<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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Commission file number 1-9678
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ARCO Chemical Company
(Exact name of registrant as specified in its charter)
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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)
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(610) 359-2000
(Registrant's telephone number, including area code)
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Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
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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
September 30, 1996: 96,766,964.
<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 Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ----- ------ ------
<S> <C> <C> <C> <C>
Sales and other operating revenues $1,035 $ 999 $2,976 $3,289
Costs and other operating expenses 800 729 2,273 2,395
------ ----- ------ ------
Gross profit 235 270 703 894
Selling, general and administrative
expenses 67 70 200 203
Research and development 22 20 61 58
------ ----- ------ ------
Operating income 146 180 442 633
Interest expense (22) (23) (65) (67)
Other income, net 8 4 26 20
------ ----- ------ ------
Income before income taxes 132 161 403 586
Provision for income taxes 35 44 119 193
------ ----- ------ ------
Net income $ 97 $ 117 $ 284 $ 393
====== ===== ====== ======
Earnings per common share $1.00 $1.21 $2.94 $ 4.08
====== ===== ====== ======
Cash dividends paid per common
share $.70 $.70 $2.10 $ 1.95
====== ===== ====== ======
</TABLE>
See accompanying notes.
<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 362 $ 235
Short-term investments - 25
Accounts receivable 560 631
Receivable from sale of assets 160 -
Inventories 444 472
Prepaid expenses and other current assets 42 19
------ ------
Total current assets 1,568 1,382
Investments and long-term receivables 75 90
Property, plant and equipment, net 2,167 2,293
Deferred charges and other assets (net of
accumulated amortization of $303 in 1996
and $285 in 1995) 410 370
------ ------
Total assets $4,220 $4,135
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Long-term debt due within one year $ 25 $ 25
Accounts payable 271 253
Taxes payable 96 94
Other accrued liabilities 213 217
------ ------
Total current liabilities 605 589
------ ------
Long-term debt 855 887
Other liabilities and deferred credits 173 158
Deferred income taxes 380 409
Minority interest 184 123
Stockholders' equity:
Common stock 100 100
Additional paid-in capital 874 869
Retained earnings 1,065 985
Foreign currency translation 70 110
Treasury stock, at cost (86) (95)
------ ------
Total stockholders' equity 2,023 1,969
------ ------
Total liabilities and stockholders'
equity $4,220 $4,135
====== ======
</TABLE>
See accompanying notes.
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<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1996 1995
----- -----
<S> <C> <C>
Cash flows from operating activities
Net income $ 284 $ 393
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 165 176
Net change in accounts receivable, inventories,
accounts and other payables 46 (127)
Provision for environmental liabilities 4 12
Other (60) (26)
----- -----
Net cash provided by operating activities 439 428
----- -----
Cash flows from investment activities
Capital expenditures (158) (132)
Increase in deferred charges (6) (82)
Proceeds from (purchase of) short-term investments 25 (30)
Other 37 4
----- -----
Net cash used in investment activities (102) (240)
----- -----
Cash flows from financing activities
Dividends paid (203) (188)
Repayment of long-term debt (17) (15)
Other 13 (7)
----- -----
Net cash used in financing activities (207) (210)
----- -----
Effect of exchange rate changes on cash (3) -
----- -----
Net increase (decrease) in cash and cash equivalents 127 (22)
Cash and cash equivalents at beginning of period 235 144
----- -----
Cash and cash equivalents at end of period $ 362 $ 122
===== =====
</TABLE>
See accompanying notes.
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<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 1995 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, 1995.
