<PAGE> 1
===============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
---------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-14521
CONOCO INC.
(Exact name of registrant as specified in its charter)
DELAWARE (51-0370352)
(State or other jurisdiction of incorporation (I.R.S. Employer
of incorporation or organization) Identification No.)
600 NORTH DAIRY ASHFORD ROAD
HOUSTON, TEXAS 77079
(Address of principal executive offices)
(281) 293-1000
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
189,710,697 shares of Class A common stock, $0.01 par value, and
436,543,573 shares of Class B common stock, $0.01 par value, were outstanding
as of November 5, 1999.
===============================================================================
<PAGE> 2
CONOCO INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statement of Income..................................................................... 1
Consolidated Balance Sheet........................................................................... 2
Consolidated Statement of Cash Flows................................................................. 3
Notes to Consolidated Financial Statements........................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
(a) Financial Condition............................................................................ 13
(b) Results of Operations.......................................................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 23
Part II - Other Information
Item 1. Legal Proceedings........................................................................... 24
Item 5. Other Information
(a) Disclosure Regarding Forward-Looking Information............................................... 24
(b) Other Events................................................................................... 25
Item 6. Exhibits and Reports on Form 8-K............................................................... 25
Signature.............................................................................................. 26
Exhibit Index.......................................................................................... 27
</TABLE>
i
<PAGE> 3
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CONOCO INC.
CONSOLIDATED STATEMENT OF INCOME (NOTES 1 AND 3)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In millions, except per share)
<S> <C> <C> <C> <C>
Revenues
Sales and Other Operating Revenues* ............... $ 7,409 $ 5,916 $ 18,972 $ 17,264
Equity in Earnings of Affiliates .................. 51 23 84 30
Other Income ...................................... 25 90 93 221
---------- ---------- ---------- ----------
Total Revenues ............................ 7,485 6,029 19,149 17,515
---------- ---------- ---------- ----------
Costs and Expenses
Cost of Goods Sold and Other Operating Expenses ... 4,757 3,624 11,644 10,378
Selling, General and Administrative Expenses ...... 205 151 588 521
Exploration Expenses .............................. 65 59 185 235
Depreciation, Depletion and Amortization .......... 296 257 880 762
Taxes Other Than on Income* ....................... 1,697 1,529 4,943 4,425
Interest and Debt Expense ......................... 80 107 230 108
---------- ---------- ---------- ----------
Total Costs and Expenses .................. 7,100 5,727 18,470 16,429
---------- ---------- ---------- ----------
Income Before Income Taxes ............................ 385 302 679 1,086
Provision for Income Taxes ............................ 162 119 259 373
---------- ---------- ---------- ----------
Net Income (Note 10) .................................. $ 223 $ 183 $ 420 $ 713
========== ========== ========== ==========
Earnings Per Share (Note 4)
Basic ............................................. $ .36 $ .42 $ .67 $ 1.63
Diluted ........................................... $ .35 $ .42 $ .66 $ 1.63
Weighted Average Shares Outstanding (Note 4)
Class A** ......................................... 190 -- 190 --
Class B ........................................... 437 437 437 437
---------- ---------- ---------- ----------
Total Basic ............................... 627 437 627 437
Stock Options** ................................... 10 -- 10 --
---------- ---------- ---------- ----------
Total Diluted ............................. 637 437 637 437
Dividends Per Share of Common Stock (Note 5) .......... $ .19 $ -- $ .52 $ --
- ---------------
* Includes petroleum excise taxes .................. $ 1,654 $ 1,489 $ 4,810 $ 4,295
** Earnings per share for the period prior to Conoco's initial public offerings was calculated using only
Class B common stock as required by SFAS No. 128 (see Note 4).
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE> 4
CONOCO INC.
CONSOLIDATED BALANCE SHEET (NOTES 1 AND 3)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(In millions)
<S> <C> <C>
Current Assets
Cash and Cash Equivalents .................................................................. $ 318 $ 394
Accounts and Notes Receivable .............................................................. 1,460 1,191
Inventories (Note 6) ....................................................................... 824 807
Prepaid Expenses ........................................................................... 280 378
---------- ----------
Total Current Assets .................................................................... 2,882 2,770
Property, Plant and Equipment ................................................................. 22,611 22,094
Less: Accumulated Depreciation, Depletion and Amortization .................................... (11,356) (10,681)
---------- ----------
Net Property, Plant and Equipment ............................................................. 11,255 11,413
Investment in Affiliates ...................................................................... 1,526 1,363
Other Assets .................................................................................. 519 529
---------- ----------
Total ................................................................................... $ 16,182 $ 16,075
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable ........................................................................... $ 1,404 $ 1,312
Short-term Borrowings and Capital Lease Obligations ........................................ 701 52
Income Taxes ............................................................................... 108 199
Other Accrued Liabilities (Note 7) ......................................................... 1,304 1,162
---------- ----------
Total Current Liabilities ............................................................... 3,517 2,725
Long-term Borrowings-- Related Parties ........................................................ -- 4,596
Long-term Borrowings and Capital Lease Obligations ............................................ 4,087 93
Deferred Income Taxes ......................................................................... 1,681 1,714
Other Liabilities and Deferred Credits ........................................................ 2,173 2,200
---------- ----------
Total Liabilities ....................................................................... 11,458 11,328
---------- ----------
Commitments and Contingent Liabilities (Note 8)
Minority Interests ............................................................................ 311 309
Stockholders' Equity
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 2
Class B Common Stock, $.01 par value:
1,600,000,000 shares authorized; 436,543,573 shares issued and outstanding ................. 4 4
Additional Paid-In Capital ................................................................. 4,977 4,955
Accumulated Deficit ........................................................................ (159) (244)
Accumulated Other Comprehensive Loss (Note 9) .............................................. (377) (274)
Treasury Stock, at cost (1,303,159 and 249,863 Class A shares at September 30,
1999 and December 31, 1998, respectively) ............................................... (34) (5)
---------- ----------
Total Stockholders' Equity .............................................................. 4,413 4,438
---------- ----------
Total ................................................................................... $ 16,182 $ 16,075
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 5
CONOCO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (NOTES 1 AND 3)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
1999 1998
---------- ----------
(In millions)
<S> <C> <C>
Cash Provided by Operations
Net Income ................................................................. $ 420 $ 713
Adjustments to Reconcile Net Income to Cash Provided by Operations:
Depreciation, Depletion and Amortization ................................ 880 762
Dry Hole Costs and Impairment of Unproved Properties .................... 83 79
Deferred Income Taxes ................................................... (73) 164
Income Applicable to Minority Interests ................................. 18 16
Other Noncash Charges and Credits-- Net ................................. (44) (110)
Decrease (Increase) in Operating Assets:
Accounts and Notes Receivable ........................................ (281) 163
Inventories .......................................................... (32) (155)
Other Operating Assets ............................................... 71 (107)
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Other Operating Liabilities ...................... 487 115
Accrued Interest and Income Taxes ..................................... (12) (376)
---------- ----------
Cash Provided by Operations ....................................... 1,517 1,264
---------- ----------
Investment Activities
Purchases of Property, Plant and Equipment ................................. (1,104) (1,412)
Investments in Affiliates-- Net ............................................ (192) (315)
Proceeds from Sales of Assets and Subsidiaries ............................. 52 389
Net Decrease (Increase) in Short-term Financial Instruments ................ 35 (76)
---------- ----------
Cash Used for Investment Activities ............................... (1,209) (1,414)
---------- ----------
Financing Activities
Cash Dividends (Note 5) .................................................... (326) --
Treasury Stock Purchases-- Net ............................................. (42) --
Short-term Borrowings-- Net ................................................ 666 (18)
Long-term Borrowings-- Receipts ............................................ 3,970 --
-- Payments ............................................ (20) (3)
Related Party Borrowings-- Receipts ........................................ 865 927
-- Payments ........................................ (5,461) (1,739)
Related Party Notes Receivable--Net ........................................ -- 114
Net Cash Contribution From (To) Owner ...................................... (10) 113
Decrease in Minority Interests ............................................. (16) (16)
---------- ----------
Cash Used for Financing Activities ................................ (374) (622)
---------- ----------
Effect of Exchange Rate Changes on Cash ........................................ (10) 31
---------- ----------
Decrease in Cash and Cash Equivalents .......................................... (76) (741)
Cash and Cash Equivalents at Beginning of Year ................................. 394 1,147
---------- ----------
Cash and Cash Equivalents at September 30 ...................................... $ 318 $ 406
========== ==========
Supplemental Schedule of Noncash Financing Activities:
Dividends Paid to Owner (Note 3) ........................................... $ -- $ (8,200)
Promissory Note Payable - DuPont (Note 3) .................................. -- 7,500
Notes Receivable - DuPont (Note 3) ......................................... -- 700
---------- ----------
Total Noncash Financing Activities ..................................... $ -- $ --
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 6
CONOCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in millions, except per share)
1. BASIS OF PRESENTATION
Conoco Inc., including its consolidated subsidiaries ("Conoco"), is an
integrated, global energy company that is involved in the Upstream and
Downstream operating segments of the petroleum industry. Activities of the
Upstream operating segment include exploring for, 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. Conoco has four
reporting segments for its Upstream and Downstream businesses, reflecting
geographic division between the United States and International. Corporate and
other includes general corporate expenses, financing costs and other
non-operating items, results for power and related-party insurance operations.
The initial public offerings (the "Offerings") 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 Offerings
consisted of 191,456,427 shares of Class A common stock issued at a price of $23
per share, and represented E.I. du Pont de Nemours and Company's ("DuPont")
first step in the planned divestiture of Conoco. After the Offerings, DuPont
owned 100 percent of Conoco's Class B common stock (436,543,573 shares),
representing approximately 70 percent of Conoco's outstanding common stock and
approximately 92 percent of the combined voting power of all classes of voting
stock of Conoco. 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.
On August 6, 1999 (the "split-off date"), DuPont concluded an exchange
offer to its stockholders which resulted in all 436,543,573 shares of Class B
common stock being distributed to DuPont stockholders. The exchange offer was
the final step in DuPont's planned divestiture of Conoco.
Prior to the date of the Offerings, operations were conducted by Conoco
and, in some cases, subsidiaries of DuPont. The accompanying consolidated
financial statements for the periods ended September 30, 1998 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, net cash contributions from/to owner prior to
the Offerings included funds transferred between Conoco and DuPont for operating
needs, cash dividends paid and other equity transactions.
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.
These consolidated interim financial statements are unaudited, but
reflect all adjustments that, in the opinion of management, are necessary to
provide a fair presentation of the financial position, results of operations and
cash flows for the dates and periods covered. All such adjustments are of a
normal recurring nature. Interim period results are not necessarily indicative
of results of operations or cash flows for a full-year period. These interim
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Conoco's 1998 Annual Report
on Form 10-K as amended.
4
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(Dollars in millions, except per share)
2. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
Effective January 1, 1999, Conoco adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities," issued by the American
Institute of Certified Public Accountants. This Statement requires that costs
related to start-up activities, including organization costs, be expensed as
incurred. Conoco's policy has been one of expensing organization and other
similar costs of start-up operations. Accordingly, there was no effect on
earnings due to the adoption of this pronouncement.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement on Financial Accounting Standards ("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 gain or loss 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. In June 1999, the FASB approved the issuance of SFAS No.
137 deferring the effective date of SFAS No. 133 for one year. Consequently,
Conoco is required to adopt SFAS No. 133 by the first quarter of 2001 and is
currently assessing its effect on the consolidated financial statements.
3. RELATED PARTY TRANSACTIONS
The consolidated financial statements include significant related party
transactions with DuPont involving services, such as cash management, other
financial services, purchasing, legal, computer, corporate aviation and general
corporate expenses that were provided between Conoco and DuPont organizations
prior to the split-off date. For periods prior to the Offerings, the costs of
services were directly charged or allocated between Conoco and DuPont using
methods management believes were reasonable. These methods included negotiated
usage rates, dedicated asset assignment and proportionate corporate formulas
involving assets, revenues and employees. Such charges and allocations were 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 $6 and
$36 for the third quarter of 1999 and 1998, respectively, and $21 and $108 for
the first nine months of 1999 and 1998, respectively, and were 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 $2 and $12 for the third quarter
of 1999 and 1998, respectively, and $15 and $37 for the first nine months of
1999 and 1998, respectively. These charges to DuPont were treated as reductions,
as appropriate, of cost of goods sold and other operating expenses and selling,
general and administrative expenses.
Interest expense charged by DuPont was $117 for the third quarter of
1998, and $91 and $172 for the first nine months of 1999 and 1998, respectively,
and reflected market-based interest rates. A portion of this was capitalized as
costs associated with major construction projects. Interest income from DuPont
was $12 for the third quarter of 1998 and $45 for the first nine months of 1998
and also reflected market-based interest rates.
5
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(Dollars in millions, except per share)
Sales and other operating revenues included sales of products from
Conoco to DuPont, principally natural gas and gas liquids to supply several
DuPont plant sites. These sales totaled $32 and $108 for the third quarter of
1999 and 1998, respectively, and $211 and $317 for the first nine months of 1999
and 1998, respectively. Also included, for the third quarter of 1998 and the
first nine months of 1998, were revenues of $4 and $14 from insurance premiums
charged to DuPont for property and casualty coverage outside the United States.
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, were provided under
transition service agreements or other long-term agreements.
Accounts and notes receivable included amounts due from DuPont of $80
at December 31, 1998 and represented current month balances of transactions
between Conoco and DuPont, mainly product sales and certain charges billed
annually. In September 1998, Conoco reduced notes receivable from DuPont through
declaration of a $700 dividend. Accounts payable included amounts due DuPont of
$52 at December 31, 1998. Other liabilities included accrued interest of $51 due
DuPont at December 31, 1998.
Amounts representing borrowings from DuPont, including its subsidiary
organizations, are identified as related parties and presented separately in the
consolidated balance sheet. In connection with the separation from DuPont,
Conoco incurred indebtedness to DuPont, consisting of a dividend promissory
note, other intercompany notes and borrowings under a revolving credit
agreement. The largest component of this debt was the July 1998 dividend
promissory note in the aggregate principal amount of $7,500 bearing interest at
a rate of 6.0125 percent per annum.
The net proceeds from the Offerings of $4,228 were used to repay a
portion of the indebtedness owed to DuPont or purchase a portion of certain
subsidiaries' indebtedness owed to DuPont. At December 31, 1998, Conoco had
long-term borrowings from DuPont of $4,596.
In April 1999, Conoco issued and sold in a public offering $4,000 in
senior fixed-rate debt securities with a weighted average interest rate of 6.49
percent. The $3,970 net proceeds of this offering were used to repay a portion
of Conoco's separation-related indebtedness to DuPont. The remaining debt owed
to DuPont was repaid in May 1999 with proceeds from a commercial paper program.
The commercial paper program provides Conoco with up to $2,000 of borrowing
capacity and gives Conoco the ability to issue commercial paper at any time with
various maturities not to exceed 270 days. As of September 30, 1999, Conoco had
$671 of commercial paper outstanding, bearing a weighted average interest rate
of 5.62 percent.
Upon repayment of the indebtedness to DuPont, Conoco and DuPont
terminated the revolving credit agreement.
4. 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 certain Conoco employee and director award and fee deferrals that
are invested in Conoco stock units (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.
As described in Note 1, Conoco's capital structure was established at
the time of the Offerings. In accordance with Securities Exchange Commission
("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 the third quarter and first nine months of 1998. For the third
quarter and first nine months of 1999, basic EPS reflected the weighted average
number of shares of Class A and Class B common stock and deferred award units
outstanding at September 30, 1999. Corresponding diluted EPS for the third
quarter and first nine months of 1999 included an additional 10,085,208 and
9,227,600 shares, respectively, representing the weighted average dilutive
effect of outstanding stock options that resulted from the concurrent
cancellation of DuPont stock options at the date of the Offerings and the
issuance of options with respect to Class A common stock.
