
of Conoco's energy production activities and offer integrated energy solutions
to customers by capitalizing on our strengths in managing major projects, risk
and industrial operations.
Conoco Global Power owns 37.5 percent of a Colombian joint venture located
in Barrancabermeja, Colombia along with Western Resources (37.5 percent) and
five Colombian companies (five percent each). The joint venture built a natural
gas-fired generation plant capable of producing 160 megawatts of power, which
became operational in August 1998. The joint venture sells primarily to the
local grid.
Conoco Global Power has entered into a joint venture agreement to build a
natural gas-fired cogeneration plant near Corpus Christi, Texas. Construction
has begun on the plant, which will be located adjacent to chemical complexes
owned by DuPont and OxyChem, Occidental Petroleum Corporation's chemicals
division and Conoco's partner in this joint venture. OxyChem will operate the
plant under a long-term contract and will purchase electricity and steam
production from the plant. The plant is designed to produce 440 megawatts of
power and 1.1 million pounds per hour of process steam. The plant will be a
qualifying facility under the Public Utility Regulatory Policies Act and expects
to sell excess electricity in the Texas power markets. Commercial operation of
the plant is expected in the third quarter of 1999.
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Conoco Global Power and DuPont have signed letters of intent to develop
natural gas-fired cogeneration facilities at DuPont chemical facilities in the
United States, Spain, Luxembourg, Germany and the United Kingdom. In the United
States, the cogeneration facility will be located at DuPont's Orange, Texas
chemical complex. The proposed facility would be owned by a joint venture
between Conoco and a yet to be selected partner. The facility would provide
electric and process steam to the chemical complex, with much of the electric
output being sold as merchant power. DuPont would be the contract operator of
the facility under a long-term operating agreement. The plant is planned to
produce 440 megawatts of power and 780 thousand pounds per hour of process
steam. Construction is expected to commence in mid-1999 with commercial
operation scheduled in mid-2001. In Europe, the four plants, with a total
capacity of 510 megawatts, will provide needed electricity and steam for various
DuPont operations. Conoco also will sell surplus electric power to other
customers, including the local utilities. All four plants are expected to be in
operation by 2002.
CORE VALUES
Conoco is committed to four core values: operating safely, protecting the
environment, behaving ethically and valuing all people. Conoco is a recognized
industry leader in safety performance and in protecting employees' health and
the environment.
In 1998, Conoco achieved its lowest recordable injury rate on record for
both employees and contractors. A similar performance in 1997 earned Conoco the
lowest injury rate among all major petroleum companies reporting to the American
Petroleum Institute, an achievement matched in ten out of the last 15 years.
Conoco is also an innovator both at recycling materials and at operating in
environmentally sensitive areas. In the United Kingdom, for example, Conoco
recycled over 99 percent of four Viking gas platforms, which it decommissioned
in the North Sea. Conoco has also operated in the Aransas National Wildlife
Refuge in South Texas for 60 years. In 1990, Conoco took a major step toward oil
spill prevention as the first petroleum company to voluntarily commit to build
only double-hulled tankers -- a decision made before U.S. law mandated such
technology. During 1998, Conoco began operating fleets of 100 percent
double-hulled crude oil tankers and tank barges in U.S. waters, more than a year
ahead of its target date of 2000. Also in 1998, Conoco marked the 30th
anniversary of implementing one of the industry's first environmental policies,
which predates both World Environmental Day and Earth Day in the United States.
In order to maintain the highest ethical standards, Conoco established
clear guidelines on business ethics which every employee agrees to follow.
Conoco has established annual President's Awards for performance in safety,
environmental protection and valuing all people. A President's Award for ethical
behavior will be added in 1999. Valuing all people includes seeking diversity in
the workforce, nationalizing a significant portion of Conoco's workforce in each
country where it operates as soon as practicable, responding to employee ideas
and concerns, treating everyone with dignity and respect, sharing the financial
success of Conoco with substantially all employees through the "Conoco
Challenge" program, and helping employees contribute fully in achieving business
goals. Conoco believes that these core values result in a motivated workforce
with values and goals firmly aligned with the strategic aims of the business.
They provide guidance to employees in working to meet the expectations of
customers, partners and host governments, and in respecting the communities in
which Conoco does business. In addition, Conoco believes its commitment to core
values helps to reduce liabilities, manage risks and improve business
performance.
ENVIRONMENTAL REGULATION
As with other companies and industries engaged in similar businesses,
Conoco's operations are subject to numerous federal, state, local, European
Union and other foreign environmental laws and regulations concerning its oil
and gas operations, products and other activities, including laws that implement
international conventions or protocols. In particular, these laws and
regulations require the acquisition of
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permits, restrict the type, quantities and concentration of various substances
that can be released into the environment, limit or prohibit activities on
certain lands lying within wilderness, wetlands and other protected areas,
regulate the generation, handling, storage, transportation, disposal and
treatment of hazardous materials and wastes and impose criminal or civil
liabilities for pollution resulting from oil, natural gas and petrochemical
operations.
Conoco must obtain government permits to conduct its operations. The
duration and success of obtaining these permits are contingent upon numerous
variables, many of which are not within Conoco's control. To the extent these
permits are required and not obtained, operations may be delayed or curtailed,
or Conoco may be prohibited from proceeding with planned exploration or
operation of facilities.
Conoco expects that environmental laws and regulations will have an
increasing impact on Conoco's operations in most of the countries in which it
operates, although it is impossible to predict accurately the effect of future
developments in these laws and regulations on its future earnings and
operations. Some risk of environmental costs and liabilities is inherent in
particular operations and products of Conoco, and Conoco may incur material
costs and liabilities to comply with existing and future environmental laws and
regulations.
To meet future environmental obligations, Conoco is engaged in a continuing
program to develop effective measures to protect the environment. This program
includes research into reducing sulfur levels in heavy fuel oils and diesel
fuel, reducing benzene content in gasoline, reducing vapor emissions at service
stations, developing more effective methods of preventing, containing and
recovering offshore oil spills, reducing the release of pollutants from Conoco's
refineries and other facilities, and developing and installing monitoring
systems at its facilities.
AIR EMISSIONS
The operations of Conoco are subject to regulations controlling emissions
of air pollutants. The primary legislation affecting Conoco's U.S. air emissions
is the Federal Clean Air Act and its 1990 Amendments (the "CAA"). Among other
things, the CAA requires all major sources of air emissions to obtain operating
permits. The CAA also revised the definition of "major source" such that
additional equipment involved in oil and gas production may now be covered by
the permitting requirements. Although the precise requirements of the CAA are
not yet known, Conoco may incur substantial capital, operating and maintenance
costs to comply with such requirements.
The CAA requires the EPA to promulgate regulations imposing MACT standards
to reduce emissions of hazardous air pollutants from industrial facilities, such
as Conoco's refineries, transportation terminals and certain crude oil
production operations. The EPA has promulgated MACT standards that are
applicable to some of Conoco's operations, and Conoco's costs to comply with
them have not been material. MACT standards applicable to many of Conoco's other
operations have been proposed, but not finalized. Consequently, while it is not
yet possible to predict accurately the total expenditures that Conoco may incur
to comply with these standards, Conoco anticipates that these costs could be
substantial.
In June 1997, the EPA revised the National Ambient Air Quality Standards
for ozone and particulate matter, which will ultimately require more stringent
controls on stationary sources and cleaner-burning fuels in certain parts of the
United States. Conoco cannot reasonably estimate the financial impacts of these
revisions until individual states adopt regulations to implement the revised
National Ambient Air Quality Standards, although Conoco believes that such
impacts could be substantial.
Under the CAA, the EPA has promulgated a number of standards that regulate
the composition of motor fuels, including gasoline and diesel fuels produced and
marketed by Conoco. These standards are designed to reduce emissions of air
pollutants from vehicles burning such fuels. In addition, many other countries
in which Conoco produces or markets motor fuels similarly regulate the
composition of such products or are proposing to do so. Conoco has already
incurred the costs of complying with such requirements that are currently in
effect. The European Union recently enacted legislation that, among other
things, requires phased reductions of sulfur and aromatics content in gasoline
and diesel fuel and of
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benzene in gasoline. Conoco cannot yet predict accurately the total actual
expenditures that it may incur to comply with these requirements, but it
estimates capital expenditures to comply with the European Union legislation
will be $100 million in 1999, $100 million in 2000, and $50 million in 2001. In
the U.S., the EPA also continues to consider further regulation of the
composition of motor fuels. The EPA likely will propose regulations in the near
future requiring a significantly lower level of sulfur emissions for gasoline,
but Conoco cannot predict the precise level that may be imposed. As a result,
Conoco cannot predict the total actual expenditures that may be incurred to
produce motor fuels meeting future specifications, but such expenditures will
likely be substantial.
In 1997, an international conference on global warming concluded an
agreement, known as the Kyoto Protocol, which called for reductions of certain
emissions that contribute to increases in atmospheric greenhouse gas
concentrations. The combustion of fossil fuels, such as crude oil, results in
emissions of the type sought to be reduced by the Kyoto Protocol. The treaty
codifying the Kyoto Protocol has not been ratified by the United States, but it
may be in the future. In addition, other countries where Conoco has interests,
or may have interests in the future, have made commitments to implement the
Kyoto Protocol and are in various stages of formulating applicable regulations.
Although Conoco cannot yet estimate accurately the total actual expenditures
that may be incurred by it as a result of the Kyoto Protocol, such expenditures
could be substantial.
HAZARDOUS WASTE
Conoco currently owns or leases numerous properties that have been used for
many years for hard minerals production or natural gas and crude oil production.
Although Conoco used operating and disposal practices that were standard in the
industry at the time, wastes may have been disposed of or released on or under
the properties it owned or leased. In addition, some of these properties have
been operated by third parties over whom Conoco had no control. The
Comprehensive Environmental Response, Compensation, and Liability Act, as
amended ("CERCLA") and comparable state statutes can impose liability for the
entire cost of clean-up upon each of the owners and operators of sites or on
persons who disposed of or arranged for the disposal of hazardous waste found at
such sites, regardless of fault or the lawfulness of the original disposal
activity. The Resource Conservation and Recovery Act ("RCRA") and comparable
state statutes govern the management and disposal of wastes. Although CERCLA
currently excludes petroleum from regulation, many state laws affecting Conoco's
operations impose clean-up liability for petroleum contamination. In addition,
although RCRA currently classifies certain exploration and production wastes as
non-hazardous, such wastes could be reclassified as hazardous wastes thereby
making such wastes subject to more stringent requirements. If such a change in
legislation were to be enacted, it could have a significant impact on Conoco's
operating costs, as well as the gas and oil industry in general.
OIL SPILLS
Under the U.S. Federal Oil Pollution Act of 1990, as amended ("OPA"), (1)
owners and operators of onshore facilities and pipelines, (2) lessees or
permittees of an area in which an offshore facility is located and (3) owners
and operators of tank vessels ("Responsible Parties") can be liable regardless
of fault for all removal costs and damages that result from a discharge of oil
into the navigable waters of the United States. These damages include, for
example, natural resource damages, real and personal property damages and
economic losses. OPA limits the liability of Responsible Parties for removal
costs and damages that result from a discharge of oil to $350 million in the
case of onshore facilities, $75 million plus removal costs in the case of
offshore facilities, and in the case of tank vessels, an amount based on gross
tonnage of the vessel. However, these limits do not apply if the discharge was
caused by gross negligence or willful misconduct, or by the violation of an
applicable Federal safety, construction or operating regulation by the
Responsible Party, its agent or subcontractor or in certain other circumstances.
OPA requires evidence of financial responsibility in an amount of up to
$150 million for certain offshore facilities. OPA also requires offshore
facilities, certain onshore facilities and tank vessels to prepare spill
response plans, which Conoco has done, for responding to a "worst case
discharge" of oil.
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Failure to comply with these requirements or failure to cooperate during a spill
event may subject a Responsible Party to civil or criminal enforcement actions
and penalties.
OFFSHORE PRODUCTION
Offshore oil and gas operations in U.S. waters are subject to regulations
of the United States Department of the Interior, which currently impose
liability regardless of fault upon the lessee under a Federal lease for the cost
of clean-up of pollution resulting from the lessee's operations, and such lessee
could be subject to liability for pollution damages. In the event of a serious
incident of pollution, the Department of the Interior may require a lessee under
Federal leases to suspend or cease operations in the affected areas.
SOURCES OF SUPPLY
During 1998, Conoco supplemented its own crude oil production to meet its
refining requirements by the purchase of crude oil from both domestic and
international sources. Approximately 49 percent of the crude oil processed in
Conoco's U.S. refineries in 1998 came from U.S. sources. The remainder of crude
processed came principally from Venezuela, Mexico and Canada. During 1998,
Conoco's Humber refinery in the United Kingdom processed principally North Sea
crude oils. In the joint venture MiRO refinery, Conoco processed primarily
Mediterranean crude oils in 1998. Conoco's joint venture CRC refineries in the
Czech Republic processed primarily Russian crudes.
To assure availability, Conoco maintains multiple sources for most raw
materials, supplies, services and equipment, with no one company supplying a
substantial portion of Conoco's needs. Conoco also routinely leases or charters
equipment, such as drilling rigs, offshore supply boats, seismic boats, pipeline
laying equipment, derrick barges and cranes. Availability of supply and/or cost
of such equipment has been a factor in the past, and could have a detrimental
impact on Conoco in the future.
RESEARCH AND DEVELOPMENT
The objectives of Conoco's research and development programs are to
discover new products, processes and business opportunities in relevant fields,
and to improve existing products and processes. Research and development also
focuses on optimizing existing assets and improving efficiency, safety and
environmental protection. Worldwide expenditures for research and development
amounted to approximately $42 million in 1998, $44 million in 1997 and $41
million in 1996.
PATENTS AND TRADEMARKS
Conoco owns and is licensed under various patents, which expire from time
to time, covering many products, processes and product uses. No individual
patent is of material importance to Conoco's business as a whole. During 1998,
Conoco was granted seven U.S. and 28 non-U.S. patents. Conoco also has
individual trademarks and brands for its products and services which are
registered in various countries throughout the world. None of these trademarks
and brands is considered material other than the "Conoco" and "Jet" brands.
OPERATING HAZARDS AND INSURANCE
Conoco's operations are subject to certain operating hazards such as well
blowouts, collapsed wells, explosions, uncontrolled flows of oil, natural gas or
well fluids, fires, formations with abnormal pressures, pipeline ruptures or
spills, refinery explosions, surface or marine transportation incidents,
pollution, releases of toxic gas and other environmental hazards and risks. In
accordance with customary industry practices, Conoco maintains insurance against
some, but not all, of such risks and losses. Given Conoco's risk profile and in
accordance with the practices of a number of major integrated, international
energy companies, Conoco does not carry business interruption insurance.
Conoco's decision not to carry business interruption insurance is based on
several factors, including its spread of risk over five wholly owned refineries
(with some resultant ability to replace product during periods of business
interruption), a favorable loss history
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and loss prevention and safety programs. Conoco has elected to retain the risk
where management believes the cost of insurance, although available, is
excessive relative to the risks presented. In addition, pollution and
environmental risks are generally not fully insurable.
PROPERTIES
Conoco owns its corporate headquarters, consisting of 16 three-story
buildings on a 62-acre site in Houston, Texas. Conoco owns and leases petroleum
properties and operates production processing, refining, marketing,
power-generating and research and development facilities worldwide. In addition,
Conoco operates sales offices, regional purchasing offices, distribution centers
and various other specialized service locations throughout the world.
EMPLOYEES
Conoco had approximately 16,650 employees as of December 31, 1998.
Approximately 1,400 employees at Conoco's U.S. refineries are represented by the
Oil, Chemical and Atomic Workers International Union under separate bargaining
agreements for each refinery. These agreements cover wages, certain benefit
matters, grievance procedures and various employment conditions, and Conoco
believes they are typical of the refining industry in the U.S. In 1999, Conoco
will reduce staff by approximately 975 positions to improve operational
efficiencies by combining some functions in the United States and by more
broadly sharing services and more effectively deploying employees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Conoco -- Restructuring."
LEGAL PROCEEDINGS
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 40 percent 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. The parties have
reached an agreement to settle the case that requires the parties to pay a
penalty of $165,000 and construct a fish passageway in the Jocko River to
enhance the Bull Trout population. The parties are in the process of executing
final settlement documents, and Conoco expects them to be lodged with the court
for the thirty-day comment period by the end of March 1999.
On January 5, 1999, Conoco paid $105,000 in penalties and agreed to perform
certain remediation at a cost of $200,000 to settle allegations made on June 18,
1998 by the New Mexico Environmental Department that Conoco had failed to obtain
a Clean Air Act permit and violated certain conditions in existing permits at
the Maljamar Gas Plant and the MCA field.
On August 31, 1998, the Louisiana Department of Environmental Quality
("LDEQ") issued a Notice of Violation against Conoco for failure to maintain
equipment to control emissions from the sulfur pits at the Lake Charles
Refinery. On November 11, 1998, the LDEQ notified Conoco that it is seeking a
fine of $300,000. Conoco is contesting these allegations and the proposed
penalty and is seeking a hearing in this matter.
On February 18, 1999, the Oklahoma Department of Environmental Quality
issued a Notice of Violation to Conoco's Ponca City refinery alleging certain
violations of the Oklahoma Air Pollution Control Rules. Although this Notice of
Violation may result in the Department seeking monetary sanctions in excess of
$100,000, Conoco intends to vigorously defend the matter.
Conoco 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 its
separation from DuPont, Conoco has also assumed responsibility for current and
future claims related to
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certain discontinued chemicals and agricultural chemicals businesses operated by
Conoco in the past. Conoco cannot reasonably estimate the effect on future
financial results, because considerable uncertainty exists. Conoco 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 that they
will not materially affect the consolidated financial position of Conoco.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Following is information concerning the current executive officers and
directors of Conoco. Each director holds office until his successor is duly
elected and qualified or until his resignation or removal if earlier. The Board
is divided into three classes, designated Class I, Class II and Class III. See
"Description of Conoco Capital Stock -- Anti-Takeover Effects of Certain
Certificate and By-Law Provisions -- Board of Directors."
<TABLE>
<CAPTION>
NAME AGE(1) POSITION WITH CONOCO
- ---- ------ --------------------
<S> <C> <C>
Edgar S. Woolard, Jr. ............... 64 Chairman of the Board of Directors
Archie W. Dunham..................... 60 President, Chief Executive Officer and Director
Ruth R. Harkin....................... 54 Director
Frank A. McPherson................... 65 Director
Gary M. Pfeiffer..................... 49 Director
William K. Reilly.................... 59 Director
William R. Rhodes.................... 63 Director
Franklin A. Thomas................... 64 Director
Gary W. Edwards...................... 57 Executive Vice President, Refining, Marketing,
Supply and Transportation
Robert E. McKee III.................. 52 Executive Vice President, Exploration Production
Robert W. Goldman.................... 56 Senior Vice President, Finance, and Chief Financial
Officer
Rick A. Harrington................... 54 Senior Vice President, Legal, and General Counsel
</TABLE>
- ------------
(1) As of March 15, 1999.
EDGAR S. WOOLARD, JR. has been a Class III director since July 1998. He
retired as Chairman of the Board of Directors of DuPont on October 29, 1997,
having served since 1989. He was named Chairman of the Board of Conoco in July
1998. He remains a director of DuPont. Since he joined DuPont in 1957, he
occupied many technical and managerial positions at various locations across the
United States. From 1987 to 1989, Mr. Woolard served as President and Chief
Operating Officer of DuPont, and from 1989 to 1995, as Chairman and Chief
Executive Officer. Mr. Woolard is a director of Citigroup Inc. and Apple
Computer, Inc. and a member of The Business Council, the Board of Trustees of
Winterthur Museum, the Christiana Care Corporation, the Protestant Episcopal
Theological Seminary in Virginia and the North Carolina Textile Foundation. He
is also a member of the National Academy of Engineering and the Bretton Woods
Committee.
ARCHIE W. DUNHAM has been a Class II director since July 1998. He has been
President and Chief Executive Officer of Conoco since 1996. He joined Conoco in
1966 and subsequently held a number of commercial and managerial positions
within Conoco and DuPont. He currently serves on both companies' boards of
directors. Mr. Dunham is also a member of the boards of directors of
Louisiana-Pacific Corporation and Phelps Dodge Corporation. Mr. Dunham is a
former Executive Vice President, Exploration Production and Executive Vice
President, Refining, Marketing, Supply and Transportation for Conoco. He was
also a Senior Vice President, Polymers and Senior Vice President, Chemicals and
Pigments for DuPont. He is a director of the American Petroleum Institute, the
U.S.-Russia Business Council and the Greater Houston Partnership. He is Chairman
of the United States Energy Association, Vice-Chairman of the National Petroleum
Council and a member of The Business Council. Mr. Dunham is also a member of the
Board of Visitors and the Energy Center board of directors at the University of
Oklahoma. He also serves on the board of trustees of the Memorial Hermann
Healthcare System in Houston, the Houston Grand Opera, the Houston Symphony, the
George Bush Presidential Library and the Smithsonian Institution.
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RUTH R. HARKIN has been a Class I director since October 1998. She is
Senior Vice President, International Affairs and Government Relations of United
Technologies Corporation and Chair of United Technologies International, UTC's
international representation arm. Previously, Mrs. Harkin was the President and
Chief Executive Officer of the Overseas Private Investment Corporation in the
Clinton administration from 1993 to 1997. Mrs. Harkin was elected as a
prosecutor in the office of the County Attorney of Story County, Iowa in 1973.
She also served as Deputy General Counsel at the U.S. Department of Agriculture
and was Of Counsel at the law firm of Akin, Gump, Strauss, Hauer & Feld. Mrs.
Harkin is a member of the Board of Visitors of the College of Business
Administration, University of Iowa. She also sits on the boards of the Center
for National Policy and the National Association of Manufacturers.
FRANK A. MCPHERSON has been a Class I director since October 1998. He
retired as Chairman and Chief Executive Officer of Kerr-McGee Corporation on
February 1, 1997. He joined Kerr-McGee in 1957 and held many technical,
operational and managerial positions, including President from 1980 to 1983. He
is a past director of the Federal Reserve Bank of Kansas City and the Oklahoma
State University foundation Board of Trustees. Mr. McPherson serves on the
boards of directors of Kimberly-Clark Corp., Bank of Oklahoma, Tri-Continental
Corporation, Seligman Quality Fund, Inc., Seligman Select Municipal Fund, Inc.
and the Seligman Group of Mutual Funds. He is also a member of the boards of the
American Petroleum Institute, Boys and Girls Clubs of America, Baptist Medical
Center, Oklahoma Chapter of Nature Conservancy, Oklahoma City Chamber of
Commerce, Oklahoma City Public School Foundation, Oklahoma Medical Research
Foundation and Oklahoma Foundation for Excellence in Education.
GARY M. PFEIFFER has been a Class I director since July 1998. He has been
Senior Vice President, Finance and Chief Financial Officer of DuPont since 1997.
From 1994 to 1997, Mr. Pfeiffer was Vice President and General Manager of DuPont
Nylon, North America, with responsibility for all of DuPont's nylon fiber and
intermediates business in North America. He has also served as Global Business
Director, Nylon Intermediates for DuPont Chemicals from 1992 to 1994, and as
Director -- Finance for DuPont Chemicals and Specialties Manufacturing from 1991
to 1992. Since he joined DuPont in 1974, Mr. Pfeiffer has held a number of
technical and managerial positions in the United States and overseas. He is also
on the board of the Hagley Museum and Library.
WILLIAM K. REILLY has been a Class II director since October 1998. He is
currently a member of the board of directors of DuPont and is President and
Chief Executive Officer of Aqua International Partners, an investment group
which finances water improvements in developing countries. Formerly, Mr. Reilly
was a visiting professor at the Institute of International Studies at Stanford
University and served as Administrator of the U.S. Environmental Protection
Agency from February 1989 to January 1993. Mr. Reilly was president of the
Conservation Foundation from 1973 to 1989 and, after its affiliation with World
Wildlife Fund in 1985, served as President of both groups. He also serves on the
boards of Royal Caribbean International and Evergreen Holdings. He is Chairman
of the Board of the American Farmland Trust and serves on the boards of National
Geographic Society, World Wildlife Fund and Yale University. Mr. Reilly also
serves as a member of the board of the Presidio Trust of San Francisco.
WILLIAM R. RHODES has served as a Class III director since October 1998. He
is a Vice Chairman of Citibank, N.A., a principal subsidiary of Citigroup Inc.
Mr. Rhodes is Vice Chairman of the Institute of International Finance, a
director of the Private Export Funding Corporation, a trustee and member of the
Executive Council of the Council of the Americas, an Executive Committee member
of the Bretton Woods Committee and the U.S.-Russia Business Council, and a
founding member of the U.S. National Advisory Council to the International
Management Center. Other board memberships include The Group of Thirty, the
Americas Society, The African-American Institute, CHIPCo, and the U.S.-Egypt
Presidents' Council. He is also a member of the Council on Foreign Relations,
the Foreign Policy Association, and The Bankers Roundtable. Mr. Rhodes is a past
Chairman of the U.S. Advisory Committee of the Export-Import Bank of the United
States, past Chairman of the U.S. section of the Venezuela-U.S. Business
Council, past President of the Venezuela-American Chamber of Commerce, and past
President of the Bankers Association for Foreign Trade. He is a Governor and
Trustee of the New York and Presbyterian Hospital and a director of the New York
City Partnership and Chamber of
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Commerce. He serves as a trustee of Brown University and Chairman of the Board
of Trustees of the Northfield Mount Hermon School.
FRANKLIN A. THOMAS has been a Class II director since October 1998. He has
been a consultant to the TFF Study Group, a non-profit initiative assisting
development in southern Africa, since April 1996. Mr. Thomas was President and
Chief Executive Officer of The Ford Foundation from 1979 to 1996. He also serves
as a director of ALCOA, Inc., Citigroup Inc., Cummins Engine Company, Inc.,
Lucent Technologies, Inc. and PepsiCo, Inc.
GARY W. EDWARDS has been Executive Vice President of Conoco since 1991,
with responsibility for worldwide refining, marketing, supply and transportation
and was a Senior Vice President of DuPont until October 27, 1998. He joined
Conoco in 1963, working at various locations throughout the United States and in
the United Kingdom, and was formerly Conoco's Vice President, Refining Marketing
Europe; Vice President Refining, Marketing and Transportation; and Vice
President North American Marketing. Mr. Edwards has held a number of managerial
positions in Conoco Pipeline, Transportation, Natural Gas and Gas Products,
Logistics and Marketing. He is a Director of the American Petroleum Institute
and a previous director and Vice President of the European Petroleum Industry
Association in Brussels, Belgium. Mr. Edwards is a member of the Kansas State
University Engineering advisory council, and serves on the boards of the
Yellowstone Park Foundation, Theatre Under the Stars, Junior Achievement, Inc.
(National) as well as Junior Achievement of Southeast Texas, Target Hunger,
Private Sector Initiative, and the Houston Music Hall Foundation.
ROBERT E. MCKEE III has been an Executive Vice President for Conoco since
1992, with responsibility for worldwide exploration and production and was a
Senior Vice President of DuPont until October 27, 1998. He was formerly Conoco's
Executive Vice President for Corporate Strategy and Development, Senior Vice
President for Administration, Vice President of North American Refining and
Marketing and Vice President, Chairman and Managing Director of Conoco (UK)
Limited. Since he joined Conoco in 1967, Mr. McKee has worked at various
locations and held numerous managerial, operating, administrative and technology
positions both in the United State and overseas. He currently serves on the
board of directors of the American Petroleum Institute and is a former director
of Consol Energy Inc. and Consol Inc. In addition, he is Chairman of the
Southern Regional Advisory Board of the Institute of International Education and
a member of the advisory committee of the University of Texas Engineering
Department. Mr. McKee also serves as Chairman of the President's Council of the
Colorado School of Mines.
ROBERT W. GOLDMAN has been Senior Vice President, Finance, and Chief
Financial Officer of Conoco since 1998 and was its Vice President, Finance from
1991 to 1998. Mr. Goldman began his career with DuPont in 1965 and subsequently
held many technical and managerial positions within the finance, tax and
treasury functions. He is the former Vice President-Finance of DuPont (Mexico),
Vice President, Remington Arms Company and served as Director and Comptroller of
several operating departments of DuPont in Wilmington, Delaware. Mr. Goldman
transferred to Conoco in 1988 as Vice President and Controller. He is
co-chairman of Conoco's Risk Management Committee and is a member of the
American Petroleum Institute, a former chairman of its Accounting Committee and
currently serves on its Executive Committee of the General Committee on Finance.
He is also a member of the Financial Executives Institute and the Executive
Committee of the Board of Directors of the Alley Theatre in Houston, Texas.
RICK A. HARRINGTON has been Senior Vice President, Legal, and General
Counsel of Conoco since 1998 and was Vice President and General Counsel of
Conoco and Vice President and Assistant General Counsel of DuPont from 1994
until October 27, 1998. He joined DuPont in 1979 as a Senior Attorney, and
subsequently held the positions of Managing Counsel, Special Litigation, and
Vice President and General Counsel of Consolidation Coal Company. Prior to
joining DuPont, he was a partner in the firm of Arent, Fox, Kintner, Plotkin and
Kahn in Washington, D.C. where he specialized in antitrust litigation. Mr.
Harrington is a member of the bar of the District of Columbia, the District of
Columbia Court of Appeals and the Fifth Circuit Court of Appeals. He is
co-chairman of Conoco's Risk Management Committee and a director of the American
Corporate Counsel Association and is a member of its Policy
113
<PAGE> 115
Committee. He is also a member of the American Petroleum Institute General
Committee on Law and the University of Kansas School of Business Dean's Board.
ELECTION AND COMPENSATION OF DIRECTORS
Conoco's restated certificate of incorporation provides that the board of
directors will consist of not less than six nor more than 15 directors. The
board of directors is classified into three classes. Each class consists, as
nearly as may be possible, of one-third of the total number of directors
constituting the entire board of directors. The terms of office of the members
of one class of directors expire each year in rotation so that the members of
one class are elected at each annual meeting to serve for full three-year terms,
or until their successors are elected and qualified. The current number of
authorized directors is set at nine, but only eight positions are occupied.
Directors who are employees of Conoco or DuPont receive no additional
compensation for serving on the board of directors. At the time of the initial
public offering, each nonemployee member of the board of directors received a
special grant of stock options to purchase 3,900 shares of Class A Common Stock
and a grant of 4,135 restricted stock units with respect to Class A Common
Stock. Future nonemployee directors, upon election to the board, will receive a
grant of restricted stock units with an aggregate value on the date of grant
equal to $95,000. On an annual basis, nonemployee directors will receive a fee
of $30,000, a grant of restricted stock units with an aggregate value on the
date of grant of $20,000, and options to purchase Common Stock with a present
value on the date of grant of $30,000.
