<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995
------------------------
COMMISSION FILE NUMBER 1-9678
------------------------
ARCO CHEMICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
DELAWARE 51-0104393
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3801 WEST CHESTER PIKE
NEWTOWN SQUARE, PENNSYLVANIA 19073-2387
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
------------------------
(610) 359-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- -----
NUMBER OF SHARES OF COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING AS OF JUNE 30,
1995: 96,289,378.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. ARCO CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1995 1994 1995 1994
------ ----- ------ ------
<S> <C> <C> <C> <C>
Sales and other operating revenues $1,149 $ 824 $2,290 $1,581
Costs and other operating expenses 822 608 1,666 1,195
------ ----- ------ ------
Gross profit 327 216 624 386
Selling, general and administrative
expenses 69 62 133 119
Research and development 20 20 38 37
------ ----- ------ ------
Operating income 238 134 453 230
Interest expense (22) (22) (44) (43)
Other income, net 11 1 16 2
------ ----- ------ ------
Income before income taxes 227 113 425 189
Provision for income taxes 77 45 149 76
------ ----- ------ ------
Net income $ 150 $ 68 $ 276 $ 113
====== ===== ====== ======
Earnings per common share $1.56 $.71 $2.87 $ 1.18
====== ===== ====== ======
Cash dividends paid per common
share $.625 $.625 $1.25 $ 1.25
====== ===== ====== ======
</TABLE>
See Accompanying Notes.
<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 94 $ 144
Short-term investments 30 -
Accounts receivable 704 565
Inventories 432 397
Prepaid expenses and other current assets 45 18
------ ------
Total current assets 1,305 1,124
Investments and long-term receivables 107 97
Property, plant and equipment, net 2,289 2,221
Deferred charges and other assets (net of
accumulated amortization of $266 in 1995
and $247 in 1994) 369 295
------ ------
Total assets $4,070 $3,737
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 19 $ 23
Long-term debt due within one year 24 15
Accounts payable 285 242
Taxes payable 72 66
Other accrued liabilities 203 199
------ ------
Total current liabilities 603 545
Long-term debt 904 898
Other liabilities and deferred credits 152 142
Deferred income taxes 410 369
Minority interest 120 124
Stockholders' equity:
Common stock 100 100
Additional paid-in capital 866 864
Retained earnings 888 732
Foreign currency translation 128 70
Treasury stock, at cost (101) (107)
------ ------
Total stockholders' equity 1,881 1,659
------ ------
Total liabilities and stockholders'
equity $4,070 $3,737
====== ======
</TABLE>
See accompanying notes.
- 2 -
<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1995 1994
----- -----
<S> <C> <C>
Cash flows from operating activities
Net income $ 276 $ 113
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 120 113
Increase in accounts receivable (105) (28)
Net change in inventories, accounts
and other payables 14 37
Other (47) (16)
----- -----
Net cash provided by operating activities 258 219
----- -----
Cash flows from investment activities
Capital expenditures (75) (85)
Increase in deferred charges (73) (4)
Purchase of short-term investments (30) -
Other 2 21
----- -----
Net cash used in investment activities (176) (68)
----- -----
Cash flows from financing activities
Dividends paid (120) (120)
Net repayments of notes payable (6) (37)
Repayment of long-term debt (14) (12)
Other 8 2
----- -----
Net cash used in financing activities (132) (167)
----- -----
Effect of exchange rate changes on cash - -
----- -----
Net decrease in cash and cash equivalents (50) (16)
Cash and cash equivalents at beginning of year 144 42
----- -----
Cash and cash equivalents at end of period $ 94 $ 26
===== =====
</TABLE>
See accompanying notes.
- 3 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE A. BASIS OF PRESENTATION
The foregoing financial information is unaudited and has been prepared
from the records of ARCO Chemical Company (the company). In the opinion of
management, the financial information reflects all adjustments (consisting only
of items of a normal recurring nature) necessary for a fair statement of
financial position and results of operations in conformity with generally
accepted accounting principles. Certain amounts in 1994 have been reclassified
for comparative purposes. These interim financial statements should be read in
conjunction with the consolidated financial statements for the year ended
December 31, 1994.
NOTE B. BUSINESS SEGMENT INFORMATION
The following table sets forth certain information concerning the
company's principal geographic regions for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1995 1994 1995 1994
------ ----- ------ ------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Total revenues
Americas $ 773 $ 606 $1,562 $1,145
Europe 400 214 754 425
Asia Pacific 66 57 124 111
Elimination of interregional
sales (90) (53) (150) (100)
------ ----- ------ ------
Total $1,149 $ 824 $2,290 $1,581
====== ===== ====== ======
Pretax earnings
Americas $ 172 $ 119 $ 352 $ 214
Europe 32 5 24 (4)
Asia Pacific 7 (3) 10 (7)
Corporate 38 14 76 27
Interest expense (22) (22) (44) (43)
Equity in net income of
Asian joint venture 5 - 8 -
Eliminations (5) - (1) 2
------ ----- ------ ------
Total $ 227 $ 113 $ 425 $ 189
====== ===== ====== ======
</TABLE>
Interregional sales are made at prices approximating current market values.
Included in pretax earnings are royalty charges made from corporate to the
regions for the use of company technology.
- 4 -
<PAGE>
NOTE C. INVENTORIES
Inventories at June 30, 1995 and December 31, 1994 comprised the
following categories:
<TABLE>
<CAPTION>
1995 1994
---- ----
(Millions of Dollars)
<S> <C> <C>
Finished goods $ 286 $ 272
Work-in-process 32 35
Raw materials 71 49
Materials and supplies 43 41
----- -----
Total $ 432 $ 397
===== =====
</TABLE>
NOTE D. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, at cost, and related accumulated
depreciation at June 30, 1995 and December 31, 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(Millions of Dollars)
<S> <C> <C>
Property, plant and equipment $3,741 $3,524
Less: accumulated depreciation 1,452 1,303
------ ------
Total $2,289 $2,221
====== ======
</TABLE>
NOTE E. CONTINGENCIES
The company and its subsidiaries are involved in a number of
lawsuits, all of which have arisen in the ordinary course of the company's
business. The company is unable to predict the outcome of these matters, but
does not believe, based upon currently available facts, that the ultimate
resolution of such matters will have a material adverse effect on the
consolidated financial statements of the company.
The company is subject to other loss contingencies pursuant to
federal, state, local, and foreign environmental laws and regulations. These
contingencies include possible obligations to remove or mitigate the effect on
the environment of the disposal or release of certain chemical substances at
various sites. The company continues to estimate the amount of these costs and
periodically establishes reserves based on the progress made in determining the
magnitude, method and timing of the remedial actions that may be required by
government authorities, and an evaluation of the company's potential liability
in relation to the liability and financial resources of the other potentially
responsible parties.
At June 30, 1995, the company's environmental reserve totaled $49
million, which reflects the company's latest assessment of potential future
costs associated with existing sites. A significant portion of the reserve is
related to the company's Beaver Valley (Pennsylvania) facility. The company and
the Pennsylvania Department of Environmental Resources have agreed
- 5 -
<PAGE>
upon a work plan for testing and remedial process design with regard to
conditions at the Beaver Valley plant. The reserve reflects an agreement between
the company and another responsible party whereby that party has agreed to pay
for approximately 50 percent of the cost of the remediation at the Beaver Valley
plant. The remainder of the reserve is related to six other sites for amounts
ranging from $1 million to $7 million per site. Substantially all amounts
accrued are expected to be paid out over the next five to ten years.
The company is currently performing environmental site assessments,
remedial investigations/feasibility studies, and remediation activities at a
number of sites under applicable laws. The company may in the future be involved
in additional environmental assessments and cleanups. As the scope of the
company's environmental contingencies becomes more clearly defined, it is
possible that amounts in excess of those already reserved may be necessary.
Management believes, based upon its past experience and best
assessment of future events, that these environmental liabilities and costs will
be determined and incurred over an extended period of time, allowing the company
to fund such liabilities and costs through its operating cash flow, and
therefore that the impact of such liabilities and costs would not be material in
relation to the company's consolidated financial position as of June 30, 1995.
Depending on the amounts of future operating results, the environmental
liabilities to be recorded in a given annual or quarterly period may potentially
result in charges that are material to the results of operations for that
period.
The company and Atlantic Richfield Company (ARCO) are parties to an
agreement whereby the company has indemnified ARCO against certain claims or
liabilities that ARCO may incur relating to ARCO's former ownership and
operation of the oxygenates and polystyrenics businesses of the company,
including liabilities under laws relating to the protection of the environment
and the workplace and liabilities arising out of certain litigation. ARCO has
indemnified the company with respect to claims or liabilities and other matters
of litigation not related to the assets or businesses reflected in the
consolidated financial statements. ARCO has also indemnified the company for
certain federal, foreign, state, and local taxes that might be assessed upon
audit of the operations of the company included in its consolidated financial
statements for periods prior to the July 1, 1987 formation of the company.
NOTE F. EARNINGS PER COMMON SHARE
Earnings per common share for the three- and six-month periods ended
June 30, 1995 are computed based on 96,247,342 and 96,194,622 weighted average
number of shares outstanding, respectively. Earnings per common share for the
three- and six-month periods ended June 30, 1994 are computed based on
96,051,915 and 96,042,599 weighted average number of shares outstanding,
respectively. The effect of stock options issued under the 1987 Executive Long-
Term Incentive Plan and the 1990 Long-Term Incentive Plan on the computation of
primary and fully diluted earnings per common share was not material and had no
effect on the reported earnings per common share.
- 6 -
<PAGE>
NOTE G. SUPPLEMENTAL CASH FLOW INFORMATION
Following is supplemental cash flow information for the six months
ended June 30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
(Millions of Dollars)
<S> <C> <C>
Short-term investments:
Gross proceeds from sales $ - $ -
Gross purchases (30) -
------- -----
Net purchases $ (30) $ -
======= =====
Notes Payable:
Gross proceeds from issuances $ 1,212 $ 113
Gross repayments (1,218) (150)
------- -----
Net repayments $ (6) $ (37)
======= =====
Cash paid during the period for:
Interest (net of amount capitalized) $ 43 $ 42
======= =====
Income taxes (net of refunds) $ 136 $ 24
======= =====
</TABLE>
NOTE H. CORPORATE RESTRUCTURING PROGRAM
In connection with the company's 1994 global restructuring,
approximately 130 people will be leaving the company. The company accrued $30
million before tax in the fourth quarter of 1994, consisting primarily of
personnel costs (pension enhancements, severance and other ancillary costs)
associated with personnel reductions. Of the total accrued, approximately $15
million related to severance and other ancillary costs that will be paid from
company funds. An additional $15 million is primarily related to enhanced
pension benefits, the majority of which will be paid from the assets of
qualified pension plans. Through June 30, 1995, approximately 55 employees have
left the company, and approximately $3 million of severance and ancillary costs
have been paid and charged against the accrual. Payments made do not necessarily
correlate to the number of employees who have left due to the ability of
affected employees to defer receipt of certain payments.
NOTE I. LONG-TERM SUPPLY ARRANGEMENT
As more fully described in the December 31, 1994 consolidated
financial statements, the company entered into a long-term, toluene di-
isocyanate supply arrangement in January 1995. A substantial portion of the
initial payment of $80 million made at closing related to capacity reservation
fees and other long-term rights and costs. These are reported in the
accompanying consolidated balance sheet as "Deferred charges and other assets"
and are being amortized on a straight-line basis over the 15-year period of the
agreement, the period of expected benefit.
- 7 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRODUCT VOLUMES
Sales volumes of the company's key product, propylene oxide (PO), its
two co-products, tertiary butyl alcohol (TBA) and styrene monomer (SM), and
their derivatives are noted below. Methyl tertiary butyl ether (MTBE) is a key
derivative of TBA used in oxygenated and reformulated gasolines and as a
gasoline octane additive.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1995 1994 1995 1994
---- ---- ----- -----
<S> <C> <C> <C> <C>
(Millions)
PO and derivatives (pounds) 853 891 1,790 1,834
TBA and derivatives (gallons) 301 258 590 496
SM and derivatives (pounds) 650 684 1,349 1,304
</TABLE>
The company manufactures and markets its products in three major world regions,
the Americas, Europe, and Asia Pacific.
RESULTS OF OPERATIONS
SECOND QUARTER 1995 VERSUS SECOND QUARTER 1994
NET INCOME
Net income in the second quarter 1995 more than doubled to $150
million, or $1.56 per share, from $68 million, or $.71 per share, for the second
quarter 1994. The 1995 increase primarily reflected significant improvement in
SM margins due to stronger worldwide SM demand. Also contributing to the
increase in net income were higher MTBE volumes and margins and higher PO and
derivatives margins. Additionally, net income in 1995 included a lower effective
tax rate than the 1994 period.