6
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(Dollars in millions, except per share)
The denominator is based on the following weighted average number of common
shares outstanding:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic .............. 627,355,441 436,543,573 627,486,516 436,543,573
Diluted ............ 637,440,649 436,543,573 636,714,116 436,543,573
</TABLE>
Variable stock options for 1,724,146 shares of Class A common stock
were outstanding at September 30, 1999, 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. In addition, variable stock options for
1,400,000 shares of Class B common stock were outstanding at September 30, 1999,
but were not included in the computation of diluted EPS as the threshold price
of $35.00 on 700,000 options and $42.00 on the remaining 700,000 options had not
been reached.
Common shares held as treasury stock are deducted in determining the
number of shares outstanding.
For the three months and nine months ended September 30, 1999, stock
options for 29,316 and 34,335 shares, respectively, of Class A common stock were
not included in the diluted earnings per share calculation because the exercise
price was greater than the average market price.
PRO FORMA EPS
Pro forma EPS for the third quarter and the first nine months of 1998
included the shares of Conoco Class A and Class B common stock and deferred
award units outstanding immediately after the Offerings as if the Offerings had
been completed in the beginning of the period presented. Pro forma basic EPS was
based on pro forma net income for the third quarter and the first nine months of
1998 divided by the total Class A and Class B common stock plus deferred award
units outstanding immediately after the Offerings (basic shares). For pro forma
diluted EPS, basic shares were adjusted to reflect the effect of outstanding
stock options immediately after the Offerings as though outstanding for the
periods presented. Pro forma net income reflected historical income for the
periods adjusted to give effect to the transactions substantially completed in
October 1998, which were directly associated with the Offerings and separation
from DuPont.
7
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(Dollars in millions, except per share)
The reconciliation of historical net income to pro forma net income
with pro forma adjustments separately identified is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------------------------
1999 1998 1998
ACTUAL PRO FORMA ACTUAL
------------- ------------- -------------
<S> <C> <C> <C>
Historical net income ............................ $ 223 $ 183 $ 183
Lower interest income(1) ..................... -- (7) --
Incremental interest expense adjustment(2) ... -- 45 --
Related tax effects(3) ....................... -- (33) --
------------- ------------- -------------
Net income ....................................... $ 223 $ 188 $ 183
============= ============= =============
Earnings per share:
Basic ........................................ $ .36 $ .30 $ .42
Diluted ...................................... $ .35 $ .30 $ .42
Weighted average shares outstanding:
Basic ........................................ 627,355,441 628,195,100 436,543,573
Diluted ...................................... 637,440,649 636,746,186 436,543,573
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------------------------
1999 1998 1998
ACTUAL PRO FORMA ACTUAL
------------- ------------- -------------
<S> <C> <C> <C>
Historical net income ............................ $ 420 $ 713 $ 713
Lower interest income(1) ..................... -- (60) --
Incremental interest expense adjustment(2) ... -- (46) --
Related tax effects(3) ....................... -- 3 --
------------- ------------- -------------
Net income ....................................... $ 420 $ 610 $ 713
============= ============= =============
Earnings per share:
Basic ........................................ $ .67 $ .97 $ 1.63
Diluted ...................................... $ .66 $ .96 $ 1.63
Weighted average shares outstanding:
Basic ........................................ 627,486,516 628,195,100 436,543,573
Diluted ...................................... 636,714,116 636,746,186 436,543,573
</TABLE>
- --------------
(1) Lower interest income due to settlement of related party notes receivables
and the impact of currency exchange rates on certain intercompany loans
purchased by Conoco from DuPont.
(2) Incremental interest expense adjustment resulting from Conoco's new debt
structure.
(3) Tax effects associated with adjustments in (1) and (2) and the impact of
the calculation of income taxes on a separate return basis.
5. DIVIDENDS
<TABLE>
<CAPTION>
1999 Dividends Declared and Paid on Class A and Class B Common Stock DIVIDENDS
- -------------------------------------------------------------------- PER SHARE
---------
<S> <C>
First Quarter............................................................... $ .14
Second Quarter.............................................................. $ .19
Third Quarter............................................................... $ .19
-------
Dividends Declared and Paid Through September 30, 1999...................... $ .52
=======
</TABLE>
8
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(Dollars in millions, except per share)
On October 28, 1999, Conoco declared a quarterly cash dividend of $.19
per share on each outstanding share of Class A and Class B common stock, payable
on December 10, 1999, to stockholders of record on November 10, 1999.
6. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Crude oil and petroleum products................................... $ 683 $ 661
Other merchandise.................................................. 22 22
Materials and supplies............................................. 119 124
------------- ------------
$ 824 $ 807
============= ============
</TABLE>
7. RESTRUCTURING
In December 1998, Conoco announced that as a result of a comprehensive
review of its assets and long-term strategy, Conoco 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 are being implemented in 1999 and will 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 the
disposition of assets and past and ongoing consolidation of assets into
operations requiring less employee support as well as better sharing of common
services and functions across regions. Associated with these announcements,
Conoco recorded a charge in the fourth quarter of 1998 of $82 pretax ($52
after-tax), nearly all of which represents termination payments and related
employee benefits to be made to persons affected. During the first nine months
of 1999, 578 persons left Conoco under implementation of these realignment
plans. The following table shows the status of, and changes to, the
restructuring reserve for the first nine months of 1999.
<TABLE>
<CAPTION>
AMOUNTS
-------
<S> <C>
Reserve at December 31, 1998....................................... $ 82
Expenditures................................................... (36)
New accruals................................................... --
------
Reserve at September 30, 1999...................................... $ 46
======
</TABLE>
We expect the restructuring efforts provided for in December 1998 to be
largely completed by December 31, 1999 with the remaining identified positions
eliminated in early 2000 as asset sales are finalized.
8. COMMITMENTS AND CONTINGENT LIABILITIES
Conoco 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 September 30, 1999, Conoco had obligations under
international contracts to purchase, over periods up to 19 years, natural gas at
prices that were in excess of current market prices at September 30, 1999. No
material annual loss is expected from these long-term commitments.
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 the
separation agreement with DuPont, Conoco has also 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. Conoco believes the
9
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(Dollars in millions, except per share)
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 Conoco.
Conoco is also subject to contingencies pursuant to environmental laws
and regulations that in the future may require further action to correct the
effects on the environment of prior disposal practices or releases of petroleum
substances by Conoco or other parties. Conoco has accrued for certain
environmental remediation activities consistent with the policy set forth in
Note 2 to the consolidated financial statements presented in Conoco's 1998
Annual Report on Form 10-K as amended. Conoco has assumed environmental
remediation liabilities from DuPont related to certain discontinued chemicals
and agricultural chemicals businesses operated by Conoco in the past, which are
included in the environmental accrual. At September 30, 1999, such accrual
amounted to $120 and, in management's opinion, was appropriate based on existing
facts and circumstances. Under adverse changes in circumstances, potential
liability may exceed amounts accrued. 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. 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 Conoco.
Conoco has indirectly guaranteed various debt obligations under
agreements with certain affiliated and other companies to provide specified
minimum revenues from shipments or purchases of products. At September 30, 1999,
these indirect guarantees totaled $9 and Conoco or DuPont, on behalf of and
indemnified by Conoco, had directly guaranteed $1,253 of the obligations of
certain affiliated companies and others. No material loss is anticipated by
reason of such agreements and guarantees.
9. COMPREHENSIVE INCOME
The following sets forth Conoco's comprehensive income for the periods
shown:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income ....................................... $ 223 $ 183 $ 420 $ 713
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustment ........ 2 49 (103) 22
---------- ---------- ---------- ----------
Comprehensive Income ............................. $ 225 $ 232 $ 317 $ 735
========== ========== ========== ==========
</TABLE>
10. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
Conoco is involved in both the Upstream and Downstream operating
segments of the petroleum industry. Activities of the Upstream operating segment
include exploring for, 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. Conoco has four reporting segments for its
Upstream and Downstream businesses, reflecting geographic division between the
United States and International. Corporate and other includes general corporate
expenses, financing costs and other non-operating items, results for power and
related-party insurance operations. Conoco sells its products worldwide. Major
products include crude oil, natural gas and refined products that are sold
primarily in the energy and transportation markets. Conoco'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.
10
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(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>
THREE MONTHS ENDED SEPTEMBER 30, 1999
Sales and Other Operating Revenues ..................... $ 865 $ 564 $ 3,270 $ 2,709 $ 1 $ 7,409
Transfers Between Segments ............................. 115 140 33 100 -- --
-------- -------- -------- -------- -------- --------
Total Operating Revenues ............................ $ 980 $ 704 $ 3,303 $ 2,809 $ 1 $ 7,409
======== ======== ======== ======== ======== ========
Operating Profit ....................................... 96 275 51 56 (66) 412
Equity in Earnings of Affiliates ....................... 3 34 19 (4) (1) 51
Non-Operating Items:
Interest and Debt Expense ............................ (80) (80)
Interest Income (net of misc. interest expense) ...... 7 7
Other ................................................ (5) (5)
-------- -------- -------- -------- -------- --------
Income Before Income Taxes ............................. 99 309 70 52 (145) 385
Provision for Income Taxes ............................. (15) (141) (26) (18) 38 (162)
-------- -------- -------- -------- -------- --------
Net Income (Loss) (1) .................................. $ 84 $ 168 $ 44 $ 34 $ (107) $ 223
======== ======== ======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 1998
Sales and Other Operating Revenues ..................... $ 783 $ 320 $ 2,373 $ 2,097 $ 343 $ 5,916
Transfers Between Segments ............................. 70 92 24 46 -- --
-------- -------- -------- -------- -------- --------
Total Operating Revenues ............................ $ 853 $ 412 $ 2,397 $ 2,143 $ 343 $ 5,916
======== ======== ======== ======== ======== ========
Operating Profit ....................................... 52 122 95 68 (23) 314
Equity in Earnings of Affiliates ....................... 2 3 21 (3) -- 23
Non-Operating Items:
Interest and Debt Expense ............................ (107) (107)
Interest Income (net of misc. interest expense) ...... 25 25
Other ................................................ 47 47
-------- -------- -------- -------- -------- --------
Income Before Income Taxes ............................. 54 125 116 65 (58) 302
Provision for Income Taxes ............................. (6) (55) (41) (26) 9 (119)
-------- -------- -------- -------- -------- --------
Net Income (Loss) ...................................... $ 48 $ 70 $ 75 $ 39 $ (49) $ 183
======== ======== ======== ======== ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 1999
Sales and Other Operating Revenues ..................... $ 2,272 $ 1,486 $ 7,935 $ 7,254 $ 25 $ 18,972
Transfers Between Segments ............................. 277 324 78 205 -- --
-------- -------- -------- -------- -------- --------
Total Operating Revenues ............................ $ 2,549 $ 1,810 $ 8,013 $ 7,459 $ 25 $ 18,972
======== ======== ======== ======== ======== ========
Operating Profit ....................................... 180 531 78 145 (119) 815
Equity in Earnings of Affiliates ....................... 7 54 42 (18) (1) 84
Non-Operating Items:
Interest and Debt Expense ............................ (230) (230)
Interest Income (net of misc. interest expense) ...... 16 16
Other ................................................ (6) (6)
-------- -------- -------- -------- -------- --------
Income Before Income Taxes ............................. 187 585 120 127 (340) 679
Provision for Income Taxes ............................. (11) (263) (31) (51) 97 (259)
-------- -------- -------- -------- -------- --------
Net Income (Loss) (1) .................................. $ 176 $ 322 $ 89 $ 76 $ (243) $ 420
======== ======== ======== ======== ======== ========
</TABLE>
11
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
(Dollars in millions, except per share)
<TABLE>
<CAPTION>
UPSTREAM DOWNSTREAM
--------------------- --------------------- CORPORATE
UNITED UNITED AND
SEGMENT INFORMATION (CONT'D) STATES INTERNATIONAL STATES INTERNATIONAL OTHER CONSOLIDATED
----------------------------- ------ ------------- ------ ------------- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30,
1998
Sales and Other Operating
Revenues ....................... $ 2,450 $ 1,128 $ 6,838 $ 6,166 $ 682 $ 17,264
Transfers Between Segments ......... 235 311 70 132 -- --
-------- -------- -------- -------- -------- --------
Total Operating Revenues ....... $ 2,685 $ 1,439 $ 6,908 $ 6,298 $ 682 $ 17,264
======== ======== ======== ======== ======== ========
Operating Profit ................... 212 486 202 222 (86) 1,036
Equity in Earnings of Affiliates ... 1 (9) 40 (2) -- 30
Non-Operating Items:
Interest and Debt Expense ....... (108) (108)
Interest Income (net of misc. ...
interest expense) .............. 78 78
Other ........................... 50 50
-------- -------- -------- -------- -------- --------
Income Before Income Taxes ......... 213 477 242 220 (66) 1086
Provision for Income Taxes ......... (21) (192) (81) (86) 7 (373)
-------- -------- -------- -------- -------- --------
Net Income (Loss) (1) ............. $ 192 $ 285 $ 161 $ 134 $ (59) $ 713
======== ======== ======== ======== ======== ========
(1) Includes after-tax benefits (charges) from special items:
THREE MONTHS ENDED SEPTEMBER 30,
1999
Litigation and Settlement Charges .. $ -- $ -- $ (18) $ -- $ (20) $ (38)
-------- -------- -------- -------- -------- --------
Total ........................... $ -- $ -- $ (18) $ -- $ (20) $ (38)
======== ======== ======== ======== ======== ========
Nine Months Ended September 30,
1999
Litigation and Settlement Charges .. $ -- $ -- $ (18) $ -- $ (20) $ (38)
-------- -------- -------- -------- -------- --------
Total ........................... $ -- $ -- $ (18) $ -- $ (20) $ (38)
======== ======== ======== ======== ======== ========
Nine Months Ended September 30,
1998
Asset Sales ........................ $ -- $ 54 $ -- $ -- $ -- $ 54
Litigation and Settlement Charges .. -- -- (28) -- -- (28)
-------- -------- -------- -------- -------- --------
Total ........................... $ -- $ 54 $ (28) $ -- $ -- $ 26
======== ======== ======== ======== ======== ========
</TABLE>
Special items for the third quarter and first nine months of 1999
totaled $38 related to the settlement of certain posted price litigation and the
resolution of certain liabilities associated with the separation agreement with
DuPont related to discontinued businesses operated by Conoco in the past.
There were no special items in the third quarter of 1998. Special items
for the first nine months of 1998 reflected a $23 gain from the sale of
properties in the North Sea and a $31 gain from the sale of an international
subsidiary, partly offset by a $28 litigation charge.
12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(a) FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED BY OPERATIONS
Cash provided by operations in the first nine months of 1999 increased
$253 million to $1,517 million versus $1,264 million in the first nine months of
1998. Cash provided by operations before changes in operating assets and
liabilities decreased $340 million compared to the first nine months of 1998,
primarily due to significantly weaker refined product margins, lower net
realized natural gas prices and increased interest expense, partly offset by
higher crude oil prices and higher volumes. Positive changes to net operating
assets and liabilities of $593 million were due to timing of payments on other
operating liabilities, lower 1999 tax payments and higher 1999 accrued interest
expense. Partly offsetting these improvements was an increase in accounts
receivable due to the rise in crude oil prices during the first nine months of
1999 as compared to the decrease in crude oil prices during the first nine
months of 1998.
