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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event report): March 23, 1999
CONOCO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-14521 51-0370352
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation) File Number) Identification No.)
600 NORTH DAIRY ASHFORD ROAD
HOUSTON, TEXAS 77079
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: 281-293-1000
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ITEM 5. OTHER EVENTS
The following unaudited pro forma statement of income of Conoco Inc.
("Conoco") for the year ended December 31, 1998, was prepared by Conoco to
illustrate the estimated effects of the initial public offering, the separation
and related transactions from DuPont as described in the notes to these pro
forma financial statements as if they had occurred as of the beginning of the
period presented. Management believes that the assumptions used provide a
reasonable basis for presenting the significant effects directly attributable to
the initial public offering, the separation and related transactions. The pro
forma statement of income does not purport to represent what the results of
operations or financial position of Conoco would actually have been if the
initial public offering, the separation and related transactions had in fact
occurred on such date or to project the results of operations or financial
position of Conoco for any future period or date. This statement should be read
in connection with, and is qualified by reference to, the consolidated financial
statements included in Conoco's Annual Report on Form 10-K for the year ended
December 31, 1998, as amended on March 12, 1999 (the "Form 10-K").
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(b) Pro forma financial information:
1. Pro Forma Statement of Income for Year Ended December 31,
1998
SIGNATURES
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 hereunto duly authorized.
CONOCO INC.
By: /s/ W. DAVID WELCH
-----------------------------
W. David Welch
Controller
Date: March 23, 1999
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PRO FORMA FINANCIAL INFORMATION
1. PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
(in millions, except per share data)
<TABLE>
<CAPTION>
Initial
Public Pro Forma
Pro Forma Offering as
Historic Adjustments Pro forma Adjustments Adjusted
---------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues 23,168 (43)(a) 23,116 (6)(d) 23,110
(9)(b)
Cost of Goods Sold and Other Operating Expenses 13,840 - 13,840 - 13,840
Selling, General and Administrative Expenses 736 - 736 - 736
Stock Option Provision 236 - 236 - 236
Exploration Expenses 380 - 380 - 380
Depreciation, Depletion and Amortization 1,113 - 1,113 - 1,113
Taxes Other Than on Income 5,970 - 5,970 - 5,970
Interest and Debt Expense 199 263 (a) 462 (237)(e) 225
------- ----- ------ ----- -------
Income Before Income Taxes 694 (315) 379 231 610
Provision for Income Taxes 244 (91)(c) 153 65 (e) 218
------- ----- ------ ----- -------
Net Income 450 (224) 226 166 392
======= ===== ====== ===== =======
Pro Forma Earnings Per Share (Note 4)
Basic .95 .62
Diluted .95 .62
Pro Forma Weighted Average Shares Outstanding (Note 4):
Class A 37 154 191
Class B 437 - 437
------- ----- -------
Total Basic 474 154 628
Stock Options 1 8 9
------- ----- -------
Total Diluted 475 162 637
======= ===== =======
</TABLE>
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CONOCO
NOTES TO PRO FORMA STATEMENT OF INCOME
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1. BASIS OF PRESENTATION
The unaudited pro forma statement of income for the year ended December
31, 1998, has been prepared from the consolidated statement of income for the
year ended December 31, 1998, included in the Form 10-K. This unaudited pro
forma statement of income is based on numerous assumptions and includes the
adjustments explained in note 3 below. The unaudited pro forma statement of
income has been prepared as if the initial public offering, separation and
related transactions described in the following paragraphs had occurred as of
the beginning of the period presented. The initial public offering, separation
and related transactions described below are reflected in Conoco's consolidated
balance sheet at December 31, 1998, as included in the Form 10-K, and
accordingly, an unaudited pro forma balance sheet as of December 31, 1998 has
not been presented. The pro forma statement of income does not purport to
represent what the results of operations of Conoco would actually have been if
the initial public offering, separation and related transactions had in fact
occurred on such date or to project the results of operations of Conoco for any
future date or period. The unaudited pro forma statement of income should be
read in connection with, and is qualified by reference to, the consolidated
financial statements included in the Form 10-K.
The pro forma adjustments are based upon currently available
information and contain certain estimates and assumptions. Should DuPont's
ownership interest fall below 50 percent, pro forma Selling, General and
Administrative expenses and guarantee and letter of credit fees would
potentially increase by approximately $15 to $20 on a full year basis. In
addition, certain changes were made in services historically provided to DuPont
by Conoco. These changes included ceasing to provide insurance coverage to
DuPont which historically has been provided through a company-owned captive
insurance company and entering into new contractual commitments related to fees
charged by Conoco for services provided to DuPont such as research and
development and securing supplies of natural gas for various DuPont facilities.
The effect of these changes are not expected to be material to Conoco's results
of operations and are not reflected in the pro forma statement of income.
Management believes the estimates and assumptions provide a reasonable
basis for presenting the significant effects of the initial public offering and
transactions as contemplated in the separation, and that the pro forma
adjustments give appropriate effect to these estimates and assumptions and are
properly applied in the pro forma statement of income.
2. INITIAL PUBLIC OFFERING AND SEPARATION
The initial public offering of the Class A Common Stock of Conoco
commenced on October 21, 1998, and the Class A Common Stock began trading on the
New York Stock Exchange on October 22, 1998. The initial public offering
consisted of 191,456,427 shares of Class A Common Stock issued at a price of $23
per share, for net proceeds of $4,228, after deducting the underwriting
discounts and commissions payable by Conoco. Through DuPont's ownership of 100
percent of Conoco Class B Common Stock (436,543,573 shares), DuPont owns
approximately 70 percent of Conoco's Common Stock representing approximately 92
percent of the combined voting power of all classes of voting stock of Conoco at
December 31, 1998.