Conoco awards stock options and restricted stock units under the terms of
its 1998 Stock and Performance Incentive Plan. Stock options have a term of ten
years and become exercisable in increments of one-third of the total grant on
the first, second and third anniversaries of the grant. The present value of
stock options is determined using a generally accepted stock option valuation
methodology. Restricted stock units are grants of units representing Common
Stock. Shares underlying restricted stock units granted to directors may not be
sold or voted for a period of three years, but dividend equivalents in the form
of additional units are credited during such period. Restricted stock units vest
immediately upon grant and stock options vest after six months of service as a
director.
Annual fees and awards of restricted stock units may be deferred under the
terms of Conoco's Deferred Compensation Plan for Nonemployee Directors, which is
established under the 1998 Stock and Performance Incentive Plan. An election to
defer must generally be made before the fiscal year in which it will be earned.
Once made, the election is generally irrevocable for the first year. The
deferred amounts are deemed to be invested, under the election of the
participant, in Common Stock or in an interest-bearing account.
Each deferral election will indicate the time (either on the date of
termination of service as a director or on the date that is five years following
such date) and form of payment for the amounts to be deferred. Distributions
will be made in cash or Common Stock to the participant at the time irrevocably
selected on the deferral form, or, in the event of the participant's death, to
the participant's designated beneficiary. Upon a change in control of Conoco, at
the director's election, all deferred amounts (including deferred restricted
stock units) may be paid in full.
Board members are also eligible to participate in the Directors' Charitable
Gift Plan. This plan provides that, upon a director's death, Conoco will donate
$200,000 per year for five years to tax-exempt educational institutions or
charitable organizations recommended by the director and approved by Conoco.
Each director will be fully vested in the Directors' Charitable Gift Plan after
completing one year of service as director. Conoco may fund the Directors'
Charitable Gift Plan through, among other vehicles, the purchase of life
insurance policies on the lives of the directors. Conoco will be the beneficiary
of and will own these policies. Employee directors may elect to participate in
the plan if they bear their allocable cost of the plan. Directors derive no
personal financial or tax benefit from the Directors' Charitable Gift Plan
because the charitable, tax-deductible donations and insurance proceeds, if any,
accrue solely to the benefit of Conoco.
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<PAGE> 116
A board member who serves as chairman of a standing board committee
receives a supplement of $5,000 annually. No additional fees are paid for
serving on board committees or for attending board or committee meetings.
In lieu of the compensation payable to nonemployee directors described
above (other than participation in the Directors' Charitable Gift Plan), Edgar
S. Woolard, Jr., Chairman of the Board, is entitled to receive an annual fee of
$300,000 and annual equity grants with a present value on the date of grant of
$700,000. Conoco granted Mr. Woolard 4,350 restricted stock units with respect
to Class A Common Stock and nonqualified options to purchase 170,000 shares of
Class A Common Stock at the closing of the initial public offering. This grant
covers Mr. Woolard's first two years of service as a director. Restricted stock
units and stock options are granted under the 1998 Stock and Performance
Incentive Plan and have provisions consistent with those of the other
nonemployee directors.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT AND COMPLIANCE COMMITTEE
Members: Frank A. McPherson, Chairman
Ruth R. Harkin
Gary M. Pfeiffer
William R. Rhodes
Number of meetings in
1998: Two
Principal Functions:
The Audit and Compliance Committee oversees Conoco's internal
control structure, financial reporting, and legal and ethical
compliance program, including strategic oversight of corporate
safety, health and environmental policy and direction. The
committee selects an independent accounting firm, subject to
stockholder ratification, to audit Conoco's financial
statements. It also requests that Conoco's subsidiaries engage
independent accountants, as deemed appropriate by the
committee, to audit their respective financial statements. The
committee receives and acts on reports and comments from
Conoco's independent accountants, reviews significant
accounting principles employed in Conoco's financial
reporting, reviews and recommends approval of Conoco's annual
financial statements and maintains direct lines of
communication with the board of directors and Conoco's
management, internal auditing staff and independent
accountants. It reports to the board of directors a summary of
its findings and recommendations.
COMPENSATION COMMITTEE
Members: Franklin A. Thomas, Chairman
William K. Reilly
Edgar S. Woolard, Jr.
Number of Meetings in
1998: Two
Principal Functions:
The Compensation Committee oversees and administers Conoco's
executive compensation policies, plans and practices. The
committee has responsibility for approving and/or recommending
to the board of directors levels of compensation for the
President and Chief Executive Officer, as well as stock
options, performance awards and other stock-based awards for
employee directors and senior management. The committee also
administers certain grants to management under Conoco's
stock-based compensation plans and adopts and/or recommends to
the full board of directors new plans or changes in these
programs. The committee also oversees succession planning for
the Chief Executive Officer and other key executives.
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<PAGE> 117
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the number of shares of Class A Common Stock
beneficially owned on March 1, 1999, by each Conoco director, executive officer
named in the Summary Compensation Table below and all directors and executive
officers as a group. None of such individuals owns Class B Common Stock.
BENEFICIAL OWNERSHIP TABLE
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT OF
NAME OWNED(1)(2)(3) CLASS
- ---- -------------- ----------
<S> <C> <C>
Edgar S. Woolard, Jr................................ 12,350(4) *
Archie W. Dunham.................................... 2,676,029(5) 1.4%
Ruth R. Harkin...................................... 4,135 *
Frank A. McPherson.................................. 7,430 *
Gary M. Pfeiffer.................................... -- --
William K. Reilly................................... 4,816 *
William R. Rhodes................................... 4,135 *
Franklin A. Thomas.................................. 4,135 *
Gary W. Edwards..................................... 1,261,894 *
Robert E. McKee III................................. 1,001,521(6) *
Robert W. Goldman................................... 305,269 *
Rick A. Harrington.................................. 307,885 *
Directors and Executive Officers as a Group (12
persons).......................................... 5,589,599 2.9%
</TABLE>
- ---------------
* Less than 1%
(1) The persons named in this table have sole voting power and investment power
with respect to all shares of Class A Common Stock shown as beneficially
owned by them, subject to community property laws where applicable and the
information contained in this table and these notes.
(2) Includes restricted or deferred stock units credited under the 1998 Stock
and Performance Incentive Plan and the Deferred Compensation Plan for
Nonemployee Directors, the following number of which may be voted or sold
only upon the passage of time: Mr. Woolard -- 4,350; Mr. Dunham -- 80,584;
Ms. Harkin -- 4,135; Mr. McPherson -- 4,135; Mr. Reilly -- 4,135; Mr.
Rhodes -- 4,135; and Mr. Thomas -- 4,135.
(3) Includes beneficial ownership of the following number of shares of Class A
Common Stock which may be acquired within 60 days of March 1, 1999 under
stock options awarded under compensation plans: Mr. Dunham -- 2,450,870; Mr.
Edwards -- 1,233,596; Mr. McKee -- 986,740; Mr. Goldman -- 298,583; and Mr.
Harrington -- 301,528. Of such options, the following number are subject to
stock price hurdles which have not yet been met: Mr. Dunham -- 392,846; Mr.
Edwards -- 182,324; Mr. McKee -- 173,427; Mr. Goldman -- 52,562; and Mr.
Harrington -- 80,349.
(4) Includes 3,000 shares owned by Mr. Woolard's wife.
(5) Includes 10,100 shares held in Dunham Management Trust, a revocable grantor
trust.
(6) Includes 100 shares owned by Mr. McKee's wife and 200 shares owned by Mr.
McKee's son.
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<PAGE> 118
COMPENSATION OF EXECUTIVE OFFICERS
Until October 1998, the executive officers named in the table below
participated in DuPont's compensation plans. The following table provides
information about the compensation of Conoco's chief executive officer and four
other most highly compensated executive officers during 1997 and 1998 without
regard to whether compensation was provided under DuPont's plans or Conoco's
plans. Two additional tables provide detailed information about these employees'
stock options.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -----------------------
--------------------------------------- SHARES
OTHER RESTRICTED UNDERLYING
NAME AND ANNUAL STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) AWARDS(3) GRANTED(4) COMPENSATION(5)
- ------------------ ---- -------- ---------- --------------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Archie W. Dunham......... 1998 $901,261 $1,300,000 $29,946 $1,100,090 1,693,040 $51,750
President, Chief 1997 667,500 1,450,000 33,075 794,936 39,950
Executive Officer and
Director
Gary W. Edwards.......... 1998 469,460 389,000 16,347 567,974 27,620
Executive Vice 1997 431,320 725,000 24,044 364,648 25,715
President, Refining,
Marketing, Supply and
Transportation
Robert E. McKee III...... 1998 418,775 372,000 30,573 561,677 24,563
Executive Vice 1997 374,400 718,000 16,612 346,854 22,247
President, Exploration
Production
Robert W. Goldman........ 1998 262,750 140,000 6,211 164,191 15,390
Senior Vice President, 1997 236,700 292,000 1,513 105,672 13,958
Finance, and Chief
Financial Officer
Rick A. Harrington....... 1998 264,500 172,000 1,760 198,411 15,600
Senior Vice President, 1997 229,500 325,000 4,703 163,716 13,598
Legal, and General
Counsel
</TABLE>
- ---------------
(1) On average, approximately 25% of 1998 variable compensation (i.e., bonus)
was paid in Class A Common Stock, and about 25% of 1997 variable
compensation was paid in DuPont common stock.
(2) Other annual compensation consists solely of the reimbursement for the
payment of taxes.
(3) For 1998, Mr. Dunham received 47,830 restricted stock units with respect to
Class A Common Stock valued at $23 per unit. Such stock units vest two years
from the date of grant. During such period, dividend equivalents will be
credited to Mr. Dunham's account in the form of additional units. Such
restricted stock units had an aggregate value of $998,451 on December 31,
1998 based on the closing price on the New York Stock Exchange on such date
of $20.875.
(4) Reflects for 1998, new grants of Conoco stock options and, for 1997 and
1998, replacement grants of Conoco stock options at the time of the initial
public offering resulting from the election of the officers to surrender
DuPont stock options granted in 1997 and 1998 and receive Conoco stock
options having an equivalent appreciated value at the time of the initial
public offering. The number of shares of Class A Common Stock covered by the
replacement stock options was calculated by multiplying the number of shares
of DuPont common stock subject to the original DuPont options by a factor of
2.7376, and the exercise price of the options was decreased by dividing the
original exercise price by the same factor.
(5) 1998 amounts consist of matching contributions made under Conoco's Thrift
Plan and the following amounts credited under DuPont's savings restoration
plan: Mr. Dunham -- $42,150; Mr. Edwards -- $18,020; Mr. McKee -- $14,963;
Mr. Goldman -- $5,790 and Mr. Harrington -- $6,000.
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<PAGE> 119
OPTION GRANTS TABLE
<TABLE>
<CAPTION>
INDIVIDUAL OPTION GRANTS IN 1998(1)(2) POTENTIAL REALIZABLE
----------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT ANNUAL RATES OF STOCK
SHARES OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS TERM(5)
OPTIONS GRANTED EXERCISE EXPIRATION -------------------------
NAME GRANTED IN 1998(3) PRICE(4) DATE 5% 10%
- ---- ---------- ---------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Archie W. Dunham............................... 388,740 11.83% $21.73 02/03/2008 $ 5,313,532 $13,465,565
1,304,300 16.40 23.00 10/20/2008 18,866,178 47,810,551
Gary W. Edwards................................ 132,774 4.04 21.73 02/03/2008 1,814,835 4,599,159
435,200 5.47 23.00 10/20/2008 6,294,994 15,952,735
Robert E. McKee III............................ 126,477 3.85 21.73 02/03/2008 1,728,764 4,381,037
435,200 5.47 23.00 10/20/2008 6,294,994 15,952,735
Robert W. Goldman.............................. 40,791 1.24 21.73 02/03/2008 557,556 1,412,959
123,400 1.55 23.00 10/20/2008 1,784,932 4,523,363
Rick A. Harrington............................. 75,011 2.28 21.73 02/03/2008 1,025,295 2,598,306
123,400 1.55 23.00 10/20/2008 1,784,932 4,523,363
</TABLE>
- ---------------
(1) All options have a term of ten years and become exercisable in increments of
one-third of the total grant on the first, second, and third anniversaries
of the grant. In addition, the options expiring on February 3, 2008 were to
become exercisable only upon a 20% increase in the price of DuPont's common
stock, which has occurred.
(2) The options expiring on February 3, 2008 were originally granted with
respect to DuPont common stock and the amounts shown represent the number of
shares of Conoco Class A Common Stock resulting from the replacement in
October 1998 of outstanding DuPont options with Conoco stock options, which
was intended to preserve the economic value of the DuPont options in
connection with the initial public offering. The number of shares of Conoco
Class A Common Stock covered by the replacement options was calculated by
multiplying the number of shares of DuPont common stock subject to the
original options by a factor of 2.7376, and the exercise price of the
options was decreased by dividing the original exercise price by the same
factor.
(3) Percent of total options granted to Conoco employees.
(4) The original exercise price for the options expiring on February 3, 2008 was
the average of the high and low prices of the DuPont common stock as
reported on the New York Stock Exchange Composite Transactions Tape on
February 4, 1998, the date of the grant. Such exercise price was adjusted by
dividing it by a factor of 2.7376 upon the replacement of the DuPont stock
options with Conoco stock options. The exercise price for the options
expiring on October 20, 2008 was the initial public offering price of
Conoco's Class A Common Stock on October 21, 1998, the date of the grant.
(5) Represents total appreciation over the exercise price at the assumed annual
appreciation rates of 5% and 10% compounded annually for the term of the
options.
118
<PAGE> 120
OPTION EXERCISES TABLE
(Aggregated Option Exercises in Last Fiscal Year
and Year-end Option Values)
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1998 AT DECEMBER 31, 1998(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Archie W. Dunham.................. -- -- 1,928,446 2,085,886 $16,449,027 $666,895
Gary W. Edwards................... -- -- 1,007,016 750,298 9,444,625 309,513
Robert E. McKee III............... -- -- 771,156 735,104 6,502,665 294,410
Robert W. Goldman................. -- -- 232,426 216,753 1,955,829 89,229
Rick A. Harrington................ -- -- 196,177 278,760 1,166,709 136,400
</TABLE>
- ---------------
(1) No Conoco stock options were exercised in 1998. DuPont stock options were
exercised by the following officers in the amounts indicated: Mr. McKee,
14,708 shares with a realized value of $487,878; Mr. Goldman, 8,406 shares
with a realized value of $292,078; and Mr. Harrington, 23,492 shares with a
realized value of $925,806. The realized value represents the pre-tax gain,
which is the difference between the market value of the shares on the date
of exercise of the options and the exercise price.
(2) Represents the closing price as reported on the New York Stock Exchange for
Class A Common Stock on December 31, 1998 of $20.875, less the exercise
price for all outstanding exercisable and unexercisable options for which
the exercise price is less than such closing price. Exercisable options have
been held at least one year from the date of grant and have met applicable
stock price hurdles. Unexercisable options have been held for less than one
year or have not met the applicable stock price hurdles.
RETIREMENT BENEFITS
Retirement benefits for Conoco employees are provided under the DuPont
Pension and Retirement Plan, and are based on an employee's years of service and
average monthly pay during the employee's three highest paid years. "Average
monthly pay" for this purpose includes regular compensation and 100% of annual
variable compensation payments, but excludes other bonuses and compensation in
excess of limits imposed by the Internal Revenue Code of 1986. The Code limits
the amount of annual benefits which may be payable from the pension trust.
Retirement benefits in excess of these limitations are paid from Conoco's
general revenues under separate, nonfunded pension restoration plans.
Effective as of the date DuPont ceases to own securities representing 80%
or more of the voting power and 80% or more of the economic value of all
outstanding shares of Common Stock, Conoco will establish its own retirement
plan. See "Arrangements Between Conoco and DuPont -- Employee Matters
Agreement."
119
<PAGE> 121
The table below illustrates the straight-life annuity amounts payable under
the DuPont Pension and Retirement Plan and retirement restoration plans to
Conoco employees retiring at age 65 in 1998. These amounts reflect an offset
based on Social Security benefits. The current years of service credited for
retirement benefits for the Named Officers are as follows: 33 years for Archie
W. Dunham; 35 years for Gary W. Edwards; 31 years for Robert E. McKee III; 33
years for Robert W. Goldman; and 19 years for Rick A. Harrington.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ESTIMATED ANNUAL RETIREMENT BENEFITS ON SERVICE OF:
-------------------------------------------------------
SALARY AND VARIABLE COMPENSATION 30 YEARS 35 YEARS 40 YEARS 45 YEARS
-------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
$ 450,000.............................. $ 208,000 $ 244,000 $ 280,000 $ 316,000
900,000............................. 424,000 496,000 568,000 640,000
1,350,000............................. 640,000 748,000 856,000 964,000
1,800,000............................. 856,000 1,000,000 1,144,000 1,288,000
2,250,000............................. 1,072,000 1,252,000 1,432,000 1,612,000
2,700,000............................. 1,288,000 1,504,000 1,720,000 1,936,000
</TABLE>
SEVERANCE ARRANGEMENTS
On May 10, 1998, Conoco entered into a severance agreement with Archie W.
Dunham. The severance agreement has an initial term of three years, which term
will be extended, if necessary, upon any "Change in Control" (as such term is
defined in the severance agreement) so that the severance agreement will expire
no earlier than 24 months after such event. The severance agreement provides
that if, during the term of the severance agreement, Mr. Dunham's employment is
terminated by Conoco other than for cause, or by reason of Mr. Dunham's death or
disability, or if Mr. Dunham terminates his employment for "Good Reason" (as
defined in the severance agreement), Mr. Dunham will be entitled to (i) a lump
sum severance payment equal to three times the sum of his base salary and
previous year's bonus, (ii) 36 months of benefits continuation, (iii) a pro rata
portion of the annual bonus for which he is eligible in the year of termination
and (iv) vesting of any unvested equity-based awards from Conoco. Mr. Dunham
will also be entitled to terminate his employment and receive the foregoing
benefits if, prior to the second anniversary of the occurrence of the Offerings
or after DuPont reduces its ownership to less than 50%, he is not appointed as
Chairman of the Board of Conoco (unless his employment had previously terminated
by reason of death, disability or for cause). Mr. Dunham will also be entitled
to receive an additional payment (a "gross-up payment") sufficient to compensate
him for the amount of any excise tax imposed on payments made under the
severance agreement or otherwise pursuant to Section 4999 of the Code and for
any taxes imposed on such additional payment.
Conoco has established the Conoco Inc. Key Employee Severance Plan, which
covers certain employees of Conoco, including Gary W. Edwards, Robert E. McKee
III, Robert W. Goldman and Rick A. Harrington. The plan provides that if the
employment of a participant in the plan is terminated (i) within two years of a
"Change in Control" of Conoco or (ii) after a "Potential Change in Control" of
Conoco but prior to a Change in Control (whether or not a Change in Control ever
occurs), in either case by Conoco other than for "Cause" or by the participant
for "Good Reason" (as such terms are defined in the plan), the participant will
be entitled to (i) a lump sum severance payment equal to two or three times the
sum of his base salary and previous year's bonus, (ii) 24 or 36 months of
benefits continuation and (iii) a pro rata portion of the annual bonus for which
he is eligible in the year of termination and, if necessary, a gross-up payment
sufficient to compensate the participant for the amount of any excise tax
imposed on payment made under the plan or otherwise pursuant to Section 4999 of
the Code and for any taxes imposed on such an additional payment. The plan has a
three-year term commencing on May 10, 1998, which term will be extended, if
necessary, upon a Change in Control so that it expires no earlier than 24 months
after such an event. Amounts payable under the plan will be in lieu of any
payments or benefits that may be payable to the severed employee under any other
plan, policy or program of Conoco relating to severance.
120
<PAGE> 122
Conoco has also established both the (i) Conoco Inc. Key Employee Temporary
Severance Plan (the "Key Employee Temporary Severance Plan") and (ii) the Conoco
Inc. Temporary Severance Plan (the "Temporary Severance Plan"), each of which
covers certain Conoco employees, including the Named Officers. Under the Key
Employee Temporary Severance Plan (which expires in 2001), if the employment of
a participant is involuntarily terminated due to a reduction in force or if a
participant experiences defined adverse employment changes (including certain
relocation requirements and reductions in pay or position), the individual will
be entitled to one year's base salary and variable bonus. Under the Temporary
Severance Plan, benefits are paid to a participant upon termination of
employment in the same circumstances as are described under the Key Employee
Temporary Severance Plan, but only if such termination occurs after a "Change in
Control" (as defined in the Temporary Severance Plan) except that benefits upon
such a termination are equal to two weeks' pay for each completed year of
service, up to a maximum of 52 weeks' pay. Amounts payable under both the Key
Employee Temporary Severance Plan and the Temporary Severance Plan are reduced
by amounts payable pursuant to any other severance plan, policy or program of
Conoco.
121
<PAGE> 123
PRINCIPAL STOCKHOLDERS OF CONOCO COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership as of March 1, 1999 of shares of Class A and Class B Common Stock by
DuPont and each other person or entity known to Conoco to be a beneficial owner
of five percent or more of Conoco's voting securities.
PRINCIPAL STOCKHOLDERS TABLE
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK
--------------------- ----------------------
NUMBER PERCENT NUMBER PERCENT
NAME AND ADDRESS OF SHARES OF CLASS OF SHARES OF CLASS
- ---------------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C>
E. I. du Pont de Nemours and Company.............. -- -- 436,543,573 100%(1)
1007 Market Street
Wilmington, Delaware 19898
Putnam Investments, Inc. and related
entities(2)..................................... 13,654,179 7.1% -- --
One Post Office Square
Boston, Massachusetts 02109
Ark Asset Management Co., Inc.(3)................. 11,278,200 5.9% -- --
125 Broad Street
New York, New York 10004
Citigroup Inc.(4)
153 East 53rd Street
New York, New York 100043....................... 10,259,914 5.4% -- --
Scudder Kemper Investments, Inc.(5)............... 9,693,000 5.1% -- --
345 Park Avenue
New York, New York 10154
</TABLE>
- ---------------
(1) Shares of Class B Common Stock have five votes per share. Accordingly,
DuPont's ownership of Class B Common Stock represents approximately 92% of
the combined voting power of the Class A and Class B Common Stock.
(2) Based on a Schedule 13G filed with the Securities and Exchange Commission on
February 4, 1999 by Putnam Investments, Inc. ("PI"), a subsidiary of Marsh &
McLennan Companies, Inc. ("MMC"), on behalf of itself, MMC, Putnam
Investment Management, Inc. ("PIM") and The Putnam Advisory Company, Inc.
("PAC"). Consists of 12,483,788 shares beneficially owned by PIM and
1,170,391 shares beneficially owned by PAC, both wholly owned registered
investment advisors of PI. Both subsidiaries have dispositive power over the
shares as investment managers, but each of the mutual funds' trustees have
voting power over shares held by each fund, and PAC has shared voting power
over the shares held by institutional clients. The address of MMC is 1166
Avenue of the Americas, New York, New York 10036.
(3) Based on a Schedule 13G filed with the SEC on February 4, 1999.
(4) Based on a Schedule 13G filed with the SEC on February 12, 1999. Consists
entirely of shares beneficially owned by subsidiaries of Citigroup Inc.
which individually qualify to file a Schedule 13G but whose beneficial
ownership does not exceed 5%. Citigroup Inc. has shared voting and
dispositive power over all these shares, but disclaims beneficial ownership
of all such shares.
(5) Based on a Schedule 13G filed with the SEC on February 11, 1999. Scudder
Kemper Investments, Inc. has sole voting power with respect to 3,253,300
shares, shared voting power with respect to 6,013,300 shares, sole
dispositive power with respect to 9,488,800 shares and shared dispositive
power with respect to 204,200 shares.
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PRINCIPAL STOCKHOLDERS OF DUPONT COMMON STOCK
As of December 31, 1998, Wilmington Trust Corporation, Wilmington,
Delaware, beneficially owned an aggregate of 75,717,172 shares of DuPont's
Common Stock, or 6.6 percent of such shares outstanding at the time. The shares
held by Wilmington Trust are held of record for trust, estate, custody or agency
accounts and at year-end included 14,167,867 shares held in the DuPont
Flexitrust, a trust created by DuPont to satisfy obligations of DuPont under
various employee benefit and compensation plans. Based on public filings, there
is no reported stockholder that owns five percent or more of either series of
DuPont preferred stock.
SHARES ELIGIBLE FOR FUTURE SALE
Shares of Conoco Class B Common Stock distributed to stockholders of DuPont
will be freely transferable, except for shares received by persons who may be
deemed to be "affiliates" of Conoco under the Securities Act. Affiliates
generally include individuals or entities that control, are controlled by, or
are under common control with, Conoco. The directors and principal executive
officers of Conoco, as well as certain significant stockholders of Conoco will
be affiliates. Affiliates of Conoco may sell their shares of Conoco Class B
Common Stock only under an effective registration statement under the Securities
Act or an exemption from the registration requirements of the Securities Act.
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DESCRIPTION OF CONOCO CAPITAL STOCK
GENERAL
The authorized capital stock of Conoco consists of (1) 3.0 billion shares
of Class A Common Stock, par value $.01 per share, and 1.6 billion shares of
Class B Common Stock, par value $.01 per share, and (2) 250 million shares of
preferred stock, par value $.01 per share. There is no preferred stock
outstanding on the date of this Offering Circular -- Prospectus. As of March 15,
1999, there were 190.5 million shares of Class A Common Stock and 436.5 million
shares of Class B Common Stock outstanding. DuPont and its affiliates own all
the Class B Common Stock. A description of the material terms and provisions of
Conoco's certificate of incorporation affecting the relative rights of the Class
A Common Stock, the Class B Common Stock and the preferred stock is set forth
below. The following description of the capital stock of Conoco is intended as a
summary only. For complete information, you should read Conoco's certificate of
incorporation and by-laws incorporated by reference as an exhibit to the
Registration Statement of which this Offering Circular-Prospectus forms a part.
COMMON STOCK
VOTING RIGHTS
The holders of Class A Common Stock and Class B Common Stock generally have
identical rights, except that holders of Class A Common Stock are entitled to
one vote per share while holders of Class B Common Stock are entitled to five
votes per share. Holders of shares of Class A Common Stock and Class B Common
Stock may not cumulate their votes in the election of directors. Generally,
matters to be voted on by stockholders, including amendments to the certificate
of incorporation, must be approved by a majority of the votes entitled to be
cast by the holders of Conoco Common Stock, voting together as a single class,
subject to any voting rights granted to holders of any preferred stock. However,
a majority vote of the affected class (voting separately) is also necessary for
amendments of the certificate of incorporation that would adversely affect the
powers, preferences or special rights of the Class A Common Stock or the Class B
Common Stock. Holders of Class A Common Stock may not vote on any change in the
powers, preferences or special rights of the Class B Common Stock that would not
adversely affect their rights. For purposes of the foregoing provisions, any
provision for the voluntary, mandatory and 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.
Any amendment to the certificate of incorporation to increase the authorized
shares of any class of capital stock of Conoco requires the approval only of a
majority of the votes entitled to be cast by the holders of Conoco Common Stock
voting together as a single class.
DIVIDENDS
All holders of Conoco Common Stock will share equally on a per share basis
in any dividend declared by the board of directors, subject to any preferential
rights of any outstanding preferred stock. If the board declares a stock
dividend, stockholders of each class must receive shares of the class of stock
they already hold. Additionally, all common stockholders must receive the same
number of dividend shares on a per share basis.
Conoco may not reclassify, subdivide or combine shares of either class of
Common Stock without simultaneously doing the same to shares of the other class.
CONVERSION
Each share of Conoco Class B Common Stock is convertible while held by
DuPont or any of its subsidiaries (excluding Conoco) at the holder's option into
one share of Class A Common Stock. Following the exchange offer, shares of Class
B Common Stock will no longer be convertible into shares of Class A Common
Stock.
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Prior to the exchange offer, any shares of Class B Common Stock transferred
to a person other than DuPont or any of its affiliates (excluding Conoco) will
automatically be converted into shares of Class A Common Stock upon the
transfer. Shares of Class B Common Stock transferred to stockholders of DuPont
in the exchange offer will not be converted into shares of Class A Common Stock.
Following the exchange offer, shares of Class B Common Stock will be
transferable as Class B Common Stock, subject to applicable laws.
If the exchange offer (or other transaction intended to qualify as a
tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as
amended) does not occur, all shares of Class B Common Stock will automatically
be converted into Class A Common Stock when the number of outstanding shares of
Class B Common Stock owned by DuPont (together with its affiliates (excluding
Conoco)) falls below 50 percent of the aggregate number of outstanding shares of
Common Stock. This provision prevents DuPont from owning less than 50 percent of
Conoco's economic value while still retaining control of more than 80 percent of
Conoco's voting power. All conversions will be effected on a share-for-share
basis.
OTHER RIGHTS
If Conoco merges or consolidates with another corporation in which shares
of Common Stock are converted into or exchangeable for shares of stock, other
securities or property (including cash), all holders of Common Stock, regardless
of class, will be entitled to receive the same kind and amount of consideration
for their shares. This requirement can be waived by a majority vote of each
class of holders of Common Stock.
On liquidation, dissolution or winding up of Conoco, after payment in full
of any amounts required to be paid to holders of preferred stock, all holders of
Common Stock, regardless of class, are entitled to receive the same amount per
share with respect to any distribution of assets to holders of shares of Common
Stock.
No shares of either class of Common Stock are subject to redemption or have
preemptive rights to purchase additional shares of Common Stock or other
securities of Conoco.
All the outstanding shares of Conoco Common Stock are validly issued, fully
paid and nonassessable.
PREFERRED STOCK
The preferred stock is issuable from time to time in one or more series.
The Conoco board resolutions issuing these shares will specify the designations,
preferences and other rights for each series. The certificate of incorporation
authorizes Conoco's board of directors to determine, among other things, the
voting, dividend, redemption, conversion, exchange and liquidation powers,
rights and preferences and the limitations thereon pertaining to preferred
stock. The Conoco board of directors, without stockholder approval, may issue
preferred stock with voting and other rights that could adversely affect the
voting power of the holders of the Common Stock and that could hinder takeovers.
Conoco has no present plans to issue any shares of preferred stock. The ability
of the board of directors to issue preferred stock without stockholder approval
may delay, defer or prevent a change in control of Conoco or the removal of
existing management.