INVESTMENT ACTIVITIES
CAPITAL EXPENDITURES AND INVESTMENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------------
1999 1998
------ ------
(In millions)
<S> <C> <C>
Upstream:
United States ..................................... $ 302 $ 583
International ..................................... 546 769
------ ------
Total Upstream ................................ 848 1,352
Downstream:
United States ..................................... 131 135
International ..................................... 167 220
------ ------
Total Downstream .............................. 298 355
Corporate and Other ................................... 37 10
------ ------
Total Capital Expenditures and Investments..... $1,183 $1,717
====== ======
United States ..................................... $ 470 $ 728
International ..................................... 713 989
------ ------
Total ......................................... $1,183 $1,717
====== ======
</TABLE>
Total capital expenditures and investments, excluding amounts paid in
the first quarter of 1999 for the completion of 1998 acquisitions, were $1,183
million, a decrease of $534 million, or 31 percent, versus capital expenditures
and investments of $1,717 million for the first nine months of 1998. The
decrease is primarily due to lower spending worldwide on Upstream capital
projects. Described below is a more detailed analysis of capital expenditures
and investments by operating segments within the United States and
International. Capital expenditures and investments include capitalized
exploratory wells but do not include expensed exploration costs.
Upstream
Upstream capital expenditures and investments, excluding amounts paid
in the first quarter of 1999 for the completion of 1998 acquisitions, totaled
$848 million in the first nine months of 1999. The decrease was $504 million, or
approximately 37 percent, compared to $1,352 million for the first nine months
of 1998, primarily a result of an overall reduction in the capital expenditure
program.
13
<PAGE> 16
United States
During the first nine months of 1999, Conoco spent $302 million on
Upstream capital projects in the United States, a decrease of $281 million, or
48 percent, from $583 million in the first nine months of 1998. Expenditures in
the first nine months of 1999 focused on the continued development of the Lobo
field in South Texas and the completion of the Ursa field, as well as the
drilling of the Magnolia and K2 discoveries, in the deepwater Gulf of Mexico.
International
International Upstream capital expenditures and investments totaled
$546 million in the first nine months of 1999, a decrease of $223 million, or 29
percent, from $769 million in the first nine months of 1998. The 1999
expenditures included investments in Petrozuata, a joint venture in Venezuela,
as well as continued development of various fields in the U.K. and the Norwegian
sector of the North Sea.
Downstream
Downstream capital expenditures and investments totaled $298 million in
the first nine months of 1999, a decrease of $57 million, or 16 percent, versus
$355 million in the first nine months of 1998 and primarily reflected reduced
expenditures associated with the Melaka refinery in the Asia Pacific region that
was completed in the second half of 1998.
United States
During the first nine months of 1999, Conoco spent $131 million on
Downstream capital projects in the United States, down $4 million, or three
percent, from $135 million in the first nine months of 1998. These funds were
spent to support continuing operations.
International
During the first nine months of 1999, Conoco spent $167 million on
Downstream international capital expenditures and investments, down $53 million,
or 24 percent, from $220 million in the first nine months of 1998. Expenditures
in the first nine months of 1999 focused on strengthening Conoco's retail
marketing position, as well as on investment in the Melaka refinery in Malaysia
and the Humber refinery in the U.K.
Corporate and Other
Corporate and other capital expenditures totaled $37 million in the
first nine months of 1999. Expenditures were primarily related to project costs
associated with the construction of power generation facilities.
PROCEEDS FROM SALES OF ASSETS AND SUBSIDIARIES
Conoco's investment activities also included proceeds of $52 million
from the sale of assets during the first nine months of 1999, a decrease of $337
million, or 87 percent, from $389 million in the first nine months of 1998.
Prior year proceeds included $54 million from the sale of North Sea producing
and non-producing properties and $156 million from the sale of various
Downstream assets in the U.S. These sales resulted from Conoco's ongoing
strategic portfolio realignment.
FINANCING ACTIVITIES
Conoco's ability to maintain and grow its operating income and cash
flow is dependent upon continued capital spending to replace depleting assets.
Conoco believes its future cash flow from operations and its borrowing capacity
should be sufficient to fund its dividends, if any, capital expenditures and
working capital requirements and to service debt.
14
<PAGE> 17
In connection with the separation from DuPont, Conoco incurred indebtedness
to DuPont, consisting of a $7,500 million dividend promissory note dated July
1998, other intercompany notes and borrowings under a revolving credit
agreement. In October 1998, Conoco raised net proceeds of $4,228 million in the
Offerings, which were used to repay a portion of the $7,500 million note and
certain other intercompany notes with DuPont.
In April 1999, Conoco issued and sold in a public offering $4,000 million
in senior fixed-rate debt securities with a weighted average interest rate of
6.49 percent. The $3,970 million net proceeds of this offering were used to
repay a portion of Conoco's separation-related indebtedness to DuPont. The
remaining debt owed to DuPont was repaid in May 1999 with proceeds from a
commercial paper program. The commercial paper program provides Conoco with up
to $2,000 million of borrowing capacity and gives Conoco the ability to issue
commercial paper at any time with various maturities not to exceed 270 days. As
of September 30, 1999, Conoco had $671 million of commercial paper outstanding,
bearing a weighted average interest rate of 5.62 percent.
Upon repayment of the indebtedness to DuPont, Conoco and DuPont terminated
the revolving credit agreement.
Total Conoco debt was $4,788 million at September 30, 1999, up $47 million
versus $4,741 million at year-end 1998. The total debt-to-capitalization ratio
was 52 percent at September 30, 1999 and at year-end 1998.
15
<PAGE> 18
(b) RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In millions)
<S> <C> <C> <C> <C>
SALES AND OTHER OPERATING REVENUES
Upstream
United States ........................................... $ 865 $ 783 $ 2,272 $ 2,450
International ........................................... 564 320 1,486 1,128
---------- ---------- ---------- ----------
Total Upstream ........................................ 1,429 1,103 3,758 3,578
Downstream
United States ........................................... 3,270 2,373 7,935 6,838
International ........................................... 2,709 2,097 7,254 6,166
---------- ---------- ---------- ----------
Total Downstream ...................................... 5,979 4,470 15,189 13,004
Corporate and Other ...................................... 1 343 25 682
---------- ---------- ---------- ----------
Total Sales and Other Operating Revenues .............. $ 7,409 $ 5,916 $ 18,972 $ 17,264
========== ========== ========== ==========
AFTER-TAX OPERATING INCOME
Upstream
United States ........................................... $ 84 $ 48 $ 176 $ 192
International ........................................... 168 70 322 285
---------- ---------- ---------- ----------
Total Upstream ........................................ 252 118 498 477
Downstream
United States ........................................... 44 75 89 161
International ........................................... 34 39 76 134
---------- ---------- ---------- ----------
Total Downstream ...................................... 78 114 165 295
Corporate and Other Operating ............................ (42) (9) (76) (48)
---------- ---------- ---------- ----------
Total After-Tax Operating Income ...................... 288 223 587 724
Interest and Other Non-Operating Income (Expenses) Net
Of Tax ................................................. (65) (40) (167) (11)
---------- ---------- ---------- ----------
CONSOLIDATED NET INCOME .................................... $ 223 $ 183 $ 420 $ 713
========== ========== ========== ==========
</TABLE>
SPECIAL ITEMS
Consolidated net income includes the following non-recurring items on
an after-tax basis:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In millions)
<S> <C> <C> <C> <C>
UPSTREAM
Asset Sales .............................................. $ -- $ -- $ -- $ 54
---------- ---------- ---------- ----------
Total Upstream Special Items .......................... $ -- $ -- $ -- $ 54
========== ========== ========== ==========
DOWNSTREAM
Litigation and Settlement Charges ........................ $ (18) $ -- $ (18) $ (28)
---------- ---------- ---------- ----------
Total Downstream Special Items ........................ $ (18) $ -- $ (18) $ (28)
========== ========== ========== ==========
CORPORATE AND OTHER OPERATING
Litigation and Settlement Charges ........................ $ (20) $ -- $ (20) $ --
---------- ---------- ---------- ----------
Total Corporate and Other Operating Special Items ..... $ (20) $ -- $ (20) $ --
========== ========== ========== ==========
TOTAL SPECIAL ITEMS ........................................ $ (38) $ -- $ (38) $ 26
========== ========== ========== ==========
</TABLE>
16
<PAGE> 19
Special Items for the third quarter and first nine months of 1999
totaled $38 million related to the settlement of certain posted price litigation
and the resolution of certain liabilities associated with the separation
agreement with DuPont related to discontinued businesses previously operated by
Conoco in the past.
There were no special items for the third quarter of 1998. Special
items for the first nine months of 1998 reflected a $23 million gain from the
sale of properties in the North Sea and a $31 million gain from the sale of an
international subsidiary, partly offset by a $28 million litigation charge.
Third Quarter 1999 versus Third Quarter 1998
Conoco had third quarter consolidated net income of $223 million in
1999, up 22 percent from $183 million in the third quarter of 1998. Conoco had
earnings before special items of $261 million in the third quarter of 1999, up
43 percent from $183 million in the third quarter of 1998. Higher earnings
primarily reflected higher crude oil prices, increased crude oil and natural gas
volumes, higher refinery volumes and improved earnings from international
Upstream equity companies partly offset by higher crude feedstock costs, higher
production costs associated with higher volumes and higher overall compensation
charges.
Sales and other operating revenues for the third quarter of 1999 were
$7,409 million, up 25 percent from $5,916 million in the third quarter of 1998.
The rise was primarily due to higher refined product prices and sales volumes,
higher crude oil prices and increased oil and natural gas volumes, partly offset
by reduced power trading revenues. Conoco's worldwide net realized crude oil
price was $20.02 per barrel for the quarter, up $7.73 per barrel, or 63 percent,
from $12.29 per barrel in the third quarter of 1998. Worldwide net realized
natural gas prices averaged $2.05 per thousand cubic feet (mcf) for the quarter,
compared with $2.08 per mcf in the same period in 1998, a reduction of one
percent.
Worldwide crude oil and condensate production, including Conoco's share
of equity affiliates, in the third quarter of 1999 was 350,000 barrels per day
versus 292,000 barrels per day in the third quarter of 1998, a 20 percent
increase. U.S. crude oil and condensate production was down four percent, or
2,000 barrels per day, primarily due to dispositions of various small,
non-strategic properties as well as natural production declines, partly offset
by increased production volumes from the Ursa field. International production
was up 25 percent due to the additional production volumes from the North Sea
Britannia and Banff fields and increased volumes from equity affiliates in
Venezuela and Russia.
Worldwide natural gas production, including Conoco's share of equity
affiliates, in the third quarter of 1999 was up 14 percent to 1,560 million
cubic feet per day from 1,374 million cubic feet per day in the third quarter of
1998. U.S. natural gas deliveries were down 12 percent from the third quarter of
1998, primarily from dispositions of various non-strategic properties, reduced
development drilling in the South Texas Lobo field during the first half of the
year and natural production declines. Conoco has now structured Lobo's
development program to further optimize capital efficiency. International
natural gas deliveries were up 72 percent from the third quarter of 1998 due to
the additional production from the North Sea Britannia and Viking Phoenix
fields.
Worldwide refined product sales were 1,190,000 barrels per day, up six
percent versus 1998. Crude oil and refined product buy/sell and natural gas
activities in the third quarter of 1999 totaled $1,503 million, up nine percent
compared to $1,384 million in the third quarter of 1998, primarily due to higher
crude oil prices, partly offset by the absence in 1999 of electric power resale
activities included in the third quarter of 1998.
Cost of goods sold and other operating expenses for the third quarter
of 1999 totaled $4,757 million, an increase of $1,133 million, or 31 percent,
compared to $3,624 million in the third quarter of 1998, primarily due to higher
refinery feedstock costs and higher operating costs associated with increased
volumes, partly offset by a reduction in power trading activities.
Selling, general and administrative expenses for the third quarter of
1999 totaled $205 million, an increase of $54 million, or 36 percent, compared
to $151 million in the comparable period of 1998. The increase was primarily
related to litigation and settlement charges and higher overall compensation
charges in the third quarter of 1999. Third quarter 1998 compensation charges
were unusually low due to a credit for DuPont employee stock option costs tied
to the fall in DuPont's stock price during the quarter, along with several one
time separation-related benefits.
17
<PAGE> 20
Exploration expenses for the third quarter of 1999 totaled $65 million,
an increase of $6 million, or ten percent, compared to $59 million in the third
quarter of 1998, primarily driven by the write-down of a property held for sale.
Depreciation, depletion and amortization ("DD&A") for the third quarter
of 1999 totaled $296 million, an increase of $39 million, or 15 percent,
compared to $257 million in the third quarter of 1998, primarily due to
increased DD&A associated with higher volumes and the write-down of an asset
held for sale.
Provision for income taxes for the third quarter of 1999 totaled $162
million, up 36 percent compared to $119 million for the third quarter of 1998.
This reflected higher pretax income in the third quarter of 1999 versus 1998 and
a higher effective tax rate of approximately 42 percent in the third quarter of
1999 compared to 39 percent in the third quarter of 1998.
First Nine Months 1999 versus First Nine Months 1998
Conoco had consolidated net income of $420 million for the first nine
months of 1999, down 41 percent from $713 million in the first nine months of
1998. Conoco had earnings before special items of $458 million in the first nine
months of 1999, down 33 percent from $687 million in the first nine months of
1998. Lower earnings primarily reflected significantly weaker refined product
margins, lower net realized natural gas prices, higher operating costs
associated with higher volumes, write-downs from asset dispositions, increased
interest expense and higher overall compensation charges, partly offset by
higher crude oil prices, increased crude oil and natural gas volumes, increased
refining volumes, improved earnings from international Upstream equity companies
and lower exploration expenses.
Sales and other operating revenues for the first nine months of 1999
were $18,972 million, up ten percent from $17,264 million in the first nine
months of 1998, primarily due to higher refined product prices and sales
volumes, increased crude oil and natural gas volumes and higher crude oil
prices, partly offset by reduced power trading revenues and lower natural gas
prices. Conoco's worldwide net realized crude oil price was $15.43 per barrel
for the first nine months of 1999, up $2.61 per barrel, or 20 percent versus
$12.82 per barrel in the first nine months of 1998. Worldwide net realized
natural gas prices averaged $1.99 per mcf for the first nine months of 1999,
compared with $2.28 per mcf in the same period in 1998, a reduction of 13
percent.
Worldwide crude oil and condensate production, including Conoco's share
of equity affiliates, in the first nine months of 1999 was 329,000 barrels per
day versus 309,000 barrels per day in the first nine months of 1998, a six
percent increase. Worldwide natural gas production, including Conoco's share of
equity affiliates, in the first nine months of 1999 was up 24 percent to 1,651
million cubic feet per day from 1,330 million cubic feet per day in the first
nine months of 1998. U.S. natural gas production was up three percent, primarily
as a result of higher production volumes in the first half of 1999 from
development drilling in the South Texas Lobo field. International natural gas
production was up 65 percent due to the additional production from the North Sea
Britannia and Viking Phoenix fields.
Worldwide refined product sales were 1,155,000 barrels per day, up
eight percent versus 1998. Crude oil and refined product buy/sell and natural
gas and electric power resale activities in the first nine months of 1999
totaled $3,748 million, down one percent compared to $3,788 million in the first
nine months of 1998, primarily due to reduced power trading activities, partly
offset by higher crude oil prices.
Cost of goods sold and other operating expenses for the first nine
months of 1999 totaled $11,644 million, an increase of $1,266 million, or 12
percent, compared to $10,378 million in the first nine months of 1998, primarily
due to higher refinery feedstock costs and higher production operating costs
associated with higher volumes, partly offset by the reduction in power trading
activities.
Selling, general and administrative expenses for the first nine months
of 1999 totaled $588 million, an increase of $67 million, or 13 percent,
compared to $521 million in the comparable period of 1998. The increase was
primarily related to litigation and settlement charges and higher overall
compensation charges.