NOTE B. Geographic Information
The Company is an international manufacturer of intermediate chemicals
and specialty chemical products which it principally markets to other
industrial concerns. The Company operates in one industry segment. The
geographic distribution of the Company's markets is indicated by the table
below. Total revenues are summarized geographically by destination (customer
location) and by origin (point of sale); intercompany sales between geographic
areas are excluded.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
(Millions of Dollars)
<S> <C> <C> <C> <C>
Total revenues (by destination)
United States $ 563 $ 495 $1,580 $1,673
Europe 266 302 812 897
Other foreign 206 202 584 719
------ ----- ------ ------
Total $1,035 $ 999 $2,976 $3,289
====== ===== ====== ======
Total revenues (by origin)
United States $ 629 $ 558 $1,759 $1,952
Europe 313 368 961 1,099
Other foreign 93 73 256 238
------ ----- ------ ------
Total $1,035 $ 999 $2,976 $3,289
====== ===== ====== ======
Pretax earnings
United States $ 122 $ 185 $ 376 $ 614
Europe 28 6 89 30
Other foreign 6 10 (4) 27
Interest expense (22) (23) (65) (67)
Eliminations (2) (17) 7 (18)
------ ----- ------ ------
Total $ 132 $ 161 $ 403 $ 586
====== ===== ====== ======
</TABLE>
Included in pretax earnings are royalty charges made to foreign operations
for the use of Company technology. Eliminations principally include
intercompany profit.
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<PAGE>
NOTE C. Inventories
Inventories at September 30, 1996 and December 31, 1995 comprised the
following categories:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Millions of Dollars)
<S> <C> <C>
Finished goods $ 313 $ 338
Work-in-process 30 38
Raw materials 62 51
Materials and supplies 39 45
----- -----
Total $ 444 $ 472
===== =====
</TABLE>
NOTE D. Property, Plant and Equipment, Net
Property, plant and equipment, at cost, and related accumulated depreciation
at September 30, 1996 and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Millions of Dollars)
<S> <C> <C>
Property, plant and equipment $3,666 $3,812
Less: accumulated depreciation 1,499 1,519
------ ------
Total $2,167 $2,293
====== ======
</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 effects on
the environment of the past disposal or release of certain chemical substances
at various sites (remediation costs). The Company continues to evaluate the
amount of these remediation costs and periodically adjusts its reserve for
remediation costs and its estimate of additional environmental loss
contingencies based on 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 any other potentially responsible parties.
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<PAGE>
At September 30, 1996, the Company's environmental reserve totaled $56
million, which reflected the Company's latest assessment of potential future
remediation costs associated with existing sites. A significant portion of the
reserve is related to the Beaver Valley plant, formerly owned by the Company,
located in Monaca, Pennsylvania. The reserve gives recognition to a work plan,
between the Company and the Pennsylvania Department of Environmental Protection
(PADEP), for testing, risk assessment, remedial process design and remediation
of conditions at the Beaver Valley plant site. The reserve also reflects an
agreement between the Company and another responsible party whereby that party
has agreed to pay for approximately 50 percent of the costs associated with the
Beaver Valley plant work plan. The Company sold the Beaver Valley plant assets
to NOVA Chemicals Inc. (NOVA) as of September 30, 1996, see Note H, but
currently retains ownership of the land at the Beaver Valley plant site,
substantial portions of which are being leased to NOVA. The Company has
retained responsibility for certain remediation of the land at the Beaver
Valley plant site under the work plan and for certain additional remediation
that may be required by PADEP pursuant to the Pennsylvania Land Recycling and
Environmental Remediation Standards Act.
The remainder of the reserve is related to four other plant sites and one
federal Superfund site for amounts ranging from $2 million to $16 million per
site. The Company is involved in administrative proceedings or lawsuits
relating to nine other Superfund sites. However, the Company estimates, based
on currently available information, that potential loss contingencies
associated with these sites, individually and in the aggregate, are not
significant. Substantially all amounts reserved are expected to be paid out
over the next five to ten years.
The Company relies upon remedial investigation/feasibility studies (RI/FS) at
each site as a basis for estimating remediation costs at the site. The Company
has completed RI/FS or preliminary assessments at most of its sites. However,
selection of the remediation method and the cleanup standard to be applied are,
in most cases, subject to approval by the appropriate government authority.
Accordingly, the Company may have possible loss contingencies in excess of the
amounts reserved to the extent that the scope of remediation required, the
final remediation method selected and the cleanup standard applied vary from
the assumptions used in estimating the reserve. The Company estimates that the
upper range of these possible loss contingencies should not exceed the amount
accrued by more than $65 million.
