<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 MARCH 31, 1997
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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 X 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 MARCH
31, 1997: 96,869,370.
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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
March 31,
------------------
1997 1996
------ -----
<S> <C> <C>
Sales and other operating revenues $1,029 $ 982
Costs and other operating expenses 844 730
------ -----
Gross profit 185 252
Selling, general and administrative
expenses 68 63
Research and development 21 18
------ -----
Operating income 96 171
Interest expense (22) (22)
Other (expense) income, net (1) 9
------ -----
Income before income taxes 73 158
Provision for income taxes 25 52
------ -----
Net income $ 48 $ 106
====== =====
Earnings per common share $.50 $1.10
====== =====
Cash dividends paid per common
share $.70 $ .70
====== =====
</TABLE>
See accompanying notes.
<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 54 $ 70
Accounts receivable 649 629
Inventories 534 536
Prepaid expenses and other current assets 47 37
------ ------
Total current assets 1,284 1,272
Investments and long-term receivables 69 71
Property, plant and equipment, net 2,570 2,622
Deferred charges and other assets (net of
accumulated amortization of $321 in 1997
and $312 in 1996) 440 429
------ ------
Total assets $4,363 $4,394
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 172 $ 150
Long-term debt due within one year 24 25
Accounts payable 332 349
Taxes payable 34 19
Other accrued liabilities 235 229
------ ------
Total current liabilities 797 772
------ ------
Long-term debt 828 844
Other liabilities and deferred credits 179 171
Deferred income taxes 387 408
Minority interest 213 185
Stockholders' equity:
Common stock 100 100
Additional paid-in capital 876 875
Retained earnings 1,043 1,062
Foreign currency translation 24 64
Treasury stock, at cost (84) (87)
------ ------
Total stockholders' equity 1,959 2,014
------ ------
Total liabilities and stockholders'
equity $4,363 $4,394
====== ======
</TABLE>
See accompanying notes.
- 2 -
<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------
<S> <C> <C>
1997 1996
----- -----
Cash flows from operating activities
Net income $ 48 $ 106
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 57 54
Changes in working capital accounts (37) 41
Other (2) 5
----- -----
Net cash provided by operating activities 66 206
----- -----
Cash flows from investment activities
Purchases of short-term investments - (89)
Capital expenditures (60) (40)
Proceeds from asset sales 20 21
Other 5 (1)
----- -----
Net cash used in investment activities (35) (109)
----- -----
Cash flows from financing activities
Dividends paid (68) (68)
Repayment of long-term debt (158) -
Proceeds from issuance of long-term debt 158 -
Net proceeds from notes payable 21 -
Other 4 6
----- -----
Net cash used in financing activities (43) (62)
----- -----
Effect of exchange rate changes on cash (4) (2)
----- -----
Net (decrease) increase in cash and cash equivalents (16) 33
Cash and cash equivalents at beginning of year 70 235
----- -----
Cash and cash equivalents at end of period $ 54 $ 268
===== =====
</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 1996 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, 1996.
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
March 31,
------------------
1997 1996
------ ----
(Millions of Dollars)
<S> <C> <C>
Total revenues (by destination)
United States $ 531 $516
Europe 264 281
Other foreign 234 185
------ ----
Total $1,029 $982
====== ====
Total revenues (by origin)
United States $ 639 $561
Europe 292 337
Other foreign 98 84
------ ----
Total $1,029 $982
====== ====
Pretax earnings
United States $ 91 $142
Europe 2 40
Other foreign 2 (2)
Interest expense (22) (22)
------ ----
Total $ 73 $158
====== ====
</TABLE>
Included in pretax earnings are royalty charges made to foreign operations for
the use of Company technology.
- 4 -
<PAGE>
NOTE C. INVENTORIES
Inventories at March 31, 1997 and December 31, 1996 comprised the following
categories:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
(Millions of Dollars)
Finished goods $ 404 $ 392
Work-in-process 33 38
Raw materials 52 62
Materials and supplies 45 44
----- -----
Total $ 534 $ 536
===== =====
</TABLE>
NOTE D. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, at cost, and related accumulated depreciation
at March 31, 1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
(Millions of Dollars)
Property, plant and equipment $4,102 $4,152
Less: accumulated depreciation 1,532 1,530
------ ------
Total $2,570 $2,622
====== ======
</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.