In July 1998, a dividend of $7,500 was declared and paid in the form of
a promissory note by Conoco to DuPont. In September 1998, Conoco declared a
dividend of $700 representing a reduction of
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notes receivable from DuPont. In connection with the initial public offering,
DuPont transferred to Conoco the ownership of certain subsidiaries, which
consisted of oil and gas businesses and operations including the associated
assets and liabilities. The transactions related to the separation primarily
included the following: (a) structuring Conoco on a stand-alone basis by
transferring between DuPont and Conoco, certain subsidiaries and assets and
liabilities; (b) settling, to the extent specified, intercompany loans in
existence prior to the initial public offering; (c) delivering a promissory
note to DuPont as settlement for DuPont stock options held by Conoco employees
and other employee benefits related liabilities; (d) using the net proceeds of
the initial public offering to repay a portion of the long-term
borrowings-related parties; and (e) entering into certain agreements with
respect to employee benefit arrangements, information management, the provision
of interim services, financing arrangements, tax sharing, environmental
liabilities and various commercial arrangements. The transactions described
above, excluding the initial public offering, are referred to herein
collectively as the "separation."
Conoco used the net proceeds from the initial public offering to repay
indebtedness owed to DuPont or to purchase a portion of the indebtedness owned
by certain subsidiaries of Conoco to DuPont as follows: (a) to pay accrued
interest ($124) on the $7,500 promissory note and then to repay principal
($2,654) on such note to the extent necessary to reduce the principal amount to
$4,846; (b) to purchase certain intercompany notes denominated in Norwegian
Kroner with an aggregate principal amount of approximately $461 after conversion
to U.S. dollars, together with accrued interest ($9); (c) to pay accrued
interest ($8) and a portion of the principal ($820) on a certain other
intercompany note to the extent necessary to reduce the principal amount to $7;
and (d) to pay a portion of the principal ($152) on an intercompany demand note.
In connection with the initial public offering, Conoco and DuPont gave
certain employees of the Conoco the option, subject to specific country tax and
legal requirements, to participate in the option program, which involves the
cancellation of all or part of their options to purchase DuPont common stock or
stock appreciation rights (SARs) with respect to DuPont common stock and the
issuance by Conoco, upon such cancellation, of comparable Conoco Class A Common
Stock options, or SARs with respect to Conoco Class A Common Stock. The option
program was deemed a change in the terms of certain awards granted to Conoco
employees. As a result, Conoco incurred a non-cash charge to compensation
expense in the fourth quarter of 1998 of $236 pretax or $183 after-tax.
3. PRO FORMA ADJUSTMENTS
Unaudited Pro Forma Statement of Income
(a) Reflects a decrease in interest income due to settlement of notes
receivable - related parties and incremental interest expense resulting from
Conoco's new debt structure. The incremental interest expense was calculated by
multiplying long-term borrowings - related parties ($7,500), certain
intercompany notes denominated in Norwegian Kroner ($461) and certain other
intercompany notes ($820) by an annual interest rate of 6.0125 percent on those
borrowings and subtracting the associated historical related party interest
cost of $264 for the year ended December 31, 1998. The historical related party
interest cost excludes capitalized interest of $72.
(b) Reflects the impact of changes in currency exchange rates on certain
intercompany loans denominated in foreign currencies purchased by Conoco from
DuPont as part of the restructuring and settlement of notes prior to the
initial public offering as provided for in the separation. These loans are to
Western European petroleum operations for which the local currency has been
designated as the functional currency.
(c) Reflects the impact of the pro forma adjustments (primarily increased
interest expense resulting from Conoco's new debt structure) and a separate
return income tax calculation method on the provision for income taxes. The
historic tax provision for the period prior to the initial public offering was
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calculated on a loss benefit method. In accordance with SEC Staff Accounting
Bulletin No. 55, the pro forma provision for income taxes is calculated using a
separate return method. The pro forma statement of income for the year ended
December 31, 1998 reflects an increase of $6 in the pro forma provision for
income taxes, due to the change to the separate return method presentation. The
increase is attributable to a reduction in tax benefits resulting from the
transfer of international exploration subsidiaries from one tax jurisdiction to
another, partially offset by utilization of additional foreign credits against
the provision of U.S. taxes.
Initial Public Offering Adjustments
(d) Reflects the impact of changes in currency exchange rates on certain
intercompany loans denominated in foreign currencies purchased by Conoco from
DuPont after the initial public offering. These loans are to Western European
petroleum operations for which the local currency has been designated as the
functional currency.
(e) Represents the reduction of interest expense and the associated
increase in income taxes resulting from the payment to DuPont of the borrowings
described in note 2 relating to the use of net proceeds and the tax impact of
the adjustment described in (d) above.
4. EARNINGS PER SHARE
Unaudited pro forma basic earnings per share includes the shares of Conoco
Class A and Class B Common Stock outstanding immediately after the initial
public offering. Pro forma diluted earnings per share includes the dilutive
effect of the 8.5 million shares of Class A Common Stock issuable upon exercise
of Conoco stock options, after applying the treasury stock method, which were
issued in the option program upon cancellation of outstanding DuPont stock
options. The adjustments for the basic and diluted pro forma weighted average
shares give effect to the above.
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