18
<PAGE> 21
Exploration expenses for the first nine months of 1999 totaled $185
million, a decline of $50 million, or 21 percent, compared to $235 million in
the first nine months of 1998, primarily driven by cost reduction efforts, a
more focused exploration program and lower dry hole costs.
DD&A for the first nine months of 1999 totaled $880 million, an
increase of $118 million, or 15 percent, compared to $762 million in the first
nine months of 1998, primarily due to increased DD&A associated with higher
volumes, the write-down of an asset held for sale, DD&A rate changes and field
mix.
Provision for income taxes for the first nine months of 1999 totaled
$259 million, down 31 percent compared to $373 million for the first nine months
of 1998. This is primarily the result of lower pretax income for the first nine
months of 1999, partially offset by a higher effective tax rate of approximately
38 percent for the first nine months of 1999, compared to 34 percent in the
prior year due to a relatively higher proportion of income from Upstream
international operations.
UPSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
After-Tax Operating Income
United States ...................... $ 84 $ 48 $ 176 $ 192
International ...................... 168 70 322 285
---------- ---------- ---------- ----------
After-Tax Operating Income ....... $ 252 $ 118 $ 498 $ 477
Special Items
United States ...................... $ -- $ -- $ -- $ --
International ...................... -- -- -- (54)
---------- ---------- ---------- ----------
Special Items .................... $ -- $ -- $ -- $ (54)
Earnings Before Special Items
United States ...................... $ 84 $ 48 $ 176 $ 192
International ...................... 168 70 322 231
---------- ---------- ---------- ----------
Earnings Before Special Items .... $ 252 $ 118 $ 498 $ 423
========== ========== ========== ==========
</TABLE>
Third Quarter 1999 versus Third Quarter 1998
Upstream earnings before special items were $252 million in the third
quarter of 1999, up 114 percent from $118 million in the third quarter of 1998.
U.S. Upstream earnings before special items totaled $84 million in the third
quarter of 1999, up 75 percent from $48 million in the comparable period of
1998. Higher U.S. Upstream earnings were due to higher crude oil and natural gas
prices, partly offset by lower natural gas volumes, higher overall compensation
charges and the write-down of an asset held for sale. International Upstream
earnings before special items were $168 million, up 140 percent, from $70
million in the comparable period in 1998, primarily attributable to higher crude
oil prices, increased crude oil and natural gas volumes and improved equity
earnings, partly offset by lower natural gas prices, higher operating costs and
DD&A charges associated with higher volumes.
First Nine Months 1999 versus First Nine Months 1998
Upstream earnings before special items were $498 million in the first
nine months of 1999, up 18 percent from $423 million in the first nine months of
1998. U.S. Upstream earnings before special items totaled $176 million in the
first nine months of 1999, down eight percent from $192 million in the
comparable period of 1998. Lower U.S. Upstream earnings were due to lower
natural gas prices, higher overall compensation charges, reduced gains from
non-strategic asset dispositions, and higher DD&A associated with the write-down
of an asset held for sale, rate changes and field mix. These factors were partly
offset by higher crude oil prices and lower exploration expenses. Natural gas
volumes in the United States were up three percent, as production from the South
Texas Lobo field increased more than production declined elsewhere.
International Upstream earnings before special items were $322 million, up 39
percent, from $231 million in the comparable period in 1998, primarily
attributable to higher crude oil and natural gas volumes, higher crude oil
prices, higher equity earnings and lower exploration expenses, partly offset by
lower natural gas prices, higher DD&A charges associated with higher volumes and
fewer gains from non-strategic asset dispositions.
19
<PAGE> 22
DOWNSTREAM SEGMENT RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In millions)
<S> <C> <C> <C> <C>
After-Tax Operating Income
United States ....................... $ 44 $ 75 $ 89 $ 161
International ....................... 34 39 76 134
---------- ---------- ---------- ----------
After-Tax Operating Income ........ $ 78 $ 114 $ 165 $ 295
Special Items
United States ....................... $ 18 $-- $ 18 $ 28
International ....................... -- -- -- --
---------- ---------- ---------- ----------
Special Items ..................... $ 18 $-- $ 18 $ 28
Earnings Before Special Items
United States ....................... $ 62 $ 75 $ 107 $ 189
International ....................... 34 39 76 134
---------- ---------- ---------- ----------
Earnings Before Special Items ..... $ 96 $ 114 $ 183 $ 323
========== ========== ========== ==========
</TABLE>
Third Quarter 1999 versus Third Quarter 1998
Downstream earnings before special items were $96 million for the third
quarter of 1999, down 16 percent from $114 million in the comparable period in
1998. U.S. Downstream earnings before special items were $62 million for the
third quarter of 1999, down 17 percent from $75 million for the third quarter of
1998, due to higher crude feedstock costs and higher overall compensation
charges, partly offset by lower costs from operational efficiencies and higher
refinery volumes. International Downstream earnings before special items were
$34 million for the third quarter of 1999, down 13 percent from $39 million in
the comparable period in 1998 and reflected higher crude feedstock costs.
First Nine Months 1999 versus First Nine Months 1998
Downstream earnings before special items were $183 million for the
first nine months of 1999, down 43 percent from $323 million in the comparable
period in 1998. U.S. Downstream earnings before special items were $107 million
for the first nine months of 1999, down 43 percent from $189 million for the
first nine months of 1998, due to significantly weaker refining margins, higher
crude feedstock costs and higher overall compensation charges, partly offset by
higher refinery runs and lower costs from continued operating improvements.
International Downstream earnings before special items were $76 million for the
first nine months of 1999, down 43 percent from $134 million in the comparable
period in 1998 and reflected weaker refinery margins, partly offset by higher
refining and marketing volumes.
CORPORATE AND OTHER SEGMENT RESULTS
CORPORATE AND OTHER OPERATING
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In millions)
<S> <C> <C> <C> <C>
After-Tax Operating Loss .......... $ (42) $ (9) $ (76) $ (48)
Special Items ..................... 20 -- 20 --
---------- ---------- ---------- ----------
Losses Before Special Items ....... $ (22) $ (9) $ (56) $ (48)
========== ========== ========== ==========
</TABLE>
Third Quarter 1999 versus Third Quarter 1998
Corporate and other operating losses before special items were $22
million for the third quarter of 1999, up 144 percent compared to a loss of $9
million in the comparable period in 1998. Expenses in 1998 were unusually low
20
<PAGE> 23
due to a credit for DuPont employee stock option costs tied to the fall in
DuPont's stock price during the quarter, along with several separation-related
one-time benefits.
First Nine Months 1999 versus First Nine Months 1998
Corporate and other operating losses before special items were $56
million for the first nine months of 1999, up 17 percent from a loss of $48
million in the comparable period in 1998 which resulted from higher overall
compensation charges and administrative costs.
INTEREST AND OTHER NON-OPERATING INCOME (EXPENSES) NET OF TAX
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In millions)
<S> <C> <C> <C> <C>
Interest Expense on Debt .......... $ (51) $ (69) $ (147) $ (69)
Interest Income ................... 5 16 13 55
Exchange Gains (Losses) ........... (3) 27 3 32
Other Corporate Expenses (1) ...... (16) (14) (36) (29)
---------- ---------- ---------- ----------
Total .......................... $ (65) $ (40) $ (167) $ (11)
========== ========== ========== ==========
</TABLE>
- ------------------
(1) Includes other non-operating items.
Third Quarter 1999 versus Third Quarter 1998
Interest and other non-operating expenses for the third quarter of 1999
were a loss of $65 million, up 63 percent compared to a loss of $40 million in
the comparable period in 1998. Prior year results included $27 million in
exchange gains tied to DuPont intercompany loans eliminated as part of the
separation. Current year results do not include any comparable gains.
First Nine Months 1999 versus First Nine Months 1998
Interest and other non-operating expenses for the first nine months of
1999 were a loss of $167 million, compared to a loss of $11 million in the
comparable period in 1998, primarily attributable to an increase in interest
expense from separation-related debt, lower interest income and lower exchange
gains than last year.
TAX MATTERS
As a result of the separation from DuPont and the Offerings, Conoco is
no longer able to combine the results of its operations with those of DuPont in
reporting income for U.S. federal income tax, state tax and non-U.S. income tax
purposes in certain states and countries. Conoco believes this will not have a
material adverse effect on its earnings.
During the nine month period ended September 30, 1999, Conoco's net
deferred tax assets increased, primarily as a result of the recognition of $84
million of carryforwards related to foreign tax credits, alternative fuels tax
credits and the U.S. alternative minimum tax. Conoco believes it is more likely
than not that the additional deferred tax assets related to these foreign tax
credits and alternative fuels tax credits will be realized in the current year.
Further, Conoco believes it is more likely than not the alternative minimum tax
credits will be realized.
YEAR 2000
Historically, many 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 2000. This
could result in major failures or miscalculations.
21
<PAGE> 24
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 production, plant,
transportation and marketing facilities. External parties include any third
party with which 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 implemented for all business units. Mitigation Plans outline a
list of actions that will be taken at specified times to further minimize risk.
These plans have been developed for areas in which the Year 2000 Compliance
Plans may not adequately address all of the relevant risk issues. For example,
Conoco cannot be guaranteed that external partners will be ready for the year
2000. Therefore, operations that rely heavily on external partners have
developed Mitigation Plans as needed. Mitigation Plans currently include:
o maintaining higher than normal staffing for close monitoring of
operations and external supply during and around critical dates;
o increasing some critical inventories and products;
o not transiting shipping lanes with oil tankers, where practical, for a
twenty-four hour period around the rollover;
o suspending most U.S. crude and refined product pipeline operations for
a few hours around midnight, December 31st; and
o staffing communications centers to monitor worldwide events and provide
operations with early notification of any developing Year 2000 related
problems
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. Accordingly, the Emergency
Recovery Plans have been reviewed and supplemented to address Year 2000 risks.
Drills to confirm readiness of these plans started in the second quarter and
will continue through the fourth quarter.
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 98 percent of the
work required to fix issues identified by the Year 2000 Program has been
completed. All mission critical work for our worldwide operations is complete.
Conoco has relied on vendor testing of hardware, software and embedded
chips, with certification and validation through limited internal testing and/or
industry test results. Downtime for normally scheduled plant maintenance was
used to conduct testing.
With respect to external parties, various methods are being used to
assess and monitor readiness including letters, phone calls, meetings and
reviewing SEC disclosure statements. Monitoring of risk in this area will
continue throughout 1999.
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 Conoco's Year 2000 work
is $46 million. 1997 costs were $5 million, 1998 costs were $25 million and
through the third quarter 1999
22
<PAGE> 25
costs were $11 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. Conoco is also taking advantage of
savings presented by its memberships in industry organizations.
Conoco cannot guarantee that all third parties of business importance
to Conoco will be prepared for the Year 2000. Therefore, the most likely worst
case scenario may occur if Conoco's Mitigation and Emergency Response Plans do
not adequately address the nature or extent of disruptions caused by external
third parties, or by abnormal supply and demand patterns in late 1999 and early
2000. These disruptions could materially affect Conoco's operations, liquidity
or capital resources. Given the diverse and global nature of Conoco operations,
varying degrees of readiness and risk exist at each location. Conoco cannot
quantify the impact or probability of these failures. Therefore, Conoco cannot
further anticipate the potential impact of a worst case scenario. Conoco's
Mitigation and Emergency Recovery Plans only address issues within its control.
This program minimizes, but does not eliminate, risks related to external
parties.
This disclosure is provided pursuant to Securities Exchange Act Release
No. 39-40277. As such, it is protected as a forward-looking statement under
Section 21E of the Securities Exchange Act of 1934. See Part II, Item 5(a)
"Disclosure Regarding Forward-Looking Information." This disclosure is also
subject to protection under the Year 2000 Information and Readiness Disclosure
Act of 1998, 15 USC Section 1 (1999), as a "Year 2000 Statement" and "Year 2000
Readiness Disclosure" as defined therein.
RESTRUCTURING
In December 1998, Conoco announced that as a result of a comprehensive
review of its assets and long-term strategy, Conoco 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 are being implemented in 1999 and will 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 the
disposition of assets and past and ongoing consolidation of assets into
operations requiring less employee support as well as better sharing of common
services and functions across regions. Associated with these announcements,
Conoco recorded a charge in the fourth quarter of 1998 of $82 million pretax
($52 million after-tax), nearly all of which represents termination payments and
related employee benefits to be made to persons affected. During the first nine
months of 1999, 578 persons left Conoco under implementation of these
realignment plans. Restructuring costs of $36 million pretax were charged
against the reserve for the first nine months of 1999.
We expect the restructuring efforts provided for in December 1998 to be
largely completed by December 31, 1999 with the remaining identified positions
eliminated in early 2000 as asset sales are finalized.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the nine months ended September 30,
1999 does not differ materially from that discussed under Item 7A of Conoco's
1998 Annual Report on Form 10-K as amended.
23
<PAGE> 26
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 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. We believe 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 Conoco.
ITEM 5. OTHER INFORMATION
(a) DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. You can identify our forward-looking
statements by the words "expects," "intends," "plans," "projects," "believes,"
"estimates" and similar expressions.
We have based the forward-looking statements related to our operations
on our current expectations, estimates and projections about us and the
petroleum industry in general. We caution you that these statements are not
guarantees of future performance and involve risks, uncertainties and
assumptions that we cannot predict. In addition, we have based many of these
forward-looking statements on assumptions about future events that may prove to
be inaccurate. Accordingly, our actual outcomes and results may differ
materially from what we have expressed or forecasted in the forward-looking
statements. Any differences could result from a variety of factors including the
following:
o fluctuations in crude oil and natural gas prices and refining and
marketing margins;
o failure or delays in achieving expected production from existing and
future oil and gas development projects;
o uncertainties inherent in predicting oil and gas reserves and oil and
gas reservoir performance;
o lack of exploration success;
o disruption or interruption of our production facilities due to
accidents or political events;
o international monetary conditions and exchange controls;
o liability for remedial actions under environmental regulations;
o disruption to our operations due to untimely or incomplete resolution
of Year 2000 issues by us or other entities;
o liability resulting from litigation;
o world economic and political conditions; and
o changes in tax and other laws applicable to our business
24
<PAGE> 27
(b) OTHER EVENTS
On August 17, 1999, the board of directors of Conoco Inc. elected A. R.
"Tony" Sanchez, Jr., of Laredo, Texas, to Conoco's board of directors. The board
also accepted the resignation of William R. Rhodes from the Audit and Compliance
Committee, designated him as a member of the Compensation Committee and
designated Mr. Sanchez as a member of the Audit and Compliance Committee.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibit index filed with this Form 10-Q is on page 27.
(b) REPORTS ON FORM 8-K
None
25
<PAGE> 28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONOCO INC.
(Registrant)
By: /s/ W. DAVID WELCH
----------------------------
(As Duly Authorized Officer
and Principal Accounting
Officer)
Date: November 9, 1999
26
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.2 By-laws of Conoco Inc. as amended October 28, 1999
(incorporated by reference to Exhibit 3.2 of the registration
statement of Conoco Inc. on Form S-3/A, Registration No.
333-88573)
10.1 Employment Agreement, dated September 23, 1999, between
Conoco and Archie W. Dunham (incorporated by reference to
Exhibit 10.1 of the registration statement of Conoco Inc. on
Form S-1, Registration No. 333-88573)
10.2 Conoco Inc. Key Employee Severance Plan as amended
(incorporated by reference to Exhibit 10.2 of the
registration statement of Conoco Inc. on Form S-1,
Registration No. 333-88573)
10.3 Conoco Inc. Key Employee Temporary Severance Plan as amended
(incorporated by reference to Exhibit 10.3 of the
registration statement of Conoco Inc. on Form S-1,
Registration No. 333-88573)
10.4 Conoco Salary Deferral & Savings Restoration Plan as amended
(incorporated by reference to Exhibit 10.4 of the
registration statement of Conoco Inc. on Form S-1,
Registration No. 333-88573)
10.5 Directors' Charitable Gift Plan as amended (incorporated by
reference to Exhibit 10.5 of the registration statement of
Conoco Inc. on Form S-1, Registration No. 333-88573)
10.6 1998 Stock and Performance Incentive Plan as amended October
28, 1999*
10.7 1998 Key Employee Stock Performance Plan as amended October
28, 1999*
12 Computation of Ratio of Earnings to Fixed Charges*
27 Financial Data Schedule*
</TABLE>
- -------------
* Filed herein.