REVENUES AND GROSS PROFIT
Revenues increased 39 percent to $1,149 million in the second quarter
1995 from $824 million in the second quarter 1994 primarily due to higher sales
prices. Gross profit of $327 million in the second quarter 1995 increased 51
percent from $216 million in the 1994 second quarter. The gross profit increase
primarily reflects higher sales prices, principally for SM.
- 8 -
<PAGE>
PO AND DERIVATIVES
PO and derivatives margins in the second quarter 1995 increased
compared to the prior year period as generally higher sales prices and benefits
from a weaker U.S. dollar offset increases in the costs of raw materials and
utilities. PO and derivatives volumes in the second quarter 1995 decreased four
percent compared to the second quarter 1994 with lower U.S. volumes partly
offset by higher European volumes. The lower U.S. volumes were principally due
to the start up of the Texaco PO/MTBE plant, which increased industry supplies
of PO. Higher European volumes reflected the strengthening economy in that
region.
TBA AND DERIVATIVES
TBA and derivatives volumes increased 17 percent in the second quarter
1995 compared to the second quarter 1994 primarily due to increased U.S. demand
for MTBE. The increased demand resulted from implementation of the reformulated
gasoline phase of the Clean Air Act in January 1995. TBA and derivatives margins
in the second quarter 1995 increased compared to the second quarter 1994 due to
higher U.S. and European MTBE margins. The MTBE margin improvement primarily
reflected higher prices.
On June 30,1994, the Environmental Protection Agency (EPA) promulgated
regulations under the Clean Air Act requiring that 15 percent in 1995, and 30
percent thereafter, of the oxygenate content in reformulated gasoline be
supplied by oxygenates such as ethanol and ethyl tertiary butyl ether (ETBE),
which are derived from renewable feedstocks. ETBE uses ethanol as a feedstock.
In June, 1995, the U.S. Court of Appeals for the District of Columbia ruled that
the EPA could not mandate the use of a specific percentage of renewable
oxygenates in reformulated gasoline. The EPA may appeal this decision to the
U.S. Supreme Court. The regulations, if implemented, may, in the long term,
decrease demand for MTBE and increase demand for other oxygenates derived from
renewable feedstocks, including ETBE. The company is capable of producing both
MTBE and ETBE.
The company is responding through public education to consumer
concerns about the potential health effects resulting from the widespread use of
fuel oxygenates, particularly MTBE. Extensive health studies of MTBE over the
past 20 years support the product's continued use in gasoline. Nonetheless,
additional tests on MTBE are presently being conducted to assess these consumer
concerns.
SM AND DERIVATIVES
SM and derivatives margins improved in the second quarter 1995
compared to the second quarter 1994 primarily reflecting increased worldwide SM
demand. SM and derivatives volumes in the second quarter 1995 decreased 5
percent versus the second quarter 1994 due to the timing of customer purchases
under annual contracts.
OTHER
The company revised its expected 1995 effective tax rate to 35.0
percent from 36.5 percent in the first quarter 1995. This revision resulted in a
33.7 percent tax rate for the second quarter 1995 compared to 39.8 percent in
the second quarter 1994. The higher 1994 tax rate reflected an initially lower
estimate of 1994 foreign source income. The final 1994 tax rate was 35.3
percent.
- 9 -
<PAGE>
SIX MONTHS ENDED JUNE 30, 1995 VERSUS SIX MONTHS ENDED JUNE 30, 1994
NET INCOME
Net income for the first six months 1995 was $276 million, or $2.87
per share, compared with $113 million, or $1.18 per share, for the first six
months 1994. The 1995 increase was primarily due to the significant improvement
in SM margins as well as higher overall MTBE margins and volumes and higher PO
and derivatives margins. Net income in 1995 also reflected a lower effective tax
rate.
REVENUES AND GROSS PROFIT
Revenues increased 45 percent to $2,290 million in the first six
months 1995 from $1,581 million in the first six months 1994 primarily due to
higher prices. Gross profit increased 62 percent to $624 million in the first
six months 1995 from $386 million in the first six months 1994. The 1995
increase in gross profit margins primarily reflected higher sales prices.
PO AND DERIVATIVES
PO and derivatives margins in the first six months 1995 increased
compared to the first six months 1994 due to higher sales prices and the benefit
from a weaker U.S. dollar. PO and derivatives volumes in the first six months
1995 decreased slightly compared to the 1994 period as lower U.S. volumes were
partly offset by higher volumes overseas. U.S. volumes were primarily affected
by the startup of the Texaco PO/MTBE plant and the effect of a mild winter on
deicer sales. Higher overseas volumes reflected the strengthening economy in
Europe.
TBA AND DERIVATIVES
TBA and derivatives volumes increased 19 percent in the first six
months 1995 versus the comparable 1994 period primarily due to increased U.S.
demand for MTBE in reformulated gasoline. TBA and derivatives margins in the
first six months 1995 increased compared to the same period in 1994. Higher MTBE
prices and margins in the U.S. more than offset lower margins in Europe.
SM AND DERIVATIVES
SM and derivatives margins improved in the first six months 1995
compared to the first six months 1994 reflecting increased worldwide SM demand
and tighter SM supplies due to maintenance turnarounds at other producers'
plants. SM and derivatives volumes in the first six months 1995 increased
slightly compared to the first six months 1994.
OTHER
The company currently expects its 1995 effective tax rate to be 35.0
percent compared to a 40.0 percent tax rate used in the first half 1994. The
final 1994 effective tax rate was 35.3 percent.
- 10 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1995, the company had $124 million in cash and cash
equivalents and short-term investments compared with $144 million at December
31, 1994.
The Consolidated Statement of Cash Flows for the six months ended June
30, 1995 shows $258 million of net cash flows provided by operating activities,
whereas net cash flows used by investment and financing activities were $176
million and $132 million, respectively.
Investment activities for the first six months 1995 included capital
expenditures of $75 million. The company's 1995 capital budget for plant and
equipment is $195 million. Actual 1995 expenditures are expected to be slightly
less than the budget. A significant portion of the 1995 capital budget is
allocated to environmental, health and safety projects as well as to low-cost
capacity debottlenecking projects. As more fully described in the company's
consolidated financial statements for the year ended December 31, 1994, the
company entered into a long-term, toluene di-isocyanate supply arrangement in
January 1995. A substantial portion of the initial $80 million payment made at
closing related to capacity reservation fees and other long-term rights and
costs. Such amounts are reported in the accompanying consolidated balance sheet
as "Deferred charges and other assets" and are being amortized on a straight-
line basis over the 15-year period of the agreement, the period of expected
benefit.
The company paid dividends totalling $120 million during the first six
months 1995, including a $.625 per share dividend, totalling $60 million, during
the quarter ended June 30, 1995. On July 20, 1995, the Board of Directors
declared a dividend of $.70 per share of common stock, payable September 1,
1995, which represents a 12 percent increase over the prior quarter's dividend.
The Board of Directors has approved commencement of engineering
studies for the expansion of the PO/SM complex located in Channelview, Texas and
the construction of a new world scale PO/SM plant in Rotterdam, the Netherlands.
Final Board of Directors' approval of such projects will depend on the results
of engineering studies, the receipt of permitting approvals and the conclusion
of certain commercial arrangements.
It is expected that future cash requirements for capital expenditures,
dividends and debt repayments will be met by cash generated from operating
activities and additional borrowing.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 121 requires companies to adopt its provisions for fiscal years
beginning after December 15, 1995. The provisions of SFAS No. 121 require the
company to review its long-lived assets for impairment on an exception basis
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable through future cash flows. If it is determined
that an impairment loss has occurred based on expected future cash flows, then
the loss should be recognized in the income statement and certain disclosures
regarding the impairment should be made in the financial statements. The company
has not yet had sufficient time to evaluate the impact, if any, of the
provisions of SFAS No. 121.
- 11 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the disclosure on page 8 of the company's 1994
Form 10-K Report regarding the French Ltd. Site. The company believes that the
maximum remaining aggregate cost for the potentially responsible parties to
implement the bioremediation remedy will be less than $5 million. The company's
allocated share of clean-up costs for this site is approximately 33 percent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company's annual meeting of stockholders was held on May 11, 1995.
The stockholders elected all the company's nominees for director and approved
the appointment of Coopers & Lybrand L.L.P. as the company's independent
auditors for 1995. The votes were as follows:
1. Election of Directors:
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Ronald J. Arnault 94,517,554 232,856
Walter F. Beran 94,539,018 211,392
Mike R. Bowlin 94,567,111 183,299
E. Kent Damon, Jr. 94,550,272 200,138
Alan R. Hirsig 94,557,977 192,433
Marie L. Knowles 94,546,345 204,065
James A. Middleton 94,560,756 189,654
Frank Savage 94,550,205 200,205
Marvin O.Schlanger 94,563,806 186,604
Robert H. Stewart, III 94,546,776 203,634
Walter J. Tusinski 94,553,684 196,726
</TABLE>
2. Approval of the Appointment of Coopers & Lybrand L.L.P.:
<TABLE>
<CAPTION>
<S> <C>
For 94,562,273
Against 120,852
Abstain 67,285
</TABLE>
ITEM 5. OTHER INFORMATION
The company and Atlantic Richfield Company ("ARCO") entered into an
Amended and Restated Tax Sharing Agreement (the "Amended Agreement") effective
as of January 1, 1995. The company and its subsidiaries will continue to compute
their share of the ARCO consolidated group's federal income tax liability on a
stand-alone basis. However, the Amended Agreement will permit the company to
reduce its federal income tax liability through the use of certain tax
attributes that produce a benefit to the ARCO affiliated group, but would not
otherwise benefit the company on a stand-alone basis. In addition, under certain
circumstances and after consulting with the company, ARCO may adjust, compromise
or settle issues related to the company and its subsidiaries without
indemnifying the company for the increased tax liability arising therefrom.
- 12 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10 Amended and Restated Tax Sharing Agreement, effective as of January 1,
1995, between ARCO Chemical Company and Atlantic Richfield Company.
27 Financial Data Schedule for the six months ended June 30, 1995.
(b) Reports on Form 8-K:
None
- 13 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARCO CHEMICAL COMPANY
(Registrant)
/s/ John A. Shaw
-----------------------------
(Signature)
John A. Shaw
Vice President
and Controller
(Duly Authorized Officer and
Chief Accounting Officer)
Dated: July 31, 1995
- 14 -
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10 Amended and Restated Tax Sharing Agreement, effective as of
January 1, 1995, between ARCO Chemical Company and Atlantic
Richfield Company
27 Financial Data Schedule for the six months
ended June 30, 1995
<PAGE>
EXHIBIT 10
AMENDED AND RESTATED TAX SHARING AGREEMENT
THIS AMENDED AND RESTATED TAX SHARING AGREEMENT is entered into as of
January 1, 1995 by and between Atlantic Richfield Company, a Delaware
corporation ("ARCO"), and ARCO Chemical Company, a Delaware corporation ("ACC"),
and restates in its entirety that Tax Sharing Agreement entered into by and
between ARCO and ACC as of June 3, 1987, as amended as of June 30, 1987 (the
"Prior Agreement"), and supersedes it for Taxable Years beginning after December
31, 1994. The Prior Agreement will apply to all Taxable Years beginning prior
to January 1, 1995.
WHEREAS, the Internal Revenue Code and the tax laws of certain states
provide specific procedures, requirements and advantages to filing income tax
returns on a group basis by related corporations.
WHEREAS, ACC and ARCO are members of a Combined Consolidated Group of
related corporations for these income tax purposes and ARCO is the Common Parent
of that group; and the tax laws and regulations confer upon ARCO as Common
Parent certain authority to file group income tax returns, make elections and
handle audits, among other functions for the entire group, and require
consistency in the positions of the members of the group reported on returns.
WHEREAS, ACC and ARCO desire to enable ACC to have wide latitude to act for
its own benefit in the area of taxes while being consistent with the positions
of the Combined Consolidated Group as reported to the taxing jurisdictions on a
consolidated basis, as well as to allow ACC to benefit from participation in tax
attributes of the group that would not be possible if it was not part of the
group.
