<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 11, 1994
AND DECLARED EFFECTIVE ON JULY , 1994.
REGISTRATION NO. 33-53481
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ATLANTIC RICHFIELD COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-0371610
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
515 SOUTH FLOWER STREET
LOS ANGELES, CALIFORNIA 90071
213--486-3511
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
HOWARD L. EDWARDS, ESQ.
CORPORATE SECRETARY
ATLANTIC RICHFIELD COMPANY
515 SOUTH FLOWER STREET
LOS ANGELES, CALIFORNIA 90071
213--486-1461
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES OF COMMUNICATIONS TO:
DIANE A. WARD, ESQ. JOHN W. WHITE, ESQ.
SENIOR COUNSEL--SECURITIES & FINANCE CRAVATH, SWAINE & MOORE
ATLANTIC RICHFIELD COMPANY WORLDWIDE PLAZA
515 SOUTH FLOWER STREET 825 EIGHTH AVENUE
LOS ANGELES, CALIFORNIA 90071 NEW YORK, NEW YORK 10019
213--486-2808 212--474-1732
----------------
Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE.
----------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [_]
----------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
EXPLANATORY NOTE
The prospectus relating to the Exchangeable Notes being registered hereby to
be used in connection with a United States offering (the "U.S. Prospectus") is
set forth following this page. The prospectus to be used in a concurrent
international offering (the "International Prospectus") will consist of
alternate pages set forth following the U.S. Prospectus and the balance of the
pages included in the U.S. Prospectus for which no alternate is provided. The
U.S. Prospectus and the International Prospectus are identical except that they
contain different front and back cover pages, different inside front cover
pages and different descriptions of the plan of distribution (contained under
the caption "Underwriting" in both the U.S. Prospectus and the International
Prospectus). Alternate pages for the International Prospectus are separately
designated.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 11, 1994
35,000,000 EXCHANGEABLE NOTES
ATLANTIC RICHFIELD COMPANY
[LOGO OF ARCO]
% EXCHANGEABLE NOTES DUE , 1997
(SUBJECT TO EXCHANGE INTO SHARES OF COMMON STOCK, PAR VALUE $1.00 PER SHARE, OF
LYONDELL PETROCHEMICAL COMPANY)
----------
Of the 35,000,000 Exchangeable Notes offered, 30,000,000 Exchangeable Notes
are being offered hereby in the United States and 5,000,000 Exchangeable Notes
are being offered in a concurrent international offering outside the United
States. The initial public offering price and the aggregate underwriting
discount per Exchangeable Note will be identical for both offerings. See
"Underwriting."
The principal amount of each of the % Exchangeable Notes due , 1997 of
Atlantic Richfield Company being offered hereby will be $ (the closing
price of the common stock, par value $1.00 per share, of Lyondell Petrochemical
Company on , 1994, as reported on the New York Stock Exchange Composite
Tape) (the "Initial Price"). The Exchangeable Notes will mature on , 1997.
Interest on the Exchangeable Notes, at the rate of % of the principal amount
per annum, is payable quarterly in arrears on , , and ,
beginning , 1994. Exchangeable Notes are not subject to redemption or any
sinking fund prior to maturity.
At maturity (including as a result of acceleration or otherwise), the
principal amount of each Exchangeable Note will be mandatorily exchanged by
ARCO into a number of shares of Lyondell Common Stock (or, at ARCO's option,
cash with an equal value) at the Exchange Rate. The Exchange Rate is equal to,
subject to certain adjustments, (a) if the Maturity Price per share of Lyondell
Common Stock is greater than or equal to $ per share of Lyondell Common
Stock (the "Threshold Appreciation Price"), shares of Lyondell Common Stock
per Exchangeable Note, (b) if the Maturity Price is less than the Threshold
Appreciation Price but is greater than the Initial Price, a fractional share of
Lyondell Common Stock per Exchangeable Note so that the value thereof at the
Maturity Price equals the Initial Price and (c) if the Maturity Price is less
than or equal to the Initial Price, one share of Lyondell Common Stock per
Exchangeable Note. The "Maturity Price" means the average Closing Price per
share of Lyondell Common Stock on the 20 Trading Days immediately prior to
maturity. Accordingly, holders of the Exchangeable Notes will not necessarily
receive an amount equal to the principal amount thereof. The Exchangeable Notes
will be unsecured obligations of ARCO ranking pari passu with all of its other
unsecured and unsubordinated indebtedness. Lyondell will have no obligations
with respect to the Exchangeable Notes. See "Description of the Exchangeable
Notes."
Attached hereto as Appendix A and included as part of this Prospectus is a
prospectus of Lyondell covering the shares of Lyondell Common Stock which may
be received by a holder of Exchangeable Notes at maturity. The Lyondell
prospectus relates to an aggregate of 39,921,400 shares of Lyondell Common
Stock.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSIDER CAREFULLY THE INFORMATION
CONTAINED UNDER "SPECIAL CONSIDERATIONS RELATING TO EXCHANGEABLE NOTES."
For a discussion of certain United States federal income tax consequences for
holders of Exchangeable Notes, see "Certain United States Federal Income Tax
Considerations."
The Lyondell Common Stock is listed on the New York Stock Exchange under the
symbol LYO.
Application has been made to list the Exchangeable Notes on the New York
Stock Exchange under the symbol "LYX."
The Exchangeable Notes will be represented by Global Securities registered in
the name of the nominee of The Depository Trust Company, which will act as the
Depository. Interests in the Exchangeable Notes represented by Global
Securities will be shown on, and transfers thereof will be effected only
through, records maintained by the Depository and its direct and indirect
participants. Except as described herein, Exchangeable Notes in definitive form
will not be issued.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL
OFFENSE.
----------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (1) DISCOUNT (2) ARCO (1) (3)
---------- ------------ ------------
<S> <C> <C> <C>
Per Exchangeable Note...................... % % %
Total (4).................................. $ $ $
</TABLE>
- -----
(1) Plus accrued interest, if any, from July , 1994.
(2) ARCO and the Company have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933.
(3) Before deducting expenses payable by ARCO estimated to be $3,500,000.
(4) ARCO has granted the Underwriters an option, exercisable within 30 days
from the date hereof, to purchase up to an additional 4,921,400
Exchangeable Notes at the Price to Public, less Underwriting Discount, for
the purpose of covering over-allotments, if any. If the Underwriters
exercise such option in full, the total Price to Public, Underwriting
Discount, and Proceeds to ARCO will be $ , $ and
$ , respectively. See "Underwriting."
----------
The Exchangeable Notes are offered subject to receipt and acceptance by the
U.S. Underwriters, to prior sale and to their right to reject any order in
whole or in part and to withdraw, cancel or modify the offer without notice. It
is expected that delivery of Global Securities representing the Exchangeable
Notes will be made to The Depository Trust Company on or about July , 1994.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
----------
The date of this Prospectus is July , 1994.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
<PAGE>
AVAILABLE INFORMATION
ARCO is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements, and other information filed by ARCO with the
Commission pursuant to the informational requirements of the Exchange Act can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, Seven World Trade Center, 13th Floor, New York, New York 10048 and
Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be
obtained upon written request addressed to the Securities and Exchange
Commission, Public Reference Section, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Such reports, proxy statements and
other information can also be inspected at the offices of the New York Stock
Exchange, on which one or more of ARCO's securities are listed.
DOCUMENTS INCORPORATED BY REFERENCE
ARCO incorporates herein by this reference the following documents filed
pursuant to the Exchange Act, which also have been filed with the Commission
(File No. 1-1196):
(a) ARCO's Annual Report on Form 10-K for the year ended December 31,
1993;
(b) ARCO's Current Report on Form 8-K dated March 28, 1994; and
(c) ARCO's Report on Form 10-Q for the quarterly period ended March 31,
1994.
All documents filed by ARCO pursuant to Sections 13(a), 13(c), 13(d), 14 and
15(d) of the Exchange Act after the date hereof and prior to the termination of
the offering of the Exchangeable Notes offered hereby (collectively with the
documents referenced above the " '34 Act Reports") shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of
filing of such documents.
ARCO WILL FURNISH WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL
OWNER, TO WHOM THIS PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF
SUCH PERSON, A COPY OF ANY AND ALL OF THE '34 ACT REPORTS INCORPORATED HEREIN
BY REFERENCE (NOT INCLUDING EXHIBITS TO SUCH REPORTS, UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH REPORTS) AND ANY OTHER
DOCUMENTS SPECIFICALLY IDENTIFIED HEREIN AS INCORPORATED BY REFERENCE INTO THE
REGISTRATION STATEMENT TO WHICH THIS PROSPECTUS RELATES, OR INTO ANOTHER '34
ACT REPORT OF ARCO. REQUESTS SHOULD BE ADDRESSED TO: JUNE WORTH, SECURITIES
REGULATION COORDINATOR, ATLANTIC RICHFIELD COMPANY, 515 SOUTH FLOWER STREET,
LOS ANGELES, CALIFORNIA 90071 (TELEPHONE: 213-486-1450).
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE EXCHANGEABLE
NOTES AND THE LYONDELL COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
SPECIAL CONSIDERATIONS RELATING TO EXCHANGEABLE NOTES
As described in more detail below, the trading price of the Exchangeable
Notes may vary considerably prior to maturity (including by acceleration or
otherwise, "Maturity") due to, among other things, fluctuations in the price of
Lyondell Common Stock and other events that are difficult to predict and beyond
ARCO's control.
COMPARISON TO OTHER DEBT SECURITIES; RELATIONSHIP TO LYONDELL COMMON STOCK
The terms of the Exchangeable Notes differ from those of ordinary debt
securities in that the amount that a holder of the Exchangeable Notes will
receive upon mandatory exchange of the principal amount thereof at Maturity is
not fixed, but is based on the price of the Lyondell Common Stock as specified
in the Exchange Rate (as defined under "Description of the Exchangeable
Notes"). There can be no assurance that such amount receivable by such holder
upon exchange at Maturity will be equal to or greater than the principal amount
of the Exchangeable Notes. For example, if the Maturity Price of the Lyondell
Common Stock is less than the Initial Price, such amount receivable upon
exchange will be less than the principal amount paid for the Exchangeable
Notes, in which case an investment in Exchangeable Notes may result in a loss.
In addition, the opportunity for equity appreciation afforded by an
investment in the Exchangeable Notes is less than the opportunity for equity
appreciation afforded by an investment in the Lyondell Common Stock because the
amount receivable by holders of the Exchangeable Notes upon exchange at
Maturity will only exceed the principal amount of such Exchangeable Notes if
the Maturity Price exceeds the Threshold Appreciation Price (which represents
an appreciation of % of the Initial Price). Holders of the Exchangeable
Notes will only be entitled to receive upon exchange at Maturity % of any
appreciation of the value of Lyondell Common Stock in excess of the Threshold
Appreciation Price. Because the price of the Lyondell Common Stock is subject
to market fluctuations, the value of the Lyondell Common Stock (or, at the
option of the Company, the amount of cash) received by a holder of Exchangeable
Notes upon exchange at Maturity, determined as described herein, may be more or
less than the principal amount of the Exchangeable Notes.
It is impossible to predict whether the price of Lyondell Common Stock will
rise or fall. Trading prices of Lyondell Common Stock will be influenced by
Lyondell's operational results and by complex and interrelated political,
economic, financial and other factors that can affect the commodity
petrochemical and refining markets generally. See the prospectus relating to
Lyondell and to Lyondell Common Stock attached hereto as Appendix A and
included as part of this Prospectus.
DILUTION OF LYONDELL COMMON STOCK
The amount that holders of the Exchangeable Notes are entitled to receive
upon the mandatory exchange at Maturity is subject to adjustment for certain
events arising from stock splits and combinations, stock dividends and certain
other actions of Lyondell that modify its capital structure. See "Description
of the Exchangeable Notes--Dilution Adjustments." Moreover, the amount to be
received by Note holders upon exchange at Maturity may not be adjusted for
other events, such as offerings of Lyondell Common Stock for cash or in
connection with acquisitions, that may adversely affect the price of the
Lyondell Common Stock and, because of the relationship of such amount to be
received upon exchange to the price of Lyondell Common Stock, such other events
may adversely affect the trading price of the Exchangeable Notes. There can be
no assurance that Lyondell will not make offerings of Lyondell Common Stock or
take such other action in the future or as to the amount of such offerings, if
any. In addition, until such time as ARCO shall deliver shares of Lyondell
Common Stock to holders of the Exchangeable Notes at Maturity thereof (in the
event ARCO does not exercise its option to deliver cash), holders of the
Exchangeable Notes will not be entitled to any rights with respect to the
Lyondell Common Stock (including without limitation voting rights and the
rights to receive any dividends or other distributions in respect thereof).
3
<PAGE>
POSSIBLE ILLIQUIDITY OF THE SECONDARY MARKET
It is not possible to predict how the Exchangeable Notes will trade in the
secondary market or whether such market will be liquid or illiquid.
Exchangeable Notes are novel and innovative securities and there is currently
no secondary market for the Exchangeable Notes. The Underwriters currently
intend, but are not obligated, to make a market in the Exchangeable Notes.
There can be no assurance that a secondary market will develop or, if a
secondary market does develop, that it will provide the holders of the
Exchangeable Notes with liquidity of investment or that it will continue for
the life of the Exchangeable Notes.
ARCO has applied for listing of the Exchangeable Notes on the NYSE. However,
there can be no assurance that the Exchangeable Notes will not later be
delisted or that trading in the Exchangeable Notes on the NYSE will not be
suspended. In the event of a delisting or suspension of trading on such
exchange, ARCO will apply for listing of the Exchangeable Notes on another
national securities exchange or for quotation on another trading market. If
the Exchangeable Notes are not listed or traded on any securities exchange or
trading market, or if trading of the Exchangeable Notes is suspended, pricing
information for the Exchangeable Notes may be more difficult to obtain, and
the liquidity of the Exchangeable Notes may be adversely affected.
NO OBLIGATION ON THE PART OF LYONDELL WITH RESPECT TO THE EXCHANGEABLE NOTES
Lyondell has no obligations with respect to the Exchangeable Notes or
amounts to be paid to holders thereof, including any obligation to take the
needs of ARCO or of holders of the Exchangeable Notes into consideration for
any reason. Lyondell will not receive any of the proceeds of the offering of
the Exchangeable Notes made hereby and is not responsible for the
determination of the timing of, prices for or quantities of the Exchangeable
Notes to be issued or the determination or calculation of the amount to be
paid upon mandatory exchange at Maturity.
WITHDRAWAL BY ARCO OF ACTIVE INVOLVEMENT IN LYONDELL
Following consummation of the offering, ARCO currently intends, but is not
committed by any agreement or otherwise, to vote its shares of Lyondell Common
Stock proportionately to the votes cast by the non-ARCO stockholders,
including with respect to the election of directors, except under certain
circumstances. ARCO has agreed, during the period the Exchangeable Notes are
outstanding, to limit certain of its rights as a stockholder of Lyondell,
including its right to call a special meeting of stockholders, to take action
by written consent, to solicit proxies in respect of the election of directors
or certain other matters, and to initiate or solicit proposals by a single
entity or group of affiliated entities to acquire all or substantially all of
the Lyondell Common Stock or otherwise to acquire Lyondell. ARCO also intends
to cause the five ARCO officers who currently serve on Lyondell's Board of
Directors to resign following issuance of the Exchangeable Notes; however,
ARCO will retain the right to nominate and vote for candidates for Lyondell's
Board of Directors. ARCO is not required to retain its shares of Lyondell
Common Stock pursuant to the terms of the Exchangeable Notes or otherwise.
ARCO remains free to sell all or any portion of its Lyondell Common Stock in a
public or private offering intended to result in widespread distribution or
pursuant to a tender or exchange offer; subject to the foregoing, ARCO has
agreed, during the period the Exchangeable Notes are outstanding, and
continuing for a period of one year thereafter, not to sell all or any portion
of its Lyondell Common Stock to a single entity or group of affiliated
entities in a private transaction without the approval of Lyondell's Board of
Directors. For all of these reasons, there can be no assurance that ARCO will
have any influence over the actions and decisions taken and made by Lyondell
following consummation of the offering.
ATLANTIC RICHFIELD COMPANY
Atlantic Richfield Company ("ARCO") was incorporated in 1870 under the laws
of Pennsylvania as The Atlantic Refining Company. Atlantic Petroleum Storage
Company, a predecessor to The Atlantic Refining Company, began operations in
1866. ARCO's principal executive offices are at 515 South Flower
4
<PAGE>
Street, Los Angeles, California 90071 (Telephone (213) 486-3511). ARCO's
present name was adopted subsequent to the merger of Richfield Oil Corporation
into The Atlantic Refining Company in 1966. In 1969, Sinclair Oil Corporation
was merged into ARCO. In 1977, The Anaconda Company was merged into a wholly
owned subsidiary of ARCO and, on December 31, 1981, that subsidiary was merged
into ARCO. On May 7, 1985, ARCO was reincorporated in the State of Delaware.
Unless indicated otherwise, the term "ARCO" as used herein refers to Atlantic
Richfield Company or Atlantic Richfield Company and one or more of its
consolidated subsidiaries.
ARCO, including its subsidiaries, constitutes one of the largest integrated
enterprises in the petroleum industry, with its principal operations conducted
in the United States. ARCO conducts operations in two business segments:
resources and products. ARCO also owns a 49.9 percent equity interest in
Lyondell, or 39,921,400 shares of Lyondell Common Stock, which operates
petrochemical and petroleum processing businesses.
ARCO's resources segment includes the exploration, development and
production of petroleum, which includes petroleum liquids (crude oil,
condensate and natural gas liquids ("NGLs")) and natural gas, the purchase and
sale of petroleum liquids and natural gas, and the mining and sale of coal.
The exploration, development and production of all of ARCO's oil and gas
interests in the State of Alaska and surrounding offshore waters are conducted
through a wholly owned subsidiary, ARCO Alaska, Inc. The exploration,
development and production of ARCO's oil and gas interests in foreign
countries are conducted through the ARCO International Oil and Gas division.
The mining and marketing of coal from surface and underground mines located in
the western United States and in Australia are conducted through the ARCO Coal
division.
In October 1993, ARCO reorganized the ARCO Oil and Gas division, which
operated ARCO's Lower 48 exploration, development, production and marketing
activities. The cornerstone of ARCO's program to reorganize its Lower 48
operations is Vastar Resources, Inc. ("Vastar"), which on a stand alone basis
is one of the largest independent (non-integrated) oil and gas companies in
the United States. On July 5, 1994, Vastar consummated the sale of 17,250,000
shares of its Common Stock to the public at an initial offering price of $28
per share. ARCO currently owns 80,000,001 shares of Vastar's Common Stock,
which represents 82.3% of Vastar's outstanding Common Stock. Net proceeds to
Vastar were $457 million. Vastar is engaged in the exploration for and the
development and production of natural gas and, to a lesser extent, crude oil
in selected major producing basins in the Gulf of Mexico, the Gulf Coast, the
San Juan Basin and the Mid-Continent areas. ARCO conducts its other operations
in the Lower 48 through its ARCO Permian business unit, which exploits long-
lived producing fields in the Permian and East Texas basins; its ARCO Western
Energy business unit, which focuses on oil production primarily from five
producing oil fields in California and related cogeneration operations; and
ARCO Long Beach Inc., a wholly-owned subsidiary, which manages the optimized
waterflood program for the Long Beach unit of the Wilmington Field pursuant to
a contractual arrangement with the State of California and the City of Long
Beach.
ARCO's products segment includes the refining and transportation of
petroleum and petroleum products, the marketing of petroleum products on the
West Coast and the manufacture and sale of intermediate chemicals and
specialty products. The ARCO Products division is a refiner and marketer of
refined petroleum products on the West Coast. ARCO Chemical Company, a
subsidiary of which ARCO owns 83.3 percent ("ARCO Chemical"), produces and
markets on a worldwide basis certain intermediate chemicals and specialty
products, including propylene oxide and its derivatives, tertiary butyl
alcohol and its derivatives, and styrene monomer and its derivatives. The ARCO
Transportation division operates domestic facilities for the transportation
and storage of petroleum liquids, refined petroleum products, petrochemicals
and natural gas.
5
<PAGE>
USE OF PROCEEDS
Proceeds to be received from the sale of the Exchangeable Notes offered
hereby will be used, together with internally generated funds, for general
corporate purposes, including capital expenditures and retirement of maturing
debt. Pending ultimate application, the proceeds from the sale of the
Exchangeable Notes will be used to reduce short-term debt or will be invested
in marketable securities.
LYONDELL PETROCHEMICAL COMPANY
ARCO owns a 49.9 percent equity interest in Lyondell, or 39,921,400 shares of
Lyondell Common Stock, which is accounted for on the equity method. Prior to
1989, Lyondell was first a division and then a wholly-owned subsidiary of ARCO.
Lyondell is a manufacturer and marketer of petrochemicals and, through its
interest in LYONDELL-CITGO Refining Company Ltd. ("LCR"), a manufacturer of
refined petroleum products. Lyondell produces a wide variety of petrochemicals,
including olefins (primarily ethylene, propylene and butadiene), polyolefins
(low density polyethylene and polypropylene), methanol, MTBE (methyl tertiary
butyl ether) and aromatics. Lyondell's refining business is conducted through
its approximate 90 percent interest in LCR, which operates a 265,000 barrels
per day refinery (the "Refinery"). LCR sells the majority of the gasoline, jet
fuel and heating oil it produces to CITGO Petroleum Corporation ("CITGO"),
which currently has an approximate 10 percent interest in LCR.
For the year ended December 31, 1993, Lyondell recorded total revenues of
approximately $263 million from sales of petrochemical products to ARCO
Chemical. Lyondell also provides certain plant services at these facilities
owned by ARCO Chemical on Lyondell property. ARCO Chemical in turn provides
certain feedstocks and supplies to Lyondell. Lyondell historically purchased a
portion of its crude oil, natural gas and NGLs requirements from ARCO. Lyondell
currently purchases certain of these requirements from ARCO's Lower 48 business
units under short-term contracts and/or on the spot market at prices based on
prevailing market prices. In addition, Lyondell and ARCO have entered into a
services agreement and various leases, technology transfers and licenses and
other arrangements. Lyondell has various lease agreements with ARCO Pipe Line
Company ("APL"), including one relating to APL's private pipeline systems.
During 1993, Lyondell paid ARCO and its consolidated subsidiaries an aggregate
of $73 million under these agreements, arrangements and transactions and
received an aggregate of $278 million, including sales to ARCO Chemical.
In July 1993, Lyondell and CITGO Petroleum Corporation ("CITGO"), a
subsidiary of Petroleos de Venezuela, S.A. ("PDVSA"), the Venezuelan national
oil company, created a jointly owned Texas limited liability company, LYONDELL-
CITGO Refining Company Ltd. ("LCR"), that owns and operates Lyondell's refining
business. Lyondell contributed its refining assets (including the lube oil
blending and packaging plant in Birmingport, Alabama) and refining working
capital to LCR. CITGO contributed $100 million to LCR in 1993 (excluding its
contribution towards the upgrade project described below) giving it an
approximate 10 percent interest in LCR. Prior to the in-service date for the
upgrade project, CITGO is required to reinvest its share of LCR's operating
cash flow and thereby increase its interest in LCR. LCR is undertaking a major
upgrade project at the Refinery to enable the facility to process substantial
additional volumes of very heavy crude oil. The upgrade project, which is
subject to regulatory approvals and the resolution of certain other matters, is
intended to increase the heavy crude oil processing capability of the Refinery
from approximately 130,000 barrels per day of 22 degree API gravity crude oil
to approximately 200,000 barrels per day of 17 degree API gravity Venezuelan
crude oil in a full conversion mode. The upgrade is not intended to increase
the total throughput of the Refinery, but rather its ability to process heavier
crude oil. The cost of the upgrade project, based on the detailed engineering
completed to date, currently is estimated to be approximately $830 million. In
addition, LCR has estimated a 15 percent ($125 million) allowance for
contingency costs, which would increase the total project cost estimate to
approximately $955 million. Completion of the upgrade project is anticipated in
late 1996 or early 1997.
6
<PAGE>
CITGO is required to fund the first phase ($300 million) of the upgrade
project. The second phase is expected to be funded through an LCR borrowing
and the third phase is anticipated to be funded: (i) 50 percent through an LCR
borrowing, (ii) 25 percent through CITGO contributions and (iii) 25 percent
through subordinated loans of Lyondell.
The timing of the third phase and the level of contributions from Lyondell
and CITGO will depend on the total cost of the upgrade project and/or LCR's
ability to obtain construction financing. In the event that LCR is unable to
obtain construction financing for the refinery upgrade project, Lyondell and
CITGO each are obligated to fund one-half of the cost of the upgrade project
in excess of $300 million.
In exchange for CITGO's upgrade project contributions described above, the
reinvestment of its share of cash flows and an additional $30 million cash
contribution at the in-service date, CITGO's interest in LCR is expected to
increase to approximately 40 percent effective as of the in-service date.
CITGO will have a one-time option to increase its interest in LCR up to 50
percent during the 20-month period following the in-service date. In addition,
in 1993 an affiliate of PDVSA entered into a 25-year contract to supply and
LCR to purchase specified quantities of heavy crude oil. At the same time,
CITGO entered into a long-term Products Agreement with LCR to purchase at
market-based prices the full volume of gasoline, jet fuel and heating oil
manufactured at the Refinery following the expiration of one contract retained
by Lyondell. The upgrade project also will expand the Refinery's ability to
produce low-sulfur diesel and reformulated fuel.
For additional information about Lyondell, see the Lyondell Prospectus
attached hereto as Appendix A. A copy of Lyondell's 1993 Annual Report to
Stockholders and 1993 Annual Report on Form 10-K can be obtained by writing to
Investor Relations, Lyondell Petrochemical Company, One Houston Center, 1221
McKinney Street, Houston, Texas 77010. Lyondell's telephone number is (713)
652-7200.
7
<PAGE>
RELATIONSHIP BETWEEN ARCO AND LYONDELL
ARCO, which prior to January 1989 owned 100 percent of the outstanding
Lyondell Common Stock, presently owns for its own account approximately 49.9
percent (39,921,400 shares) of the outstanding Lyondell Common Stock. Five of
the eleven directors of Lyondell are officers of ARCO. In addition, ARCO and
Lyondell have entered into various intercompany transactions and arrangements.
See "Relationship with ARCO" in the Lyondell prospectus attached hereto as
Appendix A.
Lyondell is operated and managed as a corporation independent from ARCO. ARCO
has agreed, during the period the Exchangeable Notes are outstanding, to limit
certain of its rights as a stockholder of Lyondell, including its rights to
call a special meeting of stockholders, to take action by written consent, to
solicit proxies in respect of the election of directors or certain other
matters, and to initiate or solicit proposals by a single entity or group of
affiliated entities to acquire all or substantially all of the Lyondell Common
Stock or otherwise to acquire Lyondell. Following consummation of the offering,
ARCO currently intends, but is not committed by any agreement or otherwise, to
vote its shares of Lyondell Common Stock proportionately to the votes cast by
the non-ARCO stockholders, including with respect to the election of directors;
provided, that in the event (i) a person or group of persons other than ARCO
are deemed to own more than 10 percent of the Lyondell Common Stock within the
meaning of Section 13(d) of the Securities and Exchange Act of 1934 (the
"Exchange Act"), and (ii) there occurs a contested proxy solicitation within
the meaning of Rule 14a-11(a) of the Exchange Act, ARCO intends to vote its
shares in the manner it deems appropriate. Also following consummation of the
offering, ARCO intends to cause the ARCO officers who currently serve on the
Board of Directors to resign; however, ARCO will retain the right to nominate
and vote for candidates for Lyondell's Board of Directors.
ARCO is not required to retain its present holdings of shares of Lyondell
Common Stock pursuant to the terms of the Exchangeable Notes or otherwise. ARCO
and Lyondell are entering into a Registration Rights Agreement (the
"Registration Rights Agreement") pursuant to which Lyondell is registering on
Form S-3 (the "Lyondell S-3") the Lyondell Common Stock deliverable, at ARCO's
option, upon maturity of the Exchangeable Notes. ARCO will pay all of
Lyondell's costs and expenses in respect of the Lyondell S-3. In addition,
Lyondell will grant ARCO certain further registration rights. ARCO remains free
to sell all or any portion of its Lyondell Common Stock in a public or private
offering intended to result in widespread distribution or pursuant to a tender
or exchange offer; subject to the foregoing, ARCO has also agreed, during the
period the Exchangeable Notes are outstanding, and continuing for a period of
one year thereafter, not to sell all or any portion of its Lyondell Common
Stock to a single entity or group of affiliated entities in a private
transaction without the approval of Lyondell's Board of Directors.
Moreover, because ARCO is not required to retain its Lyondell Common Stock
and because of all of the agreements described in the preceding three
paragraphs, there can be no assurance that ARCO will have any influence over
the actions and decisions taken and made by Lyondell.
Lyondell has no obligations with respect to the Exchangeable Notes or amounts
to be paid to holders thereof, including any obligation to take the needs of
ARCO or of holders of the Exchangeable Notes into consideration for any reason.
Lyondell will not receive any of the proceeds of the offering of the
Exchangeable Notes made hereby and is not responsible for the determination of
the timing of, prices for or quantities of the Exchangeable Notes to be issued
or the determination or calculation of the amount to be paid upon mandatory
exchange at Maturity.
8
<PAGE>
CAPITALIZATION (UNAUDITED)
The following table sets forth the capitalization of ARCO and its
consolidated subsidiaries as of March 31, 1994, and as adjusted for the
Exchangeable Notes offered hereby.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------- -----------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Obligations due within one year:
Notes payable......................................... $ 1,729 $ 1,729
Long-term debt due within one year.................... 159 159
------- -------
1,888 1,888
Long-term debt:
Debentures, notes and other........................... 7,008 7,008
% Exchangeable Notes offered hereby................. --
------- -------
Total notes payable and debt........................ 8,896
Stockholders' equity:
Preference stocks..................................... 1 1
Common stock.......................................... 402 402
Capital in excess of par value of stock............... 656 656
Retained earnings..................................... 5,236 5,236
Pension liability adjustment.......................... (29) (29)
Treasury stock, at cost............................... (47) (47)
Foreign currency translation.......................... (116) (116)
------- -------
Total stockholders' equity.......................... 6,103 6,103
------- -------
Total capitalization................................ $14,999 $
======= =======
</TABLE>
At March 31, 1994, ARCO and its consolidated subsidiaries had outstanding
notes payable due within one year aggregating approximately $1.7 billion and
cash, cash equivalents and short-term investments aggregating approximately
$3.6 billion.
Notes, debentures and other long-term debt are stated at their principal
amount, except for issues sold at a substantial discount, which are included
net of unamortized original issue discount.
9
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial information for ARCO:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
---------------- ---------------------------------------
1994 1993 1993(1) 1992(2) 1991(3) 1990 1989(4)
------- -------- ------- ------- ------- ------- -------
(MILLIONS OF DOLLARS EXCEPT PER SHARE
(UNAUDITED) AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales and other
operating revenues
(including excise
taxes)................. $ 3,800 $ 4,507 $18,487 $18,668 $18,191 $18,836 $16,049
Income before changes in
accounting principles.. $ 149 $ 260 $ 269 $ 1,193 $ 709 $ 1,688 $ 1,953
Net income.............. $ 149 $ 260 $ 269 $ 801 $ 709 $ 2,011 $ 1,953
Earned per share before
changes in accounting
principles............. $ .92 $ 1.60 $ 1.66 $ 7.39 $ 4.39 $ 10.20 $ 11.26
Earned per share........ $ .92 $ 1.60 $ 1.66 $ 4.96 $ 4.39 $ 12.15 $ 11.26
Cash dividends per com-
mon share.............. $ 1.375 $ 1.375 $ 5.50 $ 5.50 $ 5.50 $ 5.00 $ 4.50
Total assets............ $23,818 $ 23,903 $23,894 $24,256 $24,492 $23,864 $22,261
Long-term debt and capi-
tal lease obligations.. $ 7,008 $ 6,216 $ 7,089 $ 6,227 $ 5,989 $ 5,997 $ 5,313
</TABLE>
- --------
(1) In 1993, ARCO provided as unusual items a pretax charge of $659 million,
$404 million after tax, associated with an announced reorganization of its
Lower 48 oil and gas operations.
(2) In 1992, ARCO recognized a pretax benefit of $149 million from a settlement
with Iran and a pretax benefit of $178 million related to a portion of the
gain from the 1989 sale of a majority interest in Lyondell. ARCO also
recognized a pretax charge of $56 million resulting from ARCO Chemical's
withdrawal from a joint venture in Korea. The net benefit related to 1992
unusual items was $211 million after tax.
(3) In 1991, ARCO provided as unusual items an estimated pretax charge of $281
million associated with a reorganization of its Lower 48 oil and gas
operations and a company-wide workforce reduction. ARCO also provided as
unusual items a pretax charge of approximately $222 million for the
anticipated loss on the sale of certain Lower 48 oil and gas properties and
the writedown of certain coal assets. The net provision related to 1991
unusual items was $312 million after tax.
(4) Includes after-tax gain of $634 million from sale of majority interest in
Lyondell.
ARCO's financial statements for the year ended December 31, 1993 are
contained in its Report on Form 10-K for such period, incorporated herein by
reference.
ARCO cautions against projecting any future results based on present earnings
levels because of economic uncertainties and the impact of potential government
actions.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
ARCO for the three months ended March 31, 1994 and the five years ended
December 31, 1993:
<TABLE>
<CAPTION>
MARCH 31, 1994 1993 1992 1991 1990 1989
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
2.17 1.69 2.89 2.00 3.71 4.13
</TABLE>
10
<PAGE>
PRICE RANGE OF LYONDELL COMMON STOCK AND DIVIDENDS
The Lyondell Common Stock has been traded on the NYSE since January 18, 1989.
The following table sets forth, for the indicated calendar periods, the
reported high and low sales prices of the Lyondell Common Stock on the NYSE
Composite Tape and the cash dividends per share of Lyondell Common Stock. As of
July 8, 1994, there were approximately 3,000 record holders of the Lyondell
Common Stock, including The Depository Trust Company which holds shares of
Lyondell Common Stock on behalf of an indeterminate number of beneficial
owners.
<TABLE>
<CAPTION>
DIVIDENDS
PERIOD HIGH LOW PER SHARE
------ ------- ------- ---------
<S> <C> <C> <C>
1992
First Quarter.................................. $25 3/4 $22 1/8 $0.45
Second Quarter................................. 25 7/8 21 1/8 0.45
Third Quarter.................................. 25 5/8 21 3/8 0.45
Fourth Quarter................................. 25 1/2 23 1/8 0.45
1993
First Quarter.................................. 29 1/2 23 3/4 0.45
Second Quarter................................. 26 5/8 19 0.225*
Third Quarter.................................. 21 5/8 16 3/4 0.225
Fourth Quarter................................. 21 1/2 18 3/8 0.225
1994
First Quarter.................................. 23 7/8 20 5/8 0.225
Second Quarter................................. 26 7/8 21 1/4
Third Quarter (through July 8)................. 25 1/4 24 1/8
</TABLE>
- --------
* On July 23, 1993, Lyondell's Board of Directors decreased the amount of the
regular quarterly dividend from $0.45 to $0.225 per share.
For a recent sale price of the Lyondell Common Stock, see the cover page of
this Prospectus. See also "Price Range of Common Stock and Dividends" in the
Lyondell Prospectus attached hereto as Appendix A.
ARCO makes no representation as to the amount of dividends, if any, that
Lyondell will pay in the future. In any event, holders of the Exchangeable
Notes will not be entitled to receive any dividends that may be payable on the
Lyondell Common Stock until such time as ARCO, if it so elects, delivers
Lyondell Common Stock at Maturity of the Exchangeable Notes. See "Description
of the Exchangeable Notes."
DESCRIPTION OF THE EXCHANGEABLE NOTES
The Exchangeable Notes are one series of Debt Securities (as defined below)
to be issued under an indenture dated as of January 1, 1992, between ARCO and
The Bank of New York, as trustee, as supplemented by a First Supplemental
Indenture dated as of May 1, 1994, between ARCO and The Bank of New York, as
trustee (the "Trustee") (as supplemented from time to time, the "Indenture").
All references herein to "Debt Securities" shall refer to debt securities
issued under the Indenture. The following summary of certain provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. All article and
section references appearing herein are to articles and sections of the
Indenture, and all capitalized terms have the meanings specified in the
Indenture.
11
<PAGE>
GENERAL
The Exchangeable Notes will be unsecured and will rank on a parity with all
other unsecured and unsubordinated indebtedness of ARCO. The Indenture does not
limit the amount of Debt Securities which may be issued thereunder. (Section
2.01) The aggregate number of Exchangeable Notes to be issued will be
35,000,000, plus such additional number of Exchangeable Notes as may be issued
pursuant to the over-allotment option granted by ARCO to the Underwriters (see
"Plan of Distribution"). The Exchangeable Notes will mature on , 1997.
Each Exchangeable Note, which will be issued with a principal amount of
$ , will bear interest at the annual rate of % of the principal amount
per annum (or $ per annum) from , 1994, or from the most recent
Interest Payment Date to which interest has been paid or provided for until the
principal amount thereof exchanged at Maturity pursuant to the terms of the
Exchangeable Notes. Interest on the Exchangeable Notes will be payable
quarterly in arrears on , , and ,
commencing , 1994 (each, an "Interest Payment Date"), to the persons
in whose names the Exchangeable Notes are registered at the close of business
on the last day of the calendar month immediately preceding such Interest
Payment Date. Interest on the Exchangeable Notes will be computed on the basis
of a 360-day year of twelve 30-day months. If an Interest Payment Date falls on
a day that is not a Business Day, the interest payment to be made on such
Interest Payment Date will be made on the next succeeding Business Day with the
same force and effect as if made on such Interest Payment Date, and no
additional interest will accrue as a result of such delayed payment.
At Maturity, the principal amount of each Exchangeable Note will be
mandatorily exchanged by ARCO into a number of shares of Lyondell Common Stock
at the Exchange Rate (as defined below) or, at ARCO's option, cash with an
equal value. Accordingly, holders of the Exchangeable Notes will not
necessarily receive an amount equal to the principal amount thereof. The
"Exchange Rate" is equal to, subject to adjustment as a result of certain
dilution events (see "Dilution Adjustments" below), (a) if the Maturity Price
(as defined below) per share of Lyondell Common Stock is greater than or equal
to $ per share of Lyondell Common Stock (the "Threshold Appreciation
Price"), shares of Lyondell Common Stock per Exchangeable Note, (b) if
the Maturity Price is less than the Threshold Appreciation Price but is greater
than the Initial Price, a fractional share of Lyondell Common Stock per
Exchangeable Note so that the value thereof (determined at the Maturity Price)
is equal to the Initial Price and (c) if the Maturity Price is less than or
equal to the Initial Price, one share of Lyondell Common Stock per Exchangeable
Note. No fractional shares of Lyondell Common Stock will be issued at Maturity
as provided under "Fractional Shares" below. Notwithstanding the foregoing,
ARCO may, at its option in lieu of delivering shares of Lyondell Common Stock,
deliver cash in an amount equal to the value of such number of shares of
Lyondell Common Stock at the Maturity Price. On or prior to 45 days before
Maturity, , , ARCO will notify The Depository Trust Company and the
Trustee and publish a notice in a daily newspaper of national circulation
stating whether the principal amount of each Exchangeable Notes will be
exchanged for shares of Lyondell Common Stock or cash. If ARCO elects to
deliver shares of Lyondell Common Stock, holders of the Exchangeable Notes will
be responsible for the payment of any and all brokerage costs upon the
subsequent sale of such stock. (Section 16.01)
The "Maturity Price" is defined as the average Closing Price per share of
Lyondell Common Stock on the 20 Trading Days immediately prior to Maturity. The
"Closing Price" of any security on any date of determination means the closing
sale price (or, if no closing price is reported, the last reported sale price)
of such security on the NYSE on such date or, if such security is not listed
for trading on the NYSE on any such date, as reported in the composite
transactions for the principal United States securities exchange on which such
security is so listed, or if such security is not so listed on a United States
national or regional securities exchange, as reported by the National
Association of Securities Dealers, Inc. Automated Quotation System, or, if such
security is not so reported, the last quoted bid
12
<PAGE>
price for such security in the over-the-counter market as reported by the
National Quotation Bureau or similar organization, or, if such bid price is not
available, the market value of such security on such date as determined by a
nationally recognized independent investment banking firm retained for this
purpose by ARCO. A "Trading Day" is defined as a Business Day on which the
security the Closing Price of which is being determined (A) is not suspended
from trading on any national or regional securities exchange or association or
over-the-counter market at the close of business and (B) has traded at least
once on the national or regional securities exchange or association or over-
the-counter market that is the primary market for the trading of such security.
"Business Day" means any day that is not a Saturday, a Sunday or a day on which
the NYSE, banking institutions or trust companies in The City of New York are
authorized or obligated by law or executive order to close.
For illustrative purposes only, the following chart shows the number of
shares of Lyondell Common Stock or the amount of cash that a holder of
Exchangeable Notes would receive for each Exchangeable Note at various Maturity
Prices. The table assumes that there will be no adjustments to the Exchange
Rate described under "Dilution Adjustments" below. There can be no assurance
that the Maturity Price will be within the range set forth below. Given the
Issue Price of $ per Exchangeable Note and the Threshold Appreciation
Price of $ , holders of Exchangeable Notes would receive at Maturity the
following number of shares of Lyondell Common Stock or amount of cash (if ARCO
elects to pay the Exchangeable Notes in cash):
<TABLE>
<CAPTION>
MATURITY PRICE NUMBER OF
OF LYONDELL SHARES OF LYONDELL
COMMON STOCK COMMON STOCK AMOUNT OF CASH
-------------- ------------------ --------------
<S> <C> <C>
$ $
$ $
$ $
</TABLE>
Interest on the Exchangeable Notes will be payable, and delivery of Lyondell
Common Stock (or, at the option of ARCO, its cash equivalent) in exchange for
the Exchangeable Notes at Maturity will be made upon surrender of such
Exchangeable Notes, at the office or agency of ARCO maintained for such
purposes in the city where the principal corporate trust office of the Trustee
is located, which will initially be the principal corporate trust office of the
Trustee, provided that payment of interest may be made (subject to collection)
at the option of ARCO by check mailed to the persons in whose names the
Exchangeable Notes are registered at the close of business on ,
, , and . The principal corporate trust office of the
Trustee at the date hereof is 101 Barclay Street, New York, New York 10286.
The Exchangeable Notes will be transferable at any time or from time to time.
No service charge will be made to the Holder for any such transfer except for
any tax or governmental charge incidental thereto.
The Indenture does not contain any restriction on the ability of ARCO to
sell, pledge or otherwise convey all or any portion of the Lyondell Common
Stock held by it, and no such shares of Lyondell Common Stock will be pledged
or otherwise held in escrow for use at Maturity of the Exchangeable Notes.
Consequently, in the event of a bankruptcy, insolvency or liquidation of ARCO,
the Lyondell Common Stock, if any, owned by ARCO will be subject to the claims
of the creditors of ARCO. In addition, as described herein, ARCO will have the
option, exercisable in its sole discretion, to satisfy its obligations pursuant
to the mandatory exchange for the principal amount of each Exchangeable Note at
Maturity by delivering to holders of the Exchangeable Notes either the
specified number of shares of Lyondell Common Stock or cash in an amount equal
to the value of such number of shares at the Maturity Price. In the event of
such a sale, pledge or conveyance, a holder of the Exchangeable Notes may be
more likely to receive cash in lieu of Lyondell Common Stock. As a result,
there can be no assurance that ARCO will elect at Maturity to deliver Lyondell
Common Stock or, if it so elects, that it will use all or any portion of its
current holdings of Lyondell Common Stock to make such
13
<PAGE>
delivery. Consequently, holders of the Exchangeable Notes will not be entitled
to any rights with respect to the Lyondell Common Stock (including without
limitation voting rights and rights to receive any dividends or other
distributions in respect thereof) until such time, if any, as ARCO shall have
delivered shares of Lyondell Common Stock to holders of the Exchangeable Notes
at Maturity thereof.
DILUTION ADJUSTMENTS
The Exchange Rate is subject to adjustment if Lyondell shall (i) pay a stock
dividend or make a distribution with respect to Lyondell Common Stock in
shares of such stock, (ii) subdivide or split its outstanding shares of
Lyondell Common Stock, (iii) combine its outstanding shares of Lyondell Common
Stock into a smaller number of shares, (iv) issue by reclassification of its
shares of Lyondell Common Stock any shares of common stock of Lyondell, (v)
issue rights or warrants to all holders of Lyondell Common Stock entitling
them to subscribe for or purchase shares of Lyondell Common Stock at a price
per share less than the market price of the Lyondell Common Stock (other than
rights to purchase Lyondell Common Stock pursuant to a plan for the
reinvestment of dividends or interest) or (vi) pay a dividend or make a
distribution to all holders of Lyondell Common Stock of evidences of its
indebtedness or other assets (excluding any dividends or distributions
referred to in clause (i) above or any cash dividends other than any
Extraordinary Cash Dividends) or issue to all holders of Lyondell Common Stock
rights or warrants to subscribe for or purchase any of its securities (other
than those referred to in clause (v) above). An "Extraordinary Cash Dividend"
means, with respect to any one-year period, all cash dividends on the Lyondell
Common Stock during such period to the extent such dividends exceed on a per
share basis 10% of the average price of the Lyondell Common Stock over such
period (less any such dividends for which a prior adjustment to the Exchange
Rate was previously made). All adjustments to the Exchange Rate will be
calculated to the nearest 1/10,000th of a share of Lyondell Common Stock (or
if there is not a nearest 1/10,000th of a share to the next lower 1/10,000th
of a share). No adjustment in the Exchange Rate shall be required unless such
adjustment would require an increase or decrease of at least one percent
therein; provided, however, that any adjustments which by reason of the
foregoing are not required to be made shall be carried forward and taken into
account in any subsequent adjustment.
In the event of (A) any consolidation or merger of Lyondell, or any
surviving entity or subsequent surviving entity of Lyondell (a "Lyondell
Successor"), with or into another entity (other than a merger or consolidation
in which Lyondell is the continuing corporation and in which the Lyondell
Common Stock outstanding immediately prior to the merger or consolidation is
not exchanged for cash, securities or other property of Lyondell or another
corporation), (B) any sale, transfer, lease or conveyance to another
corporation of the property of Lyondell or any Lyondell Successor as an
entirety or substantially as an entirety, (C) any statutory exchange of
securities of Lyondell or any Lyondell Successor with another corporation
(other than in connection with a merger or acquisition) or (D) any
liquidation, dissolution or winding up of Lyondell or any Lyondell Successor
(any such event, a "Reorganization Event"), the Exchange Rate used to
determine the amount payable upon exchange at Maturity for each Exchangeable
Note will be adjusted to provide that each holder of Exchangeable Notes will
receive at Maturity cash in an amount equal to (a) if the Transaction Value
(as defined below) is greater than or equal to the Threshold Appreciation
Price, multiplied by the Transaction Value, (b) if the Transaction Value
is less than the Threshold Appreciation Price but greater than the Initial
Price, the Initial Price and (c) if the Transaction Value is less than or
equal to the Initial Price, the Transaction Value. "Transaction Value" means
(i) for any cash received in any such Reorganization Event, the amount of cash
received per share of Lyondell Common Stock, (ii) for any property other than
cash or securities received in any such Reorganization Event, an amount equal
to the market value at Maturity of such property received per share of
Lyondell Common Stock as determined by a nationally recognized independent
investment banking firm retained for this purpose by ARCO and (iii) for any
securities received in any such Reorganization Event, an amount equal to the
average Closing Price
14
<PAGE>
per share of such securities on the 20 Trading Days immediately prior to
Maturity multiplied by the number of such securities received for each share of
Lyondell Common Stock.
Notwithstanding the foregoing, in lieu of delivering cash as provided above,
ARCO may at its option deliver an equivalent value of securities or other
property received in such Reorganization Event, determined in accordance with
clause (ii) or (iii) above, as applicable. If ARCO elects to deliver securities
or other property, holders of the Exchangeable Notes will be responsible for
the payment of any and all brokerage and other transaction costs upon the sale
of such securities or other property. The kind and amount of securities into
which the Exchangeable Notes shall be exchangeable after consummation of such
transaction shall be subject to adjustment as described in the immediately
preceding paragraph following the date of consummation of such transaction.
ARCO is required, within ten Business Days following the occurrence of an
event that requires an adjustment to the Exchange Rate (or if ARCO is not aware
of such occurrence, as soon as practicable after becoming so aware), to provide
written notice to the Trustee of the occurrence of such event and a statement
in reasonable detail setting forth the method by which the adjustment to the
Exchange Rate was determined and setting forth the revised Exchange Rate.
(Section 16.03)
FRACTIONAL SHARES
No fractional shares of Lyondell Common Stock will be issued if ARCO
exchanges the Exchangeable Notes for shares of Lyondell Common Stock. In lieu
of any fractional share otherwise issuable in respect of all Exchangeable Notes
of any holder which are exchanged at Maturity, such holder shall be entitled to
receive an amount in cash equal to the value of such fractional share at the
Maturity Price. (Section 16.02)
REDEMPTION
The Exchangeable Notes are not subject to redemption prior to Maturity.
TRUSTEE
The Trustee for the Exchangeable Notes is The Bank of New York under the
Indenture dated as of January 1, 1992 between ARCO and The Bank of New York, as
amended by the First Supplemental Indenture dated as of May 1, 1994.
BOOK-ENTRY SYSTEM
The Exchangeable Notes will be issued in the form of one or more global
securities (the "Global Securities") deposited with The Depository Trust
Company (the "Depository") and registered in the name of a nominee of the
Depository.
The Depository has advised ARCO and the Underwriters as follows: The
Depository is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to Section 17A of the Exchange Act. The
Depository was created to hold securities of persons who have accounts with the
Depository ("participants") and to facilitate the clearance and settlement of
securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of certificates. Such participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the Depository's book-entry system is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
15
<PAGE>
Upon the issuance of a Global Security, the Depository or its nominee will
credit the respective Exchangeable Notes represented by such Global Security to
the accounts of participants. The accounts to be credited shall be designated
by the Underwriters. Ownership of beneficial interests in such Global
Securities will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests by participants in such
Global Securities will be shown on, and the transfer of those ownership
interests will be effected only through, records maintained by the Depository
or its nominee for such Global Securities. Ownership of beneficial interests in
such Global Securities by persons that hold through participants will be shown
on, and the transfer of that ownership interest within such participant will be
effected only through, records maintained by such participant. The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Security.
So long as the Depository for a Global Security, or its nominee, is the
registered owner of such Global Security, such depository or such nominee, as
the case may be, will be considered the sole owner or holder of the
Exchangeable Notes for all purposes under the Indenture. Except as set forth
below, owners of beneficial interests in such Global Securities will not be
entitled to have the Exchangeable Notes registered in their names, will not
receive or be entitled to receive physical delivery of the Exchangeable Notes
in definitive form and will not be considered the owners or holders thereof
under the Indenture.
Payment of principal of and any interest on the Exchangeable Notes registered
in the name of or held by the Depository or its nominee will be made to the
Depository or its nominee, as the case may be, as the registered owner or the
holder of the Global Security. None of ARCO, the Trustee, any Paying Agent or
the Notes Registrar for the Exchangeable Notes will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in a Global Security or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
ARCO expects that the Depository, upon receipt of any payment of principal or
interest in respect of a permanent Global Security, will credit immediately
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Security
as shown on the records of the Depository. ARCO also expects that payments by
participants to owners of beneficial interests in such Global Security held
through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts
of customers in bearer form or registered in "street name," and will be the
responsibility of such participants.
A Global Security may not be transferred except as a whole by the Depository
to a nominee or a successor of the Depository. If the Depository is at any time
unwilling or unable to continue as depository and a successor depository is not
appointed by ARCO within ninety days, ARCO will issue Exchangeable Notes in
definitive registered form in exchange for all of the Global Securities
representing such Exchangeable Notes. In addition, ARCO may at any time and in
its sole discretion determine not to have any Exchangeable Notes represented by
one or more Global Securities and, in such event, will issue Exchangeable Notes
in definitive form in exchange for all of the Global Securities representing
the Exchangeable Notes. Further, if ARCO so specifies with respect to the
Exchangeable Notes, an owner of a beneficial interest in a Global Security
representing Exchangeable Notes may, on terms acceptable to ARCO and the
Depository for such Global Security, receive Exchangeable Notes in definitive
form. In any such instance, an owner of a beneficial interest in a Global
Security will be entitled to physical delivery in definitive form of
Exchangeable Notes represented by such Global Security equal in number to that
represented by such beneficial interest and to have such Exchangeable Notes
registered in its name.