- 5 -
<PAGE>
At March 31, 1997, the Company's environmental reserve totaled $51 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 site, 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. 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, 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 eight 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 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.
- 6 -
<PAGE>
The Company and the other principal responsible party (PRP) at the Beaver
Valley site have reached an agreement with the U.S. government whereby the
government will pay 28.5 percent of the costs incurred by the Company and the
other PRP for remediation of substantial portions of the Beaver Valley site.
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 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 months ended March 31, 1997
and 1996 are computed based on 96.8 million and 96.5 million weighted average
shares outstanding, respectively. The dilutive effect of stock options was not
material.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," establishing standards for computing and presenting earnings per share
(EPS). SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997 and requires restatement of all prior-period EPS
data presented. Earlier application is not permitted. The implementation of
SFAS No. 128 is not expected to have a material effect on the reported EPS of
the Company.
- 7 -
<PAGE>
NOTE G. SUPPLEMENTAL CASH FLOW INFORMATION
Following is supplemental cash flow information for the three months ended
March 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
(Millions of Dollars)
Changes in working capital-increase (decrease) to cash:
Accounts receivable $ (48) $ 33
Inventories (6) (11)
Prepaid expense and other current assets (11) (15)
Accounts payable 1 22
Taxes payable 16 32
Other accrued liabilities 11 (20)
----- -----
Changes in working capital accounts $ (37) $ 41
===== =====
Short-term investments:
Gross proceeds from maturities $ - $ 25
Gross purchases - (114)
----- -----
Net purchases $ - $ (89)
===== =====
Notes payable:
Gross proceeds from issuances $ 455 $ -
Gross repayments (434) -
----- -----
Net repayments $ 21 $ -
===== =====
Cash paid during the period for:
Interest (net of amount capitalized) $ 17 $ 16
===== =====
Income taxes $ - $ 11
===== =====
</TABLE>
- 8 -
<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
products, operating in a single industry segment. It conducts business
primarily in the Americas, Europe, and the Asia Pacific region.
Each of the Company's two principal manufacturing processes yields its key
product, propylene oxide (PO), and one of two co-products, styrene monomer (SM)
or tertiary butyl alcohol (TBA). The Company also manufactures numerous
derivatives of PO and TBA. Among these are polyols, a key derivative of PO,
and methyl tertiary butyl ether (MTBE), a principal derivative of TBA. MTBE is
used in oxygenated fuels and as an octane additive. The Company also
manufactures and markets toluene diisocyanate (TDI) and aliphatic diisocyanate
(ADI). TDI and polyols are combined in the manufacture of polyurethanes.
Net income for the first quarter 1997 was $48 million compared with $106
million in the first quarter 1996. The $58 million decline was primarily due
to lower margins for most products. First quarter 1997 margins were lower due
to the combined effect of higher worldwide feedstock costs and generally lower
sales prices.
RESULTS OF OPERATIONS
Product Volumes
Sales and other operating revenues include the sales and processing volumes
of the Company's core products and co-products for the first quarter 1997 and
1996 as set forth below. Core products include PO, PO derivatives, TDI and
ADI.
<TABLE>
<CAPTION>
1997 1996
----- ----
<S> <C> <C>
(Millions)
Core products (pounds) 1,002 895
Co-products:
SM and derivatives (pounds) 708 659
TBA and derivatives (gallons) 260 275
</TABLE>
The reported SM volumes include quantities processed for PO/SM II equity
partners (SM equity volumes) under long-term processing arrangements. The SM
equity volumes were 200 million and 198 million pounds in the 1997 and 1996
quarters, respectively. The 1996 data includes sales volumes for SM
derivatives, which the Company stopped manufacturing and selling when it sold
its plastics business on September 30, 1996.
- 9 -
<PAGE>
REVENUES
Revenues of $1,029 million in the first quarter 1997 increased five
percent compared to revenues of $982 million in the first quarter 1996,
reflecting higher net volumes partly offset by lower average sales prices.