27
<PAGE> 1
EXHIBIT 10.6
1998 STOCK AND PERFORMANCE INCENTIVE PLAN
OF
CONOCO INC.
(AS AMENDED EFFECTIVE AS OF OCTOBER 28, 1999)
1. Plan. This 1998 Stock and Performance Incentive Plan of Conoco Inc.
(the "Plan") was adopted by Conoco Inc. (the "Company") to reward certain
corporate officers and key employees of Conoco Inc., certain independent
contractors and nonemployee directors of Conoco Inc. by providing for certain
cash benefits and by enabling them to acquire shares of common stock of Conoco
Inc., and the Plan has been amended effective May 12, 1999.
2. Objectives. The purpose of this 1998 Stock and Performance Incentive
Plan of Conoco Inc. is to further the interests of the Company, its Subsidiaries
and its shareholders by providing incentives in the form of awards to key
employees, independent contractors and directors who can contribute materially
to the success and profitability of the Company and its Subsidiaries and to
provide for issuance of awards in connection with the "Option Program" under
which certain existing DuPont awards will be canceled at the election of the
holder. Such awards will recognize and reward outstanding performances and
individual contributions and give Participants in the Plan an interest in the
Company parallel to that of the shareholders, thus enhancing the proprietary and
personal interest of such Participants in the Company's continued success and
progress. This Plan will also enable the Company and its Subsidiaries to attract
and retain such employees, independent contractors and directors.
3. Definitions. As used herein, the terms set forth below shall have
the following respective meanings:
"Annual Director Award Date" means, for each year beginning on
or after the IPO Closing Date, the first business day of the month next
succeeding the date upon which the annual meeting of stockholders of the Company
is held in such year.
"Authorized Officer" means the Chairman of the Board or the
Chief Executive Officer of the Company (or any other senior officer of the
Company to whom either of them shall delegate the authority to execute any Award
Agreement, where applicable).
"Award" means an Employee Award, a Director Award or an
Independent Contractor Award.
"Award Agreement" means any Employee Award Agreement, Director
Award Agreement or Independent Contractor Award Agreement.
"Board" means the Board of Directors of the Company.
- 1 -
<PAGE> 2
"Cash Award" means an award denominated in cash.
"Chairman" means the Chairman of the Board as of the IPO
Pricing Date.
"Class A Common Stock" means the Class A Common Stock, par
value $.01 per share, of the Company.
"Class B Common Stock" means the Class B Common Stock, par
value $.01 per share, of the Company.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"Committee" means the Compensation Committee of the Board or
such other committee of the Board as is designated by the Board to administer
the Plan; provided, however, that prior to the IPO Closing Date, except for
purposes of any action to be taken by the Committee under the Option Program,
"Committee" shall mean the Compensation Committee of the Board of Directors of
DuPont. For any action to be taken under the Option Program prior to the IPO
Closing Date, the Compensation Committee of the Board of Directors of DuPont
shall function as the "Committee" solely with respect to Participants residing
in the United States.
"Common Stock" means the Class A Common Stock or Class B
Common Stock, except where the context requires that the reference is to one of
such classes.
"Company" means Conoco Inc., a Delaware corporation.
"Director Award" means a Director Option or Stock Unit.
"Director Award Agreement" means a written agreement setting
forth the terms, conditions and limitations applicable to a Director Award.
"Director Option" means a Nonqualified Stock Option granted to
a Nonemployee Director pursuant to paragraph 9 hereof.
"Directors Deferred Compensation Plan" means the Conoco Inc.
Deferred Compensation Plan for Nonemployee Directors established under the Plan.
"Disability" means, with respect to a Nonemployee Director,
the inability to perform the duties of a member of the Board for a continuous
period of more than three months by reason of any medically determinable
physical or mental impairment.
"Dividend Equivalents" means, with respect to shares of
Restricted Stock that are to be issued at the end of the Restriction Period, an
amount equal to all dividends and other distributions (or the economic
equivalent thereof) that are payable to stockholders of record during the
Restriction Period on a like number of shares of Common Stock.
- 2 -
<PAGE> 3
"DuPont" means E. I. du Pont de Nemours and Company, a
Delaware corporation.
"DuPont Award" means an option, stock appreciation right or
other form of stock award granted by DuPont pursuant to the DuPont Stock
Performance Plan, the DuPont Variable Compensation Plan, the DuPont Corporate
Sharing Plan or the Conoco Unit Option Plan.
"Employee" means an employee of the Company or any of its
Subsidiaries and an individual who has agreed to become an employee of the
Company or any of its Subsidiaries and is expected to become such an employee
within the following six months.
"Employee Award" means any Option, SAR, Stock Award, Cash
Award or Performance Award granted, whether singly, in combination or in tandem,
to a Participant who is an Employee pursuant to such applicable terms,
conditions and limitations (including treatment as a Performance Award) as the
Committee may establish in order to fulfill the objectives of the Plan.
"Employee Award Agreement" means a written agreement setting
forth the terms, conditions and limitations applicable to an Employee Award.
"Fair Market Value" of a share of Class A Common Stock or
Class B Common Stock means, as of a particular date, (i) if shares of that class
of Common Stock are listed on a national securities exchange, the mean between
the highest and lowest sales price per share of such Common Stock on the
consolidated transaction reporting system for the principal national securities
exchange on which shares of such Common Stock are listed on that date, or, if
there shall have been no such sale so reported on that date, on the next
succeeding date on which such a sale was so reported, or, at the discretion of
the Committee, the price prevailing on the exchange at the time of exercise,
(ii) if shares of that class of Common Stock are not so listed but are quoted on
the Nasdaq National Market, the mean between the highest and lowest sales price
per share of such class of Common Stock reported by the Nasdaq National Market
on that date, or, if there shall have been no such sale so reported on that
date, on the next succeeding date on which such a sale was so reported, or, at
the discretion of the Committee, the price prevailing on the Nasdaq National
Market at the time of exercise, (iii) if that class of Common Stock is not so
listed or quoted, the mean between the closing bid and asked price on that date,
or, if there are no quotations available for such date, on the next succeeding
date on which such quotations shall be available, as reported by the Nasdaq
Stock Market, or, if not reported by the Nasdaq Stock Market, by the National
Quotation Bureau Incorporated or (iv) if shares of that class of Common Stock
are not publicly traded, the most recent value determined by an independent
appraiser appointed by the Company for such purpose; provided that,
notwithstanding the foregoing, "Fair Market Value" in the case of any Award
granted in connection with the IPO means the price per share of Common Stock set
on the IPO Pricing Date, as set forth in the final prospectus relating to the
IPO.
"Grant Date" means the date an Award is granted to a
Participant pursuant to the Plan.
- 3 -
<PAGE> 4
"Grant Price" means the price at which a Participant may
exercise his or her right to receive cash or Common Stock, as applicable, under
the terms of an Award.
"Incentive Stock Option" means an Option that is intended to
comply with the requirements set forth in Section 422 of the Code.
"Independent Contractor" means a person providing services to
the Company or any of its Subsidiaries, or who will provide such services,
except an Employee or Nonemployee Director.
"Independent Contractor Award" means any Nonqualified Stock
Option, SAR, Stock Award, Cash Award or Performance Award granted, whether
singly, in combination or in tandem, to a Participant who is an Independent
Contractor pursuant to such applicable terms, conditions and limitations as the
Committee may establish in order to fulfill the objectives of the Plan.
"Independent Contractor Award Agreement" means a written
agreement setting forth the terms, conditions and limitations applicable to an
Independent Contractor Award.
"IPO" means the first time a registration statement filed
under the Securities Act of 1933 and respecting an underwritten primary offering
by the Company of shares of Common Stock is declared effective under that Act
and the shares registered by that registration statement are issued and sold by
the Company (otherwise than pursuant to the exercise of any over-allotment
option).
"IPO Closing Date" means the date on which the Company first
receives payment for the shares of Common Stock it sells in the IPO.
"IPO Pricing Date" means the date of the execution and
delivery of an underwriting or other purchase agreement among the Company and
the underwriters relating to the IPO setting forth the price at which shares of
Common Stock will be issued and sold by the Company to the underwriters and the
terms and conditions thereof.
"Nonemployee Director" means an individual serving as a member
of the Board who is not an employee of DuPont or any of its Subsidiaries or the
Company or any of its Subsidiaries.
"Nonqualified Stock Option" means an Option that is not an
Incentive Stock Option.
"Option" means a right to purchase a specified number of
shares of Common Stock at a specified Grant Price, which may be an Incentive
Stock Option or a Nonqualified Stock Option.
"Option Program" means a program involving the cancellation of
certain existing DuPont Awards, and the issuance upon such cancellation of
comparable awards with respect to
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<PAGE> 5
Class A Common Stock, in which certain employees will be given the option to
participate in connection with the IPO.
"Option Program Award" means an Option, SAR or Stock Award
granted pursuant to Section 8(d) in connection with the Option Program.
"Option Value" means the value of a Director Option as
determined on the basis of a generally accepted valuation methodology as
determined by the Board.
"Participant" means an Employee, Director or Independent
Contractor to whom an Award has been granted under this Plan.
"Performance Award" means an award made pursuant to this Plan
to a Participant who is an Employee or Independent Contractor that is subject to
the attainment of one or more Performance Goals.
"Performance Goal" means a standard established by the
Committee, to determine in whole or in part whether a Performance Award shall be
earned.
"Restricted Stock" means Common Stock that is restricted or
subject to forfeiture provisions.
"Restriction Period" means a period of time beginning as of
the Grant Date of an Award of Restricted Stock and ending as of the date upon
which the Common Stock subject to such Award is no longer restricted or subject
to forfeiture provisions.
"Stock Appreciation Right" or "SAR" means a right to receive a
payment, in cash or Common Stock, equal to the excess of the Fair Market Value
or other specified valuation of a specified number of shares of Common Stock on
the date the right is exercised over a specified Grant Price, in each case, as
determined by the Committee.
"Stock Award" means an Award in the form of shares of Common
Stock or units denominated in shares of Common Stock, including an award of
Restricted Stock.
"Stock Unit" means a unit equal to one share of Class A Common
Stock or Class B Common Stock (as determined by the Committee) (as adjusted
pursuant to Section 3.6 of the Directors Deferred Compensation Plan) granted to
a Nonemployee Director.
"Subsidiary" means (i) in the case of a corporation, any
corporation of which the Company directly or indirectly owns shares representing
50% or more of the combined voting power of the shares of all classes or series
of capital stock of such corporation which have the right to vote generally on
matters submitted to a vote of the stockholders of such corporation and (ii) in
the case of a partnership or other business entity not organized as a
corporation, any such business entity of which the Company directly or
indirectly owns 50% or more of the voting, capital or profits interests (whether
in the form of partnership interests, membership interests or otherwise).
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<PAGE> 6
4. Eligibility.
(a) Employees. Employees eligible for the grant of Employee
Awards under this Plan are those who hold positions of responsibility and whose
performance, in the judgment of the Committee, can have a significant effect on
the success of the Company and its Subsidiaries.
(b) Directors. Members of the Board eligible for the grant of
Director Awards under this Plan are those who are Nonemployee Directors.
(c) Independent Contractors. All Independent Contractors are
eligible for the grant of Independent Contractor Awards under this Plan.
5. Common Stock Available for Awards.
(a) Subject to the provisions of paragraph 15 hereof, no Award
shall be granted if it shall result in the aggregate number of shares of Common
Stock issued under the Plan plus the number of shares of Common Stock covered by
or subject to Awards then outstanding (after giving effect to the grant of the
Award in question) to exceed the greater of (a) 20,000,000 shares or (b) 3.3% of
the number of shares of Common Stock (including both Class A and Class B)
outstanding at the time of granting such Award. No more than 7,000,000 shares of
Class A Common Stock and Class B Common Stock (in the aggregate) shall be
available for Incentive Stock Options. The number of shares of Common Stock that
are the subject of Awards under this Plan that are forfeited or terminated,
expire unexercised, are settled in cash in lieu of Common Stock or in a manner
such that all or some of the shares covered by an Award are not issued to a
Participant or are exchanged for Awards that do not involve Common Stock, shall
again immediately become available for Awards hereunder. The Committee may from
time to time adopt and observe such procedures concerning the counting of shares
against the Plan maximum as it may deem appropriate. The Board and the
appropriate officers of the Company shall from time to time take whatever
actions are necessary to file any required documents with governmental
authorities, stock exchanges and transaction reporting systems to ensure that
shares of Common Stock are available for issuance pursuant to Awards.
(b) Option Program Awards shall not be subject to the
limitations in paragraph 8(b), nor shall such Awards count against the
limitations on Common Stock available for Awards set forth in paragraph 5(a).
Option Program Awards shall be subject to such terms and conditions as the
Committee may establish in accordance with Section 8(d), but shall in all events
comply with the applicable provisions of that certain Restructuring, Transfer,
and Separation Agreement to which the Company and DuPont are parties and shall
in all respects comply with the provisions of Exhibit 10.3 thereto (the Employee
Matters Agreement).
6. Administration.
(a) This Plan shall be administered by the Committee except as
otherwise provided herein.
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<PAGE> 7
(b) Subject to the provisions hereof, the Committee shall have
full and exclusive power and authority to administer this Plan and to take all
actions that are specifically contemplated hereby or are necessary or
appropriate in connection with the administration hereof. The Committee shall
also have full and exclusive power to interpret this Plan and to adopt such
rules, regulations and guidelines for carrying out this Plan as it may deem
necessary or proper, all of which powers shall be exercised in the best
interests of the Company and in keeping with the objectives of this Plan. The
Committee may, in its discretion, provide for the extension of the
exercisability of an Employee Award or Independent Contractor Award, accelerate
the vesting or exercisability of an Employee Award or Independent Contractor
Award, eliminate or make less restrictive any restrictions applicable to an
Employee Award or Independent Contractor Award, waive any restriction or other
provision of this Plan (insofar as such provision relates to Employee Awards or
to Independent Contractor Awards) or an Employee Award or Independent Contractor
Award or otherwise amend or modify an Employee Award or Independent Contractor
Award in any manner that is either (i) not adverse to the Participant to whom
such Employee Award or Independent Contractor Award was granted or (ii)
consented to by such Participant. The Committee may grant an Award to an
Employee who it expects to become an employee of the Company or any of its
Subsidiaries within the following six months, with such Award being subject to
the individual's actually becoming an employee within such time period, and
subject to such other terms and conditions as may be established by the
Committee. The Committee may correct any defect or supply any omission or
reconcile any inconsistency in this Plan or in any Award in the manner and to
the extent the Committee deems necessary or desirable to further the Plan
purposes. Any decision of the Committee in the interpretation and administration
of this Plan shall lie within its sole and absolute discretion and shall be
final, conclusive and binding on all parties concerned.
(c) No member of the Committee or officer of the Company to
whom the Committee has delegated authority in accordance with the provisions of
paragraph 7 of this Plan shall be liable for anything done or omitted to be done
by him or her, by any member of the Committee or by any officer of the Company
in connection with the performance of any duties under this Plan, except for his
or her own willful misconduct or as expressly provided by statute.