16
<PAGE>
LIMITATION ON LIENS
ARCO agrees that neither it nor any Restricted Subsidiary will issue, assume
or guarantee any notes, bonds, debentures or other similar evidences of
indebtedness for money borrowed ("Debt") secured by a mortgage, lien, pledge or
other encumbrance ("Mortgages") upon any Restricted Property without
effectively providing that the Debt Securities (together with, if ARCO so
determines, any other indebtedness or obligation then existing or thereafter
created ranking equally with the Debt Securities) shall be secured equally and
ratably with (or prior to) such Debt so long as such Debt shall be so secured,
except that this restriction will not apply to: (a) Mortgages affecting
property of a corporation existing at the time it becomes a Subsidiary or at
the time it is merged into or consolidated with ARCO or a Subsidiary; (b)
Mortgages on property existing at the time of acquisition thereof or incurred
to secure payment of the purchase price thereof or to secure Debt incurred
prior to, at the time of, or within 24 months after the acquisition for the
purpose of financing all or part of the purchase price; (c) Mortgages on
property to secure all or part of the cost of exploration, drilling or
development thereof or the cost of improvement of property which, in the
opinion of the Board of Directors, is substantially unimproved for the use
intended by ARCO or to secure Debt incurred to provide funds for any such
purpose; (d) Mortgages which secure only indebtedness owing by a Subsidiary to
ARCO or to a Subsidiary; (e) certain Mortgages to government entities,
including pollution control or industrial revenue bond financing; and (f) any
extension, renewal or replacement of any Mortgage referred to in the foregoing
clauses (a) through (e). Notwithstanding the foregoing, ARCO and any one or
more Restricted Subsidiaries may, without securing the Debt Securities, issue,
assume or guarantee Debt which would otherwise be subject to the foregoing
restrictions in an aggregate principal amount which, together with all other
such Debt of ARCO and its Restricted Subsidiaries and the aggregate Value of
Sale and Lease-Back Transactions (other than those in connection with which
ARCO has voluntarily retired Funded Debt) does not at any one time exceed 10%
of Consolidated Net Tangible Assets of ARCO and its consolidated Subsidiaries.
The following types of transactions shall not be deemed to create Debt secured
by Mortgage: (1) the sale or other transfer of oil, gas or other minerals in
place for a period of time until, or in an amount such that, the transferee
will realize therefrom a specified amount (however determined) of money or such
minerals, or the sale or other transfer of any other interest in property of
the character commonly referred to as a production payment; and (2) Mortgages
required by any contract or statute in order to permit ARCO or a Subsidiary to
perform any contract or subcontract made by it with or at the request of the
United States, any State or any department, agency or instrumentality of
either. (Sections 5.03 and 5.04)
The term Restricted Property means any of ARCO's or a Subsidiary's oil or gas
producing properties or refining or manufacturing plants (other than such
determined by the Board of Directors not to be a principal plant) located in
the continental United States, and any shares of capital stock or indebtedness
of a Restricted Subsidiary. The term Restricted Subsidiary means any Subsidiary
which owns Restricted Property unless substantially all such Subsidiary's
physical properties are located outside the continental United States. The term
Subsidiary will be defined to mean any corporation at least a majority of the
outstanding securities of which having ordinary voting power to elect a
majority of the board of directors of such corporation is at the time owned or
controlled directly or indirectly by ARCO or one or more Subsidiaries or by
ARCO and one or more Subsidiaries. The term Consolidated Net Tangible Assets
means the total amount of assets (less applicable reserves and other properly
deductible items) after deducting therefrom (i) all current liabilities
(excluding any thereof which are by their terms extendible or renewable at the
option of the obligor thereon to a time more than 12 months after the time as
of which the amount thereof is being computed), and (ii) all goodwill, trade
names, trademarks, patents, unamortized debt discount and expense and other
like intangible assets, all as set forth on the most recent balance sheet of
ARCO and its consolidated Subsidiaries and computed in accordance with
generally accepted accounting principles. (Article One)
ARCO agrees that, if, upon any consolidation or merger of ARCO with or into
any other corporation, or upon any sale or conveyance of all or substantially
all of its property to any other corporation, any of
17
<PAGE>
the property of ARCO or of any Restricted Subsidiary would thereupon become
subject to any mortgage, lien or pledge, ARCO will first secure the Debt
Securities equally and ratably with any other obligations of ARCO or any
Restricted Subsidiary then entitled thereto, by a direct lien on all such
property prior to all liens other than any theretofore existing thereon.
(Section 12.02)
LIMITATION ON SALE AND LEASE-BACK
ARCO agrees that neither it nor any Restricted Subsidiary will enter into any
Sale and Lease-Back Transaction with respect to any Restricted Property with
any person (other than ARCO or a Subsidiary) unless either (a) ARCO or such
Restricted Subsidiary would be entitled, pursuant to the above provisions, to
incur Debt in a principal amount equal to or exceeding the Value of such Sale
and Lease-Back Transaction secured by a Mortgage on the property to be leased
without equally and ratably securing the Debt Securities, or (b) ARCO during or
immediately after the expiration of four months after the effective date of
such transaction applies to the voluntary retirement of its Funded Debt an
amount equal to the greater of: (1) the net proceeds of the sale of the
property leased in such transaction or (2) the fair value in the opinion of the
Board of Directors of the leased property at the time such transaction was
entered into (subject to credits for certain voluntary retirements of Funded
Debt, including the Debt Securities). (Sections 5.04 and 5.05)
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting ARCO and the Trustee, with the
consent of the Holders of not less than 50% in principal amount of the Debt
Securities of each series affected by the modification or amendment at the time
outstanding, to modify the Indenture or any supplemental indenture or the
rights of the Holders of the Debt Securities; provided that no such
modification shall (a) extend the fixed maturity of any Debt Security, or
reduce the rate or extend the time of payment of interest thereon, or reduce
the principal amount thereof, or change the method of computing the amount of
principal thereof at any date, or change the currency in which the Debt
Security is payable, without the consent of the Holder of each Debt Security so
affected, or (b) reduce the aforesaid percentage of Debt Securities, the
consent of the Holders of which is required for any such modification, without
the consent of the Holders of all outstanding Debt Securities of such series so
affected. (Section 11.02)
EVENTS OF DEFAULT
The Indenture defines an Event of Default with respect to a particular series
of Debt Securities as being any one of the following events and such other
event as may be established for the Debt Securities of such series: (a) default
for 30 days in any payment of interest on such series; (b) default in any
payment of principal, and premium, if any, on such series when due; (c) default
for 30 days in the payment of any sinking fund installment when due; (d)
default for 90 days after appropriate notice in performance of any other
covenant in the Indenture applicable to that series; or (e) certain events in
bankruptcy, insolvency or reorganization. No Event of Default with respect to a
particular series of Debt Securities issued under the Indenture necessarily
constitutes an Event of Default with respect to any other series of Debt
Securities issued thereunder. In case an Event of Default shall occur and be
continuing with respect to a particular series of Debt Securities, the Trustee
or the Holders of not less than 25% in aggregate principal amount of the Debt
Securities then outstanding of the series (or, in the case of defaults under
(d) or (e), of the Debt Securities of all series) may declare the principal or,
in the case of discounted Debt Securities, the amount specified in the terms
thereof, of such series (or of all outstanding Debt Securities, as the case may
be) to be due and payable. Any Event of Default with respect to a particular
series of Debt Securities may be waived by the Holders of a majority in
aggregate principal amount of the outstanding Debt Securities of such series
(or of the outstanding Debt Securities of all series, in the case of defaults
under (d) or (e)), except in each case a failure to pay principal, or premium,
if any, or interest on such Debt Security. (Section 7.01)
18
<PAGE>
The Indenture requires ARCO to file annually with the Trustee an Officers'
Certificate as to the absence of certain defaults under the terms of the
Indenture. (Section 5.08) The Indenture provides that the Trustee may withhold
notice to the Holders of the Debt Securities of any default (except in payment
of principal, or premium, if any, or interest) if it considers it in the
interest of the Holders of the Debt Securities to do so. (Section 7.08)
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default shall occur and be continuing, the
Indenture provides that the Trustee shall be under no obligation to exercise
any of its rights or powers under the Indenture at the request, order or
direction of the Holders of the Debt Securities unless such Holders shall have
offered to the Trustee reasonable indemnity. (Sections 7.04, 8.01 and 8.02)
Subject to such provisions for indemnification and certain other rights of the
Trustee, the Indenture provides that the Holders of a majority in principal
amount of the outstanding Debt Securities of the particular series affected
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. (Sections 7.07 and 8.02)
Other than the restrictions on liens and Sale and Lease-Back Transactions
described above, the Indenture and the Debt Securities do not contain any
covenants or other provisions designed to afford holders of the Debt Securities
protection in the event of a highly leveraged transaction involving ARCO or any
Subsidiary.
CONCERNING THE TRUSTEE
The Bank of New York, the Trustee, also acts as trustee under other
indentures of ARCO and extends credit to ARCO and its subsidiaries in the
ordinary course of business.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
consequences relating to ownership of the Exchangeable Notes. No information is
provided herein with respect to foreign, state or local tax laws. This summary
is based upon the provisions of the Internal Revenue Code of 1986, as amended
(the "Code") and the regulations, rulings and judicial decisions thereunder as
of the date hereof, and such authorities may be repealed, revoked or modified
so as to result in federal income tax consequences different from those
discussed below.
This summary deals only with holders who are initial holders of the
Exchangeable Notes and who will hold the Exchangeable Notes as capital assets.
It does not address all aspects of United States federal income taxation and
does not deal with tax considerations applicable to investors that may be
subject to special United States federal income tax treatment, such as dealers
in securities or persons holding the Exchangeable Notes as a position in a
"straddle" for United States federal income tax purposes or as part of a
"synthetic security" or other integrated investment.
As used herein, a "United States Holder" of the Exchangeable Notes means a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized under the laws of the United States or any
political subdivision thereof, an estate or trust the income of which is
subject to United States federal income taxation regardless of its source who
is the beneficial owner of the Exchangeable Notes. A "Non-United States Holder"
is a holder who is not a United States Holder. All references to "holders"
(including United States Holders and Non-United States Holders) are to
beneficial owners of the Exchangeable Notes.
No statutory, judicial or administrative authority directly addresses the
characterization of the Exchangeable Notes or instruments similar to the
Exchangeable Notes for United States federal income
19
<PAGE>
tax purposes. As a result, significant aspects of the United States federal
income tax consequences of an investment in the Exchangeable Notes are not
certain. No ruling is being requested from the Internal Revenue Service (the
"IRS") with respect to the Exchangeable Notes and no assurance can be given
that the IRS will agree with the conclusions expressed herein. ACCORDINGLY,
PROSPECTIVE INVESTORS (INCLUDING TAX-EXEMPT INVESTORS) IN THE EXCHANGEABLE
NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF THE EXCHANGEABLE NOTES,
INCLUDING THE TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY FOREIGN,
STATE, LOCAL OR OTHER TAXING JURISDICTION.
Pursuant to the terms of the Indenture, ARCO and all holders of the
Exchangeable Notes will be obligated to treat the Exchangeable Notes as a unit
(the "Unit") consisting of (i) a debt obligation ("Note") with a fixed
principal amount unconditionally payable at Maturity equal to the principal
amount of the Exchangeable Notes, bearing interest at the stated interest rate
on the Exchangeable Notes, and (ii) a forward purchase contract (the "Purchase
Contract") pursuant to which the holder agrees to use the principal payment
due on the Note to purchase at Maturity the Lyondell Common Stock which the
holder is entitled to receive at that time (subject to the Company's right to
deliver cash in lieu of the Lyondell Common Stock). The Indenture will require
each United States Holder to include currently in income when received or
accrued payments denominated as interest that are made with respect to the
Exchangeable Notes in accordance with such holder's regular method of tax
accounting.
Pursuant to the agreement to treat the Exchangeable Notes as a unit, a
holder will be required to allocate the purchase price of the Exchangeable
Notes between the two components of the Unit (the Note and the Purchase
Contract) on the basis of their relative fair market values. The purchase
price so allocated will generally constitute the tax basis for each component.
Pursuant to the terms of the Indenture, ARCO and the holders agree to allocate
the entire purchase price of the Exchangeable Notes to the Note. Upon the sale
or other disposition of Exchangeable Notes, a United States Holder generally
will be required to allocate the amount realized between the two components of
the Exchangeable Notes on the basis of their then relative fair market values.
A United States Holder will recognize gain or loss with respect to each
component equal to the difference between the amount realized on the sale or
other disposition for each such component and the United States Holder's tax
basis in such component. Such gain or loss generally will be long-term capital
gain or loss if the United States Holder has held the Exchangeable Notes for
more than one year at the time of disposition.
The distinction between capital gain or loss and ordinary income or loss is
important for purposes of the limitations on a United States Holder's ability
to offset capital losses against ordinary income. In addition, certain
individuals are subject to tax at a reduced rate on long-term capital gains.
At Maturity, pursuant to the agreement to treat the Exchangeable Notes as a
unit, (i) on the repayment of the Note, a United States Holder will realize
long-term capital gain or loss equal to any difference between its tax basis
and the principal amount of the Note, (ii) if ARCO delivers Lyondell Common
Stock, a United States Holder will realize no additional gain or loss on the
exchange, pursuant to the Purchase Contract, of the principal payment due on
the Note for the Lyondell Common Stock, will have a tax basis in such stock
equal to the amount of the principal payment, and will realize capital gain or
loss upon the sale or disposition of such stock, and (iii) if ARCO pays the
Exchangeable Notes in cash, a United States Holder will have gain or loss
(which might be ordinary income or loss rather than long-term capital gain or
loss) equal to the difference between the principal amount of the Note and the
amount of cash received from ARCO.
Due to the absence of authority as to the proper characterization of the
Exchangeable Notes, no assurance can be given that the IRS will accept or that
a court will uphold the characterization described above. Under alternative
tax characterizations of the Exchangeable Notes, it is possible, for example,
that (i) gain may be treated as ordinary income, instead of capital gain, (ii)
a United States Holder may be
20
<PAGE>
taxable upon the receipt of Lyondell Common Stock with a value in excess of
the principal amount of the Note, rather than upon the sale of such stock,
(iii) all or part of the interest income on the Note may be treated as
nontaxable, increasing the gain (or decreasing the loss) at Maturity or
disposition of the Exchangeable Notes (or disposition of the Lyondell Common
Stock) or (iv) the Notes could be considered as issued at a premium which, if
amortized, would reduce the amount of interest income currently includible in
income by a holder and would increase the taxable gain (or decrease the loss)
realized at Maturity or disposition of the Exchangeable Notes (or disposition
of the Lyondell Common Stock).
It is possible that the IRS may contend that the Exchangeable Notes should
be subject to certain proposed Treasury regulations dealing with "contingent
payment" debt instruments (the "Proposed Regulations"). Under the Proposed
Regulations, payments made in respect of the Exchangeable Notes (including the
value of the Lyondell Common Stock received at Maturity) would be treated
first as a nontaxable return of the holder's investment in the Exchangeable
Notes and thereafter would be taxable as interest income to the holder.
The IRS has indicated that it is considering withdrawing the Proposed
Regulations, and may replace them with a rule that requires some minimum
amount of interest income to be accrued on all contingent payment debt
instruments. It is impossible to predict whether, or in what manner, the
Proposed Regulations may be modified and whether any modifications would apply
to the Exchangeable Notes. In addition, the IRS has announced that it intends
to promulgate regulations addressing the tax consequences of complex financial
instruments which could affect the tax treatment of the Exchangeable Notes.
The Revenue Reconciliation Act of 1993 added Section 1258 to the Code, which
may require certain holders of the Exchangeable Notes who enter into hedging
transactions or offsetting positions with respect to the Exchangeable Notes to
treat all or a portion of their gain as ordinary income rather than as capital
gain upon the disposition of the Exchangeable Notes. United States Holders
hedging their positions with respect to the Notes should consult their own tax
advisors regarding the applicability of this legislation to an investment in
the Exchangeable Notes.
NON-UNITED STATES HOLDERS
Based on the treatment of the Exchangeable Notes described above, in the
case of a Non-United States Holder of the Exchangeable Notes, payments made
with respect to the Exchangeable Notes should not be subject to United States
withholding tax, provided that such holder complies with applicable
certification requirements. Any capital gain realized upon the sale or other
disposition of the Exchangeable Notes by a Non-United States Holder will
generally not be subject to United States federal income tax unless (i) such
gain is effectively connected with a United States trade or business of such
holder; (ii) such gain is treated as effectively connected with a trade or
business in the United States because Lyondell is or has been a "United States
real property holding corporation" for United States federal income tax
purposes and the Non-United States Holder held, directly or indirectly, at any
time during the five-year period ending on the date of disposition, more than
five percent of the Exchangeable Notes (in which case withholding of such tax
may also apply); or (iii) in the case of an individual, such individual is
present in the United States for 183 days or more in the taxable year of the
sale or other disposition or the gain is attributable to a fixed place of
business maintained by such individual in the United States.
As discussed above, alternative characterizations of the Exchangeable Notes
for federal income tax purposes are possible. Should an alternative
characterization cause payments with respect to the Exchangeable Notes to
become subject to withholding tax, ARCO will withhold tax at the statutory
rate. However, until the IRS provides further guidance, no tax will be
withheld. Non-United States Holders should consult their own tax advisors.
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<PAGE>
BACKUP WITHHOLDING AND INFORMATION REPORTING
A holder of the Exchangeable Notes may be subject to information reporting
and to backup withholding at a rate of 31 percent of certain amounts paid to
the holder unless such holder provides proof of an applicable exemption or a
correct taxpayer identification number, and otherwise complies with applicable
requirements of the backup withholding rules. Backup withholding is not an
additional tax. Any amounts withheld under the backup withholding rules will
be refunded or credited against such holder's United States federal income tax
liability, provided that required information is furnished to the IRS.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, ARCO has
agreed to sell to each of the U.S. Underwriters named below (the "U.S.
Underwriters"), and each of such U.S. Underwriters, for whom Goldman, Sachs &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Salomon Brothers
Inc are acting as representatives, has severally agreed to purchase from ARCO,
the respective number of Exchangeable Notes set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
EXCHANGEABLE
UNDERWRITER NOTES
----------- ------------
<S> <C>
Goldman, Sachs & Co. ........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................
Salomon Brothers Inc ........................................
----------
Total...................................................... 30,000,000
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the Exchangeable Notes
offered hereby, if any are taken.
The U.S. Underwriters propose to offer the Exchangeable Notes in part
directly to the public at the initial public offering price set forth on the
cover page of the ARCO Prospectus, and in part to certain securities dealers
at such price less a concession of $ per Exchangeable Note. The U.S.
Underwriters may allow, and each of such dealers may reallow, a concession not
exceeding $ per Exchangeable Note to certain dealers and brokers. After
the Exchangeable Notes are released for sale to the public, the offering price
and the other selling terms may from time to time be varied by the
representatives.
ARCO has entered into an underwriting agreement (the "International
Underwriting Agreement") with the underwriters of the International Offering
(the "International Underwriters") providing for the concurrent offer and sale
of 5,000,000 shares of Exchangeable Notes in an international offering outside
the United States. The offering price and underwriting discount per
Exchangeable Note for the two offerings are identical. The closing of the
offering made hereby is a condition to the closing of the international
offering, and vice versa. The representatives of the International
Underwriters are Goldman Sachs International, Merrill Lynch International
Limited and Salomon Brothers International Limited.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of
the U.S. Underwriters named herein has agreed that, as a part of the
distribution of the Exchangeable Notes offered hereby and subject to certain
exceptions, it will offer, sell or deliver the Exchangeable Notes, directly or
indirectly, only in the United States of America (including the States and the
District of Columbia), its territories, its
22
<PAGE>
possessions and other areas subject to its jurisdiction (the "United States")
and to U.S. persons, which term shall mean, for purposes of this paragraph: (a)
any individual who is a resident of the United States or (b) any corporation,
partnership or other entity organized in or under the laws of the United States
or any political subdivision thereof and whose office most directly involved
with the purchase is located in the United States. Each of the International
Underwriters has agreed pursuant to the Agreement Between that, as a part of
the distribution of the Exchangeable Notes offered as a part of the
International Offering, and subject to certain exceptions, it will (i) not,
directly or indirectly, offer, sell or deliver any Exchangeable Notes (a) in
the United States or to any U.S. persons or (b) to any person whom it believes
intends to reoffer, resell or deliver the Exchangeable Notes in the United
States or to any U.S. persons, and (ii) cause any dealer to whom it may sell
such Exchangeable Notes at any concession to agree to observe a similar
restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of Exchangeable
Notes as may be mutually agreed. The price of any Exchangeable Notes so sold
shall be the initial public offering price, less an amount not greater than the
selling concession.
ARCO has granted the U.S. Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 4,171,400
additional Exchangeable Notes solely to cover over-allotments, if any. If the
U.S. Underwriters exercise their over-allotment option, the U.S. Underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof that the number of Exchangeable Notes to be
purchased by each of them, as shown in the foregoing table, bears to the
30,000,000 Exchangeable Notes offered. The U.S. Underwriters may exercise such
option only to cover over-allotments in connection with the sale of the
30,000,000 Exchangeable Notes offered. ARCO has granted the International
Underwriters an option exercisable for 30 days to purchase up to an aggregate
of 750,000 additional Exchangeable Notes, solely to cover over-allotments, at
the initial public offering price less the underwriting discount, as set forth
on the cover page of the Prospectus.
ARCO and Lyondell have agreed that during the period beginning from the date
of the ARCO Prospectus and continuing to and including the date 120 days after
the date of the ARCO Prospectus, subject to certain exceptions set forth in the
Underwriting Agreement and the International Underwriting Agreement, they will
not offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock of Lyondell or securities convertible into Common Stock of Lyondell
without the prior written consent of the representatives.
The representatives have informed ARCO that they do not expect sales to
discretionary accounts by the U.S. Underwriters to exceed five percent of the
total number of Exchangeable Notes offered by them and that sales to
discretionary accounts by the representatives will be less than one percent of
the total number of Exchangeable Notes offered by them.
The Exchangeable Notes will be a new issue of securities with no established
trading market. The representatives have advised ARCO that they intend to make
a market in the Exchangeable Notes but will not be obligated to do so and may
discontinue any market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for the Exchangeable Notes.
ARCO and Lyondell have agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
23
<PAGE>
EXPERTS
The consolidated financial statements of ARCO, appearing in ARCO's Annual
Report on Form 10-K for the year ended December 31, 1993, have been audited by
Coopers & Lybrand, independent accountants, as set forth in their report
included therein, and are incorporated by reference herein in reliance upon
such report and upon the authority of such Firm as experts in accounting and
auditing.
LEGAL OPINIONS
The legality of the Exchangeable Notes offered hereby will be passed upon for
ARCO by Ronald C. Redcay, Esq., Acting General Counsel of Atlantic Richfield
Company, 515 South Flower Street, Los Angeles, California 90071. As of July 1,
1994, Mr. Redcay's ownership of Common Stock of ARCO constituted less than 1%
of the outstanding Common Stock and consisted of shares or options to purchase
shares held pursuant to ARCO's employee benefit plans. The legality of the
Exchangeable Notes offered hereby will be passed upon for the Underwriters by
Cravath, Swaine & Moore, New York, New York. Cravath, Swaine & Moore provides
legal services to ARCO from time to time and is currently doing so on certain
matters relating to ARCO's investment in Lyondell.
24
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
APPENDIX A
SUBJECT TO COMPLETION, DATED JULY 11, 1994
35,000,000 SHARES
[LOGO OF LYONDELL PETROCHEMICAL COMPANY]
COMMON STOCK
(PAR VALUE $1.00 PER SHARE)
-----------
This Prospectus relates to 35,000,000 shares of common stock, par value $1.00
per share (the "Common Stock"), of Lyondell Petrochemical Company (the
"Company"), which may be delivered by Atlantic Richfield Company ("ARCO"), at
its option, pursuant to the terms of the % Exchangeable Notes due ,
1997 (the "Exchangeable Notes") of ARCO. This Prospectus is Appendix A to both
a U.S. prospectus of ARCO covering the sale of 30,000,000 Exchangeable Notes
and an international prospectus of ARCO covering the sale of 5,000,000
Exchangeable Notes. The Company will not receive any of the proceeds from the
sale of the Exchangeable Notes or the delivery thereunder of shares of Common
Stock covered hereby.
ARCO has granted the underwriters of the Exchangeable Notes a 30-day option
to purchase up to an additional 4,921,400 Exchangeable Notes, which may be
exchangeable at their maturity for additional shares of Common Stock. Such
option has been granted solely to cover over-allotments, if any.
SEE "CERTAIN INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
The Common Stock is traded on the New York Stock Exchange, Inc. ("NYSE")
under the symbol "LYO." On July 8, 1994, the last reported sale price of Common
Stock on the NYSE Composite Tape was $25.25 per share. See "Price Range of
Common Stock and Dividends."
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-----------
The date of this Prospectus is July , 1994.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission may
be inspected and copied at the Public Reference Section of the Commission at
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
following Regional Offices of the Commission: Chicago Regional Office,
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and New York Regional Office, Seven World Trade Center,
New York, New York 10048. Copies of such material may also be obtained from the
Public Reference Section of the Commission at its principal office at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, at prescribed rates. The
Company's registration statements, reports, proxy statements and other
information may also be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
This Prospectus, which constitutes a part of a registration statement on Form
S-3 (the "Registration Statement") filed by the Company with the Commission
under the Securities Act of 1933, as amended (the "Securities Act"), omits
certain of the information set forth in the Registration Statement. Reference
is hereby made to the Registration Statement and to the exhibits thereto for
further information with respect to the Company and the securities offered
hereby. Statements contained herein concerning the provisions of such documents
are necessarily summaries of such documents, and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Commission. Copies of the Registration Statement and the
exhibits thereto are on file at the offices of the Commission and may be
obtained upon payment of the fee prescribed by the Commission, or may be
examined without charge at the public reference facilities of the Commission
described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31, 1993
("1993 Form 10-K Report"), Quarterly Report on Form 10-Q for the quarter ended
March 31, 1994, Current Report on Form 8-K dated June 6, 1994, Current Report
on Form 8-K dated June 21, 1994, Current Report on Form 8-K dated July 11, 1994
and Proxy Statement dated April 14, 1994 (as supplemented by Supplement to
Proxy Statement dated June 23, 1994) are incorporated herein by reference.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the
date of filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated herein by reference shall be
deemed to be modified or superseded for purposes of the Registration Statement
and this Prospectus to the extent that a statement contained herein or in any
other subsequently filed incorporated document or in any accompanying
prospectus supplement modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
Copies of all documents incorporated herein by reference other than exhibits
to such documents (unless such exhibits are specifically incorporated by
reference) will be provided without charge to each person who receives a copy
of this Prospectus upon request to the Company, 1221 McKinney Street, Suite
1600, Houston, Texas 77002, Attention: Assistant Secretary (telephone: (713)
652-7200).
The Company is incorporated in Delaware, and its executive offices are
located at 1221 McKinney Street, Suite 1600, Houston, Texas 77002 (telephone:
(713) 652-7200).
THE COMPANY HAS BEEN ADVISED THAT IN CONNECTION WITH THE OFFERING OF THE
EXCHANGEABLE NOTES BY ARCO, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE EXCHANGEABLE
NOTES OR THE COMMON STOCK OF THE COMPANY, OR EACH OF THEM, AT A LEVEL ABOVE
THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE
EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in connection with, the more detailed information and the
consolidated financial statements (including the notes thereto) appearing
elsewhere in this Prospectus as well as the information incorporated herein by
reference. Unless otherwise indicated or required by context, references to
"Lyondell" or the "Company" include its consolidated subsidiaries.
COMPANY OVERVIEW
Lyondell Petrochemical Company ("Lyondell" or the "Company") is a leading
manufacturer and marketer of petrochemicals and, through its interest in
LYONDELL-CITGO Refining Company Ltd. ("LCR"), of refined petroleum products.
The Company's corporate headquarters and manufacturing facilities are located
in the Houston, Texas area.
The Company produces a wide variety of petrochemicals, including olefins
(primarily ethylene, propylene and butadiene), polyolefins (low density
polyethylene and polypropylene), methanol, MTBE (methyl tertiary butyl ether)
and aromatics. Lyondell is the largest domestic merchant marketer of ethylene
and propylene, with rated production capacities of 3.6 and 2.1 billion pounds
per year, respectively. Lyondell's petrochemical products are primarily
commodity chemicals that are sold to customers for use in the manufacture of
chemicals, plastics and other synthetic materials. These materials are used, in
turn, to produce a wide variety of consumer goods and industrial products.
The Company's refining business is conducted through its approximate 90
percent interest in LCR, which operates a 265,000 barrels per day refinery (the
"Refinery"). LCR sells the majority of the gasoline, jet fuel and heating oil
it produces to CITGO Petroleum Corporation ("CITGO"), which currently has an
approximate 10 percent interest in LCR. LCR also produces fuel oil and
aromatics, as well as lubricants for the transportation, oil drilling and food
processing industries.
LYONDELL'S STRATEGY
Lyondell's management believes that the best means to create value for its
stockholders is to maximize free cash flow over the long term. Lyondell's
strategy is to achieve the lowest possible costs and the highest degree of
operational flexibility in order to capture the benefits of cyclical upturns in
its businesses and to minimize the impact of downturns. The following are the
key elements of the Company's strategy to achieve superior performance
throughout the business cycle:
. LOW COSTS AND UNIQUE OPERATING FLEXIBILITY IN PETROCHEMICALS
Management believes that Lyondell's cost to produce ethylene is the
lowest in the United States and that its olefins plants are the most
flexible in the industry. In order to enhance the Company's low cost
position, management strives to quickly identify and capitalize on
opportunities to use its operating and organizational flexibility,
including the ability to recover and upgrade by-products and to optimize
integration of its facilities. Lyondell is the only ethylene producer
with the flexibility to process from 100 percent petroleum liquids
feedstocks (including heavy liquids) to 90 percent natural gas liquids
feedstocks as market conditions change. Lyondell also has a unique
ability to vary the production ratios of ethylene and propylene in order
to capture more profitable market opportunities through its product
flexibility unit, which converts ethylene and other light hydrocarbons
into propylene. After a doubling of capacity in 1993, this unit is
designed to produce up to one billion pounds of propylene per year.
High productivity, lean staffing and a participative management style
also are key to the Company's low operating costs. Industry studies show
that Lyondell's olefins plants have the highest production per plant-
level employee in the industry. Lyondell's lean staff levels and
3
<PAGE>
minimal expenses have resulted in a five-year average for annual
selling, general and administrative expenses (which exclude certain
distribution costs) of 2.4 percent of sales, which management believes
is among the lowest in the industry.
. ENHANCING THE VALUE OF THE REFINING BUSINESS
Management believes the Company has significantly improved the outlook
for its refining business through a mutually advantageous arrangement
with CITGO and other affiliates of the Venezuelan national oil company,
Petroleos de Venezuela, S.A. ("PDVSA"), entered into in 1993.
A crude oil supply agreement (the "Crude Supply Agreement") provides
LCR with a 25-year supply of Venezuelan crude oil under a pricing
formula that incorporates market prices for refined products as well as
deemed yields, deemed operating costs and deemed margins. The Crude
Supply Agreement is expected to significantly diminish the impact of
market volatility on the refining business and stabilize its cash flow
at attractive levels relative to historic performance. Under this
arrangement, LCR currently is processing approximately 130,000 barrels
per day of heavy crude oil, and upon successful completion of the
upgrade project discussed below is expected to process approximately
200,000 barrels per day of very heavy crude oil.
LCR is undertaking a major upgrade project to create a world-class
facility capable of refining very heavy grades of crude oil into
valuable light products, including reformulated gasoline and low-sulfur
diesel. Completion of the upgrade project is anticipated in late 1996 or
early 1997. CITGO has entered into a long-term agreement to purchase the
upgraded Refinery's gasoline, jet fuel, heating oil and low-sulfur
diesel at market-based prices.
In 1993, CITGO contributed $100 million to LCR for on-going capital
projects other than the Refinery upgrade project, giving CITGO an
approximate 10 percent interest in LCR. The arrangement with CITGO
provides that the Refinery upgrade project will be funded primarily by
additional CITGO equity contributions and LCR borrowings, with CITGO
funding all interest and fees for the borrowings prior to completion.
Upon completion of the upgrade project, when it receives credit for its
project-related contributions, CITGO's interest in LCR will increase to
approximately 40 percent. CITGO also has a one-time option following
completion of the upgrade to make an additional contribution to LCR in
order to increase its interest up to 50 percent.
. DISCIPLINED CAPITAL SPENDING
The Company's discretionary capital spending strategy focuses on high-
return projects that enhance manufacturing efficiency, increase
production volume, upgrade product streams or achieve lower operating
costs. For example, through a low cost debottleneck project in 1989 the
Company increased its ethylene capacity from 2.8 to 3.6 billion pounds
per year. Lyondell continues to develop and review both internal and
external opportunities to enhance the value of the Company's business
through increased cash flow. Examples of this approach are the Company's
1990 acquisition of its polyolefins business and polymers facility,
which enhanced its petrochemicals business, and the LCR transaction,
which is improving its refining business.
----------------
Through the strategy described above, Lyondell expects to maximize cash flow
throughout the business cycle by emphasizing low operating costs, high
operating flexibility and stable refining margins. Specifically, management
expects refining operations to generate relatively stable cash flow, while the
Company's large petrochemical capacity positions Lyondell to capture higher
cash flows when the petrochemical cycle improves.
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF OR FOR
--------------------------------------------------------
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------- ----------------------------------------
1994 1993 1993 1992 1991 1990 1989
------ ------ ------ ------ ------ ------ ------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AND CERTAIN OTHER
DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales and other
operating revenues.... $ 824 $1,065 $3,850 $4,809 $5,735 $6,499 $5,361
Cost of sales.......... 736 1,029 3,627 4,578 5,210 5,777 4,640
Selling, general and
administrative
expenses.............. 34 29 130 127 126 121 108
------ ------ ------ ------ ------ ------ ------
Operating income....... 54 7 93 104 399 601 613
Net interest expense... (17) (17) (72) (69) (60) (64) (57)
Minority interest...... (3) -- (5) -- -- -- --
Income tax (provision)
benefit............... (12) 2 (12) (9) (117) (181) (182)
------ ------ ------ ------ ------ ------ ------
Income (loss) before
cumulative effect of
accounting changes.... 22 (8) 4 26 222 356 374
Cumulative effect of
accounting changes(1). -- 22 22 (10) -- -- --
------ ------ ------ ------ ------ ------ ------
Net income............. $ 22 $ 14 $ 26 $ 16 $ 222 $ 356 $ 374
====== ====== ====== ====== ====== ====== ======
Net income (loss) per
common share:
Before cumulative
effect of accounting
changes............. $ .27 $ (.09) $ .06 $ .32 $ 2.78 $ 4.45 $ 4.67
From cumulative
effect of accounting
changes............. -- .27 .27 (.12) -- -- --
------ ------ ------ ------ ------ ------ ------
Net income........... $ .27 $ .18 $ .33 $ .20 $ 2.78 $ 4.45 $ 4.67
====== ====== ====== ====== ====== ====== ======
BALANCE SHEET DATA:
Cash, restricted cash
and short-term
investments(2)........ $ 103 $ 60 $ 119 $ 121 $ 307 $ 127 $ 245
Working capital........ 229 176 224 223 375 238 367
Property, plant and
equipment, net........ 676 627 655 623 569 568 455
Total assets........... 1,270 1,181 1,231 1,215 1,479 1,372 1,267
Long-term debt,
excluding current
portion............... 717 722 717 725 554 471 500
Capitalized lease
obligations, less
current portion....... -- -- -- -- 156 187 214
Common stockholders'
equity (deficit)...... (84) (28) (88) (6) 122 38 9
OTHER DATA:
Capital expenditures... $ 32 $ 15 $ 69 $ 97 $ 43 $ 145 $ 176
Depreciation and
amortization(1)....... 15 14 58 39 39 31 19
Cash flow provided by
operating activities.. 29 9 84 108 270 386 538
Distribution to ARCO... -- -- -- -- -- -- 500
Dividends per share.... $ .225 $ .45 $ 1.35 $ 1.80 $ 1.75 $ 4.10(3) $ 1.20
====== ====== ====== ====== ====== ====== ======
Ethylene, propylene and
polymers sales
(million pounds)...... 1,503 1,307 5,366 5,785 6,000 6,373 5,048
Refined product sales
average per day
(thousand barrels).... 239 296 263 277 288 301 298
</TABLE>
- --------
(1) See Note 4 of "Notes to Consolidated Financial Statements."
(2) As of March 31, 1994 and December 31, 1993, $46 million and $73 million of
cash and $22 million and $6 million of short-term investments,
respectively, were restricted for use in LCR capital projects and other
expenditures as determined by the LCR owners.
(3) Includes a $2.50 per share special dividend paid in the first quarter of
1990.
5
<PAGE>
CERTAIN INVESTMENT CONSIDERATIONS
Prospective investors should carefully consider the specific factors set
forth below as well as the other information contained in this Prospectus and
the information incorporated herein by reference.
IMPACT OF THE EXCHANGEABLE NOTES ON THE MARKET FOR LYONDELL COMMON STOCK
It is not possible to accurately predict how or whether the % Exchangeable
Notes due , 1997 (the "Exchangeable Notes") of Atlantic Richfield
Company ("ARCO") will trade in the secondary market or whether such market will
be liquid. Any market that develops for the Exchangeable Notes is likely to
influence, and be influenced by, the market for the common stock, par value
$1.00 per share (the "Common Stock"), of Lyondell Petrochemical Company
("Lyondell" or the "Company"). For example, the price of the Common Stock could
become more volatile and could be depressed by investors' anticipation of the
potential distribution into the market of substantial additional amounts of
Common Stock at the maturity of the Exchangeable Notes, by possible sales of
Common Stock by investors who view the Exchangeable Notes as a more attractive
means of equity participation in Lyondell and by hedging or arbitrage trading
activity that may develop involving the Exchangeable Notes and Common Stock.
CYCLICALITY AND VOLATILITY OF EARNINGS
The Company's historical operating results reflect the cyclical and volatile
nature of both the petrochemical and refining industries. Both industries are
mature and capital intensive, and industry margins are sensitive to supply and
demand cycles. As a result, the Company's earnings may be subject to
significant fluctuations. In general, external factors beyond the Company's
control, such as general economic conditions, competition, international events
and circumstances and governmental regulation, can cause volatility in crude
oil and other feedstock prices, as well as fluctuations in product prices,
volumes, and margins and can magnify the impact of economic cycles on the
Company's businesses.
UNCERTAIN PETROCHEMICAL INDUSTRY OUTLOOK
The petrochemical industry historically has experienced alternating periods
of tight supply, causing prices and margins to increase, followed by periods of
substantial capacity additions resulting in oversupply and declining prices and
margins. For example, during the mid 1980s, olefins capacity increases did not
keep pace with demand and by the 1987-1988 period domestic producers were
operating at high capacity utilization rates and prices and margins had
increased substantially. The high profitability experienced by the ethylene
industry during this period peaked in early 1989. As a result of a downturn in
general economic conditions experienced in the late 1980s, the rate of growth
in U.S. demand slowed, which in turn had an adverse effect on ethylene margins.
In addition, increased olefins and polyolefins capacity in the Far East, as
well as increased export sales from Europe and the Middle East to the Far East,
adversely affected net U.S. export sales of polyolefins and, therefore,
ethylene margins. As a consequence, since 1990, the olefins industry, including
the Company, has experienced an overcapacity condition that has resulted in
lower average selling prices and low profit margins. Two new ethylene plants
(including one plant that came on line during the second quarter of 1994),
along with other announced plant expansions, currently are scheduled to
commence operations in the U.S. prior to December 1995, resulting in an
aggregate capacity addition of approximately four billion pounds per year
(approximately 8.6 percent of 1993 domestic industry capacity). There can be no
assurance that future growth in demand for ethylene and its by-products will be
sufficient to utilize current and anticipated capacity. Excess capacity, to the
extent it occurs, may depress volumes and margins. Furthermore, there can be no
assurance that future conditions will not be aggravated by unanticipated
industry capacity additions.
COMPETITION; RELIANCE ON MERCHANT MARKET
Both the petrochemical and refining industries in which the Company operates
are highly competitive. Many of the Company's competitors, particularly in
petrochemicals, are larger and have greater financial resources than the
Company. Among Lyondell's petrochemical competitors are some
6
<PAGE>
of the world's largest chemical companies. In the last several years, there
have been a number of mergers, acquisitions and spin-offs in the petrochemical
industry. This restructuring activity may result in fewer but more competitive
producers with greater financial resources than the Company.
As a producer of olefins primarily for the merchant market, Lyondell may
experience greater variations in its sales volumes and profitability when
industry supply and demand relationships are at extremes in comparison to more
integrated competitors, i.e., those with a higher proportion of captive demand
for olefins derivatives production. Among the refining competitors of LYONDELL-
CITGO Refining Company Ltd. ("LCR") are major integrated petroleum companies
that have their own raw material resources and, in many cases, downstream
markets, both of which tend to decrease the impact of business cycles on these
competitors' sales volumes and profitability.
LCR TRANSACTION AND REFINERY UPGRADE PROJECT
REFINERY UPGRADE PROJECT COST AND POTENTIAL DELAYS. The ultimate cost to LCR
of the upgrade project at its refinery (the "Refinery") will have a significant
impact on the value to the Company of the LCR transaction with CITGO Petroleum
Corporation ("CITGO"). The cost of the upgrade project, based on the detailed
engineering completed to date, currently is estimated to be approximately $830
million. In addition, LCR has estimated a 15 percent ($125 million) allowance
for contingency costs, which would increase the total project cost estimate to
approximately $955 million. The final cost of the project will be influenced by
numerous factors, many of which are beyond LCR's control, including the timing
and terms of necessary construction, operating and regulatory permits, as well
as construction schedule delays whether caused by adverse weather conditions,
material shortages, labor disputes or otherwise. In addition, there can be no
assurance that LCR will be able to obtain the numerous required regulatory and
environmental approvals, or that this process will not result in unanticipated
delays.
FINANCING OF REFINERY UPGRADE PROJECT AND POTENTIAL LIMITATIONS ON LCR
DISTRIBUTIONS. A significant portion of the funds for the Refinery upgrade
project are to be provided pursuant to CITGO's contractual commitments to LCR
as well as by financing at the LCR level. To the extent that LCR cannot obtain
financing for its share of costs, CITGO and the Company each will fund one half
of the cost of the upgrade project in excess of $300 million. See "The
Company--Refining--LCR Transaction." There can be no assurance that CITGO will
meet its remaining funding obligations or that LCR will be able to obtain
either construction loans or any other financing of sufficient magnitude or on
terms acceptable to it or to the Company and CITGO. The failure to obtain such
funding or loans could delay or decrease the scope of the Refinery upgrade
project, require the Company to loan or contribute additional amounts to LCR or
to guarantee its borrowings, and affect the repayment by LCR of Company loans.
The Company's ability to make contributions to LCR may, under certain
circumstances, be restricted by the Company's $400 million credit facility. In
addition, the existence of significant levels of financing at the LCR level and
the terms of the related financing agreements could restrict LCR's ability to
make cash distributions or otherwise impair the financial flexibility of the
Company, including its ability to obtain additional financing or to renew its
existing long-term debt. In addition, LCR may enter into other financing
arrangements following the completion of the upgrade project.
CRUDE SUPPLY AGREEMENT. The pricing of the crude oil purchased by LCR under
the crude supply agreement (the "Crude Supply Agreement") is based upon
published market prices of refined products, deemed yields, deemed operating
costs and deemed margins. If the actual yields, costs or volumes differ
substantially from those contemplated by the Crude Supply Agreement, the
benefits of this agreement to LCR could be substantially diminished, and it
could result in lower earnings and cash flow. Furthermore, there may be periods
during which LCR's costs for crude oil under the Crude Supply Agreement may be
higher than might otherwise be available to LCR from other sources.
7
<PAGE>
The supplier of crude oil under the Crude Supply Agreement is Lagoven, S.A.
("Lagoven"), which like CITGO is a subsidiary of Petroleos de Venezuela, S.A.
("PDVSA"), the Venezuelan national oil company. There are risks associated with
enforcing the provisions of contracts with companies such as Lagoven that are
non-United States affiliates of a sovereign nation. It is impossible to predict
how governmental policies may change under the current or any subsequent
Venezuelan government. In addition, there are risks associated with enforcing
judgments of United States courts against entities whose assets may be located
outside of the United States and whose management does not reside in the United
States. Although the parties have negotiated alternative arrangements in the
event of certain force majeure conditions, including governmental or other
actions restricting or otherwise limiting Lagoven's ability to perform its
obligations, any such alternative arrangements may not be as beneficial as the
Crude Supply Agreement. In the event that CITGO transfers its interest in LCR
to an unaffiliated third party after the completion of the Refinery upgrade
project, Lagoven has an option to terminate the Crude Supply Agreement.
Depending on then current market conditions, breach or termination of the Crude
Supply Agreement could adversely affect the Company. There can be no assurance
that alternative crude oils with similar margins would be available for
purchase by LCR. Furthermore, the breach or termination of the Crude Supply
Agreement would require LCR to return to the practice of purchasing all of its
crude oil feedstocks in the merchant market and would again subject LCR to
significant volatility and price fluctuations.
HEAVY CRUDE OIL PROCESSING. The heavy (22 degree API gravity) Venezuelan
crude oil currently being processed by LCR under the Crude Supply Agreement
contains high levels of heavy metals, naphthenic acids, sulfur and residual
fuels, which make it more difficult to process than lighter, sweeter crude
oils. The Refinery began processing Venezuelan crude oil in the third quarter
of 1992. Although the Company and LCR have made significant progress in
identifying and overcoming obstacles inherent in processing high volumes of
heavy Venezuelan crude oil, unplanned shutdowns of two units were necessary
during 1993 to address limitations and improve processing efficiency. There can
be no assurance that there will not be additional operational interruptions.
See "The Company--Refining--LCR Transaction."
The design of the Refinery upgrade project is based on proven technology and
is intended to result in the processing of 200,000 barrels per day of very
heavy (17 degree API gravity) Venezuelan crude oil after completion of the
project, which is currently expected in late 1996 or early 1997. To the
Company's knowledge, no refinery has previously processed this quantity of 17
degree API gravity crude oil. Although the Company does not presently
anticipate such developments, the design, construction, start up and testing of
the upgrade project are subject to all of the risks of and the consequential
expenses related to such matters as design errors, construction accidents,
fires, explosions and similar events that can potentially affect large complex
manufacturing projects built within substantial existing refining,
petrochemical or other manufacturing plant sites. In addition, there can be no
assurance that the anticipated post-upgrade processing of very heavy (rather
than heavy) Venezuelan crude oil will not require significant additional design
or operational modifications. Furthermore, unanticipated difficulties in
eventually achieving the designed processing capability of the upgraded
Refinery may under certain circumstances result in LCR not being able to
satisfy its minimum processing requirements under the Crude Supply Agreement.
As a consequence, LCR would be required to renegotiate or obtain other
contractual relief with respect to these minimum requirements. Any such risks,
modifications or delays could result in significantly increased costs for the
project or negatively affect LCR's operating results.
FINANCING RISKS; POTENTIAL DILUTION
To the extent that the Company requires additional financing, whether to
pursue an expansion, acquisition or other enhancement of its business, or for
other purposes, the primary sources for such financing will be the Company's
internal cash flow, additional debt or equity financing or a combination
8
<PAGE>
thereof. There can be no assurance that any such debt or equity financing can
be obtained on terms acceptable to the Company. In addition, the existence of
financing at the LCR level could impair the financial flexibility of the
Company. To the extent the Company finances such activities through the
issuance of additional equity securities, the equity interests of its holders
of Common Stock could be substantially diluted. In addition, the Company's $400
million credit facility may restrict under certain circumstances the Company's
ability to incur additional indebtedness. See "Financial Matters--Long-Term
Debt and Financing Arrangements."
OPERATING RISKS
Lyondell has two major operating facilities, the petrochemical complex in
Channelview, Texas (the "Channelview Complex") and the Refinery, and the loss
or shutdown over an extended period of operations at either such facility would
have a material adverse effect on the Company. The Company's operations are
subject to the usual hazards associated with petrochemical manufacturing,
petroleum refining, and the related storage (including in underground salt
domes) and transportation of feedstocks and products, including pipeline leaks
and ruptures, explosions, fires, inclement weather and natural disasters,
mechanical failure, unscheduled downtime, transportation interruptions, oil and
chemical spills, discharges or releases of toxic substances or gases, storage
tank leaks, and other environmental risks. These hazards can cause personal
injury and loss of life, severe damage to or destruction of property and
equipment and environmental damage, and may result in suspension of operations.
The Company maintains property, business interruption and casualty insurance
which it believes is in accordance with customary industry practices, but it is
not fully insured against all potential hazards incident to its business.
ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS
The Company's operations are subject to extensive environmental, health and
safety laws and regulations promulgated by federal, state and local
governments. Many of these laws and regulations provide for substantial fines
and criminal sanctions for violations. The nature of the petrochemical and
refining industries exposes the Company to risks of liability due to the
production, storage, transportation and sale of materials that can cause
contamination or personal injury if released into the environment. In addition,
environmental laws may have a significant effect on the nature and scope of
cleanup of contamination at operating facilities and the costs of
transportation and storage of feedstocks and finished products. The Company
believes that its business, operations and facilities have been and are being
operated in compliance in all material respects with all such applicable laws
and regulations. However, the operation of any petrochemical and refining
business entails risks in this area, and there can be no assurance that
material costs or liabilities will not be incurred. See "The Company--
Environmental Matters" and "--Legal Proceedings."
Lyondell expects that the nature of its businesses will continue to subject
the Company to increasingly stringent environmental and other regulatory
standards. It is difficult to predict the future development of such laws and
regulations or their impact on future earnings and operations, but the Company
anticipates that these standards will continue to require increased capital
expenditures. In particular, the ultimate effect of the Clean Air Act on the
Company's operations will depend on how the law is interpreted and implemented
pursuant to regulations that are currently being developed and on additional
factors such as the evolution of environmental control technologies. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Environmental Matters" and "The Company--Environmental Matters."
The Company's policy is to accrue remediation costs when it is probable that
such efforts will be required and the related costs can be reasonably
estimated. Estimated costs for future environmental compliance and remediation
are necessarily imprecise due to such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and
application of technology, the identification of presently unknown remediation
sites and the allocation of costs among the responsible
9
<PAGE>
parties under applicable statutes. On a quarterly basis, the Company evaluates
the status of all significant existing or potential environmental issues,
develops or revises estimates of costs to satisfy known remediation
requirements and adjusts its accruals accordingly; as of March 31, 1994, the
reserve was $24 million. Based upon information presently available, the
Company does not expect that such future costs will have a material adverse
effect on its competitive or financial position or its ongoing results of
operations. However, it is not possible to predict accurately the amount or
timing of costs of any future environmental remediation requirements. Such
costs could be material to future quarterly or annual results of operations. In
addition, the "Superfund" statutes may impose joint and several liability for
the costs of remedial investigations and actions on the entities that arranged
for disposal of the wastes, the waste transporters that selected the disposal
sites and the past and present owners and operators of such sites; responsible
parties (or any one of them, including the Company) may be required to bear all
of such costs regardless of fault, legality of the original disposal or
ownership of the disposal site. In such event, the amount owed by the Company
for liabilities at Superfund sites would be significantly greater.
The Audit Committee of the Board of Directors and its independent counsel
recently completed an investigation into certain allegations by a senior
employee in the Company's legal department regarding environmental
noncompliance. The investigation concluded that two process waste water streams
were not in compliance with certain benzene regulations for a fourteen-month
period and that two incorrect reports had been filed with regulatory
authorities during that period. See "The Company--Environmental Matters--Audit
Committee Report Regarding Alleged Violations of Certain Environmental Laws."
CERTAIN RELATED PARTY MATTERS
ARCO and its affiliates are important customers and, in some cases, suppliers
of materials and services, of the Company. During 1993, for instance, the
Company sold $263 million (or 17 percent of petrochemical sales) of products
and services to ARCO Chemical Company, an affiliate of ARCO. Subject to the
contractual agreements that are currently in place with ARCO and its
affiliates, there can be no assurance that these existing business
relationships will be continued unchanged after the offering of the
Exchangeable Notes. ARCO has expressed its current intention as to how it will
vote its shares of Lyondell Common Stock, and ARCO and Lyondell have entered
into an agreement limiting certain of ARCO's rights as a stockholder of
Lyondell. See "Relationship with ARCO--General" and "--Registration Rights
Agreement with ARCO." Notwithstanding ARCO's current intentions and applicable
contractual restrictions, there is no assurance regarding the extent to which
its influence on the Company's actions and decisions will be limited.
POTENTIAL RESTRICTIONS ON DIVIDEND PAYMENTS
In 1993, the Company decreased the amount of its regular quarterly dividend
from $0.45 to $0.225 per share as a result of the Board of Directors' decision
that the previous level was no longer appropriate in light of current business
conditions. The future declaration and payment of dividends and the amount
thereof will depend upon the Company's results of operations, financial
condition, cash position and requirements, investment opportunities, future
prospects and other factors deemed relevant by the Board of Directors.