Volumes for core products increased 12 percent in the first quarter
1997 versus the prior year period. The increase reflected higher TDI/ADI
volumes due to the Olin acquisition and the increased availability of TDI from
a plant in France. The French plant was under repair and operated at
restricted rates in the 1996 period. Core product sales also reflected higher
volumes for PO derivatives. SM volumes increased seven percent primarily due to
increased SM sales to export markets. The loss of SM derivatives volumes
through the sale of the plastics business was substantially offset by increased
sales of SM to the buyer of the plastics business. TBA and derivative volumes
decreased five percent, mainly due to a weaker MTBE market in the first quarter
1997.
Average sales prices were generally lower in 1997. Contributing to the
weakness in 1997 prices were expiration of the Company's long-term MTBE
contracts, concerns over SM capacity additions in Asia, a weak economy in
Europe, and the effect of a stronger U.S. dollar.
GROSS PROFIT
Gross profit of $185 million in the first quarter 1997 decreased $67
million from $252 million in the 1996 first quarter, reflecting lower margins
for most products. Gross profit was 18.0 percent of sales in the first quarter
1997 compared to 25.7 percent in the 1996 period. The decline in gross profit
margins was due to the combined effect of higher feedstock costs and generally
lower sales prices in the first quarter 1997 versus the 1996 period.
OTHER
Other expense of $1 million in 1997 compared to income of $9 million in
1996. The $10 million decrease is primarily due to higher foreign exchange
losses related to the stronger U.S. dollar and lower interest income as a
result of lower levels of cash and cash equivalents in the 1997 period.
The Company expects its 1997 effective tax rate to be 34.0 percent
compared to a 33.0 percent effective tax rate used in the first quarter 1996
and a final 1996 effective tax rate of 28.5 percent. The final 1996 rate
reflected utilization of capital loss carryforwards and the utilization of
foreign tax credits pursuant to the tax sharing agreement with ARCO.
- 10 -
<PAGE>
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the company had $54 million in cash and cash
equivalents compared with $70 million at December 31, 1996. The Consolidated
Statement of Cash Flows for the quarter ended March 31, 1997 shows that net
cash flows provided by operating activities were $66 million, whereas net cash
flows used by investment and financing activities were $35 million and $43
million, respectively.
Investment activities for the first quarter 1997 included capital
expenditures of $60 million. The Company's 1997 budget for plant and equipment
is $453 million and is part of a five-year, $2.6 billion program primarily
devoted to capacity expansion and growth. Minority interest includes equity
contributions designated for specific capital projects. At March 31, 1997, the
unexpended amounts were classified as long-term other assets in the balance
sheet.
Financing activities for the first quarter 1997 included the
refinancing of two Dutch bank loans with a combined principal of 300 million
Dutch guilders ($158 million) and due in 1997 with one loan due in 2002. The
Company paid dividends of $.70 per share, totaling $68 million. On April 17,
1997, the Board of Directors declared a dividend of $.70 per share on the
Company's common stock, payable June 6, 1997.
During the first quarter 1997, the Company revised its hedging strategy
with respect to capital commitments related to construction of the new PO/SM
plant in Rotterdam, the Netherlands. To take advantage of the strong U.S.
dollar, the Company effectively terminated forward contracts in the notional
amount of $127 million and entered into purchased option contracts for
approximately the same notional amount. Gains on the purchased options will be
deferred and offset against the plant's construction costs. There were no
deferred hedging gains as of March 31, 1997.
The Company maintains a credit agreement under which it can borrow
amounts up to $300 million. At March 31, 1997, the Company had no outstanding
borrowing against the credit agreement, which is used to back up the Company's
commercial paper borrowing.
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 February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," establishing standards for computing and presenting earnings per share
(EPS). SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997 and requires restatement of all prior-period EPS
data presented. Earlier application is not permitted. The implementation of
SFAS No. 128 is not expected to have a material effect on the reported EPS of
the Company.
- 11 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the disclosure on page 10 of the Company's 1996
Annual Report on Form 10-K regarding other litigation.