For purposes of the Rights Plan described below, Conoco's board of
directors has designated 1.0 million shares of Series A Junior Participating
Preferred Stock, par value $.01 per share (the "Junior Preferred Shares"). See
"-- Anti-Takeover Effects of Certain Certificate and By-law Provisions -- Rights
Plan."
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ANTI-TAKEOVER EFFECTS OF CERTAIN CERTIFICATE AND BY-LAW PROVISIONS
GENERAL
Certain provisions of the certificate of incorporation and by-laws
summarized below may delay, deter, or prevent a tender offer or takeover attempt
that a stockholder might consider to be in its best interest, including offers
or attempts that might result in a premium being paid over the market price for
the Common Stock.
BOARD OF DIRECTORS
The certificate of incorporation and by-laws provide that the Conoco board
of directors is divided into three classes of directors, with the classes to be
nearly equal in number as possible. The classes have been elected for terms
expiring at the annual meeting of stockholders to be held in 1999, 2000 and
2001, respectively. Each director is to hold office until his or her successor
is duly elected and qualified. Beginning with the 1999 annual meeting of
stockholders, directors will be elected for three-year terms.
The certificate of incorporation and by-laws provide that Conoco's board of
directors shall initially consist of nine members. The certificate of
incorporation and by-laws also provide that Conoco shall have not less than six
nor more than 15 directors. A majority of the entire board of directors
determines the exact number. The certificate of incorporation also provides that
any vacancies on the board will be filled by the majority vote of the remaining
directors, even if less than a quorum, or by a sole remaining director, or by
stockholders if the vacancy was caused by the action of stockholders (in which
event the vacancy may not be filled by the directors).
The certificate of incorporation and the by-laws provide that, except as
provided below, stockholders can remove directors, with or without cause;
provided, however, that during the period (1) beginning on the first date that
DuPont ceases to beneficially own shares representing 50 percent or more of the
votes entitled to be cast by Conoco's voting stock; and (2) ending on the first
date that DuPont ceases to beneficially own shares representing 30 percent or
more of the votes entitled to be cast by Conoco's voting stock, a two-thirds
majority vote of stockholders is required to remove directors. We refer to the
date in clause (1) as the First Trigger Date and the date in clause (2) as the
Second Trigger Date.
Notwithstanding the foregoing, from and after the Second Trigger Date,
directors of Conoco may only be removed for cause by a majority vote of
stockholders.
Unless the Board of Directors has made a determination that removal is in
the best interests of Conoco (in which case the following definition shall not
apply), "cause" for removal of a director will exist only if:
- the director has been convicted, or when a director is granted immunity
to testify when another has been convicted, of a felony by a court and
such conviction is no longer subject to direct appeal;
- a majority of the directors or a court finds the director guilty of
willful misconduct in the performance of his duties to Conoco in a matter
of substantial importance to Conoco; or
- a court finds the director to be mentally incompetent, and the mental
incompetency directly affects his ability as a director of Conoco.
Notwithstanding the foregoing, whenever holders of outstanding shares of
one or more series of preferred stock may elect directors of Conoco because
Conoco has not paid dividends or because of other defaults contained in the
board resolution establishing a series of preferred stock, any of those
directors can only be removed in accordance with the resolution establishing the
preferred stock.
The by-laws provide that (1) prior to the First Trigger Date, a majority of
the directors on the audit and compliance committee and the compensation
committee of the board of directors shall be directors designated by DuPont and
(2) on and after the First Trigger Date, but so long as DuPont owns shares
representing 10 percent or more of the votes entitled to be cast by Conoco's
voting stock, each committee of the board of directors shall include at least
one director designated by DuPont.
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ADVANCE NOTICE PROCEDURES
In general, a stockholder wishing to nominate directors or raise other
matters for consideration at an annual meeting of stockholders must notify
Conoco in writing between 90 and 120 days prior to the anniversary of the
previous year's annual meeting of stockholders. The notice must contain certain
information concerning the person to be nominated or the matters to be brought
before the meeting and concerning the stockholder submitting the proposal. The
certificate of incorporation and the by-laws provide that, as long as DuPont
controls more than 10 percent or more of the votes entitled to be cast by
Conoco's voting stock, DuPont is exempt from the foregoing advance notice
procedures for director nominations and stockholder proposals.
SPECIAL MEETINGS
The by-laws provide that currently only specified officers of Conoco or any
officer at the request of the Board of Directors or committee thereof may call
special meetings; stockholders may not call special meetings. The certificate of
incorporation and the by-laws provide that, after the Second Trigger Date, only
the Chairman of the Board of Directors or the Board of Directors by resolution
may call special meetings of stockholders and stockholders are expressly denied
the right to call special meetings. In addition, the certificate of
incorporation and the by-laws provide that currently stockholders may act by
written consent, but that after the Second Trigger Date stockholders may only
act at an annual or special meeting of stockholders and not by written consent.
No business other than that stated in the notice of such meeting may be
transacted at any special meeting.
FAIR PRICE PROVISION
The certificate of incorporation includes a "fair price" provision which
prohibits certain mergers, sales of all assets, recapitalizations or
dissolutions with persons (other than DuPont) owning 15 percent of Conoco's
Common Stock. These transactions are permitted, however, if (a) the holders of
each class of Common Stock receive the same consideration as the other class and
either (1) the same consideration in form and amount per share as the highest
consideration paid by the Related Person in a tender or exchange offer in which
the Related Person acquired at least 50 percent of each outstanding stock of
either class of Common Stock and which was completed not more than one year
prior to the entering into of a definitive agreement for the Business
Combination or (2) not less in amount (as to cash) or fair market value (as to
non-cash consideration) than the highest price paid or agreed to be paid by the
Related Person for shares of any class of Conoco's voting stock in any
transaction that either resulted in the Related Person's beneficially owning 15
percent or more of any class of Conoco's voting stock or was effected at a time
when the Related Person beneficially owned 15 percent or more of any class of
Conoco's voting stock, in either case occurring not more than one year prior to
the Business Combination, or (b) the transaction is approved by (1) a majority
of the Continuing Directors or (2) shares representing (x) not less than 66 2/3
percent of the votes entitled to be cast by the voting stock, (y) not less than
50.01 percent of the votes entitled to be cast by the voting stock not
beneficially owned by the Related Person, and (z) 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 by any Related
Person), voting separately as a class; provided that, after the Second Trigger
Date, the required approval percentages in clauses (b)(2)(x) and (y) increase to
80 percent and 66 2/3 percent, respectively. Such approvals are also required to
amend the Fair Price Provisions. The Fair Price Provision will 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.
Under the Fair Price Provision, a "Related Person" is any person (other
than DuPont and its affiliates and associates) that beneficially owns 15 percent
or more of any class of Conoco's voting stock outstanding or is an affiliate of
Conoco and at any time within the preceding two-year period was the beneficial
owner of 15 percent or more of any class of Conoco's voting stock outstanding.
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The relevant "Business Combinations" involving Conoco covered by the Fair
Price Provision are
- any merger or consolidation of Conoco or any subsidiary of Conoco with or
into a Related Person or an affiliate of a Related Person,
- any sale, lease, exchange, transfer or other disposition of all or
substantially all of the assets of Conoco to a Related Person or an
affiliate of a Related Person,
- certain reclassifications, recapitalizations and other corporate actions
requiring a stockholder vote that have the effect of increasing by more
than one percent the proportionate share of any class of voting stock
beneficially owned by the Related Person or an affiliate of a Related
Person and
- a dissolution of Conoco caused or proposed by a Related Person or an
affiliate of a Related Person.
A "Continuing Director" is a director who is unaffiliated with the Related
Person and who was a director before the Related Person became a Related Person,
and any successor of a Continuing Director who is unaffiliated with a Related
Person and is recommended or nominated to succeed a Continuing Director by a
majority of the Continuing Directors.
AMENDMENT
A two-thirds majority vote of Conoco's voting stock (80% after the Second
Trigger Date) is required to amend provisions of Conoco's certificate of
incorporation and by-laws relating to:
- stockholder action by written consent;
- the right to call special meetings of stockholders;
- advance notice procedures with respect to stockholder meetings (including
DuPont's exemption from those procedures);
- board of directors classification and removal provisions; and
- amendments changing the voting requirements for amendments;
provided that after the First Trigger Date, if there are any shares of Class B
Common Stock outstanding, approval by a majority of the votes entitled to be
cast by the holders of each class of Common Stock, voting separately by class,
is also required.
The board of directors may also amend the by-laws.
EFFECT OF EXCHANGE OFFER ON THE FOREGOING PROVISIONS
If the exchange offer is completed, the date of completion will be the
Second Trigger Date. Accordingly, from that time
- directors may only be removed for cause, by majority vote of Conoco's
voting stock,
- stockholders will no longer be able to take action by written consent,
- the approval percentages required under clauses b(2)(x) and (y) in the
"Fair Price Provision" section above will increase to 80 percent and
66 2/3 percent, respectively, and
- amendments by stockholders of the provisions under "Amendment" will
require 80 percent of the votes of Conoco's voting stock and a majority
vote of each class.
RIGHTS PLAN
The board of directors has adopted a Share Purchase Rights Plan. Pursuant
to the Rights Plan, one preferred share purchase right accompanies each
outstanding share of Conoco Common Stock. We refer to these securities as
"Rights". Each holder of a Right is entitled to purchase from Conoco one one-
thousandth of a share of the Junior Preferred Shares at a price of $88 (the
"Purchase Price"), subject to
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adjustment. The description and terms of the Rights are set forth in a Rights
Agreement between Conoco and First Chicago Trust Company of New York. The
following description is only a summary. For complete information you should
read the Rights Agreement, which has been incorporated by reference as an
exhibit to the Registration Statement of which this Offering Circular-Prospectus
is a part. See "Where You Can Find More Information" on page 143.
The Rights will be evidenced by the certificates representing the Common
Stock until the earlier to occur of
(1) 10 business days following a public announcement that a person or group
of affiliated or associated persons (an "Acquiring Person") has acquired
beneficial ownership of
- 15 percent or more of the outstanding Class A Common Stock,
- 15 percent or more of the outstanding Class B Common Stock or
- any combination of Class A Common Stock and Class B Common Stock
representing 15 percent or more of the votes of all shares entitled to
vote in the election of directors or
(2) 10 business days (or such later date as may be determined by action of
the Board of Directors prior to such time as any person becomes an Acquiring
Person) following the commencement of, or announcement of an intention to make,
a tender offer or exchange offer the completion of which would result in
beneficial ownership by a person or group of shares meeting the requirements set
forth above. We refer to the earlier of the two dates as the "Rights
Distribution Date."
Until the Rights Distribution Date (or earlier redemption or expiration of
the Rights), the Rights will only be transferred with the respective Class A
Common Stock and Class B Common Stock. Until the Rights Distribution Date (or
earlier redemption or expiration of the Rights), all shares of Common Stock
which are issued will have associated Rights. As soon as practicable following
the Rights Distribution Date, Conoco will mail separate certificates evidencing
the Class A Rights and Class B Rights to holders of record of the Class A Common
Stock and the Class B Common Stock, respectively, as of the close of business on
the Rights Distribution Date. The separate Rights Certificates alone will then
evidence the Rights.
The Rights will not be exercisable until the Rights Distribution Date. The
Rights will expire on August 31, 2008, unless this date is extended or unless
Conoco redeems the Rights earlier, in each case, as summarized below.
If any person or group becomes an Acquiring Person, the Rights held by the
Acquiring Person will become void. At that time each other holder of a Right,
will thereafter have the right to receive upon exercise that number of shares of
the class of Common Stock attributable to the Right, having a current market
price of two times the exercise price of the Right. If Conoco is acquired in a
merger or other business combination transaction or 50 percent or more of its
consolidated assets or earning power are sold after a person or a group becomes
an Acquiring Person, each holder of a Right will from that time on have the
right to receive, upon exercising the Right at the then-current exercise price,
a number of shares of common stock of the acquiring company which has a current
market price of two times the exercise price of the Right.
At any time until the tenth business day following the public announcement
that a person or group has become an Acquiring Person, the board of directors
may redeem all of the Rights at a price of $.01 per Right. If the board redeems
the Rights, holders will no longer be able to exercise the Rights and the only
right of the holders of the Rights will be to receive $.01 per Right.
The board of directors may amend the terms of the Rights without the
consent of the holders of the Rights prior to the Rights Distribution Date.
After the Rights Distribution Date, the Board may amend the Rights Agreement to
cure any ambiguity, to make changes that do not adversely affect the interests
of holders of Rights, or to shorten or lengthen any time period under the Rights
Agreement; provided, however, that the board may not amend the Rights to
lengthen a time period relating to when the Rights
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may be redeemed if the Rights are not redeemable at that time. In addition, all
amendments require the consent of DuPont, if DuPont holds 30 percent of voting
power of the outstanding shares of Common Stock. In addition, no amendments to
the definition of "Acquiring Person" can be made at any time without DuPont's
consent, if DuPont holds 10 percent of voting power of the outstanding shares of
Common Stock.
Until a Right is exercised, the holder of the Right will have no rights as
a stockholder of Conoco, including, without limitation, the right to vote or to
receive dividends.
The board may adjust the number of outstanding Rights and the number of
one-thousandths of a Junior Preferred Share issuable upon exercise of each Right
in the event of a stock split of or a common stock dividend on the Common Stock
or subdivisions, consolidations or combinations of the Common Stock occurring,
in any such case, prior to the Rights Distribution Date.
The board may adjust the Purchase Price payable, and the number of Junior
Preferred Shares or other securities or property issuable, upon exercise of the
Rights from time to time to prevent dilution:
(1) in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Junior Preferred Shares,
(2) upon the grant to holders of the Junior Preferred Shares of certain
rights or warrants to subscribe for or purchase Junior Preferred Shares at a
price, or securities convertible into Junior Preferred Shares with a conversion
price, less than the then-current market price of the Junior Preferred Shares
or,
(3) upon the distribution to holders of the Junior Preferred Shares of
evidences of indebtedness or assets, excluding regular periodic cash dividends
paid out of earnings or retained earnings or dividends payable in Junior
Preferred Shares, or of subscription rights or warrants, other than those
referred to above.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent in such Purchase Price. No fractional Junior Preferred Shares will be
issued (other than fractions which are integral multiples of one one-thousandth
of a Junior Preferred Share, which may, at Conoco's option, be evidenced by
depositary receipts) and instead of issuing fractional shares, an adjustment in
cash will be made based on the market price of the Junior Preferred Shares on
the last trading day prior to the date of exercise.
Junior Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Junior Preferred Share will be entitled to a minimum
preferential quarterly dividend payment of $.01 per share but will be entitled
to an aggregate dividend of 1,000 times the dividend declared per share of
Common Stock. In the event of liquidation, the holders of the Junior Preferred
Shares will be entitled to a minimum preferential liquidation payment of $1,000
per share but will be entitled to an aggregate payment of 1,000 times the
payment made per share of Common Stock. Each Junior Preferred Share will have
1,000 votes voting together with the Common Stock. Finally, in the event of any
merger, consolidation or other transaction in which shares of Common Stock are
exchanged, each Junior Preferred Share will be entitled to receive 1,000 times
the amount received per share of the Common Stock. These rights are protected by
customary anti-dilution provisions.
Due to the nature of the Junior Preferred Shares' dividend, liquidation and
voting rights, the value of the one one-thousandth interest in a Junior
Preferred Share purchasable upon exercise of each Right should approximate the
value of one share of Common Stock.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group of persons that attempts to acquire
Conoco on terms not approved by the Board of Directors. The Rights should not
interfere with any merger or other business combination approved by the Board of
Directors prior to the time that a person or group has acquired beneficial
ownership of 15 percent or more of the Class A Common Stock, Class B Common
Stock or voting power of the outstanding shares of Common Stock since the Rights
may be redeemed by Conoco at the Redemption Price until such time.
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DuPont is excluded from the definition of "Acquiring Person" and therefore
its ownership cannot trigger the distribution of rights under the Rights Plan.
CONTRACTUAL RELATIONS AMONG CONOCO, DUPONT AND CERTAIN RELATED ENTITIES
The certificate of incorporation provides that, if certain disclosure
conditions are satisfied and if fair as to Conoco as of the time it is
authorized, approved or ratified by the board of directors, by a committee
thereof or by the stockholders, no contract, agreement, arrangement or
transaction between (1) Conoco and DuPont, (2) Conoco and one or more of the
directors or officers of Conoco, DuPont or a Related Entity (as defined below)
or (3) Conoco and any Related Entity will be void or voidable solely because
DuPont, any Related Entity or any one or more of the officers or directors of
Conoco, DuPont or any Related Entity are parties to the contract, agreement,
arrangement or transaction (or solely because any such directors or officers are
present at or participate in the meeting of the board of directors or committee
thereof that authorizes the contract, agreement, arrangement or transaction or
solely because his or their votes are counted for such purpose), DuPont, any
Related Entity and such directors and officers (a) will have fully satisfied and
fulfilled their fiduciary duties to Conoco and its stockholders with respect to
the contract, agreement, arrangement or transaction, (b) will not be liable to
Conoco or its stockholders for any breach of fiduciary duty by reason of the
entering into, performance or completion of any such contract, agreement,
arrangement or transaction, (c) will 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 Conoco and (d) will be deemed not to have breached their duties of
loyalty to Conoco and its stockholders and not to have derived an improper
personal benefit therefrom. A "Related Entity" is a corporation, partnership,
association or other organization in which one or more of Conoco's directors
have a financial interest.
DELAWARE BUSINESS COMBINATION STATUTE
Conoco is subject to Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions. Section 203 provides that, subject to
certain exceptions, an "interested stockholder" of a Delaware corporation shall
not engage in any "business combination," including in general mergers or
consolidations or acquisitions of additional shares of the corporation, with the
corporation for three years after becoming an interested stockholder unless:
(1) the board of directors of the corporation had previously approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder,
(2) upon completion of the transaction which resulted in the stockholder
becoming an "interested stockholder," the interested stockholder owned at least
85 percent of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding certain shares), or
(3) on or after such time, the business combination is approved by the
board of directors of the corporation and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3 percent of the outstanding voting stock not owned by the
interested stockholder.
Under Section 203, the restrictions described above also do not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors, if
such extraordinary transaction is approved or not opposed by a majority of the
directors who were directors prior to any person becoming an interested
stockholder during the previous three years or were recommended for election or
elected to succeed such directors by a majority of such directors. Except as
otherwise specified in Section 203, an "interested stockholder" includes:
(1) any person that is the owner of 15 percent or more of the outstanding
voting stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15 percent or more of
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the outstanding voting stock of the corporation at any time within three years
immediately prior to the date of determination; and
(2) that person's affiliates and associates. DuPont and its affiliates,
however, are excluded from the definition of "interested stockholder" under the
terms of Section 203. Under certain circumstances, Section 203 makes it more
difficult for a person who would be an interested stockholder to effect various
business combinations with a corporation for a three-year period.
LIMITATIONS ON DIRECTORS' LIABILITY
The certificate of incorporation provides that no director of Conoco shall
be liable to Conoco or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability
- for any breach of the director's duty of loyalty to Conoco or its
stockholders,
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- in respect of certain unlawful dividend payments or stock redemptions or
repurchases as provided in Section 174 of the Delaware General
Corporation Law, or
- for any transaction from which the director derived an improper personal
benefit.
These provisions eliminate the rights of Conoco and its stockholders
(through stockholders' derivative suits on behalf of Conoco) to recover monetary
damages against a director for breach of fiduciary duty as a director (including
breaches resulting from grossly negligent behavior), except in the situations
described above. Conoco's by-laws provide for indemnification of directors and
officers to the maximum extent permitted by Delaware law. Conoco has also
entered into indemnification agreements with each of its directors providing for
indemnification of such directors to the fullest extent permitted by applicable
law.
LISTING
Conoco will apply to list Conoco Class B Common Stock on the NYSE under the
trading symbol "COC.B." The Class A Common Stock is listed on the NYSE under the
symbol "COC." Upon the closing of the exchange offer, the symbol for the Conoco
Class A Common Stock will be changed to "COC.A."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Conoco Common Stock is First Chicago
Trust Company of New York.
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COMPARISON OF RIGHTS OF HOLDERS OF DUPONT COMMON STOCK
AND CONOCO COMMON STOCK
Upon completion of the exchange offer, DuPont stockholders who exchange
their shares of DuPont Common Stock for Conoco Class B Common Stock will become
stockholders of Conoco. These holders' rights will continue to be governed by
Delaware law and will be governed by the Conoco certificate of incorporation and
by-laws. Because each of DuPont and Conoco is organized under the laws of
Delaware, differences in the rights of a Conoco stockholder from those of a
DuPont stockholder arise principally from provisions of the certificates of
incorporation and by-laws of each of DuPont and Conoco.
The following is a summary of the material differences between the
companies' certificates and by-laws. The summary is not a complete statement of
the rights of stockholders of the two companies or a complete description of the
specific provisions referred to below. The summary is qualified in its entirety
by reference to the governing corporate instruments of DuPont and Conoco which
you should read. Copies of the governing corporate instruments of DuPont and
Conoco have been filed with the SEC. See "Where You Can Find More Information"
on page 143.
AUTHORIZED CAPITAL STRUCTURE AND LIQUIDATION RIGHTS
The following table summarizes the capital structure of the two companies
as of :
CONOCO
<TABLE>
<CAPTION>
CLASS OF SECURITY AUTHORIZED OUTSTANDING LIQUIDATION PREFERENCE
----------------- ---------- ----------- ----------------------
<S> <C> <C> <C>
Class A Common 3 billion 190.5 million None
Class B Common 1.6 billion 436.5 million None
Preferred, $.01 par 250 million None Not applicable
value
</TABLE>
DUPONT
<TABLE>
<CAPTION>
CLASS OF SECURITY AUTHORIZED OUTSTANDING LIQUIDATION PREFERENCE
----------------- ---------- ----------- ----------------------
<S> <C> <C> <C>
Common Stock, 1.8 billion 1.14 billion None
$0.30 par value
Preferred Stock 23 million
$4.50 DuPont Preferred 1.7 million $100 per share if involuntary
$115 per share if voluntary, plus
accrued dividends in either case
$3.50 DuPont Preferred 700,000 $100 per share if involuntary
$107 per share if voluntary, plus
accrued dividends in either case
</TABLE>
DIVIDEND POLICY
Neither DuPont nor Conoco is under any legal or contractual obligation to
pay dividends on their respective Common Stock. Conoco currently intends to pay
quarterly cash dividends of $.19 per share on its Common Stock, subject to
financial results and declaration by its board of directors. DuPont currently
intends to pay quarterly cash dividends of $.35 per DuPont share, subject to
financial results and declaration by its board of directors.
There can be no assurance, however, that these dividends or any future
dividends will be declared and paid.
VOTING RIGHTS
Holders of Conoco Class B Common Stock are entitled to cast five votes per
share on all matters submitted to a vote of the common stockholders of Conoco.
Holders of Conoco Class A Common Stock are entitled to cast one vote per share.
Generally, matters to be voted on by stockholders must be approved by a majority
(or in the case of the election of directors, a plurality) of the votes entitled
to be cast by the
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holders of Class A Common Stock and Class B Common Stock present in person or
represented by proxy, voting together as a single class, subject to any voting
rights granted to holders of any preferred stock. For more details, see
"Description of Conoco Capital Stock -- Common Stock -- Voting Rights."
Holders of DuPont Common Stock are entitled to cast one vote per share on
all matters submitted to a vote of the common stockholders of DuPont. Generally,
all matters to be decided by the common stockholders of DuPont shall be decided
by plurality vote, except as otherwise required by statute.
CERTAIN ANTI-TAKEOVER PROVISIONS
Shareholder Action by Written Consent
Conoco's certificate of incorporation and by-laws provide that after the
Second Trigger Date (which shall occur upon completion of the exchange offer),
Conoco stockholders may no longer take action by written consent.
DuPont's certificate of incorporation and by-laws provide that any action
required or permitted to be taken by stockholders may be effected by written
consent.
Board of Directors
The following table compares the structure of Conoco's and DuPont's boards
of directors:
<TABLE>
<CAPTION>
PROVISION CONOCO DUPONT
--------- ------ ------
<S> <C> <C>
Number of Directors Between six and 15 More than 10
Expiration of Directors'
Terms(1) Staggered Simultaneous
Votes required for removal 50% (currently) 50%
66 2/3% (between the First
and Second Trigger Dates)
50% and only for cause (after
the Second Trigger Date)
</TABLE>
- ---------------
(1) See "Description of Conoco Capital Stock -- Anti-Takeover Effects of Certain
Certificate and By-Law Provisions -- Board of Directors." The terms of
one-third of Conoco's directors expire each year. The terms of each DuPont
director expires each year. A board structure like Conoco's is more likely
than DuPont's to hinder takeover attempts.
Advance Notice Procedures
Conoco's by-laws provide for an advance notice procedure for the
nomination, other than by or at the direction of the board of directors, of
candidates for election as directors, as well as for other stockholder proposals
to be considered at annual meetings of stockholders. In general, a stockholder
wishing to nominate a director or raise another proposal must notify Conoco in
writing between 90 and 120 days prior to the anniversary of the previous year's
annual meeting of stockholders. This notice must contain certain information
concerning the person to be nominated or the matters to be brought before the
meeting and concerning the stockholder submitting the proposal.
DuPont's certificate of incorporation and by-laws have no provisions
regarding advance notice of director nominations or stockholder proposals.
Special Meetings
Conoco's by-laws provide that special meetings of stockholders generally
may be called only by certain specified officers of Conoco or by any officer at
the request of the board of directors or one of the board's committees. Special
meetings cannot be called by stockholders of Conoco and the certificate of
incorporation and the by-laws expressly deny stockholders the right to call
special meetings after the exchange offer.
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DuPont's by-laws provide that a special meeting of the stockholders of
DuPont shall be called by the board of directors or by the secretary of DuPont
at the request of at least 25 percent of the outstanding stock of DuPont
entitled to vote.
Fair Price Provision
Conoco's certificate of incorporation includes a fair price provision that
prohibits certain business combinations with a person owning more than 15
percent of Conoco's Common Stock, unless the transaction meets certain fairness
criteria or is approved by certain super-majority voting criteria. For more
details, see "Description of Conoco Capital Stock -- Anti-Takeover Effects of
Certain Certificate and By-Law Provisions -- Fair Price Provision."
DuPont's certificate of incorporation and by-laws do not contain a fair
price provision.
Amendment
Amendments to provisions of Conoco's certificate of incorporation (and
amendments to its by-laws by stockholders) relating to the following matters
require two-thirds majority of all Common Stock votes (80 percent after the
Second Trigger Date), provided that after the First Trigger Date, if there are
any shares of Class B Common Stock outstanding, approval by a majority of the
votes entitled to be cast by the holders of each class of Common Stock, voting
separately by class, is also required:
- stockholder action by written consent;
- the right to call special meetings of stockholders;
- advance notice procedures with respect to stockholder meetings
(including DuPont's exemption from those procedures);
- board classification and removal provisions; and
- amendments changing the voting requirements for amendments.
There are no provisions in DuPont's governing documents which require
supermajority votes. Both companies are subject to the provisions of Delaware
law governing amendments to certificates of incorporation and by-laws.
Rights Plan
Conoco's board of directors has adopted a rights plan providing for the
issuance of Rights, which would cause substantial dilution to a person or group
that attempts to acquire Conoco on terms not approved in advance by Conoco's
board of directors. For more details, see "Description of Conoco Capital
Stock -- Anti-Takeover Effects of Certain Certificate and By-Law
Provisions -- Rights Plan."
DuPont has not adopted a rights plan.
LISTING
Conoco will apply to list the Conoco Class B Common Stock on the NYSE under
the symbol "COC.B."
DuPont Common Stock is currently listed and traded on the NYSE under the
symbol "DD" and on the Boston, Chicago, Cincinnati, Pacific, Philadelphia,
London, Brussels, Paris, Dusseldorf, Frankfurt and Amsterdam exchanges, as well
as the Swiss Electronic Exchange.
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ARRANGEMENTS BETWEEN CONOCO AND DUPONT
In 1998 and prior years, there were significant transactions between Conoco
and DuPont involving services (such as natural gas and gas liquids supply, cash
management, other financial services, purchasing, legal, computer and corporate
activities). See note 3 to the notes to consolidated financial statements of
Conoco. To govern Conoco's and DuPont's on-going relationship and to facilitate
separating the two companies, Conoco and DuPont, or their respective
subsidiaries, entered into various agreements, including those described below.
These agreements were negotiated in the context of a parent-subsidiary
relationship and therefore are not the result of arm's-length negotiations
between independent parties. Therefore, these agreements may not contain terms
as favorable to Conoco as Conoco could have obtained from unaffiliated third
parties.
Conoco filed the agreements summarized below as exhibits to the
registration statement filed with its initial public offering. Reading the
following summaries is not a substitute for reading the documents in their
entirety. For more details, see "Where You Can Find More Information."
RESTRUCTURING, TRANSFER AND SEPARATION AGREEMENT
In connection with the Conoco initial public offering, DuPont and Conoco
entered into a Restructuring, Transfer and Separation Agreement, which provided
for, among other things, the principal transactions required to effect the
separation of the two companies and the Conoco initial public offering. These
transactions included the transfer to Conoco of oil and gas assets, the division
between DuPont and Conoco of certain liabilities, and certain other agreements
governing the on-going relationship between DuPont and Conoco.
To effect the separation, (1) DuPont transferred or caused its subsidiaries
to transfer assets related to the oil and gas business (including its equity
interests in certain companies) to Conoco or to a subsidiary of Conoco and (2)
Conoco transferred or caused its subsidiaries to transfer assets unrelated to
the oil and gas business (including its equity interests in certain companies)
to DuPont or a subsidiary of DuPont. As a result, Conoco and DuPont assumed the
liabilities of the businesses they received in the transfer. The Separation
Agreement provided that assets that could not legally be transferred prior to
October 27, 1998 the effective date of the separation (the "Effective Date"),
were to be transferred as soon as practical following receipt of all necessary
consents of third parties and regulatory approvals. DuPont and Conoco and their
respective subsidiaries made all of the transfers on an "as is, where is" basis,
and without any representations or warranties. As a result, Conoco and DuPont,
as the case may be, each bear the economic and legal risks that these transfers
failed to convey good and marketable title to such assets. The parties also
agreed that following the Conoco initial public offering, DuPont and its
subsidiaries (excluding Conoco and its subsidiaries), on the one hand, and
Conoco and its subsidiaries, on the other hand, would transfer to the other, in
some instances without additional consideration, all assets which, subsequent to
the Effective Date, the parties determined more properly belong in the other's
business.