Pursuant to the terms of its $400 million unsecured credit facility (the
"Credit Facility"), the Company is subject to several restrictive covenants
including a restriction as to the payment of dividends. In addition, certain of
the Company's debt instruments contain provisions (the "Put Rights") that
provide that the holders of such debt may under certain circumstances require
the Company to repurchase the debt at par. The Put Rights may be triggered by,
among other things, the making of certain unearned distributions to
stockholders, other than regular dividends, that are followed by a specified
decline in the public ratings on such debt. Regular dividends are defined in
the Company's debt instruments as those quarterly cash dividends determined in
good faith by the Company's Board of Directors (whose determination is
conclusive) to be appropriate in light of the Company's results of
10
<PAGE>
operations and capable of being sustained. See "Financial Matters--Long-Term
Debt and Financing Arrangements." The Credit Facility includes restrictive
covenants regarding the incurrence of additional debt, the maintenance of
certain fixed charge coverage and leverage ratios and the making of
contributions to LCR, as well as the payment of dividends to the extent the
Company's net income after January 1, 1994 generally does not exceed, over
time, dividends declared or paid after that date. As of March 31, 1994,
approximately $90 million was available for the payment of dividends, and the
Company is currently in compliance with the financial and other covenants in
the Credit Facility and its other debt instruments. However, if the Company
were to fail to comply with any of its financial covenants, there can be no
assurance that as a condition to waiving any default or otherwise providing the
Company with continued access to credit, lenders would not impose certain
restrictions on the Company's operations, including a requirement that the
Company eliminate or severely restrict dividend payments.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock is listed on the New York Stock Exchange ("NYSE") under the
trading symbol "LYO." ARCO has advised the Company that, as of July 8, 1994,
ARCO owned 39,921,400 shares of the Common Stock, which represented 49.9
percent of the outstanding shares.
The reported high and low sale prices of the Common Stock based on the New
York Stock Exchange Composite Tape for each quarter from January 1, 1992
through July 8, 1994, inclusive, were:
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ------- -------
<S> <C> <C>
1992
First Quarter.......................................... $25 3/4 $22 1/8
Second Quarter......................................... 25 7/8 21 1/8
Third Quarter.......................................... 25 5/8 21 3/8
Fourth Quarter......................................... 25 1/2 23 1/8
1993
First Quarter.......................................... 29 1/2 23 3/4
Second Quarter......................................... 26 5/8 19
Third Quarter.......................................... 21 5/8 16 3/4
Fourth Quarter......................................... 21 1/2 18 3/8
1994
First Quarter.......................................... 23 7/8 20 5/8
Second Quarter......................................... 26 7/8 21 1/4
Third Quarter (through July 8)......................... 25 1/4 24 1/8
</TABLE>
On July 8, 1994 the closing price of the Common Stock was $25.25 and there
were approximately 3,000 record holders of the Common Stock.
Since January 1, 1992, Lyondell has declared per share quarterly cash
dividends (which were paid in the subsequent quarter) as follows:
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1992...................... $0.45 $0.45 $0.45 $0.45
1993...................... $0.45 $0.225* $0.225 $0.225
1994...................... $0.225
</TABLE>
*On July 23, 1993, the Board of Directors decreased the amount of the regular
quarterly dividend from $0.45 to $0.225 per share. For a discussion of this
dividend reduction, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Current Business Outlook."
The declaration and payment of dividends is at the discretion of the Board of
Directors of the Company. The future declaration and payment of dividends and
the amount thereof will be dependent upon the Company's results of operations,
financial condition, cash position and requirements, investment opportunities,
future prospects and other factors deemed relevant by the Board of Directors.
11
<PAGE>
Subject to these considerations and to the legal considerations discussed in
the following paragraph, the Company currently intends to distribute to its
stockholders cash dividends on its Common Stock at a quarterly rate of $0.225
per share.
In order to declare and pay dividends in the future, the Company's Board of
Directors will have to make the determination that for purposes of the General
Corporation Law of the State of Delaware (the "Delaware Law") there is a
sufficient amount of surplus (the amount by which its assets exceed its
liabilities and capital) or sufficient net profits at that time. In determining
the amount of surplus of the Company for purposes of Delaware Law, the
Company's assets, including the stock of any of its subsidiaries, may be valued
by the Board of Directors at their current market value. If prior to or as a
result of any future dividend the Company had a negative stockholders' equity
(as is currently the case), the Company's Board of Directors would have to make
the determination that, based upon its familiarity with the Company's business,
prospects and financial condition, the Company's recent earnings history, an
appraisal of the Company's assets and discussions with the Company's executive
officers, legal department and accountants, the dividend was a permitted
dividend under Delaware Law.
For a discussion of possible restrictions on the payment of dividends, see
"Certain Investment Considerations--Potential Restrictions on Dividend
Payments."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1994. This table should be read in conjunction with the historical
financial statements of the Company and the related notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31,
1994
---------
<S> <C>
Long-term debt, excluding current portion............................ $ 717
Stockholders' equity (deficit):
Common stock, $1 par value, 250,000,000 shares authorized,
80,000,000 issued and outstanding(1).............................. 80
Additional paid-in capital......................................... 158
Accumulated deficit................................................ (322)
-----
Total stockholders' deficit........................................ (84)
-----
Total capitalization................................................. $ 633
=====
</TABLE>
- --------
(1) Excludes 1,464,328 shares of Common Stock issuable pursuant to outstanding
employee stock options at March 31, 1994.
12
<PAGE>
SELECTED FINANCIAL DATA
The following selected income statement and balance sheet data for each of
the five years in the period ending December 31, 1993, have been derived from
financial statements audited by Coopers and Lybrand, independent accountants.
Their report on the Company's financial statements as of December 31, 1993 and
1992 and for each of the three years for the period ended December 31, 1993 is
included elsewhere in this Prospectus. The historical financial data set forth
with respect to the Company as of and for the three months ended March 31,
1994 and 1993 have been derived from unaudited financial statements that, in
the opinion of management, reflect all normal recurring adjustments necessary
for a fair presentation of such data. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
full year. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF OR FOR
-------------------------------------------------------
THREE MONTHS
ENDED MARCH
31, YEAR ENDED DECEMBER 31,
------------- ----------------------------------------
1994 1993 1993 1992 1991 1990 1989
----- ------ ------ ------ ------ ------ ------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AND CERTAIN
OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales and other
operating revenues.... $ 824 $1,065 $3,850 $4,809 $5,735 $6,499 $5,361
Cost of sales.......... 736 1,029 3,627 4,578 5,210 5,777 4,640
Selling, general and
administrative
expenses.............. 34 29 130 127 126 121 108
----- ------ ------ ------ ------ ------ ------
Operating income....... 54 7 93 104 399 601 613
Net interest expense... (17) (17) (72) (69) (60) (64) (57)
Minority Interest...... (3) -- (5) -- -- -- --
Income tax (provision)
benefit............... (12) 2 (12) (9) (117) (181) (182)
----- ------ ------ ------ ------ ------ ------
Income (loss) before
cumulative effect of
accounting changes.... 22 (8) 4 26 222 356 374
Cumulative effect of
accounting changes(1). -- 22 22 (10) -- -- --
----- ------ ------ ------ ------ ------ ------
Net income............. $ 22 $ 14 $ 26 $ 16 $ 222 $ 356 $ 374
===== ====== ====== ====== ====== ====== ======
Net income (loss) per
common share:
Before cumulative
effect of accounting
changes............. $ .27 $ (.09) $ .06 $ .32 $ 2.78 $ 4.45 $ 4.67
From cumulative
effect of accounting
changes............. -- .27 .27 (.12) -- -- --
----- ------ ------ ------ ------ ------ ------
Net income........... $ .27 $ .18 $ .33 $ .20 $ 2.78 $ 4.45 $ 4.67
===== ====== ====== ====== ====== ====== ======
BALANCE SHEET DATA:
Cash, restricted cash
and short-term
investments(2)........ $ 103 $ 60 $ 119 $ 121 $ 307 $ 127 $ 245
Working capital........ 229 176 224 223 375 238 367
Property, plant and
equipment, net........ 676 627 655 623 569 568 455
Total assets........... 1,270 1,181 1,231 1,215 1,479 1,372 1,267
Long-term debt,
excluding current
portion............... 717 722 717 725 554 471 500
Capitalized lease
obligations, less
current portion....... -- -- -- -- 156 187 214
Common stockholders'
equity (deficit)...... (84) (28) (88) (6) 122 38 9
OTHER DATA:
Capital expenditures... $ 32 $ 15 $ 69 $ 97 $ 43 $ 145 $ 176
Depreciation and
amortization(1)....... 15 14 58 39 39 31 19
Cash flow provided by
operating activities.. 29 9 84 108 270 386 538
Distribution to ARCO... -- -- -- -- -- -- 500
Dividends per share.... $.225 $ .45 $ 1.35 $ 1.80 $ 1.75 $ 4.10(3) $ 1.20
===== ====== ====== ====== ====== ====== ======
Ethylene, propylene and
polymers sales
(million pounds)...... 1,503 1,307 5,366 5,785 6,000 6,373 5,048
Refined product sales
average per day
(thousand barrels).... 239 296 263 277 288 301 298
</TABLE>
- -------
(1) See Note 4 of "Notes to Consolidated Financial Statements."
(2) As of March 31, 1994 and December 31, 1993, $46 million and $73 million of
cash and $22 million and $6 million of short-term investments,
respectively, were restricted for use in LCR capital projects and other
expenditures as determined by the LCR owners.
(3) Includes a $2.50 per share special dividend paid in the first quarter of
1990.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
On July 1, 1993, the Company and CITGO announced the commencement of
operations of LCR, a new entity owned by subsidiaries of the Company and CITGO.
LCR owns and operates the refining business formerly owned by the Company,
including the full-conversion Refinery. LCR is undertaking a major upgrade
project at the Refinery to enable the facility to process substantial
additional volumes of very heavy crude oil. CITGO is providing a major portion
of the funds for the upgrade project and has provided in excess of $100 million
for funding other capital projects.
The cost of the upgrade project, based on preliminary engineering, was
initially estimated to be approximately $800 million. Preliminary engineering,
or "scoping quality" estimates, are generally regarded as valid within a range
of plus or minus 30 percent of the ultimate installed costs, assuming no
significant changes to the scope of a project. Definitive engineering for the
upgrade project is still in progress and design enhancements have been made to
the project scope. LCR's management expects the next cost estimate for the
project (which may be available in the second quarter of 1994) to be higher
than $800 million, although not in excess of the range of the original
estimate.
On July 1, 1993, LCR entered into a long-term Crude Supply Agreement with
Lagoven, an affiliate of CITGO. In addition, under terms of a long-term product
sales agreement ("Products Agreement"), CITGO is purchasing a substantial
portion of the refined products produced at the Refinery. Both Lagoven and
CITGO are subsidiaries of PDVSA, the national oil company of Venezuela.
Prior to July 1, 1993, the petrochemical and refining operations of the
Company were considered to be a single segment due to the integrated nature of
their operations. However, these operations are now considered to be separate
segments due to the formation of LCR and the related separate management and
operations of that entity.
The petrochemical segment consists of olefins, including ethylene, propylene,
butadiene, butylenes and specialty products; polyolefins, including
polypropylene and low density polyethylene; aromatics produced at the
Channelview Complex, including benzene and toluene; methanol and refinery
blending stocks.
The refining segment consists of refined petroleum products, including
gasoline, heating oil and jet fuel; aromatics produced at the Refinery,
including benzene, toluene, paraxylene and orthoxylene; lubricants; olefins
feedstocks and crude oil resales.
14
<PAGE>
The following table sets forth sales volumes for the Company's major
products, for the periods indicated. Sales volumes include production,
purchases of products for resale, propylene production from the product
flexibility unit and draws from inventory.
<TABLE>
<CAPTION>
FOR THREE
MONTHS
ENDED MARCH
31, FOR YEAR ENDED DECEMBER 31,
----------- -----------------------------
1994 1993 1993 1992 1991
----- ----- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Selected petrochemical products
(millions)
(excluding intersegment sales):
Ethylene, propylene and polymers
(pounds).......................... 1,503 1,307 5,366 5,785 6,000
Other olefins (pounds)............. 329 287 1,150 1,158 1,112
Methanol (gallons)................. 54 49 225 212 224
Aromatics (gallons)................ 36 28 125 112 108
Refined products (thousand barrels
per day)
(excluding intersegment sales):
Gasoline........................... 112 140 120 125 131
Heating oil (no. 2 distillate)..... 50 64 62 60 74
Jet fuel........................... 24 39 30 38 33
Aromatics.......................... 9 11 10 11 11
Other refined products............. 44 42 41 43 39
----- ----- --------- --------- ---------
Total refined products volumes... 239 296 263 277 288
===== ===== ========= ========= =========
</TABLE>
The following table sets forth the Company's sales and other revenues,
excluding intersegment sales, for the periods indicated:
<TABLE>
<CAPTION>
FOR THREE
MONTHS
ENDED MARCH FOR YEAR ENDED
31, DECEMBER 31,
----------- --------------------
1994 1993 1993 1992 1991
---- ------ ------ ------ ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Petrochemical products:
Ethylene, propylene and polymers............ $208 $ 204 $ 808 $ 939 $1,135
Other olefins............................... 43 41 169 177 171
Methanol.................................... 27 19 89 77 100
Aromatics................................... 32 30 120 121 130
Other petrochemical products and other
revenues................................... 30 30 140 95 130
---- ------ ------ ------ ------
Total petrochemical products sales........ 340 324 1,326 1,409 1,666
---- ------ ------ ------ ------
Refined products:
Gasoline.................................... 187 285 950 1,123 1,289
Heating oil (no. 2 distillate).............. 85 128 481 510 667
Jet fuel.................................... 43 82 245 342 316
Aromatics................................... 37 45 167 193 195
Other refined products and other revenues... 71 74 280 339 294
---- ------ ------ ------ ------
Total refined products sales.............. 423 614 2,123 2,507 2,761
---- ------ ------ ------ ------
Crude oil resales(*).......................... 61 127 401 893 1,308
---- ------ ------ ------ ------
Total..................................... $824 $1,065 $3,850 $4,809 $5,735
==== ====== ====== ====== ======
</TABLE>
- --------
(*) Crude oil resales consist of revenues from the resale of previously
purchased crude oil and from locational exchanges of crude oil that are
settled on a cash basis. Crude oil exchanges and resales facilitate the
operation of the Company's petroleum processing business by allowing the
Company to optimize the crude oil feedstock mix in response to market
conditions and refinery maintenance turnarounds and also to reduce
transportation costs.
15
<PAGE>
RESULTS OF OPERATIONS
OVERVIEW
Three Months Ended March 31, 1994 and 1993
Net income for the first quarter of 1994 was $22 million or $0.27 per share
compared to a net income of $14 million or $0.18 per share for the first
quarter of 1993. First quarter 1993 earnings included a $22 million favorable
adjustment for the cumulative effect, for prior periods, associated with a
change in accounting for major maintenance turnarounds. Excluding the effect of
this accounting change, earnings improved $30 million during the first quarter
of 1994 compared to the first quarter of 1993. This improvement was primarily
due to higher margins for refined products and certain petrochemical products
and higher ethylene sales volumes.
Net income was $8 million higher for the first quarter of 1994 compared to
the fourth quarter of 1993. This increase was primarily due to higher ethylene
sales volumes and higher petrochemical margins. Partially offsetting these
improvements was the absence during the current period of net favorable
adjustments of $4 million recorded in the earlier period consisting of a
contract amendment and LIFO inventory adjustments, partially offset by
increases in the environmental reserve.
Years Ended December 31, 1993, 1992 and 1991
Net income for 1993 was $26 million or $0.33 per share compared with $16
million or $0.20 per share in 1992 and $222 million or $2.78 per share in 1991.
Earnings for 1993 included a net $13 million after-tax benefit associated with
a change in accounting for major maintenance turnarounds consisting of a $22
million favorable adjustment for the cumulative effect related to prior
periods, partially offset by a $9 million charge to current operations.
Earnings for 1992 reflect a net after-tax charge of $10 million for the
cumulative effect related to prior periods of adopting Financial Accounting
Standards Board mandated accounting standards for postretirement benefits and
income taxes. Excluding the effect of these accounting changes, the earnings
decline was primarily due to lower ethylene sales volumes and lower polyolefins
margins, partially offset by higher refined products margins. The decrease in
1992 versus 1991 resulted primarily from lower refining and ethylene margins as
well as higher maintenance expenses for scheduled and unscheduled downtime at
the Refinery.
The 1993 results included after-tax charges of $11 million consisting of the
cancellation of a capital project, an increase in the environmental reserve and
a workforce reduction and realignment and an additional charge of $3 million
for an adjustment to deferred income taxes associated with an increase in the
federal income tax rate. These charges were partially offset by a benefit of $7
million due to a contract adjustment and LIFO inventory profits. Net income in
1992 included a benefit of $3 million due to an insurance recovery. This
compares to a benefit of $25 million in 1991 primarily associated with
insurance and litigation settlements and LIFO inventory profits.
PETROCHEMICAL SEGMENT
Three Months Ended March 31, 1994 and 1993
Revenues. Sales and other operating revenues for the first quarter of 1994
were essentially unchanged from period to period at $384 million compared to
$390 million for the first quarter of 1993. Increases in sales volumes,
particularly in olefins, were offset by lower sales prices.
Cost of Sales. Cost of sales was $335 million in the first quarter of 1994
compared to $369 million in the first quarter of 1993, a decrease of $34
million. This decrease was primarily due to lower feedstock prices, reflecting
generally lower crude oil costs.
Operating Income. Operating income for the first quarter of 1994 was $39
million compared to $12 million in the first quarter of 1993. The $27 million
increase was primarily due to higher ethylene sales
16
<PAGE>
volumes and higher margins for certain petrochemical products. Ethylene and
other olefins sales volumes were higher in part due to increased demand driven
by improvement in the overall U.S. economy, particularly in the automotive and
construction sectors. Improved ethylene margins resulted primarily from lower
feedstock costs which more than offset lower ethylene sales prices. Methanol
sales margins and volumes were substantially above the earlier period. Methanol
margins were higher due to higher sales prices, which more than offset higher
feedstock costs.
Operating income for the first quarter of 1994 compared to the fourth quarter
of 1993 increased $6 million. The increase was primarily due to higher ethylene
sales volumes and higher margins for petrochemical products. These improvements
were partially offset by the absence during the current period of net favorable
adjustments amounting to $11 million (before tax) recorded in the earlier
period for the contract amendment and for LIFO inventory adjustments. Higher
ethylene and other olefins sales volumes resulted from the increase in demand
caused in part by the improvement in certain sectors of the U.S. economy.
Margins for methanol and polymers increased primarily due to higher sales
prices.
Years Ended December 31, 1993, 1992 and 1991
Revenues. Sales and other operating revenues, including intersegment sales,
were $1.5 billion in 1993 compared to $1.7 billion in 1992 and $2.0 billion in
1991. The 1993 decrease of $169 million compared to 1992 was primarily due to
lower olefins and polyolefins sales volumes and prices caused by continued weak
demand associated with poor worldwide industry conditions and higher industry
production due to reduced maintenance downtime during 1993.
The 1992 decrease in sales and other operating revenues of $284 million
versus 1991 was primarily due to lower sales prices for olefins and methanol.
Olefins sales prices were negatively affected by the continued weak worldwide
economy and by additional industry production capability due to capacity
additions.
Cost of Sales. Cost of sales was $1.4 billion in 1993 compared to $1.5
billion in 1992 and $1.7 billion in 1991. The 1993 decrease of $124 million
compared to 1992 and the 1992 decrease of $175 million compared to 1991 were
principally due to lower olefins feedstock costs due to the curtailment of
production resulting from the poor economic conditions and to a lesser extent
to lower feedstock prices.
Cost of sales was reduced in 1993 and 1992 by $5 million and $2 million,
respectively, and was increased $2 million in 1991 relating to LIFO inventory
adjustments.
Operating Income. Operating income amounted to $57 million in 1993 compared
to $102 million in 1992 and $213 million in 1991. The decrease of $45 million
in operating income in 1993 compared to 1992 was primarily due to lower
ethylene sales volumes and lower polyolefins margins. Ethylene sales volumes
and polyolefins margins were lower primarily due to poor industry and economic
conditions.
The decrease of $111 million in operating income in 1992 compared to 1991 was
primarily due to lower ethylene and methanol margins. Ethylene margins were
negatively affected by the continued weak worldwide economy and by industry
capacity additions. Methanol sales prices were lower due to the dissipation
during 1992 of the Gulf War related price premium created during 1990 and 1991.
Contributing to the decrease in operating income was the absence of a $12
million one-time gain recorded in 1991 for proceeds received from an out-of-
period settlement of litigation.
REFINING SEGMENT
Three Months Ended March 31, 1994 and 1993
Revenues. Sales and other operating revenues for the first quarter of 1994
were $535 million compared to $814 million for the first quarter of 1993. The
$279 million decrease was primarily due to
17
<PAGE>
lower resale volumes of purchased light products, lower crude oil resales and
lower sales prices for refined products. The purchase and resale activity for
light refined products conducted for logistic and other reasons declined during
the current period as a result of the Products Agreement. Effective with the
beginning of LCR operations on July 1, 1993, a majority of the refined products
produced at the Refinery is sold to CITGO under the Products Agreement. Crude
oil resale volumes were lower due to reduced logistical purchases required to
meet refinery feedstock requirements, a significant percentage of which are
satisfied by Venezuelan crude oil purchased under the Crude Supply Contract.
Refined products sales prices were lower primarily due to lower industry crude
oil prices.
Cost of Sales. Cost of sales was $496 million in the first quarter of 1994, a
decrease of $303 million compared to the first quarter of 1993. This decrease
was primarily due to lower volume purchases of light refined products and crude
oil and to lower crude oil prices. Purchases of light refined products declined
because of the reduction in resale activity. Crude oil purchases were lower
primarily due to the reduced need for logistical purchases required to meet
refinery feedstock requirements. Lower crude oil prices were due to generally
lower industry crude oil prices and to the processing of higher volumes of
lower priced Venezuelan crude oil.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $13 million in the first quarter of 1994, an
increase of $3 million compared to the first quarter of 1993. Contributing to
this increase were higher expenses associated with the ongoing operations of
LCR commencing on July 1, 1993.
Operating Income. Operating income for the first quarter of 1994 was $26
million compared to $5 million for the first quarter of 1993. The $21 million
increase was primarily due to improved refined products margins. Lower period
costs were offset by higher selling, general and administrative expenses.
Refined products margins were higher due to processing higher volumes of
Venezuelan crude oil purchased under the Crude Supply Contract and to lower
industry crude oil prices, which together more than offset lower refined
products sales prices.
Operating income for the first quarter of 1994 was higher by $3 million
compared to the fourth quarter of 1993. Refining results benefited from higher
Venezuelan crude oil volumes and higher industry margins; however, this
improvement was offset by the early January 1994 downtime on two major refining
units for completion of maintenance which began in late December 1993.
Additionally, lubricants and aromatics showed strong sales improvements in the
first quarter of 1994 compared to the fourth quarter of 1993.
Years Ended December 31, 1993, 1992 and 1991
Revenues. Sales and other operating revenues, including intersegment sales,
were $2.8 billion in 1993 compared to $3.7 billion in 1992 and $4.5 billion in
1991. The 1993 decrease of $973 million compared to 1992 was due to lower crude
oil resale volumes, lower sales prices for refined products and lower resale
volumes of purchased light products. Crude oil resale volumes were lower due to
reduced logistical purchases required to meet refinery feedstock requirements
which were impacted by higher Venezuelan crude oil volumes purchased under the
Crude Supply Agreement. Refined products sales prices were lower as additional
industry supply exceeded demand growth due to additions of oxygenates,
primarily MTBE to meet stricter environmental standards, as well as new
industry conversion capacity. The purchase and resale activity for light
refined products conducted for logistic and other reasons was curtailed during
the current period because, effective with the beginning of LCR operations on
July 1, 1993, a majority of the refined products produced at the Refinery are
now sold to CITGO under the Products Agreement.
The 1992 decrease in sales and other operating revenues of $790 million
versus 1991 was primarily due to lower crude oil resales and to lower sales
prices and volumes for refined products. The price premium that existed for
refined products during 1991 that was caused by the 1990-1991 Gulf War
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dissipated in 1992 resulting in lower prices. Refined products sales volumes
were lower primarily due to lower production resulting from scheduled and
unscheduled downtime of major units.
Cost of Sales. Cost of sales was $2.6 billion in 1993, compared to $3.6
billion in 1992 and $4.2 billion in 1991. The 1993 decrease compared to 1992 of
$1,010 million was principally due to lower quantities of crude oil purchased,
lower light refined products purchased and lower crude oil prices. Crude oil
purchases were lower due to the reduced logistical purchases. Purchases of
light refined products were lower primarily due to lower purchases for resale
activity. Lower crude oil prices were due to generally lower industry-wide
crude oil prices and to the processing of higher volumes of lower priced heavy
Venezuelan crude oil purchased under the Crude Supply Agreement.
The 1992 decrease compared to 1991 of $605 million was principally due to
lower crude oil purchases that were resold and to lower refining feedstock
costs. Refining feedstock costs were lower primarily due to lower production
resulting from the scheduled and unscheduled downtime and a reduction in crude
oil runs due to unfavorable margins. Partially offsetting this decrease were
higher maintenance expenses related to the scheduled and unscheduled downtime.
Cost of sales was reduced in 1991 by $8 million relating to LIFO inventory
profits.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $48 million in 1993, compared to $43 million in
1992 and $42 million in 1991. The increase in 1993 compared to 1992 of $5
million resulted primarily from higher personnel and realignment expenses
associated with ongoing operations of LCR starting on July 1, 1993.
Operating Income. Operating income amounted to $81 million in 1993, compared
to $49 million in 1992 and $235 million in 1991. The $32 million increase in
1993 compared to 1992 was primarily due to improved refined products margins,
partially offset by higher selling, general and administrative expenses.
Refined products margins were higher due to processing higher volumes of lower
priced heavy Venezuelan crude oil purchased under the Crude Supply Agreement.
The decrease in operating income of $186 million in 1992 compared to 1991
resulted primarily from lower refined products margins and to higher
maintenance expenses. Refined products margins were lower primarily because
decreasing product prices more than offset reductions in crude oil costs.
Product prices were lower due to the dissipation during 1992 of the Gulf War
related price premium created in 1990 and 1991. Higher maintenance expenses and
the reduced ability to process higher margin heavy crude oils which resulted
from the scheduled and unscheduled downtime of major units during 1992
contributed to lower operating profits. Also contributing to the decrease in
operating income during 1992 compared to 1991 was a net reduction in benefits
of $11 million from insurance settlements and lower LIFO inventory profits of
$8 million.
UNALLOCATED AND HEADQUARTERS
Three Months Ended March 31, 1994 and 1993
Minority Interest in LYONDELL-CITGO Refining Company Ltd. Minority interest
was $3 million in the first quarter of 1994, representing CITGO's allocation of
LCR's income. LCR began operations on July 1, 1993.
Income Tax. The effective income tax rate during the first quarter of 1994
from continuing operations was 35 percent compared to 24 percent (tax benefit)
for the first quarter of 1993. The tax benefit in the first quarter of 1993 was
reduced by a charge to state deferred taxes related to Texas franchise taxes.
Years Ended December 31, 1993, 1992 and 1991
Selling, General and Administrative. General and administrative expenses were
$45 million in 1993, $47 million in 1992 and $49 million in 1991. The reduction
of $2 million in general and administrative
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expenses in 1993 compared to 1992 and in 1992 compared to 1991 primarily
resulted from lower personnel related costs.
Interest Expense and Interest Income. Interest expense was $74 million in
1993 compared to $79 million in 1992 and $74 million in 1991. The $5 million
reduction in interest expense in 1993 compared to 1992 was primarily caused by
a reduction of outstanding debt due to the prepayment of amounts due under
capitalized leases during April, 1992. The $5 million increase in 1992 compared
to 1991 resulted from higher average debt outstanding in 1992 which more than
offset lower interest rates.
Interest income was $2 million in 1993 compared to $10 million in 1992 and
$14 million in 1991. The $8 million decrease in 1993 versus 1992 was primarily
due to lower amounts of cash available for investment. The $4 million decrease
in 1992 versus 1991 was primarily due to lower interest rates and to a lesser
extent to lower amounts of cash available for investment.
Minority Interest in LYONDELL-CITGO Refining Company Ltd. Minority interest
was $5 million in 1993 representing CITGO's allocation of LCR's income.
Income Tax. The effective income tax rate during 1993 from continuing
operations was 73.1 percent compared to 27.3 percent for 1992 and 34.6 percent
for 1991. The difference for 1993, between the effective tax rate and the
federal statutory rate was primarily due to a charge to state deferred taxes
related to Texas franchise taxes and the unfavorable impact on federal deferred
taxes of the increase in the federal tax rate. The difference for 1992 was
primarily due to a state income tax adjustment, tax exempt income related to
company owned life insurance and tax exempt interest.
FINANCIAL CONDITION
Three Months Ended March 31, 1994 and 1993
Operating Activities. Cash flow from operations for the first quarter of 1994
was $29 million, which was net of the annual property tax payments of $28
million.
Investing Activities. Cash flows associated with investing activities during
the first quarter of 1994 included capital expenditures of $32 million, of
which $12 million was for environmentally related projects and $10 million was
for the upgrade project at the Refinery. CITGO, the minority owner of LCR,
contributed $10 million to LCR for the upgrade project.
Financing Activities. Cash flows associated with financing activities during
the first three months of 1994 included $18 million of dividend payments and
net $5 million for debt repayments. On May 4, 1994, the Board of Directors
declared a regular quarterly dividend in the amount of $0.225 per share of
common stock, payable June 15, 1994 to stockholders of record on May 20, 1994.
Years Ended December 31, 1993, 1992 and 1991
Investing Activities. Cash flows associated with investing activities during
1993 included capital expenditures of $60 million, excluding $9 million related
to the Refinery upgrade project, of which $38 million was for environmentally
related projects at the Refinery and the Channelview Complex. During 1992,
capital expenditures were $97 million, of which $57 million was for
environmentally related projects. The 1994 capital expenditures budget,
excluding the Refinery upgrade project, has been set at $90 million. The budget
provides approximately $60 million for refinery projects, $26 million of which
are to be funded by Lyondell according to the terms of the agreement with LCR
and $34 million to be funded from the restricted cash balance which was created
by CITGO's 1993 contributions to LCR. The remaining $30 million is for
petrochemical projects at the Channelview Complex. In addition to the capital
expenditures budget, $150 million of spending in 1994, funded by CITGO, is
planned for the Refinery upgrade project designed to increase the Refinery's
ability to process larger volumes of very heavy Venezuelan crude oil.
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As of December 31, 1993, $73 million of cash and $6 million of short-term
investments were restricted for use in LCR capital projects, including the
Refinery upgrade project and other expenditures as determined by the LCR
owners.
Financing Activities. Cash flows associated with financing activities during
1993 included $108 million of dividend payments, $29 million for scheduled
repayments of medium-term notes and $4 million of net proceeds from short-term
debt.
In December 1993, the Company completed a five-year, $400 million revolving
Credit Facility with a group of banks, representing an increase in amount and
term compared to the Company's previous $300 million bank credit facility,
which was scheduled to terminate in July, 1994. Borrowings under the new Credit
Facility bear interest based on Euro-Dollar, CD or prime rates, at the
Company's option. The facility is available for working capital and general
corporate purposes as needed. This Credit Facility contains covenants relating
to dividend payments, debt incurrence, liens, disposition of assets, mergers
and consolidations, fixed charge and leverage ratios and certain investments in
LCR. At December 31, 1993, no amounts were outstanding under this Credit
Facility. See Note 11 of "Notes to Consolidated Financial Statements."
Effective July 1, 1993, LCR entered into a 364 day unsecured $100 million
revolving credit facility with a group of banks. Under terms of the credit
facility, LCR may borrow with interest based on prime, LIBOR or CD rates at
LCRs option or have letters of credit issued on its behalf. The facility is
available for working capital and general corporate purposes as needed. At
December 31, 1993, no amounts were outstanding under this credit facility. See
Note 11 of "Notes to Consolidated Financial Statements."
On January 21, 1994, the Board of Directors declared a quarterly dividend in
the amount of $0.225 per share of common stock, payable March 15, 1994 to
stockholders of record on February 18, 1994.
During 1993, all of the $108 million of dividend payments exceeded earnings
and profits in 1993, as computed for federal income tax purposes subject to
final determination by the Internal Revenue Service, and will be considered a
return of capital to all stockholders. See Note 13 of "Notes to Consolidated
Financial Statements."
ENVIRONMENTAL MATTERS
Various environmental laws and regulations impose substantial requirements
upon the operations of the Company. The Company's policy is to be in compliance
with such laws and regulations, which include, among others, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as
amended, the Resource Conservation and Recovery Act ("RCRA") and the Clean Air
Act and Clean Air Act Amendments of 1990. ARCO, along with many other
companies, has been named a potentially responsible party ("PRP") under CERCLA
in connection with the past disposal of waste at third party waste sites. The
Company may have an obligation to reimburse ARCO for a portion of the
remediation costs for two of those sites pursuant to a cross-indemnity
agreement. For a discussion of this agreement, see "Relationship with ARCO--
Cross-Indemnity Agreement."
The Company reserves for contingencies, including those based upon unasserted
claims, that are probable and reasonably estimable. In connection with
environmental matters, the Company establishes reserves based upon known facts
and circumstances. Based on current environmental laws and regulations, the
Company believes that it has adequately reserved for the matters described
above and, based upon such reserves, does not anticipate any material adverse
effect upon its earnings, operations or competitive position, although the
resolution in any reporting period of one or more of these matters could have a
material impact on the Company's results of operations for that period.
The environmental reserve on December 31, 1993 was $24 million. The
environmental reserve includes $0.5 million of estimated advances to ARCO for
remediation costs associated with CERCLA waste disposal sites and $23.5 million
of estimated remediation costs related to waste disposal sites
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located within the Company's facilities associated with RCRA. The Company spent
$627,000, $593,000 and $1 million in 1993, 1992 and 1991, respectively,
relating to CERCLA matters. The Company also spent $2 million, $158,000 and
$224,000 in 1993, 1992 and 1991, respectively, in conjunction with RCRA
matters. The Company estimates it will incur approximately $7 million of costs
in conjunction with CERCLA and RCRA matters in 1994, an amount which is
included in the December 31, 1993 environmental reserve.
CURRENT BUSINESS OUTLOOK
Lyondell's first quarter 1994 results reflect an improved business
environment for both petrochemicals and refining, as well as actions that were
taken over the prior year to strengthen the Company. Those actions included the
formation of LCR, a significant reduction in capital expenditures from the
budgeted amount, implementation of a cost reduction program and the reduction
of regular quarterly dividends from $0.45 per share to $0.225 per share
beginning with the dividend paid in the third quarter of 1993. Profitability
and cash flows for the petrochemical and refining businesses are affected by
market conditions, feedstock cost volatility, capital expenditures required to
meet increasing environmental standards, repair and maintenance costs, and
downtime of production units due to turnarounds. Turnarounds on major units can
have significant financial impact due to the repair and maintenance costs
incurred as well as the associated loss of production, resulting in lower
profitability during the period of the turnaround. The methanol unit at the
Channelview Complex is currently expected to be shut down for maintenance for
approximately six weeks within the next few quarters. In addition, turnarounds
on the coker and one of the major crude distillation units at the Refinery
currently are scheduled during late 1994; however, the timing of such
turnarounds may be accelerated or delayed because of numerous factors, some of
which are beyond the Company's control. During these Refinery turnarounds, work
will be completed to "tie-in" the crude distillation unit to the upgrade
project, thereby preventing or reducing downtime of the unit that otherwise
would be necessary at the completion of the upgrade project.
Management believes that the low costs and operating flexibility of its
petrochemical business, as well as its large production capacity, position it
to capture higher cash flows if the petrochemical cycle continues to improve.
In the first quarter of 1994, the domestic olefins industry operated at close
to maximum available capacity. However, additional capacity scheduled to come
on-stream in 1994 and rising feedstock prices may negatively affect future
operating rates and margins. Management believes the Company has significantly
improved the outlook for its refining business by forming LCR which has entered
into the Crude Supply Contract and Products Agreement. These arrangements are
designed to diminish the impact of market volatility and stabilize cash flow at
attractive levels relative to historic performance, although the remaining
portion of LCR's crude oil volume continues to be sensitive to market
conditions.
Although the future economic environment cannot be known with certainty, the
Company believes that the cash flow management, cost reduction and other steps
recently taken have positioned it to capitalize on the anticipated improvement
in the business environment. Further, the Company believes that business
conditions will be such that cash balances, cash generated from operating
activities and existing lines of credit will be adequate to meet future cash
requirements for scheduled debt repayments, necessary capital expenditures and
to sustain for the reasonably foreseeable future the revised regular quarterly
dividend. However, the Company continually evaluates its cash requirements and
allocates cash in order to maximize stockholder returns.
RECENT DEVELOPMENTS
Effective July 1, 1994, LCR elected to replace its $100 million revolving
credit facility with a $70 million revolving credit facility on substantially
the same terms. No amounts were outstanding under
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the previous facility as of June 30, 1994. The new credit facility may be
extended at the request of LCR upon consent of the bank group.
On May 4, 1994, the Board of Directors declared a quarterly dividend in the
amount of $0.225 per share of common stock that was paid on June 15, 1994 to
stockholders of record on May 20, 1994.
The cost of the upgrade project, based on the detailed engineering completed
to date, currently is estimated to be approximately $830 million. In addition,
LCR has estimated a 15 percent ($125 million) allowance for contingency costs,
which would increase the total project cost estimate to approximately $955
million.
----------------
Management cautions against projecting any future results based on present or
prior earnings levels because of the cyclical nature of the refining and
petrochemical industries and uncertainties associated with the United States
and worldwide economies and United States governmental regulatory actions.
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FINANCIAL MATTERS
OVERVIEW
The Company's primary financial strategy is to use its cash position and cash
flow to enhance total return to stockholders as determined by stock
appreciation and dividends, while maintaining suitable credit ratings and
appropriate financial liquidity. The Company believes that its ability to
maintain suitable debt ratings, to fund a capital program appropriate to its
asset base, to pay dividends on its Common Stock and to position the Company to
benefit from upturns in the business cycle are critical factors in maximizing
total return to stockholders.
In 1993, as it became apparent that the downturn in petrochemicals would be
broader and more prolonged than previously expected, the Company took action
consistent with the strategies described above to improve its ability to
generate cash flow. These actions included implementation of a cost reduction
program, a reduction of the capital budget and a decrease in the regular
quarterly dividend. These and the other actions, as well as management's
continued commitment to keep working capital at minimal levels, have better
positioned the Company to benefit from an upturn in the business cycle. See
"Managements' Discussion and Analysis of Financial Condition and Results of
Operations--Current Business Outlook."
CAPITAL SPENDING
The Company invests discretionary capital in order to improve operating
efficiency, increase production capability in a cost-effective manner, lower
operating costs or upgrade the petrochemical components in its product streams.
A significant portion of the Company's non-discretionary capital spending is
used for projects to improve the health, safety and environmental aspects of
its operations, including compliance with government regulations, and for
replacing capital assets.
Lyondell places major emphasis on finding innovative solutions to improve its
operations without a high level of discretionary capital spending. As one
example of this strategy, in order to take advantage of the strong market for
its petrochemical products and to reduce operating costs, the Company
debottlenecked its two olefins plants and related units in 1989, which
increased the rated ethylene capacity from 2.8 to 3.6 billion pounds per year
and also increased the capacities of certain downstream units at less than half
of the estimated cost of new "grassroots" capacity. Another example of this
strategy is the LCR transaction. The funds contributed to LCR by CITGO (other
than for the upgrade project) are required to be used for capital spending and
other expenditures as determined by the LCR owners, and will substantially
reduce the total capital spending that the Company otherwise would be required
to make in connection with Refinery operations. See "The Company--Refining--LCR
Transaction--Contributions of the Parties."
The petrochemical business capital expenditures totaled $15 million in 1993,
and its capital budget for 1994 is $30 million, of which approximately $3
million is for environmentally-related capital projects. The refining business
capital expenditures (excluding spending on the upgrade project) totaled $45
million in 1993. The refining business capital budget (excluding the upgrade
project) for 1994 is approximately $60 million, of which $48 million is for
environmentally-related capital projects. See "The Company--Environmental
Matters" for a discussion of these environmentally-related capital projects.
Management is currently considering additional capital projects which could
result in a moderate increase in 1994 capital expenditures.
The Company remains obligated to fund certain Refinery environmentally-
related capital projects begun prior to the creation of LCR as well as its
share of ongoing Refinery capital improvements; the total of these obligations
is estimated to be approximately $75 million through the completion of the
upgrade project. The level and timing of these anticipated capital expenditures
will be affected by changes in applicable governmental regulations, including
environmental and tax laws. See "The Company--Refining--LCR Transaction--
Contributions of the Parties."
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As part of its ongoing operations, the Company periodically conducts
maintenance turnarounds on its facilities, during which capital expenditures
and maintenance expenses as well as lost operating income are typically
incurred. In addition, it may become necessary to shut down units between major
turnarounds in order to perform less extensive maintenance. Such shutdowns were
necessary on the two olefins units at the Channelview Complex during 1993. In
addition to the required repairs, other work was performed during the shutdowns
which is expected to postpone the next major turnaround on the Company's
olefins units. Shutdowns also were necessary on two units at the Refinery
during 1993. The methanol unit at the Channelview Complex is currently expected
to be shut down for approximately six weeks to perform maintenance later this
year. Although turnarounds on principal facilities are usually scheduled well
in advance, the timing of such turnarounds can be accelerated or delayed
because of numerous factors, many of which are beyond the Company's control.
Turnarounds on the coker and one of the major crude distillation units at the
Refinery currently are scheduled to begin in October 1994; however the timing
of such turnarounds may be accelerated or delayed because of numerous factors,
some of which are beyond the Company's control. During these Refinery
turnarounds, work will be completed on the crude distillation unit to "tie-in"
this unit to the upgrade project, thereby preventing or reducing downtime of
the unit that otherwise would be necessary as part of the upgrade project. See
"Certain Investment Considerations--LCR Transaction and Refinery Upgrade
Project--Heavy Crude Oil Processing" and "The Company--Refining--Refining
Feedstocks."
LONG-TERM DEBT AND FINANCING ARRANGEMENTS
As of June 30, 1994, the Company had $707 million of long-term debt
consisting of $300 million of notes due 1996 and 1999, $200 million of notes
due 1997 and 2002 and $207 million of medium-term notes due from 1995 to 2005.
The notes due 1996 and 1999 and the medium-term notes contain Put Rights that
would allow the holders to require the Company to repurchase the debt at par
upon the occurrence of certain events combined with specified declines in
public ratings on the notes due 1996 and 1999. Events that may trigger the Put
Rights include, among other things, (i) acquisitions by persons other than ARCO
or the Company of more than 20 percent of the Company's Common Stock, (ii) any
merger or transfer of substantially all of the Company's assets in connection
with which the Company's Common Stock is changed into or exchanged for cash,
securities or other property and (iii) payment of dividends other than regular
dividends. See "Certain Investment Considerations--Potential Restrictions on
Dividend Payments."
Company Unsecured Revolving Credit Facility
During December 1993, the Company executed the Credit Facility, a five year,
$400 million unsecured revolving credit facility that replaced its existing
$300 million credit facility which was due to expire in July 1994. At June 30,
1994, no amounts were outstanding under the Credit Facility.
Under the terms of the Credit Facility, the interest rate for borrowings is
based on Euro-Dollar, CD or prime rates, at the Company's option, and also is
dependent upon the Credit Facility utilization rate and the Company's debt
ratings. The Credit Facility contains restrictive covenants regarding the
incurrence of additional debt, the maintenance of certain fixed charge coverage
and leverage ratios and the provision of contributions to LCR, as well as the
payment of dividends. The Company is currently in compliance with the financial
and other covenants in the Credit Facility. See "Certain Investment
Considerations--Potential Restrictions on Dividend Payments."
LCR Unsecured Revolving Credit Facility
Effective July 1, 1994, LCR entered into a 364-day unsecured $70 million
revolving credit facility with a group of banks, including Continental Bank as
agent. Under terms of the credit facility, LCR may borrow with interest based
on prime, LIBOR or CD rates at LCR's option or have letters of credit
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issued on its behalf. The revolving credit facility may be extended at the
request of LCR upon consent of the bank group. The credit facility contains
covenants that limit LCR's ability to modify certain significant contracts,
dispose of assets or merge or consolidate with other entities. This agreement
replaced a $100 million revolving credit facility with substantially the same
terms which expired on June 30, 1994.
Petrochemical Financing Strategy
Potential funding sources for long-term capital projects, whether involving
transactions with third parties or otherwise, could include, without
limitation, the Company's current financial resources, potential earnings
growth, future borrowings and future issuance of equity securities, as well as
possible contractual arrangements such as joint ventures or partnerships. See
"The Company--Business Strategy." There is no assurance that such funding could
be obtained on terms acceptable to the Company. Both the Company's ability to
undertake and fund its business strategies, and the general level of the
Company's capital commitments and expenditures from period to period, will be
affected by a variety of factors including, without limitation, the general
business environment, as well as changes in applicable government regulations
and tax laws. See "Certain Investment Considerations--Financing Risks;
Potential Dilution."
For a further discussion of the Company's long-term debt and financing
arrangements, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition" and Note 11 of "Notes to
Consolidated Financial Statements."
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THE COMPANY
COMPANY OVERVIEW
Lyondell is a leading manufacturer and marketer of petrochemicals and,
through its interest in LCR, of refined petroleum products. The Company's
corporate headquarters and manufacturing facilities are located in the Houston,
Texas area.
The Company produces a wide variety of petrochemicals, including olefins
(primarily ethylene, propylene and butadiene), polyolefins (low density
polyethylene and polypropylene), methanol, MTBE (methyl tertiary butyl ether)
and aromatics. Lyondell is the largest domestic merchant marketer of ethylene
and propylene, with rated production capacities of 3.6 and 2.1 billion pounds
per year, respectively. Lyondell's petrochemical products are primarily
commodity chemicals that are sold to customers for use in the manufacture of
chemicals, plastics and other synthetic materials. These materials are used, in
turn, to produce a wide variety of consumer goods and industrial products.
The Company's refining business is conducted through its approximate 90
percent interest in LCR, which operates the Refinery. LCR sells the majority of
the gasoline, jet fuel and heating oil it produces to CITGO, which currently
has an approximate 10 percent interest in LCR. LCR also produces fuel oil and
aromatics, as well as lubricants for the transportation, oil drilling and food
processing industries.
Lyondell was originally created by ARCO as a separate division (the "Lyondell
Division") in 1985 through the combination of the operations of the Channelview
Complex and the Refinery. Effective July 1, 1988, ARCO transferred
substantially all the assets and liabilities relating to the integrated
petrochemical and petroleum processing business of the Lyondell Division to a
wholly-owned subsidiary incorporated under the laws of the state of Delaware.
In February, 1990, the Company acquired a polypropylene plant and a low density
polyethylene plant located in Pasadena, Texas (the "Polymers Facility"). On
July 1, 1993 the Company and CITGO announced the commencement of operations of
LCR, a new entity formed and owned by the Company and CITGO in order to own,
operate and upgrade the Company's refining business.
In exchange for the initial transfer of petrochemical and refining assets and
liabilities in 1988, Lyondell issued ARCO additional shares of its Common
Stock, bringing ARCO's stock ownership to 80,000,000 shares, which represented
all of the then outstanding Common Stock. In January 1989, ARCO completed an
initial public offering of shares of Lyondell's Common Stock, and ARCO
currently owns 39,921,400 shares, or 49.9 percent of the outstanding shares.
For information relating to certain continuing relationships and potential
conflicts of interest among Lyondell, LCR and ARCO, including their respective
subsidiaries and affiliates, see "Relationship with ARCO."
BUSINESS STRATEGY AND MANAGEMENT PHILOSOPHY
The Company's primary objective is to maximize total return to stockholders
(as measured by stock price appreciation plus dividends). Lyondell's management
believes that in its petrochemical and refining commodity businesses maximizing
free cash flow over the long term is the best means to create value for
stockholders. Lyondell's strategy is to position the Company to capture the
opportunities of the upturns and to minimize the impact of downturns in the
inevitable cycles of its commodity businesses. The Company's assets are managed
to maintain low costs and high operational flexibility and management strives
to quickly identify and capitalize on opportunities to use its operating and
organizational flexibility to improve profitability. Lyondell believes that it
has the lowest cost, most flexible operations among its competitors in the
domestic olefins industry. Through its interest in LCR, the Company is
enhancing the value of its refining business by undertaking a major upgrade of
the Refinery in connection with entering into the long-term Crude Supply
Agreement and the Products Agreement. In both of its businesses, the Company
employs a disciplined approach to capital spending, with discretionary capital
spending focused on high-return projects. See "Financial Matters."
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Lyondell evaluates, on an ongoing basis, opportunities to expand or diversify
its petrochemical operations through potential acquisitions, joint ventures and
other opportunities involving third parties. The petrochemical industry is
currently experiencing significant merger, acquisition and divestiture
activity, and the Company believes the industry ultimately will be left with
fewer but more competitive participants. Although management does not believe
that the Company will be required to undertake such a transaction in order to
maintain its competitive position, management believes that there may be
opportunities to create incremental cash flow for the Company's petrochemical
business by applying its experience in the efficient and low-cost operation of
the Company's facilities to a larger asset base. Vertical integration with an
ethylene or propylene consumer could increase olefins plant operating rates
during weak market periods by providing captive demand. Horizontal integration
with another olefins producer could improve operating efficiencies by spreading
costs across larger volumes and enhancing operating flexibility. Consistent
with the Company's overall strategy, however, management's intent is to
undertake such a transaction only if it expects that the transaction would
produce both near-term and long-term improved cash flow. While management has
publicly stated the Company's interest in pursuing such transactions, no
assurance can be given with respect to the size, scope, timing or likelihood,
or the financial or business effect of, any possible transaction. See "Certain
Investment Considerations--Financing Risks; Potential Dilution."
Management believes that Lyondell's productive work force, lean
organizational structure and participative management style enable the Company
to quickly identify and take advantage of profit opportunities in rapidly
changing marketplaces. The Company's team-based approach and management style
emphasize low costs, quality, customer satisfaction and the responsibility and
accountability of each employee. In addition, industry studies have shown that
Lyondell's olefins plants have the highest production per plant-level employee
in the industry.
Lyondell also emphasizes superior safety performance in order to safeguard
employees, the community and the Company's assets. Lyondell's safety
performance at the Channelview Complex and the Refinery has been better than
industry averages in each of the past four years, and has improved over that
time period. The recordable incidence rates for the Channelview Complex were
1.69 and 1.39 in 1992 and 1993, respectively, both well below the petrochemical
industry average rate of 3.3 in 1992 (the year of the most recently available
industry data). The LCR recordable incidence rates were 3.9 and 2.8 in 1992 and
1993, respectively, also well below the refining industry average rate of 4.4
in 1992 (the year of the most recently available industry data). Recent
comparative data for the polymers industry is not available, but the Polymer
Facility's recordable incidence rate was 4.4 in 1993, and it has completed
seven and one half years of operations without a lost-workday injury. In 1993,
the Channelview Complex received Star certification for plant safety under the
Voluntary Protection Programs established by the Occupational Safety and Health
Administration ("OSHA"), for which less than one-tenth of one percent of
eligible sites have qualified to date.
INDUSTRY OVERVIEW
The manufacture and marketing of petrochemicals is fundamental to many
segments of the economy, including the production of consumer products, housing
components, automotive products and other durable and non-durable goods.
Ethylene is the largest single petrochemical in terms of volume of production
worldwide and is the key building block for a large number of chemicals. With
the wide proliferation of end-use products derived from ethylene during the
past 20 years, especially as plastics have developed into low-cost, high
performance substitutes for a wide range of materials such as metals and paper,
U.S. ethylene consumption has grown by an average annual rate of approximately
four percent.
The supply of and demand for ethylene in the various geographic regions of
the world, and the movement of ethylene and its derivatives between regions,
significantly affects a large segment of the petrochemical business. Foreign
consumption of ethylene derivatives has, on a per capita basis,
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<PAGE>
substantially lagged that in the U.S. However, as other regions develop
economically, this gap could narrow.
The petrochemical industry historically has experienced periods of high
demand and high capacity utilization which result in increasingly high
operating margins and profitability. This generally leads to new capacity
investment until supply exceeds demand. The overcapacity in turn leads to
periods of decreasing capacity utilization and declining operating margins
until demand exceeds supply and the cycle is repeated. For example, during the
mid 1980's, olefins capacity increases did not keep pace with demand and, by
1987-1988, domestic producers were operating at high capacity utilization rates
and prices and margins had increased substantially as a result of ethylene
demand growth. Ethylene demand growth peaked at 6.7 percent in 1987 resulting
in average industry operating rates of 97 and 100 percent (of nameplate
capacity), in 1987 and 1988, respectively. The high profitability experienced
by the ethylene industry during this period peaked in early 1989. Over 7.7
billion pounds was added to domestic ethylene capacity from the end of 1989 to
the beginning of 1994 (a 20 percent increase). The additional capacity,
combined with poor overall U.S. and world economic conditions and further
additions to supply in other parts of the world, outpaced ethylene demand
growth and caused the industry to experience a decline in margins. During 1992
and 1993, U.S. industry operating rates were 89 and 92 percent, respectively.