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), Repsol Quimica, S.A. (Quimica) and Repsol
Petroleo, S.A. (Petroleo). The dispute concerns technology for the production
of PO and SM licensed to Quimica by the Company under agreements entered into
in conjunction with the dissolution in 1986 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 licensed technology by requiring
Quimica to reach agreement with the Company upon commercial terms before using
the licensed technology in connection with an expansion of its existing plant
or the construction of a second plant. Subsequently, pursuant to an agreement
among the parties, Repsol was permitted to withdraw as a party to the
arbitration. On October 15, 1996, the Company also formally notified the
European Commission (Commission) of the 1986 agreements, because Quimica and
its affiliates take the position that those agreements are not enforceable
under European law. Quimica and Petroleo concurrently filed a complaint with
the Commission in which they seek to have the 1986 agreements declared to be
contrary to Articles 85 and 86 of the Treaty of Rome and therefore
unenforceable. They also filed a complaint with the Spanish Bureau for the
Defense of Competition (Bureau) seeking relief under Spanish competition law.
On March 21, 1997, the Bureau issued a "Statement of Facts," which is a
preliminary document in which the Bureau indicates that it has tentatively
found a violation of Spanish competition law and intends to refer the matter to
the Spanish Competition Court. Spanish procedure allows a party an opportunity
to persuade the Bureau to the contrary prior to such referral. The Bureau's
Statement of Facts indicates that the Bureau believes that provisions of the
agreements signed in 1986, which the Company is attempting to enforce in the
arbitration, are contrary to Spanish competition law and therefore
unenforceable. The Company filed a response with the Bureau on April 18, 1997
arguing that the provisions are both valid and enforceable.
On April 17, 1997, the Company received a Statement of Objections of
the Commission, which is a preliminary document indicating the views of the
Commission and allowing a party an opportunity to respond. The Commission's
Statement of Objections takes the position that key provisions of the 1986
agreements, which the Company is seeking to enforce in its arbitration
proceedings with Quimica, are contrary to European competition law, and
indicates the Commission's intention to seek an order against both the Company
and Quimica finding those clauses invalid and imposing unspecified fines. The
Company has the right to respond in writing to the Commission's Statement of
Objections by June 12, 1997 and to request an oral hearing to present its
arguments. The Company believes that the provisions in question are consistent
with European law and are valid and enforceable and intends to so respond to
the Commission.
- 12 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amendment No. 2 to the ARCO Chemical Company Key Management Deferral
Plan, effective as of January 1, 1997.
10.2 Amendment No. 2 to the ARCO Chemical Company Deferral Plan for
Outside Directors, effective as of January 1, 1997.
27 Financial Data Schedule for the three months ended March 31, 1997.
(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/ Van Billet
-----------------------------
(Signature)
Van Billet
Vice President
and Controller
(Duly Authorized Officer and
Chief Accounting Officer)
Dated: April 30, 1997
- 14 -
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10.1 Amendment No. 2 to the ARCO Chemical Company Key Management Deferral
Plan, effective as of January 1, 1997.
10.2 Amendment No. 2 to the ARCO Chemical Company Deferral Plan for
Outside Directors, effective as of January 1, 1997.
27 Financial Data Schedule for the three months
ended March 31, 1997.
<PAGE>
AMENDMENT NO. 2
TO
ARCO CHEMICAL COMPANY
KEY MANAGEMENT DEFERRAL PLAN
------------------
Pursuant to resolutions adopted by the Board of Directors on October 17,
1996, the following amendment is hereby made to the ARCO Chemical Company Key
Management Deferral Plan (the "Plan") effective as of January 1, 1997.
1. Article I, Section 3.1 of the Plan is amended to read as follows:
"3.1 Account means a separate bookkeeping account maintained by the Company
for each Employee and which measures and determines the amounts to be paid
to the Employee under the Plan for each component of Deferred Compensation.
Separate subaccounts will be established for separate components of
Deferred Compensation, as applicable, deferred by an Employee."
2. Article I, Section 3.10 of the Plan is amended to read as follows:
"3.10 Deferral Commitment means a promise made by an Employee to defer
compensation pursuant to Article III for which a Participation Agreement
has been submitted by the Employee to the Administrative Committee."
3. Article I, Section 3.12 of the Plan is deleted and Sections 3.13 through
3.31 are redesignated as Sections 3.12 through 3.30.
4. Article II, Section 2 of the Plan is amended to read as follows:
1
EXHIBIT 10.1
<PAGE>
"Section 2. Basic Forms of Deferral
2.1 A Participant may elect to defer the following forms of
compensation in a Participation Agreement:
(a) Base Pay Deferral. Commencing with Base Pay earned during pay
periods ending on and after October 1, 1990, a Participant may elect to defer
Base Pay earned during a Deferral Period, subject to any limitations, conditions
or restrictions, such as minimum or maximum amounts that may be deferred, as are
prescribed by the Administrative Committee in advance of the Deferral Period.