The Separation Agreement generally provided that DuPont and Conoco assumed
all of the liabilities, actual or contingent, associated with the following:
CONOCO
- - Conoco's historical and current operations (including the oil and gas
business)
- - Conoco's former chemical business (except those sold to Cain Chemical)
- - Conoco's interest in the Pocahantas Gas partnership
- - all other assets transferred to Conoco in connection with the separation
DUPONT
- - all other business of DuPont and its subsidiaries
- - Conoco's former coal business
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- - Conoco's former chemical business sold to Cain Chemical
Each party also agreed to assume and be responsible for certain liabilities
associated with activities and operations of the other party and its
subsidiaries to the extent performed for or on behalf of its current or
historical business. The parties also agreed to bear responsibility in
proportion to the relative amounts of waste deposited by each party on any
contaminated off-site location. The Separation Agreement contained
indemnification and contribution provisions in connection with (1) the
assumption or retention of liabilities by Conoco and DuPont, (2) the conduct of
the parties' respective businesses after the separation, (3) misstatements or
omissions in the Conoco initial public offering Registration Statement with
respect to information provided by the other party and (4) the use of the
other's trade marks, tradenames, logos or other identifiers.
The Separation Agreement contains certain provisions regarding corporate
governance of Conoco, most of which depend on the level of DuPont's ownership
interest in Conoco. Upon completion of the Transaction, Conoco will no longer be
subject to these provisions. The Separation Agreement provides for the following
provisions in the event DuPont owns the following percentages of the voting
power of all of Conoco's capital stock:
Percentage Provision
At least 10% Each committee of the Conoco board of directors
must include a director designated by DuPont.
At least 20% Conoco must deliver to DuPont certain financial
information.
At least 30% Conoco cannot recommend or take any action (without
DuPont's consent) which would limit the rights of
DuPont or deny any benefit to DuPont or its
subsidiaries in a manner not applicable to Conoco's
other stockholders
At least 50% 1. DuPont can nominate a majority of Conoco's board
of directors. These directors designated by
DuPont must constitute a majority of the Conoco
board's Audit and Compensation Committee.
2. Conoco may not change certain accounting
practices without DuPont's consent.
Between 10 and 50% DuPont may designate for nomination a number of
Conoco directors proportionate to its voting power.
The Separation Agreement provides that Conoco will, subject to certain
exceptions, use the proceeds from incurring debt or issuing stock to repay debt
owed to DuPont, including the $7.5 billion Note described below under the
caption "-- Intercompany Notes." Net proceeds from the Conoco initial public
offering of $4.2 billion were used to repay a portion of debt owed to DuPont in
October 1998. The Separation Agreement provides in general that DuPont is
responsible for all nonrecurring costs, including fees and taxes, directly
relating to the Conoco initial public offering, the separation and certain
subsequent transactions resulting in a reduction of DuPont's ownership of
outstanding voting stock, including the Transaction, and will reimburse Conoco
for all such costs that it incurs. Conoco and DuPont have agreed in the
Separation Agreement that Conoco shall take all actions reasonably requested by
DuPont to facilitate the exchange offer and that DuPont would reimburse Conoco
for its expenses therewith. In addition, Conoco and DuPont have agreed to
indemnify and provide contribution to each other and take other relevant action,
in a manner analogous to that set forth in the Registration Rights Agreement.
The Separation Agreement requires that Conoco use its best efforts to
terminate, or have Conoco or a subsidiary of Conoco substituted for DuPont,
under all existing guarantees by DuPont of obligations relating to the business
of Conoco, including financial, performance and other guarantee obligations, and
under letters of credit for the account of DuPont issued on behalf of Conoco's
business. Commencing on the earlier of (1) October 27, 2000 or (2) First Trigger
Date (which will occur upon completion of the
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exchange offer), Conoco will pay DuPont a fee of 0.20 percent per annum on the
total amount of any outstanding guarantees and letters of credit. For the
purpose of the fee calculation, Conoco and DuPont agreed that the amount of such
guarantees was $1,610 million as of the Effective Date. The amount of guarantees
for purposes of the fee calculation may be increased or decreased in good faith
judgment of the chief financial officer or treasurer of DuPont to reflect
changes in the financial exposure of DuPont but may only be adjusted at such
time as the amount of any such adjustment exceeds $50 million.
INTERCOMPANY NOTES
On July 20, 1998, a wholly owned subsidiary of Conoco issued a promissory
note to DuPont in the aggregate principal amount of $7.5 billion. The note bears
interest at a rate of 6.0125 percent per annum and matures on January 2, 2000.
Conoco can prepay the note anytime without penalty or premium. If Conoco issues
stock or incurs additional debt, it must use the proceeds it receives to prepay
all or a portion of the note. The note includes certain covenants and customary
events of default, including failure to pay interest when due, certain events of
bankruptcy of Conoco and change of control. The completion of the Transaction
will constitute an event of default under the note, requiring Conoco to pay the
remaining unpaid principal amount and all accrued and unpaid interest on the
note.
The net proceeds from Conoco's initial public offering were approximately
$4,228 million. Conoco used the net proceeds of the initial public offering to
repay a portion of the amounts outstanding under the note including principal
and accrued interest and to repay or purchase other intercompany indebtedness
owed by certain Conoco subsidiaries to DuPont. At December 31, 1998, the
aggregate principal amount owed by Conoco to DuPont pursuant to the note was
$4,589 million. Pursuant to the Employee Matters Agreement and the Separation
Agreement, Conoco also owes DuPont an additional amount, of approximately $7
million, evidenced by a promissory note. See "-- Employee Matters Agreement."
Conoco and DuPont have entered into a revolving credit agreement under
which DuPont provides Conoco with a revolving credit facility in principal
amount of up to $500 million. The term of DuPont's commitment will continue
until the earlier of (1) October 11, 1999 or (2)(a) the First Trigger Date or
(b) DuPont's election to terminate its commitment as the result of an unremedied
event of default. Whenever Conoco has more than $325 million in cash and cash
equivalents (or such higher amount as Conoco and DuPont may agree), Conoco will
have to prepay loans under the facility. 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. Upon completion of the
Transaction, DuPont's commitment under the facility will terminate and Conoco
will be obligated to repay all amounts outstanding under the revolving credit
agreement.
TAX SHARING AGREEMENT
Conoco and certain of its subsidiaries have historically been included in
DuPont's consolidated group (the "Consolidated Group") for U.S. federal income
tax purposes as well as in certain consolidated, combined or unitary groups
which include DuPont and/or certain of its subsidiaries (a "Combined Group") for
state, local and foreign income tax purposes. Conoco and DuPont entered into a
tax sharing agreement (the "Tax Sharing Agreement") in connection with the
Conoco initial public offering. Pursuant to the Tax Sharing Agreement, Conoco
and DuPont generally will make payments between them such that, with respect to
tax returns for any taxable period in which Conoco or any of its subsidiaries is
included in the Consolidated Group or any Combined Group, the amount of taxes to
be paid by Conoco will be determined, subject to certain adjustments, as if
Conoco and each of its subsidiaries included in the Consolidated Group or
Combined Group filed their own consolidated, combined or unitary tax return.
Conoco and DuPont will jointly prepare pro forma tax returns with respect to any
tax return filed with respect to the Consolidated Group or any Combined Group in
order to determine the amount of tax sharing payments under the Tax Sharing
Agreement. Conoco generally will be responsible for any taxes with respect to
tax returns that include only Conoco and its subsidiaries.
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DuPont will be primarily responsible for preparing and filing any tax
return with respect to the Consolidated Group or any Combined Group. Pursuant to
the Tax Sharing Agreement, Conoco will be responsible for preparing the portion
of any such tax return that relates exclusively to Conoco or any of its
subsidiaries; provided, that Conoco will be required to submit any such portions
to DuPont for DuPont's review and approval, which approval may not be
unreasonably withheld. Conoco generally will be responsible for preparing and
filing any tax returns that include only Conoco and its subsidiaries.
DuPont will be primarily responsible for controlling and contesting any
audit or other tax proceeding with respect to the Consolidated Group or any
Combined Group. Pursuant to the Tax Sharing Agreement, Conoco will have the
right to control and contest any audit or tax proceeding that relates directly
to any tax item included on the portion of any tax return which Conoco is
responsible for preparing; provided, that the entering into by Conoco of any
settlement or agreement or any decision in connection with any judicial or
administrative tax proceeding will be subject to the review and approval of
DuPont, which approval may not be unreasonably withheld. Disputes arising
between the parties relating to matters covered by the Tax Sharing Agreement are
subject to resolution through specific dispute resolution provisions.
Conoco was included in the Consolidated Group for periods in which DuPont
beneficially owned at least 80 percent of the total voting power and value of
the outstanding stock of Conoco. Conoco ceased to be included in the
Consolidated Group following the Conoco initial public offering. Each member of
a consolidated group for U.S. federal income tax purposes is jointly and
severally liable for the federal income tax liability of each other member of
the consolidated group. Accordingly, although the Tax Sharing Agreement
allocates tax liabilities between Conoco and DuPont, for any period in which
Conoco was included in the Consolidated Group, Conoco could be liable in the
event that any federal tax liability was incurred, but not discharged, by any
other member of the Consolidated Group.
DuPont and Conoco have agreed to cooperate, and Conoco has agreed to take
any and all actions reasonably requested by DuPont, in connection with DuPont's
obtaining of the ruling. Each of Conoco and DuPont have also agreed not to take,
or fail to take, any action inconsistent with any information, covenant or
representation provided to the IRS in connection with obtaining the ruling and
further agreed to be liable for any taxes arising from a breach of such
agreement. In addition, Conoco has agreed that, during the three year period
following the Transaction, it will not engage in certain transactions that could
adversely affect the tax treatment of the Transaction, unless a supplemental
ruling from the IRS or a tax opinion (acceptable to DuPont) of nationally
recognized tax counsel is obtained to the effect that the proposed transaction
would not adversely affect the tax treatment of the Transaction. Moreover,
Conoco will be liable to DuPont for, among other things, any corporate level
taxes incurred by DuPont as a result of the Transaction to the extent such taxes
are attributable to certain actions or failures to act by Conoco, or to certain
transactions involving Conoco following the Transaction (including the
acquisition of Conoco stock by any person or persons).
EMPLOYEE MATTERS AGREEMENT
In connection with the Conoco initial public offering, DuPont and Conoco
entered into an Employee Matters Agreement. This agreement covers, among other
things, claims arising out of or relating to any employee benefit or
compensation plan, agreement, arrangement or program, as well as collective
bargaining agreements, accrued wages and workers' compensation, holiday,
vacation and disability benefits. Under this agreement (with certain
exceptions), Conoco agreed to assume sole responsibility for all liabilities
arising with respect to current and former employees of businesses transferred
to Conoco under the Separation Agreement referred to above. We refer to these
employees in this section as "Transferred Business Employees." DuPont agreed to
assume sole responsibility for liabilities relating to all of its other current
and former employees. Individuals employed by both a business transferred to
Conoco as well as another business retained by DuPont are considered Transferred
Business Employees if their primary employment is with a transferred business.
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Notwithstanding the preceding, (a) with respect to any claim of a
Transferred Business Employee relating to a liability or obligation arising
under the DuPont Savings and Investment Plan or any DuPont health benefit plan,
which claim arose while such Transferred Business Employee was a DuPont
employee, DuPont (and the applicable DuPont plan) or the applicable DuPont
subsidiary (and the applicable DuPont subsidiary plan) retained all such
liabilities and obligations of such Transferred Business Employee and (b) with
respect to any claim of a current or former DuPont employee (other than the
Transferred Business Employees) relating to a liability or obligation arising
under the Thrift Plan for Employees of Conoco Inc. or any Conoco health benefit
plan, which claim arose while such DuPont employee was a Conoco employee, Conoco
(and the applicable Conoco plan) or the applicable Conoco subsidiary (and the
applicable Conoco subsidiary plan) assumed and is solely responsible for all
such liabilities and obligations of such DuPont employee.
Transferred Business Employees who participated in the DuPont Pension Plan
continue to participate in the DuPont Pension Plan. On the date DuPont ceases to
own securities representing 80 percent or more of the voting power and 80
percent or more of the economic value of all outstanding shares of Conoco Common
Stock, Conoco will establish its own retirement plan. This will occur upon
completion of the Transaction. Within six months of Conoco's establishing its
own plan, so long as certain conditions are met, the trustee of the DuPont
Pension Plan will transfer to the trustee of Conoco's retirement plan an amount
equal to approximately 90 percent of $820 million (plus or minus any investment
gains and losses and benefits payments made between the date of the separation
and the date of the transfer); within 90 days of the this date, the trustee of
the DuPont Pension Plan will transfer the remaining 10 percent, plus interest.
Certain Conoco employees had the option, subject to specific country tax
and legal requirements, effective as of the closing of the Conoco initial public
offering, to cancel all or part of their DuPont Options or DuPont SARs and
receive Conoco Stock Options and Conoco SARs, as applicable (the "Option
Program"). Retired employees of Conoco did not participate in the Option
Program. All DuPont Options and DuPont SARs held by retired employees, together
with all such Options and SARs held by employees who did not elect to
participate in the Option Program, will continue to be obligations solely of
DuPont.
With respect to any pension plan maintained or sponsored by DuPont for the
benefit of foreign employees in which only Transferred Business Employees
participate, Conoco assumed or retained those plans, their assets and the sole
liability relating to Transferred Business Employees under those plans.
In consideration of the liabilities assumed by DuPont under the employee
transfer guidelines as a result of certain transfers of employees between Conoco
and DuPont, Conoco incurred an approximate $10 million liability to DuPont. This
amount was reduced by a $3 million obligation of DuPont to Conoco resulting from
an agreed calculation to allocate liabilities associated with the Option Program
based on actual levels of participation. As a result, Conoco owes DuPont
approximately $7 million, evidenced by a promissory note. If a single transfer
of 100 or more employees from Conoco to DuPont occurs or if a single transfer of
100 or more employees from DuPont to Conoco occurs, in either case prior to the
Transaction, a supplemental cash payment will be made to Conoco or DuPont as
applicable. The amount of the cash payment will be calculated in accordance with
the Employee Matters Agreement.
The Conoco Thrift Plan continues to include DuPont Common Stock and will
continue to retain the DuPont Common Stock fund for a period of no less than
five years. However, Conoco, at its option, may amend the Conoco Thrift Plan to
provide that new investments in DuPont Common Stock may be discontinued after
the date DuPont and Conoco cease to be in the same "controlled group of
corporations" as defined in Section 1563(a) of the Internal Revenue Code.
TRANSITIONAL SERVICES AGREEMENTS
In connection with the Conoco initial public offering, DuPont and Conoco
entered into certain Transitional Services Agreements where they agreed to
continue providing various services to each other. These services include
material procurement, financial and administrative services, consulting and
research
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services, and employee benefits administration. The parties agreed to provide
each service covered for a specified time period, ranging from three to 24
months. However, either party and its subsidiaries may terminate any or all
services that they receive under the Transitional Services Agreements at any
time upon 45 days prior written notice. The parties and their subsidiaries
receiving services are obligated to take all steps necessary to enable them to
perform the relevant services on a stand alone basis. The parties and their
subsidiaries are obligated to pay fees established in the Transitional Services
Agreements based upon the type and amount of services rendered.
INFORMATION SYSTEMS AND TELECOMMUNICATION CARRIER TRANSITIONAL SERVICES
AGREEMENTS AND FACILITIES LEASE AGREEMENTS
DuPont and Conoco entered into a series of United States and foreign
service agreements under which DuPont and Conoco provide information system
services to each other, and DuPont provides telecommunication carrier services
to Conoco. DuPont and Conoco also entered into a facilities lease agreement
whereby DuPont leases data center and office facilities at Conoco's Houston,
Texas and Ponca City, Oklahoma sites. The terms of these agreements range from
two to nine years. Under the agreements, DuPont and third party contractors
provide services to Conoco at DuPont's cost, or, in the case of third party
services, at the prices and in accordance with the terms and conditions provided
for in the third party agreements, and subject to an administrative fee.
NATURAL GAS SUPPLY AGREEMENT
DuPont consumes approximately 350 million cubic feet per day of natural gas
at its various facilities in the United States. Prior to the Conoco initial
public offering, DuPont and Conoco entered into an agreement providing for
Conoco to supply natural gas to DuPont for at least one year at cost plus a
management fee reflecting market costs for similar supply services.
FEEDSTOCK FOR DUPONT'S SABINE RIVER WORKS PLANT
Conoco owns and operates the Mont Belvieu Storage Facility, which currently
supplies DuPont's Sabine River Works Plant (Ethylene Business Unit) with its
full ethane feedstock requirements. Conoco also provides storage and throughput
services for both ethane and ethylene and operates DuPont-owned pipelines for
these products. Conoco has agreed to provide ethane and ethylene storage and
throughput services for the next 30 years, and to operate certain DuPont-owned
pipelines for the next 20 years. Conoco will supply DuPont with its partial
requirements of ethane for at least two years, generally at market prices.
MOTOR CARRIER AGREEMENT
Conoco and Sentinel Transportation Company, a wholly owned subsidiary of
DuPont, have entered into a motor carrier agreement governing transportation of
commodities within the United States and Canada. The motor carrier agreement
expires in 1999. However, either party may terminate this arrangement at any
time upon 90 days' prior written notice.
REGISTRATION RIGHTS AGREEMENT
In connection with the Conoco initial public offering, DuPont and Conoco
entered into a registration rights agreement, under which Conoco agreed to
register on a "shelf" registration statement the sale of Conoco Common Stock
owned by DuPont. Conoco agreed to keep the shelf registration effective for a
period of two years following the date that the shelf registration becomes
effective. In addition, Conoco provided DuPont with three demand registration
rights and certain "piggy-back" registration rights, with respect to securities
owned by DuPont. Such sales may be effected under one or more underwritten
offerings or otherwise. The parties agreed to indemnify each other and any
underwriters on standard terms, including for liability under federal securities
laws. Upon completion of the Transaction, DuPont will no longer own any
securities of Conoco which would be subject to this agreement.
141
<PAGE> 143
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States federal income tax
consequences relating to the Transaction. The summary is based on the Code, the
Treasury regulations promulgated thereunder, and interpretations of the Code and
Treasury regulations by the courts and the IRS, all as they exist as of the date
of this Offering Circular -- Prospectus. This summary is for general information
only and does not discuss all tax considerations that may be relevant to DuPont
stockholders in light of their particular circumstances, nor does it address the
consequences to certain DuPont stockholders subject to special treatment under
the United States federal income tax laws (such as tax-exempt entities,
non-resident alien individuals, foreign corporations, persons who acquire such
DuPont stock pursuant to the exercise of employee stock options or otherwise as
compensation, insurance companies, and dealers in securities). In addition, this
summary does not address the United States federal income tax consequences to
DuPont stockholders who do not hold their DuPont Common Stock as a capital
asset. This summary does not address any state, local or foreign tax
consequences. DuPont stockholders are urged to consult their tax advisors as to
the particular tax consequences to them of the Transaction.
IRS Ruling and Federal Income Tax Consequences. DuPont has requested a
ruling from the IRS to the effect that, for United States federal income tax
purposes, the Transaction will qualify under Section 355 of the Code as a
distribution that is generally tax-free to DuPont stockholders and to DuPont.
Although rulings generally are binding on the IRS, DuPont will not be able to
rely on the ruling if any factual representations made to the IRS are incorrect
or untrue in any material respect or any undertakings made to the IRS are not
complied with. Neither DuPont nor Conoco is aware of any facts or circumstances
that would cause any such representations to be incorrect or untrue in any
material respect. Nevertheless, if DuPont completes the Transaction and,
notwithstanding the ruling, the Transaction is held to be taxable, both DuPont
and its stockholders that receive Conoco Class B Common Stock could be subject
to a material amount of taxes as a result of the Transaction. Conoco will be
liable to DuPont for any such corporate level taxes incurred by DuPont to the
extent such taxes are attributable to certain actions or failures to act by
Conoco, or to certain transactions involving Conoco following the Transaction.
See "Arrangements Between Conoco and DuPont -- Tax Sharing Agreement."
The ruling is expected to provide that:
- no gain or loss will be recognized by, and no amount will be included in
the income of, the DuPont stockholders upon their receipt of shares of
Conoco Class B Common Stock in the Transaction;
- for those DuPont stockholders that surrender all of their DuPont Common
Stock in the exchange offer, the aggregate tax basis of the shares of
Conoco Class B Common Stock held by the DuPont stockholders after the
exchange offer, including any fractional share interests, will be the
same as the aggregate tax basis of the shares of DuPont Common Stock
exchanged in the exchange offer;
- for those DuPont stockholders that do not surrender all of their DuPont
Common Stock in the exchange offer, each such stockholder's aggregate tax
basis in the DuPont Common Stock held before the completion of the
exchange offer will be allocated between the DuPont Common Stock and
Conoco Class B Common Stock (including any fractional share interests)
held by such stockholder after the Transaction in proportion to their
relative fair market values; and
- the holding period of the shares of Conoco Class B Common Stock received
by the DuPont stockholders in the Transaction, including any fractional
share interests, will include the holding period of the shares of DuPont
Common Stock with respect to which the shares of Conoco Class B Common
Stock were received.
The ruling will not specifically address tax basis issues with respect to
holders of DuPont Common Stock who have blocks of DuPont Common Stock with
different per share tax bases. Such holders are urged to consult their tax
advisors regarding the possible tax basis consequences of the Transaction. For a
description of the rules generally addressing the allocation of tax basis
between Conoco Class B Common Stock and DuPont Common Stock, see questions 20
and 21 under "Questions and Answers About the Exchange Offer" on pages 7 and 8.
142
<PAGE> 144
United States Treasury regulations require each DuPont stockholder that
receives shares of Conoco Class B Common Stock in the Transaction to attach to
the holder's United States federal income tax return for the year in which such
stock is received a detailed statement setting forth such data as may be
appropriate in order to show the applicability of Section 355 of the Code to the
Transaction. Within a reasonable time after the Transaction, DuPont will provide
DuPont stockholders who participate in the exchange offer and DuPont
stockholders who receive Conoco Class B Common Stock in a spin-off, if any, with
the information necessary to comply with such requirement, and will provide
information regarding the allocation of tax basis described in the third bullet
point above.
DuPont stockholders are urged to consult their tax advisors as to the
particular tax consequences to them of the exchange offer, including the
application of state, local and foreign tax laws and any changes in federal tax
laws that occur after the date of this Offering Circular-Prospectus.
LEGAL MATTERS
Rick A. Harrington, Senior Vice President, Legal and General Counsel of
Conoco, will pass upon the validity of Conoco Class B Common Stock being offered
hereby. Certain legal matters with respect to the Transaction will be passed
upon for DuPont by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
Baker & Botts, L.L.P., Houston, Texas, is representing Conoco in connection with
certain aspects of the Transaction. Cravath, Swaine & Moore, New York, New York
will represent the dealer manager. Skadden, Arps, Slate, Meagher & Flom LLP has
in the past represented Conoco and DuPont and continues to represent DuPont in
connection with various matters. Cravath, Swaine & Moore has in the past and
continues to represent DuPont in various matters not related to the Transaction.
EXPERTS
The consolidated financial statements of Conoco as of December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998
included in this Offering Circular-Prospectus, and the consolidated financial
statements of DuPont as of December 31, 1998 and 1997 and for each of the three
years in the period ended December 31, 1998 incorporated by reference in
DuPont's Annual Report on Form 10-K have been so included in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
143
<PAGE> 145
WHERE YOU CAN FIND MORE INFORMATION
DuPont and Conoco both file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information filed by either company at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. The companies' SEC filings are also available to the
public from commercial document retrieval services and at the web site
maintained by the SEC at "http://www.sec.gov." You can also obtain information
about DuPont and Conoco at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
Conoco filed a Registration Statement (together with any amendments
thereto, the "Registration Statement") on Form S-4 to register with the SEC
Conoco Class B Common Stock to be issued to DuPont stockholders who tender their
shares in the exchange offer and whose shares of DuPont Common Stock are
accepted for exchange. DuPont will file a Schedule 13E-4 Issuer Tender Offer
Statement with the SEC with respect to the exchange offer (together with any
amendments thereto, the "Schedule 13E-4"). This Offering Circular-Prospectus is
a part of that Registration Statement and constitutes an Offering Circular of
DuPont, in addition to being a Prospectus of Conoco. As allowed by SEC rules,
this Offering Circular-Prospectus does not contain all the information you can
find in the Registration Statement, the Schedule 13E-4 or the exhibits to the
Registration Statement and the Schedule 13E-4.
The SEC allows DuPont to "incorporate by reference" information into this
Offering Circular-Prospectus, which means important information may be disclosed
to you by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this Offering
Circular-Prospectus, except for any information superseded by information in (or
incorporated by reference in) this Offering Circular-Prospectus. The Offering
Circular-Prospectus incorporates by reference the documents of DuPont set forth
below that have been previously filed with the SEC. These documents contain
important information about DuPont and its finances.
<TABLE>
<CAPTION>
DUPONT SEC FILINGS (FILE NO. 1-815) PERIOD
- ----------------------------------- ------
<S> <C>
Annual Report on Form 10-K........... Year ended December 31, 1998
Proxy Statement...................... Filed March 19, 1999
</TABLE>
DuPont is also incorporating by reference additional documents that the
company may file with the SEC between the date of this Offering
Circular-Prospectus and the expiration date.
[Conoco has agreed to indemnify DuPont against certain liabilities,
including civil liabilities under the federal securities act, and to contribute
to payments which DuPont may be required to make in respect thereof, but solely
with respect to information relating to Conoco in this Offering
Circular-Prospectus. DuPont has agreed to indemnify Conoco against certain
liabilities, including civil liabilities under the federal securities, and to
contribute to payments which Conoco may be required to make in respect thereof,
but solely with respect to information relating to DuPont in this Offering
Circular-Prospectus.]
DuPont may have already sent you some of the documents incorporated by
reference, but you can obtain any of them through the SEC or through DuPont, the
dealer manager or the information agent, without charge, excluding all exhibits
unless we have specifically incorporated by reference an exhibit in this
Offering Circular-Prospectus. Stockholders may obtain documents incorporated by
reference in this Offering Circular-Prospectus by requesting in writing or by
telephone from the information agent or the dealer manager at their respective
addresses and telephone numbers provided on the back cover of this Offering
Circular-Prospectus.
If you would like to request documents from either company, please do so
five business days before the expiration date to receive them in time.
You should rely only on the information contained in this document. We have
not authorized anyone to provide you with information that is different. This
Offering Circular-Prospectus is dated , 1999. You should assume
that the information appearing in this Offering Circular-Prospectus is accurate
144
<PAGE> 146
as of the date on the front cover of this document only. The business, financial
condition, results of operations and prospects of DuPont and Conoco may have
changed since that date.
This Offering Circular-Prospectus is not an offer to sell and it is not
soliciting any offer to buy any Conoco common stock in any jurisdiction to where
the offer or sale is not permitted. DuPont is not aware of any jurisdiction
where the making of the exchange offer or the acceptance thereof would not be
legal. If DuPont learns of any jurisdiction where the making of the exchange
offer or acceptance thereof would not be permitted, DuPont will make a good
faith effort to comply with the relevant law. If, after such good faith effort,
DuPont cannot comply with such law, the exchange offer will not be made to, nor
will tenders be accepted from or on behalf of, holders of shares of DuPont
Common Stock in any such jurisdiction.
145
<PAGE> 147
CONOCO INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Consolidated Financial Statements
Report of Independent Accountants......................... F-2
Consolidated Statement of Income -- Years Ended December
31, 1998, 1997 and 1996................................ F-3
Consolidated Balance Sheet -- at December 31, 1998 and
1997................................................... F-4
Consolidated Statement of Stockholders' Equity/Owner's Net
Investment and Accumulated Other Comprehensive
Loss -- Years Ended December 31, 1998, 1997 and 1996... F-5
Consolidated Statement of Cash Flows -- Years Ended
December 31, 1998, 1997 and 1996....................... F-6
Notes to Consolidated Financial Statements................ F-7
Unaudited Financial Information
Supplemental Petroleum Data............................... F-39
Consolidated Quarterly Financial Data -- 1998 and 1997.... F-45
</TABLE>
Certain supplementary financial statement schedules have been omitted
because the information required to be set forth therein is either not
applicable or is shown in the financial statements or notes thereto.
F-1
<PAGE> 148
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the Board of Directors of Conoco Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Conoco Inc. and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We conducted our audits
of these statements in accordance with generally accepted auditing standards,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
February 15, 1999
F-2
<PAGE> 149
CONOCO INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C> <C>
Revenues
Sales and Other Operating Revenues*............... $ 22,796 $ 25,796 $ 24,230
Other Income (Note 4)............................. 372 467 186
----------- ----------- -----------
Total Revenues............................ 23,168 26,263 24,416
----------- ----------- -----------
Costs and Expenses
Costs of Goods Sold and Other Operating
Expenses....................................... 13,840 16,226 14,560
Selling, General and Administrative Expenses...... 736 726 755
Stock Option Provision (Note 22).................. 236 -- --
Exploration Expenses.............................. 380 457 404
Depreciation, Depletion and Amortization.......... 1,113 1,179 1,085
Taxes Other Than on Income* (Note 5).............. 5,970 5,532 5,637
Interest and Debt Expense (Note 6)................ 199 36 74
----------- ----------- -----------
Total Costs and Expenses.................. 22,474 24,156 22,515
----------- ----------- -----------
Income Before Income Taxes.......................... 694 2,107 1,901
Provision for Income Taxes (Note 7)................. 244 1,010 1,038
----------- ----------- -----------
Net Income.......................................... $ 450 $ 1,097 $ 863
=========== =========== ===========
Earnings Per Share (Note 8)
Basic............................................. $ .95 $ 2.51 $ 1.98
Diluted........................................... $ .95 $ 2.51 $ 1.98
Weighted Average Shares Outstanding:
Class A**......................................... 37 -- --
Class B........................................... 437 437 437
----------- ----------- -----------
Total Basic............................... 474 437 437
Stock Options**................................... 1 -- --
----------- ----------- -----------
Total Diluted............................. 475 437 437
=========== =========== ===========
- ---------------
* Includes petroleum excise taxes.................. $ 5,801 $ 5,349 $ 5,461
** Earnings per share for the periods prior to the
Offerings was calculated using only Class B
Common Stock as required by SFAS 128 (see Note
8).