The extent of loss related to environmental matters ultimately depends upon a
number of factors, including technological developments, changes in
environmental laws, the number and ability to pay of other parties involved at
a particular site and the Company's potential involvement in additional
environmental assessments and cleanups. Based upon currently known facts,
management believes that any remediation costs the Company may incur in excess
of the amounts reserved or disclosed above would not have a material adverse
impact on the Company's consolidated financial statements.
The Company and the 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 (see next page)
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<PAGE>
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 nine-month periods ended
September 30, 1996 are computed based on 96,721,243 and 96,630,871 weighted
average number of shares outstanding, respectively. Earnings per common share
for the three- and nine-month periods ended September 30, 1995 are computed
based on 96,340,677 and 96,243,844 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.
NOTE G. Supplemental Cash Flow Information
Following is supplemental cash flow information for the nine months ended
September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------ ------
(Millions of Dollars)
<S> <C> <C>
Short-term investments:
Gross proceeds from maturities $ 139 $ -
Gross purchases (114) (30)
----- -----
Net proceeds (purchases) $ 25 $ (30)
===== =====
Cash paid during the period for:
Interest (net of amount capitalized) $ 66 $ 60
===== =====
Income taxes $ 129 $ 171
===== =====
Noncash investing activities:
Noncash aspects of asset sale
Net assets sold $ 160 $ -
Receivable from the sale of assets (160) -
</TABLE>
The assets and liabilities sold to NOVA have been removed from the Company's
September 30, 1996 balance sheet and a corresponding receivable from the sale
of assets has been recorded. Cash proceeds from the sale were received on
October 1, 1996. See Note H.
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<PAGE>
NOTE H. Asset Sale
On September 30, 1996, the Company sold its plastics business to NOVA. The
sale price was approximately $160 million. As part of the transaction, the
Company entered into a long-term sales agreement to supply NOVA with
approximately 400 million pounds per year of styrene monomer, a principal raw
material in plastics production. Neither the plastics' results of operations
nor the sale of the plastics business were material to the Company's
consolidated results of operations.
NOTE I. Subsequent Event
On October 9, 1996, the Company signed an agreement to purchase Olin
Corporation's (Olin) toluene diisocyanate (TDI) and aliphatic diisocyanate
(ADI) businesses for approximately $565 million. The agreement includes Olin's
TDI and ADI production facilities at Lake Charles, Louisiana, and certain
related assets, including patents and process technologies. Subject to
regulatory approval, the transaction is expected to close in late 1996 or early
1997.
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company manufactures and markets intermediate chemicals and specialty
chemical products, operating in a single industry segment. It conducts
business primarily in the Western Hemisphere, Europe, and the Asia Pacific
region.
The Company's two principal manufacturing processes both yield its key
product, propylene oxide (PO), and either one of two co-products, styrene
monomer (SM) or tertiary butyl alcohol (TBA). The Company also manufactures
numerous derivatives of these products, including methyl tertiary butyl ether
(MTBE), the principal derivative of TBA used as an oxygenate and an octane
component in gasoline, and polyols, a key derivative of PO. The Company also
sells toluene diisocyanate (TDI) obtained under long-term supply agreements
with a third party. TDI and polyols are combined to manufacture polyurethanes.
On September 30, 1996, the Company completed the sale of its plastics
business to NOVA Chemicals, Inc. (NOVA) for approximately $160 million. This
transaction is reflected in the third quarter 1996 financial statements.
On October 9, 1996, the Company signed an agreement to purchase Olin
Corporation's (Olin) TDI and aliphatic diisocyanate (ADI) businesses for
approximately $565 million. Subject to regulatory approval, the transaction is
expected to close in late 1996 or early 1997.
RESULTS OF OPERATIONS
Product Volumes
Sales and other operating revenues include the sales and processing
volumes of PO, SM, TBA and their derivatives for the periods indicated below.