WHEREAS, experience under the Prior Agreement has indicated that it is in
the best interests of both parties to enter into an Amended and Restated Tax
Sharing Agreement that sets forth relevant procedures in more detail and that is
more oriented to sharing favorable consolidated tax results with ACC where ACC
has generated an essential attribute to obtaining those tax results.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained herein, the parties to this Amended and
Restated Tax Sharing Agreement agree as follows:
1. DEFINITIONS.
-----------
The following terms as used in this Agreement shall have the meanings set
forth below:
(a) ACC Consolidated Group shall mean ACC and those present and future
----------------------
corporations that would be considered Includible Corporations of an Affiliated
Group of
<PAGE>
which ACC would be the Common Parent if it were not includible in the Combined
Consolidated Group.
(b) ACC Consolidated Group Tax Liability shall mean for any Taxable Year
------------------------------------
the consolidated federal income tax liability imposed under sections 11, 55 and
59A of the Code or any successor provisions thereto, determined on the basis of
the Pro Forma ACC Return, as adjusted by ARCO pursuant to this Agreement. In
making such computation for any such Taxable Year, such liability shall be
determined:
(i) on the basis of the highest rate of corporate tax in effect for
such taxable year under section 11 of the Code, as though such rate were
the only income tax rate in effect for such Taxable Year;
(ii) on the assumption that the "exemption amount" specified in
section 55 of the Code for such Taxable Year is zero; and
(iii) on the further assumption that the amount specified in section
59A(a)(2) of the Code for such Taxable Year is zero.
(c) ACC Pro Forma Statement shall have the meaning attributed to that term
-----------------------
in Section 4(e) of this Agreement.
(d) Affiliated Group shall have the meaning attributed to that term in
----------------
section 1504(a) of the Code.
(e) Agreement shall mean this Amended and Restated Tax Sharing Agreement,
---------
as amended from time to time.
(f) Authorized Capital Losses shall have the meaning attributed to that
-------------------------
term in Section 4(j)(i) of this Agreement.
(g) Certified Foreign Tax Credit shall have the meaning attributed to that
----------------------------
term in Section 4(h)(i) of this Agreement.
(h) Code shall mean the Internal Revenue Code of 1986, as amended, and
----
shall include corresponding provisions of any subsequently enacted federal tax
laws.
(i) Combined Consolidated Group, as of any particular date, shall mean the
---------------------------
Affiliated Group of which ARCO (or any successor thereto) is the Common Parent
as of such date.
(j) Combined Consolidated Group Tax Liability shall mean the consolidated
-----------------------------------------
federal income tax liability of the Combined Consolidated Group for any Taxable
Year for which the Combined Consolidated Group files a Consolidated Return.
(k) Combined Return, for any Taxable Year of the Combined Consolidated
---------------
Group, shall mean any consolidated, combined or unitary state or local income or
franchise tax return.
2
<PAGE>
(l) Common Parent shall have the meaning of that term as it is used in the
-------------
Consolidated Return Regulations.
(m) Consolidated Return, for any Taxable Year of the Combined Consolidated
-------------------
Group, shall mean a consolidated federal income tax return filed pursuant to
section 1501 of the Code by the Common Parent for such Taxable Year.
(n) Consolidated Return Regulations shall mean Income Tax Regulations
-------------------------------
sections 1.1502-1 through 1.1502-100 (26 C.F.R.), as amended from time to time.
(o) Designated Foreign Tax Credit shall have the meaning attributed to
-----------------------------
that term in Section 4(h)(i) of this Agreement.
(p) Final Determination shall mean with respect to any issue or item
-------------------
(i) the execution of a final and irrevocable closing agreement or other
settlement agreement with the Service or the relevant state or local taxing
authorities, (ii) the expiration of the time for filing a claim for refund or,
if a refund claim has been timely filed, the expiration of the time for
instigating suit in respect of such refund claim, (iii) the expiration of the
time for filing a petition with the Tax Court or the relevant state or local
tribunal if no such petition has been filed and no suit has been instigated in
respect of the subject matter of such petition, or (iv) a final, unappealable
decision of any court of competent jurisdiction.
(q) Includible Corporation shall have the meaning attributed to that term
----------------------
in section 1504(b) of the Code.
(r) Income Tax Regulations shall mean the regulations (26 C.F.R.), as
----------------------
amended from time to time, promulgated pursuant to the Code.
(s) Increase shall mean any increase in the ACC Consolidated Group Tax
--------
Liability.
(t) Material Increase shall have the meaning attributed to that term in
-----------------
Section 8(c)(i) of this Agreement.
(u) Member, for any Taxable Year of the Combined Consolidated Group,
------
shall mean any corporation (or any predecessor or successor in interest to such
corporation under section 381 of the Code or otherwise which was or is an
Includible Corporation) which at any time during such Taxable Year is an
Includible Corporation that is included in the Combined Consolidated Group and
shall include any such corporation which at any time during such Taxable Year is
or would be the Common Parent.
(v) Offset Amount shall have the meaning attributed to that term in
-------------
Section 4(j)(i) of this Agreement.
(w) Post-Consolidation Year shall have the meaning attributed to that term
-----------------------
in Section 7(a) of this Agreement.
3
<PAGE>
(x) Prior Agreement shall have the meaning attributed to that term in the
---------------
introductory paragraph to this Agreement.
(y) Prior Notice of a Position shall mean written notice from ACC to
--------------------------
ARCO on or after January 1, referencing this Agreement, that describes a
position or positions that ACC proposes to take on the Pro Forma ACC Return for
the preceding Taxable Year in sufficient detail so as to reasonably apprise ARCO
of the basis for such position or positions.
(z) Pro Forma ACC Return shall have the meaning attributed to that term in
--------------------
Section 4(a) of this Agreement.
(aa) Reconciliation Statement shall have the meaning attributed to that
------------------------
term in Section 4(d) of this Agreement.
(bb) Service shall mean the Internal Revenue Service.
-------
(cc) Subsidiary shall mean as to any entity (the parent corporation)
----------
a corporation that would be an Includible Corporation in an Affiliated Group of
which the parent corporation would be the Common Parent.
(dd) Substantial Authority shall have the meaning attributed to that
---------------------
term in section 6662 of the Code and section 1.6662-4 of the Income Tax
Regulations and the cases and rulings interpreting such sections. For purposes
of determining whether there is Substantial Authority for the treatment of an
item, each Member of the ACC Consolidated Group shall be deemed to have a right
of appeal to the Ninth Circuit.
(ee) Taxable Year shall mean any taxable year or portion thereof
------------
beginning on or after July 1, 1987, with respect to which a Consolidated Return
is filed on behalf of the Combined Consolidated Group which includes ACC (or any
successor corporation) or any Subsidiary of ACC or, in the case of any Combined
Return, any such taxable year with respect to which a Combined Return is filed
by ARCO or any Subsidiary of ARCO that includes ARCO or any Subsidiary of ARCO
(other than ACC or any Subsidiary of ACC) and that includes ACC or any
Subsidiary of ACC; provided, however, that if ACC or a Subsidiary of ACC is
-------- -------
included in the Combined Consolidated Group for only a portion of a Taxable Year
of the Combined Consolidated Group, the "Taxable Year" with respect to ACC or
such Subsidiary shall include only that portion of the Taxable Year in which ACC
or such Subsidiary is included in the Combined Consolidated Group.
(ff) Utilized Designated Credit shall have the meaning attributed to that
--------------------------
term in Section 4(h)(ix) of this Agreement.
4
<PAGE>
2. SCOPE, COOPERATION AND LIMITATION ON DOUBLE BENEFIT.
---------------------------------------------------
(a) Scope. This Agreement relates solely to (i) federal income tax
-----
liabilities and (ii) income tax liabilities with respect to certain state and
local jurisdictions in which ACC and/or any Subsidiary of ACC participates with
ARCO or any Subsidiary of ARCO (other than ACC or any of its Subsidiaries) in
the filing of a Combined Return. Under this Agreement, the ACC Consolidated
Group will, with certain modifications set forth in this Agreement, compute its
tax liability as if the ACC Consolidated Group was not part of the Combined
Consolidated Group. However, so long as ACC or any Subsidiary of ACC is a
Member of the Combined Consolidated Group, the ACC Consolidated Group is
obligated to provide information and make payments of the ACC Consolidated Group
Tax Liability to ARCO and is subject to the same standards and control that ARCO
applies in preparing and filing the Consolidated Return (and any applicable
Combined Returns).
(b) Cooperation. ARCO and ACC shall cooperate, and each shall cause
-----------
its respective Subsidiaries to cooperate, fully in the implementation of this
Agreement on a consolidated basis, including but not limited to, providing
promptly to the requesting party such assistance and documentation as may be
requested by such party in connection with the preparation or filing of the
Consolidated Return (and any applicable Combined Returns) and the preparation
for or conduct of any audit or other examination, judicial or administrative
proceeding or any determination relating thereto. The providing party shall
bear its own costs of providing information to the requesting party if such
request relates to any Taxable Year.
(c) Avoidance of Double Deduction or Double Benefit. Nothing in this
-----------------------------------------------
Agreement shall be interpreted to entitle ACC or any Member of the ACC
Consolidated Group to receive a double deduction, compensation or benefit with
respect to any item or attribute that is not otherwise permitted under Section
4(b) of this Agreement, unless such treatment is consistent with the manner in
which such item is treated on the Combined Consolidated Group's Consolidated
Return for the relevant taxable year (or unless ACC has eliminated such double
deduction or benefit in a manner acceptable to ARCO).
3. FILING OF RETURNS AND PAYMENT OF CONSOLIDATED TAX LIABILITY.
-----------------------------------------------------------
(a) Appointment of ARCO as Agent For Consolidated Return. ACC and
----------------------------------------------------
each of its Subsidiaries hereby appoint ARCO as their agent with respect to all
periods during which ACC or such Subsidiary, as the case may be, is a Member of
the Combined Consolidated Group for the purpose of filing the Consolidated
Return and any Combined Returns and for making any election or application or
taking any action in connection therewith on behalf of ACC and such Subsidiary.
ACC shall make payments to ARCO or receive payments from ARCO as provided in
this Agreement in settlement of the ACC Consolidated Group Tax Liability.
Nothing herein shall be construed as requiring ARCO to file a Consolidated
Return for any Taxable Year;
5
<PAGE>
provided, however, that if ARCO decides not to file a Consolidated Return it
- -------- -------
shall notify ACC in writing within a period reasonably sufficient to permit ACC
to file timely returns for Members of the ACC Consolidated Group.
(b) ARCO Control Over Consolidated Return. ARCO shall prepare and
-------------------------------------
file, or cause to be prepared and filed, the Consolidated Return and any other
documents or statements required to be filed with the Service that pertain to
the determination of the Combined Consolidated Group Tax Liability for each
Taxable Year of the Combined Consolidated Group. In its sole and absolute
discretion, ARCO shall have the right with respect to any Consolidated Return
that it has filed or will file to determine (regardless of the manner in which
an item or matter may have been reported by ACC on a Pro Forma ACC Return):
(i) the manner in which such Consolidated Return, as well as any
other documents or statements incidental or related thereto, shall be
prepared and filed, including without limitation, the manner in which any
item of income, gain, loss, deduction, expense or credit of ACC or any
Subsidiary of ACC shall be reported therein or thereon;
(ii) whether any extensions with respect to any Consolidated Return
will be requested and whether to extend or refuse to extend the applicable
time period for making assessments or adjustments;
(iii) the elections that will be made in any such Consolidated Return
by any Member, including without limitation, elections by ACC or any
Subsidiary of ACC;
(iv) whether to file an amended Consolidated Return or a claim for
refund or credit;
(v) whether any refunds to which the Combined Consolidated Group may
be entitled shall be paid by way of cash refund or credited against the
Combined Consolidated Group Consolidated Tax Liability for any Taxable Year
or Taxable Years; and
(vi) any other matter or matters or take any action relating to the
tax liability of the Combined Consolidated Group for any Taxable Year.
ACC and each Subsidiary of ACC hereby irrevocably appoints ARCO as its agent and
attorney-in-fact to take any action (including the execution of documents) as
ARCO may deem appropriate to effect the foregoing. Nothing contained in this
Agreement shall limit ARCO's discretion to determine the manner in which any
item shall be reported on the Consolidated Return.
(c) Assistance and Responsibility For Support of Returns; Provision of
------------------------------------------------------------------
Financial Data. ACC and its Subsidiaries shall assist ARCO in the filing, to
- --------------
the extent permitted by law, of a Consolidated Return and such Combined Returns
for Members of the Combined Consolidated Group (including Members of the ACC
Consolidated Group) as
6
<PAGE>
ARCO elects to file or cause to be filed by maintaining such books and records
and providing such information as may be necessary or useful in the filing of
such returns and executing any documents and taking any actions that ARCO may
reasonably request in connection therewith, including without limitation,
designing and implementing systems, processes and programs for the compilation
and review of financial data; the review of transactions and accounting methods;
and the preparation of returns and of supporting documentation to assure that
such returns and all related reports and schedules are complete and accurate.