(b) Award Deferral. A Participant may elect to defer Awards to be
paid by the Company during a Deferral Period, subject to any limitations,
conditions or restrictions, such as minimum or maximum amounts that may be
deferred, as are prescribed by the Administrative Committee in advance of the
Deferral Period.
(c) ESSP Benefit Deferral. A Participant may elect to defer the
ESSP Benefit earned during the Deferral Period, subject to any limitations,
conditions or restrictions, such as minimum or maximum amounts that may be
deferred, as are prescribed by the Administrative Committee in advance of the
Deferral Period.
(d) CAP Plan Make-Up Deferral. Any amount of Base Pay that the
Participant elected to defer into the CAP Plan during each Deferral Period and
which was not permitted due to legal restrictions, other than the limitation on
the amount of deferrals under Section 402(g) of the Code, precluding such
deferrals to the CAP Plan shall be deferred under this Plan to the extent that
such deferrals would have received the Matching Company Contribution under the
CAP Plan. To the extent that such amounts are deferred into this Plan during
the
2
<PAGE>
Deferral Period, the Company will contribute an additional amount to this
Plan based upon the Matching Company Contribution formula then in effect
under the CAP Plan."
5. Article II, Section 4 of the Plan is amended to read as follows:
"Section 4. Limitation on Deferral
4.1 Except as otherwise permitted for accelerated Deferred
Compensation, as defined in Section 7.1(b) of this Article, Deferral
Commitments shall be subject to the following limitations:
(a) A Participant may not defer more than fifty percent (50%) of
the Participant's Base Pay, except that the limit shall be seventy-five
percent (75%) of the Participant's Base Pay payable during the first Plan
Year, which commences on the Effective Date and ends on December 31, 1990
and during the Plan Year commencing on January 1, 1991.
(b) The minimum amount that may be deferred for the Deferral Period
relating to a Deferral Commitment, shall be established by the
Administrative Committee in advance of the Deferral Period and shall be
allocable among the forms of Deferred Compensation described in Article II,
Section 2.1(a) through (c)."
6. Article III, Section 1 of the Plan is amended to read as follows:
"Section 1. Accounts
1.1 For record-keeping purposes only, an Account shall be
maintained for each Participant. Separate subaccounts shall be maintained
for each form of Deferred Compensation of a Participant."
3
<PAGE>
7. Article III, Section 3 of the Plan is amended to read as follows:
"Section 3. Interest Rate
3.1 (a) A Participant's Account shall be credited as of each Valuation
Date during each Plan Year at the interest rate previously announced by the
Company to be applicable for the Plan Year, compounded annually. Interest
shall be credited as of each Valuation Date from the dates when deferred
amounts are credited to Accounts based on the balance of each Account.
(b) Guaranteed Interest Rate. In no event will the Interest Rate
applicable to a Participant's Account during the Participant's lifetime and
Transferred Accounts from the ARCO Chemical Company Annual Incentive Plan
be less than the Citibank Base Rate and in no event will the Interest Rate
applicable to Transferred Accounts from the ARCO Chemical Company Executive
Supplementary Savings Plan be less than the Money Market Rate of interest
under the CAP Plan for the period of time commencing on the date of
transfer and ending on the date the Accounts are paid."
8. Article IV, Section 1 of the Plan is amended to read as follows:
"Section 1. Plan Benefit
1.1 If a Participant has a Termination of Employment for any reason
the Company shall pay a Plan benefit equal to the Participant's Account
balance, as determined below:
(a) A Participant's Account shall be credited with the rate of
interest previously determined under Article III, Section 3.1(a) or (b),
and communicated in advance of each Deferral Period, to be applicable for
each Plan Year that the Account has been maintained.
4
<PAGE>
(b) The Interest Rates provided under Section 1.1(a) of this Article,
shall be payable until the Participant's Account is distributed in full."