The data in this paragraph with respect to industry operating rates, demand and
capacity is based on reports by Chemical Data, Inc.
Domestic ethylene demand grew at approximately three percent during 1993 and
increased in the fourth quarter, with growth at more than four percent. One new
plant came on line during the second quarter of 1994 and another plant is
scheduled for completion in early 1995. Capacity additions resulting from these
two new plants, along with additional plant expansions, are expected to total
four billion pounds, or 8.6 percent of 1993 domestic industry capacity. No new
additional ethylene plants have been announced for the U.S. after 1995. The
Company estimates that the average length of time to design, obtain necessary
permits for, construct and begin to operate a new ethylene plant on the U.S.
Gulf Coast is approximately four years. See "Certain Investment
Considerations--Uncertain Petrochemical Industry Outlook."
Due to the Company's large ethylene capacity, a small change in ethylene
margin causes a large change in the Company's profitability and cash flow. For
example, assuming that the Company operates at its rated capacity, a one cent
per pound annual increase in ethylene margins can result in a $36 million
annual increase in the Company's pre-tax operating income. The Company's other
major commodity chemical products all experience cyclical market conditions
similar to (although not necessarily coincident with) those of ethylene. As a
producer of olefins primarily for the merchant market, Lyondell may experience
greater variations in its sales volumes and profitability when industry supply
and demand relationships are at extremes in comparison to more integrated
competitors, i.e., those with a higher proportion of captive demand for olefins
derivatives production. In 1993 the Company sold approximately 90 percent of
its ethylene and propylene production into the merchant market.
The refining business tends to be volatile as well as cyclical. Crude oil
prices, which are impacted by worldwide political events and the economics of
exploration and production in addition to refined products demand, are the
largest source of this volatility. Demand for refined products is influenced by
seasonal and short-term factors such as weather and driving patterns, as well
as by longer term issues such as energy conservation and alternative fuels. The
refined products supply is also dependent on industry operating capabilities
and on long-term refining capacity trends. Among LCR's refining competitors are
major integrated petroleum companies that have their own raw material resources
and, in many cases, downstream markets, both of which tend to decrease the
impact of business cycles on these competitors' sales volumes and
profitability.
Although 1990 and 1991 were generally viewed as good years for the refining
industry, industry profitability returned to lower levels beginning in 1992.
Although apparent demand for refined products has shown a slight increase
consistent with growth in the overall economy, supply has been more than
adequate to meet this demand. Capacity increases have occurred in the form of
debottlenecks to
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<PAGE>
conversion units and additional oxygenate capacity, including new MTBE plants,
which have added to gasoline supply. To date, this has more than offset the
declines in industry crude oil distillation capacity, which are beginning to
occur as smaller, less efficient plants are shut down. The resulting lower
refining profitability has been more evident for merchant refiners, who do not
have retail outlets for their products.
PETROCHEMICALS
The Company believes, based on the most recently available ethylene industry
survey by Solomon Associates, Inc. (which used 1991 data), that it is the
lowest cost producer of ethylene in the U.S. industry. Factors contributing to
the Company's low-cost position include flexibility in feedstock supply and
product output, integration of manufacturing, storage and transportation
facilities and the ability to upgrade by-product streams.
Petrochemical Products
The Company's olefins plants and related processing units produce ethylene,
propylene, butadiene, butylenes, benzene, toluene, hydrogen and certain
specialty products, such as isoprene, dicyclopentadiene, piperylenes and resin
oils along with gasoline blendstocks and heavy liquid fuels. The Company's
petrochemical products are used by its customers to manufacture intermediate
chemicals for plastics and other synthetic materials that are used in a variety
of consumer and industrial products. The Company also produces methanol and
MTBE.
PETROCHEMICAL PRODUCTS AND RATED CAPACITIES
<TABLE>
<CAPTION>
PRODUCT PRIMARY USES
------- ------------
<S> <C>
ETHYLENE Polyethylene, ethylene oxide used to produce
Produced at Channelview ethylene glycol, ethylene dichloride used to produce
Complex. Current rated polyvinyl chloride, ethylbenzene used to produce
capacity: 3.6 billion styrene. Major end uses: trash bags, packaging film,
pounds/year. toys, blow-molded bottles, pipe, anti-freeze,
polyester fibers and resins.
PROPYLENE Polypropylene, acrylonitrile, propylene oxide. Major
Produced at Channelview end uses: carpet backing, luggage, high impact
Complex. Current rated plastics, polypropylene fibers, polyurethane foams,
capacity: 2.1 billion cleaning compounds and coatings.
pounds/year (excludes
product flexibility
unit).
BUTADIENE Styrene butadiene rubber (SBR), ABS copolymer
Produced at Channelview (acrylonitrile butadiene styrene). Major end uses:
Complex. Current rated rubber for tires, hoses, surgical gloves (SBR),
capacity: 615 million high-impact plastics (ABS).
pounds/year.
AROMATICS Benzene: styrene, phenol nylon.
Benzene and toluene Toluene: octane enhancers, benzene production,
produced at Channelview urethane chemicals. Major end uses: plastics, rubber
Complex. Benzene current markets, fibers for carpet and apparel, polyurethane
rated capacity: 90 foams for seat cushions, gasoline.
million gallons/year.
Toluene current rated
capacity: 40 million
gallons/year.
SPECIALTY PRODUCTS Various types of hydrocarbon resins and unsaturated
Dicyclopentadiene (DCPD), polyester resins. Major end uses: inks, adhesives,
LRO (Lyondell resin oil), paints and varnishes, rubber market, fiberglass
piperylenes, isoprene products.
produced at Channelview
Complex. Total current
rated capacity: 388
million pounds/year.
METHANOL MTBE, formaldehyde, acetic acid. Major end uses:
Produced at Channelview gasoline, adhesive resins, textiles, paints,
Complex. Current rated coatings.
capacity: 233 million
gallons/year.
MTBE Blending component for oxygenated gasoline.
Produced at Channelview
Complex. Current rated
capacity: 167 million
gallons/year.
LOW DENSITY POLYETHYLENE Trash bags, packaging film, toys, housewares, paper
Produced at Polymers coatings.
Facility. Current rated
capacity: 140 million
pounds/year.
POLYPROPYLENE Plastics for auto parts, household products, carpet
Produced at Polymers backing, fibers, films.
Facility. Current rated
capacity: 300 million
pounds/year.
</TABLE>
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<PAGE>
Petrochemical Marketing and Product Distribution
Lyondell sells substantially all of its olefins products to long-term
customers. Sales are made pursuant to written agreements, which typically
provide for monthly negotiations of prices based upon then current market
prices. Contract volumes are established within a range, and the contracts
generally allow the customer to take up to 10 to 20 percent less than the
maximum contract commitment. The terms of these contracts are fixed for a
period (typically three to five years), although earlier terminations may occur
if the parties fail to agree on price and deliveries are suspended for a period
of several months. In some cases, these contracts also contemplate extension of
the term unless specifically terminated by one of the parties.
The Company sells substantially all of its methanol output and the majority
of the benzene volumes under long-term contracts having terms similar to those
contained in the olefins contracts. A significant portion of the Company's
benzene production is sold under contract to ARCO Chemical at market-based
prices. See "Relationship with ARCO." Lyondell licenses MTBE technology from
ARCO Chemical and sells MTBE produced at one of its two units to ARCO Chemical
at market-based prices. The production from the second unit is tolled for LCR
for gasoline blending.
Ethylene and propylene are shipped or exchanged via a comprehensive pipeline
system which has connections to numerous Gulf Coast ethylene and propylene
consumers. The pipeline system is owned by ARCO Pipe Line, and substantially
all of it is leased by the Company under a long-term lease. See "--Facilities
and Properties" and "Relationship with ARCO--Agreements Between the Company and
ARCO Pipe Line Company." The Company has exchange agreements with other olefins
producers which allow access to customers who are not directly connected to the
pipeline system. Butadiene, methanol, aromatics and other petrochemicals are
distributed by one or more of the following means: pipeline, railcar, truck or
barge.
Feedstock Flexibility
The primary feedstocks used in the production of ethylene are natural gas
liquids feedstocks (ethane, propane and butane, collectively "NGLs") and
petroleum liquids. However, olefins plants with the flexibility to consume a
wide range of feedstocks are better able to maintain higher levels of
profitability during periods of changing energy and petrochemical prices than
olefins plants that are restricted in their feedstock processing capability.
Prior to the mid 1970s, the feedstocks used at most ethylene plants in the
United States consisted predominantly of NGLs. As of July 1, 1994,
approximately 44 percent of domestic ethylene plant capacity was limited to NGL
feedstocks, and the remaining approximately 56 percent could process to some
extent both NGLs and petroleum liquids feedstocks.
Management believes that the Channelview Complex has the highest degree of
feedstock flexibility in the domestic industry, and management continuously
evaluates both the optimum use of the Company's current feedstock flexibility
and opportunities to increase its capacity to process low-cost feeds. The
Channelview olefins units are capable of processing not only 100 percent
petroleum liquids feedstocks (for which the plants were originally designed)
but also up to 90 percent NGLs. Liquid feedstocks have had a significant
historical margin advantage over ethane and propane, with an average light
naphtha to ethane variable cost advantage over the last five years of three
cents per pound of ethylene. The industry margin differential between these
feedstocks has been typically between one and four cents per pound of ethylene.
The Company has the capability to capture this differential due to its
feedstock flexibility. Lyondell is one of only five U.S. producers that has the
ability to process a full range of liquid feedstocks through light vacuum gas
oil. The factors described above historically have given the Company a
competitive advantage that has contributed to the Company's low operating
costs.
The Company obtains a portion of its petroleum liquids requirements from the
Refinery (primarily naphtha and gas oil), a portion of its petroleum liquids
requirements in the form of petroleum condensates pursuant to a contract with a
foreign government affiliate, and the remainder of its
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<PAGE>
petroleum liquids requirements under short-term contracts or on the spot market
from a variety of foreign and domestic sources. The Company purchases NGLs from
a wide variety of domestic sources, many of which have storage facilities in
the Mont Belvieu area.
The Company consumed an average of 186 million standard cubic feet per day of
natural gas in 1993 for use as fuel in its operations at the Refinery and the
Channelview Complex and as feedstock for its methanol plant. The Channelview
Complex is connected to a diverse natural gas supply network, which provides
the Channelview Complex with a choice of natural gas suppliers (including
producers) at competitive prices. During 1993, the Company's natural gas costs
averaged $0.27 less per thousand cubic feet than the published Texas Average
Industrial Price, resulting in $18.3 million of savings. If NGLs or residual
oils are more favorably priced than natural gas, the Company substitutes them
for natural gas in some applications in order to lower its average fuel costs.
The primary feedstock and fuel used in the methanol plant is natural gas,
although the plant has the flexibility to process NGL feedstocks as well.
Product Flexibility
The Company has the flexibility to adjust its product output mix in response
to changing market conditions to capture the highest available margins. The two
major factors contributing to this flexibility are (i) the adjustment of
olefins plants operating conditions and (ii) the product flexibility unit at
the Channelview Complex. The product flexibility unit uses technology licensed
from a third party as well as the Company's patented technology to convert
ethylene and other light petrochemical streams into propylene. Improvements to
this unique unit in 1993 included a doubling of capacity, so that the unit
currently is designed to produce one billion pounds per year of propylene in
addition to the Company's base capacity of 2.1 billion pounds. Adjustment of
olefins plants operating conditions can result in production of up to an
additional 0.4 billion pounds of propylene with some reduction in ethylene
production.
By-Product Stream Upgrading
Another key component of Lyondell's low-cost position is the Company's
capability to upgrade by-products from its olefins production. At the
Channelview Complex, the Company recovers and sells valuable petrochemical
components contained in a number of intermediate product streams.
The Channelview Complex includes units for butadiene recovery and aromatics
recovery. The Company has further enhanced the value of its product slate by
expanding its capability to recover other high value products. The Channelview
Complex has recovered valuable components such as high purity isoprene,
piperylenes and dicyclopentadiene ("DCPD"), and resin oils from its gasoline
products since 1986. In 1993, the Company increased resin oil capacity by 14
percent and increased piperylenes capacity by 20 percent with debottlenecks and
instrumentation improvements.
The Company plans to utilize its proprietary butylene isomerization
technology, known as ISOMPLUS, to efficiently produce isobutylene from olefins
plant butylene by-product streams. The project, which will start up in the
second half of 1994, includes a MTBE unit debottleneck. See "--Research and
Technology; Patents and Trademarks."
32
<PAGE>
Integration
The Company takes advantage of the integration of operations among the
Channelview Complex, the LCR Refinery and the Polymers Facility to capture
additional opportunities to increase profits by upgrading product streams or
providing feedstocks for downstream processes.
The Company and LCR have entered into multiple agreements designed to
preserve much of the synergy between the Refinery and the Channelview Complex.
Economic evaluations at the Channelview Complex and the Refinery are based on
sending products to the highest-value disposition, which may be local use, use
at the other site, or third party sales. Certain refinery products (propane,
butane, low-octane naphthas, heating oils, and gas oils) can be used as
feedstocks for olefins production, and certain Channelview Complex olefins by-
products (pyrolysis gasoline and pyrolysis gas oil) can be processed by the
Refinery into gasoline, jet fuel or heating oil. Butylenes from the LCR
Refinery are tolled through Channelview for the production of alkylate and MTBE
for gasoline blending. Hydrogen from the Channelview Complex is used at the
Refinery for sulfur removal and product stabilization. Ethylene and propylene
produced at the Channelview Complex are used as feedstocks for the Polymers
Facility.
[Paste up Graph]
33
<PAGE>
REFINING
Through its interest in LCR, the Company is undertaking a major upgrade
project at the Refinery in connection with securing a long-term supply of crude
oil and a long-term arrangement to sell its light refined products. Management
believes that this strategic initiative will stabilize cash flow from the
refining business and reduce the Company's exposure to market volatility. See
"--LCR Transaction" and "Certain Investment Considerations--LCR Transaction and
Refinery Upgrade Project."
Refined Products
The Refinery produces gasoline, heating oil and jet fuel, for sale primarily
to CITGO, aromatics and lube oils (white oils, industrial lubricants, motor
oils and process oils) and certain industrial products for sale to others, and
feedstocks for the Channelview Complex. The Refinery's aromatics recovery unit
produces benzene, toluene, paraxylene and orthoxylene which are marketed by the
Company. Benzene and toluene also are produced at the Channelview Complex.
The Refinery has a crude distillation rated capacity of 265,000 barrels per
day. In 1993, the Refinery produced approximately 293,000 barrels per day of
total products.
The following table shows the typical ranges of production for the Refinery's
principal products based on 1993 actual production. It is not possible to
produce the maximum amount of all products at the same time. Specific product
mix (and thus production volume) is dependent on feedstock type and operating
conditions, which are selected based on market conditions.
<TABLE>
<CAPTION>
TYPICAL
PRODUCT PRODUCTION
------- ----------------
(BARRELS PER
DAY)
<S> <C>
Gasoline................................................. 80,000 - 120,000
Heating Oil.............................................. 35,000 - 70,000
Jet Fuel/Kerosene........................................ 10,000 - 35,000
Lube Oils................................................ 3,000 - 7,000
</TABLE>
The Refinery has maintained a low-cost position in the best one-third of the
domestic industry, according to the two most recent refining industry surveys
by Solomon Associates, Inc. The Refinery's flexibility to process a wide range
of crude oils as well as its access to numerous sources of crude oil are
important factors in maximizing the margins of its cracking operations. The
Refinery also has the capability to produce lubricants and aromatics, process
purchased intermediates such as fluid and reformer feed, and produce oxygenated
gasoline and other specialty products when market conditions are favorable.
Marketing and Product Distribution
CITGO purchases gasoline, heating oil and jet fuel from LCR under the long-
term Products Agreement at market-based prices. See "--LCR Transaction--
Products Agreement." Lube oils are manufactured and sold directly to end
consumers and to distributors throughout the United States and international
markets. Aromatics produced at the Refinery are marketed on LCR's behalf by
Lyondell.
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<PAGE>
LCR Transaction
Overview. Management believes that the LCR transaction, entered into in July
1993, accomplishes the Company's strategy for the refining business by
significantly upgrading the quality of the refining assets and securing an
economically favorable long-term supply of crude oil while reducing the
exposure of the refining business to market volatility. The LCR transaction is
expected to stabilize cash flow from the refining business at attractive levels
relative to historic performance. Major components of the LCR transaction
include:
. An upgrade project to increase heavy crude oil processing capability;
. Asset contributions by the Company, cash contributions by CITGO and the
resulting ownership positions;
. A long-term crude supply contract for heavy Venezuelan crude oil; and
. A long-term product arrangement to sell light products to CITGO.
Prior to completion of the upgrade project, the keys to operational success
for LCR will be (i) to maximize the amount of heavy Venezuelan crude oil
processed in the coking mode, (ii) to optimize the efficient utilization of the
remaining cracking capacity, and (iii) to maintain an overall focus on low-cost
operations. See "--Refining Feedstocks." Heavy (22 degree API gravity)
Venezuelan crude oil is supplied pursuant to the Crude Supply Agreement, which
is intended to stabilize cash flow from this portion of the refinery. Prior to
completion of the Refinery upgrade project, when the full benefits of the
upgrade and the Crude Supply Agreement should be realized, the margins realized
from the remaining crude processed at the Refinery in a cracking mode will
continue to be subject to the volatile refining business environment. The
Refinery's low cost, flexibility and access to numerous sources of crude oil
supply continue to be important factors in maximizing margins on this portion
of the Refinery's operations. See "Certain Investment Considerations--LCR
Transaction and Refinery Upgrade Project."
Upgrade Project. LCR is undertaking a major upgrade project at the Refinery
to enable the facility to process substantial additional volumes of very heavy
crude oil. Project engineering for the upgrade is currently underway. The
upgrade project, which is subject to regulatory approvals and the resolution of
certain other matters, is intended to increase the heavy crude oil processing
capability of the Refinery from approximately 130,000 barrels per day of 22
degree API gravity crude oil to approximately 200,000 barrels per day of 17
degree API gravity Venezuelan crude oil in a coking mode. The upgrade is not
intended to increase the total throughput of the Refinery, but rather its
ability to process heavier, higher margin crude oils. The project also will
include expansion of the Refinery's reformulated gasoline capability and the
addition of low sulfur diesel production capability. Major components of the
upgrade include new coking, hydrotreating and sulfur recovery units; a new
crude distillation unit and modifications to the Refinery's largest existing
crude distillation unit and various hydrodesulfurization units.
The cost of the upgrade project, based on the detailed engineering completed
to date, currently is estimated to be approximately $830 million. In addition,
LCR has estimated a 15 percent ($125 million) allowance for contingency costs,
which would increase the total project cost estimate to approximately $955
million. The final cost of the project will be influenced by numerous factors,
many of which are beyond LCR's control, including the timing and terms of
necessary construction, operating and regulatory permits, as well as
construction schedule delays whether caused by adverse weather conditions,
material shortages, labor disputes or otherwise.
Following the upgrade, the earnings potential of the Refinery is expected to
be enhanced because of the higher margins expected to be associated with the
resulting heavier crude oil mix and the
35
<PAGE>
Refinery's increased coking capability, enhanced reformulated fuel and low
sulfur diesel production capability and other yield improvements.
Contributions of the Parties. Pursuant to agreements between the Company and
CITGO (and their affiliates), the Company contributed its refining business and
refining working capital to LCR in July 1993. CITGO contributed $100 million to
LCR in 1993 (excluding its contribution towards the upgrade project described
below) giving it an approximate 10 percent interest in LCR. Prior to the in-
service date for the upgrade project, CITGO is required to reinvest its share
of LCR's operating cash flow and thereby increase its interest in LCR. These
contributions by CITGO will be used for ongoing LCR capital projects, other
than (i) the upgrade project and (ii) certain Refinery environmental capital
projects for which liability has been retained by the Company and that the
Company will fund with cash contributions. Any additional ongoing LCR capital
requirements prior to the in-service date (for purposes other than the upgrade
project) will be funded substantially by Lyondell, primarily in the form of
subordinated loans to LCR. The Company estimates that during 1994 to 1996 its
total contributions to LCR with respect to the capital requirements described
in this paragraph will be approximately $75 million, with a significant portion
of this amount being in the form of subordinated loans to LCR.
Funding for the upgrade project will occur in three phases. The first phase,
the initial $300 million, will be funded by CITGO. As of July 1, 1994, CITGO
had contributed $200 million, including letters of credit and cash, toward this
phase. The second phase is expected to be funded by an LCR borrowing of
approximately $200 million. The third phase (which would be $330 million based
on an estimated $830 million upgrade project cost, and would be $455 million
based on an estimated $955 million upgrade project cost) is anticipated to be
funded (i) 50 percent through an LCR borrowing, (ii) 25 percent through
contributions from CITGO and (iii) 25 percent through subordinated loans from
the Company. Prior to completion of the upgrade project, the financing costs
for the third party borrowings are required to be funded by CITGO. In exchange
for CITGO's upgrade project contributions described above and an additional $30
million cash contribution at the in-service date, CITGO's interest in LCR is
expected to increase to approximately 40 percent effective as of the in-service
date. The timing of the third phase and the level of contributions from the
Company and CITGO will depend on the total cost of the upgrade project and on
LCR's ability to obtain construction financing. See "Certain Investment
Considerations--LCR Transaction and Refinery Upgrade Project--Refinery Upgrade
Project Cost and Potential Delays." In the event that LCR is unable to obtain
construction financing for the refinery upgrade project, the Company and CITGO
each are obligated to fund one-half of the cost of the upgrade project in
excess of $300 million. In turn, CITGO's interest in LCR as of the in-service
date will be dependent upon the actual contributions of CITGO as discussed in
this and the preceding paragraph. CITGO will have a one-time option to increase
its interest in LCR up to 50 percent during the 20-month period following the
in-service date. See "Certain Investment Considerations--LCR Transaction and
Refinery Upgrade Project--Financing of Refinery Upgrade Project and Potential
Limitations on LCR Distributions." Subsequent to the in-service date, Lyondell
will no longer consolidate LCR in its financial statements but will instead
account for LCR as an equity investment.
Crude Supply Agreement. LCR also has entered into the Crude Supply Agreement
with Lagoven. The Crude Supply Agreement requires Lagoven to supply and LCR to
purchase specified quantities of crude oil for 25 years. The contract
incorporates a formula price based on the market value of a slate of refined
products deemed to be produced from each particular crude oil or feedstock,
less: (i) certain deemed operating costs; (ii) certain actual costs, including
crude transportation costs, import duties and taxes; and (iii) a deemed margin,
which varies according to the grade of crude oil or other feedstock delivered.
Deemed margins and deemed costs are adjusted periodically by a formula
primarily based on the rate of inflation. Because deemed operating costs and
the slate of refined products deemed to be produced from a given barrel of
crude oil or other feedstock do not necessarily reflect the actual costs and
yields in any period, the actual refining margin earned by LCR under the
contract will vary depending on, among other things, the efficiency with which
LCR conducts its operations during such period. See "Certain Investment
Considerations--LCR Transaction and Refinery Upgrade Project--Crude Supply
Agreement."
36
<PAGE>
Products Agreement. CITGO also has entered into the long-term Products
Agreement with LCR to purchase at market-based prices the full volume of
gasoline, jet fuel and heating oil manufactured at the Refinery following the
expiration of one contract retained by Lyondell. LCR evaluates and determines
the optimal product output mix based on spot market prices and conditions. The
Products Agreement thus provides a secure outlet for the Refinery's products
without imposing an economic penalty caused by production requirements based on
retail outlet needs.
Other Agreements. Effective July 1, 1993, LCR and Lyondell entered into
multiple agreements for feedstock and product sales designed to preserve much
of the synergy between the Refinery and the Company's petrochemical business.
Under the terms of these agreements, various feedstock and product streams will
be transferred between the Refinery and Lyondell's Channelview Complex at
market-related prices. LCR and Lyondell also have entered into tolling
agreements, pursuant to which alkylate and MTBE attributable to Refinery
feedstocks will be produced for LCR at Lyondell's Channelview Complex.
Also effective July 1, 1993, the majority of the employees formerly employed
by Lyondell in its refining business became employees of LCR. Pursuant to the
terms of a number of service agreements, Lyondell has contracted with LCR to
continue to perform services in certain areas, including employee services,
administrative services and marketing services. Lyondell and LCR also have
entered into a variety of contracts providing for the assignment or licensing
of intellectual property rights associated with the refining business.
Management of LCR. LCR is a limited liability company organized under the
laws of the state of Texas, and has pass-through tax characteristics similar to
those of a partnership for federal income tax purposes. The Company owns its
interest in LCR through a wholly-owned subsidiary, Lyondell Refining Company.
CITGO holds its interest through CITGO Refining Investment Company, a wholly-
owned subsidiary of CITGO (together with Lyondell Refining Company, the
"Owners"). The operative agreement with respect to the rights of each of the
Owners and their parent companies is the Amended and Restated Limited Liability
Company Regulations (the "Regulations") of LCR. The Regulations govern
ownership and cash distribution rights. CITGO has committed to reinvest its
share of operating cash flow during the upgrade project which will increase its
interest in LCR. Under the Regulations, the Company has unrestricted access to
its share of operating cash flow from LCR. See "Certain Investment
Considerations--LCR Transaction and Refinery Upgrade Project--Financing of
Refinery Upgrade Project and Potential Limitations on LCR Distributions." The
term of the Regulations is 25 years, although they may be terminated under
certain circumstances, including the insolvency of LCR or either Owner, uncured
material breaches by either Owner or failure to obtain permits for the upgrade
project. Under the terms of a reciprocal Performance Guarantee and Control
Agreement, Lyondell and CITGO each have unconditionally guaranteed the
obligations and performance of their respective Owner under the terms of the
Regulations.
The Regulations provide that LCR is managed by an Owners Committee, which has
three representatives from each Owner. Certain actions require unanimous
consent of the representatives, including, without limitation, amendment of the
Regulations, borrowing money outside of LCR's existing credit facility,
delegation of authority to committees, certain purchase commitments and capital
expenditures in excess of designated amounts. All actions not requiring
unanimous consent can be determined by Lyondell so long as it is the majority
owner. The day-to-day operations of the Refinery are managed by the executive
officers of LCR, including former Lyondell officers with responsibility for
manufacturing and refining operations and refined products marketing. The
results of LCR's operations currently are consolidated into Lyondell's
financial statements.
Refining Feedstocks
The Refinery can process a wide variety of domestic and foreign crude oil
feedstocks, including heavy (low API gravity, high viscosity) and sour (high
sulfur content) crude oils. In addition to 45,000
37
<PAGE>
barrels per day of light sweet crude oil for lubricants production, the
Refinery can process up to (i) approximately 220,000 barrels per day of light
sour crude oil in a coking mode, or (ii) in the mode in which it currently
operates, approximately 130,000 barrels per day of heavy sour crude oil (22
degree API gravity) primarily in a coking mode plus approximately 80,000
barrels per day of light crude oil in a cracking mode. The upgrade project is
intended to increase the Refinery's processing capability to 200,000 barrels
per day of very heavy Venezuelan crude oil (17 degree API gravity) in a coking
mode.
The Refinery began processing Venezuelan crude oil in the third quarter of
1992. Since that time, the Company and LCR have identified and overcome a
number of obstacles inherent in processing high rates of heavy Venezuelan crude
oil, including making operational changes to the coker and physical
modifications to one of the crude distillation units. These changes increased
the Refinery's capability of running high volumes of heavy Venezuelan crude oil
to approximately 130,000 barrels per day in a coking mode. In the second
quarter the Refinery processed an average of 140,000 barrels per day of heavy
Venezuelan crude oil, with crude oil run in a coking mode limited to 115,000
barrels per day because of coker mechanical problems. The remainder of the
Refinery's capacity currently is used to process lighter crude oils and
feedstocks. See "Certain Investment Considerations--LCR Transaction and
Refinery Upgrade Project--Heavy Crude Oil Processing."
Domestic crude oil is transported to the Refinery primarily by common carrier
pipeline systems. Foreign crude oil is transported by tankers either directly
to the Refinery or to the connecting deepwater terminals at Texas City or on
the Houston Ship Channel.
FACILITIES AND PROPERTIES
Channelview Petrochemical Complex
The Channelview petrochemical complex, located on an approximately 2,900 acre
site in Channelview, Texas, 20 miles east of Houston, includes two large
olefins plants, two MTBE units, a methanol plant, a butadiene recovery unit, a
product flexibility unit, an aromatics (benzene and toluene) recovery unit, an
isoprene recovery unit, a DCPD recovery unit, a piperylenes recovery unit, an
alkylation unit and other petrochemical processing units. This complex is
connected by pipeline systems to Lyondell's salt dome storage facility at Mont
Belvieu, Texas, which has approximately 10 million barrels of storage capacity
for NGL feedstocks and for the Company's ethylene and propylene production. The
Channelview Complex also is connected by pipeline systems to the LCR Refinery,
which is approximately 16 miles away and provides a portion of the petroleum
liquids feedstock requirements for the Channelview Complex. See "--Other
Properties."
The combined rated capacity of the two olefins plants at January 1, 1994 was
approximately 3.6 billion pounds of ethylene per year or approximately 7.7
percent of total domestic production capacity. Based on published rated
production capacities, the Company believes it is one of the five largest
producers of ethylene in the United States. Of the total ethylene production
capacity in the United States, approximately 93 percent is located along the
Gulf Coast, and approximately 77 percent is owned by ten manufacturers.
Lyondell licenses MTBE technology from ARCO Chemical and sells MTBE produced
at one of its two units to ARCO Chemical at market-based prices. The production
from the second unit is tolled for LCR for gasoline blending. The Channelview
Complex also includes an isopropyl alcohol ("IPA") unit, which the Company uses
for the manufacture of IPA for ARCO Chemical. See "Relationship with ARCO--
Agreements Between the Company and ARCO Chemical Company."
Polymers Facility
The Polymers Facility, located on approximately 200 acres in Pasadena, Texas,
converts propylene and ethylene supplied by the Channelview Complex into
polypropylene and low density polyethylene that is sold into the derivative
markets and transported by railcar and truck. The Polymers Facility is
connected by pipeline systems to the Company's Mont Belvieu, Texas storage
facility for feedstock supply.
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<PAGE>
LCR Refinery
The LCR Refinery, located on an approximately 700 acre site alongside the
Houston Ship Channel, currently includes a coker, a fluid catalytic cracking
unit, three reformers, four crude distillation units, two sulfur recovery
plants and several hydrodesulfurization units, as well as lube oil
manufacturing and packaging facilities and an aromatics recovery unit. The
upgrade project will include new coker, hydrotreater, sulfur recovery and crude
distillation units, as well as modifications to the largest existing crude
distillation unit and various hydrodesulfurization units. The Refinery is
connected by pipeline to the Channelview Complex and provides feedstocks to and
receives by-products from that complex.
Historically, the Refinery has operated in a "full conversion" mode,
processing the heaviest portion of crude oil through the coker unit without
producing lower-value residual fuel. The Refinery currently produces residual
fuel as a result of processing the heavy Venezuelan crude oil. The upgrade
project will enhance the Refinery's conversion capability so that very heavy 17
degree API gravity Venezuelan crude oil can be processed in a full conversion
mode.
Other Properties
In addition to the real property, plant and equipment that comprise its
Channelview Complex and the real property, plant and equipment which comprise
the Polymers Facility, Lyondell owns several pipelines connecting the
Channelview Complex, the Refinery and the Mont Belvieu storage facility,
including six lines used to transport heavy liquid feedstocks, butylenes,
benzene, hydrogen, butane, MTBE and unfinished gasolines between the
Channelview Complex and the Refinery. Lyondell also owns the storage facility,
a brine pond facility and a tract of vacant land at Mont Belvieu, Texas.
Storage capacity for up to 10 million barrels of NGL feedstocks, ethylene,
propylene and butylenes is provided in salt domes at the Mont Belvieu facility.
The Company also owns an approximate 10 percent undivided joint interest in
much of the real property surrounding the Mont Belvieu site which is maintained
as a greenbelt for these facilities. The Company has a lease on product
pipelines from Mont Belvieu to most olefins customers. See "Relationship with
ARCO--General" and "--Agreements Between the Company and ARCO Pipeline."
In addition to the real property, plant and equipment which comprise the
Refinery, LCR also owns the real property, plant and equipment which comprise a
lube oil blending and packaging plant in Birmingport, Alabama. LCR owns a
pipeline and utilizes another pipeline to transport refined products from the
Refinery to the GATX Terminal to interconnect with common carrier pipelines.
RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS
The Company maintains a small, focused research and development effort that
builds on the Company's strengths and existing businesses. Recent efforts have
concentrated on Lyondell's position in butylenes. In 1992, the Company
introduced a new technology called ISOMPLUS for producing low-cost isobutylene
by isomerizing normal butylenes. Management believes that ISOMPLUS will play an
important role in the next increments of capacity that the industry will need
to supply the growing MTBE demand in reformulated gasoline. Lyondell is seeking
to take advantage of this opportunity by commercializing the technology through
a joint development and licensing relationship with CDTECH, a joint venture
that is a leading supplier of ethers technologies used in reformulated fuels
production. The arrangement with CDTECH is intended to commercialize two
isomerization processes that produce blending agents for cleaner burning
gasolines. If successful, the alliance is expected to accelerate worldwide
commercialization of Lyondell's butene isomerization process. Research efforts
are continuing on a similar technology to produce isoamylene, a feedstock used
to produce TAME, another oxygenate used in the production of reformulated
gasoline. The Company also has product development efforts aimed at tailoring
products to meet specific customer needs, especially in such areas as resins,
fibers, adhesives and sealants.
39
<PAGE>
The Company, including LCR, uses numerous patents in its operations, many of
which are licensed from third parties, including ARCO. See "Relationship with
ARCO." Although the Company's licenses from ARCO and others are significant to
its operations, the Company is not dependent upon any particular patent, trade
secret or the like, and it believes that the loss of any individual patent,
trade secret, or similar proprietary right would not have a material adverse
effect on the operations of the Company. The Company submitted several new
patent applications during 1993 to protect processes it developed.
The Company, including LCR, uses numerous trademarks in its marketing
operations, a portion of which are licensed from third parties, including ARCO.
The Company is not dependent upon any particular trademark, and it believes the
loss of any individual trademark would not have a material adverse effect on
its operations. The Company submitted several new trademark applications during
1993 to protect product line names and to foster its marketing position.
ENVIRONMENTAL MATTERS
General
The Company's production facilities generally are required to have permits
and licenses regulating air emissions, discharges to water and generation,
storage, treatment and disposal of hazardous wastes. Companies that are
permitted to treat, store or dispose of hazardous waste and maintain
underground storage tanks pursuant to RCRA also are required to meet certain
financial responsibility requirements. The Company believes that it has all
permits and licenses generally necessary to conduct its business or, where
necessary, is applying for additional, amended or modified permits, and that it
meets applicable financial responsibility requirements.
The Company's policy is to be in compliance with all applicable environmental
laws. The Company is committed to Responsible Care(R), a chemical industry
initiative to enhance the industry's responsible management of chemicals. The
Company (together with the industry in which it operates) is subject to
extensive federal, state and local environmental laws and regulations
concerning emissions to the air, discharges onto land or waters and the
generation, handling, storage, transportation, treatment and disposal of waste
materials. Some of these laws and regulations are subject to varying and
conflicting interpretations. In addition, the Company cannot accurately predict
future developments, such as increasingly strict requirements of environmental
laws, inspection and enforcement policies and compliance costs therefrom, which
might affect the handling, manufacture, use, emission or disposal of products,
other materials or hazardous and non-hazardous waste. For example, a revised
testing procedure under RCRA that became effective in 1990, the toxicity
characteristic leachate procedure ("TCLP"), resulted in the reclassification of
some wastes at the Company's facilities which has required changes in the
Company's waste management practices. These changes have caused the Company to
make expenditures in 1993 and will cause the Company to make substantial
additional expenditures in 1994. In addition, in April 1994, new regulations
relating to emission standards for a large number of petrochemicals such as
methanol, butadiene and toluene, were announced by the Environmental Protection
Agency ("EPA"). The Company is in the process of analyzing the impact that
these new regulations will have on its petrochemical business. Some risk of
environmental costs and liabilities is inherent in particular operations and
products of the Company, as it is with other companies engaged in similar
businesses, and there is no assurance that material costs and liabilities will
not be incurred. With respect to the capital expenditures and risks described
above, however, the Company does not expect that it will be affected
differentially from the rest of the domestic petrochemical and refining
industry.
In some cases, compliance with environmental, health and safety laws and
regulations require capital expenditures. In the years ended December 31, 1992
and 1993, the Company spent approximately $57 million and $38 million,
respectively, for environmentally-related capital expenditures at existing
facilities. For 1994 and 1995, the Company currently estimates that
environmentally-related capital expenditures at existing facilities (including
the Refinery) will be approximately $51 million and $50 million, respectively.
The timing and amount of these expenditures are subject to the regulatory
40
<PAGE>
and other uncertainties described above as well as obtaining of the necessary
permits and approvals. The Company's 1994 capital budget includes the following
environmentally-related projects: (1) work on installation of a wet gas
scrubber that will reduce sulfur dioxide and particulate emissions from the
Refinery's fluid catalytic cracking unit; (2) TCLP-related projects at the
Refinery; (3) completion of a number of projects to reduce benzene emissions in
compliance with federal regulations; (4) a marine vapor recovery project at the
Refinery; and (5) compliance costs at the Channelview Complex and the Refinery
related to nitrogen oxide emissions from combustion sources. Additional
projects may be required as a result of various enforcement orders that the
Company is negotiating with the appropriate regulatory authorities. For periods
beyond 1995, additional environmentally related capital expenditures will be
required, although the Company cannot accurately predict the levels of such
expenditures at this time.
The Refinery contains on-site solid-waste landfills which were used in the
past to dispose of waste, and it is anticipated that corrective actions will be
necessary to comply with federal and state requirements with respect to this
facility. In addition, the Company negotiated an order with the Texas Water
Commission, now the Texas Natural Resource Conservation Commission (the
"TNRCC"), for assessment and remediation of groundwater and soil contamination
at the Refinery. The Company has reserved an amount (without regard to
potential insurance recoveries or other third party reimbursements) it believes
to be sufficient to cover current estimates of the cost for remedial measures
at its manufacturing facilities based upon its interpretation of current
environmental standards. Based on the establishment of such reserves, and the
status of discussions with the applicable regulatory agencies, and although the
reserves are subject to increase, the Company does not anticipate any material
adverse effect upon its earnings, operations or competitive position as a
result of compliance with the laws and regulations described in this or the
preceding paragraphs. See also "Legal Proceedings--Claims Relating to Waste
Disposal Sites."
Audit Committee Report Regarding Alleged Violations of Certain Environmental
Laws
From April 1993 to June 1994, two process waste water streams at the
Channelview Complex were not in compliance with applicable Benzene National
Emissions Standard for Hazardous Air Pollutants ("NESHAPS") regulations. In
response to an employee's allegations, described further below, regarding this
situation, the Board of Directors directed the Audit Committee of the Board
(the "Audit Committee"), which is composed of the four directors of the Company
who are not affiliated with either the Company or ARCO, to conduct an
independent investigation regarding the compliance status of the process waste
water streams and the issues raised by the employee's statements. The
investigation by the Audit Committee and its independent legal counsel was
conducted during the month of June and involved interviews of over 50 Company
employees and the review of more than 10,000 document pages. The Audit
Committee has issued a report to the Board concerning the results of its
investigation.
The investigation highlighted the following events:
. As of April 7, 1993 two process waste water streams at the Channelview
Complex were not in compliance with applicable Benzene NESHAPS regulations
which generally require that process waste water streams containing
concentrations of benzene in excess of 10 parts per million be
"controlled"--i.e., treated, recycled, deep well injected or otherwise
isolated from the open air;
. On April 7, 1993 the Company submitted a report to the TNRCC that
affirmatively and incorrectly indicated that the streams were controlled in
accordance with the Benzene NESHAPS regulations. The Company also filed a
subsequent report with the TNRCC on April 7, 1994. While the April 1994
report did not repeat the assertion that the streams were controlled in
compliance with the Benzene NESHAPS regulations, it also did not
specifically state that the streams were out of compliance;
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. After learning that the process waste water streams were not controlled
in accordance with the Benzene NESHAPS regulations, Company employees
determined that the streams did not create a discernible impact on health
or safety and began working on compliance solutions;
. After the development of compliance solutions was substantially
underway, on and after May 20, 1994, a senior employee in the Company's
legal department made several written and oral statements to the Company's
executive management and the Board with respect to the compliance status of
the process waste water streams and the accuracy of the related reports.
The employee also made a number of statements regarding alleged conduct by
the Company's management with respect to compliance with environmental
laws, allegations regarding the commitment of the Company's management to
compliance with applicable environmental laws and the general effectiveness
of the Company's environmental processes;
. On May 20, 1994, the Company notified the TNRCC that the two streams
were not controlled in accordance with the Benzene NESHAPS regulations, and
shortly thereafter the Company also notified the EPA, which has oversight
of the Clean Air Act compliance program supervised by the TNRCC, and the
Department of Justice; and
. After May 20, 1994, efforts to implement a compliance solution for the
two process waste water streams were expedited. Compliance was achieved for
both streams by June 7, 1994 using an interim solution.
The Company estimates that the capital costs incurred in achieving a permanent
compliance solution will be approximately $1,000,000.
The Audit Committee's report to the Board and the results of the
investigation include the following conclusions:
. Treating the Company's Benzene NESHAPS experience as a test of the
Company's environmental commitment, the overall record evidences the
Company's willingness to incur substantial cost and inconvenience in order
to meet its stated goal of wholehearted compliance with environmental laws;
. The Company intended all waste water streams to be controlled in
compliance with the Benzene NESHAPS regulations, and the omission of the
two waste water streams was an oversight due to a series of
miscommunications and organizational failures and not a deliberate
violation;
. According to the Company's routine monitoring of employees, the fact
that the streams were not controlled in accordance with the Benzene NESHAPS
regulations did not result in employee exposures above the health and
safety standards for benzene exposure set by OSHA. Furthermore, there is no
evidence that the process waste water streams at issue caused exposure of
the general public to benzene concentrations which were in excess of levels
established by applicable regulations. In fact, both monitoring by Lyondell
and an independent third party showed benzene levels far below maximum
permissible levels;
. Once the compliance issue with respect to the two process waste water
streams had been clearly defined, the Company's actions were consistent
with an intent to find and implement a permanent solution as quickly as it
reasonably could. The problem was neither ignored nor covered up;
. There is no evidence that anyone was aware that the April 1993 report
was incorrect as filed. Although certain lower and middle management
employees became aware that the process waste water streams were not
controlled just prior to the submission of the April 1994 report, that fact
was not understood by the officer signing the April 1994 report; and
. There is no basis to support a generalized allegation that the
Company's senior management knowingly conceals or tolerates environmental
compliance problems.
In connection with its report to the Board, the Audit Committee has
recommended that the Company's senior management address certain organizational
and managerial issues to ensure that
42
<PAGE>
there is no recurrence of the kinds of oversights that occurred in connection
with the Benzene NESHAPS situation.
On June 6, 1994, the Company received a Notice of Violation from TNRCC
regarding the two uncontrolled process waste water streams. In an initial
enforcement conference the TNRCC has indicated that it intends to proceed with
an administrative enforcement action, and the Company expects that the TNRCC
will impose an administrative fine. Noncompliance with the Benzene NESHAPS
regulations and the related reporting requirements can result in civil
penalties and, under certain circumstances, substantial civil and, potentially,
criminal penalties. However, the Company does not believe that any of the
matters described above are likely to subject the Company to criminal liability
or will have a material adverse effect on the Company's business or financial
condition.
LEGAL PROCEEDINGS
General
Although Lyondell is involved in numerous and varied legal proceedings, a
significant portion of its litigation arises in three contexts: (1) claims for
personal injury or death allegedly arising out of exposure to the Company's
products; (2) claims for personal injury or death, and/or property damage
allegedly arising out of the generation and disposal of chemical wastes at
Superfund and other waste disposal sites; and (3) claims for personal injury
and/or property damage and air and noise pollution allegedly arising out of the
operation of the Company's facilities. Lyondell (either directly or through
ARCO as its indemnitee) is the real party at interest in these proceedings, all
of which are described at greater length in the Company's periodic filings with
the Commission.
In connection with the transfer of assets and liabilities from ARCO to
Lyondell, Lyondell agreed to assume certain liabilities arising out of the
operation of the Company's integrated petrochemical and petroleum processing
business prior to July 1, 1988. At that time, the Company and ARCO entered into
an agreement ("Cross-Indemnity Agreement") whereby the Company agreed to defend
and indemnify ARCO against certain uninsured claims and liabilities which ARCO
may incur relating to the operation of the business of the Company prior to
July 1, 1988, including liabilities which may arise out of certain of the legal
proceedings described in this section. See "Relationship with ARCO."
Prior to November 20, 1990, ARCO's insurance carriers had assumed the defense
of most of the lawsuits described in this section. Since that date, ARCO's
insurance carriers have refused to advance defense costs in those lawsuits
relating to certain of the waste disposal sites. On November 21, 1990, ARCO
filed suit against certain of its insurers with respect to insurance policies
in effect at times during past years. This litigation involves claims for
reimbursement of defense costs and environmental expenses incurred by ARCO in
connection with ARCO's activities at sites and locations throughout the United
States. ARCO's insurers had been participating in the defense of the Company
and ARCO for the Mont Belvieu proceedings (see "--Claims Related to Company
Operations") as well as the litigation involving the French Ltd. and the Brio
Superfund sites (see "--Claims Related to Waste Disposal Sites"); however,
subsequent to the filing of ARCO's lawsuit, the insurers have refused to
advance defense costs for these proceedings (and certain other proceedings
relating to the Company's products) until the coverage dispute has been
resolved. ARCO currently is paying the defense costs in these proceedings, as
well as certain other waste disposal site litigation, pending the resolution of
the coverage dispute. It has not been determined whether or not the Company has
an obligation to reimburse ARCO for defense costs related to the coverage
dispute.
In addition to the types of proceedings specifically described in this
section, ARCO, the Company and its subsidiaries are defendants in other suits,
some of which are not covered by insurance. Many of these additional suits
involve smaller amounts than the matters described herein, or make no specific
claim for relief. Although final determination of legal liability and the
resulting financial impact with
43
<PAGE>
respect to the litigation described in this section, as well as the other
litigation affecting the Company, cannot be ascertained with any degree of
certainty, the Company does not believe that any ultimate uninsured liability
resulting from the legal proceedings in which it currently is involved
(directly or indirectly) will individually, or in the aggregate, have a
material adverse effect on the business or financial condition of the Company.
See Note 18 of "Notes to Consolidated Financial Statements."
Claims Related to Company Products
ARCO and the Company are involved in numerous suits arising in whole or in
part from the operation of the Company's integrated petrochemical and petroleum
processing business and the assets related thereto in which the plaintiffs
allege damages arising from exposure to allegedly toxic chemical products, such
as benzene and butadiene. Plaintiffs in these cases usually worked at a
manufacturing facility as employees of one of Lyondell's customers, were
employees of the Company's contractors, or were employees of companies involved
in the transportation of the Company's products to its customers. These suits
allege toxic effects of exposure to chemicals sold in the ordinary course of
business to third parties by various industrial concerns, including ARCO or the
Company, or allege toxic chemical exposures at the Company's manufacturing
facilities. The Company believes that it has always followed a policy of not
only complying with all mandated standards related to product warnings and
exposure levels but also of complying with Company specific standards that were
more strict than those imposed by the law. As a result, the Company believes
that it has a basis to avail itself of legal defenses against claims regarding
its products due to exposures by employees and by claims of exposures from
third parties to whom the Company sold its products.
The vast majority of chemical exposure cases name a large number of
industrial concerns, in addition to the Company, as defendants and are at
various stages of discovery. Although the Company does not believe that the
pending chemical exposure cases will have a material adverse effect on its
business or financial condition, it is difficult to determine the potential
outcome of this type of case. The majority of the plaintiffs in chemical
exposure legal proceedings request relief in the form of unspecified monetary
damages. Furthermore, when specific amounts are requested they often bear no
objective relation to the merits of the case. Notwithstanding the foregoing, it
is possible that if one or more of the presently pending chemical exposure
cases were resolved against ARCO or the Company, the resulting damage award
could be material to the Company without giving effect to contribution or
indemnification obligations of co-defendants or others, or to the effect of any
insurance coverage that may be available to offset the effects of any such
award.
Claims Relating to Waste Disposal Sites
Wastes generated from products produced by facilities transferred from ARCO
and now owned by the Company have, from time to time, been disposed of at waste
disposal landfill sites owned by third parties. Two of these waste disposal
facilities, known as the "French Ltd." and the "Brio" sites, both of which are
located near Houston, Texas, have been classified as "Superfund" sites under
CERCLA. The EPA has entered into consent decrees with numerous PRPs, including
ARCO, from whom wastes were allegedly received at each site. Based on the
current law, the Company does not believe that its obligation to ARCO related
to ARCO's share of clean-up costs at either of these sites will result in a
liability that will have, individually or in the aggregate, a material adverse
effect on the business or financial condition of the Company. In addition,
numerous private plaintiffs have made claims and filed lawsuits involving the
French Ltd. and Brio sites. ARCO (or its affiliate) is the named defendant in
the above described proceedings. Under the provisions of the Cross-Indemnity
Agreement, Lyondell is not obligated to indemnify ARCO for costs and losses
arising out of litigation for which ARCO is insured. Lyondell believes that the
ultimate resolution of these matters will not result in any material obligation
on the part of Lyondell to ARCO with respect to the Brio and the French Ltd.
Superfund sites.
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<PAGE>
It is possible that the Company may be involved in future CERCLA and
comparable state law investigations and clean-ups. The Administration recently
proposed a plan to revise significantly the Superfund law which is scheduled
for reauthorization this year. Because the proposal is so recent and because it
has generated strong reactions from business, insurance companies, lenders,
municipalities and environmentalists, the Company is not able to predict
whether the Administration's plan will be enacted or to determine with
specificity what the impact of such legislation would be on the Company.
Claims Related To Company Operations
Several organizations and groups of citizens who own property in the vicinity
of Mont Belvieu, Texas, have instituted lawsuits against ARCO and others who
own underground storage and transportation facilities in the city of Mont
Belvieu. ARCO is paying all defense costs in all of the Mont Belvieu litigation
and the Company does not expect that a claim will be made under the Cross-
Indemnity Agreement. The Company also is a defendant in lawsuits alleging the
emission of loud noises, bright lights and noxious fumes from the Channelview
Complex in proximity to the plaintiffs homes as well as a diminished quality of
well water.
Other Matters
In the fourth quarter of 1992, the Refinery underwent an EPA multi-media
inspection and an OSHA Process Quality Verification Audit. The OSHA inspection
of the Refinery was resolved in an informal settlement agreement in April 1993.
At this time, the EPA has not formally notified the Company of the enforcement
action to be taken, if any.
The Company has reached a settlement agreement with the City of Houston,
Texas and the TNRCC to resolve a lawsuit filed by the City of Houston alleging
violations of the Texas Clean Air Act at the Refinery. Pursuant to the
settlement agreement, the Company has agreed to pay fines of $175,000 to each
of the City of Houston and the TNRCC and has agreed to cover attorneys' fees of
$50,000. In addition, LCR has committed to construct a larger flare as part of
the Refinery upgrade project and to tie-in certain atmospheric relief valves.
Lyondell will fund $1.5 million of the costs of these modifications, which is
the current estimate of the costs of the tie-in to the flare system. See "The
Company--Refining--LCR Transaction--Contributions of the Parties." The
settlement agreement has been submitted to the court and the Company expects
approval during the third quarter of 1994.
In addition to the matters reported herein, from time to time the Company
receives notices from federal, state or local governmental entities of alleged
violations of environmental laws and regulations pertaining to, among other
things, the disposal, emission and storage of chemical and petroleum
substances, including hazardous wastes. Although the Company has not been the
subject of significant penalties to date, such alleged violations may become
the subject of enforcement actions or other legal proceedings and may
(individually or in the aggregate) involve monetary sanctions of $100,000 or
more (exclusive of interest and costs).
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MANAGEMENT
Five of the eleven members of the Board of Directors of Lyondell are officers
of ARCO, which owns 49.9 percent of the outstanding Common Stock. Following
consummation of the offering of the Exchangeable Notes, ARCO has informed the
Company that it will cause the ARCO officers who currently serve on the Board
of Directors to resign. Although the Board of Directors has not made a final
determination with respect to the size of the Board following these proposed
resignations, the Nominating Committee of the Board intends to nominate persons
unaffiliated with either the Company or ARCO to fill any vacancies. Set forth
below are the directors of the Company as of July 1, 1994.