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE> 150
CONOCO INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1998 1997
------- -------
(IN MILLIONS)
<S> <C> <C>
Current Assets
Cash and Cash Equivalents................................. $ 394 $ 1,147
Marketable Securities..................................... -- 7
Accounts and Notes Receivable (Note 9).................... 1,191 1,497
Notes Receivable -- Related Parties (Note 3).............. -- 490
Inventories (Note 10)..................................... 807 830
Prepaid Expenses.......................................... 378 236
------- -------
Total Current Assets.............................. 2,770 4,207
Property, Plant and Equipment (Note 11)..................... 22,094 21,229
Less: Accumulated Depreciation, Depletion and
Amortization.............................................. (10,681) (10,401)
------- -------
Net Property, Plant and Equipment........................... 11,413 10,828
------- -------
Investment in Affiliates (Note 12).......................... 1,363 1,085
Long-Term Notes Receivable -- Related Parties (Note 3)...... -- 450
Other Assets (Note 13)...................................... 529 492
------- -------
Total............................................. $16,075 $17,062
======= =======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY/OWNER'S NET INVESTMENT
<S> <C> <C>
Current Liabilities
Accounts Payable (Note 14)................................ $ 1,312 $ 1,090
Short-Term Borrowings -- Related Parties (Note 3)......... -- 644
Other Short-Term Borrowings and Capital Lease Obligations
(Note 15).............................................. 52 72
Income Taxes (Note 7)..................................... 199 545
Other Accrued Liabilities (Note 16)....................... 1,162 1,289
------- -------
Total Current Liabilities......................... 2,725 3,640
Long-Term Borrowings -- Related Parties (Note 3)............ 4,596 1,450
Other Long-Term Borrowings and Capital Lease Obligations
(Note 17)................................................. 93 106
Deferred Income Taxes (Note 7).............................. 1,714 1,739
Other Liabilities and Deferred Credits (Note 18)............ 2,200 1,922
------- -------
Total Liabilities................................. 11,328 8,857
------- -------
Commitments and Contingent Liabilities (Note 26)
Minority Interests (Note 19)................................ 309 309
Owner's Net Investment...................................... -- 8,087
Stockholders' Equity (Note 20)
Preferred Stock, $.01 par value:
250,000,000 shares authorized; none issued................ -- --
Class A Common Stock, $.01 par value:
3,000,000,000 shares authorized; 191,497,821 shares
issued................................................. 2 --
Class B Common Stock; $.01 par value:
1,600,000,000 shares authorized; 436,543,573 shares issued
and outstanding........................................ 4 --
Additional Paid-In Capital................................ 4,955 --
Accumulated Deficit....................................... (244) --
Accumulated Other Comprehensive Loss (Note 21)............ (274) (191)
Treasury Stock, at cost (249,863 Class A shares).......... (5) --
------- -------
Total Stockholders' Equity........................ 4,438 (191)
------- -------
Total Stockholders' Equity/Owner's Net
Investment....................................... 4,438 7,896
------- -------
Total............................................. $16,075 $17,062
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-4
<PAGE> 151
CONOCO INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY/OWNER'S NET
INVESTMENT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
(NOTES 20 AND 21)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
OWNER'S NET COMMON PAID-IN ACCUMULATED COMPREHENSIVE COMPREHENSIVE TREASURY
INVESTMENT STOCK CAPITAL DEFICIT INCOME LOSS STOCK
----------- ------ ---------- ----------- ------------- ------------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1996.............. $ 6,762 $ (8)
Comprehensive Income
Net Income......................... 863 $ 863
Other Comprehensive Income (Loss):
Foreign Currency Translation
Adjustment..................... (39)
Minimum Pension Liability
Adjustment..................... (10)
------
Other Comprehensive Loss....... (49) (49)
------
Comprehensive Income......... $ 814
======
Net Cash Contribution to Owner....... (993)
Other Transfer from Owner............ 4
------- -----
Balance December 31, 1996............ 6,636 (57)
Comprehensive Income
Net Income (Loss).................. 1,097 $1,097
Other Comprehensive Income (Loss):
Foreign Currency Translation
Adjustment..................... (121)
Minimum Pension Liability
Adjustment..................... (13)
------
Other Comprehensive Loss....... (134) (134)
------
Comprehensive Income......... $ 963
======
Net Cash Contribution from Owner..... 360
Other Transfers to Owner............. (6)
------- -----
Balance December 31, 1997............ 8,087 (191)
Comprehensive Income
Net Income (Loss).................. 694 $(244) $ 450
Other Comprehensive Income (Loss):
Foreign Currency Translation
Adjustment..................... (25)
Minimum Pension Liability
Adjustment..................... (58)
------
Other Comprehensive Loss....... (83) (83)
------
Comprehensive Income......... $ 367
======
Net Cash Contribution to Owner....... (512)
Dividends to Owner (Note 3).......... (8,200)
Other Transfers from Owner........... 433
Capitalization from Owner at
Offerings.......................... (502) $4 $ 498
Initial Public Offering.............. 2 4,226
Compensation Plans................... (5)
Treasury Stock Purchases............. $(5)
Stock Option Provision (Note 22)..... 236
------- -- ------ ----- ----- ---
Balance December 31, 1998............ $ -- $6 $4,955 $(244) $(274) $(5)
======= == ====== ===== ===== ===
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-5
<PAGE> 152
CONOCO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1998 1997 1996
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Cash Provided by Operations
Net Income................................................ $ 450 $ 1,097 $ 863
Adjustments to Reconcile Net Income to Cash Provided by
Operations:
Depreciation, Depletion and Amortization............... 1,113 1,179 1,085
Dry Hole Costs and Impairment of Unproved Properties... 163 169 137
Stock Option Provision (Note 22)....................... 236 -- --
Inventory Write-down to Market (Note 10)............... 97 -- --
Deferred Income Taxes (Note 7)......................... (32) 16 10
Income Applicable to Minority Interests................ 21 24 19
Other Non-Cash Charges and Credits -- Net.............. (137) (271) 66
Decrease (Increase) in Operating Assets:
Accounts and Notes Receivable........................ 125 127 (280)
Inventories.......................................... (62) (79) 22
Other Operating Assets............................... (172) (96) 10
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Other Operating Liabilities..... (85) 622 362
Accrued Interest and Income Taxes (Notes 6 and 7).... (344) 88 102
------- ------- -------
Cash Provided by Operations....................... 1,373 2,876 2,396
------- ------- -------
Investing Activities (Note 24)
Purchases of Property, Plant and Equipment................ (1,965) (2,644) (1,616)
Investments in Affiliates................................. (385) (339) (326)
Proceeds from Sales of Assets and Subsidiaries............ 721 565 328
Net Decrease (Increase) in Short-Term Financial
Instruments............................................ 31 381 (33)
------- ------- -------
Cash Used for Investing Activities................ (1,598) (2,037) (1,647)
------- ------- -------
Financing Activities
Short-Term Borrowings -- Receipts......................... -- 24 --
-- Payments..................... (26) (2) (90)
Other Long-Term Borrowings -- Receipts.................... -- 33 38
-- Payments............... (4) (3) (1)
Proceeds from Initial Public Offering (Notes 3 and 20).... 4,228 -- --
Treasury Stock Purchases.................................. (5) -- --
Transactions with Related Parties:
Notes Receivable -- Receipts........................... 444 9 402
-- Payments......................... (152) (617) (9)
Borrowings -- Receipts................................. 927 413 706
-- Payments................................ (5,434) (695) (520)
Net Cash Contribution From (To) Owner.................. (512) 360 (993)
Increase (Decrease) in Minority Interests (Note 19)....... (21) (21) 280
------- ------- -------
Cash Used for Financing Activities................ (555) (499) (187)
------- ------- -------
Effect of Exchange Rate Changes on Cash..................... 27 (39) (2)
------- ------- -------
Increase (Decrease) in Cash and Cash Equivalents............ (753) 301 560
Cash and Cash Equivalents at Beginning of Year.............. 1,147 846 286
------- ------- -------
Cash and Cash Equivalents at End of Year.................... $ 394 $ 1,147 $ 846
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Transactions with Related Parties (Note 3):
Dividends to Owner..................................... $(8,200)
Promissory Note Issued................................. 7,500
Notes Receivable Reduced............................... 700
Borrowings Contributed to Capital...................... (544)
-------
Total Non-Cash Financing Activities............... $ (544)
=======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-6
<PAGE> 153
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1. BASIS OF PRESENTATION
Conoco Inc., including its consolidated subsidiaries, ("Conoco" or the
"Company") is an integrated, global energy company that is involved in the
Upstream and Downstream segments of the petroleum business. Activities of the
Upstream operating segment include exploring for, and developing, producing and
selling crude oil, natural gas and natural gas liquids. Activities of the
Downstream operating segment include refining crude oil and other feedstocks
into petroleum products, buying and selling crude oil and refined products and
transporting, distributing and marketing petroleum products. The Company has
four reporting segments for its Upstream and Downstream operating segments,
reflecting geographic division between the United States and International.
Corporate and Other includes general corporate expenses, financing costs and
other non-operating items, and results for electric power and related-party
insurance operations.
The initial public offering (the "Offerings") of the Class A Common Stock
of Conoco, a subsidiary of E.I. du Pont de Nemours and Company ("DuPont"),
commenced on October 21, 1998, and the 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 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 owned 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 at December 31, 1998. The
holders of Class A Common Stock and Class B Common Stock generally have
identical rights, except that holders of Class A Common Stock are entitled to
one vote per share while holders of Class B Common Stock are entitled to five
votes per share on matters to be voted on by stockholders.
Effective at the time of the Offerings, Conoco's capital structure was
established and the transfer to Conoco of certain subsidiaries previously owned
by DuPont was substantially complete, resulting in direct ownership of those
subsidiaries. Accordingly, for periods subsequent to the Offerings, financial
information is presented on a consolidated basis.
Prior to the date of the Offerings, operations were conducted by Conoco
Inc., subsidiaries of Conoco Inc. and, in some cases, subsidiaries of DuPont.
The accompanying Consolidated Financial Statements for these periods are
presented on a carve-out basis prepared from DuPont's historical accounting
records, and include the historical operations of both entities owned by Conoco
and operations transferred to Conoco by DuPont at the time of the Offerings. 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
Stockholders' Equity in the Consolidated Financial Statements. Net Cash
Contributions from/to Owner prior to the Offerings include funds transferred
between Conoco and DuPont for operating needs, cash dividends paid and other
equity transactions.
The Consolidated Statement of Income includes all revenues and costs
directly attributable to Conoco, including costs for facilities, functions and
services used by Conoco at shared sites and costs for certain functions and
services performed by centralized DuPont organizations and directly charged to
Conoco based on usage. In addition, services performed by Conoco on DuPont's
behalf are directly charged to DuPont. The results of operations also include
allocations of DuPont's general corporate expenses through the date of the
Offerings.
Prior to the date of the Offerings, all charges and allocations of cost for
facilities, functions and services performed by DuPont organizations for Conoco
have been deemed to have been paid by Conoco to DuPont, in cash, in the period
in which the cost was recorded in the Consolidated Financial Statements.
Allocations of current income taxes receivable or payable are similarly deemed
to have been remitted, in cash, by or to DuPont in the period the related income
taxes were recorded. Subsequent to the Offerings,
F-7
<PAGE> 154
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
such costs are billed directly under transitional service agreements, and income
taxes are paid directly to the taxing authorities, or to DuPont, as appropriate.
All of the allocations and estimates in the Consolidated Financial
Statements are based on assumptions that management believes are reasonable
under the circumstances. However, these allocations and estimates are not
necessarily indicative of the costs and expenses that would have resulted if
Conoco had been operated as a separate entity for periods prior to the
Offerings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accounts of wholly owned and majority-owned subsidiaries are included
in the Consolidated Financial Statements. The equity method is used to account
for investments in corporate entities, partnerships and limited liability
companies in which the Company exerts significant influence, generally having a
20-50% ownership interest. The Company's 50.1 percent non-controlling interest
in Petrozuata C.A. in Venezuela is accounted for using the equity method because
the minority shareholder, a subsidiary of the national oil company of the
Republic of Venezuela, has substantive participating rights. Undivided interests
in oil and gas joint ventures and transportation assets are combined on a pro
rata basis. Other investments, excluding marketable securities, are carried at
cost.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosure of contingent assets and liabilities. Actual
results may differ from those estimates and assumptions.
Cash Equivalents
Cash equivalents represent investments with maturities of three months or
less from time of purchase. They are carried at cost plus accrued interest,
which approximates fair value.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined
under the last-in, first-out ("LIFO") method for inventories of crude oil and
petroleum products. Cost for remaining inventories, principally materials and
supplies, is generally determined by the average cost method. Market is
determined on a regional basis and any lower of cost or market write-down is
recorded as a permanent adjustment to the cost of inventory.
Property, Plant and Equipment ("PP&E")
PP&E is carried at cost. Depreciation of PP&E, other than oil and gas
properties, is generally computed on a straight-line basis over the estimated
economic lives of the facilities, which for major assets range from 14 to 25
years. When assets that are part of a composite group are retired, sold,
abandoned or otherwise disposed of, the cost, net of sales proceeds or salvage
value, is charged against the accumulated reserve for depreciation, depletion
and amortization ("DD&A"). Where depreciation is accumulated for specific
assets, gains or losses on disposal are included in period income.
Maintenance and repairs are charged to expense; replacements and
improvements are capitalized.
Oil and Gas Properties
The Company follows the successful efforts method of accounting, under
which the costs of property acquisitions, successful exploratory wells,
development wells and related support equipment and facilities
F-8
<PAGE> 155
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
are capitalized. The costs of producing properties are amortized at the field
level on a unit-of-production method.
Unproved properties which are individually significant are periodically
assessed for impairment, whereas the impairment of individually insignificant
properties is provided by amortizing the costs based on past experience and the
estimated holding period. Exploratory well costs are expensed in the period the
well is determined to be unsuccessful. All other exploration costs, including
geological and geophysical costs, production costs and overhead costs, are
expensed in the period incurred.
The estimated costs of dismantlement and removal of oil and gas related
facilities are accrued over the properties' productive lives using the
unit-of-production method and recognized as a liability as the amortization
expense is recorded.
Impairment of Long-Lived Assets
Long-lived assets with recorded values that are not expected to be
recovered through future cash flows are written down to current fair value
through additional amortization or depreciation provisions. Fair value is
generally determined from estimated discounted future net cash flows.
Environmental Costs
Environmental expenditures are expensed or capitalized, as appropriate,
depending on their future economic benefit. Expenditures that relate to an
existing condition caused by past operations, and that do not have future
economic benefit, are expensed. Liabilities related to these future costs are
recorded on an undiscounted basis when environmental assessments and/or
remediation activities are probable and the costs can be reasonably estimated.
Stock Compensation
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for stock options. Pro forma information regarding changes in net
income and earnings per share data if the accounting prescribed by Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", had been applied is presented in Note 22.
Income Taxes
The provision for income taxes has been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax bases of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
Prior to the date of the Offerings, Conoco was included in the DuPont
consolidated tax return and the provision for income taxes was determined using
the loss benefit method. Under the loss benefit method, the current tax
provision or benefit is allocated based on the amount expected to be paid or
received from the consolidated group and benefits of losses and credit carry
forwards are recorded when such benefits are expected to be realized by members
of the consolidated group. The pro forma effect on the Consolidated Statement of
Income reflecting the provision for income taxes on a separate return basis
prior to the
F-9
<PAGE> 156
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Offerings is not material. For periods ending after the Offerings, Conoco will
file a separate tax return. Accordingly, for periods subsequent to the
Offerings, the provision for income taxes has been determined on a separate tax
return basis.
Provision has been made for income taxes on unremitted earnings of
subsidiaries and affiliates, except in cases in which earnings are deemed to be
permanently invested.
Foreign Currency Translation
Local currency is the functional currency for the Company's integrated
Western European petroleum operations. For subsidiaries whose functional
currency is the local currency, assets and liabilities denominated in local
currency are translated into United States dollars at end-of-period exchange
rates. The resultant translation adjustment is a component of Accumulated Other
Comprehensive Loss (see Note 21). Assets and liabilities denominated in other
than the local currency are remeasured into the local currency prior to
translation into United States dollars, and the resultant exchange gains or
losses, together with their related tax effects, are included in income in the
period in which they occur. Income and expenses are translated into United
States dollars at average exchange rates in effect during the period.
For subsidiaries where the United States dollar is the functional currency,
all foreign currency asset and liability amounts are remeasured into United
States dollars at end-of-period exchange rates, except for inventories, prepaid
expenses and property, plant and equipment, which are remeasured at historical
rates. Foreign currency income and expenses are remeasured at average exchange
rates in effect during the year, except for expenses related to balance sheet
amounts, which are remeasured at historical exchange rates. Exchange gains and
losses arising from remeasurement of foreign currency-denominated monetary
assets and liabilities are included in current period income.
Effective January 1, 1999, the Euro was adopted as the local currency by 11
countries participating in the European Economic and Monetary Union. For those
countries in which the Company operates, the Euro concurrently became the
functional currency.
Commodity Hedging and Trading Activities
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.
Under the Company's policy, hedging includes only those transactions that
offset physical positions and reduce overall Company exposure to price risk.
Trading is defined as any transaction that does not meet the definition of
hedging.
Gains and losses on hedging contracts are deferred and included in the
measurement of the related transaction. Changes in market values of trading
contracts are reflected in income in the period the change occurs.
In the event a derivative designated as a hedge is terminated prior to the
maturation of the hedged transaction, gains or losses realized at termination
are deferred and included in the measurement of the hedged transaction. If a
hedged transaction matures, is sold, extinguished or terminated prior to the
maturity of a derivative designated as a hedge of such transaction, gains or
losses associated with the derivative through the date the transaction matured
are included in the measurement of the hedged transaction and the derivative is
reclassified as for trading purposes. Derivatives designated as a hedge of an
anticipated transaction are reclassified as for trading purposes if the
anticipated transaction is no longer likely to occur.
F-10
<PAGE> 157
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
In the Consolidated Statement of Cash Flows, the Company reports the cash
flows resulting from its hedging activities in the same category as the related
item that is being hedged.
Recent Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which the Company has adopted for the year ended December 31, 1998. This
standard requires disclosing segment information on the same basis used
internally for evaluating segment performance and deciding how to allocate
resources to segments. It also requires disclosure of revenue and long-lived
assets attributed to operations in individual countries outside the United
States for which such information is material. No substantive changes in segment
reporting resulted from this standard. The Company has four reporting segments
for its Upstream and Downstream operating segments, reflecting geographic
division between the United States and International. In addition, geographic
reporting changed with revenues and long-lived assets attributed to operations
in the United Kingdom, Germany and Norway disclosed separately.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
About Pensions and Other Postretirement Benefits," that revised disclosure
requirements for pension and other postretirement benefits. This statement did
not affect measurement of the expense of the Company's pension and other
postretirement benefits. The Company has adopted the disclosure requirements of
this Statement for the year ended December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires that companies recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 provides, if certain conditions
are met, that a derivative may be specifically designated as (1) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment (fair value hedge), (2) a hedge of the exposure to
variable cash flows of a forecasted transaction (cash flow hedge), or (3) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction (foreign currency hedge).
Under SFAS No. 133, the accounting for changes in fair value of a derivative
depends on its intended use and designation. For a fair value hedge, the gain or
loss is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item. For a cash flow hedge, the effective
portion of the derivative's gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into earnings when the
forecasted transaction affects earnings. For a foreign currency hedge, the gain
or loss is reported in other comprehensive income as part of the cumulative
translation adjustment. For all other items not designated as hedging
instruments, the gain or loss is recognized in earnings in the period of change.
The Company is required to adopt this Statement by the first quarter of 2000 and
is currently assessing its effect on the Consolidated Financial Statements.
3. RELATED PARTY TRANSACTIONS
The Consolidated Financial Statements include significant transactions with
DuPont involving services (such as cash management, other financial services,
purchasing, legal, computer and corporate aviation) and general corporate
expenses that were provided between Conoco and centralized DuPont organizations.
For periods prior to the Offerings, the costs of services have been directly
charged or allocated between Conoco and DuPont using methods management believes
are reasonable. These methods include negotiated usage rates, dedicated asset
assignment and proportionate corporate formulas involving assets,
F-11
<PAGE> 158
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
revenues and employees. 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 $121, $125
and $101 for the years 1998, 1997 and 1996, 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 $61, $62 and $66 in 1998, 1997
and 1996, respectively. These charges to DuPont were treated as reductions, as
appropriate, of Cost of Goods Sold and Other Operating Expenses or Selling,
General and Administrative Expenses.
Interest expense charged by DuPont was $264, $124 and $143 for the years
1998, 1997 and 1996, respectively, and reflects market-based interest rates. A
portion of this and other interest and debt expense was capitalized as cost
associated with major construction projects. Interest income from DuPont was
$43, $11 and $57 for the same years 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 $427, $420 and $413 for the years 1998, 1997 and
1996, respectively. Also included are revenues from insurance premiums charged
to DuPont for property and casualty coverage outside the United States. These
revenues totaled $20, $22 and $21 for the years 1998, 1997 and 1996,
respectively. Purchases of products from DuPont during these periods were not
material.
Subsequent to the Offerings, these intercompany arrangements between DuPont
and Conoco, excluding insurance coverage provided to DuPont, are being provided
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 consolidated financial
position.
Accounts and Notes Receivable include amounts due from DuPont of $80 and
$79 at December 31, 1998 and 1997, respectively, representing current month
balances of transactions between Conoco and DuPont, mainly product sales and
certain charges billed annually. Accounts Payable include amounts due DuPont of
$52 and $4 at December 31, 1998 and 1997, respectively. Other Liabilities
include accrued interest of $51 due DuPont at December 31, 1998.
Amounts representing notes receivable or borrowings from DuPont, including
its subsidiary organizations, are identified as related parties and presented
separately in the Consolidated 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. At December 31, 1997, 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. At December 31, 1998, related balances only
reflected long-term borrowings due DuPont as further described.
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 and due on 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.
F-12
<PAGE> 159
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
In September 1998, the Company declared a dividend of $700 paid through a
reduction of notes receivable from DuPont and further certain intercompany notes
were created.
The net proceeds from the Offerings referred to in Note 1 were $4,228,
after deducting the underwriting discounts and commissions payable by the
Company. The Company used these net proceeds to repay indebtedness owed to
DuPont or purchase a portion of the indebtedness owed by certain subsidiaries of
the Company to DuPont as follows:
(a) to pay accrued interest ($124) on the $7,500 Note and then to
repay principal ($2,654) on such Note to the extent necessary to reduce the
principal amount to $4,846;
(b) to purchase certain intercompany notes denominated in Norwegian
Kroner with an aggregate principal amount of approximately $461 after
conversion to U.S. dollars, together with accrued interest ($9);
(c) to pay accrued interest ($8) and a portion of the principal ($820)
on a certain other intercompany note to the extent necessary to reduce the
principal amount to $7;
(d) to pay a portion of the principal ($152) on an intercompany demand
note which reduced the outstanding balance to $52.
During 1998, DuPont made capital contributions of $544 to the Company
reflecting the retirement of certain non-interest bearing borrowings of $492 and
the remaining balance of $52 on the foregoing demand note.
Subsequent to the Offerings, the Company made an additional principal
payment of $257 on the Note reducing the outstanding balance to $4,589 at
December 31, 1998. Aggregate borrowings from related parties at December 31,
1998, totaled $4,596 and reflected a weighted average interest rate of 6.0
percent with maturity on January 2, 2000.
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. Loans under the revolving credit
agreement will be subject to mandatory repayment to the extent the Company's
cash and cash equivalents exceed $325 or such higher amount as the Company and
DuPont may agree. Loans under this facility 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. There was no outstanding debt under this facility on
December 31, 1998.
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 and public debt in 1999.
F-13
<PAGE> 160
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
4. OTHER INCOME
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income
Related parties (see Note 3).............................. $ 43 $ 11 $ 57
Other, net of miscellaneous interest expense.............. 46 66 67
---- ---- ----
89 77 124
Equity in earnings of affiliates (see Note 12).............. 22(1) 40 (25)
Gain on sales of assets(2).................................. 206 314 84
Exchange gain (loss)........................................ 51 27 (5)
Other -- net................................................ 4 9 8
---- ---- ----
$372 $467 $186
==== ==== ====
</TABLE>
- ---------------
(1) Includes a $5 charge for write-down of inventories to market in accordance
with the Company's inventory valuation policy (see Note 2).
(2) 1998 includes a gain of $89 from sale of certain Upstream properties in the
North Sea and the United States. 1997 includes a gain of $239 from sale of
certain Upstream properties in the North Sea.
5. TAXES OTHER THAN ON INCOME
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Petroleum excise taxes
U.S...................................................... $1,286 $1,201 $1,145
Non-U.S.................................................. 4,515 4,148 4,316
------ ------ ------
5,801 5,349 5,461
Payroll taxes.............................................. 42 43 48
Property taxes............................................. 64 63 55
Production and other taxes................................. 63 77 73
------ ------ ------
$5,970 $5,532 $5,637
====== ====== ======
</TABLE>
6. INTEREST AND DEBT EXPENSE
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest and debt cost incurred
Related parties (see Note 3).............................. $264 $124 $143
Other..................................................... 7 6 6
---- ---- ----
271 130 149
Less: Interest and debt cost capitalized.................... 72 94 75
---- ---- ----
Interest and debt expense................................... $199 $ 36 $ 74
==== ==== ====
</TABLE>
Interest paid (net of amounts capitalized) was $145 in 1998, $33 in 1997
and $77 in 1996.
F-14
<PAGE> 161
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
7. PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1998 1997 1996
---- ------ ------
<S> <C> <C> <C>
Current tax expense
U.S. federal............................................ $(57) $ 64 $ 155
U.S. state and local.................................... 10 5 8
Non-U.S. ............................................... 323 925 865
---- ------ ------
Total........................................... 276 994 1,028
---- ------ ------
Deferred tax expense
U.S. federal............................................ (51) 80 (78)
U.S. state and local.................................... (5) 8 --
Non-U.S. ............................................... 24 (72) 88
---- ------ ------
Total........................................... (32) 16 10
---- ------ ------
Provision for Income Taxes................................ 244 1,010 1,038
Foreign Currency Translation(1)........................... (22) -- --
Minimum Pension Liability(1).............................. (26) (7) (5)
---- ------ ------
Total Provision................................. $196 $1,003 $1,033
==== ====== ======
</TABLE>
- ---------------
(1) Represents respective deferred tax provisions for adjustments included in
other comprehensive loss (see Note 21).
Total income taxes paid worldwide were $714 in 1998, $935 in 1997 and $901
in 1996.
The significant components of deferred tax assets and liabilities at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
ASSET LIABILITY ASSET LIABILITY
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Property, plant and equipment....................... $ 233 $2,296 $ 182 $2,219
Employee benefits................................... 247 -- 166 --
Other accrued expenses.............................. 237 -- 273 --
Inventories......................................... -- 90 -- 102
Tax loss/tax credit carry forwards.................. 496 -- 417 --
Other............................................... 25 188 27 169
------ ------ ------ ------
Total..................................... $1,238 $2,574 $1,065 $2,490
====== ======
Valuation allowances................................ (423) (392)
------ ------
Net....................................... $ 815 $ 673
====== ======
</TABLE>
Valuation allowances, which reduce deferred tax assets to an amount that
will more likely than not be realized, increased $31 in 1998, primarily
reflecting increases in tax assets representing operating losses incurred in
exploration and start-up operations. Valuation allowances decreased by $22 in
1997, principally reflecting a $37 decrease related to tax assets representing
operating losses which the Company determined will more likely than not be
realized in future years. This decrease was partially offset by an increase of
$15 reflecting offsets to operating losses. Valuation allowances in 1996
increased by $52 to offset increases in deferred tax assets resulting primarily
from operating losses incurred in exploration and start-up operations.
F-15
<PAGE> 162
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Under the tax laws of various jurisdictions in which the Company operates,
deductions or credits that cannot be fully utilized for tax purposes during the
current year may be carried forward, subject to statutory limitations, to reduce
taxable income or taxes payable in a future year. At December 31, 1998, the tax
effect of such carry forwards approximated $496. Of this amount, $312 has no
expiration date, $3 expires in 1999, $5 expires in 2000, $75 expires in 2001,
$46 expires in 2002, and $55 expires in 2003 and later years.
Current deferred tax liabilities (included in the Consolidated Balance
Sheet caption "Income Taxes") were $76 and $122 at December 31, 1998 and 1997,
respectively.
Current deferred tax assets included in Prepaid Expenses were $7 at
December 31, 1997. In addition, Other Assets includes deferred tax assets of $31
and $37 at December 31, 1998 and 1997, respectively.
An analysis of the Company's effective income tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate..................... 35.0% 35.0% 35.0%
Higher effective tax rate on non-U.S. operations........... 7.8 13.9 21.6
Alternative fuels credit................................... (8.2) (3.0) (3.4)
Reduced tax benefit from Stock Option Provision............ 4.9 -- --
Realization of unbenefited loss from sale of subsidiary.... (4.6) -- --
Other -- net............................................... 0.3 2.0 1.4
---- ---- ----
Effective income tax rate.................................. 35.2% 47.9% 54.6%
==== ==== ====
</TABLE>
Earnings before income taxes shown below are based on the location of the
corporate unit to which such earnings are attributable. However, since such
earnings are often subject to taxation in more than one country, the income tax
provision shown above as U.S. or non-U.S. does not correspond to the earnings
set forth below.
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ ------
<S> <C> <C> <C>
U.S......................................................... $(173) $ 740 $ 563
Non-U.S..................................................... 867 1,367 1,338
----- ------ ------
$ 694 $2,107 $1,901
===== ====== ======
</TABLE>
At December 31, 1998 and 1997, respectively, unremitted earnings of
non-U.S. subsidiaries totaling $1,536 and $1,645 were deemed to be permanently
invested. No deferred tax liability has been recognized with regard to the
remittance of such earnings. It is not practicable to estimate the income tax
liability that might be incurred if such earnings were remitted to the United
States.
8. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net income (the
numerator) by the weighted average number of common shares outstanding plus the
effects of award and fee deferrals that are invested in Conoco stock units by
certain employees and directors of the Company (the denominator). Diluted EPS is
similarly computed, except that the denominator is increased to include the
dilutive effects of outstanding stock options awarded under Conoco's
compensation plans (see Note 22).
As described in Note 1, the Company's capital structure was established at
the time of the Offerings. In accordance with SEC Staff Accounting Bulletin No.