9. Article IV, Section 2, Paragraph 2.1 of the Plan is amended to read as
follows:
"2.1 Retirement Distributions shall be paid at the time and in the
form of benefit elected by the Participant for the total Deferred
Compensation (Base Pay, Awards and ESSP), at the time of the Deferral
Commitment establishing such deferral, on the Participation Agreement. A
Participant's election shall be irrevocable, except as follows:
(a) Once each Plan Year prior to the Plan Year previously designated
by the Administrative Committee and communicated to Participants, at a time
and on a form prescribed by the Administrative Committee, each Participant
may change the time and/or form of the Retirement Distribution of the total
Deferred Compensation in the Participant's Account. Effective as of the
Plan Year previously designated by the Administrative Committee under the
preceding sentence, the election by the Participant on file on such date
shall govern the time and form of the Retirement Distribution for all
amounts in the Participant's Account, whether attributable to deferrals
before or after such date.
(b) A Participant may request, by application to the Administrative
Committee, approval of a change of the prior election at any time prior to
retirement or commencement of benefits, or in the case of installment
payments, following commencement of payments, (i) without any reduction in,
or imposition of any penalty on, the Participant's Account, provided that
the Administrative Committee determines, upon application of the
Participant, that the Participant has experienced a Financial Hardship
justifying the request for a change of election; or (ii) the Administrative
Committee, in its sole discretion, determines that it is appropriate to
grant the Participant's request.
5
<PAGE>
(c) Absent an election by the Participant of the form and/or
commencement date of the Retirement Distribution, payment will be made in a
lump sum immediately following the Participant's date of retirement."
10. Article IV, Section 4 of the Plan is amended to read as follows:
"Section 4. Survivor Benefits
4.1 (a) Death After Age 65. If the Participant dies on or after
-------------------
attaining age 65 the Survivor Benefits shall be equal to the Participant's
Account balance, payable in the form previously elected by the Participant.
(b) Death Prior to Termination of Employment and Prior to Age 65.
-------------------------------------------------------------
If the Participant dies prior to attaining age 65 and prior to Termination
of Employment, the Survivor Benefit shall be paid in monthly installments
and shall be the greater of (i) forty percent (40%) of the Participant's
total Deferral Commitment, or (ii) the actual Account balance of the
Participant, assuming a payout for the number of years between the
Participant's death and the year the Participant would have attained age
65, increased by the applicable Interest Rate credited on unpaid Account
balances of deceased Participants during each year of the payment period
to the survivor.
(c) Death After Termination of Employment and Prior to Age 65. If
----------------------------------------------------------
the Participant dies after Termination of Employment and prior to age 65,
the Participant's Account balance, if any, shall be paid by continuation of
the form of benefit which was payable to the Participant for the remaining
payments which would have been made to the Participant if the Participant
has lived, increased by the applicable Interest Rate credited on unpaid
Account balances of deceased Participants during each year of the payment
period to the survivor.
6
<PAGE>
(d) Special Rule. If the Participant dies before age 65, the
------------
Survivor Benefit will be paid in monthly installments until the Participant
would have attained age 65; provided, however, that if payment is made
pursuant to Section 4.1 (b)(ii) of this Article, and the number of years
between the Participant's death and the year the Participant would have
attained age 65 is less than the period of installments elected by the
Participant to be payable upon retirement, then the Survivor Benefit will
be paid in accordance with the Participant's retirement election of
installments to be payable upon retirement."
11. Article IV, Section 5 of the Plan is amended to read as follows:
"Section 5. In-Service Distributions
5.1 A Participant may elect to receive an In-Service Distribution
from the Participant's Account subject to the following restrictions:
(a) Timing of Election. The election to take an In-Service
Distribution from an Account must be made at the same time the Participant
makes the annual Deferral Commitment.
(b) Amount of Withdrawal. The amount which a Participant can elect
to receive as an In-Service Distribution with respect to an Account shall
be such portions of the Participant's Account balance, as prescribed by the
Administrative Committee in advance of the Deferral Period. If a previously
elected amount exceeds the Account balance when in In-Service Distribution
is to be made, only the Account balance will be paid.
(c) Timing and Form of In-Service Distribution. The In-Service
Distribution shall commence at the time and in the form elected by the
Participant on the Participation Agreement at the time of the Deferral
Commitment; provided, however, that if the Participant terminates
employment
7
<PAGE>
without a right to commence a retirement allowance under the Retirement
Plan, the In-Service Distribution election will be canceled and
distribution will be made pursuant to Section 3 of this Article, and
provided, further, that if the Participant terminates employment with a
right to commence a retirement allowance, the In-Service Distribution
election will be canceled and distribution will be made pursuant to Section
2 of this Article."