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT
POSITION WITH LYONDELL BUSINESS EXPERIENCE DURING PAST FIVE YEARS
---------------------- ------------------------------------------
<S> <C>
Mike R. Bowlin, 51........... Mr. Bowlin was elected a Director of the Company
Chairman of the Board on July 23, 1993 and Chairman of the Board on
August 13, 1993. On March 28, 1994 Mr. Bowlin was
elected Chief Executive Officer of ARCO, effective
on July 1, 1994. He has been President and Chief
Operating Officer of ARCO since June 1, 1993 and a
director of ARCO since June 1992. He was an
Executive Vice President of ARCO from June 1992 to
May 1993. He was a Senior Vice President of ARCO
from August 1985 to June 1992 and President of
ARCO International Oil and Gas Company from
November 1987 to June 1992. He was Senior Vice
President of International Oil and Gas
Acquisitions from July 1987 to November 1987. He
was President of ARCO Coal Company from August
1985 to July 1987. He was a Vice President of ARCO
from October 1984 to July 1985. From April 1981 to
December 1984, he was Vice President of ARCO Oil
and Gas Company. He has been an officer of ARCO
since October 1984. He originally joined ARCO in
1969.
William T. Butler, 61........ Dr. Butler was elected a Director of the Company
on December 21, 1988, effective as of January 25,
1989. He has held his current position as
President and Chief Executive Officer of Baylor
College of Medicine (education and research) since
1979. He is also a director of First City
Bancorporation of Texas, Inc., C. R. Bard, Inc.
and Browning-Ferris Industries Inc.
Allan L. Comstock, 50........ Mr. Comstock was elected a Director of the Company
on July 23, 1993. He has been a Vice President and
Controller of ARCO since June 1993. He was a Vice
President of ARCO Chemical from October 1989
through May 1993. From November 1985 to September
1989 he was General Auditor of ARCO. He originally
joined ARCO in 1969.
Terry G. Dallas, 43.......... Mr. Dallas was elected a Director of the Company
on July 23, 1993. He has been a Vice President of
ARCO since June 1993 and Treasurer of ARCO since
January 24, 1994. He was Vice President, Corporate
Planning of ARCO from June 1993 to January 1994.
He served as Assistant Treasurer for ARCO
Corporate Finance from 1990 to 1993. He was Vice
President of Finance, Control
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT
POSITION WITH LYONDELL BUSINESS EXPERIENCE DURING PAST FIVE YEARS
---------------------- ------------------------------------------
<S> <C>
and Planning for ARCO British, Ltd. from 1988 to
1990 and Manager of International Acquisitions for
ARCO International Oil and Gas Company from 1986
to 1988. He originally joined ARCO in 1979.
Bob G. Gower, 56............ Mr. Gower was elected Chief Executive Officer of
President and Chief the Company on October 24, 1988 and a Director and
Executive Officer President of the Company on June 27, 1988. He has
been President of Lyondell and its predecessor,
the Lyondell Division, since the formation of the
Lyondell Division in April 1985. Mr. Gower was a
Senior Vice President of ARCO from June 1984 until
his resignation as an officer of ARCO in January
1989. Prior to 1984 he served in various
capacities with the then ARCO Chemical Division.
He originally joined ARCO in 1963. Mr. Gower is
also a director of Texas Commerce Bank-Houston and
Keystone International Inc.
Stephen F. Hinchliffe, Jr., Mr. Hinchliffe was elected a Director of the
60......................... Company on March 1, 1991. Since 1988, he has held
his current position of Chairman of the Board and
Chief Executive Officer of BHH Management, Inc.,
the managing partner of Leisure Group, Inc.
Previously, he served as Chairman of the Board of
Leisure Group, Inc. (a manufacturer of consumer
products), which he founded in 1964.
Dudley C. Mecum II, 59...... Mr. Mecum was elected a Director of the Company on
November 28, 1988, effective as of January 25,
1989. He has held his current position as a
partner with G. L. Ohrstrom & Company (merchant
banking) since August 1989. Previously he was
Chairman of Mecum Associates, Inc. (management
consulting) from December 1987 to August 1989. He
served as Group Vice President and director of
Combustion Engineering Inc. from 1985 to December
1987, and as a managing partner of the New York
region of Peat, Marwick, Mitchell & Co. from 1979
to 1985. He is also a director of The Travelers,
Inc., Dyncorp, VICORP Restaurants, Inc., Fingerhut
Companies, Inc. and Roper Industries, Inc.
William C. Rusnack, 49...... Mr. Rusnack was elected a Director of the Company
on October 24, 1988. He has been a Senior Vice
President of ARCO since July 1990 and President of
ARCO Products Company since June 1993. He was
President of ARCO Transportation Company from July
1990 to May 1993. He was Vice President, Corporate
Planning, of ARCO from July 1987 to July 1990. He
was Senior Vice President, Marketing and Employee
Relations, of the ARCO Oil and Gas Division from
August 1985 to July 1987 and Vice President,
Manufacturing, of the ARCO Products Division from
July 1984 to August 1985. From June 1983 to July
1984 he was Vice President, Planning
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT
POSITION WITH LYONDELL BUSINESS EXPERIENCE DURING PAST FIVE YEARS
---------------------- ------------------------------------------
<S> <C>
and Control, of the ARCO Products Division. He
originally joined ARCO in 1966. Mr. Rusnack is
also a director of BWIP Holding, Inc.
Dan F. Smith, 48............ Mr. Smith was elected a Director of the Company on
Executive Vice President October 24, 1988. He was elected Executive Vice
and Chief Operating Officer President and Chief Operating Officer on May 6,
1993. He served as Vice President Corporate
Planning of ARCO from October 1991 until May 1993.
He previously served as Executive Vice President
and Chief Financial Officer of the Company from
October 1988 to October 1991 and as Senior Vice
President of Manufacturing of Lyondell, and its
predecessor, the Lyondell Division, from June 1986
to October 1988. From August 1985 to June 1986 Mr.
Smith served as Vice President of Manufacturing
for the Lyondell Division. He joined the Lyondell
Division in April 1985 as Vice President, Control
and Administration. Prior to 1985, he served in
various financial, planning and manufacturing
positions with ARCO. He originally joined ARCO in
1968.
Paul R. Staley, 64.......... Mr. Staley was elected a Director of the Company
on November 28, 1988, effective as of January 25,
1989. He has held his current position as Chairman
of the Executive Committee of the Board of
Directors of P. Q. Corporation (an industry
supplier of silicates) since January 1991. He held
the positions of President and Chief Executive
Officer of P.Q. Corporation from 1973 and 1981,
respectively, until January 1991.
William E. Wade, Jr., 51.... Mr. Wade was elected a director of the Company on
August 13, 1993. He has been Executive Vice
President of ARCO since June 1, 1993 and a
director of ARCO since June 1, 1993. He was a
Senior Vice President of ARCO from May 1987 to May
1993 and President of ARCO Oil and Gas Company
from October 1990 to May 1993. He was President of
ARCO Alaska, Inc. from July 1987 to July 1990. He
was a Vice President of ARCO from 1985 to May
1987. From 1981 to 1985, he was Vice President of
ARCO Exploration Company. He has been an officer
of ARCO since 1985. He originally joined ARCO in
1968.
</TABLE>
Set forth below are the executive officers of the Company as of July 1, 1994.
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH LYONDELL FIVE YEARS AND PERIOD SERVED AS OFFICER(S)
---------------------- ------------------------------------------
<S> <C>
John R. Beard, 42............ Mr. Beard became Vice President Quality, Supply
Vice President, Quality, and Planning on July 1, 1993. Mr. Beard was
Supply and Planning appointed Vice President, Planning and Evaluations
in May 1992. He served as the Site Manager of
Lyondell's Houston Refinery from 1988 until April
1992. From 1985 until
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH LYONDELL FIVE YEARS AND PERIOD SERVED AS OFFICER(S)
---------------------- ------------------------------------------
<S> <C>
1988, he served in management assignments in
evaluations, marketing and manufacturing. Prior to
1985, he served in various management positions
for ARCO Products Company and the ARCO Chemical
Division. He originally joined ARCO in 1974.
Bob G. Gower, 56............ Mr. Gower was elected Chief Executive Officer of
Chief Executive Officer, the Company on October 24, 1988 and Director and
President and Director President of the Company on June 27, 1988. He has
been President of Lyondell and its predecessor,
the Lyondell Division, since formation of the
Lyondell Division in April, 1985. Mr. Gower was a
Senior Vice President of ARCO from June, 1984
until his resignation as an officer of ARCO in
January, 1989. Prior to 1984, he served in various
capacities with the then ARCO Chemical Division.
He originally joined ARCO in 1963.
Robert H. Ise, 59........... Mr. Ise was appointed Vice President, Marketing,
Vice President, Lyondell Supply and Evaluations of LYONDELL-CITGO Refining
Petrochemical Company Company Ltd. on July 1, 1993. He previously served
Vice President, Marketing, Lyondell as Vice President, Marketing and Sales,
Supply and Evaluations, Polymers and Petroleum Products from April, 1992
LYONDELL-CITGO Refining until June, 1993 and continues to serve as a Vice
Company Ltd. President of Lyondell. He served as Vice
President, Marketing and Sales, Petroleum
Products, from December, 1988 until April, 1992.
He served as Vice President of Industrial Products
Marketing of the Lyondell Division from June, 1987
to December, 1988. From May, 1985 to June, 1987 he
served as Director, Industrial Products Marketing
for the Lyondell Division. Prior thereto, he
served in various marketing capacities for the
ARCO Products Division. He originally joined ARCO
in 1959.
Richard W. Park, 54......... Mr. Park was elected Vice President, Human
Vice President, Human Resources on June 27, 1988. He previously served
Resources as Vice President of Employee Relations of the
Lyondell Division since February, 1987. From 1985
to 1987 he served as Manager of Personnel for the
then ARCO Chemical Division's Specialty Chemicals
and International Units. Prior to 1985 he held
other employee relations positions with divisions
of ARCO. He originally joined ARCO in 1965.
Jeffrey R. Pendergraft, 46.. Mr. Pendergraft was named Senior Vice President on
Senior Vice President, May 6, 1993. Mr. Pendergraft was elected Vice
Secretary and General President and General Counsel on June 27, 1988 and
Counsel Secretary on October 24, 1988. From September,
1985 to June, 1988, he served as General Attorney
of the Lyondell Division. Prior to September,
1985, he served as an attorney for various
operating divisions and corporate units of ARCO at
increasing levels of responsibility. He originally
joined ARCO in 1972.
W. Norman Phillips, Jr., 39. Mr. Phillips was elected Vice President,
Vice President, Channelview Channelview Operations on May 6, 1993. From May
Operations 22, 1992 until May 6, 1993, he served as Site
Manager of Channelview
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH LYONDELL FIVE YEARS AND PERIOD SERVED AS OFFICER(S)
---------------------- ------------------------------------------
<S> <C>
Operations. He previously served as Manager,
Planning from August, 1991 until May, 1992. Prior
to August, 1991, he served in various positions in
manufacturing and marketing for ARCO and Lyondell,
including Sales Manager in the Petroleum Products
Marketing Department from September, 1987 until
August, 1991. He originally joined ARCO in 1977.
Joseph M. Putz, 53.......... Mr. Putz was elected Vice President and Controller
Vice President and on October 24, 1988. Previously he was Vice
Controller President, Control and Administration of Lyondell,
and its predecessor, the Lyondell Division, from
June 1987 to October 1988. From 1986 to 1987 he
served as Director, Internal Control of ARCO. From
1985 to 1986 he served as Manager of Special
Projects for ARCO. Prior to 1985, he held various
financial positions with divisions of ARCO. He
originally joined ARCO in 1965.
Dan F. Smith, 48............ Mr. Smith was elected a Director of the Company on
Executive Vice President October 24, 1988. He was elected Executive Vice
and Chief Operating Officer President and Chief Operating Officer on May 6,
1993. He served as Vice President Corporate
Planning of ARCO from October 1991 until May 1993.
He previously served as Executive Vice President
and Chief Financial Officer of the Company from
October 1988 to October 1991 and as Senior Vice
President of Manufacturing of Lyondell, and its
predecessor, the Lyondell Division, from June 1986
to October 1988. From August 1985 to June 1986,
Mr. Smith served as Vice President of
Manufacturing for the Lyondell Division. He joined
the Lyondell division in April 1985 as Vice
President, Control and Administration. Prior to
1985, he served in various financial, planning and
manufacturing positions with ARCO. He originally
joined ARCO in 1968.
Debra L. Starnes, 41........ Ms. Starnes was appointed Vice President,
Vice President, Petrochemicals Business Management and Marketing
Petrochemicals Business on July 1, 1993. She previously served as Vice
Management and Marketing President, Petrochemicals Business Management from
May 22, 1992 to July 1993. She served as Vice
President, Corporate Planning from September 1991
until May 1992. From January 1989 to September
1991, she served as Director, Planning. Prior to
1989, she held various manufacturing, marketing
and planning positions with ARCO and Lyondell. She
originally joined ARCO in 1975.
Russell S. Young, 46........ Mr. Young was elected Senior Vice President, Chief
Senior Vice President, Financial Officer and Treasurer on May 7, 1992. He
Chief Financial Officer and previously served as Vice President and Treasurer
Treasurer from November 1988 until May 1992. Mr. Young
served as Controller of the ARCO Products Division
from September 1986 to January, 1989. From July
1984 to September 1986 he served as Assistant
Treasurer of ARCO. Prior thereto he served in
corporate finance positions for ARCO. He
originally joined ARCO in 1980.
</TABLE>
The By-Laws of the Company provide that each officer shall hold office until
the officer's successor is elected or appointed and qualified or until the
officer's death, resignation or removal by the Board of Directors.
50
<PAGE>
RELATIONSHIP WITH ARCO
GENERAL
As described in "The Company," Lyondell was first a division and then a
wholly-owned subsidiary of ARCO until January 1989, when ARCO completed an
initial public offering of Lyondell's Common Stock. ARCO currently owns
39,921,400 shares, or 49.9 percent of the outstanding Common Stock. The Company
and ARCO have entered into various intercompany transactions and arrangements
as described below. Five of the eleven directors of Lyondell are officers of
ARCO. Following consummation of the offering of the Exchangeable Notes, ARCO
has informed the Company that it intends to cause the ARCO officers who
currently serve on the Board of Directors to resign; however, ARCO has not
limited its right to nominate and vote for candidates for Lyondell's Board of
Directors. ARCO has also stated its current intent to vote its shares of
Lyondell Common Stock proportionately to the votes of the non-ARCO
stockholders, including with respect to the election of directors; provided,
that in the event a person other than ARCO is deemed to own more than 10
percent of the Common Stock within the meaning of Section 13(d) of the Exchange
Act and there occurs a contested proxy solicitation within the meaning of Rule
14a-11(a) of the Exchange Act, ARCO intends to vote its shares as it deems
appropriate.
REGISTRATION RIGHTS AGREEMENT WITH ARCO
Subject to the terms and conditions of a registration rights agreement
("Registration Rights Agreement") to be entered into with Lyondell concurrently
with the U.S. and international underwriting agreements with respect to the
offerings of the Exchangeable Notes ("Underwriting Agreements"), ARCO will
agree that it will not, without the prior approval of Lyondell's Board of
Directors, prior to the maturity of the Exchangeable Notes, (i) initiate or
solicit proposals by a single entity or a group of affiliated entities to
acquire all or substantially all of ARCO's Lyondell Common Stock or otherwise
to acquire Lyondell (ii) take action by written consent in lieu of a meeting of
Lyondell's stockholders or cause to be called any special meeting of Lyondell's
stockholders, (iii) initiate or propose, or solicit proxies in respect of,
stockholder proposals with respect to the Company, or (iv) solicit proxies or
written consents in respect of replacing or adding members of the Lyondell
Board of Directors.
Under the terms and conditions of the Registration Rights Agreement, ARCO
will also agree that it will not, without the prior approval of Lyondell's
Board of Directors or except upon exchange of the Exchangeable Notes as
contemplated by the prospectus for the Exchangeable Notes, prior to one year
following maturity date of the Exchangeable Notes dispose of (or enter into an
agreement contemplating the disposition of) all or any portion of its Lyondell
Common Stock in a private sale to a single entity or a group of affiliated
entities, provided that this agreement will not restrict ARCO from selling all
or any portion of its Lyondell Common Stock (i) in a public offering intended
to result in widespread distribution; (ii) in a Rule 144 transaction under the
Securities Act in accordance with the volume limitations set forth therein;
(iii) in a Rule 144A transaction intended to result in widespread distribution
to institutional buyers; or (iv) pursuant to a tender offer or exchange offer
by Lyondell or a third party or a merger or other business combination
including Lyondell that is not solicited by ARCO and in which ARCO is treated
on substantially comparable terms with other holders of Lyondell Common Stock.
Notwithstanding the foregoing, ARCO is not precluded from (i) participating in
any self tender offer or exchange offer or open market purchase program
conducted by Lyondell, (ii) voting its shares of Lyondell Common Stock as it
deems proper, or (iii) disclosing (including in response to private inquiries)
either its intentions concerning matters to be brought before Lyondell's
stockholders or making such disclosures as ARCO determines appropriate in
compliance with its obligation under the federal securities laws.
Pursuant to the Registration Rights Agreement, ARCO will have the right to
require the Company to use its best efforts to file up to three registration
statements under the Securities Act covering ARCO
51
<PAGE>
shares of Lyondell Common Stock. ARCO will also have the right, if the Company
files a registration statement, to require the Company to register ARCO's
shares of Common Stock for sale under the Securities Act on such registration
statement. If the exercise by ARCO of such "piggyback registration rights"
would result in the registration of a number of shares of Common Stock, that in
the judgment of the managing underwriter for the proposed offering exceeds the
number which can be sold in the offering, the number of shares that ARCO
initially intended to register shall be reduced. ARCO has agreed to pay all
costs and expenses relating to the exercise of ARCO's "demand" registration
rights. In the event of a "demand" registration, ARCO and the Company will
indemnify the underwriters of the offering for certain liabilities, including
liabilities under the Securities Act in connection with any such registration,
except that in the event that ARCO owns less than 20 percent of the Lyondell
Common Stock, the Company will indemnify both ARCO and the underwriters.
ARCO will pay all costs and expenses incurred by Lyondell in connection with
this Prospectus, the Registration Statement and the offering of the
Exchangeable Notes. For a further description of expense reimbursement and
indemnification agreements, see "Plan of Distribution."
RELATIONSHIP BETWEEN LYONDELL AND ARCO
In connection with the transfer of assets and liabilities to Lyondell in
1988, the Company and ARCO entered into a number of agreements for the purpose
of defining their ongoing relationships. In addition, in July 1987 the Lyondell
Division and ARCO Chemical Company ("ARCO Chemical"), then a wholly-owned (and
now an 83.3 percent owned) subsidiary of ARCO, entered into a number of
agreements in connection with the organization of ARCO Chemical. None of these
agreements was the result of arm's-length negotiations between independent
parties. It was the intention of the Company, ARCO and ARCO Chemical that such
agreements and the transactions provided for therein, taken as a whole,
accommodate the parties' interests in a manner that was fair to the parties,
while continuing certain mutually beneficial joint arrangements. The Audit
Committee of the Board of Directors of the Company, none of the members of
which are affiliated with the Company (including LCR), ARCO or ARCO
Chemical has determined that such agreements, taken as a whole, were in its
opinion fair to the Company and its stockholders. Because of the complexity of
the various relationships between the Company, ARCO and its direct and indirect
subsidiaries, including ARCO Chemical (together, "ARCO Affiliates"), however,
there can be no assurance that each of such agreements, or the transactions
provided for therein, has been effected on terms at least as favorable to the
Company as could have been obtained from unaffiliated third parties.
The terms and provisions of many of those initial agreements have been
modified subsequently or supplemented and additional or modified agreements,
arrangements and transactions have been and will continue to be entered into by
the Company and ARCO Affiliates. Any such future agreements, arrangements and
transactions will be determined through negotiation between the Company and
ARCO Affiliates and it is possible that conflicts of interest will be involved.
Future contractual relations among the Company and ARCO Affiliates will be
subject to certain provisions of the Company's Certificate of Incorporation.
See "--Certificate of Incorporation Provisions Relating to Corporate Conflicts
of Interest." In addition, the Audit Committee of the Board of Directors has
adopted a set of guidelines for the review of all agreements entered into
between the Company and ARCO Affiliates. These guidelines include a provision
that, at least annually, the Audit Committee will review such agreements, or
the transactions provided for therein, to assure that such agreements are, in
its opinion, fair to the Company and its stockholders.
For the year ended December 31, 1993, Lyondell (including LCR) paid ARCO
Affiliates an aggregate of approximately $80 million. For the year ended
December 31, 1993, Lyondell recorded revenues of approximately $278 million
from sales to ARCO Affiliates, of which $263 million represented sales to ARCO
Chemical. Sales to ARCO Chemical accounted for approximately 17 percent of
total revenues from sales of petrochemical products, and approximately seven
percent of revenues from gross sales.
52
<PAGE>
TECHNOLOGY TRANSFERS AND LICENSES
Effective July 1, 1988, ARCO assigned to the Company numerous domestic and
foreign trademarks and certain U.S. and foreign patents and granted the Company
a nonexclusive license to use other trademarks which contain the word "ARCO,"
to use ARCO's spark symbol as a logo and to use ARCO's color striping scheme,
which license was royalty-free for a period of four years. The Company paid
ARCO approximately $80,000 under the terms of this license in 1993.
In connection with the transfer of assets and liabilities relating to the
Lyondell Division from ARCO to the Company, the Company and ARCO, effective
July 1, 1988, entered into (i) a License Agreement pursuant to which ARCO
licensed to the Company on a nonexclusive, royalty-free basis certain rights
(including Lyondell's right to sublicense to third parties, in some cases
without accounting to ARCO) to ARCO's technology and intellectual property
related to certain operations or assets of the Company, (ii) a technology
assignment agreement pursuant to which legal title to certain other technology
and intellectual property useful in the Company's business (including, without
limitation, technology relating to olefins, including product flexibility) was
transferred to the Company; provided, however, that except for technology
relating to the product flexibility unit, ARCO retained a nonexclusive license
to use the technology and property rights in ARCO's other operations, and (iii)
an immunity from suit agreement in respect of the Company's right to practice
all remaining technology in the possession of the Company prior to July 1,
1988. During 1990, the Company and ARCO entered into a series of amendments to
these agreements designed to clarify the parties' rights under the original
technology transfer. In addition, Lyondell and ARCO executed a patent
maintenance agreement pursuant to which ARCO agreed to maintain certain patents
licensed to Lyondell. Lyondell and ARCO also entered into a letter agreement
granting Lyondell the right to obtain additional licensing rights.
CROSS-INDEMNITY AGREEMENT
In connection with the transfer by ARCO of substantially all of the assets
and liabilities of its Lyondell Division to the Company, the Company and ARCO
executed the Cross-Indemnity Agreement. In the Cross-Indemnity Agreement, the
Company agreed generally to indemnify ARCO against substantially all fixed and
contingent liabilities relating to the integrated petrochemical and petroleum
processing business and certain assets of the Lyondell Division. The
liabilities assumed by the Company include the following, to the extent not
covered by ARCO's insurance: (1) all liabilities and obligations of the Company
and its combined subsidiaries, as of July 1, 1988; (2) all liabilities and
obligations under contracts and commitments relating to the business of the
Lyondell Division and certain assets relating thereto; (3) employment and
collective bargaining agreements affecting the Company's employees; (4)
specified pending litigation and other proceedings; (5) federal, state, foreign
and local income taxes to the extent provided in the Cross-Indemnity Agreement;
(6) liabilities for other taxes associated with the Lyondell Division's
business and certain assets relating thereto; (7) liabilities for any past,
present or future violations of federal, state or other laws (including
environmental laws), rules, regulations or other requirements of any
governmental authority in connection with the business of the Lyondell Division
and certain assets relating thereto; (8) existing or future liabilities for
claims based on breach of contract, breach of warranty, personal or other
injury or other torts relating to such integrated petrochemical and petroleum
processing businesses and certain assets relating thereto; and (9) any other
liabilities relating to the assets transferred to the Company or its
subsidiaries. ARCO has indemnified the Company with respect to other claims or
liabilities and other matters of litigation not related to the assets or
business transferred by ARCO to the Company.
The Cross-Indemnity Agreement includes procedures for notice and payment of
indemnification claims and provides that a party entitled to indemnification
for a claim or suit brought by a third party may require the other party to
assume the defense of such claim. The Cross-Indemnity Agreement also includes a
defense cost-sharing agreement, whereby the Company will bear its allocated
defense costs for certain lawsuits.
53
<PAGE>
SERVICES AGREEMENTS
The Company and ARCO entered into an agreement effective January 1, 1991 and
amended as of February, 1992 (the "Administrative Services Agreement") under
which ARCO agreed to continue to provide various transitional services to the
Company that ARCO had been providing pursuant to previous administrative
service agreements. The services which ARCO now provides the Company pursuant
to the Administrative Services Agreement include telecommunications and certain
computer-related services. The Administrative Services Agreement terminates no
later than December 31, 1997, although it may be terminated in its entirety
earlier than such date upon the terminating party providing the other party
with at least two years prior notice, and a party may elect to terminate some
of the services it is receiving upon 30 days prior notice to the other party.
The Administrative Services Agreement provides for an annual renegotiation of
fees. ARCO earned a fee of approximately $2 million during 1993 for all of the
services (some of which are now provided under other agreements as discussed
below) which it provided under the Administrative Services Agreement.
Effective January 1, 1994, certain services that ARCO had previously been
providing under the Administrative Services Agreement began to be provided
pursuant to an agreement (the "Employee Services Agreement") covering various
employee benefits administration and payroll services and an agreement (the
"Investment Management Agreement") covering investment services with regard to
the management of Lyondell's qualified employee benefit plan funds. Each of
these agreements terminates on May 1, 1998, although it may be terminated in
its entirety by ARCO (provided that ARCO no longer owns at least five percent
of the outstanding Common Stock) by giving Lyondell at least two years prior
notice. In addition, Lyondell may elect to terminate some or all of the
services being provided upon 30 days prior notice. Upon termination of any or
all services, ARCO will provide Lyondell with support and assistance to
accomplish an orderly transition from ARCO's provision of the services to
Lyondell's acquisition of comparable services. The Employee Services Agreement
provides for substantially all services to be provided at a fee based on ARCO's
costs and for the other services to be provided at mutually-agreed fees. The
Investment Management Agreement provides for a renegotiation of fees from time
to time.
Effective January 1, 1991, the Company and ARCO entered into an agreement
which terminated the insurance coverage previously provided by ARCO and
established procedures for the resolution of pending and future claims that are
or will be covered under ARCO's policies in effect prior to January 1, 1991.
AGREEMENTS BETWEEN THE COMPANY AND ARCO PIPE LINE COMPANY
The Company has entered into several contracts with ARCO Pipe Line Company
("ARCO Pipe Line") pursuant to which the Company (1) leased certain pipelines
and pipeline segments from ARCO Pipe Line at annual rental rates which include
recovery of operating costs, return on capital investment and inflation
escalators, (2) acquired the services of ARCO Pipe Line to operate various
groups of pipelines owned by the Company, and (3) entered into a throughput and
deficiency commitment for volumes at tariff rates for transportation of crude
oil and other products. Certain of these contracts that relate to the refining
business were assigned to LCR as of July 1, 1993. The Company and LCR paid ARCO
Pipe Line approximately $20 million during 1993 for rental fees and services
under these contracts. In April 1994, the Company and ARCO Pipe Line concluded
negotiations that extend the term of the Company's lease of ARCO Pipe Line's
pipeline system described in (1) above through December 31, 2023. Absent any
major regulatory changes, the terms and conditions of this lease extension will
not be materially different from the current lease.
ARCO Pipe Line also owns various easements and licenses for its pipelines and
related equipment located on the property of the Company or LCR and has
performed services relating to the pipeline
54
<PAGE>
systems. The Company (including LCR) also ships products over common carrier
pipelines owned and operated by ARCO Pipe Line pursuant to filed tariffs on the
same basis as other non-affiliated customers.
AGREEMENTS BETWEEN THE COMPANY AND ARCO CHEMICAL COMPANY
Lyondell provides to ARCO Chemical a large portion of the feedstocks
(including ethylene, propylene and methanol) purchased by ARCO Chemical for its
manufacturing facilities located at Channelview, Texas. Pricing arrangements
under these contracts are generally representative of prevailing market prices.
Lyondell also provides certain nominal plant services at the aforementioned
plants. ARCO Chemical in turn provides certain feedstocks and supplies to
Lyondell at market-based prices.
The Company sells MTBE produced at one of its two MTBE units to ARCO Chemical
at market-based prices. The term of this agreement extends through December
1995. In addition, the Company has agreed to sell to ARCO Chemical MTBE
produced at the Company's second MTBE unit that is in excess of LCR's
requirements at market-based prices.
DISPUTE RESOLUTION AGREEMENT
In April 1993, the Company, ARCO and ARCO Chemical entered into a Dispute
Resolution Agreement that mandates a procedure for negotiation and binding
arbitration of significant commercial disputes among any two or more of the
parties.
OTHER AGREEMENTS BETWEEN THE COMPANY AND ARCO
Lyondell has purchased and LCR continues to purchase certain of its crude oil
requirements from affiliates of ARCO under short-term arrangements at prices
based on market values at the time of delivery. LCR also purchases crude oil
from affiliates of ARCO from time to time on the spot market at then-current
spot market prices. The Company and LCR also purchased natural gas and natural
gas liquids from affiliates of ARCO during 1993 on the spot market at then-
current spot market prices.
The Company (including LCR) also sold products to ARCO Affiliates, including
crude oil resales and sales of heating oil and lube oil at market-based prices.
CERTIFICATE OF INCORPORATION PROVISIONS RELATING TO CORPORATE CONFLICTS OF
INTEREST
In order to address certain potential conflicts of interest between the
Company and ARCO (for purposes of this section the term "ARCO" also includes
ARCO's successors and any corporation, partnership or other entity in which
ARCO owns fifty percent or more of the voting securities or other interests),
the Company's Certificate of Incorporation contains provisions regulating and
defining the conduct of certain affairs of the Company as they may involve ARCO
and its officers and directors, and the powers, rights, duties and liabilities
of the Company and its officers, directors and stockholders in connection
therewith. In general, these provisions recognize that from time to time the
Company and ARCO may engage in the same or similar activities or lines of
business and have an interest in the same areas of corporate opportunities. The
Certificate of Incorporation provides that ARCO has no duty to refrain from (1)
engaging in business activities or lines of business that are the same as or
similar to those of the Company, (2) doing business with any customer of the
Company or (3) employing any officer or employee of the Company. The
Certificate of Incorporation provides that ARCO is not under any duty to
present any corporate opportunity to the Company which may be a corporate
opportunity for both ARCO and the Company, and that ARCO will not be liable to
the Company or its stockholders for breach of any fiduciary duty as a
stockholder of the Company by reason of the fact that ARCO pursues or acquires
such corporate opportunity for itself, directs such corporate opportunity to
another person or does not present the corporate opportunity to the Company.
ARCO currently owns interests in certain chemical companies and refiners (other
than the Company) and has advised the Company that it may continue to acquire
additional interests in chemical companies and refiners.
55
<PAGE>
The Certificate of Incorporation provides that directors and officers of the
Company will not be liable to the Company or its stockholders for breach of any
fiduciary duty if they comply with the following provisions of the Certificate
of Incorporation. When a corporate opportunity is offered in writing to an
officer or an officer and a director of the Company who is also an officer or
an officer and a director of ARCO, solely in his or her designated capacity
with one of the two companies, such opportunity shall be first presented to
whichever company was so designated. No person is currently in this category.
Otherwise, (1) a corporate opportunity offered to any person who is an officer
or officer and director of the Company and who is also a director of ARCO,
shall be first presented to the Company, (2) a corporate opportunity offered to
a person who is a director of the Company and who is also an officer or officer
and director of ARCO shall be first presented to ARCO, (3) in all other cases,
a corporate opportunity offered to any person who is an officer and/or a
director of both the Company and ARCO shall be first presented to the Company.
Mr. Bowlin, Mr. Comstock, Mr. Dallas, Mr. Rusnack and Mr. Wade are in category
(2) and no persons currently are in categories (1) and (3).
Another section of the Certificate of Incorporation provides that no
contract, agreement, arrangement or transaction between the Company and ARCO or
between the Company and a director or officer of the Company or of ARCO would
be void or voidable for the reason that ARCO or any director or officer of the
Company or of ARCO are parties thereto or because any such director or officer
were present or participated in the meeting of the Board of Directors which
authorized the contract if the material facts about the contract, agreement,
arrangement or transaction were disclosed or known to the Board of Directors or
the stockholders and the Board of Directors in good faith authorizes the
contract by a vote of a majority of the disinterested directors or the majority
of stockholders approves such contract, agreement, arrangement or transaction.
The foregoing Certificate of Incorporation provisions describe the
obligations of officers and directors of the Company with respect to
presentation of corporate opportunities, but do not limit the ability of the
Company or of ARCO to consider and act upon such opportunities whether or not
such provisions have been followed.
SECURITY OWNERSHIP BY ARCO
ARCO currently owns, and immediately following the offering of the
Exchangeable Notes will own, 39,921,400 shares, or 49.9 percent, of the
outstanding Common Stock. Pursuant to the terms of the Exchangeable Notes, ARCO
may, at its option, consummate the mandatory exchange at maturity thereof by
delivering to holders thereof shares of Common Stock or cash with an equal
value. ARCO's ownership interest after maturity of the Exchangeable Notes could
remain at 49.9 percent of the presently outstanding number of shares of Common
Stock (if it elects to deliver cash) or could be reduced to less than one
percent of the presently outstanding shares of Common Stock if (a) at maturity
of the Exchangeable Notes the "Maturity Price" is less than or equal to the
"Initial Price" (each as defined in the prospectus for the Exchangeable Notes),
(b) the underwriters of the offering of the Exchangeable Notes elect to
exercise their over-allotment option in full and (c) ARCO elects to deliver
Common Stock instead of cash. However, ARCO is under no obligation to, and
there can be no assurance that ARCO will, elect to exercise its option to
deliver Common Stock pursuant to the terms of the Exchangeable Notes.
For a description of expense reimbursement and indemnification agreements
with respect to this Prospectus, the Registration Statement and the offering of
the Exchangeable Notes, see "Plan of Distribution," and for a description of
ARCO's intentions with respect to the Company and of the Registration Rights
Agreement between ARCO and the Company, see "Relationship with ARCO--General"
and "--Registration Rights Agreement with ARCO."
For additional information concerning the relationship between the Company
and ARCO, see "Relationship with ARCO."
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of 250,000,000
shares of Common Stock, par value $1.00 per share. ARCO, which owns 49.9
percent of the outstanding Common Stock, has entered into a Registration Rights
Agreement with the Company regarding certain voting, transfer and other matters
with respect to the shares of Common Stock it owns. See "Relationship with
ARCO--Registration Rights Agreement with ARCO."
COMMON STOCK
The Company is currently authorized to issue 250,000,000 shares of Common
Stock, of which 80,000,000 shares of Common Stock are outstanding at the date
hereof.
Holders of Common Stock are entitled (i) to receive such dividends as may
from time to time be declared by the Board of Directors of the Company; (ii) to
one vote per share on all matters on which the stockholders are entitled to
vote; (iii) to act by written consent in lieu of voting at a meeting of
stockholders; and (iv) to share ratably in all assets of the Company available
for distribution to the stockholders, in the event of liquidation, dissolution
or winding up of the Company. For additional information regarding the
Company's dividend policy, see Item 5 of the Company's 1993 Form 10-K Report,
which report is incorporated herein by reference. The holders of a majority of
the shares of Common Stock represented at a meeting can elect all of the
directors.
Shares of Common Stock are not liable to further calls or assessments by the
Company for any liabilities of the Company that may be imposed on its
stockholders under the laws of the State of Delaware, the state of
incorporation of the Company. There are no preemptive rights for the Common
Stock in the Certificate of Incorporation.
The Transfer Agent, Registrar and Dividend Disbursing Agent for the Common
Stock is The Bank of New York.
PREFERRED STOCK
The Board of Directors has adopted a resolution declaring the advisability of
an amendment to the Certificate of Incorporation of the Company to authorize
the issuance of up to 80,000,000 shares of Preferred Stock, $0.01 par value
(the "Preferred Stock"). The proposed amendment to the Certificate of
Incorporation is included in the 1994 Proxy Statement (as supplemented) and
incorporated herein by reference. The discussion hereunder is qualified in its
entirety by reference to Appendix A of the 1994 Proxy Statement (as
supplemented). If this proposal is approved by the stockholders at the July 22,
1994 reconvened annual stockholders meeting, the Board will be able to specify
the precise characteristics of the Preferred Stock to be issued, in light of
current market conditions and the nature of specific transactions, and will not
be required to solicit further authorization from stockholders for any specific
issue of Preferred Stock.
The Board of Directors has adopted a policy providing that no future issuance
of Preferred Stock will be effected without stockholder approval unless the
Board (whose decision shall be conclusive) determines in good faith (i) that
such issuance is primarily for the purpose of facilitating a financing, an
acquisition or another proper corporate objective or transaction, and (ii) that
any anti-takeover effects of such issuance are not the Company's primary
purpose for effecting such issuance. The Board of Directors will not amend or
revoke this policy without giving written notice to the holders of all
outstanding shares of the Company's stock, however, no such amendment or
revocation will be effective, without stockholder approval, to permit a
subsequent issuance of Preferred Stock for the primary purpose of obstructing a
takeover of the Company by any person who has, prior to such written notice to
stockholders, notified the Board of Directors of such person's desire to pursue
a takeover of the Company. As of the date hereof, the Board of Directors has no
present intention to issue any series of Preferred Stock.
57
<PAGE>
The authorization of preferred stock could have the effect of discouraging a
tender offer or unsolicited attempt to acquire control of the Company in a
transaction that a stockholder might deem desirable, including takeover
attempts that might result in a premium over the market price of the Common
Stock. Preferred stock issuances involving certain voting or conversion
privileges can be used to make the acquisition of a company more difficult or
more costly. The Company is not aware of any present effort by any person to
accumulate the Company's Common Stock or to obtain control of the Company.
Adoption of the proposed amendment to the Certificate of Incorporation will
require the affirmative vote of a majority of the outstanding shares of Common
Stock. ARCO has informed the Company that it intends to vote in favor of the
proposed amendment to the Certificate of Incorporation, unless the offering of
the Exchangeable Notes has been consummated prior to the vote of the
stockholders at the reconvened meeting, in which event ARCO intends to vote its
shares of Common Stock proportionately to the votes of the non-ARCO
stockholders. See "Relationship with ARCO--General."
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
FOR NON-UNITED STATES HOLDERS OF COMMON STOCK
The following is a summary of certain United States federal income tax
consequences of the acquisition, ownership and disposition of Common Stock by a
holder that, for United States federal income and estate tax purposes, is a
Non-United States Holder. For purposes of this discussion, a "Non-United States
Holder" means a corporation, individual or partnership, that is, as to the
United States, a foreign corporation, a non-resident alien individual or a
foreign partnership, or a trust, other than one the income of which is subject
to United States federal income tax regardless of its source. This summary does
not address all aspects of the United States federal income and estate taxation
and does not deal with foreign, state and local tax consequences that may be
relevant to non-United States Holders in light of their specific circumstances.
Furthermore, this summary is based upon the provisions of the United States
Internal Revenue Code of 1986, as amended and the regulations, rulings and
judicial decisions thereunder, all of which are subject to change. PROSPECTIVE
INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
UNITED STATES TAX CONSEQUENCES TO THEM OF ACQUIRING, HOLDING AND DISPOSING OF
COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES WHICH MAY ARISE UNDER THE LAWS OF
ANY FOREIGN, STATE, LOCAL OR OTHER TAXING JURISDICTION.
DIVIDENDS
Dividends paid to a Non-United States Holder generally will be subject to
withholding of United States federal income tax at a rate of 30 percent (or a
lower rate prescribed by an applicable tax treaty). If the dividends are
effectively connected with the conduct of a trade or business within the United
States by the Non-United States Holder, the dividends will be subject to the
ordinary United States federal income tax on net income that applies to United
States persons and will not be subject to withholding if the Non-United States
Holder files a United States Internal Revenue Service Form 4224 with the
Company or its dividend paying agent. In the case of corporate holders, such
dividends might also be subject to the United States branch profits tax at a
rate of 30 percent (or a lower rate prescribed by an applicable tax treaty). A
Non-United States Holder may be required to satisfy certain certification
requirements in order to obtain any reduction of or exemption from withholding
under the foregoing rules and may obtain a refund of any excess amounts
currently withheld by filing an appropriate refund claim with the United States
Internal Revenue Service.
Distributions in excess of the Company's current and accumulated earnings and
profits, as determined for United States federal income tax purposes, will be
treated first as a return of capital to the extent of the Non-United States
Holder's tax basis in the Common Stock (and will be applied against
58
<PAGE>
and reduce such holder's tax basis in the Common Stock) and thereafter as gain
from the sale of Common Stock. The portion treated as a return of capital will
not be subject to United States federal income tax and the portion, if any,
treated as gain will be subject to the rules described below under "--Gain on
Disposition." Because the Company will not be able to determine whether a
distribution should properly be treated as a dividend or as a return of capital
at the time of payment, it is required to treat all distributions as dividends
for United States withholding tax purposes. Non-United States Holders will be
eligible to claim a refund to the extent that a distribution represents a
return of capital and may in certain circumstances be eligible to claim a
refund to the extent that a distribution is treated as gain. Non-United States
Holders should consult their own tax advisors with respect to distributions in
excess of current and accumulated earnings and profits.
GAIN ON DISPOSITION
General Rule. Subject to special rules for individuals described below, a
Non-United States Holder generally will not be subject to United States federal
income tax on gain recognized on a sale or other disposition of Common Stock
unless (i) the gain is effectively connected with the conduct of a trade or
business within the United States by the Non-United States Holder (in which
case the United States branch profits tax described above may also apply to
corporate holders) or (ii) the gain is treated as effectively connected with
the conduct of a trade or business within the United States because the Company
is or has been a "United States real property holding corporation" for United
States federal income tax purposes (in which case, withholding of such tax may
also apply). The Company believes that it is currently, and is likely to
remain, a United States real property holding corporation. The preceding
sentence notwithstanding, under currently effective United States federal
income tax laws, gain recognized by a Non-United States Holder will not be
treated as effectively connected with the conduct of a trade or business within
the United States (or subject to withholding) unless such Non-United States
Holder held, directly or indirectly, at any time during the five-year period
ending on the date of disposition, more than five percent of the Common Stock.
Non-United States Holders should consult applicable tax treaties, which may
provide for different rules (including possibly the exemption of certain
capital gains from tax).
Individuals. In addition to the rules described above, an individual Non-
United States Holder who holds Common Stock as a capital asset generally will
be subject to tax on any gain recognized on the disposition of such stock if
such individual is present in the United States for 183 days or more in the
taxable year of disposition and (i) has a "tax home" in the United States (as
specifically defined under the United States federal income tax laws) or (ii)
maintains an office or other fixed place of business in the United States to
which the gain from the sale of the stock is attributable. Certain individual
Non-United States Holders may also be subject to tax pursuant to provisions of
United States federal income tax law applicable to certain United States
expatriates.
FEDERAL ESTATE TAX
Common Stock owned or treated as owned by an individual Non-United States
Holder at the date of death will be subject to United States federal estate
tax, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company or its designated paying agent (the "payor") must report annually
to the United States Internal Revenue Service and to each Non-United States
Holder the amount of dividends paid to and the tax, if any, withheld with
respect to such holder. That information may also be made available to the tax
authorities of the country in which the Non-United States Holder resides.
United States information reporting requirements (other than the reporting of
dividend payments described in the preceding paragraph ) and United States
backup withholding (imposed at a 31 percent
59
<PAGE>
rate) generally will not apply to dividends paid to a Non-United States Holder
at an address outside the United States, unless the payor has knowledge that
the payee is a United States person. Otherwise, information reporting and
backup withholding may apply to dividends paid on the Common Stock to a Non-
United States Holder who fails to furnish certain information, including a tax
identification number, in the manner required by United States law and
applicable regulations.
Payment of the proceeds of a disposition of Common Stock by a United States
office of a broker is subject to backup withholding and information reporting,
unless the holder certifies to the broker under penalties of perjury as to its
name, address and status as a Non-United States Holder or the holder otherwise
establishes an exemption. Neither backup withholding nor information reporting
generally will apply to a payment of the proceeds of a disposition of Common
Stock by a foreign office of a foreign broker that is not a United States
Related Person. Information reporting requirements (but not backup withholding)
will apply to a payment of the proceeds of a disposition of Common Stock by a
foreign office of a broker that is a United States person or a United States
Related Person, unless the broker has documentary evidence in its records that
the holder is a Non-United States Related Person, unless the broker has no
knowledge to the contrary and certain other conditions are met. For this
purpose, a "United States Related Person" is (i) a foreign broker, 50 percent
or more of whose gross income for certain periods is effectively connected with
the conduct of a trade or business in the United States or (ii) a foreign
broker that is a "controlled foreign corporation" for United States federal
income tax purposes.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that
required information is furnished to the United States Internal Revenue
Service.
PLAN OF DISTRIBUTION
The offering of the Exchangeable Notes by ARCO is being made through
concurrent offerings in the United States and outside the United States.
Subject to the terms and conditions of the Underwriting Agreement for the
offering in the United States, ARCO has agreed to sell to each of the
underwriters named below, and each of such underwriters, for whom Goldman,
Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Salomon
Brothers Inc are acting as representatives, has severally agreed to purchase
from ARCO the respective number of Exchangeable Notes set forth opposite its
name below:
<TABLE>
<CAPTION>
NUMBER OF
EXCHANGEABLE
UNDERWRITER NOTES
----------- ------------
<S> <C>
Goldman, Sachs & Co..........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................
Salomon Brothers Inc.........................................
Total.................................................... 30,000,000
==========
</TABLE>
60
<PAGE>
Subject to the terms and conditions of the Underwriting Agreement for the
offering outside of the United States, ARCO has agreed to sell to each of the
international underwriters named below, and each of such international
underwriters, for whom Goldman Sachs International, Merrill Lynch International
Limited and Salomon Brothers International Limited are acting as
representatives, has severally agreed to purchase from ARCO the respective
number of Exchangeable Notes set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
EXCHANGEABLE
UNDERWRITER NOTES
----------- ------------
<S> <C>
Goldman Sachs International..................................
Merrill Lynch International Limited..........................
Salomon Brothers International Limited.......................
Total.................................................... 5,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreements, the
underwriters are committed to take and pay for all of the Exchangeable Notes
offered pursuant to the applicable prospectus related thereto, if any are
taken.
The underwriters propose to offer the Exchangeable Notes in part directly to
the public at the initial public offering price set forth on the cover page of
the applicable prospectus for the Exchangeable Notes; and in part to certain
securities dealers at such price less a concession of $ per Exchangeable
Note. The underwriters may allow, and each of such dealers may reallow, a
concession not exceeding $ per Exchangeable Note to certain dealers and
brokers. After the Exchangeable Notes are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
representatives.
ARCO and Lyondell have entered into separate U.S. and international
Underwriting Agreements providing for the concurrent offer and sale by ARCO of
30,000,000 Exchangeable Notes in the United States and 5,000,000 Exchangeable
Notes outside the United States. The offering price and underwriting discount
per Exchangeable Note for the two offerings are identical. The closing of the
offering made in the United States is a condition to the closing of the
offering outside the United States, and vice versa.
ARCO has granted the underwriters an option exercisable for 30 calendar days
after the date of this Prospectus to purchase up to an aggregate of an
additional 4,921,400 Exchangeable Notes solely to cover over-allotments, if
any. If the underwriters exercise their over-allotment option, the underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof that the number of the Exchangeable Notes to be
purchased by each of them, as shown in the foregoing table, bears to the
aggregate of 35,000,000 Exchangeable Notes being offered. The underwriters may
exercise such option only to cover over-allotments in connection with the sale
of the Exchangeable Notes being offered.
61
<PAGE>
ARCO and Lyondell have agreed that during the period beginning from the date
of this Prospectus and continuing to and including the date 120 days after the
date of this Prospectus, subject to certain exceptions set forth in the
Underwriting Agreements, they will not offer, sell, contract to sell or
otherwise dispose of, without the prior written consent of the representatives
of the underwriters, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock.
The Exchangeable Notes will be a new issue of securities with no established
trading market. The representatives have advised ARCO that they intend to make
a market in the Exchangeable Notes but will not be obligated to do so and may
discontinue any market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for the Exchangeable Notes.
Lyondell has agreed to indemnify the underwriters of the Exchangeable Notes
against certain civil liabilities, including liabilities under the Securities
Act. ARCO has agreed to reimburse Lyondell for any legal and other expenses
reasonably incurred by Lyondell in the preparation, printing and filing of, and
in connection with investigating or defending any action or claim relating to,
this Prospectus, the Registration Statement or the offering of the Exchangeable
Notes.
This Prospectus relates to the 35,000,000 shares of Common Stock that may be
delivered by ARCO pursuant to the Exchangeable Notes and is Appendix A to both
the U.S. prospectus and the international prospectus of ARCO covering the sale
of the Exchangeable Notes (individually, an "ARCO Prospectus"). At maturity of
the Exchangeable Notes the principal amount of each such note will be
mandatorily exchanged by ARCO into shares of Common Stock or, at ARCO's option,
cash with an equal value. For a description of the Exchangeable Notes, see
"Description of the Exchangeable Notes" in the applicable ARCO Prospectus.
CERTAIN LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Jeffrey R.
Pendergraft, Esq., Senior Vice President, Secretary and General Counsel of
Lyondell. Mr. Pendergraft beneficially owns 25,521 shares of Common Stock.
Certain legal matters will be passed upon for the underwriters by Cravath,
Swaine & Moore. Cravath, Swaine & Moore provides legal services to ARCO from
time to time, and is currently doing so on certain matters relating to ARCO's
investment in the Company.
EXPERTS
The consolidated balance sheet as of December 31, 1993 and 1992 and the
consolidated statements of income and accumulated deficit, and cash flows for
each of the three years in the period ended December 31, 1993, included in this
Prospectus, have been included herein in reliance on the report of Coopers &
Lybrand, independent accountants, given on the authority of that firm as
experts in accounting and auditing.
With respect to the unaudited consolidated interim financial information for
the three-month periods ended March 31, 1994 and 1993 included in this
Prospectus, the independent accountants have reported that they have applied
limited procedures in accordance with professional standards for a review of
such information. However, their separate report, appearing elsewhere herein
states that they did not audit and they do not express an opinion on that
interim financial information. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. The accountants are not subject to the
liability provisions of Section 11 of the Securities Act of 1933 for their
report on the unaudited consolidated interim financial information because that
report is not a "report" or a "part" of the Registration Statement prepared or
certified by the accountants within the meaning of Sections 7 and 11 of the
Securities Act.
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Financial Statements
Consolidated Statement of Income and Accumulated Deficit for the Years
Ended December 31, 1993, 1992 and 1991................................. F-3
Consolidated Balance Sheet as of December 31, 1993 and 1992............. F-4
Consolidated Statement of Cash Flows for the Years Ended December 31,
1993, 1992 and 1991.................................................... F-5
Notes to Consolidated Financial Statements.............................. F-6
Independent Accountants' Review Report ................................... F-22
Unaudited Financial Statements
Consolidated Statement of Income for the Three Months Ended March 31,
1994 and 1993.......................................................... F-23
Consolidated Balance Sheet as of March 31, 1994 and December 31, 1993... F-24
Consolidated Statement of Cash Flows for the Three Months Ended March
31, 1994 and 1993...................................................... F-25
Notes to Unaudited Consolidated Financial Statements.................... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Lyondell Petrochemical Company
We have audited the accompanying consolidated balance sheet of Lyondell
Petrochemical Company as of December 31, 1993 and 1992, and the related
consolidated statements of income and accumulated deficit and cash flows for
each of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lyondell
Petrochemical Company as of December 31, 1993 and 1992, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1993, in conformity with generally accepted
accounting principles.
As discussed in Note 4 to the consolidated financial statements, during 1993
the Company changed its method of accounting for the cost of repairs and
maintenance incurred in connection with turnarounds of major units at its
manufacturing facilities and in 1992, the Company changed its method of
accounting for income taxes and for postretirement benefits other than
pensions.