7. Delegation of Authority. The Committee may delegate to the Chief
Executive Officer and to other senior officers of the Company its duties under
this Plan pursuant to such conditions or limitations as the Committee may
establish. The Committee may engage or authorize the engagement of a third party
administrator to carry out administrative functions under the Plan.
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<PAGE> 8
8. Employee and Independent Contractor Awards.
(a) The Committee shall determine the type or types of
Employee Awards to be made under this Plan and shall designate from time to time
the Employees who are to be the recipients of such Awards. Each Employee Award
shall be embodied in an Employee Award Agreement, which shall contain such
terms, conditions and limitations as shall be determined by the Committee in its
sole discretion and, if required by the Committee, shall be signed by the
Participant to whom the Employee Award is granted and by an Authorized Officer
for and on behalf of the Company. Employee Awards may consist of those listed in
this paragraph 8(a) and may be granted singly, in combination or in tandem.
Employee Awards may also be granted in combination or in tandem with, in
replacement of, or as alternatives to, grants or rights under this Plan or any
other employee plan of the Company or any of its Subsidiaries, including the
plan of any acquired entity. An Employee Award may provide for the grant or
issuance of additional, replacement or alternative Employee Awards upon the
occurrence of specified events, including the exercise of the original Employee
Award granted to a Participant. All or part of an Employee Award may be subject
to conditions established by the Committee, which may include, but are not
limited to, continuous service with the Company and its Subsidiaries,
achievement of specific business objectives, increases in specified indices,
attainment of specified growth rates and other comparable measurements of
performance. Upon the termination of employment by a Participant who is an
Employee, any unexercised, deferred, unvested or unpaid Employee Awards shall be
treated as set forth in the applicable Employee Award Agreement.
(i) Option. An Employee Award may be in the form of an Option,
which may be an Incentive Stock Option or a Nonqualified Stock Option.
The Grant Price of an Option shall be not less than the Fair Market
Value of the Common Stock subject to such Option on the Grant Date.
Subject to the foregoing provisions, the terms, conditions and
limitations applicable to any Options awarded to Employees pursuant to
this Plan, including the Grant Price, the term of the Options and the
date or dates upon which they become exercisable, shall be determined
by the Committee.
(ii) Stock Appreciation Rights. An Employee Award may be in
the form of an SAR. The terms, conditions and limitations applicable to
any SARs awarded to Employees pursuant to this Plan, including the
Grant Price, the term of any SARs and the date or dates upon which they
become exercisable, shall be determined by the Committee.
(iii) Stock Award. An Employee Award may be in the form of a
Stock Award. The terms, conditions and limitations applicable to any
Stock Awards granted pursuant to this Plan shall be determined by the
Committee.
(iv) Cash Award. An Employee Award may be in the form of a
Cash Award. The terms, conditions and limitations applicable to any
Cash Awards granted pursuant to this Plan shall be determined by the
Committee.
(v) Performance Award. Without limiting the type or number of
Employee Awards that may be made under the other provisions of this
Plan, an Employee Award
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<PAGE> 9
may be in the form of a Performance Award. A Performance Award shall be
paid, vested or otherwise deliverable solely on account of the
attainment of one or more pre-established, objective Performance Goals
established by the Committee prior to the earlier to occur of (x) 90
days after the commencement of the period of service to which the
Performance Goal relates and (y) the lapse of 25% of the period of
service (as scheduled in good faith at the time the goal is
established), and in any event while the outcome is substantially
uncertain. A Performance Goal is objective if a third party having
knowledge of the relevant facts could determine whether the goal is
met. Such a Performance Goal may be based on one or more business
criteria that apply to the Employee, one or more business units of the
Company, or the Company as a whole, and may include one or more of the
following: increased revenue, net income, stock price, market share,
earnings per share, return on equity, return on assets, decrease in
costs, shareholder value, net cash flow, total shareholder return,
return on capital, return on investors' capital, operating income,
funds from operations, cash flow, cash from operations, after-tax
operating income, reserve addition, proceeds from dispositions,
production volumes, refinery runs, net cash flow before financing
activities, reserve replacement ratio, finding and development costs,
refinery utilizations and total market value. Unless otherwise stated,
such a Performance Goal need not be based upon an increase or positive
result under a particular business criterion and could include, for
example, maintaining the status quo or limiting economic losses
(measured, in each case, by reference to specific business criteria).
In interpreting Plan provisions applicable to Performance Goals and
Performance Awards, it is the intent of the Plan to conform with the
standards of Section 162(m) of the Code and Treasury Regulation
ss.1.162-27(e)(2)(i), and the Committee in establishing such goals and
interpreting the Plan shall be guided by such provisions. Prior to the
payment of any compensation based on the achievement of Performance
Goals, the Committee must certify in writing that applicable
Performance Goals and any of the material terms thereof were, in fact,
satisfied. Subject to the foregoing provisions, the terms, conditions
and limitations applicable to any Performance Awards made pursuant to
this Plan shall be determined by the Committee.
(b) Notwithstanding anything to the contrary contained in this
Plan excluding paragraph 5(b), the following limitations shall apply to any
Employee Awards made hereunder:
(i) no Participant may be granted, during any calendar year,
Employee Awards consisting of Options or SARs that are exercisable for
more than 2,500,000 shares of Common Stock (whether Class A Common
Stock, Class B Common Stock, or a combination of such classes);
(ii) no Participant may be granted, during any calendar year,
Stock Awards covering or relating to more than 150,000 shares of Common
Stock (whether Class A Common Stock, Class B Common Stock, or a
combination of such classes) (the limitation set forth in this clause
(ii), together with the limitation set forth in clause (i) above, being
hereinafter collectively referred to as the "Stock Based Awards
Limitations"); and
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<PAGE> 10
(iii) no Participant may be granted Employee Awards consisting
of cash or in any other form permitted under this Plan (other than
Employee Awards consisting of Options or SARs or Stock Awards) in
respect of any calendar year having a value determined on the Grant
Date in excess of $7,500,000.
(c) The Committee shall have the sole responsibility and
authority to determine the type or types of Independent Contractor Awards to be
made under this Plan and the terms, conditions and limitations applicable to
such Awards.
(d) Holders of DuPont Awards who elect to participate in the
Option Program may be granted Option Program Awards under this Plan. An Option
Program Award shall generally be subject to the same terms and conditions as the
canceled DuPont Award, with appropriate adjustments to exercise price and the
number of shares subject to the Option Program Award, subject to such other
terms as are determined by the Committee.
9. Director Awards. Each Nonemployee Director of the Company shall be
granted Director Awards in accordance with this paragraph 9 and subject to the
applicable terms, conditions and limitations set forth in this Plan and the
applicable Director Award Agreements. Notwithstanding anything to the contrary
contained herein, Director Awards shall not be granted in any year in which a
sufficient number of shares of Common Stock are not available to make all such
scheduled Awards under this Plan.
(a) Initial Director Options. On the IPO Pricing Date, each
Nonemployee Director, other than the Chairman, and each person who has agreed to
become a Nonemployee Director in connection with the IPO shall be automatically
granted a Director Option on that number of shares of Class A Common Stock such
that the aggregate Option Value is $30,000, and the Chairman shall be
automatically awarded a Director Option on that number of shares of Class A
Common Stock such that the aggregate Option Value is $1,300,000, but in the case
of a person who is not a Nonemployee Director on such date, subject to that
person becoming a Nonemployee Director no later than the next regularly
scheduled meeting of the Board.
(b) Annual Director Options. On each Annual Director Award
Date, each Nonemployee Director other than the Chairman shall automatically be
granted a Director Option (on either of Class A Common Stock or Class B Common
Stock, as determined by the Committee) such that the aggregate Option Value is
$30,000.
(c) Terms of Director Option. Each Director Option shall have
a term of ten years following the Grant Date. The Grant Price of each share of
Common Stock subject to a Director Option shall be equal to the Fair Market
Value of the Common Stock subject to such Option on the Grant Date. All Director
Options shall be fully vested after 6 months of service as a Nonemployee
Director. All Director Options shall become exercisable in increments of
one-third of the total number of shares of Common Stock that are subject thereto
(rounded up to the nearest whole number) on the first and second anniversaries
of the Grant Date and of all remaining shares of Common Stock that are subject
thereto on the third anniversary of the Grant Date. Notwithstanding the
foregoing exercise schedule, all Director Options held by a Nonemployee Director
shall immediately become fully exercisable if the Nonemployee Director
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<PAGE> 11
terminates his or her status as a member of the Board by reason of the
director's death or Disability.
(d) Director Option Agreements. Any Award of Director Options
shall be embodied in a Director Award Agreement, which shall contain the terms,
conditions and limitations set forth above and shall be signed by an Authorized
Officer for and on behalf of the Company.
(e) Initial Stock Units. On the IPO Pricing Date, each
Nonemployee Director, other than the Chairman, and each person who has agreed to
become a Nonemployee Director in connection with the IPO shall be automatically
granted that number of Stock Units under the Director's Deferred Compensation
Plan determined by dividing $95,000 by the Fair Market Value of Class A Common
Stock on the IPO Pricing Date, and the Chairman shall be automatically granted
that number of Stock Units under the Director's Deferred Compensation Plan
determined by dividing $100,000 by the Fair Market Value of Class A Common Stock
on the IPO Pricing Date; provided, however, that in the case of a person who is
not a Nonemployee Director on such date, the grant under this subparagraph (e)
shall be subject to that person becoming a Nonemployee Director no later than
the next regularly scheduled meeting of the Board. Initial Stock Units shall
relate to Class A Common Stock.
(f) Other Stock Unit Grants. From and after the IPO Closing
Date, on the date of his or her first appointment or election to the Board, a
Nonemployee Director shall automatically be granted that number of Stock Units
(relating to Class A Common Stock or Class B Common Stock as determined by the
Committee) determined by dividing $95,000 by the Fair Market Value of the
applicable Common Stock on the date of election to the Board. In addition, on
each Annual Director Award Date, each Nonemployee Director other than the
Chairman shall automatically be granted an additional number of Stock Units
(relating to Class A Common Stock or Class B Common Stock as determined by the
Committee) determined by dividing $20,000 by the Fair Market Value of the
applicable class of Common Stock on such date.
(g) Terms of Stock Units. Stock Units granted under this Plan
shall be accounted for and subject to the terms and conditions of the Director's
Deferred Compensation Plan, including provisions that the Stock Units cannot be
distributed or made available to the Nonemployee Director before the expiration
of three years from the Grant Date, except by reason of death or Disability of
the director, and that dividend equivalents shall be accumulated and reinvested
in additional Stock Units.
(h) Stock Unit Agreements. Any Award of Stock Units shall be
embodied in a Director Award Agreement, which shall contain the terms and
conditions and limitations set forth above, and applicable terms and conditions
from the Director's Deferred Compensation Plan, and shall be signed by the
Participant to whom the Stock Units are granted and by an Authorized Officer for
and on behalf of the Company.
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<PAGE> 12
10. Payment of Awards.
(a) General. Payment made to a Participant pursuant to an
Award may be made in the form of cash or the appropriate class of Common Stock,
or a combination thereof, and may include such restrictions as the Committee
shall determine, including, in the case of Common Stock, restrictions on
transfer and forfeiture provisions. If such payment is made in the form of
Restricted Stock, the applicable Award Agreement relating to such shares shall
specify whether they are to be issued at the beginning or end of the Restriction
Period. In the event that shares of Restricted Stock are to be issued at the
beginning of the Restriction Period, the certificates evidencing such shares (to
the extent that such shares are so evidenced) shall contain appropriate legends
and restrictions that describe the terms and conditions of the restrictions
applicable thereto. In the event that shares of Restricted Stock are to be
issued at the end of the Restricted Period, the right to receive such shares
shall be evidenced by book entry registration or in such other manner as the
Committee may determine. Payment of Stock Units awarded to Nonemployee Directors
shall be governed by the Director's Deferred Compensation Plan.
(b) Deferral. With the approval of the Committee, amounts
payable in respect of Awards may be deferred and paid either in the form of
installments or as a lump-sum payment. The Committee may permit selected
Participants to elect to defer payments of some or all types of Awards or any
other compensation otherwise payable by the Company in accordance with
procedures established by the Committee and may provide that such deferred
compensation may be payable in shares of Common Stock. Any deferred payment
pursuant to an Award, whether elected by the Participant or specified by the
Award Agreement or by the Committee, may be forfeited if and to the extent that
the Award Agreement so provides.
(c) Dividends, Earnings and Interest. Rights to dividends or
Dividend Equivalents may be extended to and made part of any Stock Award,
subject to such terms, conditions and restrictions as the Committee may
establish. The Committee may also establish rules and procedures for the
crediting of interest or other earnings on deferred cash payments and Dividend
Equivalents for Stock Awards.
(d) Substitution of Awards. At the discretion of the
Committee, a Participant who is an Employee or Independent Contractor may be
offered an election to substitute an Employee Award or Independent Contractor
Award for another Employee Award or Independent Contractor Award or Employee
Awards or Independent Contractor Awards of the same or different type.
(e) Cash-out of Awards. At the discretion of the Committee, an
Award that is an Option or SAR may be settled by a cash payment equal to the
difference between the Fair Market Value per share of the applicable class of
Common Stock on the date of exercise and the Grant Price of the Award,
multiplied by the number of shares with respect to which the Award is exercised.
11. Option Exercise. The Grant Price shall be paid in full at the time
of exercise in cash or, if permitted by the Committee and elected by the
optionee, the optionee may purchase such shares by means of tendering Common
Stock or surrendering another Award, including
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<PAGE> 13
Restricted Stock, valued at Fair Market Value on the date of exercise, or any
combination thereof. The Committee shall determine acceptable methods for
Participants to tender Common Stock or other Awards. The Committee may provide
for procedures to permit the exercise or purchase of such Awards by use of the
proceeds to be received from the sale of Common Stock issuable pursuant to an
Award. Unless otherwise provided in the applicable Award Agreement, in the event
shares of Restricted Stock are tendered as consideration for the exercise of an
Option, a number of the shares issued upon the exercise of the Option, equal to
the number of shares of Restricted Stock used as consideration therefor, shall
be subject to the same restrictions as the Restricted Stock so submitted as well
as any additional restrictions that may be imposed by the Committee. The
Committee may adopt additional rules and procedures regarding the exercise of
Options from time to time, provided that such rules and procedures are not
inconsistent with the provisions of this paragraph. An optionee desiring to pay
the Grant Price of an Option by tendering Common Stock using the method of
attestation may, subject to any such conditions and in compliance with any such
procedures as the Committee may adopt, do so by attesting to the ownership of
either Class A Common Stock or Class B Common Stock of the requisite value,
regardless of whether the Option being exercised covers Class A Common Stock or
Class B Common Stock, in which case the Company shall issue or otherwise deliver
to the optionee upon such exercise a number of shares of the class of Common
Stock subject to the Option equal to the result obtained by dividing (a) the
excess of the aggregate Fair Market Value of the shares of the applicable class
of Common Stock subject to the Option for which the Option (or portion thereof)
is being exercised over the Grant Price payable in respect of such exercise by
(b) the Fair Market Value per share of the class of Common Stock subject to the
Option, and the optionee may retain the shares of Common Stock the ownership of
which is attested.
12. Taxes. The Company or its designated third party administrator
shall have the right to deduct applicable taxes from any Employee Award payment
and withhold, at the time of delivery or vesting of cash or shares of Common
Stock under this Plan, an appropriate amount of cash or number of shares of
Common Stock or a combination thereof for payment of taxes or other amounts
required by law or to take such other action as may be necessary in the opinion
of the Company to satisfy all obligations for withholding of such taxes. The
Committee may also permit withholding to be satisfied by the transfer to the
Company of shares of Common Stock theretofore owned by the holder of the
Employee Award with respect to which withholding is required. If shares of
Common Stock are used to satisfy tax withholding, such shares shall be valued
based on the Fair Market Value when the tax withholding is required to be made.