ACC shall, at its own expense, provide ARCO with all information required by
ARCO to reflect completely and accurately the financial results of the ACC
Consolidated Group in the Combined Consolidated Group's Consolidated Return (or
a Combined Return that includes a Member of the ACC Consolidated Group). Such
information shall be in such form as determined by ARCO from time to time and
shall be delivered to ARCO on a mutually agreed upon date, but in no event later
than 60 days prior to the due date of the Combined Consolidated Group's
Consolidated Return (taking into account any extensions thereof that have been
granted to ARCO) or the corresponding due date with respect to an applicable
Combined Return, unless ARCO, in its sole and absolute discretion, agrees to a
later date.
ACC shall, at its own expense, maintain sufficient books, records and
expertise to support all returns, positions taken thereon and methods used to
prepare such returns until there has been a Final Determination with respect to
all issues included on such returns. ARCO and ACC shall provide one another
with such other information concerning such returns and the application of
payments made under this Agreement as ARCO or ACC may reasonably request of one
another. ACC shall make all calculations of the earnings and profits of the
Members of the ACC Consolidated Group on an annual basis.
4. PRO FORMA ACC RETURN.
---------------------
(a) Preparation of Pro Forma ACC Return. For each Taxable Year for which
-----------------------------------
ARCO files a Consolidated Return, ACC shall prepare on behalf of the ACC
Consolidated Group a pro forma consolidated federal income tax return as the
--- -----
Common Parent of the ACC Consolidated Group (a "Pro Forma ACC Return") covering
that portion of the Taxable Year in which the ACC Consolidated Group is included
in the Combined Consolidated Group. Except as otherwise provided herein, the
Pro Forma ACC Return for each Taxable Year shall be prepared by ACC in such
manner as it deems to be in its best interest as Common Parent of the ACC
Consolidated Group, determined as if ACC filed a Consolidated Return on behalf
of the ACC Consolidated Group for such Taxable Year and all prior Taxable Years.
The Pro Forma ACC Return shall be prepared in accordance with subsection (b) of
this Section 4 and shall report the consolidated federal taxable income
(including, for all purposes of this Agreement, alternative minimum taxable
income) for such Taxable Year that the ACC Consolidated Group would have
reported if it had not been included in the Consolidated Return filed for the
Combined Consolidated Group with respect to such Taxable Year and all prior Pro
Forma ACC Returns had been actual returns; provided, however, that, except as
-------- -------
provided in Sections 4(h), 4(j) and 6, the Pro Forma ACC
7
<PAGE>
Return shall not reflect carryovers or carrybacks of net operating losses, net
capital losses, excess tax credits or other tax attributes from prior or
subsequent taxable years.
The provisions of the Code that require consolidated computations, such as
sections 861, 1201-1212 and 1231, shall be applied separately to the ACC
Consolidated Group. Section 1.1502-13 of the Income Tax Regulations shall be
applied as if the ACC Consolidated Group and the ARCO Consolidated Group were
separate affiliated groups. The elections made and positions taken by ACC in
the Pro Forma Return shall be consistent with those described in the ACC Pro
Forma Statement, as adjusted pursuant to subsection (g) of this Section 4, and
the Pro Forma ACC Return shall not reflect items of income, deduction, loss,
gain or credit other than those reflected on the ACC Pro Forma Statement or the
Combined Consolidated Return. The Pro Forma ACC Return shall with respect to
assets transferred by ARCO to ACC on or before June 9, 1987, reflect the tax
bases of such assets in the hands of ARCO immediately prior to such contribution
and shall not be increased by gain, if any, recognized by ARCO on such transfer.
(b) Standards For Positions, Methods and Elections on Pro Forma ACC
---------------------------------------------------------------
Return. ACC shall prepare the Pro Forma ACC Return by reporting the tax
- ------
treatment of any item by utilizing such positions, methods or elections that, in
ACC's discretion, are appropriate for the ACC Consolidated Group; provided, that
--------
each position is supported by Substantial Authority and ACC's use of each method
or election would be supported by Substantial Authority if the Pro Forma ACC
Returns had been actual returns. ACC may utilize a position on the Pro Forma
ACC Return that does not meet this standard; but only if ACC has obtained, after
--- ---- --
prior notice to and consultation with ARCO, ARCO's written consent to utilize
such position. Each proposal by ACC to ARCO to consent to such a position must
include a written confirmation described in the first sentence of Section 4(f),
below. In the event that ACC would be required to obtain consent of the
Secretary of the Treasury prior to changing an election or a method if the Pro
Forma ACC Returns had been actual returns, ACC may not change such election or
method without the prior written consent of ARCO.
(c) Coordination Between Pro Forma Return and Combined Consolidated Return
----------------------------------------------------------------------
Regarding Interest and Penalties. Provisions of the Code that allow a taxpayer
- --------------------------------
to mitigate or eliminate a penalty or interest liability by making disclosures
or payments to the Service will not apply to the Pro Forma ACC Return unless
ARCO makes a corresponding disclosure or payment with respect to the Combined
Consolidated Return with respect to such Pro Forma ACC Return item.
(d) Delivery to ARCO of Pro Forma ACC Return; Reconciliation Statement;
-------------------------------------------------------------------
and Assistance. The Pro Forma ACC Return will be delivered to ARCO, together
- --------------
with a written description of the elections and tax accounting methods used in
the preparation of such return, a statement of any positions taken on the Pro
Forma ACC Return that are different from those taken on the Combined
Consolidated Return, and a reconciliation of the difference in taxable income
and tax liability shown on the Pro Forma ACC Return and the separate tax returns
of Members of the ACC Consolidated Group included in the Combined Consolidated
Return (the "Reconciliation Statement"), no later than 60 days after the due
date for the Combined Consolidated Return (taking
8
<PAGE>
into account any extensions thereof that have been granted to ARCO). Appropriate
personnel of ACC responsible for the preparation of the Pro Forma ACC Return
will be available to discuss with appropriate personnel of ARCO all aspects of
such return and upon request will furnish or make available for inspection any
and all documents used in preparation of the Pro Forma ACC Return (documents
relied upon by ACC in ascertaining whether any position is supported by
Substantial Authority shall be furnished only to the principal tax legal officer
of ARCO under the attorney-client privilege).
(e) ACC Pro Forma Statement. As requested by ARCO, ACC shall prepare and
-----------------------
deliver to the principal tax legal officer of ARCO on a mutually agreed date but
in no event later than 60 days prior to the due date for the Combined
Consolidated Return (taking into account any extensions that have been granted
to ARCO) a written, privileged and confidential statement (the "ACC Pro Forma
Statement") setting forth: (i) a description of all elections and methods
proposed to be used in the preparation of the Pro Forma ACC Return and (ii) a
statement of all positions proposed to be taken on such return that are subject
to Section 4(b) of this Agreement. Appropriate personnel of ACC or any ACC
Subsidiary that are responsible for the preparation of the ACC Pro Forma
Statement shall be available upon reasonable notice to discuss with appropriate
personnel of ARCO all aspects of such statement and upon request by ARCO shall
furnish or make available for inspection any and all documents used in
preparation of the ACC Pro Forma Statement.
(f) Further Verification of ACC Positions; Opinion Procedure. By written
--------------------------------------------------------
notice no later than 30 days following the receipt by ARCO of the ACC Pro Forma
Statement or Prior Notice of a Position, as the case may be, ARCO may request
ACC to provide written confirmation to the principal tax legal officer of ARCO,
with detailed analysis and weighing of the facts and legal authorities, that any
positions specified by ARCO and that are proposed to be reflected on the Pro
Forma ACC Return are supported by Substantial Authority. ACC shall provide such
confirmation no later than 15 days following the receipt by ACC of the written
request by ARCO. A position will be presumed not to be supported by Substantial
Authority for purposes of this Agreement (and the ACC Pro Forma Statement and
the Pro Forma ACC Return shall be appropriately adjusted) if ARCO and ACC are
unable to agree within 10 days following the date that ACC provides such written
confirmation (or within 25 days from the date that ARCO requests such
confirmation, if earlier) that such position is supported by Substantial
Authority. In such event, ACC may rebut this presumption if ACC provides to
ARCO, at ACC's expense, within 30 days after the expiration of such 10-day or
25-day period, as the case may be, a written opinion from Miller & Chevalier
Chartered, Morgan, Lewis & Bockius, Hughes Hubbard & Reed or any other mutually
agreeable law firm to the effect that such position is supported by Substantial
Authority (and, if applicable, the ACC Pro Forma Statement and the Pro Forma ACC
Return shall be appropriately adjusted).
(g) Adjustment By ARCO of Pro Forma ACC Return. ARCO, within 60 days of
------------------------------------------
receipt of the Pro Forma ACC Return shall adjust the Pro Forma ACC Return as
appropriate in accordance with the terms of this Agreement and after prior
written notice to and consultation with ACC, to correct any error of fact or law
thereon, any
9
<PAGE>
error in mechanical calculation and any failure to reflect the principles set
forth in this Section 4. If ARCO proposes to adjust the Pro Forma ACC Return,
the opinion procedures of Section 4(f) shall apply. Acceptance by ARCO of the
Pro Forma ACC Return, the Reconciliation Statement or the ACC Pro Forma
Statement shall not necessarily indicate agreement by ARCO with the contents
therein nor relieve ACC of liability for any adjustment made upon audit or other
assessment. Neither acceptance of a Pro Forma ACC Return nor the fact that the
Consolidated Return of the Combined Consolidated Group treats an item in a
manner that is consistent with the treatment of such item on the Pro Forma ACC
Return shall mean that the treatment of such item is supported by Substantial
Authority or relieve ACC of liability for any adjustment made upon audit or
other assessment. In addition, any failure by ARCO to properly and fully adjust
the Pro Forma ACC Return within the 60-day period set forth in this Section 4(g)
shall not prevent ARCO from making subsequent adjustments contemplated by this
Section 4(g) or Section 4(f), as circumstances warrant within the applicable
statute of limitations (determined as if the Pro Forma ACC Return were an actual
return that is subject to any extensions that have been granted to ARCO with
respect to the Consolidated Return) nor relieve ACC of liability for such
adjustments. If as a result of such adjustment any amounts due to or from ACC
under this Agreement differ from the corresponding amounts prior to such
adjustment, payment of such difference and interest thereon shall be made to ACC
or by ACC within 10 days following such adjustment.
(h) Utilization of Excess Foreign Tax Credits to Reduce ACC Consolidated
--------------------------------------------------------------------
Group Tax Liability Under Certain Circumstances. Subject to the conditions,
- -----------------------------------------------
redeterminations and limitations set forth herein:
(i) Utilization of Excess Foreign Tax Credits. ACC may utilize
------------------------------------------
foreign tax credits of the Combined Consolidated Group on the Pro Forma ACC
Return for a given Taxable Year in addition to the foreign tax credits that
would otherwise be available to the ACC Consolidated Group on the Pro Forma
ACC Return for such year to reduce the ACC Consolidated Group Tax Liability
(including alternative minimum tax liability) for such Taxable Year in the
same manner and subject to the same limitations in the Code as foreign tax
credits generated by the ACC Consolidated Group, but only if and to the
--- ---- -- --- -- ---
extent that:
------ ----
(A) ARCO has certified such credits pursuant to Section
4(h)(iv)(A) of this Agreement (such credits shall hereafter be
referred to as "Certified Foreign Tax Credits"), or
(B) ARCO has designated such credits pursuant to Section
4(h)(iv)(B) of this Agreement (such credits shall hereafter be
referred to as "Designated Foreign Tax Credits").
ACC may only use Certified and Designated Foreign Tax Credits to reduce its
liability on the Pro Forma ACC Return to the extent that ACC would have
been able to do so if such credits had been generated by the ACC
Consolidated Group.
10
<PAGE>
(ii) Certain Limitations on Utilization of Designated Credits Based
--------------------------------------------------------------
Upon Utilization of Foreign Tax Credits by the Combined Consolidated Group.