98, the capitalization of Class B Common Stock has been retroactively reflected
for the purposes of presenting earnings per share for periods prior to the
F-16
<PAGE> 163
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Offerings. For the period subsequent to the Offerings, basic EPS reflects the
Class B Common Stock plus the weighted average from the date of the Offerings of
Class A Common Stock and deferred award units outstanding at the date of the
Offerings. Corresponding diluted EPS for 1998 includes an additional 1,659,816
shares representing the weight average dilutive effect of outstanding stock
options that resulted from the concurrent cancellation of DuPont stock options
at the date of the Offerings and issuance of options with respect to Class A
Common Stock.
The denominator is based on the following weighted average number of common
shares outstanding:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Basic......................................... 473,826,632 436,543,573 436,543,573
Diluted....................................... 475,486,448 436,543,573 436,543,573
</TABLE>
Variable stock options for 1,724,146 shares of common stock were
outstanding at December 31, 1998, but were not included in the computation of
diluted EPS since the threshold price of $32.88 required for these options to be
vested had not been reached.
Common shares held as Treasury Stock are deducted in determining the number
of shares outstanding.
MANAGEMENT VIEW
The substance of the Offerings was the sale by DuPont of approximately 30
percent ownership of Conoco. Therefore, management believes a more meaningful
presentation of basic EPS is to divide historical net income for all periods
presented by the total Class A and Class B Common Stock plus deferred award
units outstanding immediately after the Offerings. For diluted EPS, weighted
average shares have been adjusted to reflect the effect of outstanding stock
options immediately after the Offerings as though outstanding for all periods
presented. Using this presentation, but excluding any pro forma adjustment for
additional interest expense on the dividend Note (see Note 3), EPS would be as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ ------
<S> <C> <C> <C>
Basic....................................................... $ .72 $ 1.75 $ 1.37
Diluted..................................................... $ .71 $ 1.72 $ 1.36
</TABLE>
9. ACCOUNTS AND NOTES RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1998 1997
------ ------
<S> <C> <C>
Trade....................................................... $ 805 $ 916
Related parties (see Note 3)................................ 80 79
Other....................................................... 306 502
------ ------
$1,191 $1,497
====== ======
</TABLE>
See Note 27 for a description of operating segment markets and associated
concentrations of credit risk.
F-17
<PAGE> 164
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
10. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1998 1997
------- -------
<S> <C> <C>
Crude oil and petroleum products............................ $ 661 $ 675
Other merchandise........................................... 22 25
Materials and supplies...................................... 124 130
------- -------
$ 807 $ 830
======= =======
</TABLE>
As a result of reduced crude oil and petroleum product price levels, a
write-down to market of $97 was made in the fourth quarter of 1998, in
accordance with the Company's inventory valuation policy (see Note 2). At
December 31, 1997, the excess of market over book value of inventories valued
under the LIFO method was $152. Inventories valued at LIFO represented 82
percent and 81 percent of consolidated inventories at December 31, 1998 and
1997, respectively.
During 1998, 1997 and 1996, certain LIFO inventory quantities were reduced
resulting in partial liquidation of the LIFO bases, with no material effect on
net income.
11. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
GROSS NET
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Oil and Gas Properties
Unproved............................................. $ 1,159 $ 1,491 $ 942 $ 1,230
Proved............................................... 13,488 12,420 6,236 5,480
Other.................................................. 1,280 1,316 845 871
------- ------- ------- -------
Total Upstream............................... 15,927 15,227 8,023 7,581
Refining............................................... 3,834 3,803 1,958 1,952
Marketing and Distribution............................. 2,255 2,199 1,375 1,295
------- ------- ------- -------
Total Downstream............................. 6,089 6,002 3,333 3,247
Corporate(1)........................................... 78 -- 57 --
------- ------- ------- -------
$22,094 $21,229 $11,413 $10,828
======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes aviation investment transferred from DuPont in 1998 and corporate
software.
Property, Plant and Equipment includes Downstream gross assets acquired
under capital leases of $41 at December 31, 1998 and 1997; related amounts
included in Accumulated Depreciation, Depletion and Amortization were $12 and
$10 at December 31, 1998 and 1997, respectively.
12. SUMMARIZED FINANCIAL INFORMATION FOR AFFILIATED COMPANIES
Summarized consolidated financial information for affiliated companies for
which Conoco uses the equity method of accounting (see Note 2, "Basis of
Consolidation") is shown below on a 100 percent basis. The most significant of
these affiliates are Malaysia Refining Company Sdn. Bhd. (40%), Petrozuata C.A.
(50.1% -- see Note 2), CFJ Properties (50%), Pocahontas Gas Partnership (50%),
Excel Paralubes (50%), Polar Lights Company (50%), and Ceska Rafinerska a.s.
(16.33%).
F-18
<PAGE> 165
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Dividends received from equity affiliates were $105 in 1998, $58 in 1997
and $85 in 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Sales(1)................................................... $6,744 $7,521 $6,622
Earnings before income taxes............................... 358 556 305
Net income................................................. 252 345 140
Conoco's equity in earnings of affiliates (see Note 4)..... 22 40 (25)
</TABLE>
- ---------------
(1) Includes sales to Conoco of $574 in 1998, $568 in 1997 and $359 in 1996.
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1998 1997
------- ------
<S> <C> <C>
FINANCIAL POSITION
Current assets.............................................. $ 2,771 $2,543
Non-current assets.......................................... 8,682 6,826
------- ------
Total assets...................................... $11,453 $9,369
------- ------
Short-term borrowings(1).................................... $ 897 $ 550
Other current liabilities................................... 1,650 1,308
Long-term borrowings(1)..................................... 4,743 4,364
Other long-term liabilities................................. 1,119 645
------- ------
Total liabilities................................. $ 8,409 $6,867
------- ------
Conoco's investment in affiliates (includes advances)....... $ 1,363 $1,085
======= ======
</TABLE>
- ---------------
(1) Conoco's pro rata interest in total borrowings was $1,828 in 1998 and $1,586
in 1997, of which $967 in 1998 and $826 in 1997 were guaranteed by the
Company or DuPont, on behalf of, and indemnified by, the Company. These
amounts are included in the guarantees disclosed in Note 26.
At December 31, 1998, Conoco's equity in undistributed earnings of its
affiliated companies was $114.
13. OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1998 1997
------- ------
<S> <C> <C>
Prepaid pension cost (see Note 23).......................... $ 50 $ 71
Long-term receivables....................................... 71 74
Other securities and investments(1)......................... 116 100
Deferred pension transition obligation (see Note 23)........ 109 116
Other(2).................................................... 183 131
------- ------
$ 529 $ 492
======= ======
</TABLE>
- ---------------
(1) Includes $74 and $97 at December 31, 1998 and 1997, respectively,
representing marketable securities classified as available for sale and
reported at fair value. The remainder represents investments which are
reported at cost.
(2) Includes intangible assets of $14 and $15 at December 31, 1998 and 1997,
respectively.
F-19
<PAGE> 166
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
14. ACCOUNTS PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1998 1997
------ ------
<S> <C> <C>
Trade....................................................... $ 906 $ 969
Payables to banks........................................... 124 85
Related parties (see Note 3)................................ 52 4
Other....................................................... 230(1) 32
------ ------
$1,312 $1,090
====== ======
</TABLE>
- ---------------
(1) Includes $158 for property acquisitions.
Payables to banks represent checks issued on certain disbursement accounts
but not presented to the banks for payment.
15. OTHER SHORT-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1998 1997
------ ------
<S> <C> <C>
Industrial development bonds................................ $ 24 $ 24
Bank borrowings (foreign currency).......................... -- 21
Long-term borrowings payable within one year................ 26 25
Capital lease obligations................................... 2 2
------ ------
$ 52 $ 72
====== ======
</TABLE>
The Company has uncommitted short-term bank credit lines of approximately
$122 and $42 at December 31, 1998 and 1997, respectively. These lines are
denominated in United States dollars or various foreign currencies to support
general international operating needs. No significant advances were outstanding
under these lines at these respective dates.
The weighted average interest rate on other short-term borrowings
outstanding at December 31, 1998 and 1997, was 3.8 percent and 3.7 percent,
respectively.
16. OTHER ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1998 1997
------ ------
<S> <C> <C>
Taxes other than on income.................................. $ 354 $ 376
Operating expenses.......................................... 293 343
Payroll and other employee-related costs.................... 102 135
Restructuring costs(1)...................................... 82 --
Accrued postretirement benefits cost (see Note 23).......... 18 24
Other....................................................... 313 411
------ ------
$1,162 $1,289
====== ======
</TABLE>
- ---------------
(1) Represents estimated charges associated with cost reduction program
announced in December 1998. This program is focused on obtaining operational
efficiencies, mainly in the Upstream businesses, and was expedited in
response to adverse changes in the current business environment. The program
primarily involves the elimination of approximately 975 employee positions
on a worldwide basis. The
F-20
<PAGE> 167
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
accrual is reflected in Cost of Goods Sold and Other Operating Expenses. At
December 31, 1998, no persons had been terminated and no related payments
had been made.
17. OTHER LONG-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1998 1997
------ ------
<S> <C> <C>
5.75% notes due 2026........................................ $ 16 $ 16
6.50% notes due 2008........................................ 7 7
Other loans (various currencies) due 1999-2007(1)........... 29 30
Capitalization obligation to affiliate due 2008............. 11 --
Capitalization obligation to affiliate due 1999............. -- 20
Capital lease obligations................................... 30 33
------ ------
$ 93 $ 106
====== ======
</TABLE>
- ---------------
(1) Weighted average interest rates were 7.3 percent at December 31, 1998 and
1997, respectively.
Maturities of long-term borrowings, together with sinking fund requirements
for years ending after December 31, 1999, are $4 for each of the years 2000,
2001, 2002 and 2003.
18. OTHER LIABILITIES AND DEFERRED CREDITS
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1998 1997
------ ------
<S> <C> <C>
Deferred gas revenue........................................ $ 371 $ 379(1)
Accrued postretirement benefits cost (see Note 23).......... 331 318
Accrued pension liability (see Note 23)..................... 320 230
Abandonment costs........................................... 297 310
Environmental remediation costs (see Note 26)............... 117 132
Related parties (see Note 3)................................ 51 --
Other....................................................... 713 553
------ ------
$2,200 $1,922
====== ======
</TABLE>
- ---------------
(1) 1997 includes $303 received from a contract for future sales of natural gas
to Centrica, a United Kingdom gas marketing company.
19. MINORITY INTERESTS
In 1996, certain upstream subsidiaries contributed assets with an aggregate
fair value of $613 to Conoco Oil & Gas Associates L.P. (COGA) for a general
partnership interest of 67 percent. The remaining 33 percent was purchased by
Vanguard Energy Investors L.P. (Vanguard) as a limited partner. The net result
of this transaction was to increase minority interests by $297.
Vanguard is entitled to a cumulative annual priority return on its
investment and participation in residual earnings at rates established in the
partnership agreement. The priority return rate, currently 6.52 percent, is
scheduled to be renegotiated in the second half of 1999. In the event the
parties are unable to agree on a new return rate, Vanguard has the option to
call for liquidation of the partnership, which could take place before December
31, 1999. Cash outflows arising from such liquidation should not be materially
different from the recorded amount of minority interest.
F-21
<PAGE> 168
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Vanguard's share of COGA's earnings was $22 or 25 percent in 1998 and $22
or 18 percent in 1997; the net minority interest in COGA held by Vanguard was
$302 and $301 on December 31, 1998 and 1997, respectively.
20. STOCKHOLDERS' EQUITY
As described in Note 1, the Company's capital structure was established at
the time of the Offerings in October 1998.
At December 31, 1998, 4,600,000,000 shares of Class A and Class B Common
Stock were authorized and 628,041,394 shares were issued, including 249,863
Class A shares held in the treasury. A summary of activity in common shares
outstanding for the year 1998 is presented below:
<TABLE>
<CAPTION>
CLASS A CLASS B TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Issued in connection with the initial public
offering of Class A shares and recapitalization
of DuPont ownership (Class B shares)........... 191,456,427 436,543,573 628,000,000
Purchase of shares for treasury (to offset
dilution from issuances under compensation
plans)......................................... (250,000) -- (250,000)
Issued on exercise of stock options (including
137 from treasury)............................. 41,531 -- 41,531
----------- ----------- -----------
Common Shares Outstanding -- December 31, 1998... 191,247,958 436,543,573 627,791,531
=========== =========== ===========
</TABLE>
At December 31, 1998, 250,000,000 shares of Preferred Stock were
authorized, of which 1,000,000 shares were designated Series A Junior
Participating Preferred Stock and reserved for issuance on exercise of preferred
stock purchase rights under the Company's Share Purchase Rights Plan. Each
issued share of Class A and Class B Common Stock has one preferred stock
purchase Right attached to it. No preferred shares have been issued and the
Rights are not currently exercisable.
Net proceeds received from the Offerings totaled $4,228, after deduction
for underwriting discounts and commissions payable by the Company, and were used
to reduce indebtedness owed to DuPont (see Note 3). In addition, Additional
Paid-In Capital was increased by $236 during 1998 as a result of a corresponding
non-cash charge to compensation expense associated with changes in certain
outstanding compensation awards made at the time of the Offerings (see Note 22).
The Company declared a first quarter cash dividend on January 27, 1999, of
$.14 per share on each outstanding share of Class A Common Stock and Class B
Common Stock, payable March 12, 1999 to stockholders of record as of February
12, 1999. This initial dividend was determined on a pro rata basis covering the
period from October 27, 1998 to December 31, 1998, and is equivalent to $.19 per
share for a full quarter.
F-22
<PAGE> 169
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
21. ACCUMULATED OTHER COMPREHENSIVE LOSS
Balances of related after-tax components comprising Accumulated Other
Comprehensive Loss are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1998 1997
----- -----
<S> <C> <C>
Foreign Currency Translation Adjustment..................... $(185) $(160)
Minimum Pension Liability Adjustment (see Note 23).......... (89) (31)
----- -----
$(274) $(191)
===== =====
</TABLE>
Changes in related components of other comprehensive income (loss) are
reported net of associated income tax effects as summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ------------------------
INCOME AFTER- INCOME AFTER- INCOME AFTER-
PRETAX TAX TAX PRETAX TAX TAX PRETAX TAX TAX
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Foreign Currency Translation
Adjustment............................. $ (47) $(22) $(25) $(121) $-- $(121) $(39) $-- $(39)
Minimum Pension Liability Adjustment..... (84) (26) (58) (20) (7) (13) (15) (5) (10)
----- ---- ---- ----- --- ----- ---- --- ----
Other Comprehensive Income (Loss)........ $(131) $(48) $(83) $(141) $(7) $(134) $(54) $(5) $(49)
===== ==== ==== ===== === ===== ==== === ====
</TABLE>
22. COMPENSATION PLANS
Until the date of the Offerings, employees of Conoco participated in
stock-based compensation plans administered through DuPont and involving options
to acquire DuPont common stock. At the time of the Offerings, Conoco employees
held a total of 10,964,917 stock options for DuPont common stock and 1,333,135
stock appreciation rights (SARs) with respect to DuPont common stock, and the
Company gave those persons the option, subject to specific country tax and legal
requirements, to participate in a program involving the cancellation of all or
part of their DuPont stock options or SARs 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 substitute stock options and other
awards have the same vesting provisions, option periods and other terms and
conditions as the DuPont options and awards they replaced. The substitute stock
options had the same ratio of the exercise price per share to the market value
per share, and the same aggregated difference between market value and exercise
price, as the DuPont stock options. A total of 8,921,508 DuPont stock options
and 745,358 DuPont SARs were cancelled with Conoco issuing 24,275,690 stock
options for Class A Common Stock and 2,279,834 SARs with respect to Class A
Common Stock with comparable terms and conditions. The program was deemed a
change in the terms of certain awards granted to Conoco employees. As a result,
the Company incurred a non-cash charge to compensation expense of $236 in the
fourth quarter of 1998, with a corresponding increase in Additional Paid-In
Capital. DuPont retained responsibility for delivery of DuPont common stock to
Conoco employees when DuPont stock options not cancelled are exercised.
AWARDS UNDER DUPONT PLANS
Stock option awards under the DuPont Stock Performance Plan were granted to
key employees of the Company prior to the Offerings and were "fixed" and/or
"variable". The purchase price of shares subject to option is the market price
of DuPont stock at the date of grant. In January 1997, a reload feature was
added to the Stock Performance Plan to accelerate stock ownership. Generally,
fixed options granted under the DuPont Stock Performance Plan are fully
exercisable one year after date of grant and expire ten years
F-23
<PAGE> 170
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
from date of grant. However, awards in 1998 vest over a three-year period and,
except for the last six months of the ten-year option term, are exercisable when
the market price of DuPont common stock exceeds the option grant price by 20
percent.
During 1997, variable stock option grants were made to certain senior
management and subject to forfeiture if, within five years from the date of
grant, the market price of DuPont common stock did not achieve a price of $75
per share for 50 percent of the options and $90 per share for the remaining 50
percent. During 1998, before the Offerings, the $75 price was reached and
options with that hurdle became "fixed" and exercisable. All of the outstanding
variable DuPont options with a $90 per share hurdle price at the time of the
Offerings were cancelled and substituted with options for Conoco Class A Common
Stock with a hurdle price of $32.88 per share.
From time to time, the DuPont Board of Directors has approved the adoption
of a worldwide Corporate Sharing Program. Under these programs, a majority of
the Company's employees received a one-time grant to acquire shares of DuPont
common stock at the fair market value at the date of grant. Option terms are
"fixed" and generally are exercisable one year after date of grant and expire
ten years from date of grant.
AWARDS UNDER CONOCO PLANS
The 1998 Stock and Performance Incentive Plan provides incentives to
certain corporate officers, non-employee directors and independent contractors
who can contribute materially to the success and profitability of the Company
and its subsidiaries and provides for substitution of certain existing DuPont
awards in connection with the Offerings. Awards may be in the form of cash,
stock, stock options or SARs with respect to Class A Common Stock. This plan
also provides for the Conoco Global Variable Compensation Plan, which is an
annual management incentive program for officers and certain non-officer
employees with awards made in cash and stock. Stock options and SARs granted
under the 1998 Stock and Performance Incentive Plan (except those granted to
substitute for DuPont awards) are awarded at market price on the date of grant,
have a ten year life, and generally vest one year from date of grant with
one-third becoming exercisable each of the first three years. For certain senior
management, shares otherwise receivable from the exercise of nonqualified
options with respect to Class A Common Stock granted under the 1998 Stock and
Performance Incentive Plan of Conoco to substitute for cancelled 1998 DuPont
stock options, as well as incremental new Conoco stock options granted at the
date of the Offerings, can be deferred as stock units for a designated future
delivery. The maximum number of shares of common stock and stock options granted
under the plan is limited to the higher of 20 million or 3.3 percent of
outstanding shares of Class A and Class B Common Stock. Awards made in
substitution for DuPont awards do not count against the number of shares
available under the plan. At December 31, 1998, 16,850,266 shares of Class A
Common Stock were available for issuance under the plan.
The Company adopted the 1998 Key Employee Stock Performance Plan to attract
and retain employees by enhancing the proprietary and personal interests of
employees in the success and profitability of the Company and to grant some
awards in substitution for certain existing DuPont awards in connection with the
Offerings. Awards to employees may be in the form of Company stock options or
SARs, both with respect to Class A Common Stock. Such awards granted under this
plan (except to substitute for DuPont awards) are awarded at market price on the
date of grant, have a ten year life, and generally vest one year from date of
grant with one-third becoming exercisable each of the first three years. The
maximum number of shares of common stock and stock options granted under the
plan is limited to the higher of 18 million or three percent of outstanding
Class A and Class B Common Stock. Awards made in substitution for DuPont awards
do not count against the number of shares available under the plan. At
F-24
<PAGE> 171
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
December 31, 1998, 14,484,936 shares of Class A Common Stock were available for
issuance under the plan.
Persons electing to substitute Conoco stock options with respect to Class A
Common Stock for DuPont stock options and persons receiving incremental new
Conoco stock options with respect to Class A Common Stock at the date of the
Offerings under the 1998 Stock and Performance Incentive Plan and the 1998 Key
Employee Stock Performance Plan are eligible for reload options upon the
exercise of stock options, with the condition that shares received from the
exercise of the original option may not be sold for at least five years. Reloads
are granted at the market price on the reload grant date and have a term equal
to the remaining term of the original option. The number of new options granted
under a reload option is equal to the number of shares required to satisfy the
total exercise price of the original option.
The 1998 Global Performance Sharing Plan is a broad-based plan under which
grants of stock options and SARs with respect to Class A Common Stock were made
to certain non-officer employees on the date of the Offerings to encourage a
sense of proprietorship and an active interest in the financial success of
Conoco and its subsidiaries. The stock options and SARs were awarded at the
price of the Offerings ($23 per share), have a ten year life, and become
exercisable in one-third increments on the first, second and third anniversaries
of the grant date. There are no additional shares available for issuance under
this plan.
All stock options granted under Conoco plans are "fixed" and have no
intrinsic value at grant date except for those granted to substitute for
cancelled DuPont options. Accordingly, except for the fourth quarter 1998 charge
related to the one-time offer to cancel DuPont options and substitute Conoco
options, no compensation expense has been recognized for fixed options.
F-25
<PAGE> 172
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The following table summarizes activity for fixed and variable options for
the last three years:
<TABLE>
<CAPTION>
FIXED VARIABLE
---------------------- ---------------------
NUMBER WEIGHTED- NUMBER WEIGHTED-
OF AVERAGE OF AVERAGE
SHARES PRICE SHARES PRICE
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
DUPONT OPTIONS
January 1, 1996.................................. 7,811,547 $24.27 -- --
Granted........................................ 1,140,780 39.20 -- --
Exercised...................................... (1,781,277) 23.33 -- --
Forfeited...................................... (95,330) 26.38 -- --
---------- ------ --------- ------
December 31, 1996................................ 7,075,720 $26.88 -- --
Granted........................................ 2,761,416 52.90 1,259,600 $52.50
Exercised...................................... (730,383) 23.97 -- --
Forfeited...................................... (116,325) 50.44 -- --
---------- ------ --------- ------
December 31, 1997................................ 8,990,428 $35.14 1,259,600 $52.50
Granted........................................ 1,241,055 59.53 -- --
Reclassified................................... 629,800 52.50 (629,800) 52.50
Exercised...................................... (460,314) 24.64 -- --
Forfeited...................................... (65,852) 50.68 -- --
---------- ------ --------- ------
October 21, 1998 (Offerings date)................ 10,335,117 $39.50 629,800 $52.50
Cancelled for Conoco options................... (8,291,708) (629,800)
---------- ---------
Retained by DuPont............................. 2,043,409 --
CONOCO OPTIONS
Granted at Offerings date:
For cancelled DuPont options................... 22,551,544 $14.62 1,724,146 $19.18
New awards..................................... 9,721,750 23.00 -- --
Exercised........................................ (41,531) 14.18 -- --
Forfeited........................................ (53,840) 23.00 -- --
---------- ------ --------- ------
December 31, 1998................................ 32,177,923 $17.14 1,724,146 $19.18
</TABLE>
The following table summarizes information concerning outstanding and
exercisable fixed Conoco options at December 31, 1998. For total variable
options outstanding at December 31, 1998, the weighted-average remaining
contractual life was 3.1 years.
<TABLE>
<CAPTION>
EXERCISE PRICE
--------------------------------------------------
$5.89- $8.90- $14.47- $21.73-
$8.41 $12.80 $21.64 $29.58
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Options outstanding......................... 2,766,632 7,335,094 9,281,970 12,794,227
Weighted-average remaining contractual life
(years)................................... 2.9 5.5 7.8 9.6
Weighted-average price...................... $ 7.60 $ 10.02 $ 17.94 $ 22.70
Options exercisable......................... 2,766,632 7,335,094 9,281,970 42,204
Weighted-average price...................... $ 7.60 $ 10.02 $ 17.94 $ 24.22
</TABLE>
F-26
<PAGE> 173
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Fixed options exercisable at the end of the last three years and the
weighted-average fair value of fixed options granted are as follows:
<TABLE>
<CAPTION>
CONOCO DUPONT OPTIONS
OPTIONS ------------------------------------
1998 1998* 1997 1996
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Options exercisable at year-end:
Number of shares.......................... 19,425,900 9,113,046 6,229,012 5,934,940
Weighted-average price.................... $ 13.49 $ 36.81 $ 27.26 $ 24.51
Weighted-average fair value of options
granted during the year:
New options............................... $ 4.15 $ 13.85 $ 12.84 $ 9.01
Options substituted for DuPont options.... $ 9.22
</TABLE>
- ---------------
* As of the date of the Offerings rather than year-end.
The fair value of Conoco variable options with a hurdle price of $32.88 per
share granted as substitutes for DuPont variable options was assumed to be zero.
The fair value of options is calculated using the Black-Scholes option
pricing model. Assumptions used were as follows:
<TABLE>
<CAPTION>
CONOCO OPTIONS DUPONT OPTIONS
------------------ --------------------------------
1998 1997
FIXED 1998 ---------------- 1996
NEW SUBSTITUTES FIXED FIXED VARIABLE FIXED
---- ----------- ----- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Dividend yield................................ 3.3% 3.3% 2.1% 2.2% 2.2% 2.6%
Volatility.................................... 20.0%* 20.0%* 19.9% 18.6% 18.6% 21.0%
Risk-free interest rate....................... 4.6% 4.4% 5.5% 6.4% 6.4% 5.4%
Expected life (years)......................... 5.8* 3.9* 5.8 5.6 5.7 6.0
</TABLE>
- ---------------
* Due to insufficient history, DuPont experience trends have been used to
estimate the volatility of Conoco stock and the expected life for exercise of
Conoco stock options.
The following table sets forth pro forma information as if the Company had
adopted the optional recognition provisions of SFAS No. 123:
<TABLE>
<CAPTION>
1998 1997 1996
---- ----- -----
<S> <C> <C> <C>
Increase (Decrease) in:
Net income.................................................. $157 $ (28) $ (6)
Earnings per share
Basic..................................................... $.33 $(.06) $(.01)
Diluted................................................... $.33 $(.06) $(.01)
</TABLE>
Total fair value underpinning the pro forma disclosure for 1998 presented
above includes the fair value of new DuPont grants and a pro rata portion of new
Conoco grants made at the Offerings date, plus incremental fair value of the
Conoco stock options that were substituted for DuPont stock options granted
after the adoption of SFAS No. 123. The incremental fair value for cancellation
and substitution of stock options originally granted before adoption of SFAS No.
123 is zero because intrinsic value exceeds fair value.
F-27
<PAGE> 174
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Compensation expense recognized in income for stock-based employee
compensation awards was $229, $26 and $13 for 1998, 1997 and 1996, respectively,
with 1998 including a one-time charge of $236 for the cancellation of DuPont
stock options described above.
Prior to the Offerings, the Conoco Unit Option Plan awarded SARs with
respect to DuPont common stock to key salaried employees in certain grade levels
who showed early evidence of ability to assume significant responsibility and
leadership. At the time of the Offerings, 1,131,494 unit options were
outstanding of which 593,722 were cancelled and substituted with comparable SARs
with respect to Conoco Class A Common Stock under the 1998 Key Employee Stock
Performance Plan of Conoco. Effective with the Offerings, no new grants were
made or are planned out of the Conoco Unit Option Plan. At December 31, 1998,
outstanding unit options based on Conoco Class A Common Stock were 1,605,614. At
December 31, 1998 and 1997, outstanding unit options based on DuPont common
stock were 545,724 and 908,532, respectively. At these same dates, related
liability provisions totaled $22 and $27, respectively.
Through the date of the Offerings, certain Conoco employees who
participated in the DuPont Variable Compensation Plan received grants of stock
and cash. Overall amounts were dependent on financial performance of DuPont and
Conoco and other factors, and were subject to maximum limits as defined by the
plan. Amounts charged against earnings in anticipation of awards to be made
later were $39 in 1998, $38 in 1997 and $38 in 1996. Awards made for plan years
1998, 1997 and 1996 were $24, $45 and $38, respectively, with awards distributed
in 1999 for the 1998 plan year made out of the 1998 Stock and Performance
Incentive Plan of Conoco based on performance standards set previously in the
DuPont Variable Compensation Plan. Both the DuPont Variable Compensation Plan
and the 1998 Stock and Performance Incentive Plan of Conoco allow future
delivery of stock awards. Employees were offered the opportunity to cancel
DuPont shares granted under previous awards and receive substitute shares of
Conoco Class A Common Stock for designated future delivery under the 1998 Stock
and Performance Incentive Plan of Conoco. At December 31, 1998, 72,345 shares of
DuPont stock and 199,268 shares of Conoco Class A Common Stock are awaiting
delivery. A liability of $4 has been recognized for delivery of DuPont shares.
Awards under the separate Conoco Challenge Program may be granted in cash
to employees not covered by the Variable Compensation Plan. This plan provides
awards based on meeting financial goals and upholding Conoco's core values.
Overall amounts are dependent on Company earnings and cash provided by
operations and are subject to maximum limits as defined by the plan. Amounts
charged against earnings in anticipation of awards to be made later were $22 in
1998, $49 in 1997 and $47 in 1996. Awards made for plan years 1998, 1997 and
1996 were $19, $47 and $47, respectively.
23. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Company participates in the DuPont U.S. defined benefit pension plan,
which covers substantially all U.S. employees and has separate defined benefit
pension plans covering certain U.S. and non-U.S. employees. The benefits for
these plans are based primarily on years of service and employees' pay near
retirement. The Company's funding policy is consistent with the funding
requirements of federal laws and regulations.
With respect to the DuPont U.S. defined benefit pension plan, the Company
and DuPont agreed upon an amount of approximately $820 at the date of the
Offerings that will eventually be transferred to a separate trust for the
Company's pension plan. Ninety percent of this amount, adjusted for benefit
payments and investment return from the date of the Offerings, will be
transferred to the Company within six months following the date on which DuPont
owns neither 80 percent of the voting power nor 80 percent of the economic value
of the Common Stock, assuming certain conditions are satisfied. The
F-28
<PAGE> 175
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
remainder will be transferred within a further 90-day period. The adjusted value
subject to transfer was approximately $878 at December 31, 1998. DuPont
allocated the pension obligations based on the Company's individual employees
covered and allocated the unrecognized prior service cost and unrecognized net
gain in proportion to the Company's projected benefit obligation to the total
projected benefit obligation of the DuPont plan. The projected benefit
obligation approximates $871 and $723 at December 31, 1998 and 1997,
respectively, and the prepaid pension asset recognized in the Consolidated
Balance Sheet (see Note 13) is $50 and $71 at December 31, 1998 and 1997,
respectively. The net periodic pension cost components included in the table
below are also based on the foregoing allocation factors.