With the sale of the plastics business, the Company has sold its SM derivative
capacity but will continue to produce SM.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
(Millions)
<S> <C> <C> <C> <C>
PO and derivatives
(pounds) 846 811 2,493 2,601
Co-products:
SM and derivatives
(pounds) 730 616 2,080 1,965
TBA and derivatives
(gallons) 303 272 835 862
</TABLE>
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<PAGE>
Third Quarter 1996 versus Third Quarter 1995
Net Income
Net income for the third quarter 1996 was $97 million compared with
$117 million in the third quarter 1995. The decrease in third quarter 1996 net
income was primarily attributable to significantly lower SM margins and, to a
lesser extent, lower PO derivatives margins. The lower margins were partly
offset by the benefit of higher volumes for most products.
Revenues
Revenues of $1,035 million in the third quarter 1996 increased four
percent from $999 million in the third quarter 1995, reflecting higher product
volumes for most products offset by lower sales prices for SM and PO
derivatives. SM volumes increased 19 percent primarily due to higher
contractual offtakes by SM equity partners and higher exports. MTBE volumes
increased 11 percent, reflecting higher U. S. demand as many customers
replenished low MTBE inventories. PO and derivative volumes increased four
percent due to customer inventory building in anticipation of PO derivative
price increases and modest improvement in European and Asian demand.
The benefit from the higher sales volumes was offset by lower prices
for SM and PO derivatives. SM prices were substantially lower versus the prior
year period due to increased industry supply. PO derivative prices were lower
as a result of increased price competition.
Gross Profit
Gross profit was $235 million, or 22.7 percent of sales, in the third
quarter 1996, a decrease of $35 million from $270 million, or 27.0 percent of
sales, in the third quarter 1995. The gross profit decrease was primarily
attributable to significantly lower SM margins and, to a lesser extent, lower
PO derivative margins. SM margins were significantly lower as SM prices
decreased substantially. PO derivative margins declined primarily as a result
of lower selling prices.
The 1996 and 1995 third quarters include pretax charges of $4 million
and $12 million, respectively, for estimated future environmental clean-up
costs. These charges do not reflect any potential benefit from insurance
proceeds.
The Company is party to a number of multi-year, fixed-margin MTBE toll-
based sales contracts covering a substantial portion of the Company's U.S.-
based MTBE volume. These contracts have had the effect of reducing the
exposure of the MTBE business to market cycles. A significant number of these
contracts will terminate in late 1996 through early 1997. The Company is in
the process of negotiating new contracts. In view of the current market
conditions, however, it is anticipated that the pricing in the new contracts
may not provide margins that are as favorable as those provided in the
contracts that are currently in effect.
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<PAGE>
Other
The Company revised its 1996 estimated effective income tax rate from
31.0 percent to 29.6 percent primarily due to the utilization of prior year
capital loss carryforwards. The update resulted in a 26.5 percent effective
income tax rate for the third quarter 1996, which was comparable to the 27.3
percent effective rate for the third quarter 1995.
Nine Months Ended September 30, 1996 versus Nine Months Ended September 30,
1995
Net Income
Net income for the first nine months 1996 was $284 million compared
with $393 million in the first nine months 1995. The decrease was primarily
due to lower 1996 SM margins. For the first nine months 1996, PO and
derivative margins were higher than the 1995 period; however, this benefit was
substantially offset by the combined effect of lower PO and derivatives volumes
and lower MTBE margins.
Revenues
Revenues decreased 10 percent to $2,976 million in the first nine
months 1996 from $3,289 million in the first nine months 1995, primarily
reflecting lower SM prices and, to a lesser extent, lower volumes for PO and
derivatives. SM prices decreased significantly in comparison to the first nine
months 1995 due to increased industry supply.
Volumes for PO and derivatives and TBA and derivatives decreased four
percent and three percent, respectively. The decrease in PO and derivatives
volumes reflected weaker demand and increased industry capacity, and resulted
in lower production levels of co-product TBA. Excluding offtakes by SM equity
partners, SM and derivatives volumes showed a slight decrease.