--------------------------------------------------------------------------
ACC may utilize Designated Foreign Tax Credits only to the extent that ARCO
has determined that the ACC Consolidated Group's share of the foreign tax
credits that are actually utilized by the Combined Consolidated Group in
the year in which or for which such credits are designated (reduced by the
amount of Certified Foreign Tax Credits in such year) exceeds the amount of
foreign tax credits that would otherwise be utilized by the ACC
Consolidated Group on the Pro Forma ACC Return for such year computed
without regard to this Section 4(h). The ACC Consolidated Group's share of
the foreign tax credits utilized by the Combined Consolidated Group is
equal to the excess, if any, of (A) the foreign tax credits used by the
Combined Consolidated Group for the year, over (B) the foreign tax credits
that could have been used by the Combined Consolidated Group for the year
if the ACC Consolidated Group was not included in the Combined Consolidated
Group (computed by excluding in the relevant calculations all items of
income, gain, deduction and loss attributable to the ACC Consolidated Group
and the ACC Consolidated Group's proportionate share of the apportioned
expenses of the Combined Consolidated Group that are included in the
Combined Consolidated Group's Consolidated Return in such year). In
addition, ACC may not use Designated Foreign Tax Credits to reduce the ACC
Consolidated Group Tax Liability with respect to any Taxable Year to the
extent that the foreign tax credits used on the Pro Forma ACC Return for
such year, after application of this Section 4(h), would exceed the amount
of foreign tax credits used on the Consolidated Return. ARCO will provide
a statement to the principal tax officer of ACC that sets forth the amount
of foreign tax credits used on the Consolidated Return and the ACC
Consolidated Group's share of such foreign tax credits on or before the
date that is 30 calendar days prior to the due date of the Pro Forma ACC
Return.
(iii) Coordination of Sections. In connection with the utilization
------------------------
of credits under this Section 4(h), Section 4(j) shall be applied prior to
Section 4(h).
(iv) Procedures for ARCO Certification and Designation of Excess
-----------------------------------------------------------
Foreign Tax Credits; Refunds. ARCO may certify or designate foreign tax
----------------------------
credits with respect to a Taxable Year as Certified Foreign Tax Credits or
Designated Tax Credits, as set forth below, or increase the amount of any
such credits so certified or designated. If ARCO certifies or designates
foreign tax credits with respect to a prior Taxable Year and the ACC
Consolidated Group Tax Liability is reduced for such prior year as a result
of such certification or designation, ARCO shall make payment of such
difference to ACC without interest within 45 days of receiving from ACC a
schedule setting forth the calculation of such difference.
(A) Certification of Excess Foreign Tax Credits. ARCO will
-------------------------------------------
certify foreign tax credits of the Combined Consolidated Group as
Certified Foreign Tax Credits for utilization in the Taxable Year for
which such credits are certified (which may be the current year
or if applicable, a previous year), but only if ARCO, upon the receipt
of ACC data
11
<PAGE>
acceptable to ARCO, has determined in the year that such credits are
generated, or at any time up to and including the date that the
Consolidated Return of the Combined Consolidated Group for the last
Taxable Year to which such credits could be carried forward is filed,
that there is a practical certainty that (A) such credits will be
available after there is a Final Determination with respect to all
applicable years, (B) such credits will not be utilized by Members of
the Combined Consolidated Group other than Members of the ACC
Consolidated Group and (C) the amount of credits to be certified will
not exceed the ACC Consolidated Group's share of the foreign tax
credits that will be actually utilized by the Combined Consolidated
Group in the year in which such credits will be certified (determined
in accordance with the second sentence of Section 4(h)(ii) of this
Agreement) and that the foreign tax credits that will be used on the
Pro Forma ACC Return after application of this Section 4(h) will not
exceed to amount of credits used on the Consolidated Return of the
Combined Consolidated Group. ARCO may use any reasonable method in
making this determination, provided that such method is consistently
applied. ARCO's certification of the Certified Foreign Tax Credits
will take into account potential audit adjustments, potential usage of
such credits in any year by Members of the Combined Consolidated Group
other than Members of the ACC Consolidated Group by reason of
carrybacks and carryovers and such other factors as ARCO deems
pertinent or relevant. ARCO will provide a written statement to the
principal tax officer of ACC setting forth the amount, if any, of
Certified Foreign Tax Credits with respect to a given Taxable Year.
(B) Designation of Designated Foreign Tax Credits. ARCO will
---------------------------------------------
designate foreign tax credits of the Combined Consolidated Group as
Designated Foreign Tax Credits for utilization in the Taxable Year for
which such credits are designated (which may be the current year or if
applicable, a previous year), but only if ARCO, upon the receipt of
ACC data acceptable to ARCO, has determined in the year that such
credits are generated or in the two succeeding years that it is highly
likely that such credits (A) will be available after there is a Final
Determination with respect to all applicable years and (B) will not be
utilized by Members of the Combined Consolidated Group other than
Members of the ACC Consolidated Group. ARCO may use any reasonable
method in making this determination, provided that such method is
consistently applied. ARCO's determination of the Designated Foreign
Tax Credits will take into account potential audit adjustments,
potential usage of such credits in any year by Members of the Combined
Consolidated Group other than Members of the ACC Consolidated Group by
reason of carrybacks and carryovers and such other factors as ARCO
deems pertinent or relevant. ARCO will provide a written statement to
the principal tax officer of ACC setting forth the amount, if any, of
Designated Foreign Tax Credits with respect to a given Taxable Year.
In the event that ARCO has designated credits with respect to the
current Taxable Year, from time to
12
<PAGE>
time during such Taxable Year and at any time prior to the filing of
the Combined Consolidated Return for such Taxable Year, ARCO may
reduce its estimate of Designated Foreign Tax Credits for such Taxable
Year. Such modifications shall be retroactive to the beginning of such
Taxable Year.
(v) Priority Rule For Certified and Designated Foreign Tax Credit
-------------------------------------------------------------
Utilization. For purposes of this Agreement, including without limitation
-----------
Section 6 hereof, tax credits of the ACC Consolidated Group, including
carrybacks and carryovers thereof, that would reduce the ACC Consolidated
Group Tax Liability but for the availability or prior usage of Certified
and Designated Foreign Tax Credits, shall be deemed to be used prior to
such Certified and Designated Foreign Tax Credits notwithstanding contrary
provisions of the Code. If ACC has reduced the ACC Consolidated Group Tax
Liability for any Taxable Year under Section 4(h) of this Agreement and
such Certified or Designated Foreign Tax Credit, as the case may be, is
subsequently displaced by any attribute of the ACC Consolidated Group,
including without limitation a refund claim pursuant to Section 6(a) of
this Agreement, ACC shall reimburse ARCO for any amount by which ACC's
liability to ARCO was reduced as a result of the use of the displaced
Certified or Designated Foreign Tax Credit. For purposes of this Section
4(h)(v), Designated Foreign Tax Credits shall be deemed to be displaced
prior to Certified Foreign Tax Credits. All calculations of ACC's
reimbursement obligations pursuant to this Section 4(h)(v) shall include an
amount of interest that equals the corresponding interest amount computed
pursuant to Section 6(a) of this Agreement; provided that neither ACC nor
ARCO shall have any obligation to pay any interest pursuant to this Section
4(h)(v) and Section 6(a), respectively, unless there is a simultaneous
payment by the other of a corresponding amount of interest pursuant to
Section 6(a) and Section 4(h)(v), respectively. It is intended that ACC's
liability to ARCO pursuant to this Section 4(h)(v) shall be offset against
ARCO's liability to ACC pursuant to Section 6(a) of this Agreement.
(vi) Limitation on Carryovers and Carrybacks; Lapse of Unused
--------------------------------------------------------
Certified or Designated Foreign Tax Credits. Notwithstanding any provision
-------------------------------------------
of this Agreement to the contrary, ACC shall not be entitled with respect
to any Taxable Year (A) to carryover any Certified or Designated Foreign
Tax Credits with respect to such year to reduce the ACC Consolidated Group
Tax Liability for any subsequent Taxable Year or (B) to carryback any
Certified or Designated Foreign Tax Credits with respect to such year to
reduce the ACC Consolidated Group Tax Liability for any prior Taxable Year
without the prior written consent of ARCO, which consent may be withheld or
granted in ARCO's sole discretion. In the event that ARCO certifies or
designates a Certified or Designated Foreign Tax Credit, as the case may
be, with respect to any Taxable Year and such credit is not used by ACC to
reduce the ACC Consolidated Group Tax Liability on the Pro Forma ACC Return
that is filed with respect to such year (or such credit does not enable ACC
to receive a refund pursuant to Section 4(h)(iv) of this Agreement in the
case of credits that are certified or designated with respect to a prior
Taxable Year), such certification or
13
<PAGE>
designation will lapse and will not be available to offset any subsequent
adjustments to the ACC Consolidated Group Tax Liability, whether pursuant
to Section 8(f) or otherwise.
(vii) Assistance and Cooperation; Limitation on Inspection and
--------------------------------------------------------
Remedies. Appropriate personnel of ACC shall be available upon reasonable
--------
notice to assist ARCO in making the certifications, determinations and
calculations required by this Section 4(h). Upon request by ARCO, ACC
shall furnish such additional data or information as ARCO may require to
make the certifications, determinations and calculations contemplated by
this Section 4(h). All of ARCO's certifications, determinations,
redeterminations and calculations pursuant to this Section 4(h) shall be
conclusive in the absence of manifest error. ACC hereby agrees that
neither it nor its independent accountants will have the right to inspect
any such certifications, determinations and calculations or any related
documents, including without limitation, inspections to confirm the good
faith and reasonableness of ARCO's certification of Certified Foreign Tax
Credits and determination of Designated Foreign Tax Credits. If requested
to do so by ACC's independent accountants, ARCO's independent accountants
may review ARCO's certifications, determinations and calculations and
supporting workpapers pursuant to this Section 4(h) to confirm that ARCO's
methodology is reasonable and consistently applied. Nothing in this
Section 4(h)(vii) or otherwise shall compel ARCO to certify any Certified
Foreign Tax Credits or to designate any Designated Foreign Tax Credits with
respect to any Taxable Year or to increase the amount of any credits so
certified or designated. As a material inducement to ARCO to enter into
this Agreement, each Member of the ACC Consolidated Group (i) expressly
waives any claim or cause of action that it might otherwise assert,
including without limitation under the common law or federal or state
securities laws, by reason of this Agreement to the extent that such claims
relate in whole or in part to ARCO's certifications, determinations and
calculations pursuant to this Section 4(h) and (ii) agrees that, regardless
of any provision of this Agreement, ARCO will not have any liability in
respect of any such claim or cause of action that is or may be brought.
(viii) Subsequent Adjustments. If any adjustment is made with
----------------------
respect to a Taxable Year during which ACC or any of its Subsidiaries is a
Member of the Combined Consolidated Group to any item of income, gain,
loss, deduction, expense or credit of the Combined Consolidated Group,
whether or not such item relates to ACC or any Subsidiary of ACC, by reason
of the filing of an amended Consolidated Return, a claim for refund with
respect to such Taxable Year, a post-filing adjustment or an audit with
respect to such Taxable Year by the Service that either reduces the amount
of foreign tax credits or the ACC Consolidated Group's share of such
credits, ARCO shall redetermine the amount of the Designated Foreign Tax
Credits for such Taxable Year by taking into account any such adjustment
and applying the procedures set forth in this Agreement. ARCO shall have
sole and absolute discretion to determine whether and in what amount an
adjustment affects the amount of any Designated Foreign Tax Credits. ARCO
may also redetermine the amount of the Designated Foreign Tax Credits for a
Taxable Year to eliminate a good faith
14
<PAGE>
mathematical or clerical error in the calculation of the Designated Foreign
Tax Credits. If any amounts due from ACC under this Agreement after a
redetermination exceed the amounts previously paid, then ACC shall make
payment of such difference. ACC shall not be liable for interest, penalty
or addition to tax if the adjustment does not relate to items of income,
gain, loss, deduction, expense or credit of the ACC Consolidated Group or
if the redetermination was attributable to a mathematical or clerical error
by ARCO. To the extent that the adjustment does relate to the ACC
Consolidated Group, ACC shall be liable for interest, penalty or addition
to tax allocated as ARCO, in its discretion, deems just and proper in view
of all applicable circumstances, but in no event shall the amount allocable
to ACC exceed the amount of interest, penalty or addition to tax paid by
ARCO to the Service with respect to such adjustment.