12. Sections 7 through 10 of Article IV of the Plan are amended to read as
follows:
"Section 7. Disability
7.1 If a Participant suffers a Disability under the provisions of
the ARCO Chemical Company Key Management Long-Term Disability Plan, the
Participant's Deferral Commitments will cease except for any Awards or ESSP
Benefits which may be payable thereafter. Distribution of the Deferred
Compensation will not be made due to the Disability. The Participant's
Account will be distributed in accordance with the method which the
Participant had elected for payment of retirement benefits with respect to
such Deferred Compensation if and when the Participant retires following
his Disability. Absent a retirement election by the Participant, payment
will be made in a lump sum upon Termination of Employment.
Section 8. Termination of Employment Due to Special Circumstances
8.1 If a Participant terminates employment involuntarily in
conjunction with a sale of assets or a reorganization (including
termination due to a special job elimination) the Participant's Account
will be distributed in accordance with the method which the Participant had
elected for payment of retirement benefits with payment commencing on the
earliest date the Participant would have become eligible to commence
receiving the retirement benefit. During the period between the
Participant's termination and the commencement of payments, interest will
be credited to the Participant's Account each year at the applicable
8
<PAGE>
Interest Rate. Absent a retirement election by the Participant, payment will be
made in a lump sum upon Termination of Employment.
Section 9. Valuation and Settlement
9.1 The date on which a lump sum is paid or the date on which installment
payments commence shall be the "Settlement Date." The Settlement Date shall be
no more than thirty (30) days after the last day of the month in which the
Participant or his Beneficiary becomes entitled to payments on account of
retirement, other Termination of Employment or death, unless the Participant
elects to defer commencement of payments following retirement to a later date in
the Participation Agreement. The Settlement Date for an In-Service Distribution
or delayed payments following retirement shall be the month which the
Participant elects for commencement of such payments in the election form for
designation of form of payment. The amount of a lump sum and the initial amount
of installment payments shall be based on the value of the Participant's
Account as of the Valuation Date at the end of the immediately preceding month
before the Settlement Date. For example, the Valuation Date at the end of
December shall be used to determine lump sum or the initial amount of
installment payments which will be made in the following January.
Section 10. Small Benefit
10.1 Notwithstanding any election made by the Participant, the Administrative
Committee, in its sole discretion, may pay any benefit in the form of a lump sum
payment to the Participant or any Beneficiary, if the lump sum amount of the
Account balance which remains in the Account following a distribution for any
reason, or which is payable to the Participant or Beneficiary when payments to
such Participant or Beneficiary would otherwise commence is less than $2,000."
9
<PAGE>
13. Article V of the Plan is amendment to read as follows:
"ARTICLE V
DESIGNATION OF BENEFICIARY
Section 1. Designation of Beneficiary
1.1 Each Participant shall have the right to designate a
Beneficiary or Beneficiaries to receive Participant's interest in
Participant's Account upon the Participant's death. Such designation shall
be made on a form prescribed by and delivered to the Company. The
Participant shall have the right to change or revoke any such designation
from time to time by filing a new designation or notice of revocation with
the Company, and no notice to any Beneficiary nor consent by any
Beneficiary shall be required to effect any such change or revocation.
Section 2. Failure to Designate Beneficiary
2.1 If a Participant shall fail to designate a Beneficiary before
the Participant's death, or if no designated Beneficiary survives the
Participant, the Administrative Committee shall direct the Company to pay
the balance in Participant's Account in a lump sum to the executor or
administrator for Participant's estate."
Executed This 22nd day of November, 1996.
ATTEST: ARCO CHEMICAL COMPANY
BY: /s/ John G. Chou BY: /s/ Frank W. Welsh
---------------------------- ----------------------------
FRANK W. WELSH
Vice President
Human Resources
10
<PAGE>
AMENDMENT NO. 2
TO
ARCO CHEMICAL COMPANY
DEFERRAL PLAN FOR OUTSIDE DIRECTORS
--------------------------
Pursuant to resolutions adopted by the Board of Directors on October 17,
1996, the following amendment is hereby made to the ARCO Chemical Deferral Plan
for Outside Directors (the "Plan") effective as of January 1, 1997.