Coopers & Lybrand
Houston, Texas
February 11, 1994
F-2
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENT OF INCOME AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
----------------------
1993 1992 1991
------ ------ ------
MILLIONS OF DOLLARS
EXCEPT
PER SHARE AMOUNTS
<S> <C> <C> <C>
Sales and other operating revenues:
Unrelated parties................................... $3,572 $4,480 $5,209
Related parties..................................... 278 329 526
------ ------ ------
3,850 4,809 5,735
Operating costs and expenses:
Cost of sales:
Unrelated parties................................. 3,359 4,283 4,801
Related parties................................... 268 295 409
Selling, general and administrative expenses........ 130 127 126
------ ------ ------
3,757 4,705 5,336
------ ------ ------
Operating income.................................... 93 104 399
Interest expense...................................... (74) (79) (74)
Interest income....................................... 2 10 14
Minority interest in LYONDELL-CITGO Refining Company
Ltd.................................................. (5) -- --
------ ------ ------
Income before income taxes and cumulative effect of
accounting changes................................. 16 35 339
Provision for income taxes............................ 12 9 117
------ ------ ------
Income before cumulative effect of accounting
changes............................................ 4 26 222
Cumulative effect on prior years of acounting changes,
net of tax........................................... 22 (10) --
------ ------ ------
Net income............................................ $ 26 $ 16 $ 222
====== ====== ======
Earnings (loss) per share:
Income before cumulative effect of accounting
changes............................................ $ .06 $ .32 $ 2.78
Cumulative effect on prior years of accounting
changes............................................ .27 (.12) --
------ ------ ------
Net income.......................................... $ .33 $ .20 $ 2.78
====== ====== ======
Pro forma amounts, assuming retroactive application of
new accounting method for turnarounds:
Income before cumulative effect of accounting
changes............................................ $ 31 $ 216
====== ======
Income per share before cumulative effect of
acounting changes.................................. $ .39 $ 2.70
====== ======
Net income.......................................... $ 4 $ 22 $ 216
====== ====== ======
Net income per share................................ $ .06 $ .27 $ 2.70
====== ====== ======
Accumulated deficit at beginning of year.............. $ (244) $ (116) $ (200)
Net income.......................................... 26 16 222
Cash dividends...................................... (108) (144) (140)
Other............................................... -- -- 2
------ ------ ------
Accumulated deficit at end of year.................... $ (326) $ (244) $ (116)
====== ====== ======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1993 1992
------ ------
ASSETS MILLIONS OF
------ DOLLARS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 40 $ 108
Restricted cash (Note 3)..................................... 73 --
Short-term investments....................................... 6 13
Accounts receivable:
Trade...................................................... 179 227
Related parties............................................ 25 26
Inventories.................................................. 191 180
Prepaid expenses and other current assets.................... 9 14
------ ------
Total current assets....................................... 523 568
------ ------
Fixed assets:
Property, plant and equipment................................ 2,545 2,470
Less accumulated depreciation and amortization............... 1,890 1,847
------ ------
655 623
Deferred charges and other assets.............................. 53 24
------ ------
Total assets................................................... $1,231 $1,215
====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable:
Trade...................................................... $ 203 $ 234
Related parties............................................ 4 9
Notes payable................................................ 4 --
Current maturities of long-term debt......................... 8 29
Other accrued liabilities.................................... 80 73
------ ------
Total current liabilities.................................. 299 345
------ ------
Long-term debt................................................. 717 725
Other liabilities and deferred credits......................... 78 72
Deferred income taxes.......................................... 101 79
Commitments and contingencies (Note 18)
Minority interest.............................................. 124 --
Stockholders' equity (deficit):
Common stock, $1 par value, 250,000,000 shares authorized,
80,000,000
issued and outstanding...................................... 80 80
Additional paid-in capital................................... 158 158
Accumulated deficit.......................................... (326) (244)
------ ------
Total stockholders' deficit................................ (88) (6)
------ ------
Total liabilities and stockholders' deficit.................... $1,231 $1,215
====== ======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER
31
----------------
1993 1992 1991
---- ---- ----
MILLIONS OF
DOLLARS
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 26 $ 16 $222
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of accounting changes, net of tax...... (22) 10 --
Depreciation and amortization............................ 58 39 39
Deferred taxes........................................... 7 2 18
Net change in accounts receivable, inventories and
accounts payable........................................ (11) 54 (1)
Net change in other working capital accounts............. 16 (20) 3
Minority interest........................................ 5 -- --
Other.................................................... 5 7 (11)
---- ---- ----
Net cash provided by operating activities.............. 84 108 270
---- ---- ----
Cash flows from investing activities:
Minority owner contribution................................ 116 -- --
Additions to fixed assets.................................. (69) (97) (43)
Purchases of short-term investments........................ (9) -- (104)
Proceeds from sales of short-term investments.............. 16 88 3
---- ---- ----
Net cash provided by (used in) investing activities.... 54 (9) (144)
---- ---- ----
Cash flows from financing activities:
Proceeds from short-term debt.............................. 16 -- --
Repayments of short-term debt.............................. (12) -- --
Proceeds from long-term debt............................... -- 200 150
Repayments of long-term debt............................... (29) (67) (29)
Repayments of capitalized lease obligations................ -- (186) (28)
Dividends paid............................................. (108) (144) (140)
---- ---- ----
Net cash used in financing activities.................. (133) (197) (47)
---- ---- ----
Increase (decrease) in cash, restricted cash and cash
equivalents................................................. 5 (98) 79
Cash and cash equivalents at beginning of period............. 108 206 127
---- ---- ----
Cash, restricted cash and cash equivalents at end of period.. $113 $108 $206
==== ==== ====
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION OF THE COMPANY AND OPERATIONS
In 1985, Atlantic Richfield Company (ARCO) established the Lyondell
Petrochemical Company as a division of ARCO (Lyondell Division). Lyondell
Petrochemical Corporation, a wholly-owned subsidiary of ARCO, was incorporated
in the state of Delaware in 1985 and subsequently changed its name to Lyondell
Petrochemical Company (Company). Effective July 1, 1988, ARCO transferred
substantially all the assets and liabilities relating to the integrated
petrochemical and petroleum processing business of the Lyondell Division to the
Company. In addition, certain pipeline assets were transferred to the Company.
For financial reporting purposes, the transfer of these assets and liabilities
was recorded at the historical net book value of $127 million as of July 1,
1988.
On January 25, 1989, ARCO completed an initial public offering of 43,000,000
shares of the Company's 80,000,000 shares of common stock owned by ARCO. The
Company received none of the proceeds from the sale. As of December 31, 1993,
ARCO owned 39,921,400 shares, which represents 49.9 percent of the outstanding
common stock.
The Company and LYONDELL-CITGO Refining Company Ltd. (LCR) operate in two
business segments: petrochemicals and refining. The Company generally sells its
petrochemical products to customers for use primarily in the manufacture of
other chemicals and products, which in turn are used in the production of a
wide variety of consumer and end-use products. LCR sells its principal refined
products primarily to CITGO Petroleum Corporation (CITGO) and to a lesser
extent, other marketers of petroleum products. See Note 3.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant transactions
between the entities of the Company have been eliminated from the consolidated
financial statements. Certain amounts from prior years have been reclassified
to conform to current year presentation.
Cash, Cash Equivalents and Short-Term Investments--Cash equivalents consist
of highly liquid debt instruments such as certificates of deposit, commercial
paper and money market accounts purchased with an original maturity date of
three months or less. Short-term investments consist of similar investments
maturing in more than three months from purchase. The Company's policy is to
invest cash in conservative, highly rated instruments and limit the amount of
credit exposure to any one institution. The Company performs periodic
evaluations of the relative credit standing of these financial institutions
which are considered in the Company's investment strategy. Cash equivalents and
short-term investments are stated at cost which approximates market value
because of the short maturity of these instruments.
The Company has no requirements for compensating balances in a specific
amount at a specific point in time. The Company does maintain compensating
balances for some of its banking services and products. Such balances are
maintained on an average basis and are solely at the Company's discretion, so
that effectively on any given date, none of the Company's cash is restricted
with the exception of cash held for use in connection with LCR capital projects
and other expenditures as determined by the LCR owners (see Note 3).
Accounts Receivable--The Company sells its products primarily to companies in
the petrochemical and refining industries. The Company performs ongoing credit
evaluations of its customers' financial condition and in certain circumstances
requires letters of credit from them. The Company's allowance for doubtful
accounts receivable, which is reflected in the consolidated balance sheet as a
reduction in accounts receivable, totaled $2 million at December 31, 1993 and
1992.
F-6
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined on the last-in, first-out (LIFO) basis except for materials and
supplies, which are valued at average cost.
Fixed Assets--Fixed assets are recorded at cost. Depreciation of fixed assets
is computed using the straight-line method over the estimated useful lives of
the related assets as follows:
<TABLE>
<S> <C> <C>
Manufacturing facilities and equipment -- 5 to 30 years
Leased assets and improvements -- 5 to 20 years
</TABLE>
Upon retirement or sale, the Company removes the cost of the assets and the
related accumulated depreciation from the accounts and reflects any resulting
gains or losses in income.
Environmental Remediation Costs--Expenditures related to investigation and
remediation of contaminated sites which include operating facilities and waste
disposal sites, are accrued when it is probable that a liability has been
incurred and the amount of that liability can reasonably be estimated. These
costs are expensed or capitalized in accordance with generally accepted
accounting principles.
Futures Contracts--The Company executes futures contracts primarily to hedge
fluctuations in product prices and feedstock costs. Changes in the market value
of hedging contracts are reported as an adjustment to cost of sales upon
completion of the hedged transaction.
Exchanges--Crude oil and finished product exchange transactions, which are of
a homogeneous nature of commodities in the same line of business, that do not
involve the payment or receipt of cash, are not accounted for as purchases and
sales. Any resulting volumetric exchange balances are accounted for as
inventory in accordance with the normal LIFO valuation policy. Exchanges that
are settled through payment and receipt of cash are accounted for as purchases
and sales.
Income Taxes--Deferred taxes result from temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes
and are calculated, effective in 1992 with the adoption of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes",
based upon cumulative book/tax differences in the balance sheet.
3. FORMATION OF LYONDELL-CITGO REFINING COMPANY LTD.
On July 1, 1993, the Company and CITGO announced the commencement of
operations of LCR, a new entity formed and owned by the Company and CITGO in
order to own and operate the Company's refining business, including the full-
conversion Houston refinery (Refinery). LCR is undertaking a major upgrade
project at the Refinery to enable the facility to process substantial
additional volumes of very heavy crude oil.
LCR is a limited liability company organized under the laws of the state of
Texas. The Company owns its interest in LCR through a wholly-owned subsidiary,
Lyondell Refining Company. CITGO holds its interest through CITGO Refining
Investment Company, a wholly-owned subsidiary of CITGO. CITGO has committed to
reinvest its share of operating cash flow during the upgrade project, while the
Company has unrestricted access to its share of operating cash flow from LCR.
Under the terms of the transaction, CITGO will provide a major portion of the
funds for the upgrade project, as well as certain funds for general refinery
capital projects. Project engineering for the upgrade is currently underway and
at the present time, LCR management anticipates the cost over the next three to
four years to be approximately $800 million.
F-7
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Funding for the upgrade project will occur in three phases. The first phase,
the initial $300 million, will be funded by CITGO. The second phase will be
funded by an LCR borrowing of $200 million. The third phase, which is expected
to occur toward the end of the upgrade project, will be a combination of LCR
borrowing and contributions from CITGO and the Company. Prior to completion of
the upgrade project, the financing costs for the upgrade project loans will be
funded by CITGO. The timing of the third phase and the level of contributions
from the Company and CITGO will be dependent upon the total cost of the upgrade
project. It is currently anticipated that the Company will contribute, in the
form of a subordinated loan, 25 percent of the cost of the upgrade project in
excess of $500 million ($75 million if the cost of the upgrade project equals
$800 million).
On July 1, 1993, the Company contributed its refining assets (including the
lube oil blending and packaging plant in Birmingport, Alabama) and refining
working capital to LCR and retained an approximate 95 percent interest in LCR.
CITGO contributed $50 million for future capital projects of LCR and in
exchange received an approximate five percent interest in LCR. CITGO also made
an additional $50 million contribution for future capital projects of LCR on
December 31, 1993. At December 31, 1993, CITGO had an approximate 10 percent
interest in LCR. In addition to the funding related to the upgrade project
described in the prior paragraph, CITGO has one additional contribution
commitment of $30 million to be made upon completion of the upgrade project and
it has an option to make an additional equity contribution sufficient to
increase its interest to 50 percent.
On July 1, 1993, LCR entered into a long-term crude oil supply agreement with
LAGOVEN, S.A., an affiliate of CITGO. In addition, under the terms of a long-
term product sales agreement, CITGO will purchase a majority of the refined
products produced at the Refinery. Both LAGOVEN and CITGO are subsidiaries of
Petroleos de Venezuela, S.A., the national oil company of Venezuela.
Also effective July 1, 1993, the parties entered into multiple agreements for
feedstock and product sales between LCR and the Company. These agreements
generally are aimed at preserving much of the synergy that previously existed
between the Company's refining and petrochemical businesses. LCR and the
Company also have entered into a tolling agreement, pursuant to which alkylate
and MTBE will be produced at the Channelview Complex for LCR, and various
administrative services agreements.
With respect to liabilities associated with LCR, the Company generally has
retained liability for events that occurred prior to July 1, 1993 and certain
on-going environmental projects at the Refinery. LCR generally is responsible
for liabilities associated with events occurring after June 30, 1993 and on-
going environmental compliance inherent to the operation of the Refinery.
At December 31, 1993, $73 million of cash and $6 million of short-term
investments were restricted for use in connection with LCR capital projects,
including the Refinery upgrade project and other expenditures as determined by
the LCR owners.
4. ACCOUNTING CHANGES
In the first quarter of 1993, effective January 1, 1993, the Company changed
its method of accounting for the cost of repairs and maintenance incurred in
connection with turnarounds of major units at its manufacturing facilities.
Under the new method, turnaround costs exceeding $5 million are deferred and
amortized on a straight-line basis until the next planned turnaround, generally
four to six years. In prior years, all turnaround costs were expensed as
incurred. The Company believes that the new method of accounting is preferable
in that it provides for a better matching of turnaround costs with future
product revenues. The cumulative effect of this accounting change for years
prior to 1993
F-8
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
resulted in a benefit of $33 million ($22 million or $.27 per share after
income taxes), and was included in first quarter income. The change resulted in
$9 million after-tax (or $.11 per share) of additional amortization expenses
during the year ended December 31, 1993.
In the fourth quarter of 1992, the Company adopted, effective January 1,
1992, the provisions of SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", requiring the accrual of postretirement
benefits. The applicable postretirement benefits include medical and life
benefit plans. In prior years, expenses for these plans were recognized on a
pay-as-you-go basis. The change resulted in a decrease of 1992 net income
before cumulative effect of accounting changes of approximately $3 million (or
$.04 per share). The unfavorable effect of this accounting change through
December 31, 1991 amounted to $28 million before taxes or $18 million (or $.22
per share) net of tax and was charged against 1992 income.
In the fourth quarter of 1992, the Company adopted, effective January 1,
1992, the provisions of SFAS No. 109, "Accounting for Income Taxes". The
Statement requires, among other things, a change from the deferred to the
liability method of computing deferred income taxes. The favorable cumulative
effect of this accounting change on years prior to 1992 was an $8 million (or
$.10 per share) reduction in the Company's deferred tax liability and was
included in 1992 income. The favorable effect of the change on 1992 net income,
excluding the cumulative effect upon adoption, was $2 million (or $.02 per
share).
Effective January 1, 1992, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits". The standard requires companies to
accrue the cost of postemployment (prior to retirement) benefits either during
the years that the employee renders the necessary service or at the date of the
event giving rise to the benefit, depending upon whether certain conditions are
met. The effect of adoption did not have a material impact on 1992 net income.
5. RELATED PARTY TRANSACTIONS
Related party transactions with ARCO are summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
MILLIONS OF
DOLLARS
<S> <C> <C> <C>
Costs
Crude oil purchases..................................... $53 $140 $299
Product purchases....................................... 3 9 13
Transportation fees..................................... 27 24 24
Other, net.............................................. 2 2 2
--- ---- ----
Total................................................. $85 $175 $338
=== ==== ====
Sales of crude oil and products........................... $15 $ 33 $171
=== ==== ====
</TABLE>
In addition, sales to an affiliate, ARCO Chemical Company, consisting of
benzene, ethylene, propylene, butylene, methanol and other products and
services, were $263 million, $296 million and $355 million for the years ended
December 31, 1993, 1992 and 1991, respectively.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
MILLIONS OF
DOLLARS
<S> <C> <C> <C>
Cash paid during the year for:
Interest................................................. $76 $77 $72
Income taxes............................................. $ 7 $23 $98
</TABLE>
F-9
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1993, fixed assets included $16 million of non-cash
additions of which $14 million related to accounts payable accruals.
7. INVENTORIES
The categories of inventory and their book values at December 31, 1993 and
1992, were as follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
MILLIONS
OF
DOLLARS
<S> <C> <C>
Crude oil....................................................... $ 68 $ 51
Refined products................................................ 29 26
Petrochemicals.................................................. 57 68
Materials and supplies.......................................... 37 35
---- ----
$191 $180
==== ====
</TABLE>
For the years ended December 31, 1993, 1992 and 1991, the Company reduced
cost of sales by approximately $6 million, $1 million and $6 million,
respectively, associated with the reduction in LIFO inventories. The excess of
the current cost of inventories over book value was approximately $56 million
and $135 million at December 31, 1993 and 1992, respectively.
8. FIXED ASSETS
The components of fixed assets at December 31, 1993 and 1992, were as
follows:
<TABLE>
<CAPTION>
1993 1992
------ ------
MILLIONS OF
DOLLARS
<S> <C> <C>
Manufacturing facilities and equipment..................... $2,516 $2,441
Land....................................................... 26 26
Leased assets and improvements............................. 3 3
------ ------
$2,545 $2,470
====== ======
</TABLE>
9. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets at December 31, 1993 and 1992, was
comprised of the following:
<TABLE>
<CAPTION>
1993 1992
---- ----
MILLIONS
OF
DOLLARS
<S> <C> <C>
Deferred turnaround costs (Note 4).............................. $18 $--
Company owned life insurance.................................... 17 12
Other........................................................... 18 12
--- ---
$53 $24
=== ===
</TABLE>
F-10
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1993 and 1992, were as follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
MILLIONS
OF
DOLLARS
<S> <C> <C>
Income taxes.................................................... $-- $ 5
Accrued taxes other than income................................. 29 26
Accrued interest................................................ 11 11
Accrued payroll................................................. 20 19
Other........................................................... 20 12
--- ---
$80 $73
=== ===
</TABLE>
11. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt at December 31, 1993 and 1992, was comprised of the following:
<TABLE>
<CAPTION>
1993 1992
---- ----
MILLIONS
OF
DOLLARS
<S> <C> <C>
9.95% Notes due in 1996......................................... $150 $150
10.00% Notes due in 1999........................................ 150 150
8.25% Notes due in 1997......................................... 100 100
9.125% Notes due in 2002........................................ 100 100
Medium-Term Notes............................................... 225 254
---- ----
725 754
Less current portion............................................ 8 29
---- ----
Total long-term debt.......................................... $717 $725
==== ====
</TABLE>
Aggregate maturities of long-term debt during the five years subsequent to
December 31, 1993 are as follows: 1994-$8 million; 1995-$10 million; 1996-$150
million; 1997-$112 million; 1998-$32 million.
Effective July 1, 1993, LCR entered into a 364 day unsecured revolving credit
facility with a group of banks with Continental Bank, N.A., as agent. Under
terms of the credit facility, LCR may borrow a maximum of $100 million in the
form of cash or letters of credit with interest based on prime, LIBOR or CD
rates at LCR's option. The credit facility may be extended at the request of
LCR upon consent of the bank group. The credit facility contains covenants that
limit LCR's ability to modify certain significant contracts, dispose of assets
or merge or consolidate with other entities. At December 31, 1993, no amounts
were outstanding under this credit facility.
During December, 1993, the Company finalized a five year, $400 million
unsecured revolving credit facility (Credit Facility) which replaced its
existing $300 million credit facility which was due to expire in July, 1994. In
connection with the Credit Facility, the Company paid administrative,
arrangement and commitment fees totaling $3.2 million. At December 31, 1993, no
amounts were outstanding under the Credit Facility.
Under the terms of the Credit Facility, the interest rate is based on Euro-
Dollar or CD rates, at the Company's option, and also is dependent upon the
Credit Facility utilization rate and the Company's debt ratings. The Credit
Facility contains restrictive covenants regarding the incurrence of additional
debt, the maintenance of certain fixed charge coverage and leverage ratios and
the making of
F-11
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contributions to LCR, as well as the payment of dividends to the extent that
the Company's net income after January 1, 1994 generally does not exceed, over
time, dividends declared or paid after that date.
The Credit Facility's debt incurrence covenant restricts the incurrence by
the Company of additional debt, including debt under the Credit Facility,
unless, immediately after giving effect to the additional borrowing, the ratio
of earnings before depreciation, amortization, interest and income taxes, to
interest expense exceeds the limits set forth in the Credit Facility. However,
the debt incurrence covenant does not become applicable until the debt incurred
by the Company after December 31, 1993 exceeds $75 million.
During March, 1992, the Company completed the placement of $200 million of
Notes consisting of $100 million of 8.25 percent Notes due 1997 and $100
million of 9.125 percent Notes due 2002. A majority of the proceeds was used in
April, 1992 to prepay amounts due under capitalized leases relating to the
olefins plants, which allowed the Company to terminate the leases and acquire
ownership of the plants.
The Company's Medium-Term Notes mature at various dates from 1994 to 2005 and
have a weighted average interest rate at December 31, 1993 and 1992 of 9.85
percent.
The Notes due 1996 and 1999, and the Medium-Term Notes contain provisions
that would allow the holders to require the Company to repurchase the debt upon
the occurrence of certain events together with specified declines in public
ratings on the Notes due 1996 and 1999. Certain events include acquisitions by
persons other than ARCO or the Company of more than 20 percent of the Company's
common stock, any merger or transfer of substantially all of the Company's
assets, in connection with which the Company's common stock is changed into or
exchanged for cash, securities or other property and payment of certain
"special" dividends.
At December 31, 1993, the Company had letters of credit outstanding totaling
$33.8 million.
Based on the borrowing rates currently available to the Company for debt with
terms and average maturities similar to the Company's debt portfolio, the fair
value of long-term debt is $776 million.
12. EARNINGS PER SHARE
Earnings per share were computed based on the weighted average number of
shares outstanding of 80,000,000 for the years ended December 31, 1993, 1992
and 1991.
13. STOCKHOLDERS' EQUITY (DEFICIT)
Dividends--During 1993, the Company paid a regular dividend to stockholders
in the amount of $.45 per share during the first and second quarters and a
regular dividend to stockholders in the amount of $.225 per share during each
of the remaining two quarters. During 1992, the Company paid regular quarterly
dividends of $.45 per share. During 1991, the Company paid a regular dividend
to stockholders in the amount of $.40 per share during the first quarter and
$.45 per share during each of the remaining three quarters.
Return of Capital--During 1993, the Company paid $108 million in dividends.
Total dividends paid during the year exceeded cumulative earnings and profits,
as computed for federal income tax purposes. Subject to final determination by
the Internal Revenue Service, 100 percent of each of the 1993 quarterly
dividend payments was considered a return of capital.
Stock Options--The Company's Executive Long-Term Incentive Plan (LTI Plan),
became effective November 7, 1988. The LTI Plan provides, among other things,
for the granting to officers and other
F-12
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
key management employees of non-qualified stock options for the purchase of up
to 1,295,000 shares of the Company's common stock. The number of options
exercisable each year is equal to 25 percent of the number granted after each
year of continuous service starting one year from the date of grant. The LTI
Plan provides that the option price per share will not be less than 100 percent
of the fair market value of the stock on the effective date of the grant. As of
December 31, 1993, options covering 761,732 shares were outstanding under the
LTI Plan of which 283,056 were exercisable at a weighted average price of
$22.10 per share.
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF AVERAGE
SHARES PER SHARE TOTAL
------- ------------ -----------
<S> <C> <C> <C>
Balance, December 31, 1991............. 373,560 $21.42 $ 8,002,196
Granted.............................. 222,290 23.00 5,112,670
Exercised............................ (12,115) 18.67 (226,205)
Canceled............................. (7,433) 22.84 (169,768)
------- -----------
Balance, December 31, 1992............. 576,302 22.07 $12,718,893
------- -----------
Granted.............................. 259,490 26.00 6,746,740
Exercised............................ (1,808) 21.01 (37,984)
Canceled............................. (72,252) 22.29 (1,610,782)
------- -----------
Balance, December 31, 1993............. 761,732 23.39 $17,816,867
======= ===========
</TABLE>
The Company's Incentive Stock Option Plan (ISO Plan) became effective January
12, 1989. The ISO Plan is a qualified plan which provides for the granting of
stock options for the purchase of up to 550,000 shares of the Company's common
stock. All employees of the Company who are not on the executive payroll are
eligible to participate in the ISO Plan, subject to certain restrictions.
Various restrictions apply as to when and to the number of stock options that
may be exercised during any year. In no event, however, may a stock option be
exercised prior to the first anniversary of the date the stock option was
granted. As of December 31, 1993, options covering 476,665 shares were
outstanding at an average exercise price of $29.35 per share. These options
were held by 2,053 eligible employees. At December 31, 1993, no stock options
were exercisable. The following summarizes stock option activity for the ISO
Plan:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF AVERAGE
SHARES PER SHARE TOTAL
------- ------------ -----------
<S> <C> <C> <C>
Balance, December 31, 1991............. 528,614 $29.06 $15,362,755
Granted.............................. 8,729 30.00 261,870
Exercised............................ (5,614) 19.44 (109,136)
Canceled............................. (27,710) 26.80 (742,649)
------- -----------
Balance, December 31, 1992............. 504,019 29.31 $14,772,840
------- -----------
Granted.............................. -- -- --
Exercised............................ -- -- --
Canceled............................. (27,354) 28.59 (782,034)
------- -----------
Balance, December 31, 1993............. 476,665 29.35 $13,990,806
======= ===========
</TABLE>
F-13
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. LEASES
At December 31, 1993, future minimum rental payments for operating leases
with noncancelable lease terms in excess of one year were as follows:
<TABLE>
<CAPTION>
AMOUNT
-------------------
MILLIONS OF DOLLARS
<S> <C>
1994.................................................. $ 36
1995.................................................. 30
1996.................................................. 22
1997.................................................. 20
1998.................................................. 19
Thereafter............................................ 17
----
Total minimum lease payments........................ $144
====
</TABLE>
Operating lease net rental expenses for 1993, 1992 and 1991 were $43 million,
$35 million and $33 million, respectively.
15. RETIREMENT PLANS
All Lyondell and LCR employees are covered by defined benefit pension plans.
Retirement benefits are based on years of service and the employee's
compensation primarily during the last three years of service. The funding
policy for these plans is to make periodic contributions as required by
applicable regulations. Lyondell and LCR accrue pension costs based on an
actuarial valuation and fund the plans through contributions to separate trust
funds that are kept apart from Lyondell or LCR's funds. Lyondell and LCR also
have unfunded supplemental nonqualified retirement plans which provide pension
benefits for certain employees in excess of the qualified plans' limits.
The following table sets forth the funded status of Lyondell and LCR's
retirement plans and the amounts recognized in the Company's consolidated
balance sheet at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
--------------------- ---------------------
PLANS WITH PLANS WITH PLANS WITH PLANS WITH
ASETS IN ABO IN ASSETS IN ABO IN
EXCESS OF EXCESS OF EXCESS OF EXCESS OF
ABO ASSETS ABO ASSETS
---------- ---------- ---------- ----------
MILLIONS OF DOLLARS
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation........ $53 $21 $46 $ 2
=== === === ===
Accumulated benefit obligation
(ABO)........................... $54 $25 $49 $ 2
=== === === ===
Projected benefit obligation..... $84 $42 $78 $ 4
Plan assets at fair value,
primarily stocks and bonds........ 62 18 69 --
--- --- --- ---
Projected benefit obligation in
excess of plan assets............. (22) (24) (9) (4)
Unrecognized net loss.............. 22 14 10 1
Prior service cost not yet
recognized in pension cost........ (2) 3 (1) --
Remaining unrecognized net asset... (4) -- (5) 1
--- --- --- ---
Net pension liability.............. $(6) $(7) $(5) $(2)
=== === === ===
</TABLE>
F-14
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's net pension cost for 1993, 1992 and 1991 included the following
components:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
MILLIONS OF
DOLLARS
<S> <C> <C> <C>
Service cost--benefits earned during the period......... $ 5 $ 4 $ 4
Interest cost on projected benefit obligations.......... 8 6 5
Actual (gain) loss on plan assets....................... (14) (4) (10)
Net amortization and deferral........................... 7 (2) 5
---- --- ----
Net periodic pension cost............................... $ 6 $ 4 $ 4
==== === ====
</TABLE>
The assumptions used as of December 31, 1993, 1992 and 1991, in determining
the pension costs and pension liability shown above were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
PERCENT
<S> <C> <C> <C>
Discount rate.............................................. 7.25 8.75 8.95
Rate of salary progression................................. 5.00 5.00 5.00
Long-term rate of return on assets......................... 9.50 9.50 9.50
</TABLE>
Lyondell and LCR also maintain voluntary defined contribution Capital
Accumulation and Savings plans for eligible employees. Under provisions of the
plans, Lyondell and LCR contribute an amount equal to 150 percent of employee
contributions up to a maximum Lyondell or LCR contribution of 6 percent of the
employee's base salary for the Capital Accumulation plans and 200 percent of
employee contributions up to a maximum Lyondell or LCR contribution of 2
percent of the employee's base salary for the Savings plans. Lyondell and LCR
contributions to these plans totaled $8 million in 1993, $7 million in 1992 and
$7 million in 1991.
16. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Lyondell and LCR sponsor unfunded defined benefit postretirement plans other
than pensions that cover both salaried and non-salaried employees which provide
medical and life insurance benefits. The postretirement health care plans are
contributory while the life insurance plans are non-contributory. Currently,
Lyondell and LCR pay approximately 80 percent of the cost of the health care
plans, but reserve the right to modify the cost-sharing provisions at any time.
The following table sets forth the plans' separate postretirement benefit
liabilities as of December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
------------ ------------
MEDICAL LIFE MEDICAL LIFE
------- ---- ------- ----
MILLIONS OF DOLLARS
<S> <C> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees..................................... $ (2) $(1) $ (2)
Fully eligible active plan participants...... (5) (1) (3) $(1)
Other active plan participants............... (37) (6) (23) (4)
---- --- ---- ---
(44) (8) (28) (5)
Unrecognized net loss.......................... 12 2 -- --
---- --- ---- ---
Accrued postretirement benefit liability....... $(32) $(6) $(28) $(5)
==== === ==== ===
</TABLE>
F-15
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net periodic postretirement benefit costs for 1993 and 1992 included the
following components:
<TABLE>
<CAPTION>
1993 1992
------------ ------------
MEDICAL LIFE MEDICAL LIFE
------- ---- ------- ----
MILLIONS OF DOLLARS
<S> <C> <C> <C> <C>
Service cost--benefits attributed to service dur-
ing the period.................................. $ 2 $ 2
Interest cost on accumulated postretirement bene-
fit obligation.................................. 3 $ 1 2 $ 1
--- --- --- ---
Net periodic postretirement benefit cost......... $ 5 $ 1 $ 4 $ 1
=== === === ===
</TABLE>
For measurement purposes, the assumed annual rate of increase in the per
capita cost of covered health care benefits was 13 percent for 1993-1996, 9
percent for 1997-2001, and 6 percent thereafter. The health care cost trend
rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit liability as of December 31, 1993 by $10 million and the net periodic
postretirement benefit cost for the year then ended by $1 million.
The accumulated postretirement benefit obligation was calculated utilizing a
weighted-average discount rate of 7.25 percent and 8.75 percent at December 31,
1993 and 1992, respectively, and an average rate of salary progression of 5
percent in each year. Lyondell and LCR's current policy is to fund the
postretirement health care and life insurance plans on a pay-as-you-go basis.
17. INCOME TAXES
Effective January 1, 1992, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by SFAS
No. 109, "Accounting for Income Taxes" (see Note 4). As permitted under the new
standard, prior years' financial statements have not been restated.
During 1993, the Company increased its provision for deferred income taxes by
$3 million due to an increase in the federal corporate income tax rate from 34
percent to 35 percent effective January 1, 1993. Significant components of the
Company's provision for income taxes attributable to continuing operations
follows:
<TABLE>
<CAPTION>
LIABILITY DEFERRED
METHOD METHOD
--------- --------
1993 1992 1991
---- ---- --------
MILLIONS OF
DOLLARS
<S> <C> <C> <C>
Current
Federal.............................................. $ 5 $ 6 $ 89
State................................................ -- 1 10
--- --- ----
Total current...................................... 5 7 99
Deferred
Federal.............................................. 2 4 17
State................................................ 5 (2) 1
--- --- ----
Total deferred..................................... 7 2 18
--- --- ----
$12 $ 9 $117
=== === ====
</TABLE>
F-16
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to the change in accounting methods, the components of the Company's
provision for deferred income taxes for the year ended December 31, 1991 were
as follows (millions of dollars):
<TABLE>
<S> <C>
Depreciation and amortization........................................ $19
Other................................................................ (1)
---
$18
===
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets as of December 31, 1993
and 1992 are as follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
MILLIONS
OF
DOLLARS
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation...................................... $126 $106
Change in accounting method for turnarounds..................... 6 --
LIFO inventory.................................................. 8 3
---- ----
Total deferred tax liabilities................................ 140 109
---- ----
Deferred tax assets:
OPEB obligation................................................. 13 12
Environmental and other long-term liabilities................... 12 10
Alternative minimum tax credit receivable....................... 7 2
Other........................................................... 11 6
---- ----
Total deferred tax assets..................................... 43 30
---- ----
Net deferred tax liabilities................................ $ 97 $ 79
==== ====
</TABLE>
Pretax income from continuing operations for the years ended December 31,
1993, 1992 and 1991 was taxed under domestic jurisdictions only.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to the Company's effective tax
rates follows:
<TABLE>
<CAPTION>
LIABILITY DEFERRED
METHOD METHOD
---------- ---------
DESCRIPTION 1993 1992 1991
----------- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. statutory income tax rates................... 35.0% 34.0% 34.0%
State income taxes, net of federal................ 19.3 (1.5) 2.3
Company owned life insurance...................... 3.8 (2.1) --
Deferred tax liability rate change................ 15.6 -- --
Other, net........................................ (0.6) (3.1) (1.7)
---- ---- ----
Effective income tax rate....................... 73.1% 27.3% 34.6%
==== ==== ====
</TABLE>
18. COMMITMENTS AND CONTINGENCIES
The Company has various purchase commitments for materials, supplies and
services incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market.
F-17
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the transfer of assets and liabilities from ARCO to the
Company, the Company agreed to assume certain liabilities arising out of the
operation of the Company's integrated petrochemical and petroleum processing
business prior to July 1, 1988. In connection with the transfer of such
liabilities, the Company and ARCO entered into an agreement (Cross-Indemnity
Agreement) whereby the Company has agreed to defend and indemnify ARCO against
certain uninsured claims and liabilities which ARCO may incur relating to the
operation of the business of the Company prior to July 1, 1988, including
certain liabilities which may arise out of pending and future lawsuits.
ARCO indemnified the Company under the Cross-Indemnity Agreement with respect
to other claims or liabilities and other matters of litigation not related to
the assets or business included in the consolidated financial statements. ARCO
has also indemnified the Company for all federal taxes which might be assessed
upon audit of the operations of the Company included in the consolidated
financial statements prior to January 12, 1989, and for all state and local
taxes for the period prior to July 1, 1988.
In addition to lawsuits for which the Company has indemnified ARCO, the
Company is also subject to various lawsuits and proceedings. Subject to the
uncertainty inherent in all litigation, management believes the resolution of
these proceedings will not have a material adverse effect upon the Company's
operations.
The Company's policy is to be in compliance with all applicable environmental
laws. The Company is subject to extensive environmental laws and regulations
concerning emissions to the air, discharges to surface and subsurface waters
and the generation, handling, storage, transportation, treatment and disposal
of waste materials. Some of these laws and regulations are subject to varying
and conflicting interpretations. In addition, the Company cannot accurately
predict future developments, such as increasingly strict requirements of
environmental laws, inspection and enforcement policies and compliance costs
therefrom which might affect the handling, manufacture, use, emission or
disposal of products, other materials or hazardous and non-hazardous waste.
Subject to the terms of the Cross-Indemnity Agreement, the Company is
currently contributing funds to the cleanup of two waste sites (French Ltd. and
Brio, both of which are located near Houston, Texas) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) as amended and
the Superfund Amendments and Reauthorization Act of 1986. The Company is also
subject to certain assessment and remedial actions at the Refinery under the
Resource Conservation and Recovery Act (RCRA). In addition, the Company has
negotiated an order with the Texas Water Commission, now the Texas Natural
Resource Conservation Commission (TNRCC), for assessment and remediation of
groundwater and soil contamination at the Refinery.
The Company has accrued $24 million related to future CERCLA, RCRA and TNRCC
assessment and remediation costs, of which $7 million is included in current
liabilities while the remaining amounts are expected to be incurred over the
next three to seven years. However, it is possible that new information about
the sites for which the reserve has been established, or future developments
such as involvement in other CERCLA, RCRA, TNRCC or other comparable state law
investigations could require the Company to reassess its potential exposure
related to environmental matters.
In the opinion of management, any liability arising from these matters will
not have a material adverse effect on the consolidated financial condition of
the Company, although the resolution in any reporting period of one or more of
these matters could have a material impact on the Company's results of
operations for that period.
F-18
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. SEGMENT INFORMATION
As discussed in Note 3, the refining operations of the Company were
contributed to LCR effective July 1, 1993. Prior to July 1, 1993, the
petrochemical and refining operations of the Company were considered to be a
single segment due to the integrated nature of their operations. However, these
operations are now considered to be separate segments due to the formation of
LCR and the related separate management and operations of that entity.
The Petrochemical segment consists of olefins, including ethylene, propylene,
butadiene, butylenes and specialty products; polyolefins, including
polypropylene and low density polyethylene; aromatics produced at the
Channelview Complex, including benzene and toluene; methanol and refinery
blending stocks.
The refining segment is primarily composed of the LCR venture (see Note 3)
and consists of refined petroleum products, including gasoline, heating oil and
jet fuel; aromatics produced at the Refinery, including benzene, toluene,
paraxylene and orthoxylene; lubricants; olefins feedstocks and crude oil
resales. Crude oil resales consist of revenues from the resale of previously
purchased crude oil and from locational exchanges of crude oil that are settled
on a cash basis. Crude oil exchanges and resales facilitate the operation of
the Company's petroleum processing business by allowing the Company to optimize
the crude oil feedstock mix in response to market conditions and refinery
maintenance turnarounds and also to reduce transportation costs. Crude oil
resales amounted to $401 million, $893 million and $1,308 million for years
ended December 31, 1993, 1992 and 1991, respectively.
Consolidated sales to CITGO totaled $864 million in 1993, $282 million in
1992 and $181 million in 1991. No other customer accounted for 10 percent or
more of consolidated sales.
F-19
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summarized below is the segment data for the Company which includes certain
pro forma adjustments necessary to present the petrochemical and refining
operations as individual segments for periods prior to the formation of LCR.
These adjustments relate principally to allocations of costs and expenses
between the two segments and are based on current operating agreements between
the Company and LCR. Intersegment sales between petrochemical and refining
segments include olefins feedstocks produced at the Refinery and gasoline and
fuel oil blending stocks produced at the Channelview Complex and were made at
prices based on current market values.
<TABLE>
<CAPTION>
PETROCHEMICAL REFINING
SEGMENT SEGMENT UNALLOCATED ELIMINATIONS CONSOLIDATED
------------- -------- ----------- ------------ ------------
MILLIONS OF DOLLARS
<S> <C> <C> <C> <C> <C>
1993
Sales and other
operating revenues:
Customers............. $1,326 $2,524 $3,850
Intersegment.......... 180 237 $(417) --
------ ------ ----- ------
1,506 2,761 (417) 3,850
------ ------ ----- ------
Cost of sales........... 1,412 2,632 (417) 3,627
Selling, general and
administrative
expenses............... 37 48 $ 45 -- 130
------ ------ ---- ----- ------
Operating income........ $ 57 $ 81 $(45) $ -- $ 93
====== ====== ==== ===== ======
Depreciation and
amortization expense... $ 44 $ 13 $ 1 $ 58
====== ====== ==== ======
Capital expenditures.... $ 14 $ 54 $ 1 $ 69
====== ====== ==== ======
Identifiable assets..... $ 688 $ 514 $ 68 $ (39) $1,231
====== ====== ==== ===== ======
1992
Sales and other
operating revenues:
Customers............. $1,409 $3,400 $4,809
Intersegment.......... 266 334 $(600) --
------ ------ ----- ------
1,675 3,734 (600) 4,809
------ ------ ----- ------
Cost of sales........... 1,536 3,642 (600) 4,578
Selling, general and
administrative
expenses............... 37 43 $ 47 -- 127
------ ------ ---- ----- ------
Operating income........ $ 102 $ 49 $(47) $ -- $ 104
====== ====== ==== ===== ======
Depreciation and
amortization expense... $ 33 $ 5 $ 1 $ 39
====== ====== ==== ======
Capital expenditures.... $ 43 $ 53 $ 1 $ 97
====== ====== ==== ======
Identifiable assets..... $ 716 $ 346 $153 $1,215
====== ====== ==== ======
1991
Sales and other
operating revenues:
Customers............. $1,666 $4,069 $5,735
Intersegment.......... 293 455 $(748) --
------ ------ ----- ------
1,959 4,524 (748) 5,735
------ ------ ----- ------
Cost of sales........... 1,711 4,247 (748) 5,210
Selling, general and
administrative
expenses............... 35 42 $ 49 -- 126
------ ------ ---- ----- ------
Operating income........ $ 213 $ 235 $(49) $ -- $ 399
====== ====== ==== ===== ======
Depreciation and
amortization expense... $ 34 $ 4 $ 1 $ 39
====== ====== ==== ======
Capital expenditures.... $ 21 $ 21 $ 1 $ 43
====== ====== ==== ======
Identifiable assets..... $ 754 $ 390 $335 $1,479
====== ====== ==== ======
</TABLE>
F-20
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. UNAUDITED QUARTERLY RESULTS
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------
JUNE
MARCH 31 30 SEPTEMBER 30 DECEMBER 31
-------- ------ ------------ -----------
MILLIONS OF DOLLARS EXCEPT PER SHARE
AMOUNTS
<S> <C> <C> <C> <C>
1993(*)
- -------
Sales and other operating revenues. $1,065 $1,080 $ 885 $ 820
Operating income................... 7 5 38 43
Income (loss) before income taxes
and cumulative effect of
accounting changes................ (10) (14) 18 22
Income (loss) before cumulative
effect of accounting changes...... (8) (11) 9 14
Cumulative effect of accounting
changes, net of tax............... 22 -- -- --
Net income (loss).................. 14 (11) 9 14
Earnings (loss) per share before
cumulative effect of accounting
changes........................... (.09) (.14) .12 .17
Earnings (loss) per share.......... .18 (.14) .12 .17
1992(*)
- -------
Sales and other operating revenues. $1,029 $1,221 $1,336 $1,223
Operating income (loss)............ (5) 33 33 43
Income (loss) before income taxes
and cumulative effect of
accounting changes................ (22) 15 17 25
Income (loss) before cumulative
effect of accounting changes...... (14) 10 12 18
Cumulative effect of accounting
changes, net of tax............... (10) -- -- --
Net income (loss).................. (24) 10 12 18
Earnings (loss) per share before
cumulative effect of accounting
changes........................... (.17) .13 .15 .22
Earnings (loss) per share.......... (.29) .13 .15 .22
</TABLE>
- --------
(*) The 1992 quarterly results have been restated to reflect the adoption
during the fourth quarter of 1992, of accounting changes which were
effective January 1, 1992. In addition, the first two quarters of 1993 and
all four quarters of 1992 include certain pro forma adjustments necessary
to present the petrochemical and refining operations as individual segments
for periods prior to the formation of LCR effective July 1, 1993.
F-21
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Stockholders and Board of Directors
of Lyondell Petrochemical Company
We have reviewed the accompanying condensed consolidated balance sheet of
Lyondell Petrochemical Company as of March 31, 1994, and the related condensed
consolidated statements of income and cash flows for the three month periods
ended March 31, 1994 and 1993. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1993, and the
related consolidated statements of income and accumulated deficit, and cash
flows for the year then ended; and in our report dated February 11,1994, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1993, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
Coopers & Lybrand
Houston, Texas
April 25, 1994
F-22
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED MARCH
31,
-------------------
1994 1993
-------- ---------
MILLIONS OF
DOLLARS EXCEPT
PER SHARE AMOUNTS
<S> <C> <C>
SALES AND OTHER OPERATING REVENUES:
Unrelated parties...................................... $ 755 $ 996
Related parties........................................ 69 69
-------- ---------
824 1,065
OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties.................................... 682 963
Related parties...................................... 54 66
Selling, general and administrative expenses........... 34 29
-------- ---------
770 1,058
-------- ---------
Operating income....................................... 54 7
Interest expense......................................... (18) (18)
Interest income.......................................... 1 1
Minority interest in LYONDELL-CITGO Refining Company
Ltd..................................................... (3) --
-------- ---------
Income (loss) before income taxes and cumulative effect
of accounting changes................................. 34 (10)
Income tax provision (benefit)........................... 12 (2)
-------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGES............................................... 22 (8)
Cumulative effect on prior years of accounting changes... -- 22
-------- ---------
NET INCOME............................................. $ 22 $ 14
======== =========
EARNINGS (LOSS) PER SHARE:
Income (loss) before cumulative effect of accounting
changes............................................... $ .27 $ (.09)
Cumulative effect on prior years of accounting changes. -- .27
-------- ---------
Net income............................................. $ .27 $ .18
======== =========
</TABLE>
See notes to consolidated financial statements--unaudited.
F-23
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
--------- ------------
ASSETS
------ MILLIONS OF DOLLARS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 35 $ 40
Restricted cash (Note 3).............................. 46 73
Short-term investments................................ 22 6
Accounts receivable:
Trade............................................... 213 179
Related parties..................................... 26 25
Inventories........................................... 190 191
Prepaid expenses and other current assets............. 12 9
------ ------
Total current assets................................ 544 523
------ ------
Fixed assets:
Property, plant and equipment......................... 2,577 2,545
Less accumulated depreciation and amortization........ 1,901 1,890
------ ------
676 655
Deferred charges and other assets....................... 50 53
------ ------
Total assets............................................ $1,270 $1,231
====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable:
Trade............................................... $ 230 $ 203
Related parties..................................... 3 4
Notes payable......................................... 2 4
Current maturities of long-term debt.................. 5 8
Other accrued liabilities............................. 75 80
------ ------
Total current liabilities........................... 315 299
------ ------
Long-term debt.......................................... 717 717
Other liabilities and deferred credits.................. 83 78
Deferred income taxes................................... 102 101
Commitments and contingencies (Note 6)
Minority interest....................................... 137 124
Stockholders' equity (deficit):
Common stock, $1 par value, 250,000,000 shares autho-
rized, 80,000,000 issued and outstanding............. 80 80
Additional paid-in capital............................ 158 158
Accumulated deficit................................... (322) (326)
------ ------
Total stockholders' deficit......................... (84) (88)
------ ------
Total liabilities and stockholders' deficit............. $1,270 $1,231
====== ======
</TABLE>
See notes to consolidated financial statements--unaudited.
F-24
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
THREE
MONTHS
ENDED
MARCH 31,
----------
1994 1993
---- ----
MILLIONS
OF
DOLLARS
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 22 $ 14
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of accounting changes, net of tax............ -- (22)
Depreciation and amortization.................................. 15 14
Deferred taxes................................................. 3 --
Net change in accounts receivable, inventories and accounts
payable....................................................... (8) 18
Net change in other working capital accounts................... (10) (22)
Minority interest.............................................. 3 --
Other.......................................................... 4 7
---- ----
Net cash provided by operating activities.................... 29 9
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Minority owner contribution...................................... 10 --
Additions to fixed assets........................................ (32) (15)
Purchases of short-term investments.............................. (19) --
Proceeds from sales of short-term investments.................... 3 13
---- ----
Net cash used in investing activities........................ (38) (2)
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt.................................... 15 --
Repayments of short-term debt.................................... (17) --
Repayments of long-term debt..................................... (3) (19)
Dividends paid................................................... (18) (36)
---- ----
Net cash used in financing activities........................ (23) (55)
---- ----
DECREASE IN CASH, RESTRICTED CASH AND CASH EQUIVALENTS............. (32) (48)
Cash, restricted cash and cash equivalents at beginning of period.. 113 108
---- ----
Cash, restricted cash and cash equivalents at end of period........ $ 81 $ 60
==== ====
</TABLE>
See notes to consolidated financial statements--unaudited.
F-25
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED
1. BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal, recurring adjustments considered
necessary for a fair presentation, have been included. For further information,
refer to the consolidated financial statements and notes thereto for the year
ended December 31, 1993 included in the Lyondell Petrochemical Company
(Company) 1993 Annual Report and the Annual Report on Form 10-K pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934. The year-end
condensed balance sheet data was derived from audited financial statements but
does not include all disclosures required by generally accepted accounting
principles. Certain amounts from prior periods have been reclassified to
conform to current period presentation.
2. ACCOUNTING CHANGE
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (Statement). The Company adopted the provisions of
the Statement for investments held as of or acquired after January 1, 1994. In
accordance with the Statement, prior period financial statements have not been
restated to reflect the change in accounting principle. The effect of adopting
the Statement did not have a material impact on income for the three month
period ended March 31, 1994.
In the first quarter of 1993, effective January 1, 1993, the Company changed
its method of accounting for the cost of repairs and maintenance incurred in
connection with turnarounds of major units at its manufacturing facilities.
Under the new method, turnaround costs exceeding $5 million are deferred and
amortized on a straight-line basis until the next planned turnaround, generally
four to six years. In prior years, all turnaround costs were expensed as
incurred. The Company believes that the new method of accounting is preferable
in that it provides for a better matching of turnaround costs with future
product revenues. The cumulative effect of this accounting change for years
prior to 1993 resulted in a benefit of $33 million ($22 million or $.27 per
share after income taxes), and was included in first quarter 1993 income.
3. RESTRICTED CASH
As of March 31, 1994 and December 31, 1993, $46 million and $73 million,
respectively, was restricted for use in connection with LYONDELL-CITGO Refining
Company Ltd. (LCR) capital projects, including the Refinery upgrade project,
and other expenditures as determined by the LCR owners. (See Note 4 for
discussion of additional restricted funds.)
F-26
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED--(CONTINUED)
4. SHORT-TERM INVESTMENTS
As of March 31,1994, the Company held $10 million and $12 million of U.S.
corporate securities and other debt securities, respectively. As of January 1,
1994, the Company held approximately $3 million each of U.S. corporate
securities and other debt securities. As of March 31,1994 and January 1, 1994,
the cost of securities held approximated their estimated fair value and were
classified as available-for-sale.
The Company realized no gains or losses on sales of securities during the
three-month period ended March 31, 1994. All securities held by the Company as
of March 31, 1994 have contractual maturities of less than one year. At March
31, 1994 and December 31, 1993, in addition to restricted cash, all short-term
investments were restricted for use in connection with LCR capital projects,
including the Refinery upgrade project, and other expenditures as determined by
the LCR owners.
5. INVENTORIES
The categories of inventory and their book values at March 31, 1994 and
December 31, 1993 were:
<TABLE>
<CAPTION>
1994 1993
---- ----
MILLIONS
OF
DOLLARS
<S> <C> <C>
Crude oil....................................................... $ 59 $ 68
Refined products................................................ 27 29
Petrochemicals.................................................. 67 57
Materials and supplies.......................................... 37 37
---- ----
$190 $191
==== ====
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company has various purchase commitments for materials, supplies and
services incident to the ordinary conduct of business. In the aggregate, such
commitments are not at prices in excess of current market.
In connection with the transfer of assets and liabilities from ARCO to the
Company, the Company agreed to assume certain liabilities arising out of the
operation of the Company's integrated petrochemical and petroleum processing
business prior to July 1, 1988. In connection with the transfer of such
liabilities, the Company and ARCO entered into an agreement (Cross-Indemnity
Agreement) whereby the Company has agreed to defend and indemnify ARCO against
certain uninsured claims and liabilities which ARCO may incur relating to the
operation of the business of the Company prior to July 1, 1988, including
certain liabilities which may arise out of pending and future lawsuits.
ARCO indemnified the Company under the Cross-Indemnity Agreement with respect
to other claims or liabilities and other matters of litigation not related to
the assets or business included in the consolidated financial statements. ARCO
has also indemnified the Company for all federal taxes which might be assessed
upon audit of the operations of the Company included in the consolidated
financial statements prior to January 12, 1989, and for all state and local
taxes for the period prior to July 1, 1988.
In addition to lawsuits for which the Company has indemnified ARCO, the
Company is also subject to various lawsuits and proceedings. Subject to the
uncertainty inherent in all litigation, management
F-27
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED--(CONTINUED)
believes the resolution of these proceedings will not have a material adverse
effect upon the Company's operations.
The Company's policy is to be in compliance with all applicable environmental
laws. The Company is subject to extensive environmental laws and regulations
concerning emissions to the air, discharges to surface and subsurface waters
and the generation, handling, storage, transportation, treatment and disposal
of waste materials. Some of these laws and regulations are subject to varying
and conflicting interpretations. In addition, the Company cannot accurately
predict future developments, such as increasingly strict requirements of
environmental laws, inspection and enforcement policies and compliance costs
therefrom which might affect the handling, manufacture, use, emission or
disposal of products, other materials or hazardous and non-hazardous waste.