(ix) Sharing of Designated Foreign Tax Credits. In the event that
-----------------------------------------
ARCO determines that all or part of the Designated Foreign Tax Credits with
respect to a Taxable Year that reduced the ACC Consolidated Group Tax
Liability pursuant to this Section 4(h) in a prior Taxable Year or that
could reduce such liability in the current Taxable Year but for the
application of this Section 4(h)(ix) (a "Utilized Designated Credit") could
have been used by another Member or Members of the Combined Consolidated
Group other than a Member of the ACC Consolidated Group, such credits shall
be apportioned between the ACC Consolidated Group and such Member or
Members of the Combined Consolidated Group. The ACC Consolidated Group's
share of the Utilized Designated Credits with respect to a Taxable Year
shall be determined by multiplying the Utilized Designated Credits for such
year by a fraction, the numerator of which is the Utilized Designated
Credits for such year and the denominator of which is the sum of the
Utilized Designated Credits for such year and the amount of Utilized
Designated Credits for such year that could have been used by each Member
of the Combined Consolidated Group other than Members of the ACC
Consolidated Group. Any apportionment of Utilized Designated Credits
pursuant to this Section 4(h)(ix) shall not prevent another apportionment
of the same credits in a subsequent year if the requirements of this
subsection are met. If any amounts due from ACC under this Agreement after
such apportionment differ from the amounts previously paid, then ACC shall
make payment of such difference without interest, penalty or addition to
tax. The determination of whether another Member could have used such
credits will be made by ARCO in its sole discretion and without regard to
the ordering rules under the Code.
(x) Displaced Credits. If ACC has reduced the ACC Consolidated Group
-----------------
Tax Liability for any Taxable Year pursuant to this Section 4(h) as a
result of any Designated Foreign Tax Credit and such Designated Foreign Tax
Credit is subsequently displaced by any attribute of the Combined
Consolidated Group, ACC shall reimburse ARCO for any amount by which ACC's
liability to ARCO was reduced as a result of use of the displaced
Designated Foreign Tax Credit. For purposes of this Section 4(h)(x),
Designated Foreign Tax Credits shall be deemed to be displaced prior to
Certified Foreign Tax Credits.
15
<PAGE>
(i) Intentionally omitted
(j) Utilization of Tax Benefit Derived by the Combined Consolidated Group
---------------------------------------------------------------------
From Excess Capital Losses of the ACC Consolidated Group Under Certain
- ----------------------------------------------------------------------
Circumstances. For purposes of computing the ACC Consolidated Group Tax
- -------------
Liability the rules of this Section 4(j) shall apply, subject to the conditions
and limitations set forth herein.
(i) Initial ARCO Authorization of Capital Losses. In the event that
--------------------------------------------
ACC anticipates that the capital losses on its Pro Forma ACC Return will
exceed the capital gains on such return and that such losses may not be
carried back pursuant to Section 6 of this Agreement, ACC may request
permission on or prior to December 15 of the Taxable Year to offset such
capital losses against capital gains of Members of the Combined
Consolidated Group other than Members of the ACC Consolidated Group. If
such a request is made, ARCO will determine the amount, if any, of capital
losses of the ACC Consolidated Group that will be deemed to be offset
against capital gains of the Combined Consolidated Group (such excess
capital losses shall hereafter be referred to as "Authorized Capital
Losses"). ARCO may use any reasonable method to determine the amount of
Authorized Capital Losses, provided that such method is consistently
applied. ARCO will determine the amount of Authorized Capital Losses by
assessing the available capital gains of the Combined Consolidated Group.
This assessment will take into account potential audit adjustments,
potential carryovers of capital losses of Members of the Combined
Consolidated Group other than Members of the ACC Consolidated Group, the
benefit actually realized by the Combined Consolidated Group from capital
losses reflected on the Pro Forma ACC Return and such other factors as ARCO
deems pertinent or relevant. Appropriate personnel of ACC shall be
available upon reasonable notice to assist ARCO in making this
authorization and any other determinations required under this Section
4(j). In addition, ARCO will calculate with respect to each Taxable Year
for which there are Authorized Capital Losses the actual reduction in the
tax liability of the Combined Consolidated Group that is attributable to
the use of such Authorized Capital Losses on the Combined Consolidated
Return for such year (the "Offset Amount"). ARCO's determination of the
Offset Amount shall be made without regard to any additional benefits to
the Combined Consolidated Group in future Taxable Years, including, without
limitation, benefits associated with minimum tax credit carryovers. ARCO's
determination of the Offset Amount shall be conclusive in the absence of
manifest error. ARCO will provide a statement to the principal tax officer
of ACC that sets forth the amount of Authorized Capital Losses and the
Offset Amount associated with such losses on or before the date that is 30
calendar days prior to the due date of the Pro Forma ACC Return.
(ii) Use of Authorized Capital Losses on Pro Forma ACC Return. ACC
--------------------------------------------------------
may utilize all or part of the Offset Amount, if any, to reduce the ACC
Consolidated Group Tax Liability (including alternative minimum tax
liability) for
16
<PAGE>
any Taxable Year, but not below zero, as follows: (A) in the event that the
actual capital losses on the Pro Forma ACC Return in excess of the capital
gains on such return with respect to such Taxable Year equal or exceed the
Authorized Capital Losses with respect to such year, ACC may use the full
amount of the Offset Amount and (B) in the event that the actual capital
losses on the Pro Forma ACC Return in excess of the capital gains on such
return with respect to a Taxable Year are less than the amount of
Authorized Capital Losses with respect to such year, ACC may utilize a
proportionate amount of the Offset Amount with respect to such year
determined by multiplying the Offset Amount for such year by a fraction,
the numerator of which is the capital losses on the Pro Forma ACC Return in
excess of the capital gains on such return and the denominator of which is
the Authorized Capital Losses. To the extent that the Offset Amount reduces
the ACC Consolidated Tax Liability pursuant to this Section 4(j) the amount
of capital losses available to be utilized as carryovers or carrybacks on
the Pro Forma ACC Return shall be correspondingly reduced.
(iii) Priority Rule For Authorized Capital Loss Utilization. For
-----------------------------------------------------
purposes of this Agreement, including without limitation Section 6 hereof,
if ACC has reduced the ACC Consolidated Group Tax Liability for any Taxable
Year under Section 4(j)(ii) of this Agreement and it is subsequently
determined by ARCO that the Authorized Capital Losses that allowed such
reduction could have been offset against capital gains of the ACC
Consolidated Group, such losses will be offset against capital gains of the
ACC Consolidated Group and ACC shall reimburse ARCO for the reduction in
ACC's liability to ARCO as a result of the use of such Authorized Capital
Losses. All calculations of ACC's reimbursement obligations pursuant to
this Section 4(j)(iii) shall include an amount of interest that equals the
corresponding interest amount computed pursuant to Section 6(a) of this
Agreement; provided that neither ACC nor ARCO shall have any obligation to
pay any interest pursuant to this Section 4(j)(iii) and Section 6(a),
respectively, unless there is a simultaneous payment by the other of a
corresponding amount of interest pursuant to Section 6(a) and Section
4(j)(iii), respectively. It is intended that ACC's liability to ARCO
pursuant to this Section 4(j)(iii) shall be offset against ARCO's liability
to ACC pursuant to Section 6(a) of this Agreement.
(iv) Limitation on Carryovers and Carrybacks. Notwithstanding any
---------------------------------------
provision of this Agreement to the contrary, ACC shall not be entitled to
carryover or carryback any Authorized Capital Losses or any Offset Amount
with respect to any Taxable Year to reduce the ACC Consolidated Group Tax
Liability pursuant to this Section 4(j) for any prior or subsequent Taxable
Year.
(v) Final Determination of Offset Amount. After a Final
------------------------------------
Determination with respect to the Combined Consolidated Group's
Consolidated Return with respect to a Taxable Year, ARCO shall determine
the amount of capital gains of the Combined Consolidated Group at the end
of such year that could not be offset by capital losses (including
carryovers from prior years) at the end of such year of Members of the
Combined Consolidated Group other than Members of the ACC Consolidated
Group. In making this determination, capital loss
17
<PAGE>
carryovers from prior years and capital losses generated in the current
year by Members of the Combined Consolidated Group other than Members of
the ACC Consolidated Group shall be deemed to be applied to offset capital
gains prior to capital losses of Members of the ACC Consolidated Group,
notwithstanding the absorption provisions of the Code. If the amount of
such capital gains determined in the first sentence of this Section 4(j)(v)
exceeds the amount of capital gains that ARCO used in determining the
Offset Amount for such year, ARCO shall redetermine the Offset Amount by
taking into account the increase in available capital gains that may be
offset against capital loss carryovers and current year capital losses of
Members of the ACC Consolidated Group (such losses that may be offset
against capital gains pursuant to this Section 4(j)(v) shall be treated as
Authorized Capital Losses for purposes of this Agreement). If any amounts
due from ACC under this Agreement after such redetermination are less than
the amounts previously paid, then ARCO shall make immediate payment of such
difference to ACC without interest.
(vi) Limitation on Application of Section 4(j). In the event that
-----------------------------------------
ARCO determines that all or a portion of the capital losses on the Pro
Forma ACC Return with respect to a Taxable Year were generated in a
transaction or a series of related transactions that had as a principal
purpose the securing of a benefit under this Section 4(j) in a manner that
is inconsistent with the intent of this Agreement, the provisions of this
Section 4(j) shall be applied without reference to such capital losses. If
after application of this Section 4(j)(vi), any amounts due from ACC under
this Agreement are greater than the amounts previously paid, then ACC shall
make immediate payment of such difference to ARCO without interest.
(vii) Effect on Pro Forma ACC Foreign Tax Credit Limitation.
-----------------------------------------------------
Authorized Capital Losses that reduce the ACC Consolidated Group Tax
Liability with respect to any Taxable Year pursuant to this Section 4(j)
shall be treated as used by the ACC Consolidated Group for purposes of
determining the foreign tax credit limitation under section 904 of the Code
with respect to the Pro Forma ACC Return. Authorized Capital Losses from
sources without the United States shall be included in the numerator of the
fraction described in section 904(a) of the Code and all Authorized Capital
Losses shall be included in the denominator of such fraction. The tax
against which the foreign tax credit shall be applied shall be the ACC
Consolidated Group Tax Liability determined after application of this
Section 4(j). For purposes of this calculation, such capital losses will
be deemed to have the same source and separate limitation under section
904(d) as such losses have on the Consolidated Return.
5. PRO FORMA ACC RETURN PAYMENTS.
-----------------------------
(a) For each Taxable Year for which a Combined Consolidated Return is
filed, ACC shall make periodic payments to ARCO of the ACC Consolidated Group
Tax Liability in such amounts as, and no later than the dates on which, payments
of
18
<PAGE>
estimated tax would be due from the ACC Consolidated Group if it were not
included in the Combined Consolidated Group and the balance of the tax due for a
Taxable Year shall be paid no later than March 15 of the year following. ACC
shall pay to ARCO no later than 60 days after the date on which a Combined
Consolidated Return for any Taxable Year is filed an amount equal to the sum of
(i) the ACC Consolidated Group Tax Liability for that Taxable Year (as adjusted
pursuant to paragraph (g) of Section 4 of this Agreement) and (ii) the additions
to tax, if any, under section 6655 of the Code (or under any successor section
of the Code) that would have been imposed upon ACC (treating the amount due to
ARCO under (i) above as its federal income tax liability and treating any
periodic payments to ARCO pursuant to the first sentence of this Section 5 as
estimated tax payments under section 6655(d) of the Code), reduced by the sum of
the amount of such periodic payments and the payment made on March 15, plus
interest as determined in Section 9 of this Agreement running from the March 15
of the year following such Taxable Year. If ACC's total periodic payments to
ARCO for any Taxable Year exceed the amount of its liability under the preceding
sentence, ARCO shall refund such excess to ACC within 45 days after receipt of
the Pro Forma ACC Return, plus interest as determined in Section 9 of this
Agreement accruing from 45 days after the date that the Consolidated Return of
the Combined Consolidated Group is filed.
(b) All payments to be made by ARCO or ACC, as the case may be, pursuant
to this Agreement shall be made not later than 12:00 noon, Los Angeles time, on
the date when due, in funds immediately available in Los Angeles, in the case of
payments from ACC to ARCO, or Philadelphia, in the case of payments from ARCO to
ACC.