Gross Profit
Gross profit decreased $191 million to $703 million, or 23.6 percent of
sales, in the first nine months 1996 from $894 million, or 27.2 percent of
sales, in the first nine months 1995. The gross profit decrease was primarily
attributable to significantly lower SM margins. Higher PO and derivative
margins were substantially offset by the effect of lower PO and derivative
volumes and lower MTBE margins.
SM margins were significantly lower as prices decreased substantially
more than raw material costs. PO and derivative margins for the first nine
months 1996 increased versus the 1995 period primarily due to lower raw
material costs; however, margins declined toward the end of the 1996 period due
to lower PO derivative prices. MTBE margins decreased due to lower selling
prices and higher raw material costs.
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<PAGE>
Other
The Company estimates its effective income tax rate for 1996 at 29.6
percent. The final 1995 effective income tax rate was 32.8 percent. The
decrease in the 1996 estimated effective tax rate versus 1995 is primarily
attributable to increased utilization of foreign tax credits and utilization of
capital loss carryforwards.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of September 30, 1996, the Company had $362 million in cash and cash
equivalents and short-term investments compared with $260 million at December
31, 1995. The Consolidated Statement of Cash Flows for the quarter ended
September 30, 1996 shows that net cash flows provided by operating activities
were $439 million, whereas net cash flows used by investment and financing
activities were $102 million and $207 million, respectively.
On October 9, 1996, the Company signed an agreement to purchase Olin's
TDI and ADI businesses for approximately $565 million. The agreement includes
Olin's TDI and ADI production facilities at Lake Charles, Louisiana, and
certain related assets, including patent and process technologies. Subject to
regulatory approval, the transaction is expected to close in late 1996 or early
1997. The Company will finance the acquisition through a combination of cash
on hand and short- and long-term borrowing.
On October 4, 1996, the Company announced the start of engineering on a
250 million pound-per-year butanediol (BDO) plant to be built in Rotterdam, the
Netherlands, by the year 2001, and plans to expand existing BDO capacity in
Channelview, Texas, from 75 million to 120 million pounds per year in late
1997.
On September 30, 1996, the Company sold its plastics business to NOVA.
The sale proceeds were approximately $160 million. As part of the transaction,
the Company entered into a long-term sales agreement to supply NOVA with
approximately 400 million pounds per year of styrene monomer, a principal raw
material in plastics production. Neither the plastics' results of operations
nor the sale of the plastics business were material to the Company's
consolidated results of operations.
In connection with the sale of the plastics business, the Company
implemented a stock repurchase program for up to 320,000 shares of the
Company's common stock held in certain employee benefit plans by former
employees associated with the plastics business.
On April 12, 1996, the Board of Directors gave final approval for the
expansion of the PO/SM complex in Channelview, Texas, and the construction of a
new world-scale PO/SM plant in Rotterdam, the Netherlands. The Channelview
PO/SM expansion will add annual PO and SM capacity of 110 million and 248
million pounds, respectively, in early 1998. The new PO/SM plant will be
completed in the fourth quarter 1999, adding annual PO and SM capacity of 625
million and 1,400 million pounds, respectively, upon start up.
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<PAGE>
Investment activities for the first nine months 1996 included capital
expenditures of $158 million, which included initial spending for the above-
mentioned PO/SM projects as well as low-cost capacity increases and
environmental, health and safety projects. Minority interest includes equity
contributions designated for specific capital projects. At September 30, 1996,
the unexpended amounts were classified as long-term other assets in the balance
sheet.
The Company paid dividends of $.70 per share, totalling $68 million, in
the third quarter 1996. On October 17, 1996, the Board of Directors declared a
dividend of $.70 per share on the Company's common stock, payable December 6,
1996.
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 October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 requires companies to adopt its
provisions for fiscal years beginning after December 15, 1995. SFAS No. 123
encourages a fair value-based method of accounting for employee stock options
or similar equity instruments, but allows continued use of the intrinsic value-
based method of accounting prescribed by Accounting Principles Board (APB) No.
25, "Accounting for Stock Issued to Employees." Companies electing to continue
to use APB No. 25 must make pro forma disclosures of net income and earnings
per share as if the fair value-based method of accounting had been applied.