The Committee may provide for loans, on either a short term or demand basis,
from the Company to a Participant who is an Employee or Independent Contractor
to permit the payment of taxes required by law.
13. Amendment, Modification, Suspension or Termination of the Plan. The
Board may amend, modify, suspend or terminate this Plan for the purpose of
meeting or addressing any changes in legal requirements or for any other purpose
permitted by law, except that (i) no amendment or alteration that would
adversely affect the rights of any Participant under any Award previously
granted to such Participant shall be made without the consent of such
Participant and (ii) no amendment or alteration shall be effective prior to its
approval by the stockholders of the Company to the extent such approval is
required by applicable legal requirements.
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<PAGE> 14
14. Assignability. Unless otherwise determined by the Committee and
provided in the Award Agreement, no Award or any other benefit under this Plan
shall be assignable or otherwise transferable except by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security Act,
or the rules thereunder. The Committee may prescribe and include in applicable
Award Agreements other restrictions on transfer. Any attempted assignment of an
Award or any other benefit under this Plan in violation of this paragraph 14
shall be null and void.
15. Adjustments.
(a) The existence of outstanding Awards shall not affect in
any manner the right or power of the Company or its stockholders to make or
authorize any or all adjustments, recapitalizations, reorganizations or other
changes in the capital stock of the Company or its business or any merger or
consolidation of the Company, or any issue of bonds, debentures, preferred or
prior preference stock (whether or not such issue is prior to, on a parity with
or junior to the existing Common Stock) or the dissolution or liquidation of the
Company, or any sale or transfer of all or any part of its assets or business,
or any other corporate act or proceeding of any kind, whether or not of a
character similar to that of the acts or proceedings enumerated above.
(b) In the event of any subdivision or consolidation of
outstanding shares of either class of Common Stock, declaration of a dividend
payable in shares of either class of Common Stock or other stock split, then (i)
the number of shares of such class of Common Stock reserved under this Plan,
(ii) the number of shares of such class of Common Stock covered by outstanding
Awards, (iii) the Grant Price or other price in respect of such Awards, (iv) the
appropriate Fair Market Value and other price determinations for such Awards,
and (v) the Stock Based Awards Limitations shall each be proportionately
adjusted by the Board as appropriate to reflect such transaction. In the event
of any other recapitalization or capital reorganization of the Company, any
consolidation or merger of the Company with another corporation or entity, the
adoption by the Company of any plan of exchange affecting any class of Common
Stock or any distribution to holders of any class of Common Stock of securities
or property (other than normal cash dividends or dividends payable in Common
Stock), the Board shall make appropriate adjustments to (i) the number of shares
of such class of Common Stock covered by Awards, (ii) the Grant Price or other
price in respect of such Awards, (iii) the appropriate Fair Market Value and
other price determinations for such Awards, and (iv) the Stock Based Awards
Limitations to reflect such transaction; provided that such adjustments shall
only be such as are necessary to maintain the proportionate interest of the
holders of the Awards and preserve, without increasing, the value of such
Awards. In the event of a corporate merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation, the Board shall be
authorized (x) to issue or assume Awards by means of substitution of new Awards,
as appropriate, for previously issued Awards or to assume previously issued
Awards as part of such adjustment or (y) to cancel Awards that are Options or
SARs and give the Participants who are the holders of such Awards notice and
opportunity to exercise for 30 days prior to such cancellation.
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<PAGE> 15
16. Restrictions. No Common Stock or other form of payment shall be
issued with respect to any Award unless the Company shall be satisfied based on
the advice of its counsel that such issuance will be in compliance with
applicable federal and state securities laws. Certificates evidencing shares of
Common Stock delivered under this Plan (to the extent that such shares are so
evidenced) may be subject to such stop transfer orders and other restrictions as
the Committee may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, any securities exchange
or transaction reporting system upon which the Common Stock is then listed or to
which it is admitted for quotation and any applicable federal or state
securities law. The Committee may cause a legend or legends to be placed upon
such certificates (if any) to make appropriate reference to such restrictions.
17. Unfunded Plan. This Plan shall be unfunded. Although bookkeeping
accounts may be established with respect to Participants under this Plan, any
such accounts shall be used merely as a bookkeeping convenience. The Company
shall not be required to segregate any assets for purposes of this Plan or
Awards hereunder, nor shall the Company, the Board or the Committee be deemed to
be a trustee of any benefit to be granted under this Plan. Any liability or
obligation of the Company to any Participant with respect to an Award under this
Plan shall be based solely upon any contractual obligations that may be created
by this Plan and any Award Agreement, and no such liability or obligation of the
Company shall be deemed to be secured by any pledge or other encumbrance on any
property of the Company. Neither the Company nor the Board nor the Committee
shall be required to give any security or bond for the performance of any
obligation that may be created by this Plan.
18. Governing Law. This Plan and all determinations made and actions
taken pursuant hereto, to the extent not otherwise governed by mandatory
provisions of the Code or the securities laws of the United States, shall be
governed by and construed in accordance with the laws of the State of Delaware.
19. Effectiveness. The Plan, as approved by the Board, was effective as
of October 16, 1998. This Plan was approved by the stockholder of the Company on
October 19, 1998. The amendments to the Plan to permit the grant of Awards
denominated in Class B Common Stock shall be effective on May 12, 1999 and are
conditioned upon the approval of the stockholders of the Company prior to
December 31, 1999.
- 15 -
<PAGE> 1
EXHIBIT 10.7
1998 KEY EMPLOYEE STOCK PERFORMANCE PLAN
OF
CONOCO INC.
(AS AMENDED EFFECTIVE AS OF OCTOBER 28, 1999)
1. Plan. This 1998 Key Employee Stock Performance Plan of Conoco Inc.
(the "Plan") was adopted by Conoco Inc. (the "Company") to reward certain
employees of the Company by enabling them to acquire shares of common stock of
the Company or receive payments determined by reference to such common stock,
and the Plan has been amended effective May 12, 1999.
2. Objectives. The purpose of this 1998 Stock Performance Plan of
Conoco Inc. is to further the interests of the Company, its Subsidiaries and its
shareholders by providing incentives in the form of awards to employees and to
provide for issuance of awards in connection with the "Option Program" under
which certain existing DuPont awards will be canceled at the election of the
holder. Such awards will give Participants in the Plan an interest in the
Company parallel to that of the shareholders, thus enhancing the proprietary and
personal interest of such Participants in the Company's continued success and
progress.
3. Definitions. As used herein, the terms set forth below shall have
the following respective meanings:
"Authorized Officer" means the Chairman of the Board or the
Chief Executive Officer of the Company (or any other senior officer of the
Company to whom either of them shall delegate the authority to execute any Award
Agreement, where applicable).
"Award" means any Option or SAR granted to a Participant
pursuant to such applicable terms, conditions and limitations as the Committee
may establish in order to fulfill the objectives of the Plan
"Award Agreement" means a written agreement setting forth the
terms, conditions and limitations applicable to an Award.
"Board" means the Board of Directors of the Company.
"Class A Common Stock" means the Class A Common Stock, par
value $.01 per share, of the Company.
"Class B Common Stock" means the Class B Common Stock, par
value $.01 per share, of the Company.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
- 1 -
<PAGE> 2
"Committee" means the Compensation Committee of the Board or
such other committee of the Board as is designated by the Board to administer
the Plan; provided, however, that prior to the IPO Closing Date, Committee shall
mean the Compensation Committee of the Board of Directors of DuPont, except for
purposes of any action to be taken by the Committee under the Option Program or
with respect to Option Program Awards.
"Common Stock" means the Class A Common Stock or Class B
Common Stock, except where the context requires that the reference is to one of
such classes.
"Company" means Conoco Inc., a Delaware corporation.
"Director" means an individual serving as a member of the
Board.
"DuPont" means E. I. du Pont de Nemours and Company, a
Delaware corporation.
"DuPont Award" means an option or stock appreciation right
granted by DuPont pursuant to the DuPont Stock Performance Plan, the DuPont
Variable Compensation Plan, the DuPont Corporate Sharing Plan or the Conoco Unit
Option Plan.
"Employee" means an employee of the Company or any of its
Subsidiaries and an individual who has agreed to become an employee of the
Company or any of its Subsidiaries and is expected to become such an employee
within the following six months.
"Fair Market Value" of a share of Class A Common Stock or
Class B Common Stock means, as of a particular date, (i) if shares of that class
of Common Stock are listed on a national securities exchange, the mean between
the highest and lowest sales price per share of such Common Stock on the
consolidated transaction reporting system for the principal national securities
exchange on which shares of such Common Stock are listed on that date, or, if
there shall have been no such sale so reported on that date, on the next
succeeding date on which such a sale was so reported, or, at the discretion of
the Committee, the price prevailing on the exchange at the time of exercise,
(ii) if shares of that class of Common Stock are not so listed but are quoted on
the Nasdaq National Market, the mean between the highest and lowest sales price
per share of such class of Common Stock reported by the Nasdaq National Market
on that date, or, if there shall have been no such sale so reported on that
date, on the next succeeding date on which such a sale was so reported, or, at
the discretion of the Committee, the price prevailing on the Nasdaq National
Market at the time of exercise, (iii) if that class of Common Stock is not so
listed or quoted, the mean between the closing bid and asked price on that date,
or, if there are no quotations available for such date, on the next succeeding
date on which such quotations shall be available, as reported by the Nasdaq
Stock Market, or, if not reported by the Nasdaq Stock Market, by the National
Quotation Bureau Incorporated or (iv) if shares of that class of Common Stock
are not publicly traded, the most recent value determined by an independent
appraiser appointed by the Company for such purpose; provided that,
notwithstanding the foregoing, "Fair Market Value" in the case of any Award
granted in connection with the IPO means the price per share of Common Stock set
on the IPO Pricing Date, as set forth in the final prospectus relating to the
IPO.
- 2 -
<PAGE> 3
"Grant Date" means the date an Award is granted to a
Participant pursuant to the Plan.
"Grant Price" means the price at which a Participant may
exercise his or her right to receive cash or Common Stock, as applicable, under
the terms of an Award.
"Incentive Stock Option" means an Option that is intended to
comply with the requirements set forth in Section 422 of the Code.
"IPO" means the first time a registration statement filed
under the Securities Act of 1933 and respecting an underwritten primary offering
by the Company of shares of Common Stock is declared effective under that Act
and the shares registered by that registration statement are issued and sold by
the Company (otherwise than pursuant to the exercise of any overallotment
option).
"IPO Closing Date" means the date on which the Company first
receives payment for the shares of Common Stock it sells in the IPO.
"IPO Pricing Date" means the date of the execution and
delivery of an underwriting or other purchase agreement among the Company and
the underwriters relating to the IPO setting forth the price at which shares of
Common Stock will be issued and sold by the Company to the underwriters and the
terms and conditions thereof.
"Nonqualified Stock Option" means an Option that is not an
Incentive Stock Option.
"Option" means a right to purchase a specified number of
shares of Common Stock at a specified Grant Price, which may be an Incentive
Stock Option or a Nonqualified Stock Option.
"Option Program" means a program involving the cancellation of
certain existing DuPont Awards, and the issuance upon such cancellation of
comparable awards with respect to Class A Common Stock, in which certain
employees will be given the option to participate in connection with the IPO.
"Option Program Award" means an Option or SAR granted pursuant
to Section 8(c) in connection with the Option Program.
"Participant" means an Employee to whom an Award has been
granted under this Plan.
"Stock Appreciation Right" or "SAR" means a right to receive a
payment, in cash or in Common Stock, equal to the excess of the Fair Market
Value or other specified valuation of a specified number of shares of Common
Stock on the date the right is exercised over a specified Grant Price, in each
case, as determined by the Committee.
- 3 -
<PAGE> 4
"Subsidiary" means (i) in the case of a corporation, any
corporation of which the Company directly or indirectly owns shares representing
50% or more of the combined voting power of the shares of all classes or series
of capital stock of such corporation which have the right to vote generally on
matters submitted to a vote of the stockholders of such corporation and (ii) in
the case of a partnership or other business entity not organized as a
corporation, any such business entity of which the Company directly or
indirectly owns 50% or more of the voting, capital or profits interests (whether
in the form of partnership interests, membership interests or otherwise).
4. Eligibility. All Employees are eligible for the grant of Awards
under this Plan.
5. Common Stock Available for Awards.
(a) Subject to the provisions of paragraph 14 hereof, no Award
shall be granted if it shall result in the aggregate number of shares
of Common Stock issued under the Plan plus the number of shares of
Common Stock covered by or subject to Awards then outstanding (after
giving effect to the grant of the Award in question) to exceed the
greater of (a) 18,000,000 shares or (b) 3.0% of the number of shares of
Common Stock (including both Class A and Class B) outstanding at the
time of granting such Award. No more than 6,000,000 shares of Class A
Common Stock and Class B Common Stock (in the aggregate) shall be
available for Incentive Stock Options. The number of shares of Common
Stock that are the subject of Awards under this Plan that are forfeited
or terminated, expire unexercised, are settled in cash in lieu of
Common Stock or in a manner such that all or some of the shares covered
by an Award are not issued to a Participant, shall again immediately
become available for Awards hereunder. The Committee may from time to
time adopt and observe such procedures concerning the counting of
shares against the Plan maximum as it may deem appropriate. The Board
and the appropriate officers of the Company shall from time to time
take whatever actions are necessary to file any required documents with
governmental authorities, stock exchanges and transaction reporting
systems to ensure that shares of Common Stock are available for
issuance pursuant to Awards.
(b) Option Program Awards shall not be subject to the
limitations in paragraph 8(b), nor shall such Awards count against the
limitations on Common Stock available for Awards set forth in paragraph
5(a). Option Program Awards shall be subject to such terms and
conditions as the Committee may establish in accordance with Section
8(c), but shall in all events comply with the applicable provisions of
that certain Restructuring, Transfer, and Separation Agreement to which
the Company and DuPont are parties and shall in all respects comply
with the provisions of Exhibit 10.3 thereto (the Employee Matters
Agreement).
6. Administration.
(a) The Plan shall be administered by the Committee.
(b) The Committee shall have full and exclusive power and
authority to administer this Plan and to take all actions that are
specifically contemplated hereby or
- 4 -
<PAGE> 5
are necessary or appropriate in connection with the administration
hereof. The Committee shall also have full and exclusive power to
interpret this Plan and to adopt such rules, regulations and guidelines
for carrying out this Plan as it may deem necessary or proper, all of
which powers shall be exercised in the best interests of the Company
and in keeping with the objectives of this Plan. The Committee may, in
its discretion, provide for the extension of the exercisability of an
Award, accelerate the vesting or exercisability of an Award, eliminate
or make less restrictive any restrictions applicable to an Award, waive
any restriction or other provision of this Plan or otherwise amend or
modify an Award in any manner that is either (i) not adverse to the
Participant to whom such Award was granted or (ii) consented to by such
Participant. The Committee may grant an Award to an Employee who it
expects to become an employee of the Company or any of its Subsidiaries
within the following six months, with such Award being subject to the
individual's actually becoming an employee within such time period, and
subject to such other terms and conditions as may be established by the
Committee. The Committee may correct any defect or supply any omission
or reconcile any inconsistency in this Plan or in any Award in the
manner and to the extent the Committee deems necessary or desirable to
further the Plan purposes. Any decision of the Committee in the
interpretation and administration of this Plan shall lie within its
sole and absolute discretion and shall be final, conclusive and binding
on all parties concerned.
(c) No member of the Committee or officer of the Company to
whom the Committee has delegated authority in accordance with the
provisions of paragraph 7 of this Plan shall be liable for anything
done or omitted to be done by him or her, by any member of the
Committee or by any officer of the Company in connection with the
performance of any duties under this Plan, except for his or her own
willful misconduct or as expressly provided by statute.