6. PRO FORMA ACC RETURN REFUNDS.
----------------------------
(a) Any net operating loss, net capital loss, excess tax credits or other
tax attributes reflected on a Pro Forma ACC Return for any Taxable Year may be
carried back or forward, as the case may be, and utilized in calculating the ACC
Consolidated Group Tax Liability for prior or subsequent Taxable Years in the
same manner as such attributes would have been carried back or carried forward
and deducted if the Pro Forma ACC Returns had been actual returns. All
limitations on the use of such attributes contained in the Code or the Income
Tax Regulations shall be taken into account. The ACC Consolidated Group Tax
Liability shall be recomputed for the Taxable Year or Years to which such
attributes are carried and for any subsequent Taxable Years to take into account
such attributes, and payments made pursuant to Sections 5 of this Agreement
shall be appropriately adjusted. In the case of any carryback of attributes
pursuant to this Section 6(a), any payment between ARCO and ACC required by such
adjustment shall be paid within 90 days of the date that the ACC Consolidated
Group would have been eligible to file a claim for refund as if the ACC
Consolidated Group had never been included in the Combined Consolidated Group,
Pro Forma ACC Returns had been actual returns and the members of the ACC
Consolidated Group had not been in existence before June 1, 1987. All
calculations of actual and deemed refunds pursuant to this Section 6 shall
include interest computed as if ACC had filed a claim for refund or an
application for a tentative carryback adjustment pursuant to section 6411(a) of
the Code on the date on which it provides
19
<PAGE>
ARCO with the amended Pro Forma ACC Return. Notwithstanding the foregoing,
Certified Foreign Tax Credits, Designated Foreign Tax Credits and Authorized
Capital Losses are not subject to this Section 6. Such attributes may be carried
back or forward only as provided by Sections 4(h) or 4(j) of this Agreement.
(b) Except as provided in Section 6(a) of this Agreement, ACC may not
amend a Pro Forma ACC Tax Return for a prior Taxable Year or otherwise cause a
redetermination of the ACC Consolidated Group Consolidated Tax Liability for a
prior Taxable Year.
7. PAYMENTS FOR TAXABLE YEARS IN THE EVENT OF DECONSOLIDATION.
----------------------------------------------------------
(a) Payments by ACC to ARCO. If for any of the first 5 taxable years
-----------------------
after the ACC Consolidated Group ceases to be included in the Combined
Consolidated Group (a "Post-Consolidation Year"), (i) the federal income tax
liability of the ACC Consolidated Group in such year is less than (ii) the
federal income tax liability that would have been imposed with respect to the
same period if the ACC Consolidated Group had never been included in the
Combined Consolidated Group and all Pro Forma ACC Returns had been actual
returns, ACC shall pay to ARCO within 10 days of the filing of the ACC return
with respect to such Post-Consolidation Year the excess of (ii) over (i).
(b) Payments by ARCO to ACC. If for any of the first 5 Post-Consolidation
-----------------------
Years (i) the federal income tax liability of the ACC Consolidated Group in such
year is greater than (ii) the federal income tax liability that would have been
imposed with respect to the same period if the ACC Consolidated Group had never
been included in the Combined Consolidated Group and all Pro Forma ACC Returns
had been actual returns for such years, ARCO shall pay to ACC the excess of (i)
over (ii) within 10 days of the later of the date of the filing of the ACC
return with respect to such Post-Consolidation Year return or the date that ACC
notifies ARCO in writing of the amount of its liability to ACC under this
Section 7(b) with respect to such year.
At ARCO's request, ACC will provide ARCO with any calculations and
supporting workpapers contemplated by subsections (a) and (b) of this Section 7
to allow ARCO to determine the accuracy of such calculations. If an ACC federal
income tax return with respect to a Post-Consolidation Year reflects a net
operating loss, net capital loss, excess tax credits, or any other tax
attribute, and such attribute can be carried back to a Combined Consolidated
Return, then, if ACC shall so request, ARCO shall file a claim for refund
reflecting such carryback, and ARCO shall pay to ACC the amount of any refund
(including interest thereon) or other reduction in tax liability which ARCO, as
common parent for the former Combined Consolidated Group, actually receives or
realizes as a result of the carryback of such attribute. ARCO shall pay the
amount of any such refund to ACC within 20 days after receipt thereof and shall
pay to ACC the amount of any reduction in tax liability realized other than
through receipt of a refund within 20 days after filing a federal income tax
return reflecting such reduction.
20
<PAGE>
For purpose of clause (ii) of Section 7(a) above and clause (ii) of the
first paragraph of this Section 7(b), the federal income tax liability that
would have been imposed if the ACC Consolidated Group had never been included in
the Combined Consolidated Group and all Pro Forma ACC Returns had been actual
returns shall be determined: (A) by assuming that any attributes arising in
Post-Consolidation Years which cannot in fact be absorbed as carrybacks in years
for which Combined Consolidated Returns were filed would be available for
utilization as carrybacks or carryovers to Post-Consolidation Years, (B) by
assuming that any attributes arising in Post-Consolidation Years which are
absorbed as carrybacks in years for which Combined Consolidated Returns were
filed would not be available for utilization as carrybacks or carryovers to
Post-Consolidation Years, (C) by assuming that any Certified Foreign Tax Credits
and Designated Foreign Tax Credits that reduce the ACC Consolidated Group Tax
Liability pursuant to Section 4(h) of this Agreement are tax attributes of the
ACC Consolidated Group and are reflected in the relevant Pro Forma ACC Returns
and (D) by assuming that capital gains generated by Members of the Combined
Consolidated Group other than Members of the ACC Consolidated Group that are
offset against Authorized Capital Losses pursuant to Section 4(j) of this
Agreement are tax attributes of the ACC Consolidated Group and are reflected in
the relevant Pro Forma ACC Returns.
8. AUDITS, LITIGATION, AND ADJUSTMENTS.
-----------------------------------
(a) Control of Audits and Judicial Proceedings. Except as specifically
------------------------------------------
provided below, ARCO shall have the exclusive right to control any audit,
conference or other proceeding with the Service or the relevant state or local
authorities, or any judicial proceedings concerning the determination of the
Combined Consolidated Group Tax Liability or the state or local income tax
liability of any consolidated, combined or unitary group including ARCO or any
of its Subsidiaries (other than ACC or a Subsidiary of ACC) and ACC (or any of
the Subsidiaries of ACC). ARCO, at its sole option, may pursue or forego any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim. Except as specifically provided
below, ARCO may compromise or settle any adjustment or deficiency proposed,
asserted or assessed as a result of any such proceeding ACC and each Subsidiary
of ACC hereby appoints ARCO as its agent for the purpose of conducting such
contest or proposing and concluding any such compromise and settlement.
(b) Notification of and Attendance at Proceedings. If any claim is
---------------------------------------------
asserted by any taxing authority that, if successful, would result in an
Increase under Section 8(f) of this Agreement, ARCO shall promptly inform ACC as
to such claim in sufficient detail (taking into account the ACC Consolidated
Group's knowledge of and participation in the audit or proceeding) so as to
reasonably apprise ACC of the basis for the claim. ARCO will provide ACC, at
ACC's cost, with all notices, correspondence and other documentation with a
direct and material bearing on any such proposed claim, and will provide ACC
with notice of, and an opportunity to attend (with ACC's tax counsel), any
meetings with the Service or Department of Justice concerning such claim. A
failure to give timely notice or to include any specified information in any
notice pursuant to this Section 8(b) will not affect the rights or obligations
of any party hereunder.
21
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(c) Settlements at Examination. ARCO may pay, settle compromise or
--------------------------
concede any proposed adjustment at examination subject to the following
limitations:
(i) Settlements Not Likely to Result in Material Increase. In the
-----------------------------------------------------
event that a settlement of a proposed adjustment is not reasonably likely
to give rise to an Increase that will exceed $50,000 per year with respect
to any Taxable Year or Years (a "Material Increase"), ARCO may settle such
item without ACC's consent, provided that such payment, settlement,
compromise or concession is reasonable in light of the merits of the issues
underlying such proposed adjustment and the costs and hazards of further
administrative proceedings or litigation as to such issues. The preceding
sentence notwithstanding, ARCO may not settle an adjustment that is not
reasonably likely to give rise to a Material Increase with respect to a
Taxable Year without ACC's consent if and to the extent that the cumulative
amount of settlements without ACC's consent for such Taxable Year pursuant
to this Section 8(c)(i) exceeds $500,000.
(ii) Settlements Likely to Result in Increase. ARCO may not pay,
----------------------------------------
settle, compromise or concede any adjustments at the examination level that
are reasonably likely to give rise to a Material Increase (or that is not
reasonably likely to give rise to a Material Increase but that may not be
settled without ACC's consent pursuant to Section 8(c)(i)) without (i)
ACC's written consent or (ii) without preserving the opportunity to file a
claim for refund to recover any portion of such Increase attributable to
such adjustment. If ARCO desires to make or accept an offer to settle an
adjustment at the examination level pursuant to this Section 8(c)(ii) ARCO
will give written notice to ACC to that effect. In addition, in the event
that ARCO wishes to settle an adjustment that relates predominately to the
ACC Consolidated Group, but does not do so because ACC did not consent to
such settlement, ARCO may, in its sole and absolute discretion, require ACC
to pursue such adjustment at appeals or in judicial proceedings at ACC's
expense.
In the event that ARCO settles an item without ACC's consent pursuant
to this Section 8(c)(ii) and preserves an opportunity to file a claim for
refund, (a) ARCO shall at ACC's request (given not later than 30 days after
the conclusion of the audit in question) and at ACC's cost (including all
reasonable out-of-pocket costs incurred by ARCO and allocated costs of in-
house counsel) file a claim for refund and pursue such claim with all
reasonable diligence, provided that ACC shall have obtained and delivered
to ARCO an opinion of ACC's independent tax counsel stating that it is more
likely than not that such item would be resolved in favor of ACC through
further proceedings, and (b) any payment by ACC of such Increase shall not
be taken into account under subsection (f) of this Section 8 until there is
a Final Determination with respect to such claim for refund, provided that
ACC will pay ARCO interest on any portion of such payment which is not
refunded and which gives rise to a payment by ACC under subsection (f) of
this Section 8 at the rate provided in Section 9 of this Agreement from the
date of payment by ARCO until the date of such Final Determination.
22
<PAGE>
Notwithstanding the foregoing, ARCO shall not be precluded in its sole
and absolute discretion from paying, settling, compromising or conceding
any proposed adjustment (i) with respect to which ARCO agrees that any
resulting Increase in excess of the amount of the Increase that would have
occurred if such adjustment had been settled on terms proposed by ACC will
not be taken into account under subsection (f) of this Section 8, or (ii)
which relates, or is based upon issues which relate, predominately to
businesses conducted by Members of the Combined Consolidated Group other
than Members of the ACC Consolidated Group even though it also may relate
to businesses conducted by Members of the ACC Consolidated Group, provided
that, if ACC objects to such payment, settlement, compromise or concession,
ARCO shall, upon ACC's timely written request, obtain the written
confirmation of Miller & Chevalier Charted or other independent tax counsel
that such payment, settlement, compromise or concession is as favorable a
result on that issue as is predicted to be the result that would be
obtained in further administrative proceedings or litigation solely on that
issue.
(d) Settlements at Appeals or in Judicial Proceedings. ARCO may pay,
-------------------------------------------------
settle compromise or concede any proposed adjustment at appeals or in any
judicial proceeding with written notice to ACC, but without ACC's consent and
whether or not such adjustment is reasonably likely to give rise to an Increase,
provided that ARCO believes that such payment, settlement, compromise or
concession is reasonable in light of the merits of the issues underlying such
proposed adjustment and the costs and hazards of further administrative
proceedings or litigation as to such issues. The preceding sentence
notwithstanding, ARCO may not settle such adjustment if (i) within 10 calendar
days after giving notice of a settlement offer, ARCO receives written notice
from ACC that ACC has elected to pursue the defense of such adjustment through
further administrative or judicial proceedings at ACC's expense and by ACC's own
counsel (reasonably acceptable to ARCO) and (ii), if in the good faith judgment
of ARCO such additional proceedings may prejudice the Combined Consolidated
Group in any manner, ACC provides an opinion of ACC's independent tax counsel
within 10 calendar days that it is more likely than not that such proceedings
will result in a more favorable result to the Combined Consolidated Group than
the proposed settlement offer. Notwithstanding the foregoing, ARCO shall not be
precluded in its sole and absolute discretion from paying, settling,
compromising or conceding any proposed adjustment with respect to which ARCO
agrees that any resulting Increase in excess of the amount of the Increase that
would have occurred if such adjustment had been settled on terms proposed or
agreed to by ACC will not be taken into account under subsection (f) of this
Section 8.
(e) Expenses. ACC shall support any audit or other examination or
--------
judicial or administrative proceeding with respect to any Taxable Year, at its
own expense, in any reasonable way requested by ARCO. In addition, ACC shall
reimburse ARCO for all expenses (including, without limitation, legal and
accounting fees) incurred by ARCO in the course of proceedings described in
paragraph (a) of this Section 8 to the extent such expenses are reasonably
allocable by ARCO, after consultation with ACC, to ACC Consolidated Return
items.