Pension coverage for employees of the Company's non-U.S. subsidiaries is
provided, to the extent deemed appropriate, through separate plans. Obligations
under such plans are systematically provided for by depositing funds with
trustees, under insurance policies or by book reserves.
Conoco and certain subsidiaries also provide medical and life insurance
benefits to retirees and survivors. The associated plans, principally health,
are unfunded, and approved claims are paid from Company funds. Under the terms
of these plans, the Company reserves the right to change, modify or discontinue
the plans. Conoco has communicated to plan participants that any increase in the
annual health care escalation rate above 4.5 percent will be borne by the
participants and, therefore, result in no increase to the accumulated
postretirement benefit obligation or the other postretirement benefits cost.
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------- ------------------------
1998 1997 1996 1998 1997 1996
----- ---- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
NET PERIODIC BENEFIT COST
Service cost........................................ $ 65 $ 60 $ 55 $ 7 $ 6 $ 7
Interest cost....................................... 94 88 76 21 18 16
Expected return on plan assets...................... (105) (98) (91) -- -- --
Amortization of prior service cost (credit)......... 9 2 2 (4) (4) (4)
Recognized actuarial loss (gain).................... (4) 1 (5) -- (1) (1)
----- ---- ---- --- --- ---
Net periodic benefit cost........................... $ 59 $ 53 $ 37 $24 $19 $18
===== ==== ==== === === ===
</TABLE>
F-29
<PAGE> 176
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Information concerning benefit obligations, plan assets, funded status and
recorded values for these plans (excluding the DuPont U.S. defined benefit plan)
follows:
<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------- ---------------
1998 1997 1998 1997
------- ------- ------ ------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ 682 $ 533 $ 301 $ 242
Service cost................................................ 33 28 7 6
Interest cost............................................... 44 39 21 18
Amendments.................................................. (4) -- -- --
Participant contributions................................... -- -- 3 3
Actuarial (gain) loss....................................... 160 113 43 58
Divestitures and other...................................... (17) (2) -- --
Benefits paid............................................... (32) (29) (25) (26)
----- ----- ----- -----
Benefit obligation at end of year........................... $ 866 $ 682 $ 350 $ 301
===== ===== ===== =====
CHANGE IN PLAN ASSETS
Fair Value of plan assets at beginning of year.............. $ 386 $ 323 $ -- $ --
Actual return on plan assets................................ 61 48 -- --
Employer contribution....................................... 26 28 22 23
Participant contributions................................... -- -- 3 3
Divestitures and other...................................... (14) -- -- --
Benefits paid............................................... (21) (13) (25) (26)
----- ----- ----- -----
Fair Value of plan assets at end of year.................... $ 438 $ 386 $ -- $ --
===== ===== ===== =====
Funded status of plans at end of year....................... $(428) $(296) $(350) $(301)
Unrecognized actuarial loss................................. 240 109 53 14
Unrecognized prior service cost (credit).................... 109 121 (52) (55)
----- ----- ----- -----
Net amount recognized at end of year........................ $ (79) $ (66) $(349) $(342)
===== ===== ===== =====
AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEET AT END OF
YEAR
Accrued benefit liability:
Short-term (see Note 16).................................. $ -- $ -- $ (18) $ (24)
Long-term (see Note 18)................................... (320) (230) (331) (318)
Deferred pension cost (see Note 13)......................... 109 116 -- --
Accumulated other comprehensive loss(1)..................... 132 48 -- --
----- ----- ----- -----
Net amount recognized..................................... $ (79) $ (66) $(349) $(342)
===== ===== ===== =====
</TABLE>
- ---------------
(1) Before reduction for associated deferred tax
savings of $43 and $17 at December 31, 1998
and 1997, respectively (see Note 21).
F-30
<PAGE> 177
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<TABLE>
<S> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS AT END OF YEAR
Discount rate(1)............................................ 6.50% 7.00% 6.50% 7.00%
Rate of compensation increase(1)............................ 5.15% 5.15% 5.15% 5.15%
Expected return on plan assets(1)........................... 9.00% 9.00% -- --
Health care escalation rate................................. -- -- 4.50% 4.50%
</TABLE>
- ---------------
(1) Represents rates for U.S. plans; similar economic assumptions were used for
non-U.S. plans, with the exception of the United Kingdom where discount
rates of 6 percent and 7.25 percent were used at year end 1998 and 1997,
respectively.
At December 31, 1998, U.S. defined benefit plan assets consisted
principally of common stocks, including 471,667 shares of DuPont.
24. INVESTING ACTIVITIES
Purchases of property, plant and equipment in 1997 include $929 for
Upstream natural gas properties in South Texas (see Supplementary Petroleum
Data).
Non-cash additions to property, plant and equipment totaled $162 and $127
for the years 1998 and 1997, respectively.
Proceeds from sales of assets in 1998 include $245 from the sale of certain
Upstream properties in the U.S. and North Sea, $156 for various U.S. Downstream
assets, and $54 from sale of a Downstream office building in Europe. Proceeds in
1997 include $272 from the sale of certain Upstream North Sea properties.
25. FINANCIAL INSTRUMENTS AND OTHER RISK MANAGEMENT ACTIVITIES
Conoco operates in the worldwide crude oil, refined product, natural gas,
natural gas liquids and electric power markets and is exposed to fluctuations in
hydrocarbon prices, foreign currency rates and interest rates that can affect
the revenues and cost of operating, investing and financing. Conoco's management
has used and intends to use financial and commodity-based derivative contracts
to reduce the risk in overall earnings and cash flow when the benefits provided
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 rate and
interest rate risks. The Conoco Risk Management Committee has ongoing
responsibility for the content of this policy and has principal oversight
responsibility to ensure the Company is in compliance with the policy and that
procedures and controls are in place for the use of commodity, foreign currency
and interest rate instruments. These procedures clearly establish derivative
control and valuation processes, routine monitoring and reporting requirements,
and counterparty credit approval procedures. Additionally, the Company's
internal audit group conducts reviews of these risk management activities to
assess the adequacy of internal controls. The audit results are reviewed by the
Conoco Risk Management Committee and by management.
The counterparties to these contractual arrangements are limited to major
financial institutions and other established companies in the petroleum
industry. 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
F-31
<PAGE> 178
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
accumulate. The Company has not experienced nonperformance by counterparties to
these contracts, and no material loss would be expected from any such
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 price exposure 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 as well as
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
energy business.
Conoco's policy is to generally be exposed to market pricing for commodity
purchases and sales. 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 price risk.
Trading is defined as any transaction that does not meet the definition of
hedging. After-tax gain/loss from risk trading has not been material.
FOREIGN CURRENCY RISK
Conoco has foreign currency exchange rate risk resulting from operations in
over 40 countries around the world. The Company does not comprehensively hedge
its exposure to currency rate changes, although it may choose to selectively
hedge exposures to foreign currency rate risk. Examples include firm commitments
for capital projects, certain local currency tax payments, and cash returns from
net investments in foreign affiliates to be remitted within the coming year.
At December 31, 1998, the Company had no open forward exchange contracts.
At December 31, 1997, the Company had open forward exchange contracts designated
as a hedge of firm foreign currency commitments. The notional amount of these
contracts was $50 and the estimated fair value was $38.
INTEREST RATE RISK
Prior to the Offerings, the Company had no significant interest rate risk
to manage. Subsequent to the Offerings, however, the Company intends to manage
any material risk arising from exposure to interest rates by using a combination
of financial derivative instruments as part of a program to manage the fixed and
floating interest rate mix of the total debt portfolio and related overall cost
of borrowing.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying values of most financial instruments are based on historical
costs. The carrying values of marketable securities, receivables, payables and
short-term obligations approximate their fair value because of their short
maturity. Long-term receivables from and long-term borrowings due to related
parties approximate fair value because associated interest rates are market
based. At December 31, 1998, however, long-term borrowings due related parties
included $4,589 at a fixed rate with fair value estimated at $4,624. Excluding
amounts due related parties, the estimated fair value of other long-term
borrowings outstanding at December 31, 1998 and 1997 of $93 and $106,
respectively, was $96 and $108, respectively. These estimates were based on
quoted market prices for the same or similar issues, or the current rates
offered to the Company for issues with the same remaining maturities.
F-32
<PAGE> 179
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
SUMMARY OF OUTSTANDING DERIVATIVE FINANCIAL INSTRUMENTS
Set forth below is a summary of the fair values, carrying amounts and
notional values of outstanding commodity financial instruments at December 31,
1998 and 1997.
Notional amounts represent the face amount of the contractual arrangements
and are not a measure of market or credit exposure. The fair value 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 the balance sheet date.
Carrying amounts represent the receivable (payable) recorded in the Consolidated
Balance Sheet.
<TABLE>
<CAPTION>
FAIR CARRYING NOTIONAL
COMMODITY DERIVATIVES VALUE AMOUNT VALUE
--------------------- ----- -------- --------
<S> <C> <C> <C>
December 31, 1998:
Hedging................................................... $(10) $(6) $ 422
Trading................................................... 2 -- 330
December 31, 1997:
Hedging................................................... $ 10 $12 $1,037
Trading................................................... (2) (1) 1,089
</TABLE>
Estimated fair values for hedging instruments only represent the value of
the hedge component of the transactions and, thus, are not indicative of the
fair value of the Company's overall hedged position.
26. COMMITMENTS AND CONTINGENT LIABILITIES
The Company uses various leased facilities and equipment in its operations.
Future minimum lease payments under noncancelable operating leases are $246,
$226, $216, $199 and $194 for the years 1999, 2000, 2001, 2002 and 2003,
respectively, and $580 for subsequent years, and are not reduced by
noncancelable minimum sublease rentals due in the future in the amount of $69.
Rental expense under operating leases was $198 in 1998, $132 in 1997 and $118 in
1996.
The Company has various purchase commitments for materials, supplies,
services 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 December 31, 1998, the Company has obligations
under international contracts to purchase, over periods up to 20 years, natural
gas at prices that were in excess of year-end 1998 market prices. No material
annual loss is expected from these long-term commitments.
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 payments, severance tax payments and other payments, including
claims 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 assumed responsibility for current and future claims related to
certain discontinued chemicals and agricultural chemicals businesses operated by
Conoco 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 consolidated financial position of
the Company.
The Company is also subject to contingencies under 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
F-33
<PAGE> 180
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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. The Company has
assumed environmental remediation liabilities from DuPont related to certain
discontinued chemicals and agricultural chemicals businesses operated by Conoco
in the past that are included in the environmental accrual. At December 31, 1998
and 1997, such accrual amounted to $129 and $144, respectively, 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 consolidated 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. These indirect
guarantees totaled $18 and $19 at December 31, 1998 and 1997, respectively. The
Company, as of August 1, 1998, terminated a multiparty account banking agreement
that 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. Management believes the exposure under this
agreement is not material. In addition, the Company or DuPont, on behalf of and
indemnified by, the Company, had directly guaranteed obligations of certain
affiliated companies and others. These guarantees totaled $1,353 and $1,131 at
December 31, 1998 and 1997, respectively. The increase in 1998 is primarily
related to additional financing associated with the construction of drillships
and cogeneration facilities in South Texas. The balance at December 31, 1998,
includes a drillship construction guarantee of $260 that was eliminated through
successful completion in early 1999. No material loss is anticipated by reason
of such agreements and guarantees.
The Company's operations, particularly oil and gas exploration and
production, can be affected by changing economic, regulatory and political
environments in the various countries, including the United States, in which it
operates. In certain locations, host governments have imposed restrictions,
controls and taxes, and in others, political conditions have existed that may
threaten the safety of employees and the Company's continued presence in those
countries. Internal unrest or strained relations between a host government and
the Company or other governments may affect the Company's operations. Those
developments have, at times, significantly affected the Company's operations and
related results and are carefully considered by management when evaluating the
level of current and future activity in such countries.
Areas in which the Company has significant operations include the United
States, the United Kingdom, Norway, Germany, Venezuela, the United Arab
Emirates, Indonesia, Russia, Canada, the Czech Republic, Malaysia and Nigeria.
F-34
<PAGE> 181
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
27. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
Conoco is involved in both the Upstream and Downstream operating segments
of the petroleum business that comprise the structure used by senior management
to make key operating decisions and assess performance. Activities of the
Upstream operating segment include exploring for, and developing, producing and
selling, crude oil, natural gas and natural gas liquids. Activities of the
Downstream operating segment include refining crude oil and other feedstocks
into petroleum products, buying and selling crude oil and refined products and
transporting, distributing and marketing petroleum products. The Company has
four reporting segments for its Upstream and Downstream operating segments,
reflecting geographic division between the United States and International.
Corporate and Other includes general corporate expenses, financing costs and
other non-operating items, and results for electric power and related-party
insurance operations. The Company sells its products worldwide; however, in
1998, about 57 percent and 39 percent of sales were made in the United States
and Europe, respectively. Major products include crude oil, natural gas and
refined products that are sold primarily in the energy and transportation
markets. The Company's sales are not materially dependent on a single customer
or small group of customers. Transfers between segments are on the basis of
estimated market values.
<TABLE>
<CAPTION>
UPSTREAM DOWNSTREAM
----------------------- ----------------------- CORPORATE
UNITED UNITED AND
SEGMENT INFORMATION STATES INTERNATIONAL STATES INTERNATIONAL OTHER CONSOLIDATED
- ------------------- ------ ------------- ------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1998
Sales and Other Operating Revenues(2)
Refined Products.......................... $ -- $ -- $ 6,082 $7,647 $ -- $13,729
Crude Oil................................. 14 774 2,650 299 -- 3,737
Natural Gas............................... 2,416 723 -- -- -- 3,139
Other..................................... 770 104 217 351 749 2,191
------ ------ ------- ------ ------ -------
Total............................... 3,200 1,601 8,949 8,297 749 22,796
Transfers Between Segments.................. 308 378 89 181 -- --
------ ------ ------- ------ ------ -------
Total Operating Revenues............ $3,508 $1,979 $ 9,038 $8,478 $ 749 $22,796
====== ====== ======= ====== ====== =======
Operating Profit............................ $ 223 $ 482 $ 149 $ 256 $ (379) $ 731
Equity in Earnings of Affiliates............ 1 (14) 56 (20) (1) 22
Corporate Non-Operating Items:
Interest and Debt Expense................. (199) (199)
Interest Income (net of misc. interest
expense)................................ 89 89
Other..................................... 51 51
Provision for Income Taxes.................. (5) (185) (70) (80) 96 (244)
------ ------ ------- ------ ------ -------
Net Income (Loss)(1)........................ $ 219 $ 283 $ 135 $ 156 $ (343) $ 450
====== ====== ======= ====== ====== =======
Capital Employed at December 31:
Excluding Investment in Affiliates........ $2,349 $2,849 $ 1,245 $ 989 $ 384 $ 7,816
Investment in Affiliates.................. 191 371 248 531 22 1,363
------ ------ ------- ------ ------ -------
Total(3)............................ $2,540 $3,220 $ 1,493 $1,520 $ 406 $ 9,179
====== ====== ======= ====== ====== =======
Depreciation, Depletion and Amortization.... $ 383 $ 457 $ 139 $ 133 $ 1 $ 1,113
Dry Hole Costs and Impairment of Unproved
Properties................................ $ 59 $ 104 $ 163
Other Significant Non-Cash Items:
Stock Option Provision.................... $ 236 $ 236
Inventory Write-down to Market............ $ 6 $ 63 $ 28 $ 97
Capital Expenditures and Investments(4)..... $ 788 $1,177 $ 201 $ 332 $ 18 $ 2,516
</TABLE>
F-35
<PAGE> 182
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
UPSTREAM DOWNSTREAM
----------------------- ----------------------- CORPORATE
UNITED UNITED AND
SEGMENT INFORMATION STATES INTERNATIONAL STATES INTERNATIONAL OTHER CONSOLIDATED
- ------------------- ------ ------------- ------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1997
Sales and Other Operating Revenues(2)
Refined Products.......................... $ -- $ -- $ 7,664 $8,165 $ -- $15,829
Crude Oil................................. 24 1,191 3,483 181 -- 4,879
Natural Gas............................... 2,415 556 -- -- -- 2,971
Other..................................... 909 159 247 293 509 2,117
------ ------ ------- ------ ------ -------
Total............................... 3,348 1,906 11,394 8,639 509 25,796
Transfers Between Segments.................. 599 622 115 191 -- --
------ ------ ------- ------ ------ -------
Total Operating Revenues............ $3,947 $2,528 $11,509 $8,830 $ 509 $25,796
====== ====== ======= ====== ====== =======
Operating Profit............................ $ 489 $1,174 $ 287 $ 185 $ (132) $ 2,003
Equity in Earnings of Affiliates............ 18 (7) 30 (1) 40
Corporate Non-Operating Items:
Interest and Debt Expense................. (36) (36)
Interest Income (net of misc. interest
expense)................................ 77 77
Other..................................... 23 23
Provision for Income Taxes.................. (62) (728) (101) (93) (26) (1,010)
------ ------ ------- ------ ------ -------
Net Income (Loss)(1)........................ $ 445 $ 439 $ 216 $ 91 $ (94) $ 1,097
====== ====== ======= ====== ====== =======
Capital Employed at December 31:
Excluding Investment in Affiliates........ $2,390 $2,299 $ 1,421 $1,130 $ 903 $ 8,143
Investment in Affiliates.................. 155 256 226 425 23 1,085
------ ------ ------- ------ ------ -------
Total(3)............................ $2,545 $2,555 $ 1,647 $1,555 $ 926 $ 9,228
====== ====== ======= ====== ====== =======
Depreciation, Depletion and Amortization.... $ 268 $ 578 $ 145 $ 188 $ 1,179
Dry Hole Costs and Impairment of Unproved
Properties................................ $ 63 $ 106 $ 169
Capital Expenditures and Investments(4)..... $1,534 $ 999 $ 227 $ 331 $ 23 $ 3,114
</TABLE>
F-36
<PAGE> 183
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
UPSTREAM DOWNSTREAM
----------------------- ----------------------- CORPORATE
UNITED UNITED AND
SEGMENT INFORMATION STATES INTERNATIONAL STATES INTERNATIONAL OTHER CONSOLIDATED
- ------------------- ------ ------------- ------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
\
1996
Sales and Other Operating Revenues(2)
Refined Products.......................... $ -- $ -- $ 7,355 $8,598 $ -- $15,953
Crude Oil................................. 29 1,359 2,897 1 -- 4,286
Natural Gas............................... 1,907 471 -- -- -- 2,378
Other..................................... 847 113 293 281 79 1,613
------ ------ ------- ------ ------ -------
Total............................... 2,783 1,943 10,545 8,880 79 24,230
Transfers Between Segments.................. 587 572 125 151 -- --
------ ------ ------- ------ ------ -------
Total Operating Revenues............ $3,370 $2,515 $10,670 $9,031 $ 79 $24,230
====== ====== ======= ====== ====== =======
Operating Profit............................ $ 328 $1,231 $ 244 $ 202 $ (118) $ 1,887
Equity in Earnings of Affiliates............ 11 (41) 8 (3) (25)
Corporate Non-Operating Items:
Interest and Debt Expense................. (74) (74)
Interest Income (net of misc. interest
expense)................................ 124 124
Other..................................... (11) (11)
Provision for Income Taxes.................. (25) (823) (80) (82) (28) (1,038)
------ ------ ------- ------ ------ -------
Net Income (Loss)(1)........................ $ 314 $ 367 $ 172 $ 117 $ (107) $ 863
====== ====== ======= ====== ====== =======
Capital Employed at December 31:
Excluding Investment in Affiliates........ $1,371 $3,042 $ 1,538 $1,195 $ 995 $ 8,141
Investment in Affiliates.................. 105 129 154 315 -- 703
------ ------ ------- ------ ------ -------
Total(3)............................ $1,476 $3,171 $ 1,692 $1,510 $ 995 $ 8,844
====== ====== ======= ====== ====== =======
Depreciation, Depletion and Amortization.... $ 307 $ 485 $ 156 $ 137 $ 1,085
Dry Hole Costs and Impairment of Unproved
Properties................................ $ 65 $ 72 $ 137
Capital Expenditures and Investments(4)..... $ 400 $ 864 $ 218 $ 462 $ 1,944
- ------------
(1) Includes After-Tax Benefits (Charges)
from Special Items:
1998
Asset Sales........................... $ 41 $ 54 $ -- $ 12 $ -- $ 107
Property Impairments.................. (32) (6) -- -- -- (38)
Inventory Write-downs................. (4) -- (40) (19) -- (63)
Employee Separation Costs............. (19) (23) (5) (5) -- (52)
Environmental Litigation Charges...... -- -- (28) -- (14) (42)
Stock Option Provision................ -- -- -- -- (183) (183)
------ ------ ------- ------ ------ -------
Total........................... $ (14) $ 25 $ (73) $ (12) $ (197) $ (271)
====== ====== ======= ====== ====== =======
1997
Asset Sales........................... $ 49 $ 191 $ -- $ -- $ -- $ 240
Property Impairments.................. -- (112) -- (55) -- (167)
Environmental Litigation Charges...... -- -- (23) -- -- (23)
Tax Rate Changes...................... -- 19 -- 11 -- 30
Total........................... $ 49 $ 98 $ (23) $ (44) $ -- $ 80
====== ====== ======= ====== ====== =======
</TABLE>
F-37
<PAGE> 184
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
UPSTREAM DOWNSTREAM
----------------------- ----------------------- CORPORATE
UNITED UNITED AND
SEGMENT INFORMATION STATES INTERNATIONAL STATES INTERNATIONAL OTHER CONSOLIDATED
- ------------------- ------ ------------- ------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996
Asset Sales........................... $ 16 $ -- $ -- $ 19 $ -- $ 35
Property Impairments.................. -- (63) -- -- -- (63)
Employee Separation Costs............. (7) (4) (8) (3) -- (22)
Environmental Litigation Insurance
Recoveries.......................... -- -- 44 -- -- 44
------ ------ ------- ------ ------ -------
Total........................... $ 9 $ (67) $ 36 $ 16 $ -- $ (6)
====== ====== ======= ====== ====== =======
</TABLE>
(2) Includes sales of purchased products substantially at cost:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Buy/sell supply transactions settled in cash:
Crude oil................................................. $2,728 $3,566 $2,820
Refined products.......................................... 438 683 729
Natural gas resales......................................... 1,109 773 560
Electric power resales...................................... 729 487 58
</TABLE>
(3) Capital Employed is equivalent to the sum of Stockholders' Equity/Owner's
Net Investment and Borrowings (both short-term and long-term portions).
Borrowings include amounts due related parties, net of associated Notes
Receivable. Amounts identified for operating segments comprise those assets
and liabilities not deemed to be of a general corporate nature, such as cash
and cash equivalents, financing-oriented items and aviation investment.
(4) Includes investments in affiliates.
<TABLE>
<CAPTION>
UNITED UNITED OTHER
GEOGRAPHIC INFORMATION STATES KINGDOM GERMANY NORWAY COUNTRIES CONSOLIDATED
- ---------------------- ------- ------- ------- ------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1998
Sales and Other Operating Revenues(1)... $12,878 $4,305 $2,881 $ 289 $2,443 $22,796
Long-Lived Assets at December 31(2)..... $ 5,122 $3,577 $ 195 $1,547 $ 972 $11,413
1997
Sales and Other Operating Revenues(1)... $15,229 $4,480 $3,007 $ 406 $2,674 $25,796
Long-Lived Assets at December 31(2)..... $ 4,956 $3,284 $ 168 $1,559 $ 861 $10,828
1996
Sales and Other Operating Revenues(1)... $13,386 $4,241 $3,260 $ 508 $2,835 $24,230
Long-Lived Assets at December 31(2)..... $ 4,086 $3,201 $ 203 $1,757 $ 835 $10,082
</TABLE>
- ---------------
(1) Revenues are attributed to countries based on location of the selling
entity.
(2) Represents Net Property, Plant and Equipment.
28. OTHER FINANCIAL INFORMATION
Research and development expenses were $42, $44 and $41 for the years 1998,
1997 and 1996, respectively.
F-38
<PAGE> 185
CONOCO INC.
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
OIL AND GAS PRODUCING ACTIVITIES
Supplemental Petroleum Data disclosures are presented in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 69,
"Disclosures About Oil and Gas Producing Activities."
Accordingly, volumes of reserves and production exclude royalty interests
of others, and royalty payments are reflected as reductions in revenues.
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
------------------------ --------------------- ----------------------- ---------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
------ ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
COMPANIES
Revenues:
Sales.............. $1,938 $2,603 $2,479 $ 643 $ 787 $ 621 $ 831 $1,181 $1,204 $ 464 $ 635 $ 654
Transfers.......... 646 849 927 272 272 363 374 577 566 -- -- (2)
Exploration(1)....... (380) (457) (404) (128) (134) (151) (108) (131) (159) (144) (192) (94)
Production........... (806) (854) (755) (303) (320) (297) (382) (409) (372) (121) (125) (86)
DD&A................. (799) (827) (770) (345) (246) (282) (372) (419) (440) (82) (162)(2) (48)
Other(3)............. 148 321 69 104 106 48 48 215 (1) (4) -- 22
Income taxes......... (201) (847) (912) (36) (109) (47) (100) (393) (436) (65) (345) (429)
------ ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- -----
Results of
operations....... 546 788 634 207 356 255 291 621 362 48 (189) 17
EQUITY AFFILIATES
Results of
operations......... (4) 30 32 4 7 7 5 29 25 (13) (6) --
------ ------ ------ ----- ----- ----- ----- ------ ------ ----- ----- -----
Total........ $ 542 $ 818 $ 666 $ 211 $ 363 $ 262 $ 296 $ 650 $ 387 $ 35 $(195) $ 17
====== ====== ====== ===== ===== ===== ===== ====== ====== ===== ===== =====
</TABLE>
- ---------------
(1) Includes exploration operating expenses, dry hole costs, impairment of
unproved properties and depreciation.
(2) Includes charges of $112 for impairment of non-revenue producing properties.
(3) Includes gain/(loss) on disposal of fixed assets and other miscellaneous
revenues and expenses.
F-39
<PAGE> 186
CONOCO INC.
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT
ACTIVITIES(1)
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
------------------------ --------------------- ------------------- --------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
------ ------ ------ ---- ------ ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED COMPANIES
Property acquisitions
Proved(2)........................ $ 254 $ 152 $ 21 $ 24 $ 148 $ 14 $230(3) $ -- $ -- $ -- $ 4 $ 7
Unproved......................... 93 831 42 55 723(4) 41 25 95 -- 13 13 1
Exploration....................... 436 450 445 119 107 144 114 135 169 203 208 132
Development....................... 1,019 921 828 542 289 203 403 568 543 74 64 82
------ ------ ------ ---- ------ ---- ---- ---- ---- ---- ---- ----
Total...................... 1,802 2,354 1,336 740 1,267 402 772 798 712 290 289 222
EQUITY AFFILIATES
Total Equity Affiliates........... 564 263 19 30 12 5 2 2 14 532(5) 249(5) --
------ ------ ------ ---- ------ ---- ---- ---- ---- ---- ---- ----
Total...................... $2,366 $2,617 $1,355 $770 $1,279 $407 $774 $800 $726 $822 $538 $222
====== ====== ====== ==== ====== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(1) These data comprise all costs incurred in the activities shown, whether
capitalized or charged to expense at the time they were incurred.
(2) Does not include properties acquired through property trades.
(3) Includes acquisition costs associated with petroleum reserves acquired in
the North Sea.
(4) Includes acquisition costs associated with gas reserves acquired in the
South Texas Lobo trend.
(5) Represents Conoco's equity share of the Petrozuata heavy oil venture in
Venezuela.
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE
--------------------------- ------------------------- -------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------- ------- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED COMPANIES
Gross costs:
Proved properties..... $13,488 $12,420 $11,914 $5,013 $4,676 $4,255 $6,942(1) $6,276 $6,268
Unproved properties... 1,159 1,491 913 634 774(2) 262 262 432 444
Less: Accumulated
DD&A.................. 7,469 7,201 6,886 2,983 2,907 2,816 3,182 3,008 2,954
------- ------- ------- ------ ------ ------ ------ ------ ------
Total net
costs.......... 7,178 6,710 5,941 2,664 2,543 1,701 4,022 3,700 3,758
EQUITY AFFILIATES
Net costs of equity
affiliates............ 976 441 199 66 45 37 132 147 162
------- ------- ------- ------ ------ ------ ------ ------ ------
Total........... $ 8,154 $ 7,151 $ 6,140 $2,730 $2,588 $1,738 $4,154 $3,847 $3,920
======= ======= ======= ====== ====== ====== ====== ====== ======
<CAPTION>
OTHER REGIONS
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
CONSOLIDATED COMPANIES
Gross costs:
Proved properties..... $1,533 $1,468 $1,391
Unproved properties... 263 285 207
Less: Accumulated
DD&A.................. 1,304 1,286 1,116
------ ------ ------
Total net
costs.......... 492 467 482
EQUITY AFFILIATES
Net costs of equity
affiliates............ 778(3) 249(3) --
------ ------ ------
Total........... $1,270 $ 716 $ 482
====== ====== ======
</TABLE>
- ---------------
(1) Includes acquisition costs associated with petroleum reserves acquired in
the North Sea.
(2) Includes acquisition costs associated with gas reserves acquired in the
South Texas Lobo trend.
(3) Represents Conoco's equity share of the Petrozuata heavy oil venture in
Venezuela.
F-40
<PAGE> 187
CONOCO INC.