The Company will continue to follow the provisions of APB No. 25 and,
accordingly, will make the pro forma disclosures required by SFAS No. 123, if
material, in its financial statements for the year ended December 31, 1996.
- 13 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the disclosure on page 8 of the Company's 1995
Form 10-K Report regarding other Superfund sites. The Company is currently
involved in administrative proceedings or lawsuits relating to nine other
sites.
Reference is made to the disclosure on page 9 of the Company's 1995
Form 10-K Report regarding the Monaca, Pennsylvania (Beaver Valley) plant,
formerly owned by the Company. Certain organic waste material is contained in
the soil and ground water at the site of the Beaver Valley plant. In 1994, the
Company entered into a Consent Order and Agreement (the Consent Agreement) with
the Pennsylvania Department of Environmental Protection (PADEP) pursuant to
which the Company and PADEP agreed upon a work plan for testing and remedial
process design with regard to the conditions at the Beaver Valley site. Under
the terms of the Consent Agreement, the Company paid civil penalties totalling
$363,000 in 1994 and $63,000 in 1995. Under the terms of the Consent Agreement,
the Company must pay an additional penalty of $63,000 each year until the
commencement of active remediation at the Beaver Valley site, after which the
amount of such annual penalty shall be reduced based on the extent of
remediation commenced at the site. The Company sold the Beaver Valley plant
assets to NOVA Chemicals Inc. (NOVA) as of September 30, 1996, but currently
retains ownership of the Beaver Valley land, substantial portions of which are
being leased to NOVA. NOVA will assume ownership of such portions of the Beaver
Valley land after the occurrence of certain defined events. The Company has
retained responsibility for the work plan and for certain additional
remediation of the Beaver Valley land that may be required by PADEP pursuant to
the Pennsylvania Land Recycling and Environmental Remediation Standards Act.
The Company has an agreement with Beazer East, Inc., the successor to Koppers
Inc. (the previous owner of the Beaver Valley plant and site), whereby Beazer
East, Inc. agreed to pay for approximately 50 percent of the cost of the
remediation.
On October 15, 1996, the Company commenced an arbitration proceeding in
the International Chamber of Commerce Court of Arbitration in Paris, France
against Repsol, S.A. (Repsol) and Repsol Quimica, S.A. (Quimica). The dispute
concerns technology licensed to Quimica for the production of PO and SM under
agreements entered into in 1986 when Repsol bought the Company's half of a
Spanish joint venture called Montoro. The Company seeks in the arbitration to
enforce the Company's rights under the 1986 agreements and to protect the
technology licensed to Quimica. On October 15, 1996, the Company also formally
notified the European Commission of the 1986 agreements, because Repsol has
taken the position that those agreements are not enforceable under European
law. Quimica and another Repsol subsidiary concurrently filed a complaint with
the European Commission in which Quimica seeks to have the 1986 agreements
declared to be contrary to Articles 85 and 86 of the Treaty of Rome and
therefore unenforceable. The Company believes that Quimica's complaint is not
well founded and that the 1986 agreements are valid and enforceable.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule for the nine months ended September 30, 1996.
(b) Reports on Form 8-K:
None
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<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: October 31, 1996
- 16 -
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
27 Financial Data Schedule for the nine months
ended September 30, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 362
<SECURITIES> 0
<RECEIVABLES> 560
<ALLOWANCES> 0
<INVENTORY> 444
<CURRENT-ASSETS> 1,568
<PP&E> 3,666
<DEPRECIATION> 1,499
<TOTAL-ASSETS> 4,220
<CURRENT-LIABILITIES> 605
<BONDS> 855
0
0
<COMMON> 100
<OTHER-SE> 1,923
<TOTAL-LIABILITY-AND-EQUITY> 4,220
<SALES> 2,976
<TOTAL-REVENUES> 2,976
<CGS> 2,273
<TOTAL-COSTS> 2,273
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> 403
<INCOME-TAX> 119
<INCOME-CONTINUING> 284
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 284
<EPS-PRIMARY> 2.94
<EPS-DILUTED> 2.94
</TABLE>