Subject to the terms of the Cross-Indemnity Agreement, the Company is
currently contributing funds to ARCO for the cleanup of two waste sites (French
Ltd. and Brio, both of which are located near Houston, Texas) under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
as amended and the Superfund Amendments and Reauthorization Act of 1986. The
Company is also subject to certain assessment and remedial actions at the
Refinery under the Resource Conservation and Recovery Act (RCRA). In addition,
the Company has negotiated an order with the Texas Natural Resource
Conservation Commission (TNRCC), formerly the Texas Water Commission, for
assessment and remediation of groundwater and soil contamination at the
Refinery.
The Company has accrued $24 million related to future CERCLA, RCRA and TNRCC
assessment and remediation costs, of which $7 million is included in current
liabilities while the remaining amounts are expected to be incurred over the
next three to seven years. However, it is possible that new information about
the sites for which the reserve has been established, or future developments
such as involvement in other CERCLA, RCRA, TNRCC or other comparable state law
investigations could require the Company to reassess its potential exposure
related to environmental matters.
In the opinion of management, any liability arising from these matters will
not have a material adverse effect on the consolidated financial condition of
the Company, although the resolution in any reporting period of one or more of
these matters could have a material impact on the Company's results of
operations for that period.
7. DIVIDENDS
On March 15, 1994, the Company paid a regular quarterly dividend of $0.225
per share to stockholders of record on February 18, 1994. Additionally, on May
4, 1994, the Board of Directors declared a regular quarterly dividend of $0.225
per share of Common Stock payable June 15, 1994 to stockholders of record on
May 20, 1994.
8. EARNINGS PER SHARE
Earnings per share for all periods presented are computed based on the
weighted average number of shares outstanding for the periods, which was
80,000,000 shares.
F-28
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED--(CONTINUED)
9. SEGMENT INFORMATION
Summarized below is the segment data for the Company which includes certain
pro forma adjustments necessary to present the petrochemical and refining
operations as individual segments for periods prior to the commencement of LCR
operations on July 1, 1993. These adjustments relate principally to allocations
of costs and expenses between the two segments and are based on current
agreements between the Company and LCR. The refining segment is primarily
composed of LCR operations. Intersegment sales between petrochemical and
refining segments include olefins feedstocks produced at the Refinery and
gasoline blending stocks produced at the Channelview Complex and were made at
prices that are based on current market values.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1994 1993
------- --------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Sales and other operating revenues:
Petrochemical segment................................. $ 384 $ 390
Refining segment...................................... 535 814
Intersegment sales.................................... (95) (139)
------ --------
$ 824 $ 1,065
====== ========
Cost of sales:
Petrochemical segment................................. $ 335 $ 369
Refining segment...................................... 496 799
Intersegment purchases................................ (95) (139)
------ --------
$ 736 $ 1,029
====== ========
Selling, general and administrative expense:
Petrochemical segment................................. $ 10 $ 9
Refining segment...................................... 13 10
Unallocated........................................... 11 10
------ --------
$ 34 $ 29
====== ========
Operating income:
Petrochemical segment................................. $ 39 $ 12
Refining segment...................................... 26 5
Unallocated........................................... (11) (10)
------ --------
$ 54 $ 7
====== ========
</TABLE>
F-29
<PAGE>
LYONDELL PETROCHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED--(CONTINUED)
Summarized below are intersegment sales for the two segments.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1994 1993
------- --------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Petrochemical segment.................................... $ 44 $ 66
Refining segment......................................... 51 73
------- --------
$95 $139
======= ========
</TABLE>
F-30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN SO AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UN-
LAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Prospectus Summary........................................................ 3
Certain Investment Considerations......................................... 6
Price Range of Common Stock and Dividends................................. 11
Capitalization............................................................ 12
Selected Financial Data................................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 14
Financial Matters......................................................... 24
The Company............................................................... 27
Management................................................................ 46
Relationship with ARCO.................................................... 51
Security Ownership by ARCO................................................ 56
Description of Capital Stock.............................................. 57
Certain United States Federal Tax Consequences for Non-United States
Holders of Common Stock.................................................. 58
Plan of Distribution...................................................... 60
Certain Legal Matters..................................................... 62
Experts................................................................... 62
Financial Information..................................................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
35,000,000 SHARES
LOGO
COMMON STOCK
(PAR VALUE $1.00 PER SHARE)
------------------------
PROSPECTUS
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PAGE WHERE
GRAPHIC DESCRIPTION OF GRAPHIC OR CROSS-REFERENCE
APPEARS
- -------------------------------------------------------------------------------
TX]33 PLANT INTEGRATION CHART
This graph illustrates the integration of the Company's
two petrochemical manufacturing facilities and LCR's
Refinery. It identifies the primary feedstocks and primary
products for each of the three facilities and identifies
(i) the refinery products used as olefins feedstocks; (ii)
the Channelview Complex olefins by-products used at the
Refinery; and (iii) the Channelview Complex olefins
products used as feedstocks for the production of
polyolefins at the Bayport Facility.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 2
Documents Incorporated by Reference........................................ 2
Special Considerations Relating to
Exchangeable Notes........................................................ 3
Atlantic Richfield Company................................................. 4
Use of Proceeds............................................................ 6
Lyondell Petrochemical Company............................................. 6
Relationship Between ARCO and Lyondell..................................... 8
Capitalization (Unaudited)................................................. 9
Selected Financial Data.................................................... 10
Ratio of Earnings to Fixed Charges......................................... 10
Price Range of Lyondell Common Stock and Dividends......................... 11
Description of the Exchangeable Notes...................................... 11
Certain United States Federal Income Tax Considerations.................... 19
Underwriting............................................................... 22
Experts.................................................................... 24
Legal Opinions............................................................. 24
</TABLE>
<TABLE>
<S> <C>
Prospectus Relating to Common Stock of Lyondell Petrochemical
Company............................................................ Appendix A
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
35,000,000 EXCHANGEABLE NOTES
ATLANTIC RICHFIELD COMPANY
% EXCHANGEABLE NOTES
DUE , 1997
---------------
[LOGO OF ARCO]
---------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED JULY 11, 1994
35,000,000 EXCHANGEABLE NOTES
ATLANTIC RICHFIELD COMPANY
[LOGO OF ARCO]
% EXCHANGEABLE NOTES DUE , 1997
(SUBJECT TO EXCHANGE INTO SHARES OF COMMON STOCK, PAR VALUE $1.00 PER SHARE, OF
LYONDELL PETROCHEMICAL COMPANY)
----------
Of the 35,000,000 Exchangeable Notes offered, 5,000,000 Exchangeable Notes
are being offered hereby in an international offering outside the United States
and 30,000,000 Exchangeable Notes are being offered in a concurrent United
States offering. The initial public offering price and the aggregate
underwriting discount per Exchangeable Note will be identical for both
offerings. See "Underwriting."
The principal amount of each of the % Exchangeable Notes due , 1997 of
Atlantic Richfield Company being offered hereby will be $ (the closing
price of the common stock, par value $1.00 per share, of Lyondell Petrochemical
Company on , 1994, as reported on the New York Stock Exchange Composite
Tape) (the "Initial Price"). The Exchangeable Notes will mature on , 1997.
Interest on the Exchangeable Notes, at the rate of % of the principal amount
per annum, is payable quarterly in arrears on , , and ,
beginning , 1994. Exchangeable Notes are not subject to redemption or any
sinking fund prior to maturity.
At maturity (including as a result of acceleration or otherwise), the
principal amount of each Exchangeable Note will be mandatorily exchanged by
ARCO into a number of shares of Lyondell Common Stock (or, at ARCO's option,
cash with an equal value) at the Exchange Rate. The Exchange Rate is equal to,
subject to certain adjustments, (a) if the Maturity Price per share of Lyondell
Common Stock is greater than or equal to $ per share of Lyondell Common
Stock (the "Threshold Appreciation Price"), shares of Lyondell Common Stock
per Exchangeable Note, (b) if the Maturity Price is less than the Threshold
Appreciation Price but is greater than the Initial Price, a fractional share of
Lyondell Common Stock per Exchangeable Note so that the value thereof at the
Maturity Price equals the Initial Price and (c) if the Maturity Price is less
than or equal to the Initial Price, one share of Lyondell Common Stock per
Exchangeable Note. The "Maturity Price" means the average Closing Price per
share of Lyondell Common Stock on the 20 Trading Days immediately prior to
maturity. Accordingly, holders of the Exchangeable Notes will not necessarily
receive an amount equal to the principal amount thereof. The Exchangeable Notes
will be unsecured obligations of ARCO ranking pari passu with all of its other
unsecured and unsubordinated indebtedness. Lyondell will have no obligations
with respect to the Exchangeable Notes. See "Description of the Exchangeable
Notes."
Attached hereto as Appendix A and included as part of this Prospectus is a
prospectus of Lyondell covering the shares of Lyondell Common Stock which may
be received by a holder of Exchangeable Notes at maturity. The Lyondell
prospectus relates to an aggregate of 39,921,400 shares of Lyondell Common
Stock.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSIDER CAREFULLY THE INFORMATION
CONTAINED UNDER "SPECIAL CONSIDERATIONS RELATING TO EXCHANGEABLE NOTES."
For a discussion of certain United States federal income tax consequences for
holders of Exchangeable Notes, see "Certain United States Federal Income Tax
Considerations."
The Lyondell Common Stock is listed on the New York Stock Exchange ("NYSE")
under the symbol LYO.
Application has been made to list the Exchangeable Notes on the NYSE under
the symbol "LYX."
The Exchangeable Notes will be represented by Global Securities registered in
the name of the nominee of The Depository Trust Company, which will act as the
Depository. Interests in the Exchangeable Notes represented by Global
Securities will be shown on, and transfers thereof will be effected only
through, records maintained by the Depository and its direct and indirect
participants. Except as described herein, Exchangeable Notes in definitive form
will not be issued.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL
OFFENSE.
----------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (1) DISCOUNT (2) ARCO (1) (3)
---------- ------------ ------------
<S> <C> <C> <C>
Per Exchangeable Note...................... % % %
Total (4).................................. $ $ $
</TABLE>
- -----
(1) Plus accrued interest, if any, from July , 1994.
(2) ARCO and the Company have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933.
(3) Before deducting expenses payable by ARCO estimated to be $3,500,000.
(4) ARCO has granted the Underwriters an option, exercisable within 30 days
from the date hereof, to purchase up to an additional 4,921,400
Exchangeable Notes at the Price to Public, less Underwriting Discount, for
the purpose of covering over-allotments, if any. If the Underwriters
exercise such option in full, the total Price to Public, Underwriting
Discount, and Proceeds to ARCO will be $ , $ and
$ , respectively. See "Underwriting."
----------
The Exchangeable Notes are offered subject to receipt and acceptance by the
International Underwriters, to prior sale and to the Underwriters' right to
reject any order in whole or in part and to withdraw, cancel or modify the
offer without notice. It is expected that delivery of Global Securities
representing the Exchangeable Notes will be made to The Depository Trust
Company on or about July , 1994.
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL LIMITED
SALOMON BROTHERS INTERNATIONAL LIMITED
----------
The date of this Prospectus is July , 1994.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
AVAILABLE INFORMATION
ARCO is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements, and other information filed by ARCO with the
Commission pursuant to the informational requirements of the Exchange Act can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, Seven World Trade Center, 13th Floor, New York, New York 10048 and
Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be
obtained upon written request addressed to the Securities and Exchange
Commission, Public Reference Section, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Such reports, proxy statements and
other information can also be inspected at the offices of the New York Stock
Exchange, on which one or more of ARCO's securities are listed.
DOCUMENTS INCORPORATED BY REFERENCE
ARCO incorporates herein by this reference the following documents filed
pursuant to the Exchange Act, which also have been filed with the Commission
(File No. 1-1196):
(a) ARCO's Annual Report on Form 10-K for the year ended December 31,
1993;
(b) ARCO's Current Report on Form 8-K dated March 28, 1994; and
(c) ARCO's Report on Form 10-Q for the quarterly period ended March 31,
1994.
All documents filed by ARCO pursuant to Sections 13(a), 13(c), 13(d), 14 and
15(d) of the Exchange Act after the date hereof and prior to the termination of
the offering of the Exchangeable Notes offered hereby (collectively with the
documents referenced above the " '34 Act Reports") shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of
filing of such documents.
ARCO WILL FURNISH WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL
OWNER, TO WHOM THIS PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF
SUCH PERSON, A COPY OF ANY AND ALL OF THE '34 ACT REPORTS INCORPORATED HEREIN
BY REFERENCE (NOT INCLUDING EXHIBITS TO SUCH REPORTS, UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH REPORTS) AND ANY OTHER
DOCUMENTS SPECIFICALLY IDENTIFIED HEREIN AS INCORPORATED BY REFERENCE INTO THE
REGISTRATION STATEMENT TO WHICH THIS PROSPECTUS RELATES, OR INTO ANOTHER '34
ACT REPORT OF ARCO. REQUESTS SHOULD BE ADDRESSED TO: JUNE WORTH, SECURITIES
REGULATION COORDINATOR, ATLANTIC RICHFIELD COMPANY, 515 SOUTH FLOWER STREET,
LOS ANGELES, CALIFORNIA 90071 (TELEPHONE: 213-486-1450).
--------------
ANY STATEMENT CONTAINED IN A DOCUMENT ALL OR A PORTION OF WHICH IS
INCORPORATED OR DEEMED TO BE INCORPORATED BY REFERENCE HEREIN SHALL BE DEEMED
TO BE MODIFIED OR SUPERSEDED FOR PURPOSES OF THIS PROSPECTUS TO THE EXTENT THAT
A STATEMENT CONTAINED HEREIN OR IN ANY OTHER SUBSEQUENTLY FILED DOCUMENT WHICH
ALSO IS OR IS DEEMED TO BE INCORPORATED BY REFERENCE HEREIN MODIFIES OR
SUPERSEDES SUCH STATEMENT. ANY STATEMENT SO MODIFIED SHALL NOT BE DEEMED TO
CONSTITUTE A PART OF THIS PROSPECTUS EXCEPT AS SO MODIFIED, AND ANY STATEMENT
SO SUPERSEDED SHALL NOT BE DEEMED TO CONSTITUTE PART OF THIS PROSPECTUS.
--------------
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY THE EXCHANGEABLE NOTES IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS UNLAWFUL. THERE ARE RESTRICTIONS ON THE OFFER AND SALE OF
THE EXCHANGEABLE NOTES IN THE UNITED KINGDOM. ALL APPLICABLE PROVISIONS OF THE
FINANCIAL SERVICES ACT 1986 AND THE COMPANIES ACT 1985 WITH RESPECT TO ANYTHING
DONE BY ANY PERSON IN RELATION TO THE EXCHANGEABLE NOTES, IN, FROM OR OTHERWISE
INVOLVING THE UNITED KINGDOM MUST BE COMPLIED WITH. SEE "UNDERWRITING."
IN THIS PROSPECTUS, REFERENCE TO "DOLLARS", "U.S.$" AND "$" ARE TO UNITED
STATES DOLLARS.
--------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE EXCHANGEABLE
NOTES AND THE LYONDELL COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
BACKUP WITHHOLDING AND INFORMATION REPORTING
A holder of the Exchangeable Notes may be subject to information reporting
and to backup withholding at a rate of 31 percent of certain amounts paid to
the holder unless such holder provides proof of an applicable exemption or a
correct taxpayer identification number, and otherwise complies with applicable
requirements of the backup withholding rules. Backup withholding is not an
additional tax. Any amounts withheld under the backup withholding rules will
be refunded or credited against such holder's United States federal income tax
liability, provided that required information is furnished to the IRS.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, ARCO has
agreed to sell to each of the International Underwriters named below, and each
of such International Underwriters, for whom Goldman Sachs International,
Merrill Lynch International Limited and Salomon Brothers International Limited
are acting as representatives, has severally agreed to purchase from ARCO, the
respective number of Exchangeable Notes set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
EXCHANGEABLE
UNDERWRITER NOTES
----------- ------------
<S> <C>
Goldman Sachs International..................................
Merrill Lynch International Limited..........................
Salomon Brothers International Limited.......................
---------
Total...................................................... 5,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
International Underwriters are committed to take and pay for all of the
Exchangeable Notes offered hereby, if any are taken.
The International Underwriters propose to offer the Exchangeable Notes in
part directly to the public at the initial public offering price set forth on
the cover page of the ARCO Prospectus, and in part to certain securities
dealers at such price less a concession of $ per Exchangeable Note. The
International Underwriters may allow, and each of such dealers may reallow, a
concession not exceeding $ per Exchangeable Note to certain dealers and
brokers. After the Exchangeable Notes are released for sale to the public, the
offering price and the other selling terms may from time to time be varied by
the representatives.
ARCO has entered into an underwriting agreement (the "U.S. Underwriting
Agreement") with the underwriters of the U.S. Offering (the "U.S.
Underwriters") providing for the concurrent offer and sale of 30,000,000
Exchangeable Notes in an offering in the United States. The initial public
offering price and underwriting discount per Exchangeable Note for the two
offerings are identical. The closing of the offering made hereby is a
condition to the closing of the U.S. Offering, and vice versa. The
representatives of the U.S. Underwriters are Goldman Sachs & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Salomon Brothers Inc.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of
the International Underwriters named herein has agreed that, as a part of the
distribution of the Exchangeable Notes offered hereby and subject to certain
exceptions, it will (i) not, directly or indirectly, offer, sell or deliver
Exchangeable Notes (a) in the United States of America (including the States
and the District of Columbia), its territories, its possessions and other
areas subject to its jurisdiction (the "United States") or to any U.S.
persons,
22
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
which term shall mean, for purposes of this paragraph: (x) any individual who
is a resident of the United States or (y) any corporation, partnership or other
entity organized in or under the laws of the United States or any political
subdivision thereof and whose office most directly involved with the purchase
is located in the United States, or (b) to any person whom it believes intends
to reoffer, resell or deliver the Exchangeable Notes in the United States or to
any U.S. persons, and (ii) cause any dealer to whom it may sell such
Exchangeable Notes at any concession to agree to observe a similar restriction.
Each of the U.S. Underwriters has agreed pursuant to the Agreement Between
that, as a part of the U.S. Offering and subject to certain exceptions, it will
offer, sell or deliver the Exchangeable Notes, directly or indirectly, only in
the United States and to U.S. persons.
Pursuant to the Agreement Between, sales may be made between the
International Underwriters and the U.S. Underwriters of such number of
Exchangeable Notes as may be mutually agreed. The price of any Exchangeable
Notes so sold shall be the initial public offering price, less than an amount
not greater than the selling concession.
ARCO has granted the International Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
750,000 additional Exchangeable Notes to cover over-allotments, if any. If the
International Underwriters exercise their over-allotment option, the
International Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of Exchangeable Notes to be purchased by each of them, as shown in the
foregoing table, bears to the 5,000,000 Exchangeable Notes offered. The
International Underwriters may exercise such option only to cover over-
allotments in connection with the sale of the 5,000,000 Exchangeable Notes
offered. ARCO has granted the U.S. Underwriters an option exercisable for 30
days to purchase up to an aggregate of 4,171,400 additional Exchangeable Notes,
solely to cover over-allotments, at the initial public offering price less the
underwriting discount, as set forth on the cover page of the Prospectus.
ARCO and Lyondell have agreed that during the period beginning from the date
of the ARCO Prospectus and continuing to and including the date 120 days after
the date of the ARCO Prospectus, subject to certain exceptions set forth in the
Underwriting Agreement and the U.S. Underwriting Agreement, they will not
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock of Lyondell or securities convertible into Common Stock of Lyondell
without the prior written consent of the representatives.
The Exchangeable Notes will be a new issue of securities with no established
trading market. The representatives have advised ARCO that they intend to make
a market in the Exchangeable Notes but will not be obligated to do so and may
discontinue any market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for the Exchangeable Notes.
Each International Underwriter has agreed that (i) it has not offered or
sold, and it will not offer or sell, in the United Kingdom, by means of any
document, any Exchangeable Notes other than to persons whose ordinary business
it is to buy or sell shares or debentures, whether as principal or agent, or in
circumstances which do not constitute an offer to the public within the meaning
of the Companies Act 1985 of Great Britain, (ii) it has complied, and will
comply, with all applicable provisions of the Financial Services Act of 1986 of
Great Britain with respect to anything done by it in connection with the
offering of the Exchangeable Notes in, from or otherwise involving the United
Kingdom, and (iii) it will issue or pass on to any person in the United Kingdom
any document in connection with such offering only to a person who is of a kind
described in Article 9(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1988 of Great Britain or is a person to whom
the document may otherwise lawfully be issued or passed on.
ARCO and Lyondell have agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
23
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
EXPERTS
The consolidated financial statements of ARCO, appearing in ARCO's Annual
Report on Form 10-K for the year ended December 31, 1993, have been audited by
Coopers & Lybrand, independent accountants, as set forth in their report
included therein, and are incorporated by reference herein in reliance upon
such report and upon the authority of such Firm as experts in accounting and
auditing.
LEGAL OPINIONS
The legality of the Exchangeable Notes offered hereby will be passed upon for
ARCO by Ronald C. Redcay, Esq., Acting General Counsel of Atlantic Richfield
Company, 515 South Flower Street, Los Angeles, California 90071. As of July 1,
1994, Mr. Redcay's ownership of Common Stock of ARCO constituted less than 1%
of the outstanding Common Stock and consisted of shares or options to purchase
shares held pursuant to ARCO's employee benefit plans. The legality of the
Exchangeable Notes offered hereby will be passed upon for the Underwriters by
Cravath, Swaine & Moore, New York, New York. Cravath, Swaine & Moore provides
legal services to ARCO from time to time and is currently doing so on certain
matters relating to ARCO's investment in Lyondell.
24
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 2
Documents Incorporated by Reference........................................ 2
Special Considerations Relating to
Exchangeable Notes........................................................ 3
Atlantic Richfield Company................................................. 4
Use of Proceeds............................................................ 6
Lyondell Petrochemical Company............................................. 6
Relationship Between ARCO and Lyondell..................................... 8
Capitalization (Unaudited)................................................. 9
Selected Financial Data.................................................... 10
Ratio of Earnings to Fixed Charges......................................... 10
Price Range of Lyondell Common Stock and Dividends......................... 11
Description of the Exchangeable Notes...................................... 11
Certain United States Federal Income Tax Considerations.................... 19
Underwriting............................................................... 22
Experts.................................................................... 24
Legal Opinions............................................................. 24
</TABLE>
<TABLE>
<S> <C>
Prospectus Relating to Common Stock of Lyondell Petrochemical
Company............................................................ Appendix A
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
35,000,000 EXCHANGEABLE NOTES
ATLANTIC RICHFIELD COMPANY
% EXCHANGEABLE NOTES
DUE , 1997
---------------
[LOGO OF ARCO]
---------------
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL LIMITED
SALOMON BROTHERS INTERNATIONAL LIMITED
REPRESENTATIVES OF THE UNDERWRITERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 330,386
NYSE Listing Fee..............................................
NASD Fee...................................................... 30,500
Fees and expenses of the Trustee.............................. 20,000*
Printing and engraving expenses............................... 1,000,000
Accounting fees...............................................
Qualification under state securities laws..................... 25,000
Miscellaneous.................................................
----------
$
==========
</TABLE>
- --------
* Estimated and subject to future contingencies.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 25 of the By-Laws of the Company and to Section
145 of the General Corporation Law of the State of Delaware as set forth below.
Section 25 of the By-Laws of the Company provides:
(a) Right to Indemnification. Each person who was or is a party or is
threatened to be made a party to or is involved or is threatened to be
involved (as a witness or otherwise) in or otherwise requires
representation by counsel in connection with any threatened, pending or
completed action, suit or proceeding, or any inquiry that such person in
good faith believes might lead to the institution of any such action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or
was a director or officer of the Company or is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, and the basis of
such proceeding is alleged action or inaction in an official capacity or in
any other capacity while serving as such a director, officer, employee or
agent, shall be indemnified and held harmless by the Company to the fullest
extent authorized by the General Corporation Law of Delaware, as the same
exists or may hereafter be amended (but, in the case of any such amendment
with reference to events occurring prior to the effective date thereof,
only to the extent that such amendment permits the Company to provide
broader indemnification rights than such law permitted the Company to
provide prior to such amendment), against all costs, charges, expenses,
liabilities and losses (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid in settlement) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a
director or officer (or to serve another entity at the request of the
Company) and shall inure to the benefit of such person's heirs, personal
representatives and estate; provided, however, that, except as provided in
paragraph (b) hereof, the Company shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated
by such person against the Company only if such proceeding (or part
thereof) was authorized prior to its initiation by a majority of the
disinterested members of the Board of Directors of the Company. The rights
to indemnification conferred in this Section shall include the right to be
paid by the Company any expenses incurred in defending any such proceeding
in advance of its final disposition; provided, however, that, if the
General Corporation Law of Delaware requires, payment shall be made to or
on behalf of a person only upon delivery to the Company of an undertaking,
by or on behalf of such person, to repay all amounts so advanced if it
shall ultimately be determined that such person is not entitled to be
indemnified under this Section or otherwise. The rights to indemnification
conferred in this Section shall be deemed to be
II-1
<PAGE>
a contract between the Company and each person who serves in the capacities
described above at any time while this Section is in effect. Any repeal or
modification of this Section shall not in any way diminish any rights to
indemnification of such person or the obligations of the Company arising
hereunder.
(b) Right of claimant to appeal and to bring suit. If a claim under
paragraph (a) of this Section is not paid in full by the Company within
thirty days after a written claim has been received by the Company, the
claimant may submit a written appeal to the Chairman of the Board. If the
claim is not paid in full by the Company within thirty days after a written
appeal has been received by the Chairman of the Board, the claimant at any
time thereafter may bring suit against the Company to recover the unpaid
amount of the claim. If successful in whole or in part, the claimant shall
be entitled to be paid also the expense of prosecuting or defending such
claim. In any action brought by the claimant to enforce a right to
indemnification hereunder or by the Company to recover payments by the
Company for expenses incurred by a claimant in a proceeding in advance of
its final dispostion, the burden of proving that the claimant is not
entitled to be indemnified under this Section or otherwise shall be on the
Company. Neither the failure of the Company (including its Board of
Directors or independent legal cousel) to have made a determination prior
to the commencement of such action that indemnification of the claimant is
proper in the circumstances because the claimant has met the applicable
standard of conduct set forth in the General Corporation Law of Delaware,
nor an actual determination by the Company (including its Board of
Directors or independent legal counsel) that the claimant has not met such
applicable standard of conduct, shall create a presumption that the
claimant has not met the applicable standard of conduct or, in the case of
such action brought by the claimant, be a defense to the action.
(c) Non-exclusivity of rights. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Section shall not be exclusive of any
other right which any person may have or hereafter acquire under any
statute, the Company's Certificate of Incorporation, any By-Law, any
agreement, a vote of Company stockholders or of disinterested Company
directors or otherwise, both as to action in that person's official
capacity and as to action in any other capacity by holding such office, and
shall continue after the person ceases to serve the Company as a director
or officer or to serve another entity at the request of the Company.
(d) Insurance. The Company may maintain insurance, at its expense, to
protect itself and any director or officer of the Company or another
corporation, partnership, joint venture, trust or other enterprise against
any expense, liability or loss, whether or not the Company would have the
power to indemnify such persons against such expense, liability or loss
under the General Corporation Law of Delaware.
(e) Indemnity agreements. The Company may from time to time enter into
indemnity agreements with the persons who are members of its Board of
Directors and with such officers or other persons as the Board may
designate, such indemnity agreements to provide in substance that the
Company will indemnify such persons to the fullest extent of the provisions
of this Section 25.
(f) Indemnification of employees and agents of the Company. The Company
may, under procedures authorized from time to time by the Board of
Directors, grant rights to indemnification, and to be paid by the Company
the expenses incurred in defending any proceeding in advance of its final
disposition, to any employee or agent of the Company to the fullest extent
of the provisions of this Section 25.
Section 145 of the General Corporation Law of the State of Delaware provides:
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation)
by reason
II-2
<PAGE>
of the fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made
(1) by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2)
if such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation as authorized in this section. Such expenses
(including attorneys' fees) incurred by other employees and agents may be
so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those
II-3
<PAGE>
seeking indemnification or advancement of expenses may be entitled under
any by-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising
out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers,
and employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is or was
serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit
plan; and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee or agent with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
The Company has entered into or will enter into individual indemnity
agreements with each of its present and future directors and officers embodying
the provisions of Section 25 of the By-Laws a form of which indemnity agreement
is included as Exhibit 28.
Pursuant to Section 7 of the Underwriting Agreement, which is Exhibit 1
hereto, the underwriters named therein have agreed to indemnify the Company,
its directors and certain of its officers against certain civil liabilities,
including civil liabilities under the Securities Act of 1933 (the "Act").
The Company carries Directors and Officers Liability Insurance with a limit
of $ million to the extent authorized by the By-Laws of the Company and the
laws of the State of Delaware.
II-4
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<S> <C>
1.1 Form of U.S. Underwriting Agreement*
1.2 Form of International Underwriting Agreement**
3 Restated Certificate of Incorporation of Atlantic Richfield Company as of
June 27, 1994.**
4.1 Form of proposed Exchangeable Notes.*
4.2(a) Indenture, dated as of January 1, 1992, between ARCO and The Bank of New
York, Trustee, relating to the securities being registered, filed as Ex-
hibit 4.3, to ARCO's Registration Statement on Form S-3 (No. 33-44925),
filed with the Commission on January 6, 1992, and incorporated herein by
reference.
4.2(b) First Supplemental Indenture, dated as of May 1, 1994, between ARCO and
The Bank of New York, as Trustee.*
5.1 Opinion with consent of Francis X. McCormack, Esq., General Counsel of
ARCO.*
5.2 Opinion with consent of Ronald C. Redcay, Esq., Acting General Counsel of
ARCO.***
10 Form of Registration Rights Agreement between ARCO and Lyondell.*
12 Statement of computation of ratio of earnings to fixed charges.*
23.1 Consent of Francis X. McCormack, Esq., General Counsel of ARCO (included
in Exhibit 5.1).*
23.2 Consent of Coopers & Lybrand.*
23.3 Consent of Ronald C. Recay, Esq., Acting General Counsel of ARCO (included
in Exhibit 5.2).***
25 Statement of eligibility of The Bank of New York, as Trustee.*
28 Form of Indemnity Agreement adopted by the Board of Directors on January
26, 1987 and executed in February 1987 by ARCO and each of its directors
and officers--filed as Exhibit A to ARCO's 1987 Proxy Statement (File No.
1-1196), and incorporated herein by reference.
</TABLE>
- --------
* Filed on May 5, 1994.
** Filed on July 11, 1994.
*** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
A. Undertaking Pursuant to Rule 415.
The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
Provided, however, that paragraphs A(1)(i) and A(1)(ii) do not apply if the
Registration Statement is on Form S-3 and Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed by the Company pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act") that are incorporated by reference in the Registration Statement.
II-5
<PAGE>
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
B. Undertaking Regarding Filings Incorporating Subsequent Exchange Act
Documents by Reference.
The Company hereby undertakes that, for purposes of determining any liability
under the Act, each filing of the Company's annual report pursuant to Section
13(a) or Section 15(d) of the Exchange Act (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the Registration Statement
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
C. Undertaking in Respect of Indemnification.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described and the documents referenced under Item 15
above, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
D. Undertaking Pursuant to Rule 430A.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on the 11th
day of July, 1994.
ATLANTIC RICHFIELD COMPANY
/s/ Mike R. Bowlin*
By___________________________________
Mike R. Bowlin
Chief Executive Officer,
President and Chief Operating
Officer
----------------
Pursuant to the requirements of the Securities Act of 1933, this amendment to
the registration statement has been signed below by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Mike R. Bowlin* Chief Executive Officer
- ------------------------------------ President, Chief Operating
Mike R. Bowlin Officer and Director
Principal executive officer
/s/ Lodwrick M. Cook* Chairman of the Board
- ------------------------------------ and Director
Lodwrick M. Cook
/s/ Ronald J. Arnault* Executive Vice President, July 11, 1994
- ----------------------------------- Chief Financial Officer
Ronald J. Arnault and Director
Principal financial officer
/s/ James A. Middleton* Executive Vice President
- ------------------------------------ and Director
James A. Middleton
/s/ William E. Wade, Jr.* Executive Vice President
- ----------------------------------- and Director
William E. Wade, Jr.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Frank D. Boren* Director
- ------------------------------------
Frank D. Boren
/s/ Richard H. Deihl* Director
- ------------------------------------
Richard H. Deihl
/s/ John Gavin* Director
- ------------------------------------
John Gavin
Director
- ------------------------------------
Hanna H. Gray
/s/ Philip M. Hawley* Director
- ------------------------------------
Philip M. Hawley
/s/ William F. Kieschnick* Director
- ------------------------------------
William F. Kieschnick
/s/ Kent Kresa* Director
- ------------------------------------
Kent Kresa July 11, 1994
/s/ David T. McLaughlin* Director
- ------------------------------------
David T. McLaughlin
/s/ John B. Slaughter* Director
- ------------------------------------
John B. Slaughter
/s/ Hicks B. Waldron* Director
- ------------------------------------
Hicks B. Waldron
/s/ Henry Wendt* Director
- ------------------------------------
Henry Wendt
/s/ Allan L. Comstock* Vice President
- ------------------------------------ and Controller
Allan L. Comstock
Principal accounting officer
* By: /s/ Terry G. Dallas
- ------------------------------------
Terry G. Dallas
Attorney-in-Fact
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT PAGE WHERE
NO. DESCRIPTION LOCATED
-------- ----------- ------------
<C> <S> <C>
1.1 Form of U.S. Underwriting Agreement*
1.2 Form of International Underwriting Agreement**
3 Restated Certificate of Incorporation of Atlantic Richfield Company as of
June 27, 1994.**
4.1 Form of proposed Exchangeable Notes.*
4.2(a) Indenture, dated as of January 1, 1992, between ARCO and The Bank of New
York, Trustee, relating to the securities being registered, filed as Ex-
hibit 4.3, to ARCO's Registration Statement on Form S-3 (No. 33-44925),
filed with the Commission on January 6, 1992, and incorporated herein by
reference.
4.2(b) First Supplemental Indenture, dated as of May 1, 1994, between ARCO and
The Bank of New York, as Trustee.*
5.1 Opinion with consent of Francis X. McCormack, Esq., General Counsel of
ARCO.*
5.2 Opinion with consent of Ronald C. Redcay, Esq., Acting General Counsel of
ARCO.***
10 Form of Registration Rights Agreement between ARCO and Lyondell.*
12 Statement of computation of ratio of earnings to fixed charges.*
23.1 Consent of Francis X. McCormack, Esq., General Counsel of ARCO (included
in Exhibit 5.1).*
23.2 Consent of Coopers & Lybrand.*
23.3 Consent of Ronald C. Recay, Acting General Counsel of ARCO (included in
Exhibit 5.2).***
25 Statement of eligibility of The Bank of New York, as Trustee.*
28 Form of Indemnity Agreement adopted by the Board of Directors on January
26, 1987 and executed in February 1987 by ARCO and each of its directors
and officers--filed as Exhibit A to ARCO's 1987 Proxy Statement (File No.
1-1196), and incorporated herein by reference.
</TABLE>
- --------
* Filed on May 5, 1994.
** Filed on July 11, 1994.
*** To be filed by amendment.
<PAGE>
EXHIBIT 1.2
ATLANTIC RICHFIELD COMPANY
5,000,000
% EXCHANGEABLE NOTES DUE , 1997
(SUBJECT TO EXCHANGE INTO SHARES OF COMMON STOCK,
PAR VALUE $1.00 PER SHARE, OF LYONDELL PETROCHEMICAL COMPANY)
------------
UNDERWRITING AGREEMENT
(INTERNATIONAL VERSION)
, 1994
Goldman Sachs International
Merrill Lynch International Limited
Salomon Brothers International Limited
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman Sachs International
Peterborough Court
133 Fleet Street
London EC4A 2BB, England.
Ladies and Gentlemen:
Atlantic Richfield Company, a Delaware corporation ("ARCO"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
5,000,000 Exchangeable Notes (the "Firm Notes") and, at the election of the
Underwriters, up to 750,000 additional Exchangeable Notes (the "Optional
Notes") of % Exchangeable Notes due , 1997 of ARCO to be issued under
an Indenture (the "Indenture") dated as of January 1, 1992, between ARCO and
The Bank of New York, as Trustee (the "Trustee"), as supplemented by the First
Supplemental Indenture dated as of May 1, 1994 between ARCO and the Trustee
(collectively, the "Indenture") (the Firm Notes and the Optional Notes which
the Underwriters elect to purchase pursuant to Section 2 hereof being
collectively called the "Notes"). At maturity (including as a result of
acceleration or otherwise), the principal amount of each Note will be
mandatorily exchanged by ARCO into a number of shares of Lyondell Common Stock
(or, at ARCO's option, cash with an equal value) at the rate specified in the
ARCO Prospectus (as defined below).
It is understood and agreed to by all parties that ARCO and Lyondell
Petrochemical Company, a Delaware corporation ("Lyondell"), are concurrently
entering into an agreement, a copy of which is attached hereto (the "U.S.
Underwriting Agreement"), providing for the offering by ARCO of up to a total
of 30,000,000 Exchangeable Notes (the "U.S. Notes") including the overallotment
option thereunder through arrangements with certain underwriters in the United
States (the "U.S. Underwriters"), for whom Goldman, Sachs & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Salomon Brothers Inc are acting as
representatives. Anything herein and therein to the contrary notwithstanding,
the respective closings under this Agreement and the U.S. Underwriting
Agreement are hereby expressly made conditional on one another. The
Underwriters hereunder and the U.S. Underwriters are simultaneously entering
into an Agreement between U.S. and International Underwriting Syndicates (the
"Agreement between Syndicates"), which provides, among other things,
for the transfer of Exchangeable Notes between the two syndicates and for
consultation by the Lead Manager hereunder with Goldman, Sachs & Co. prior to
exercising the rights of the Underwriters under
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<PAGE>
Section 9 hereof. Two forms of prospectus are to be used in connection with the
offering and sale of Exchangeable Notes contemplated by the foregoing, one
relating to the Notes hereunder and the other relating to the U.S. Notes. The
latter form of prospectus will be identical to the former except for certain
substitute pages as included in the registration statement and amendments
thereto as mentioned below. Except as used in Sections 3, 4, 5, 11 and 13
herein, and except as the context may otherwise require, references hereinafter
to the Notes shall include all the Exchangeable Notes which may be sold
pursuant to either this Agreement or the U.S. Underwriting Agreement, and
references herein to any prospectus whether in preliminary or final form, and
whether as amended or supplemented shall include both of the U.S and the
international versions thereof.
In addition, this Agreement incorporates by reference certain provisions from
the U.S. Underwriting Agreement (including the related definitions of terms,
which are also used elsewhere herein) and, for purposes of applying the same,
references (whether in these precise words or their equivalent) in the
incorporated provisions to the "Underwriters" shall be to the Underwriters
hereunder, to the "Notes" shall be to the Notes hereunder as just defined, to
"this Agreement" (meaning therein the U.S. Underwriting Agreement) shall be to
this Agreement (except where this Agreement is already referred to or as the
context may otherwise require) and to the representatives of the Underwriters
or to Goldman, Sachs & Co. shall be to the addressees of this Agreement and to
Goldman Sachs International ("GSI"), and, in general, all such provisions and
defined terms shall be applied mutatis mutandis as if the incorporated
provisions were set forth in full herein having regard to their context in this
Agreement, as opposed to the U.S. Underwriting Agreement.
In connection with the foregoing and pursuant to the registration rights
agreement dated as of the date hereof, between ARCO and Lyondell Petrochemical
Company (the "Registration Rights Agreement"), Lyondell Petrochemical Company,
a Delaware corporation ("Lyondell"), has filed with the Securities and Exchange
Commission (the "Commission") a registration statement with respect to
35,000,000 shares of the common stock of Lyondell, par value $1.00 per share
(the "Lyondell Common Stock"), plus an additional 4,921,400 of shares of
Lyondell Common Stock to the extent the Underwriters exercise their over-
allotment option with respect to the Notes, for sale by ARCO as a selling
stockholder (to the extent ARCO shall so elect to deliver Lyondell Common Stock
to holders of the Notes at maturity thereof pursuant to the terms of the
Notes), which registration statement is referred to in Section 1 of this
Agreement.
1. Lyondell hereby makes with the Underwriters the same representations,
warranties and agreements as are set forth in Section 1 of the U.S.
Underwriting Agreement, which Section is incorporated herein by this reference.
2. ARCO hereby makes with the Underwriters the same representations,
warranties and agreements as are set forth in Section 2 of the U.S.
Underwriting Agreement, which Section is incorporated herein by this reference.
3. Subject to the terms and conditions herein set forth, (a) ARCO agrees to
issue and sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from ARCO, at a purchase price
per Note of $ . . . . . . the number of Firm Notes set forth opposite the name
of such Underwriter in Schedule I hereto and (b) in the event and to the extent
that the Underwriters shall exercise the election to purchase Optional Notes as
provided below, ARCO agrees to issue and sell to each of the Underwriters, and
each of the Underwriters agrees, severally and not jointly, to purchase from
ARCO, at the purchase price per share set forth in clause (a) of this Section
2, that portion of the number of Optional Notes as to which such election shall
have been exercised (to be adjusted by you so as to eliminate fractional
shares) determined by multiplying such number of Optional Notes by a fraction,
the numerator of which is the maximum number of Optional Notes which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of the Optional Notes which all of the Underwriters are entitled to
purchase hereunder.
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<PAGE>
ARCO hereby grants to the Underwriters the right to purchase at their
election up to 750,000 Optional Notes, at the purchase price per share set
forth in the paragraph above, for the sole purpose of covering overallotments
in the sale of the Firm Notes. Any such election to purchase Optional Notes may
be exercised only by written notice from you to ARCO, given within a period of
30 calendar days after the date of this Agreement, setting forth the aggregate
number of Optional Notes to be purchased and the date on which such Optional
Notes are to be delivered, as determined by you but in no event earlier than
the First Time of Delivery (as defined in Section 5 hereof) or, unless you and
ARCO otherwise agree in writing, earlier than two or later than ten business
days after the date of such notice.
4. Upon the authorization by GSI of the release of the Firm Notes, the
several Underwriters propose to offer the Firm Notes for sale upon the terms
and conditions set forth in the ARCO Prospectus and in the forms of Agreement
Among Underwriters (International Version) and Selling Agreement, which have
been previously submitted to ARCO and Lyondell by you. Each Underwriter hereby
makes to and with ARCO and Lyondell the representation and agreements of such
Underwriter as a member of the selling group contained in Sections 3(d) and
3(e) of the form of Selling Agreement.
5. Certificates for the Notes (in definitive form, if applicable) to be
purchased by each Underwriter hereunder, and in such denominations and
registered in such names as GSI may request upon at least seventy-two hours'
prior notice to ARCO, shall be delivered by or on behalf of ARCO to you for the
account of such Underwriter, against payment by such Underwriter or on its
behalf of the purchase price therefor by certified or official bank check or
checks, payable to the order of ARCO in New York Clearing House funds, all at
the office of Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue, New
York, New York 10019. The time and date of such delivery and payment shall be,
with respect to the Firm Notes, 10:00 a.m. New York time, on . . . . . . . . .
, 1994, or at such other time and date as you and ARCO may agree upon in
writing, and, with respect to the Optional Notes, 7:00 a.m., New York time, on
the date specified by you in the written notice given by you of the
Underwriters' election to purchase such Optional Notes, or at such other time
and date as you and ARCO may agree upon in writing. Such time and date for
delivery of the Firm Notes is herein called the "First Time of Delivery," such
time and date for delivery of the Optional Notes, if not the First Time of
Delivery, is herein called the "Second Time of Delivery," and each such time
and date for delivery is herein called a "Time of Delivery." Unless the Notes
are represented by global securities, such certificates will be made available
for checking and packaging at least twenty-four hours prior to each Time of
Delivery at the office of Goldman, Sachs & Co., 85 Broad Street, New York, New
York 10004.
6. Lyondell hereby makes to the Underwriters the same agreements as are set
forth in Section 6 of the U.S. Underwriting Agreement, which Section is
incorporated herein by this reference.
7. ARCO hereby makes to the Underwriters the same agreements as are set forth
in Section 7 of the U.S. Underwriting Agreement, which Section is incorporated
herein by this reference.
8. ARCO, Lyondell and the Underwriters hereby agree with respect to certain
expenses on the same terms as are set forth in Section 8 of the U.S.
Underwriting Agreement, which Section is incorporated herein by this reference.
9. Subject to the provisions of the Agreement between Syndicates, the
obligations of the Underwriters hereunder shall be subject, in their
discretion, at each Time of Delivery, to the condition that all representations
and warranties and other statements of ARCO and Lyondell herein are, at and as
of such Time of Delivery, true and correct, the condition that ARCO and
Lyondell shall have performed all of their obligations hereunder theretofore to
be performed, and additional conditions identical to those set forth in Section
9 of the U.S. Underwriting Agreement, which Section is incorporated herein by
this reference.
3
<PAGE>
10. (a) Lyondell will indemnify and hold harmless each Underwriter against
any losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in(i) any Lyondell Preliminary Prospectus, the Lyondell
Registration Statement or the Lyondell Prospectus, or any amendment or
supplement thereto, or (ii) any ARCO Preliminary Prospectus, the ARCO
Registration Statement or the ARCO Prospectus, or any amendment or supplement
thereto, and made in reliance upon and in conformity with written information
furnished to ARCO by Lyondell expressly for use therein, or arise out of or are
based upon the omission or alleged omission to state in the documents referred
to in clauses (i) and (ii) above a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that Lyondell shall not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in any Lyondell Preliminary
Prospectus, the Lyondell Registration Statement or the Lyondell Prospectus or
any such amendment or supplement in reliance upon and in conformity with
written information furnished to ARCO or Lyondell by any Underwriter through
you expressly for use therein; and provided, further, that Lyondell shall not
be liable to any Underwriter under the indemnity agreement in this subsection
(a) with respect to any Lyondell Preliminary Prospectus to the extent that any
such loss, claim, damage or liability of such Underwriter results from the fact
that such Underwriter sold Notes to a person as to whom it shall be established
that there was not sent or given, at or prior to the written confirmation of
such sale, a copy of the Lyondell Prospectus (excluding documents incorporated
by reference) or of the Lyondell Prospectus as then amended or supplemented
(excluding documents incorporated by reference) in any case where such delivery
is required by the Act if Lyondell has previously furnished copies thereof in
sufficient quantity to such Underwriter and the loss, claim, damage or
liability of such Underwriter results from an untrue statement or omission of a
material fact contained in the Lyondell Preliminary Prospectus which was
identified in writing at such time to such Underwriter and corrected in the
Lyondell Prospectus (excluding documents incorporated by reference) or in the
Lyondell Prospectus as then amended or supplemented (excluding documents
incorporated by reference). Lyondell has agreed to provide the foregoing
indemnity in consideration of receiving the following benefits in respect of
the offering of the Notes by ARCO: (1) the Notes provide a method for the
orderly disposition of ARCO's investment in Lyondell; (2) the Lyondell Common
Stock will have additional liquidity in the market; (3) ARCO has agreed to
refrain from certain actions more fully described in the ARCO Prospectus; and
(4) ARCO has agreed to pay Lyondell's defense costs in the event of litigation
arising out of the offering of the Notes.
(b) ARCO will indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in (i) any ARCO Preliminary Prospectus, the ARCO
Registration Statement or the ARCO Prospectus, or any amendment or supplement
thereto, or (ii) any Lyondell Preliminary Prospectus, the Lyondell Registration
Statement, or the Lyondell Prospectus, or any amendment or supplement thereto,
and made in reliance upon and in conformity with written information furnished
to Lyondell by ARCO expressly for use therein, or arise out of or are based
upon the omission or alleged omission to state in the documents referred to in
clauses (i) and (ii) above a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that ARCO shall not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made
4
<PAGE>
in any ARCO Preliminary Prospectus, the ARCO Registration Statement or the ARCO
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to ARCO or Lyondell by any
Underwriter through you expressly for use therein; and provided, further, that
ARCO shall not be liable to any Underwriter under the indemnity agreement in
this subsection (b) with respect to any ARCO Preliminary Prospectus to the
extent that any such loss, claim, damage or liability of such Underwriter
results from the fact that such Underwriter sold Notes to a person as to whom
it shall be established that there was not sent or given, at or prior to the
written confirmation of such sale, a copy of the ARCO Prospectus (excluding
documents incorporated by reference), as the case may be, or of the ARCO
Prospectus as then amended or supplemented (excluding documents incorporated by
reference), as the case may be, in any case where such delivery is required by
the Act if ARCO has previously furnished copies thereof in sufficient quantity
to such Underwriter and the loss, claim, damage or liability of such
Underwriter results from an untrue statement or omission of a material fact
contained in the ARCO Preliminary Prospectus which was identified in writing at
such time to such Underwriter and corrected in the ARCO Prospectus (excluding
documents incorporated by reference) or in the ARCO Prospectus as then amended
or supplemented (excluding documents incorporated by reference).
(c) ARCO will have joint and several liability with Lyondell in respect of
the indemnification set forth in subsection (a) above; provided, however, that
ARCO shall be obligated to make payment to an indemnified party in respect
thereof only if such indemnified party shall first have made demand for payment
against Lyondell in respect of subsection (a) above and Lyondell shall have
failed to pay all or any portion of such demand by such indemnified party
within 30 days following such demand. In such case, ARCO will, only to the
extent of such non-payment of such demand, be obligated to make payment to such
indemnified party pursuant to the indemnification provisions of subsection (a)
above. In the event ARCO makes any payment to any indemnified party in respect
of the indemnification set forth in this subsection (c), such indemnified party
shall assign to ARCO such of its claims against Lyondell pursuant to the
indemnification provisions set forth in this subsection (c) or in subsection
(a) above as have been discharged by ARCO pursuant to the provisions of this
subsection (c); provided that until the indefeasible payment in full to such
indemnified party of all its claims against Lyondell arising pursuant to this
subsection (c) or subsection (a) above, ARCO shall have no right by way of
subrogation or otherwise as a result of the payment of any sums hereunder. With
respect to any claim against Lyondell assigned or transferred by way of
subrogation to ARCO pursuant to the provisions of this subsection (c), ARCO
shall assume exclusively the character, attributes, properties and rights of
the indemnified party whose claim ARCO shall have paid pursuant to this
subsection (c) and Lyondell shall be entitled to raise in any action or
proceeding brought by ARCO against Lyondell in respect of any such claim
assigned or transferred by way of subrogation to ARCO pursuant to the
provisions of this subsection (c) only such defenses, whether at law or in
equity, which Lyondell would have been entitled to raise against the
indemnified party in an action or proceeding brought at such time by the
indemnified party against Lyondell pursuant to the provisions of subsection (a)
above.
(d) Each Underwriter will indemnify and hold harmless ARCO and Lyondell
against any losses, claims, damages or liabilities to which ARCO or Lyondell
may become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in any ARCO or Lyondell Preliminary Prospectus, the ARCO or Lyondell
Registration Statement or the ARCO or Lyondell Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any ARCO or Lyondell
Preliminary Prospectus, the ARCO or Lyondell Registration Statement or the ARCO
or Lyondell Prospectus or any such amendment or supplement in reliance upon and
in conformity with written information furnished to ARCO or Lyondell by such
Underwriter through you
5
<PAGE>
expressly for use therein; and will reimburse ARCO and Lyondell for any legal
or other expenses reasonably incurred by ARCO or Lyondell in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(e) Promptly after receipt by an indemnified party under subsection (a),
(b), (c) or (d) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
an indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have
to any indemnified party otherwise than under such subsection. In case any
such action shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party
(which shall not, except with the consent of the indemnified party, be counsel
to the indemnifying party), and, after notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable out-of-pocket costs of
investigation. If the indemnifying party is either ARCO or Lyondell, and you
are the indemnified party, ARCO or Lyondell, as the case may be, shall not be
liable for the expenses of more than one separate counsel for you (except for
expenses of local counsel, if necessary), which counsel shall be approved by
you.
(f) If the indemnification provided for in this Section 10 is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a),
(b), (c) or (d) above in respect of any losses, claims, damages or liabilities
(or actions in respect thereof) referred to therein, then each indemnifying
party (provided, that for purposes only of this subsection (f) Lyondell shall
not be deemed to be an indemnifying party and ARCO shall be deemed to be an
indemnifying party in lieu of Lyondell under subsection (a) above) shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by ARCO on the one hand and the Underwriters on the other from the offering of
the Notes. If, however, the allocation provided by the immediately preceding
sentence is not permitted by applicable law or if the indemnified party failed
to give the notice required under subsection (d) above, then each indemnifying
party shall contribute to such amount paid or payable by such indemnified
party in such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of ARCO and Lyondell on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by ARCO on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Notes purchased under this Agreement (before
deducting expenses) received by ARCO bear to the total underwriting discounts
and commissions received by the Underwriters with respect to the Notes
purchased under this Agreement, in each case as set forth in the table on the
cover page of the ARCO Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by ARCO and Lyondell on the one
hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. ARCO and the Underwriters agree that it would not be
just and equitable if contributions pursuant to this subsection (f) were
determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to above in this
subsection (f). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection
6
<PAGE>
(f) shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this subsection (f),
no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Notes underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters' obligations
in this subsection (f) to contribute are several in proportion to their
respective underwriting obligations and not joint.