23
<PAGE>
(f) Recomputation of Payments to Reflect Adjustments. To the extent that
------------------------------------------------
any audit, litigation, or claim for refund with respect to a Combined
Consolidated Return or any ARCO or ACC Post-Consolidation Year Return results in
an adjustment to any item of income, gain, loss, deduction, expense or credit of
ACC or any Subsidiary of ACC, the amounts, if any, due to or from ACC under this
Agreement or the Predecessor Agreement shall be redetermined by taking into
account any such adjustment and applying the procedures set forth in this
Agreement. The preceding sentence notwithstanding, adjustments that affect the
amount of Certified Foreign Tax Credits or Designated Foreign Tax Credits shall
be governed by Section 4(h) and shall not be taken into account in this Section
8(f). Adjustments that affect ACC's ability to use Certified Foreign Tax
Credits or Designated Foreign Tax Credits shall be governed by the provisions of
this Section 8(f) in addition to Section 4(h). Adjustments that affect ARCO's
ability to utilize Authorized Capital Losses shall be governed by the provisions
of this Section 8(f) in addition to Section 4(j). In the event that an
adjustment reduces or increases the amount of capital losses on the Pro Forma
ACC Return in excess of the capital gains on such return in any Taxable Year,
ARCO shall redetermine the Offset Amount by taking into account such increase or
decrease in available capital losses. ARCO's determination of whether and in
what amount an adjustment applies to ACC or any of its Subsidiaries shall be
conclusive in the absence of manifest error.
If, as a result of such redetermination or limitation on liability, any
amounts due to or from ACC under this Agreement differ from the amounts
previously paid, then except as herein provided, payment of such difference
together with any interest, penalty or addition to tax allocated to ACC shall be
made to ACC or by ACC as follows: (a) in the case of an adjustment resulting in
a credit or refund of tax, within 10 calendar days of the date on which such
refund or notice of such credit is received by ARCO or ACC with respect to such
adjustment, or (b) in the case of an adjustment resulting in a payment of
additional tax, within 10 calendar days of the date on which such additional tax
is paid. In addition, any interest, penalty or addition to tax attributable to
such adjustment will be allocated as ARCO, in its discretion, deems just and
proper in view of all applicable circumstances, but in no event shall such
amount allocable to ACC exceed the amount of interest, penalty or addition to
tax paid by ARCO to the Service with respect to such adjustment. ACC shall not
be liable for any difference that is directly attributable to an adjustment
relating to a settlement by ARCO if ARCO was required to obtain ACC's consent to
such settlement pursuant to this Section 8 and ARCO did not either (a) obtain
ACC's consent or (b) preserve the opportunity to file a claim for refund.
Neither acceptance of a Pro Forma ACC Return nor failure by ARCO to file
consistently with such Pro Forma ACC Return shall relieve ACC of liability for
an adjustment under this Section 8(f).
9. INTEREST.
--------
Interest required to be paid by or to ACC pursuant to this Agreement shall,
unless otherwise specified, be computed at the rate specified from time to time
pursuant to section 6621(a)(2) of the Code and in the manner provided in the
Code. Any payment required to made hereunder that is not made on or before the
date on which such payment is due shall bear interest computed at such rate.
24
<PAGE>
10. STATE AND LOCAL INCOME TAXES.
----------------------------
In the case of state or local taxes that are based on or measured by the
net income of the Combined Consolidated Group, or any combination of Members
thereof (other than solely with respect to Members who are (A) Members of the
ARCO Consolidated Group and not of the ACC Consolidated Group or (B) Members of
the ACC Consolidated Group and not of the ARCO Consolidated Group) and that are
determined on a combined, consolidated or unitary basis, the provisions of this
Agreement other than Sections 4(h) and 4(j) shall apply with equal force to such
state or local tax whether or not the ACC Consolidated Group is included in the
Combined Consolidated Group for federal income tax purposes; provided, however,
-------- -------
that interest pursuant to Section 9 of this Agreement shall be computed at the
rate and in the manner provided under such state or local law for interest on
underpayments or overpayments of such tax, as the case may be, for the relevant
period. To the extent that one or more Members own, directly or indirectly, at
any time during the Taxable Year more than 50 percent of the voting stock of a
corporation and are permitted or required to file consolidated, combined or
unitary tax returns with such corporation, the provisions of this Section 10
shall apply to such corporation as if it were a Member.
11. TAX TREATMENT OF PAYMENTS.
-------------------------
Each of ARCO and ACC warrants and represents that it will exclude any
payments received by it pursuant to this Agreement from its gross income for
federal income tax purposes and will seek no federal income tax deduction for
payments made by it, but only to the extent that a reasonable basis in law and
fact exists for taking such a position; provided, however, that:
-------- -------
(a) within 30 days after the tax liability for a taxable period in
which ACC receives a payment from ARCO hereunder is no longer subject to
adjustments, ACC shall provide ARCO with a statement identifying the
portion, if any, of such payment which was included in its gross income for
federal income tax purposes and, within 10 days of receipt of such
statement, ARCO shall pay to ACC an amount sufficient to hold ACC harmless
on an after-tax basis from federal, state and local income taxes (including
interest, penalties and additions to tax) imposed with respect to ACC's
receipt of such payment; and
(b) within 30 days after the tax liability for a taxable period in
which ACC makes a payment to ARCO hereunder is no longer subject to
adjustment, ARCO shall provide ACC with a statement identifying the
portion, if any, of such payment which was included in its gross income for
federal income tax purposes and, within 10 days of receipt of such
statement, ACC shall pay to ARCO an amount sufficient to hold ARCO harmless
on an after-tax basis from federal, state and local income taxes (including
interest, penalties and additions to tax) imposed with respect to ARCO's
receipt of such payment.
25
<PAGE>
Notwithstanding the foregoing, the preceding provisions of this Section 11 shall
not apply where the payment from ARCO to ACC or from ACC to ARCO is in respect
of an underlying liability (e.g., state or local income taxes or interest) the
----
payment or refund of which would ordinarily be deductible from or includible in
income.
12. SHARING OF INFORMATION.
----------------------
Each of ARCO and ACC shall provide the other with all relevant portions of
returns and claims for refund which it files on behalf of its Consolidated Group
for taxable periods in which the ACC Consolidated Group is not included in the
Combined Consolidated Group which are reasonably requested in connection with
the calculation or verification of amounts due pursuant to this Agreement.
13. ADMINISTRATION; RESOLUTION OF DISPUTES.
--------------------------------------
The provisions of this Agreement will be administered by ARCO. Except as
otherwise expressly governed by the terms of this Agreement, ARCO may use any
reasonable method in making any computations or allocations hereunder. ARCO
will, if requested to do so by ACC, provide ACC with documentation supporting
any such calculations or allocations (other than calculations or allocations
pursuant to Sections 4(h) and 4(j) of this Agreement). ARCO's calculations will
be conclusive unless a written objection is provided to ARCO within one year of
such calculations. If written objection is timely made by ACC, the disputed
issue (other than disputes described in Section 4(f) of this Agreement or
disputes with respect to Sections 4(h) and 4(j) of this Agreement, which
disputes shall be governed solely by such sections) shall be resolved by a
national law firm or another Big Six accounting firm, selected by ARCO's
independent accountants, whose determination will be conclusive and binding upon
the parties and whose fees and expenses shall be shared equally by ARCO and ACC.
Nothing in this Section 13 is intended to limit ARCO's discretion in making any
computations, allocations or determinations that may be made under this
Agreement in ARCO's sole discretion.
14. INTERPRETATION.
--------------
This Agreement is intended to provide for the calculation and allocation of
certain federal and state and local income tax liabilities between the Combined
Consolidated Group (other than ACC and its Subsidiaries) and the ACC
Consolidated Group, and any situation or circumstance concerning such
calculation and allocation that is not specifically contemplated hereby or
provided for herein shall be dealt with in a manner consistent with the
underlying principles of calculation and allocation in this Agreement.
26
<PAGE>
15. EFFECT OF AGREEMENT.
-------------------
This Agreement shall determine the liability of ARCO and ACC as to the
matters provided for herein, whether or not such determination is effective for
purposes of the Code or of state or local revenue laws, for financial reporting
purposes or for any other purpose.
16. CONFIDENTIALITY.
---------------
Each of ARCO and ACC agree that any information furnished one another
pursuant to this Agreement is confidential and, except as, and to the extent,
required during the course of an audit or litigation, shall not be disclosed to
other persons.
17. SUCCESSORS.
----------
This Agreement shall be binding upon and inure to the benefit of any
successor to any of the parties, by merger, acquisition of assets or otherwise,
to the same extent as if the successor had been an original party to this
Agreement.
18. APPLICATION TO PRESENT AND FUTURE MEMBERS OF THE ACC CONSOLIDATED
-----------------------------------------------------------------
GROUP.
- -----
This Agreement is being entered into by ACC on behalf of itself and each
other Member of the ACC Consolidated Group. This Agreement shall constitute a
direct obligation of all such Members and shall be deemed to have been readopted
and affirmed on behalf of any corporation that becomes a Member of the ACC
Consolidated Group in the future. ACC shall cause each Member of the ACC
Consolidated Group to comply fully with the terms of this Agreement in the same
manner as if each such Member had executed this Agreement. ACC hereby
guarantees the performance of all actions, agreements and obligations provided
under this Agreement of each Member of the ACC Consolidated Group. ACC shall
cause any Member or Members of the ACC Consolidated Group to execute formally
this Agreement if requested to do so by ARCO. Any Member of the ACC
Consolidated Group that leaves the Combined Consolidated Group shall be bound by
this Agreement with respect to any matter that involves a Taxable Year during
which such Member was included in the Combined Consolidated Return.
19. TAX LAW CHANGES.
---------------
Any alteration, modification, addition, deletion, or other change in the
Code or the Income Tax Regulations (or the applicable state and local tax
provisions) will automatically be applicable to this Agreement when changed.
27
<PAGE>
20. GOVERNING LAW.
-------------
This Agreement shall be governed by and construed in accordance with the
laws of Delaware.
21. HEADINGS.
--------
The headings in this Agreement are for convenience only and shall not be
deemed for any purpose to constitute a part or to affect the interpretation of
this Agreement.
22. COUNTERPARTS.
------------
This Agreement may be executed simultaneously in two or more counterparts,
each of which will be deemed an original, and it shall not be necessary in
making proof of this Agreement to produce or account for more than one
counterpart.
23. NOTICE.
------
All notices, claim, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given if and
when delivered or mailed (registered or certified mail, postage prepaid, return
receipt requested), as follows:
(a) If to ARCO: Vice President and General Tax Officer
515 South Flower Street
Los Angeles, California 90071
(b) If to ACC: Vice President and General Tax Officer
3801 West Chester Pike
Newtown Square, Pennsylvania 19073
or to such other person or address as the party to whom the communication is to
be given may have previously furnished to the other party in writing.
24. SEVERABILITY.
------------
If any provision of this Agreement is held to be unenforceable for any
reason, it shall be adjusted rather than voided, if possible, in order to
achieve the intent of the parties to the maximum extent practicable. In any
event, all other provisions of this Agreement shall be deemed valid, binding and
enforceable to their full extent.
28
<PAGE>
25. TERMINATION.
-----------
Unless otherwise agreed by the parties, this Agreement shall remain in
force and be binding so long as the period of assessments under the Code remains
unexpired for any of ARCO's or ACC's taxable years during which the ACC
Consolidated Group was included in the Combined Consolidated Return or which is
one of the first 5 Post-Consolidation Years.
IN WITNESS WHEREOF, each of the parties to this Agreement has caused this
Agreement to be executed by its duly authorized officer on this date of June 30,
1995.
ATLANTIC RICHFIELD COMPANY
By /s/ Patrick J. Ellingsworth
---------------------------
ARCO CHEMICAL COMPANY
By /s/ Louis S. Battista
---------------------------
29
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 94
<SECURITIES> 30
<RECEIVABLES> 704
<ALLOWANCES> 0
<INVENTORY> 432
<CURRENT-ASSETS> 1,305
<PP&E> 3,741
<DEPRECIATION> 1,452
<TOTAL-ASSETS> 4,070
<CURRENT-LIABILITIES> 603
<BONDS> 904
<COMMON> 100
0
0
<OTHER-SE> 1,781
<TOTAL-LIABILITY-AND-EQUITY> 4,070
<SALES> 2,290
<TOTAL-REVENUES> 2,290
<CGS> 1,666
<TOTAL-COSTS> 1,666
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> 425
<INCOME-TAX> 149
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 276
<EPS-PRIMARY> 2.87
<EPS-DILUTED> 2.87
</TABLE>