7. Delegation of Authority. The Committee may delegate to the Chief
Executive Officer and to other senior officers of the Company its duties under
this Plan pursuant to such conditions or limitations as the Committee may
establish. The Committee may engage or authorize the engagement of a third party
administrator to carry out administrative functions under the Plan.
8. Awards.
(a) The Committee shall determine the type or types of Awards
to be made under this Plan and shall designate from time to time the
Employees who are to be the recipients of Awards. Each Award shall be
embodied in an Award Agreement, which shall contain such terms,
conditions and limitations as shall be determined by the Committee in
its sole discretion and, if required by the Committee, shall be signed
by the Participant to whom the Award is granted and by an Authorized
Officer for and on behalf of the Company. Awards may consist of those
listed in this paragraph 8(a) and may be granted singly, in combination
or in tandem. Awards may also be granted in combination or in tandem
with, in replacement of, or as alternatives to, grants or rights under
this Plan or any other employee plan of the Company or any of its
Subsidiaries, including the plan of any acquired entity. An Award may
provide for the grant or issuance of additional, replacement or
alternative Awards upon the occurrence of specified events, including
the
- 5 -
<PAGE> 6
exercise of the original Award granted to a Participant. All or part of
an Award may be subject to conditions established by the Committee,
which may include, but are not limited to, continuous service with the
Company and its Subsidiaries, achievement of specific business
objectives, increases in specified indices, attainment of specified
growth rates and other comparable measurements of performance. Upon the
termination of employment by a Participant, any unexercised, deferred,
unvested or unpaid Awards shall be treated as set forth in the
applicable Award Agreement.
(i) Options. An Award may be in the form of an
Option, which may be an Incentive Stock Option or a
Nonqualified Stock Option. The Grant Price of an Incentive
Stock Option shall be not less than the Fair Market Value of
the Common Stock subject to such Option on the Grant Date.
Subject to the foregoing provisions, the terms, conditions and
limitations applicable to any Options awarded to Employees
pursuant to this Plan, including the Grant Price, the term of
the Options and the date or dates upon which they become
exercisable, shall be determined by the Committee.
(ii) Stock Appreciation Rights. An Award may be in
the form of an SAR. The terms, conditions and limitations
applicable to any SARs awarded to Employees pursuant to this
Plan, including the Grant Price, the term of any SARs and the
date or dates upon which they become exercisable, shall be
determined by the Committee.
(b) Notwithstanding anything to the contrary contained in this
Plan excluding paragraph 5(b), no Participant may be granted, during
any calendar year, Awards that are exercisable for more than 200,000
shares of Common Stock (whether Class A Common Stock, Class B Common
Stock, or a combination of such classes).
(c) Holders of DuPont Awards who elect to participate in the
Option Program may be granted Option Program Awards under this Plan. An
Option Program Award shall generally be subject to the same terms and
conditions as the canceled DuPont Award, with appropriate adjustments
to exercise price and the number of shares subject to the Option
Program Award, subject to such other terms as are determined by the
Committee.
9. Payment of Awards.
(a) General. Payment made to a Participant pursuant to an
Award may be made in the form of cash or the appropriate class of
Common Stock, or a combination thereof, and may include such
restrictions as the Committee shall determine, including, in the case
of Common Stock, restrictions on transfer and forfeiture provisions.
(b) Deferral. With the approval of the Committee, amounts
payable in respect of Awards may be deferred and paid either in the
form of installments or as a lump-sum payment. The Committee may permit
selected Participants to elect to defer payments of some or all types
of Awards or any other compensation otherwise payable by the Company in
accordance with procedures established by the Committee and may provide
- 6 -
<PAGE> 7
that such deferred compensation may be payable in shares of Common
Stock. Any deferred payment pursuant to an Award, whether elected by
the Participant or specified by the Award Agreement or by the
Committee, may be forfeited if and to the extent that the Award
Agreement so provides.
(c) Substitution of Awards. At the discretion of the
Committee, a Participant may be offered an election to substitute an
Award for another Award or Awards of the same or different type.
(d) Cash-out of Awards. At the discretion of the Committee, an
Award may be settled by a cash payment equal to the difference between
the Fair Market Value per share of the applicable class of Common Stock
on the date of exercise and the Grant Price of the Award, multiplied by
the number of shares with respect to which the Award is exercised.
10. Option Exercise. The Grant Price shall be paid in full at the time
of exercise in cash or, if permitted by the Committee and elected by the
optionee, the optionee may purchase such shares by means of tendering Common
Stock or surrendering another Award valued at Fair Market Value on the date of
exercise, or any combination thereof. The Committee shall determine acceptable
methods for Participants to tender Common Stock or other Awards. The Committee
may provide for procedures to permit the exercise or purchase of such Awards by
use of the proceeds to be received from the sale of Common Stock issuable
pursuant to an Award. The Committee may adopt additional rules and procedures
regarding the exercise of Options from time to time, provided that such rules
and procedures are not inconsistent with the provisions of this paragraph. An
optionee desiring to pay the Grant Price of an Option by tendering Common Stock
using the method of attestation may, subject to any such conditions and in
compliance with any such procedures as the Committee may adopt, do so by
attesting to the ownership of either Class A Common Stock or Class B Common
Stock of the requisite value, regardless of whether the Option being exercised
covers Class A Common Stock or Class B Common Stock, in which case the Company
shall issue or otherwise deliver to the optionee upon such exercise a number of
shares of the class of Common Stock subject to the Option equal to the result
obtained by dividing (a) the excess of the aggregate Fair Market Value of the
shares of the applicable class of Common Stock subject to the Option for which
the Option (or portion thereof) is being exercised over the Grant Price payable
in respect of such exercise by (b) the Fair Market Value per share of the class
of Common Stock subject to the Option, and the optionee may retain the shares of
Common Stock the ownership of which is attested.
11. Taxes. The Company or its designated third party administrator
shall have the right to deduct applicable taxes from any payment hereunder and
withhold, at the time of delivery of cash or shares of Common Stock under this
Plan, an appropriate amount of cash or number of shares of Common Stock or a
combination thereof for payment of taxes or other amounts required by law or to
take such other action as may be necessary in the opinion of the Company to
satisfy all obligations for withholding of such taxes. The Committee may also
permit withholding to be satisfied by the transfer to the Company of shares of
Common Stock theretofore owned by the holder of the Award with respect to which
withholding is required. If shares of Common Stock are used to satisfy tax
withholding, such shares shall be valued based
- 7 -
<PAGE> 8
on the Fair Market Value when the tax withholding is required to be made. The
Committee may provide for loans, on either a short term or demand basis, from
the Company to a Participant to permit the payment of taxes required by law.
12. Amendment, Modification, Suspension or Termination of the Plan. The
Board may amend, modify, suspend or terminate this Plan for the purpose of
meeting or addressing any changes in legal requirements or for any other purpose
permitted by law, except that (i) no amendment or alteration that would
adversely affect the rights of any Participant under any Award previously
granted to such Participant shall be made without the consent of such
Participant and (ii) no amendment or alteration shall be effective prior to its
approval by the stockholders of the Company to the extent such approval is
required by applicable legal requirements.
13. Assignability. Unless otherwise determined by the Committee and
provided in the Award Agreement, no Award or any other benefit under this Plan
shall be assignable or otherwise transferable except by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security Act,
or the rules thereunder. The Committee may prescribe and include in applicable
Award Agreements other restrictions on transfer. Any attempted assignment of an
Award or any other benefit under this Plan in violation of this paragraph 13
shall be null and void.
14. Adjustments.
(a) The existence of outstanding Awards shall not affect in
any manner the right or power of the Company or its stockholders to
make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the capital stock of the Company or
its business or any merger or consolidation of the Company, or any
issue of bonds, debentures, preferred or prior preference stock
(whether or not such issue is prior to, on a parity with or junior to
the existing Common Stock) or the dissolution or liquidation of the
Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding of any kind, whether
or not of a character similar to that of the acts or proceedings
enumerated above.
(b) In the event of any subdivision or consolidation of
outstanding shares of either class of Common Stock, declaration of a
dividend payable in shares of either class of Common Stock or other
stock split, then (i) the number of shares of such class of Common
Stock reserved under this Plan, (ii) the number of shares of such class
of Common Stock covered by outstanding Awards, (iii) the Grant Price in
respect of such Awards, (iv) the appropriate Fair Market Value and
other price determinations for such Awards, and (v) the Award
limitations shall each be proportionately adjusted by the Board as
appropriate to reflect such transaction. In the event of any other
recapitalization or capital reorganization of the Company, any
consolidation or merger of the Company with another corporation or
entity, the adoption by the Company of any plan of exchange affecting
any class of Common Stock or any distribution to holders of any class
of Common Stock of securities or property (other than normal cash
dividends or dividends payable in Common Stock), the Board shall make
appropriate adjustments to (i) the
- 8 -
<PAGE> 9
number of shares of such class of Common Stock covered by Awards, (ii)
the Grant Price in respect of such Awards, (iii) the appropriate Fair
Market Value and other price determinations for such Awards, and (iv)
the Award limitations to reflect such transaction; provided that such
adjustments shall only be such as are necessary to maintain the
proportionate interest of the holders of the Awards and preserve,
without increasing, the value of such Awards. In the event of a
corporate merger, consolidation, acquisition of property or stock,
separation, reorganization or liquidation, the Board shall be
authorized (x) to issue or assume Awards by means of substitution of
new Awards, as appropriate, for previously issued Awards or to assume
previously issued Awards as part of such adjustment or (y) to cancel
Awards that are Options or SARs and give the Participants who are the
holders of such Awards notice and opportunity to exercise for 30 days
prior to such cancellation.
15. Restrictions. No Common Stock or other form of payment shall be
issued with respect to any Award unless the Company shall be satisfied based on
the advice of its counsel that such issuance will be in compliance with
applicable federal and state securities laws. Certificates evidencing shares of
Common Stock delivered under this Plan (to the extent that such shares are so
evidenced) may be subject to such stop transfer orders and other restrictions as
the Committee may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, any securities exchange
or transaction reporting system upon which the Common Stock is then listed or to
which it is admitted for quotation and any applicable federal or state
securities law. The Committee may cause a legend or legends to be placed upon
such certificates (if any) to make appropriate reference to such restrictions.
16. Unfunded Plan. This Plan shall be unfunded. Although bookkeeping
accounts may be established with respect to Participants under this Plan, any
such accounts shall be used merely as a bookkeeping convenience. The Company
shall not be required to segregate any assets for purposes of this Plan or
Awards hereunder, nor shall the Company, the Board or the Committee be deemed to
be a trustee of any benefit to be granted under this Plan. Any liability or
obligation of the Company to any Participant with respect to an Award under this
Plan shall be based solely upon any contractual obligations that may be created
by this Plan and any Award Agreement, and no such liability or obligation of the
Company shall be deemed to be secured by any pledge or other encumbrance on any
property of the Company. Neither the Company nor the Board nor the Committee
shall be required to give any security or bond for the performance of any
obligation that may be created by this Plan.
17. Governing Law. This Plan and all determinations made and actions
taken pursuant hereto, to the extent not otherwise governed by mandatory
provisions of the Code or the securities laws of the United States, shall be
governed by and construed in accordance with the laws of the State of Delaware.
18. Effectiveness. The Plan, as approved by the Board, was effective as
of October 16, 1998. This Plan was approved by the stockholder of the Company on
October 19, 1998. The amendments to the Plan to permit the grant of Awards
denominated in Class B Common Stock shall be effective on May 12, 1999 and are
conditioned upon the approval of the stockholders of the Company prior to
December 31, 1999.
- 9 -
<PAGE> 1
Exhibit 12
CONOCO INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30 Year Ended December 31
------------ ---------------------------------------------------
1999 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Income .................................................. $ 420 $ 450 $ 1,097 $ 863 $ 575 $ 422
Provision for Income Taxes .................................. 259 244 1,010 1,038 774 551
Equity in Earnings of Affiliates ............................ (84) (22) (40) 25 (22) (25)
------- ------- ------- ------- ------- -------
Pretax Income before Adjustment for Minority
Interests in Consolidated Subsidiaries or
Income or Loss from Equity Affiliates .................... 595 672 2,067 1,926 1,327 948
Fixed Charges (see below) ................................... 274 337 174 188 210 160
Amortization of Capitalized Interest ........................ 33 40 46 53 53 49
Distributed Income in Equity Affiliates ..................... 74 105 58 85 42 75
Capitalized Interest ........................................ (4) (72) (94) (75) (95) (59)
------- ------- ------- ------- ------- -------
Total Adjusted Earnings Available for Payment of
Fixed Charges(a)(b) ...................................... $ 972 $ 1,082 $ 2,251 $ 2,177 $ 1,537 $ 1,173
======= ======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges .......................... 3.5 3.2 12.9 11.6 7.3 7.3
Fixed Charges:
Interest and Debt Expense - Borrowings ..................... $ 230 $ 199 $ 36 $ 74 $ 74 $ 63
Capitalized Interest ........................................ 4 72 94 75 95 59
Rental Expense Representative of Interest Factor ............ 40 66 44 39 41 38
------- ------- ------- ------- ------- -------
Total Fixed Charges ......................................... $ 274 $ 337 $ 174 $ 188 $ 210 $ 160
======= ======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges Excluding
Special Items:
Earnings From Above ......................................... $ 972 $ 1,082 $ 2,251 $ 2,177 $ 1,537 $ 1,173
Special Items (pretax)(c) .................................. 60 454 (91) (22) 71 113
------- ------- ------- ------- ------- -------
Earnings Adjusted For Special Items ......................... $ 1,032 $ 1,536 $ 2,160 $ 2,155 $ 1,608 $ 1,286
======= ======= ======= ======= ======= =======
Fixed Charges From Above .................................... $ 274 $ 337 $ 174 $ 188 $ 210 $ 160
======= ======= ======= ======= ======= =======
Ratio of Earnings Adjusted For Special Items to
Fixed Charges ............................................ 3.8 4.6 12.4 11.5 7.7 8.0
</TABLE>
- -----------------------
a) Equity affiliate pretax losses, where incurred, include no guaranteed
payments.
b) There are no fixed charges in subsidiaries with minority interests.
c) Includes special items as reported in third quarter 1999 Form 10-Q. See
Conoco's 1998 Form 10-K as amended for discussion of prior years'
special items.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OF CONOCO INC. AND
CONSOLIDATED SUBSIDIARIES. THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 318
<SECURITIES> 0
<RECEIVABLES> 1,460
<ALLOWANCES> 0
<INVENTORY> 824
<CURRENT-ASSETS> 2,882
<PP&E> 22,611
<DEPRECIATION> 11,356
<TOTAL-ASSETS> 16,182
<CURRENT-LIABILITIES> 3,517
<BONDS> 4,087
0
0
<COMMON> 6
<OTHER-SE> 4,407
<TOTAL-LIABILITY-AND-EQUITY> 16,182
<SALES> 18,972
<TOTAL-REVENUES> 19,149
<CGS> 11,644<F1>
<TOTAL-COSTS> 18,240<F2>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 230
<INCOME-PRETAX> 679
<INCOME-TAX> 259
<INCOME-CONTINUING> 420
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 420
<EPS-BASIC> .67
<EPS-DILUTED> .66
<FN>
<F1>INCLUDES OTHER EXPENSES
<F2>COST OF GOODS SOLD AND OTHER OPERATING EXPENSES; SELLING, GENERAL AND
ADMINISTRATIVE; EXPLORATION EXPENSES; DEPRECIATION, DEPLETION AND AMORTIZATION;
AND TAXES OTHER THAN ON INCOME.
</FN>
</TABLE>