(g) The obligations of ARCO and Lyondell under this Section 10 shall be in
addition to any liability which ARCO or Lyondell may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations of
the Underwriters under this Section 10 shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon
the same terms and conditions, to each officer and director of ARCO or
Lyondell and to each person, if any, who controls ARCO or Lyondell within the
meaning of the Act.
11. (a) If any Underwriter shall default in its obligation to purchase the
Notes which it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange for you or another party or other parties to
purchase such Notes on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Notes, then ARCO shall be entitled to a further period of thirty-six
hours within which to procure another party or other parties satisfactory to
you to purchase such Notes on such terms. In the event that, within the
respective prescribed periods, you notify ARCO that you have so arranged for
the purchase of such Notes, or ARCO notifies you that it has so arranged for
the purchase of such Notes, you or ARCO shall have the right to postpone such
Time of Delivery for a period of not more than seven days, in order to effect
whatever changes may thereby be made necessary in the ARCO Registration
Statement or the ARCO Prospectus, or in any other documents or arrangements,
and ARCO agrees to file promptly any amendments to the ARCO Registration
Statement or the ARCO Prospectus which in your opinion may thereby be made
necessary. The term "Underwriter" as used in this Agreement shall include any
person substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Notes.
(b) If, after giving effect to any arrangements for the purchase of the
Notes of a defaulting Underwriter or Underwriters by you and ARCO as provided
in subsection (a) above, the aggregate number of such Notes which remains
unpurchased does not exceed one-eleventh of the aggregate number of all the
Notes to be purchased at such Time of Delivery, then ARCO shall have the right
to require each non-defaulting Underwriter to purchase the number of Notes
which such Underwriter agreed to purchase hereunder at such Time of Delivery
and, in addition, to require each non-defaulting Underwriter to purchase its
pro rata share (based on the number of Notes which such Underwriter agreed to
purchase hereunder) of the Notes of such defaulting Underwriter or
Underwriters for which such arrangements have not been made; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Notes of a defaulting Underwriter or Underwriters by you and ARCO as provided
in subsection (a) above, the aggregate number of such Notes which remains
unpurchased exceeds one-eleventh of the aggregate number of all the Notes to
be purchased at such Time of Delivery, or if ARCO shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Notes of a defaulting Underwriter or Underwriters, then this
Agreement (or, with respect to the Second Time of Delivery, the obligations of
the Underwriters to purchase and of ARCO to sell the Optional Notes) shall
7
<PAGE>
thereupon terminate, without liability on the part of any nondefaulting
Underwriter or ARCO, except for the expenses to be borne by ARCO and the
Underwriters as provided in Section 8 hereof and the indemnity and contribution
agreements in Section 10 hereof; but nothing herein shall relieve a defaulting
Underwriter from liability for its default.
12. The respective indemnities, agreements, representations, warranties and
other statements of ARCO, Lyondell and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or ARCO or
Lyondell, or any officer or director or controlling person of ARCO or Lyondell,
and shall survive delivery of and payment for the Notes.
13. If this Agreement shall be terminated pursuant to Section 11 hereof, (a)
ARCO shall not then be under any liability to any Underwriter except as
provided in Section 8 and Section 10 hereof and (b) Lyondell shall not then be
under any liability to any Underwriter except as provided in Section 10 hereof,
but, if for any other reason, any Notes are not delivered by or on behalf of
ARCO as provided herein, ARCO will reimburse the Underwriters through you for
all out-of-pocket expenses approved in writing by you, including fees and
disbursements of counsel, reasonably incurred by the Underwriters in making
preparations for the purchase, sale and delivery of the Notes not so delivered,
but ARCO shall then be under no further liability to any Underwriter in respect
of the Notes not so delivered except as provided in Section 8 and Section 10
hereof.
14. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by GSI on behalf of you as the representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to you as the representatives in care of GSI, at
Peterborough Court, 133 Fleet Street, London EC4A, England, Attention: Equity
Capital Markets, Telex No. 94102165, facsimile transmission no. (071) 774-1550;
and if to ARCO shall be delivered or sent by mail, telex or facsimile
transmission to the address of ARCO set forth in the Registration Statement,
Attention: Secretary; provided, however, that any notice to an Underwriter
pursuant to Section 10(d) hereof shall be delivered or sent by mail, telex or
facsimile transmission to such Underwriter at its address set forth in its
Underwriters' Questionnaire, or telex constituting such Questionnaire, which
address will be supplied to ARCO by GSI upon request. Any such statements,
requests, notices or agreements shall take effect at the time of receipt
thereof.
15. This Agreement shall be binding upon, and inure solely to the benefit of,
the Underwriters, ARCO, Lyondell and, to the extent provided in Sections 10 and
12 hereof, the officers and directors of ARCO or Lyondell and each person who
controls ARCO or Lyondell or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Notes from any Underwriter shall be deemed a successor or assign by
reason merely of such purchase.
16. Time shall be of the essence of this Agreement. As used herein, the term
"business day" shall mean any day when the Commission's office in Washington,
D.C. is open for business.
17. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
18. This Agreement may be executed by any one or more of the parties hereto
in any number of counterparts, each of which shall be deemed to be an original,
but all such counterparts shall together constitute one and the same
instrument.
8
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us three counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement between each of the Underwriters, ARCO and
Lyondell. It is understood that your acceptance of this letter on behalf of
each of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to ARCO for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
Atlantic Richfield Company
By:
-------------------------------
Name:
Title:
Lyondell Petrochemical Company
By:
-------------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman Sachs International
Merrill Lynch International Limited
Salomon Brothers International Limited
By:
-------------------------------
(Goldman Sachs International)
On behalf of each of the Underwriters
9
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
NOTES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM NOTES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- --------------- ------------------
<S> <C> <C>
Goldman Sachs International .................
Merrill Lynch International Limited..........
Salomon Brothers International Limited.......
--------- -------
Total.................................... 5,000,000 750,000
========= =======
</TABLE>
10
<PAGE>
ANNEX I
Pursuant to Section 9(e) of the Underwriting Agreement, the accountants shall
furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to the
Company* and its Subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules audited by them and included in the
Prospectus or the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations thereunder; and, if applicable,
they have made a review in accordance with standards established by the
American Institute of Certified Public Accountants of the unaudited
consolidated interim financial statements, selected financial data, pro
forma financial information and/or condensed financial statements derived
from audited financial statements of the Company for the periods specified
in such letter, as indicated in their reports thereon, copies of which have
been furnished to the representatives of the Underwriters (the
"Representatives");
(iii) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company
for the five most recent fiscal years included in the Prospectus agrees
with the corresponding amounts (after restatements where applicable) in the
audited consolidated financial statements which were included in the
Prospectus;
(iv) On the basis of limited procedures, not constituting an audit in
accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial statements and other information
referred to below, a reading of the latest available interim financial
statements of the Company and its subsidiaries, inspection of the minute
books of the Company and its Subsidiaries since the date of the latest
audited financial statements included in the Prospectus, inquiries of
officials of the Company and its Subsidiaries responsible for financial and
accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
(A) the unaudited interim consolidated statements of income and cash
flows and consolidated balance sheets included in the Prospectus do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder, or any material modifications should be made to
such financial statements for them to be in conformity with generally
accepted accounting principles;
(B) any other unaudited income statement data and balance sheet items
included in the Prospectus do not agree with the corresponding items in
the unaudited interim consolidated financial statements from which such
data and items were derived, and any such unaudited data and items were
not determined on a basis substantially consistent with the basis for
the corresponding amounts in the audited consolidated financial
statements included in the Prospectus;
(C) the unaudited financial statements which were not included in the
Prospectus but from which were derived any unaudited condensed
financial statements referred to in Clause (A) and any unaudited income
statement data and balance sheet items included in the Prospectus and
referred to in Clause (B) were not determined on a basis substantially
consistent with the basis for the audited consolidated financial
statements included in the Prospectus;
- --------
* The "Company" shall mean ARCO or Lyondell, as applicable.
A-1
<PAGE>
(D) any unaudited pro forma condensed financial statements included
in the Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the
published rules and regulations thereunder or the pro forma adjustments
have not been properly applied to the historical amounts in the
compilation of those statements;
(E) as of a specified date not more than five days prior to the date
of such letter, there have been any changes in the common stock or any
increase in the consolidated long-term debt of the Company and its
subsidiaries or changes in other items specified by the
Representatives, in each case as compared with amounts shown in the
latest balance sheet included in the Prospectus, except in each case
for changes which the Prospectus discloses have occurred or may occur
or which are described in such letter; and
(F) for the period from the date of the latest financial statements
included in the Prospectus to the specified date referred to in Clause
(E) there were any decreases in consolidated sales and other operating
revenues (including excise taxes) or in the total or per share amounts
of income before cumulative effect of changes in accounting principle
or of net income or changes in other items specified by the
Representatives, in each case as compared with the comparable period of
the preceding year and with any other period of corresponding length
specified by the Representatives, except in each case for decreases or
increases which the Prospectus discloses have occurred or may occur or
which are described in such letter; and
(v) In addition to the audit referred to in their report(s) included in
the Prospectus and the limited procedures, inspection of minute books,
inquiries and other procedures referred to in paragraphs (iii) and (iv)
above, they have carried out certain specified procedures, not constituting
an audit in accordance with generally accepted auditing standards, with
respect to certain amounts, percentages and financial information specified
by the Representatives, which are derived from the general accounting
records of the Company and its subsidiaries, which appear in the
Registration Statement and the Prospectus and in Exhibit 12 to the
Registration Statement, including the information included or incorporated
in Items 1, 2, 6 and 7 of the Company's Annual Report on Form 10-K,
incorporated in the Registration Statement and the Prospectus, and the
information included in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included or incorporated in
the Company's Quarterly Reports on Form 10-Q, incorporated in the
Registration Statement and the Prospectus, agrees with the accounting
records of the Company and its subsidiaries, excluding any questions of
legal interpretation or, in certain cases, with schedules prepared by the
Company.
A-2
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
ATLANTIC RICHFIELD COMPANY
(Originally incorporated on March 14, 1985
under the name Atlantic Richfield Delaware Corporation)
ARTICLE I
Name and Term of Existence
A. The name of the Company is Atlantic Richfield Company.
B. The term of existence of the Company is perpetual.
ARTICLE II
Address and Registered Agent
The location and post office address of the Company's registered office in
the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the
City of Wilmington, County of New Castle 19801. The name of the registered
agent at such address is The Corporation Trust Company.
ARTICLE III
Description of Business
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
Capital Stock
A. Authorized Shares
The aggregate number of shares of Capital Stock which the Company shall
have authority to issue is six hundred seventy-five million, nine hundred eleven
thousand, eight hundred sixty-five (675,911,865) shares ("Capital Stock"), to be
divided into four classes consisting of:
1. Seventy-five million (75,000,000) shares of Preferred Stock of the par
value of One Cent ($.01) each (hereinafter sometimes called "Preferred Stock"),
1
<PAGE>
2. Seventy-eight thousand, eighty-nine (78,089) shares of $3.00 Preference
Stock of the par value of One Dollar ($1.00) each (hereinafter sometimes called
"$3.00 Preference Stock"),
3. Eight hundred thirty-three thousand, seven hundred seventy-six
(833,776) shares of $2.80 Cumulative Convertible Preference Stock of the par
value of One Dollar ($1.00) each (hereinafter sometimes called "$2.80 Preference
Stock"), and
4. Six hundred million (600,000,000) shares of Common Stock of the par
value of Two Dollars Fifty Cents ($2.50) each (hereinafter sometimes called
"Common Stock").
The following is a description of each class of capital stock and a
statement of the preferences, qualifications, privileges, limitations,
restrictions, and other special or relative rights granted to or imposed upon
the shares of each class:
B. Preferred Stock
The Board of Directors is authorized, subject to any limitations prescribed
by law, to provide for the issuance of the shares of Preferred Stock in series,
and by filing a certificate pursuant to the applicable law of the State of
Delaware, to establish from time to time the number of shares to be included in
each such series, and to fix a designation, powers, preferences, and rights of
the shares of each such series and any qualifications, limitations or
restrictions thereof; provided, however, that the Preferred Stock shall be
subordinate as to dividends and rights upon liquidation, dissolution and winding
up to the $3.00 Preference Stock and the $2.80 Preference Stock. The number of
authorized shares of Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative vote of
the holders of stock of the Company entitled to vote thereon having a majority
of the votes entitled to be cast, without a vote of the holders of the Preferred
Stock, or of any series thereof, unless a vote of any such holders is required
pursuant to the certificate or certificates establishing the series of Preferred
Stock.
C. Preference Stock
1. Issuance of Preference Stock.
The Company is authorized to issue the following two classes of Preference
Stock:
$3.00 Preference Stock
$2.80 Preference Stock
A. The shares of $3.00 Preference Stock may be divided into and issued in
series. Each series shall be so designated as to distinguish the shares thereof
from the shares of all other series. All shares of $3.00 Preference Stock shall
be identical except as to the relative rights and preferences, set forth in this
Certificate. There may be variations between different series, namely, the
amount payable upon shares in the event of liquidation of the Company and the
price or prices at which shares may be redeemed.
2
<PAGE>
The Board of Directors is hereby expressly vested with authority, by
resolution, to divide the $3.00 Preference Stock into series and, within the
limitations prescribed by law and by this Certificate, to fix and determine at
the time of the establishment of any series the relative rights and preferences
of any series so established.
The series of the authorized shares of $3.00 Preference Stock of the
Company designated $3.00 Cumulative Convertible Preference Stock shall consist
of seventy-eight thousand, eighty-nine (78,089) shares; and the shares of said
series shall have, in addition to the rights and preferences granted by law and
by the other provisions of this Certificate, the following relative rights and
preferences:
(i) The amount which, in the event of voluntary or involuntary
liquidation of the Company, shall be payable for shares of said series
prior to any payment to the holders of Common Stock or of any other class
of stock of the Company ranking as to assets subordinate to the $3.00
Preference Stock shall be Eighty Dollars ($80.00) for each share of said
series (in addition to accrued and unpaid dividends).
(ii) The price for each share at which shares may be redeemed at the
option of the Company is Eighty-Two Dollars ($82.00).
B. The authorized shares of $2.80 Preference Stock shall have, in addition
to the rights and preferences granted by law and by the other provisions of this
Certificate, the following rights and preferences:
(i) The amount which, in the event of voluntary or involuntary
liquidation of the Company, shall be payable for said shares prior to any
payment to the holders of Common Stock or any other class of stock of the
Company ranking as to assets subordinate to the $2.80 Preference Stock
shall be Seventy Dollars ($70.00) for each share (in addition to accrued
and unpaid dividends).
(ii) The price for each share at which shares may be redeemed at the
option of the Company is Seventy Dollars ($70.00).
2. Dividends.
The holders of shares of Preference Stock shall be entitled to receive,
when and as declared by the Board of Directors, dividends at the rate of Three
Dollars ($3.00) per share per year for $3.00 Preference Stock and at the rate of
Two Dollars and Eighty Cents ($2.80) per share per year for $2.80 Preference
Stock, and no more, payable quarterly on the twentieth day of each March, June,
September and December. Such dividends shall be cumulative from the quarterly
dividend payment date next preceding the date of issue of each share, unless the
date of issue is a quarterly dividend payment date or a date between the record
date for the determination of holders of Preference Stock entitled to receive a
quarterly dividend and the date of payment of such quarterly dividend, in either
of which events such dividends shall be cumulative from such quarterly dividend
payment date. In case dividends for any quarterly dividend period are not paid
in full, all shares of Preference Stock and all shares of any class or classes
of stock of the Company ranking as to dividends on a parity with the Preference
Stock shall participate ratably in the payment of dividends for such period in
proportion to the full amounts of dividends for such period to which they are
respectively entitled. No dividends shall be paid or set apart for payment or
declared on the Common Stock or on any other class of stock of the Company
ranking as to dividends subordinate to the
3
<PAGE>
Preference Stock (other than dividends payable in Common Stock or in any other
class of stock of the Company ranking as to dividends and assets subordinate to
the Preference Stock or dividends paid or set apart for payment or declared in
order to comply with law or with a governmental or court order or decree), and
no payment shall be made to any sinking fund for any class of stock of the
Company ranking as to dividends or assets on a parity with or subordinate to the
Preference Stock, until dividends payable for all past quarterly dividend
periods on all outstanding shares of Preference Stock have been paid, or
declared and set apart for payment, in full.
3. Liquidation of the Company.
In the event of voluntary or involuntary liquidation of the Company, the
holders of shares of Preference Stock shall be entitled to receive from the
assets of the Company (whether capital or surplus), prior to any payment to the
holders of Common Stock or of any other class of stock of the Company ranking as
to assets subordinate to the Preference Stock, the amount per share which shall
have been fixed and determined with respect to such Preference Stock plus an
amount equal to the accrued and unpaid dividends thereon computed to the date on
which payment thereof is made available, whether or not earned or declared.
After such payments to the holders of shares of Preference Stock, any balance
then remaining shall be paid to the holders of the Common Stock or of any other
class of stock of the Company ranking as to assets subordinate to the Preference
Stock, as they may be entitled. If, upon liquidation of the Company, its assets
are not sufficient to pay in full the amounts so payable to the holders of
shares of Preference Stock, all shares of Preference Stock shall participate
ratably in the distribution of assets in proportion to the full amounts to which
they are respectively entitled.
4. Rank.
The Preferred Stock shall be subordinate with respect to dividends and
rights upon liquidation, dissolution or winding up to the Preference Stock.
5. Conversion Provisions.
(a) Shares of Preference Stock, may, at the option of the holder, be
converted into Common Stock of the Company (as such shares may be constituted on
the conversion date) at the rate of six and eight-tenths (6.8) shares of Common
Stock for each share of $3.00 Preference Stock, and at the rate of two and four-
tenths (2.4) shares of Common Stock for each share of $2.80 Preference Stock,
subject to adjustment as provided herein, provided that, as to any shares of
Preference Stock which shall have been called for redemption, the conversion
right shall terminate at the close of business on the fifth full business day
prior to the date fixed for redemption or at such later time as may be fixed by
the Board of Directors of the Company.
(b) The holder of a share or shares of Preference Stock may exercise the
conversion right as to any share or shares thereof by delivering to the Company
during regular business hours, at the office of any transfer agent of the
Company for the Preference Stock or at such other place as may be designated by
the Company, the certificate or certificates for the shares to be converted,
duly endorsed or assigned in blank or to the Company (if required by it),
accompanied by written notice stating that
4
<PAGE>
the holder elects to convert such shares and stating the name or names (with
address or addresses) in which the certificate or certificates for Common Stock
are to be issued. Conversion shall be deemed to have been effected on the date
when such delivery is made and such date is referred to herein as the
"conversion date." As promptly as practicable thereafter the Company shall issue
and deliver to or upon the written order of such holder, at such office or other
place designated by the Company, a certificate or certificates for the number of
full shares of Common Stock to which the stockholder is entitled and a check,
cash, scrip certificate or other adjustment in respect of any fraction of a
share as provided in subparagraph 5(d) below. The person in whose name the
certificate or certificates for Common Stock are to be issued shall be deemed to
have become a stockholder of record on the conversion date unless the transfer
books of the Company are closed on that date, in which event the stockholder
shall be deemed to have become a stockholder of record on the next succeeding
date on which the transfer books are open, but the conversion rate shall be that
in effect on the conversion date.
(c) No payment or adjustment shall be made for dividends accrued on any
shares of Preference Stock converted or for dividends on any shares of Common
Stock issuable on conversion, but until all dividends accrued and unpaid on such
Preference Stock up to the quarterly dividend payment date next preceding the
conversion date shall have been paid to the holder of the shares of Preference
Stock converted or to his assigns, or declared and set apart for such payment,
in full, no dividends shall be paid or set apart for payment or declared on the
Common Stock or on any other class of stock of the Company ranking as to
dividends subordinate to the Preference Stock (other than dividends payable in
Common Stock or in any other class of stock of the Company ranking as to
dividends and assets subordinate to the Preference Stock or dividends paid or
set apart for payment or declared in order to comply with law or with a
governmental or court order or decree) and no payment shall be made to any
sinking fund for any class of stock of the Company ranking as to dividends or
assets on a parity with or subordinate to the Preference Stock.
(d) The Company shall not be required to issue any fraction of a share
upon conversion of any share or shares of Preference Stock. If more than one
share of Preference Stock shall be surrendered for conversion at one time by the
same holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the total number of shares of
Preference Stock so surrendered. If any fractional interest in a share of Common
Stock would be deliverable upon conversion, the Company shall make an adjustment
therefor in cash unless its Board of Directors shall have determined to adjust
fractional interests by issuance of scrip certificates or in some other manner.
Adjustment in cash shall be made on the basis of the current market value of one
share of Common Stock, which shall be taken to be the last reported sale price
of the Company's Common Stock on the New York Stock Exchange on the last
business day before the conversion date or, if there was no reported sale on
that day, the average of the closing bid and asked quotations on that Exchange
on that day or, if the Common Stock was not then listed on that Exchange, the
average of the lowest bid and the highest asked quotations in the over-the-
counter market on that day.
(e) The issuance of Common Stock on conversion of Preference Stock shall
be without charge to the converting holder of Preference Stock for any tax in
respect of the
5
<PAGE>
issuance thereof, but the Company shall not be required to pay any tax which may
be payable in respect of any transfer involved in the issuance and delivery of
shares in any name other than that of the holder of record on the books of the
Company of the shares of Preference Stock converted, and the Company shall not
be required to issue or deliver any certificate for shares of Common Stock
unless and until the person requesting the issuance thereof shall have paid to
the Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.
(f) The conversion rates provided in subparagraph 5(a) shall be subject to
the following adjustments, which shall be made to the nearest one-hundredth of a
share of Common Stock or, if none, to the next lower one-hundredth:
(i) If the Company shall pay to the holders of its Common Stock a
dividend in shares of Common Stock or in securities convertible into Common
Stock, the conversion rate in effect immediately prior to the record date
fixed for the determination of the holders of Common Stock entitled to such
dividend shall be proportionately increased, effective at the opening of
business on the next following full business day.
(ii) If the Company shall split the outstanding shares of its Common
Stock into a greater number of shares or combine the outstanding shares
into a smaller number, the conversion rate in effect immediately prior to
such action shall be proportionately increased in the case of a split or
decreased in the case of a combination, effective at the opening of
business on the full business day next following the day such action
becomes effective.
(iii) If the Company shall issue to the holders of its Common Stock
rights or warrants to subscribe for or purchase shares of its Common Stock
at a price less than the Current Market Price (as defined below in this
subparagraph) of the Company's Common Stock at the record date fixed for
the determination of the holders of Common Stock entitled to such rights or
warrants, the conversion rate in effect immediately prior to said record
date shall be increased, effective at the opening of business on the next
following full business day, to an amount determined by multiplying such
conversion rate by a fraction the numerator of which is the number of
shares of Common Stock of the Company outstanding immediately prior to said
record date plus the number of additional shares of its Common Stock
offered for subscription or purchase and the denominator of which is said
number of shares outstanding immediately prior to said record date plus the
number of shares of Common Stock of the Company which the aggregate
subscription or purchase price of the total number of shares so offered
would purchase at the Current Market Price of the Company's Common Stock at
said record date. Notwithstanding the preceding sentence, if the
Established Market Price (as defined below in this subparagraph) of the
rights or warrants in the case of a particular issue thereof is less than
Thirty-seven and One-half Cents ($0.375) per right or warrant in the case
of $3.00 Preference Stock or is less than One Dollar ($1.00) per right or
warrant in the case of $2.80 Preference Stock, the increase in the
conversion rate shall be postponed and the amount of such Established
Market Price shall be carried forward and applied as provided in
subparagraph 5(f) (v). As used in this subparagraph 5(f) (iii) the term
"Current Market Price" at said record date shall mean the average of the
daily last reported sale prices per share of the
6
<PAGE>
Company's Common Stock on the New York Stock Exchange during the twenty
(20) consecutive full business days commencing with the thirtieth (30th)
full business day before said record date, provided that if there was no
reported sale on any such day or days there shall be substituted the
average of the closing bid and asked quotations on that Exchange on that
day, and provided further that if the Common Stock was not listed on that
Exchange on any such day or days there shall be substituted the average of
the lowest bid and the highest asked quotations in the over-the-counter
market on that day. As used in this subparagraph 5(f) (iii) the term
"Established Market Price" of the rights or warrants shall mean the average
of the means between the reported high and low sale prices per right or
warrant on the New York Stock Exchange during the first three business days
on which the rights or warrants are traded on that Exchange, provided that
if an over-the-counter market for the rights or warrants is established on
any day before they are traded on that Exchange there shall be substituted
the mean between the lowest bid and the highest asked quotations in the
over-the-counter market on that day.
(iv) If the Company shall distribute to the holders of its Common
Stock any evidences of its indebtedness, or any rights or warrants to
subscribe for any security other than its Common Stock, or any other assets
(excluding dividends and distributions in cash to the extent permitted by
law), the conversion rate in effect immediately prior to the record date
fixed for the determination of the holders of Common Stock entitled to such
distribution shall be increased, effective at the opening of business on
the next following full business day, to an amount determined by
multiplying such conversion rate by a fraction the numerator of which is
the Current Market Price (as defined in subparagraph 5(f) (iii), of the
Company's Common Stock at said record date and the denominator of which is
such Current Market Price less the fair market value (as determined by the
Board of Directors, whose determination, in the absence of fraud, shall be
conclusive) of the amount of evidences of indebtedness, rights, warrants or
other assets (excluding cash dividends and distributions as aforesaid) so
distributed which is applicable to one share of Common Stock.
Notwithstanding the preceding sentence, if such fair market value in the
case of a particular distribution is less than Thirty-seven and One-half
Cents ($0.375) in the case of $3.00 Preference Stock or One Dollar ($1.00)
in the case of $2.80 Preference Stock, the increase in the conversion rate
shall be postponed and the amount of such fair market value shall be
carried forward and applied as provided in subparagraph 5(f)(v).
(v) Whenever the amounts of Established Market Price and the amounts
of fair market value being carried forward as provided in subparagraphs
5(f) (iii) and (iv) plus any similar amount determined in connection with a
particular issue of rights or warrants or a particular distribution
aggregate Thirty-seven and One-half Cents ($0.375) or more in the case of
$3.00 Preference Stock or One Dollar ($1.00) in the case of $2.80
Preference Stock, the conversion rate in effect immediately prior to the
record date fixed for the determination of the holders of Common Stock
entitled to such particular issue or distribution shall be increased,
effective at the opening of business on the next following full business
day, by the aggregate of the increases in the conversion rate which were
postponed as provided in subparagraphs 5(f) (iii) and (iv) plus the
increase resulting from such particular issue or distribution.
7
<PAGE>
(vi) If the Company shall pay to the holders of its Common Stock a
dividend in shares of Common Stock or if it shall split or combine the
outstanding shares of its Common Stock, the amount of Thirty-seven and One-
half Cents ($0.375) in the case of $3.00 Preference Stock and One Dollar
($1.00) in the case of $2.80 Preference Stock referred to in subparagraphs
5(f) (iii), (iv) and (v) (as theretofore decreased or increased) and also
all amounts of Established Market Price and all amounts of fair market
value then being carried forward as provided in subparagraphs 5(f) (iii)
and (iv) (as theretofore decreased or increased) shall forthwith be
proportionately decreased in the case of a stock dividend or split or
increased in the case of a combination, so as to appropriately reflect the
same, and all increases in the conversion rate then being postponed as
provided in subparagraphs 5(f) (iii) and (iv) (as theretofore increased or
decreased) shall forthwith be proportionately increased in the case of a
stock dividend or split or decreased in the case of a combination, so as to
appropriately reflect the same.
No adjustment of the conversion rate provided in subparagraph 5(a) shall be
made by reason of the issuance of Common Stock for cash except as provided in
subparagraph 5(f) (iii), or by reason of the issuance of Common Stock for
property or services. Whenever the conversion rate is adjusted pursuant to this
subparagraph 5(f) the Company shall (i) promptly place on file at the office of
each of its transfer agents for Preference Stock a statement signed by the
Chairman of the Board, the President or a Vice President of the Company and by
its Treasurer or an Assistant Treasurer or Secretary showing in detail the facts
requiring such adjustment and the conversion rate after such adjustment, and
shall make such statement available for inspection by shareholders of the
Company and (ii) cause a notice to be published at least once in a newspaper
printed in the English language and of general circulation in the Borough of
Manhattan, the City of New York, New York, stating that such adjustment has been
made and the adjusted conversion rate.
(g) In case of any reclassification or change of the outstanding shares of
Common Stock of the Company (except a split or combination of shares) or in case
of any consolidation or merger to which the Company is a party (except a merger
in which the Company is the surviving corporation and which does not result in
any reclassification of or change in the outstanding Common Stock of the Company
except a split or combination of shares) or in case of any sale or conveyance to
another corporation of all or substantially all of the property of the Company,
effective provision shall be made by the Company or by the successor or
purchasing corporation
(i) that the holder of each share of Preference Stock then
outstanding shall thereafter have the right to convert such share into the
kind and amount of stock and other securities and property receivable upon
such reclassification, change, consolidation, merger, sale or conveyance by
a holder of the number of shares of Common Stock of the Company into which
such share of Preference Stock might have been converted immediately prior
thereto, and
(ii) that there shall be subsequent adjustments of the conversion
rate which shall be equivalent, as nearly as practicable, to the
adjustments provided for in subparagraph 5(f) above.
The provisions of this subparagraph 5(g) shall similarly apply to
successive reclassifications, changes, consolidations, mergers, sales or
conveyances.
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(h) Shares of Common Stock issued on conversion of shares of
Preference Stock shall be issued as fully paid shares and shall be non-
assessable by the Company. The Company shall at all times reserve and keep
available, free from preemptive rights, for the purpose of effecting the
conversion of Preference Stock, such number of its duly authorized shares
of Common Stock as shall be sufficient to effect the conversion of all
outstanding shares of Preference Stock.
(i) Shares of Preference Stock converted as provided herein shall not
be reissued.
6. Redemption and Acquisition.
The Company, at its option to be exercised by its Board of Directors, may
redeem the whole or any part of the Preference Stock or of any class thereof or
of any series thereof at any time at the applicable price for each share which
shall have been fixed and determined with respect thereto, plus an amount equal
to the accrued and unpaid dividends thereon computed to the date fixed for
redemption, whether or not earned or declared (hereinafter collectively called
the "redemption price"). If at any time less than all of the $3.00 Preference
Stock then outstanding is to be called for redemption, the Board may select one
or more series of $3.00 Preference Stock to be redeemed and if less than all of
the outstanding $3.00 Preference Stock of any series is to be called for
redemption, the shares to be redeemed may be selected by lot or by such other
equitable method as the Board in its discretion may determine. If at any time
less than all of the $2.80 Preference Stock then outstanding is to be called for
redemption, the shares to be redeemed may be selected by lot or by such other
equitable method as the Board in its discretion may determine. The Board may
determine that all shares of Preference Stock or all shares of either class of
Preference Stock or all shares of any series of $3.00 Preference Stock shall be
redeemed pro rata. Notice of every redemption, stating the redemption date, the
redemption price, and the place of payment thereof, and, if less than all of
either class of the Preference Stock then outstanding is called for redemption,
identifying the shares of such class of Preference Stock to be redeemed, shall
be published at least twice in a newspaper printed in the English language and
of general circulation in the Borough of Manhattan, the City of New York, New
York, the first publication to be not less than thirty (30) nor more than sixty
(60) days prior to the date fixed for redemption. Successive publications may be
made in the same or in a different newspaper or newspapers meeting the foregoing
requirements. Copies of such notice shall be mailed at least thirty (30) days
and not more than sixty (60) days prior to the date fixed for redemption to the
holders of record of the shares of Preference Stock to be redeemed at their
addresses as the same shall appear on the books of the Company, but failure to
give such additional notice by mail or any defect therein or failure of any
addressee to receive it shall not affect the validity of the proceedings for
redemption. The Company, upon publication of the first notice of redemption as
aforesaid or upon irrevocably authorizing the bank or trust company hereinafter
mentioned to publish or to complete publication of such notice as aforesaid, may
deposit or cause to be deposited in trust with a bank or trust company in the
City of New York, New York, an amount equal to the redemption price of the
shares to be redeemed, which amount shall be payable to the holders of the
shares to be redeemed upon surrender of certificates therefor on or after the
date fixed for redemption or prior thereto if so directed by the Board of
Directors of the Company. Upon such deposit, or if no such deposit is made then
from and after the date fixed for redemption unless the
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Company shall default in making payment of the redemption price upon surrender
of certificates as aforesaid, the shares called for redemption or a pro rata
part of each share in cases of redemption pro rata shall cease to be outstanding
and the holders thereof shall cease to be stockholders with respect to such
shares or pro rata parts and shall have no interest in or claim against the
Company with respect to such shares or pro rata parts other than the right to
receive the redemption price from such bank or trust company or from the
Company, as the case may be, without interest thereon, upon surrender of
certificates as aforesaid; provided that conversion rights of shares called for
redemption shall terminate at the close of business on the fifth full business
day prior to the date fixed for redemption or at such later time as may be fixed
by the Board of Directors of the Company. Any funds so deposited which shall not
be required for such redemption because of the exercise of conversion rights
subsequent to the date of such deposit shall be returned to the Company. In case
any holder of shares of Preference Stock which have been called for redemption
shall not, within six (6) years after the date of such deposit, have claimed the
amount deposited with respect to the redemption thereof, such bank or trust
company, upon demand, shall pay over to the Company such unclaimed amount and
shall thereupon be relieved of all responsibility in respect thereof to such
holder, and thereafter such holder shall look only to the Company for payment
thereof. Any interest which may accrue on funds so deposited shall be paid to
the Company from time to time.
The Company shall, subject to applicable law, have the right to acquire
Preference Stock from time to time at such price or prices as the Company may
determine, provided that unless dividends payable for all past quarterly
dividend periods on all outstanding shares of Preference Stock have been paid,
or declared and set apart for payment, in full, the Company shall not acquire
for value any shares of Preference Stock except in accordance with an offer
(which may vary as to terms offered with respect to shares of different series
but not with respect to shares of the same series) made in writing or by
publication (as determined by the Board of Directors) to all holders of record
of shares of Preference Stock.
Preference Stock redeemed by the Company shall not be reissued and the
appropriate officers of the Company shall take appropriate action from time to
time to certify reductions in the number of shares of Preference Stock which the
Company is authorized to issue. Preference Stock acquired otherwise than upon
redemption or conversion shall not be cancelled or retired except by action of
the Board of Directors and shall have the status of treasury stock which may be
reissued by the Board until cancelled and retired by action of the Board.
7. Action by Company Requiring Approval of Preference Stock.
The Company shall not, without the affirmative vote at a meeting of the
holders of at least two-thirds of the then outstanding $3.00 Preference Stock or
of at least two-thirds of the then outstanding $2.80 Preference Stock:
(a) change the preferences, qualifications, privileges, limitations,
restrictions, or other special or relative rights granted to or imposed
upon the shares of such class of Preference Stock in any material respect
adverse to the holders thereof, provided that if any such change will
affect any particular class or series of a class materially and adversely
as contrasted with the effect thereof upon any other class
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or series of a class, no such change may be made without, in addition, such
vote of the holders of at least two-thirds of the then outstanding shares
of the particular class or series of a class which would be so affected; or
(b) create or increase the authorized number of shares of any class
of stock ranking as to dividends or assets prior to the class of Preference
Stock;
and the Company shall not, without the affirmative vote at a meeting of the
holders of at least a majority of the then outstanding $3.00 Preference Stock of
all series and of at least a majority of the then outstanding $2.80 Preference
Stock;
(c) create any class of stock ranking as to dividends or assets on a
parity with the Preference Stock or increase the authorized number of
shares of the Preference Stock or of any class of stock ranking as to
dividends or assets on a parity with it; or
(d) sell, lease or convey (which terms shall not include a mortgage)
all or substantially all of the property or business of the Company; or
(e) become a party to a merger or consolidation unless the surviving
or resulting corporation will have immediately after such merger or
consolidation no stock either authorized or outstanding (except such stock
of the Company as may have been authorized or outstanding immediately
before such merger or consolidation or such stock of the surviving or
resulting corporation as may be issued upon conversion thereof or in
exchange therefor) ranking as to dividends or assets prior to or on a
parity with the Preference Stock or the stock of the surviving or resulting
corporation issued upon conversion thereof or in exchange therefor.
8. Voting Rights.
(a) Each holder of record of $3.00 Preference Stock shall have the right
to eight votes for each share of $3.00 Preference Stock standing in his name on
the books of the Company. Each holder of record of $2.80 Preference Stock shall
have the right to two votes for each share of $2.80 Preference Stock standing in
his name on the books of the Company. In each election of directors in which
holders of Preference Stock are entitled to vote, every holder of Preference
Stock entitled to vote shall have the right to multiply the number of votes to
which he may be entitled by the total number of directors to be elected in the
same election by the holders of the class or classes or series of Preference
Stock of which his shares are a part, and he may cast the whole number of such
votes for one candidate or he may distribute them among any two or more
candidates. If the Company shall make a distribution to the holders of its
Common Stock in the form of a dividend in shares of Common Stock, or split the
Common Stock, the vote to which each holder of record of Preference Stock shall
be entitled immediately prior to the record date fixed for the determination of
the holders of Common Stock entitled to additional shares resulting from such
dividend or split shall be proportionately increased effective at the opening of
business on the next following full business day. Except as required by law or
as otherwise specifically provided in this Article IV of this Certificate the
holders of $3.00 Preference Stock, the holders of $2.80 Preference Stock and the
holders of Common Stock shall vote together as one class.
(b) If the Company shall have failed to pay, or declare and set apart for
payment, dividends on all outstanding shares of $3.00 Preference Stock in an
amount equal to six quarterly dividends at the rates payable upon such shares,
the number of directors of
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the Company shall be increased by two at the first annual meeting of the
stockholders of the Company held thereafter, and at such meeting and at each
subsequent annual meeting until dividends payable for all past quarterly
dividend periods on all outstanding shares of each series of $3.00 Preference
Stock shall have been paid, or declared and set apart for payment, in full, the
holders of shares of $3.00 Preference Stock shall have the right, voting as a
class, to elect such two additional members of the Board of Directors to hold
office for a term of one year. Upon such payment, or such declaration and
setting apart for payment, in full, the terms of the two additional directors so
elected shall forthwith terminate, and the number of directors of the Company
shall be reduced by two, and such voting right of the holders of shares of $3.00
Preference Stock shall cease, subject to increase in the number of directors as
aforesaid and to revesting of such voting right in the event of each and every
additional failure in the payment of dividends in an amount equal to six
quarterly dividends as aforesaid.
(c) If the Company shall have failed to pay, or declare and set apart for
payment, dividends on all outstanding shares of $2.80 Preference Stock in an
amount equal to six quarterly dividends at the rate payable upon such shares,
the number of directors of the Company shall be increased by two at the first
annual meeting of the stockholders of the Company held thereafter, and at such
meeting and at each subsequent annual meeting until dividends payable for all
past quarterly dividend periods on all outstanding shares of $2.80 Preference
Stock shall have been paid, or declared and set apart for payment, in full, the
holders of shares of $2.80 Preference Stock shall have the right, voting as a
class, to elect such two additional members of the Board of Directors to hold
office for a term of one year. Upon such payment, or such declaration and
setting apart for payment, in full, the terms of the two additional directors so
elected shall forthwith terminate, and the number of directors of the Company
shall be reduced by two, and such voting right of the holders of shares of $2.80
Preference Stock shall cease, subject to increase in the number of directors as
aforesaid and to revesting of such voting right in the event of each and every
additional failure in the payment of dividends in an amount equal to six
quarterly dividends as aforesaid.
D. Common Stock
1. Each holder of record of Common Stock shall have the right to one vote
for each share of Common Stock standing in his name on the books of the Company.
Except as required by law or as otherwise specifically provided in this Article
IV, the holders of $3.00 Preference Stock, the holders of $2.80 Preference Stock
and the holders of Common Stock shall vote together as one class.
E. Preemptive Rights
1. Neither the holders of Preferred Stock, nor the holders of $3.00
Preference Stock, nor the holders of $2.80 Preference Stock, nor the holders of
Common Stock shall have preemptive rights, and the Company shall have the right
to issue and to sell to any person or persons any shares of its capital stock or
any option rights or any securities having conversion or option rights without
first offering such shares, rights or securities to any holders of the Preferred
Stock, the $3.00 Preference Stock, the $2.80 Preference Stock or the Common
Stock.
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ARTICLE V
Annual and Special Meetings of Stockholders
A. Any action required or permitted to be taken by the holders of the
Capital Stock of the Company must be effected at a duly called annual or special
meeting of such holders and may not be effected by any consent in writing by
such holders. Except as otherwise required by law and subject to the rights of
the holders of any class or series of stock having a preference over the Common
Stock, special meetings of stockholders of the Company may be called only by the
Board of Directors pursuant to a resolution approved by a majority of the entire
Board of Directors or by the Chairman of the Board or by the President.
B. Notwithstanding anything contained in this Certificate to the contrary,
the affirmative vote of at least 66-2/3% of all votes entitled to be cast by the
holders of Capital Stock entitled to vote generally in the election of directors
voting together as a single class shall be required to amend or repeal this
Article V or to adopt any provision inconsistent herewith.
ARTICLE VI
Directors
A. Except as otherwise fixed by or pursuant to the provisions of Article
IV relating to the rights of the holders of any class or series of stock having
a preference over the Common Stock, the number of directors of the Company shall
be fixed from time to time by or pursuant to the By-Laws of the Company. Each
director elected prior to 1995 shall hold office for the term of years for which
that director was elected, and each director elected after January 1, 1995 shall
hold office until the next annual meeting of stockholders and until that
director's successor is elected and qualified or until that director's earlier
resignation or removal.
B. Subject to the rights of holders of any class or series of stock having
a preference over the Common Stock, nominations for the election of directors
may be made by the Board of Directors or by any record owner of Capital Stock of
the Company entitled to vote in the election of directors generally. However,
any such stockholder may nominate one or more persons for election as director
at a meeting only if written notice of such stockholder's intent to make such
nomination or nominations has been given, either by personal delivery or by
United States mail, postage prepaid, to the Secretary of the Company not later
than (i) with respect to an election to be held at an annual meeting of
stockholders, one hundred twenty (120) days in advance of such meeting, and (ii)
with respect to an election to be held at a special meeting of stockholders for
the election of directors, the close of business on the seventh day following
the earlier of (x) the date on which notice of such meeting is first given to
stockholders and (y) the date on which a public announcement of such meeting is
first made. Each such notice shall include: (a) the name and address of each
stockholder of record who intends to appear in person or by proxy to make the
nomination and of the person or persons to be nominated; (b) a description of
all arrangements or understandings between the stockholder and each nominee and
any other person or persons (naming such person or persons)
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pursuant to which the nomination or nominations are to be made by the
stockholder; (c) such other information regarding each nominee proposed by such
stockholder as would have been required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission had
the nominee been nominated, or intended to be nominated, by the Board of
Directors; and (d) the consent of each nominee to serve as a director of the
Company if so elected. The chairman of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedure.
C. Except as otherwise provided for, or fixed by, or pursuant to the
provisions of Article IV relating to the rights of the holders of any class or
series of stock having a preference over the Common Stock, newly created
directorships resulting from any increase in the number of directors or any
vacancy on the Board of Directors resulting from death, resignation,
disqualification, removal or other cause shall be filled solely by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the Board of Directors, or by a sole remaining
director. Any director elected in accordance with the preceding sentence shall
hold office for the remainder of the full term of the class of directors in
which the new directorship was created or the vacancy occurred and until such
director's successor shall have been elected and qualified. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.
D. Subject to the rights of holders of any class or series of stock having
a preference over the Common Stock, any one or more directors may be removed
only for cause by the stockholders as provided herein. At any annual meeting of
stockholders of the Company or at any special meeting of stockholders of the
Company, the notice of which shall state that the removal of a director or
directors is among the purposes of the meeting, the holders of Capital Stock
entitled to vote thereon, present in person or by proxy, by the affirmative vote
of at least 66-2/3% of all votes entitled to be cast by the holders of Capital
Stock of the Company entitled to vote generally in an election of directors
voting together as a single class, may remove such director or directors for
cause.
E. The Board of Directors shall have the power to adopt, amend and repeal
By-Laws of the Company. Notwithstanding anything in this Certificate or the By-
Laws of the Company to the contrary (and notwithstanding that a lesser
percentage may be specified by law or in the By-Laws), the By-Laws shall not be
amended or repealed by vote of the stockholders of the Company and no provision
inconsistent therewith shall be adopted by vote of the stockholders of the
Company without the affirmative vote of at least 66-2/3% of all votes entitled
to be cast by the holders of Capital Stock of the Company entitled to vote
generally in the election of directors voting together as a single class.
F. Notwithstanding anything contained in this Certificate to the contrary,
the affirmative vote of at least 66-2/3% of all votes entitled to be cast by the
holders of Capital Stock entitled to vote generally in the election of
directors, voting together as a single class, shall be required to amend or
repeal this Article VI or to adopt any provision inconsistent herewith.
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ARTICLE VII
Prohibition of "Greenmail"
A. Any purchase or other acquisition, directly or indirectly, in one or
more transactions, by the Company or any Subsidiary (as hereinafter defined) of
the Company of any share of Voting Stock (as hereinafter defined) or any Voting
Stock Right (as hereinafter defined) known by the Company to be beneficially
owned by any Interested Stockholder (as hereinafter defined) who has
beneficially owned such security or right for less than two years prior to the
date of such purchase shall, except as hereinafter expressly provided, require
the affirmative vote of at least 66-2/3% of all votes entitled to be cast by the
holders of the Voting Stock voting together as a single class. Such affirmative
vote shall be required notwithstanding the fact that no vote may be required, or
that a lesser percentage may be specified, by law or any agreement with any
national securities exchange, or otherwise, but no such affirmative vote shall
be required with respect to any purchase or other acquisition by the Company or
any of its Subsidiaries of Voting Stock or Voting Stock Rights purchased at or
below Fair Market Value (as hereinafter defined) or made as part of a tender or
exchange offer made on the same terms to all holders of such securities and
complying with the applicable requirements of the Securities Exchange Act of
1934 (the "Exchange Act") and the rules and regulations thereunder or in a
Public Transaction (as hereinafter defined).
B. For the purposes of this Article VII:
1. An "Affiliate" of, or a person "Affiliated" with, a specified
person, is a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, the person specified.
2. The term "Associate" used to indicate a relationship with any
person, means (1) any corporation or organization (other than the Company
or a Subsidiary of the Company) of which such person is an officer or
partner or is, directly or indirectly, the beneficial owner of 5% or more
of any class of equity securities, (2) any trust or other estate in which
such person has a substantial beneficial interest or as to which such
person serves as trustee or in a similar fiduciary capacity, and (3) any
relative or spouse of such person, or any relative of such spouse, who has
the same home as such person.
3. A person shall be a "beneficial owner" of any Voting Stock or
Voting Stock Right:
(a) which such person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or indirectly; or
(b) which such person or any of its Affiliates or Associates has (i)
the right to acquire (whether such right is exercisable immediately or
only after the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, or (ii)
any right to vote pursuant to any agreement, arrangement or
understanding; or
(c) which is beneficially owned, directly or indirectly, by any other
person with which such person or any of its Affiliates or Associates
has any agreement,
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arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of any security of any class of the Company or any
of its Subsidiaries.
(d) For the purposes of determining whether a person is an Interested
Stockholder, the relevant class of securities outstanding shall be
deemed to include all such securities of which such person is deemed
to be the "beneficial owner" through application of this subparagraph
3, but shall not include any other securities of such class which may
be issuable pursuant to any agreement, arrangement or understanding,
or upon exercise of conversion rights, warrants or options, or
otherwise, but are not yet issued.
4. "Fair Market Value" means, for any share of Voting Stock or any
Voting Stock Right, the average of the closing sale prices during the 90-
day period immediately preceding the repurchase of such Voting Stock or
Voting Stock Right, as the case may be, on the Composite Tape for New York
Stock Exchange-Listed Stocks, or, if such Voting Stock or Voting Stock
Right, as the case may be, is not quoted on the Composite Tape, on the New
York Stock Exchange, or, if such Voting Stock or Voting Stock Right, as the
case may be, is not listed on such Exchange, on the principal United States
securities exchange registered under the Exchange Act on which such Voting
Stock or Voting Stock Right, as the case may be, is listed, or if such
Voting Stock or Voting Stock Right, as the case may be, is not listed on
any such exchange, the average of the closing bid quotations with respect
to a share of such Voting Stock or Voting Stock Right, as the case may be,
during the 90-day period immediately preceding the date in question on the
National Association of Securities Dealers, Inc. Automated Quotations
System or any system then in use, or if no such quotations are available,
the Fair Market Value on the date in question of a share of such Voting
Stock or Voting Stock Right, as the case may be, as determined by the Board
of Directors in good faith.
5. "Interested Stockholder" shall mean any person (other than (i) the
Company, (ii) any of its Subsidiaries, (iii) any benefit plan or trust of
or for the benefit of the Company or any of its Subsidiaries, or (iv) any
trustee, agent or other representative of any of the foregoing) who or
which:
(a) is the beneficial owner, directly or indirectly, of more than 3%
of any class of Voting Stock (or Voting Stock Rights with respect to
more than 3% of any such class); or
(b) is an Affiliate of the Company and at any time within the two-
year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of more than 3% of any class
of Voting Stock (or Voting Stock Rights with respect to more than 3%
of any such class); or
(c) is an assignee of or has otherwise succeeded to any shares of any
class of Voting Stock (or Voting Stock Rights with respect to more
than 3% of any such class) which were at any time within the two-year
period immediately prior to the date in question beneficially owned by
an Interested Stockholder, unless such assignment or succession shall
have occurred pursuant to any Public Transaction or a series of
transactions including a Public Transaction.
6. A "person" shall mean any individual, firm, corporation or other
entity (including a "group" within the meaning of Section 13(d) of the
Exchange Act).
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7. A "Public Transaction" shall mean any (i) purchase of shares
offered pursuant to an effective registration statement under the
Securities Act of 1933 or (ii) open market purchases of shares if, in
either such case, the price and other terms of sale are not negotiated by
the purchaser and seller of the beneficial interest in the shares.
8. The term "Subsidiary" shall mean any corporation at least a
majority of the outstanding securities of which having ordinary voting
power to elect a majority of the board of directors of such corporation
(whether or not any other class of securities has or might have voting
power by reason of the happening of a contingency) is at the time owned or
controlled directly or indirectly by the Company or one or more
Subsidiaries or by the Company and one or more Subsidiaries.
9. The term "Voting Stock" shall mean stock of all classes and series
of the Company entitled to vote generally in the election of directors.
10. The term "Voting Stock Right" shall mean any security convertible
into, and any warrant, option or other right of any kind to acquire
beneficial ownership of, any Voting Stock, other than securities issued
pursuant to any of the Company's employee benefit plans.
C. A majority of the Board of Directors shall have the power and duty to
determine for the purposes of this Article VII, on the basis of information
known to it after reasonable inquiry, all facts necessary to determine
compliance with this Article VII, including without limitation,
1. whether:
(a) a person is an Interested Stockholder;
(b) any Voting Stock and Voting Stock Right is beneficially
owned by any person;
(c) a person is an Affiliate or Associate of another;
(d) a transaction is a Public Transaction; and
2. the Fair Market Value of any Voting Stock or Voting Stock Right.
D. Notwithstanding anything contained in this Certificate to the contrary,
the affirmative vote of at least 66-2/3% of all votes entitled to be cast by the
holders of Capital Stock entitled to vote generally in the election of
directors, voting together as a single class, shall be required to amend or
repeal this Article VII or to adopt any provision inconsistent herewith.
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ARTICLE VIII
Director's Liability
To the fullest extent permitted by the General Corporation Law of Delaware
as the same exists or may hereafter be amended, a director of the Company shall
not be liable to the Company or its Stockholders for monetary damages for breach
of fiduciary duty as a director. If the General Corporation Law of Delaware is
amended after approval by the Stockholders of this provision to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Company shall be eliminated
or limited to the fullest extent permitted by the General Corporation Law of
Delaware, as so amended. Any repeal or modification of this Article VIII by the
Stockholders of the Company shall not adversely affect any right or protection
of a director of the Company existing at the time of such repeal or modification
or with respect to events occurring prior to such time.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which
restates and integrates and does not further amend the provisions of the
Certificate of Incorporation of this Company as heretofore amended and
supplemented, having been duly adopted in accordance with Section 245 of the
General Corporation Law of Delaware, has been accepted by its President and
attested by its Secretary on this 27th day of June, 1994.
Atlantic Richfield Company
By MIKE R. BOWLIN
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Mike R. Bowlin
President
Attest: [ARCO SEAL]
By HOWARD L. EDWARDS
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Howard L. Edwards
Corporate Secretary
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