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(IN MILLIONS OF BARRELS)
ESTIMATED PROVED RESERVES OF OIL(1)
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
-------------------- ------------------ ------------------ ------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
----- ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROVED RESERVES OF
CONSOLIDATED COMPANIES
Beginning of year............. 893 926 933 277 299 294 421 413 408 195 214 231
Revisions and other changes... 42 54 55 14 3 11 20 43 36 8 8 8
Extensions and discoveries.... 41 62 75 15 12 31 6 44 35 20 6 9
Improved recovery............. 14 3 4 -- 3 4 11 -- -- 3 -- --
Purchase of reserves(2)....... 8 5 (1) -- 4 (1) 8 1 -- -- -- --
Sale of reserves(3)........... (16) (27) (12) (16) (11) (10) -- (16) -- -- -- (2)
Production.................... (119) (130) (128) (29) (33) (30) (56) (64) (66) (34) (33) (32)
----- ----- ---- --- --- --- --- --- --- --- --- ---
End of year(4)................ 863 893 926 261 277 299 410 421 413 192 195 214
----- ----- ---- --- --- --- --- --- --- --- --- ---
PROVED RESERVES OF EQUITY
AFFILIATES
Beginning of year............. 731 47 44 -- -- -- 51 47 44 680 -- --
Revisions and other changes... 5 10 8 -- -- -- 5 10 8 -- -- --
Extensions and discoveries.... -- 680 -- -- -- -- -- -- -- -- 680(5) --
Production.................... (8) (6) (5) -- -- -- (6) (6) (5) (2) -- --
----- ----- ---- --- --- --- --- --- --- --- --- ---
End of year................... 728 731 47 -- -- -- 50 51 47 678 680 --
----- ----- ---- --- --- --- --- --- --- --- --- ---
Total................. 1,591 1,624 973 261 277 299 460 472 460 870 875 214
===== ===== ==== === === === === === === === === ===
PROVED DEVELOPED RESERVES OF
CONSOLIDATED COMPANIES
Beginning of year............. 600 630 684 242 258 265 174 185 217 184 187 202
End of year................... 622 600 630 222 242 258 228 174 185 172 184 187
PROVED DEVELOPED RESERVES OF
EQUITY AFFILIATES
Beginning of year............. 43 39 32 -- -- -- 43 39 32 -- -- --
End of year................... 92 43 39 -- -- -- 42 43 39 50 -- --
</TABLE>
- ---------------
(1) Oil reserves comprise crude oil and condensate and natural gas liquids
expected to be removed for the Company's account from its natural gas
deliveries.
(2) Includes reserves acquired through property trades.
(3) Includes reserves disposed of through property trades.
(4) Includes reserves of 123, 87 and 89 at year-end 1998, 1997 and 1996,
respectively, attributable to Conoco Oil & Gas Associates L.P. in which
there is a minority interest with an approximate 20 percent average revenue
share (see Note 19).
(5) Represents Conoco's equity share of the Petrozuata heavy oil venture in
Venezuela.
F-41
<PAGE> 188
CONOCO INC.
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(IN BILLION CUBIC FEET)
ESTIMATED PROVED RESERVES OF GAS
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE OTHER REGIONS
--------------------- ---------------------- --------------------- ---------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROVED RESERVES OF
CONSOLIDATED COMPANIES
Beginning of year........... 5,491 5,063 4,709 2,235 1,822 1,891 3,060 3,068 2,649 196 173 169
Revisions and other
changes................... 25 134 41 18 -- 79 (20) 97 (39) 27 37 1
Extensions and
discoveries............... 961 518 780 624 453 176 111 59 574 226 6 30
Improved recovery........... -- 1 -- -- 1 -- -- -- -- -- -- --
Purchase of reserves(1)..... 116 270 41 4 264(2) 3 112 -- 36 -- 6 2
Sale of reserves(3)......... (281) (62) (71) (243) (46) (57) (38) (7) -- -- (9) (14)
Production.................. (510) (433) (437) (319) (259) (270) (172) (157) (152) (19) (17) (15)
----- ----- ----- ----- ----- ----- ----- ----- ----- --- --- ---
End of year(4).............. 5,802 5,491 5,063 2,319 2,235 1,822 3,053 3,060 3,068 430 196 173
----- ----- ----- ----- ----- ----- ----- ----- ----- --- --- ---
PROVED RESERVES OF EQUITY
AFFILIATES
Beginning of year........... 370 333 339 370 333 339 -- -- -- -- -- --
Revisions and other
changes................... (12) (6) -- (12) (6) -- -- -- -- -- -- --
Extensions and
discoveries............... 1 49 -- 1 49 -- -- -- -- -- -- --
Purchase of reserves........ 27 -- -- 27 -- -- -- -- -- -- -- --
Production.................. (5) (6) (6) (5) (6) (6) -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- --- --- ---
End of Year................. 381 370 333 381 370 333 -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- --- --- ---
Total............... 6,183 5,861 5,396 2,700 2,605 2,155 3,053 3,060 3,068 430 196 173
===== ===== ===== ===== ===== ===== ===== ===== ===== === === ===
PROVED DEVELOPED RESERVES OF
CONSOLIDATED COMPANIES
Beginning of year........... 3,061 2,843 2,933 1,801 1,672 1,733 1,091 1,041 1,071 169 130 129
End of year................. 3,991 3,061 2,843 1,828 1,801 1,672 1,954 1,091 1,041 209 169 130
PROVED DEVELOPED RESERVES OF
EQUITY AFFILIATES
Beginning of year........... 40 36 40 40 36 40 -- -- -- -- -- --
End of year................. 66 40 36 66 40 36 -- -- -- -- -- --
</TABLE>
- ---------------
(1) Includes reserves acquired through property trades.
(2) Includes reserves acquired in the South Texas Lobo trend.
(3) Includes reserves disposed of through property trades.
(4) Includes reserves of 121, 115 and 104 at year-end 1998, 1997 and 1996,
respectively, attributable to Conoco Oil & Gas Associates L.P. in which
there is a minority interest with an approximate 20 percent average revenue
share (see Note 19).
F-42
<PAGE> 189
CONOCO INC.
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The information on the following page has been prepared in accordance with
SFAS No. 69, which requires the standardized measure of discounted future net
cash flows to be based on year-end sales prices, costs and statutory income tax
rates and a 10 percent annual discount rate. Specifically, the per-barrel oil
sales prices used to calculate the December 31, 1998, data averaged $9.40 for
the United States, $10.69 for Europe and $10.67 for Other Regions, and the gas
prices per thousand cubic feet averaged approximately $1.70 for the United
States, $2.29 for Europe and $1.90 for Other Regions. Because prices used in the
calculation are as of December 31, the standardized measure could vary
significantly from year to year based on market conditions at that specific
date.
The projections should not be viewed as realistic estimates of future cash
flows nor should the "standardized measure" be interpreted as representing
current value to the Company. Material revisions to estimates of proved reserves
may occur in the future, development and production of the reserves may not
occur in the periods assumed, actual prices realized are expected to vary
significantly from those used and actual costs may also vary. The Company's
investment and operating decisions are not based on the information presented on
the following page, but on a wide range of reserve estimates that includes
probable as well as proved reserves, and on different price and cost assumptions
from those reflected in this information.
F-43
<PAGE> 190
CONOCO INC.
SUPPLEMENTAL PETROLEUM DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
<TABLE>
<CAPTION>
TOTAL WORLDWIDE UNITED STATES EUROPE
---------------------------- --------------------------- ---------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------- ------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED COMPANIES
Future cash flows:
Revenues............. $20,340 $26,666 $ 34,366 $ 6,148 $ 8,355 $10,044 $11,376 $15,119 $19,364
Production costs..... (8,271) (9,251) (10,406) (2,665) (2,997) (3,085) (4,742) (5,387) (6,378)
Development costs.... (1,548) (1,586) (1,669) (370) (446) (283) (823) (1,094) (1,294)
Income tax expense... (3,904) (6,822) (10,364) (546) (1,175) (2,041) (2,239) (3,921) (5,179)
------- ------- -------- ------- ------- ------- ------- ------- -------
Future net cash
flows................ 6,617 9,007 11,927 2,567 3,737 4,635 3,572 4,717 6,513
Discounted to present
value at a 10% annual
rate................. (2,414) (3,384) (4,638) (1,055) (1,552) (2,088) (1,151) (1,679) (2,317)
------- ------- -------- ------- ------- ------- ------- ------- -------
Total(1)....... 4,203 5,623 7,289 1,512 2,185 2,547 2,421 3,038 4,196
------- ------- -------- ------- ------- ------- ------- ------- -------
EQUITY AFFILIATES
Future cash flows:
Revenues............. 5,327 8,520 1,971 1,001 893 968 427 651 1,003
Production costs..... (2,228) (2,640) (597) (346) (267) (242) (266) (315) (355)
Development costs.... (1,086) (1,300) (180) (191) (174) (157) (28) (30) (23)
Income tax expense... (425) (1,090) (496) (166) (161) (193) (63) (170) (303)
------- ------- -------- ------- ------- ------- ------- ------- -------
Future net cash
flows................ 1,588 3,490 698 298 291 376 70 136 322
Discounted to present
value at a 10% annual
rate................. (1,327) (2,886) (398) (220) (226) (277) (9) (44) (121)
------- ------- -------- ------- ------- ------- ------- ------- -------
Total.......... 261 604 300 78 65 99 61 92 201
------- ------- -------- ------- ------- ------- ------- ------- -------
Total.......... $ 4,464 $ 6,227 $ 7,589 $ 1,590 $ 2,250 $ 2,646 $ 2,482 $ 3,130 $ 4,397
======= ======= ======== ======= ======= ======= ======= ======= =======
<CAPTION>
OTHER REGIONS
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
CONSOLIDATED COMPANIES
Future cash flows:
Revenues............. $ 2,816 $ 3,192 $ 4,958
Production costs..... (864) (867) (943)
Development costs.... (355) (46) (92)
Income tax expense... (1,119) (1,726) (3,144)
------- ------- -------
Future net cash
flows................ 478 553 779
Discounted to present
value at a 10% annual
rate................. (208) (153) (233)
------- ------- -------
Total(1)....... 270 400 546
------- ------- -------
EQUITY AFFILIATES
Future cash flows:
Revenues............. 3,899 6,976 --
Production costs..... (1,616) (2,058) --
Development costs.... (867) (1,096) --
Income tax expense... (196) (759) --
------- ------- -------
Future net cash
flows................ 1,220 3,063 --
Discounted to present
value at a 10% annual
rate................. (1,098) (2,616) --
------- ------- -------
Total.......... 122 447 --
------- ------- -------
Total.......... $ 392 $ 847 $ 546
======= ======= =======
</TABLE>
- ---------------
(1) Includes $263, $372 and $686 at year-end 1998, 1997 and 1996, respectively,
attributable to Conoco Oil & Gas Associates L.P. in which there is a
minority interest with an approximate 20 percent average revenue share (see
Note 19).
SUMMARY OF CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
CONSOLIDATED COMPANIES EQUITY AFFILIATES
----------------------------- ---------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1........................................ $ 5,623 $ 7,289 $ 5,158 $ 604 $ 300 $ 151
Sales and transfers of oil and gas produced, net of
production costs.......................................... (1,778) (2,583) (2,647) (2) (56) (73)
Development costs incurred during the period................ 1,019 921 828 555 218 20
Net changes in prices and in development and production
costs..................................................... (3,948) (4,974) 2,525 (1,155) (1,242) 119
Extensions, discoveries and improved recovery, less related
costs..................................................... 838 818 1,630 1 1,181 4
Revisions of previous quantity estimates.................... 189 439 553 2 37 83
Purchases (sales) of reserves in place -- net............... (92) 36 (54) 18 -- --
Accretion of discount....................................... 916 1,312 931 84 55 25
Net change in income taxes.................................. 1,541 2,285 (1,676) 128 16 (152)
Other....................................................... (105) 80 41 26 95 123
------- ------- ------- ------- ------- -----
Balance at December 31...................................... $ 4,203 $ 5,623 $ 7,289 $ 261 $ 604 $ 300
======= ======= ======= ======= ======= =====
</TABLE>
F-44
<PAGE> 191
CONOCO INC.
CONSOLIDATED QUARTERLY FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1998
Sales and Other Operating Revenues(1)........... $5,736 $5,612 $5,916 $5,532
Cost of Goods Sold and Other Expenses(2)........ 5,327 5,374 5,620 5,954
Interest and Debt Expense....................... 1 -- 107 91
Net Income (Loss)............................... 316(5) 214(6) 183 (263)(7)
Earnings Per Share
Basic(3)...................................... $ .72 $ .49 $ .42 $ (.45)
Diluted(3).................................... $ .72 $ .49 $ .42 $ (.45)
Market Price of Common Stock(4)
High.......................................... $25 3/4
Low........................................... $19 3/8
1997
Sales and Other Operating Revenues(1)........... $6,560 $5,915 $6,671 $6,650
Cost of Goods Sold and Other Expenses(2)........ 5,898 5,501 6,269 6,452
Interest and Debt Expense....................... 15 9 7 5
Net Income...................................... 341 246(8) 289(9) 221(10)
Earnings Per Share
Basic(3)...................................... $ .78 $ .56 $ .66 $ .51
Diluted(3).................................... $ .78 $ .56 $ .66 $ .51
</TABLE>
- ---------------
(1) Excludes other income of $98, $40, $113 and $121 in each of the quarters in
1998 and $55, $70, $28 and $314 in each of the quarters in 1997.
(2) Excludes provision for income taxes.
(3) Earnings per share for the year may not equal the sum of the quarterly
earnings per share due to changes in average shares outstanding. Earnings
per share for the periods prior to the Offerings was calculated using only
Class B Common Stock, as required by SFAS 128 (see Note 8 to the
consolidated financial statements). Management believes, considering the
substance of the Offerings, a more meaningful presentation of EPS would be
to reflect, as if outstanding for all periods presented, both Class A and
Class B Common Stock and certain dilutive effects. Using this presentation,
but excluding any pro forma adjustment for additional interest expense on
the dividend Note (see Note 3 to the consolidated financial statements),
quarterly EPS would be as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1998
Basic..................................... $.50 $.34 $.29 $(.42)
Diluted................................... $.50 $.34 $.29 $(.42)
1997
Basic..................................... $.54 $.39 $.46 $ .35
Diluted................................... $.54 $.39 $.45 $ .35
</TABLE>
(4) The Company's Class A Common Stock is listed on the New York Stock Exchange
(trading symbol: COC) and commenced trading on October 22, 1998. Prices are
as reported in the New York Stock Exchange, Inc. Composite Transactions
Tape.
F-45
<PAGE> 192
(5) Includes gain of $23 ($.04 per share-diluted) from sale of certain Upstream
properties.
(6) Includes net benefit of $3 ($.01 per share-diluted) reflecting: tax benefit
of $31 from sale of an international Upstream subsidiary and a $28 charge
for U.S. Downstream environmental litigation.
(7) Includes net charge of $297 ($.47 per share-diluted) reflecting: charges of
$183 for non-cash stock option compensation expense related to the
Offerings, $63 for write-down of inventories to market, $52 principally for
employee separation costs, $38 for impairment of long-lived Upstream
properties and $14 for environmental litigation charges and gains of $41
from the sale of U.S. producing properties and $12 from sale of an office
building.
(8) Includes gain of $24 ($.04 per share-diluted) from sale of U.S. producing
properties.
(9) Includes net benefit of $37 ($.05 per share-diluted) reflecting: gain of
$30 from sale of North Sea properties, benefit of $30 from foreign tax rate
changes, and charge of $23 for environmental litigation charges.
(10) Includes a net benefit of $19 ($.03 per share-diluted) reflecting: a gain
of $186 from the sale of North Sea and U.S. Upstream properties, a charge
of $112 for impairment of non-revenue producing properties, and a charge of
$55 for write-down of an office building held for sale.
F-46
<PAGE> 193
SCHEDULE A
TRANSACTIONS CONCERNING
COMMON STOCK OF DUPONT
Neither DuPont, nor any subsidiary of DuPont, nor, to DuPont's knowledge,
any of DuPont's executive officers or directors or associates of any of these
companies, has engaged in any transaction involving shares of DuPont Common
Stock during the period of forty business days prior to the date of this
Offering Circular-Prospectus except for the following transactions by certain
executive officers of DuPont:
<TABLE>
<CAPTION>
PERSON
EFFECTING DATE OF NUMBER OF DESCRIPTION OF PRICE PER
TRANSACTION TRANSACTION SHARES TRANSACTION SHARE
- ----------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C>
</TABLE>
As of , 1999, directors, executive officers and affiliates of
DuPont owned shares of DuPont Common Stock ( percent of the outstanding shares
of DuPont Common Stock). Certain of these persons have indicated to DuPont that
they intend to tender an aggregate of approximately shares of DuPont
Common Stock ( percent of the outstanding shares of DuPont Common Stock) under
the exchange offer as follows:
<TABLE>
<CAPTION>
APPROXIMATE
NAME NUMBER OF SHARES
- ---- ----------------
<S> <C>
</TABLE>
As of , 1999, shares of DuPont Comon Stock were owned
through a DuPont or a DuPont affiliated company savings plan.
A-1
<PAGE> 194
Manually signed facsimile copies of the letter of transmittal will be
accepted. The letter of transmittal, certificates for shares of DuPont Common
Stock and any other required documents should be sent or delivered by each
holder of DuPont Common Stock or his or her broker, dealer, commercial bank,
trust company or other nominee to the exchange agent at one of the following
addresses:
<TABLE>
<S> <C> <C>
If by mail: If by overnight courier: If by hand:
First Chicago Trust Company First Chicago Trust Company First Chicago Trust Company
of New York of New York of New York
Attn: Corporate Actions Dept. Attn: Corporate Actions Dept. c/o Securities Transfer and
P.O. Box 2569 8th Floor, Suite 4680 Reporting Service Inc.
Jersey City, NJ 07308-2569 14 Wall Street 100 William Street, Galleria
New York, NY 10005 New York, NY 10038
</TABLE>
If by facsimile transmission:
(For eligible institutions only)
( ) -
or
( ) -
Facsimile confirmation number:
( ) -
You may direct any questions and requests for assistance to the information
agent or the dealer manager at their respective addresses and telephone numbers
and locations listed below. Additional copies of this Offering
Circular-Prospectus, the letter of transmittal and other exchange offer material
may be obtained from the information agent or the dealer manager listed below.
You may also contact your broker, dealer, commercial bank or trust company for
assistance concerning the exchange offer.
The information agent for the exchange offer is:
United States and Canada
D.F. King & Co., Inc.
77 Water Street
New York, New York 10005
or
Call Toll-Free ( ) -
Outside United States and Canada
( ) - (Collect)
The dealer manager for the exchange offer is:
MORGAN STANLEY & CO.
INCORPORATED
1251 Avenue of the Americas
New York, New York 10020
( ) -
<PAGE> 195
INFORMATION NOT REQUIRED IN PROSPECTUS
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation -- a "derivative action"),
if they acted in good faith and in a manner they 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 their conduct
was unlawful. A similar standard is applicable in the case of derivative
actions, except that indemnification only extends to expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
action, and the statute required court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's charter, by-laws,
disinterested director vote, stockholder vote, agreement or otherwise.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personably liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (2) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3) for
payments of unlawful dividends or unlawful stock repurchases or redemptions, or
(4) for any transaction from which the director derived an improper personal
benefit.
Article 5E(2) of the certificate of incorporation of Conoco (the
"Registrant") provides that no director shall be personally liable to Conoco or
any of its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (1) for any breach of the director's duty of
loyalty to Conoco or its stockholders, (2) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, (3)
under section 174 of the Delaware General Corporation Law or (4) for any
transaction from which the director derived an improper personal benefit. Any
repeal or modification of such Article 5E(2) shall not adversely affect any
right or protection of a director of the Registrant for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
Conoco's by-laws provide for indemnification of directors and officers to the
maximum extent permitted by Delaware law.
Conoco has entered into indemnification agreements with each of its
directors and persons named in the Offering Circular-Prospectus constituting a
part of this Registration Statement (collectively, "Indemnitees"). Such
agreements provide that, to the fullest extent permitted by applicable law,
Conoco shall indemnify and hold each Indemnitee harmless from and against any
and all losses and expenses whatsoever (1) arising out of any event or
occurrence related to the fact that such Indemnitee is or was a director or
officer of Conoco, is or was serving in another capacity with Conoco, or by
reason of anything done or not done by such Indemnitee in such capacity and (2)
incurred in connection with any threatened, pending or completed legal
proceeding.
The Registrant may provide liability insurance for each director and
officer for certain losses arising from claims or changes made against them
while acting in their capabilities as directors or officers of Registrant,
whether or not Registrant would have the power to indemnify such person against
such liability, as permitted by law.
I
<PAGE> 196
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
3.1 Second Amended and Restated Certificate of Incorporation of
-- Conoco Inc.***
3.2 -- By-laws of Conoco Inc. as amended October 29, 1998***
4.1 Specimen Certificate for shares of Class A Common Stock of
-- the Registrant*
4.2 Specimen Certificate for shares of Class B Common Stock of
-- the Registrant*
4.3 -- Preferred Share Purchase Rights Agreement*
4.4 -- Promissory Note and Guaranty to DuPont Energy Company*
4.5 Promissory Note to DuPont Chemical and Energy Operations
-- Inc. (Norway)*
4.6 Promissory Note to DuPont Chemical and Energy Operations
-- Inc. (United Kingdom and Poland)*
4.7 -- Promissory Note and Guaranty to DuPont Energy Company*
4.8 -- Revolving Credit Agreement and Guaranty*
5.1 Opinion of R.A. Harrington, Senior Vice President, Legal and
General Counsel of Conoco Inc. regarding the legality of the
-- shares being registered*****
10.1 Restructuring, Transfer and Separation Agreement between
-- DuPont and Conoco*
10.2 -- Tax Sharing Agreement between DuPont and Conoco*
10.3 -- Employee Matters Agreement between DuPont and Conoco*
10.4 Information Systems and Telecommunications Carrier
Transitional Services and Facilities Lease Agreement between
-- DuPont and Conoco*
10.5 -- Transitional Services Agreement between DuPont and Conoco*
10.6 -- Registration Rights Agreement between DuPont and Conoco*
10.7 -- Natural Gas Supply Agreement between DuPont and Conoco*
10.8 Severance Agreement, dated May 10, 1998, between Conoco and
-- Archie W. Dunham*
10.9 -- 1998 Stock and Performance Incentive Plan*****
10.10 -- 1998 Key Employee Stock Performance Plan*****
10.11 -- Humber DME Agreement*
10.12 -- Deferred Compensation Plan for Nonemployee Directors*
10.13 -- Conoco Inc. Key Employee Severance Plan*
10.14 -- Conoco Inc. Key Employee Temporary Severance Plan*
10.15 -- Conoco Salary Deferral & Savings Restoration Plan*
10.16 -- Directors' Charitable Gift Plan*
10.17 -- Motor Carrier Contract between Sentinel and Conoco*
10.18 -- Mount Belvieu Agreements*
10.19 -- Form Indemnity Agreement with Directors*
21.1 -- List of Principal Subsidiaries of the Registrant****
23.1 -- Consent of PricewaterhouseCoopers LLP**
24 -- Power of Attorney (included on signature pages)
27 -- Financial Data Schedule****
99.1 -- Letter of transmittal*****
99.2 -- Notice of guaranteed delivery*****
99.3 Letter from the dealer manager to Brokers, Dealers,
-- Commercial Banks, Trust Companies and Other Nominees*****
99.4 Letter to Clients for use by Brokers, Dealers, Commercial
-- Banks, Trust Companies and other Nominees*****
99.5 Guidelines for Certification of Taxpayer Identification
-- Number on Substitute Form W-9*****
</TABLE>
II
<PAGE> 197
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
99.6 Letters from Trustees of DuPont or DuPont affiliated company
-- savings plans*****
99.7 Notice to Participants in a Blueprint brokerage account at
-- Merrill Lynch of DuPont*****
</TABLE>
- ---------------
* Incorporated by reference to the exhibit of the same number filed as part
of Conoco's Registration Statement on Form S-1, File No. 333-60119.
** Filed herein.
*** Incorporated by reference to the exhibit of the same number filed as part
of Conoco's Form 10-Q for the quarter ended September 30, 1998.
**** Incorporated by reference to the exhibit of the same number filed as part
of Conoco's Form 10-K for the year ended December 31, 1998.
***** To be filed by amendment.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report under section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report under section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant under the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Offering
Circular-Prospectus under Items 4, 10(b), 11 or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request. The
undersigned registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it becomes effective.
III
<PAGE> 198
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(a) To include any Offering Circular-Prospectus required by Section
10(a)(3) of the Securities Act:
(b) To reflect in the Offering Circular-Prospectus any facts or
events arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
Offering Circular-Prospectus filed with the Commission under Rule 424(b)
if, in the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
IV
<PAGE> 199
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on March 22, 1999.
CONOCO INC.
By: /s/ ARCHIE W. DUNHAM
------------------------------------
Name: Archie W. Dunham
Title: President and Chief
Executive Officer
POWER OF ATTORNEY
Each of the undersigned officers and directors of Conoco Inc., a Delaware
corporation, hereby constitutes and appoints Archie W. Dunham, Robert W.
Goldman, Rick A. Harrington and Gary M. Pfeiffer and each of them, severally, as
his attorney-in-fact and Agent, with full power of substitution and
resubstitution, in his name and on his behalf, to sign in any and all capacities
this Registration Statement and any and all amendments (including post-effective
amendments) and exhibits to this Registration Statement, any subsequent
Registration Statement for the same offering which may be filed under Rule
462(b) under the Securities Act of 1933, as amended, and any and all amendments
(including post-effective amendments) and exhibits thereto, and any and all
applications and other documents relating thereto, with the Securities and
Exchange Commission, with full power and authority to perform and do any and all
acts and things whatsoever which any such attorney or substitute may deem
necessary or advisable to be performed or done in connection with any or all of
the above-described matters, as fully as each of the undersigned could do if
personally present and acting, hereby ratifying and approving all acts of any
such attorney or substitute.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on March 22, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ ARCHIE W. DUNHAM President, Chief Executive Officer and Director
- ---------------------------------------------------
Archie W. Dunham
/s/ ROBERT W. GOLDMAN Senior Vice President, Finance, and Chief Financial Officer
- --------------------------------------------------- (Principal Financial Officer)
Robert W. Goldman
/s/ W. DAVID WELCH Controller (Principal Accounting Officer)
- ---------------------------------------------------
W. David Welch
/s/ EDGAR S. WOOLARD, JR. Chairman of the Board
- ---------------------------------------------------
Edgar S. Woolard, Jr.
/s/ RUTH R. HARKIN Director
- ---------------------------------------------------
Ruth R. Harkin
</TABLE>
V
<PAGE> 200
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ FRANK A. MCPHERSON Director
- ---------------------------------------------------
Frank A. McPherson
Director
- ---------------------------------------------------
Gary M. Pfeiffer
/s/ WILLIAM K. REILLY Director
- ---------------------------------------------------
William K. Reilly
/s/ WILLIAM R. RHODES Director
- ---------------------------------------------------
William R. Rhodes
/s/ FRANKLIN A. THOMAS Director
- ---------------------------------------------------
Franklin A. Thomas
</TABLE>
VI
<PAGE> 201
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
3.1 Second Amended and Restated Certificate of Incorporation of
-- Conoco Inc.***
3.2 -- By-laws of Conoco Inc. as amended October 29, 1998***
4.1 Specimen Certificate for shares of Class A Common Stock of
-- the Registrant*
4.2 Specimen Certificate for shares of Class B Common Stock of
-- the Registrant*
4.3 -- Preferred Share Purchase Rights Agreement*
4.4 -- Promissory Note and Guaranty to DuPont Energy Company*
4.5 Promissory Note to DuPont Chemical and Energy Operations
-- Inc. (Norway)*
4.6 Promissory Note to DuPont Chemical and Energy Operations
-- Inc. (United Kingdom and Poland)*
4.7 -- Promissory Note and Guaranty to DuPont Energy Company*
4.8 -- Revolving Credit Agreement and Guaranty*
5.1 Opinion of R.A. Harrington, Senior Vice President, Legal and
General Counsel of Conoco Inc. regarding the legality of the
-- shares being registered*****
10.1 Restructuring, Transfer and Separation Agreement between
-- DuPont and Conoco*
10.2 -- Tax Sharing Agreement between DuPont and Conoco*
10.3 -- Employee Matters Agreement between DuPont and Conoco*
10.4 Information Systems and Telecommunications Carrier
Transitional Services and Facilities Lease Agreement between
-- DuPont and Conoco*
10.5 -- Transitional Services Agreement between DuPont and Conoco*
10.6 -- Registration Rights Agreement between DuPont and Conoco*
10.7 -- Natural Gas Supply Agreement between DuPont and Conoco*
10.8 Severance Agreement, dated May 10, 1998, between Conoco and
-- Archie W. Dunham*
10.9 -- 1998 Stock and Performance Incentive Plan*****
10.10 -- 1998 Key Employee Stock Performance Plan*****
10.11 -- Humber DME Agreement*
10.12 -- Deferred Compensation Plan for Nonemployee Directors*
10.13 -- Conoco Inc. Key Employee Severance Plan*
10.14 -- Conoco Inc. Key Employee Temporary Severance Plan*
10.15 -- Conoco Salary Deferral & Savings Restoration Plan*
10.16 -- Directors' Charitable Gift Plan*
10.17 -- Motor Carrier Contract between Sentinel and Conoco*
10.18 -- Mount Belvieu Agreements*
10.19 -- Form Indemnity Agreement with Directors*
21.1 -- List of Principal Subsidiaries of the Registrant****
23.1 -- Consent of PricewaterhouseCoopers LLP**
24 -- Power of Attorney (included on signature pages)
27 -- Financial Data Schedule*****
99.1 -- Letter of transmittal*****
99.2 -- Notice of guaranteed delivery*****
99.3 Letter from the dealer manager to Brokers, Dealers,
-- Commercial Banks, Trust Companies and Other Nominees*****
99.4 Letter to Clients for use by Brokers, Dealers, Commercial
-- Banks, Trust Companies and other Nominees*****
99.5 Guidelines for Certification of Taxpayer Identification
-- Number on Substitute Form W-9*****
</TABLE>
<PAGE> 202
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
99.6 Letters from Trustees of DuPont or DuPont affiliated company
-- savings plans*****
99.7 Notice to Participants in a Blueprint brokerage account at
-- Merrill Lynch of DuPont*****
</TABLE>
- ---------------
* Incorporated by reference to the exhibit of the same number filed as part
of Conoco's Registration Statement on Form S-1, File No. 333-60119.
** Filed herein.
*** Incorporated by reference to the exhibit of the same number filed as part
of Conoco's Form 10-Q for the quarter ended September 30, 1998.
**** Incorporated by reference to the exhibit of the same number filed as part
of Conoco's Form 10-K for the year ended December 31, 1998.
***** To be filed by amendment.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Conoco Inc. of our report dated February
15, 1999 relating to the consolidated financial statements of Conoco Inc., which
appears in such Prospectus. We also consent to the incorporation by reference in
such Prospectus of our report dated February 19, 1999, which appears on page 40
of E.I. du Pont de Nemours and Company and its subsidiaries' 1998 Annual Report
to Stockholders, which is incorporated by reference in its Annual Report on Form
10-K for the year ended December 31, 1998. We also consent to the incorporation
by reference of our report on the Financial Statement Schedule, which appears on
page 25 of E.I. du Pont de Nemours and Company and its subsidiaries' Annual
Report on Form 10-K. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 22, 1999