1. Article I, Section 3.1 of the Plan is amended to read as follows:
"3.1 Account means a separate bookkeeping account maintained by the
Company for each Director and which measures and determines the amounts to
be paid to the Director under the Plan for each component of Deferred
Compensation. Separate subaccounts will be established for separate
components of Deferred Compensation, as applicable, deferred by a
Director."
2. Article I, Section 3.9 of the Plan is amended to read as follows:
"3.9 Deferral Commitment means a promise made by a Director to defer
compensation pursuant to Article III for which a Participation Agreement
has been submitted by the Director to the Company."
3. Article I, Section 3.11 of the Plan is deleted and Sections 3.12 through
3.29 are redesignated as Sections 3.11 through 3.28.
4. Article II, Section 2 of the Plan is amended to read as follows:
1
EXHIBIT 10.2
<PAGE>
"Section 2. Basic Forms of Deferral
2.1 A Participant may elect to defer the following forms of compensation
in a Participation Agreement:
(a) Board Retainer and Meeting Fees. Commencing with Board Retainer and
Meeting Fees earned on and after October 1, 1990, a Participant may elect
to defer such amounts earned during a Deferral Period, subject to any
limitations, conditions or restrictions, such as minimum or maximum
amounts that may be deferred, as are prescribed by the Administrative
Committee in advance of the Deferral Period.
(b) Committee Chairmanship and Meeting Fees. "Commencing with
Committee Chairmanship and Meeting Fees earned on and after October 1,
1990, a Participant may elect to defer such amounts earned during a
Deferral Period, subject to any limitations, conditions or restrictions,
such as minimum or maximum amounts that may be deferred, as are prescribed
by the Administrative Committee in advance of the Deferral Period."
5. Article II, Section 4 of the Plan is amended to read as follows:
"Section 4. Limitation on Deferral
4.1 Deferral Commitments shall be subject to any limitations, including
minimum amounts that may be deferred for the Deferral Period relating to a
Deferral Commitment, as are established by the Administrative Committee in
advance of the Deferral Period. Any minimum amounts shall be allocable
among the forms of Deferred Compensation described in Article II, Section
2.1(a) and (b)."
2
<PAGE>
6. Article III, Section 1 of the Plan is amended to read as follows:
"Section 1. Accounts
1.1 For record-keeping purposes only, an Account shall be maintained
for each Participant. Separate subaccounts shall be maintained for each
form of Deferred Compensation of a Participant."
7. Article III, Section 3 of the Plan is amended to read as follows:
"Section 3. Interest Rate
3.1 A Participant's Account shall be credited as of each Valuation
Date during each Plan Year at the interest rate previously announced by
the Company to be applicable for the Plan Year, compounded annually.
Interest shall be credited as of each Valuation Date from the dates when
deferred amounts are credited to Accounts based on the balance of each
Account."
8. Article IV, Section 1 of the Plan is amended to read as follows:
"Section 1. Plan Benefit
1.1 If a Participant has a Termination of Service for any reason the
Company shall pay a Plan benefit equal to the Participant's Account
balance, as determined below:
(a) A Participant's Account shall be credited with the rate of
interest previously determined under Article III, Section 3.1, and
communicated in advance of each Deferral Period, to be applicable for each
Plan Year that the Account has been maintained.
(b) The Interest Rates provided under Section 1.1(a) of this Article,
shall be payable until the Participant's Account is distributed in full."
3
<PAGE>
9. Article IV, Section 2, Paragraph 2.1 of the Plan is amended to read as
follows:
"2.1 Retirement Distributions shall be paid at the time and in the
form of benefit elected by the Participant for the total Deferred
Compensation, at the time of the Deferral Commitment establishing such
deferral, on the Participation Agreement. A Participant's election shall be
irrevocable, except as follows:
(a) Once each Plan Year prior to a Plan Year previously designated by
the Administrative Committee and communicated to Participants, at a time
and on a form prescribed by the Administrative Committee, each Participant
may change the time and/or form of the Retirement Distribution of the Total
Deferred Compensation in the Participant's Account. Effective as of the
Plan Year previously designated by the Administrative Committee under the
preceding sentence, the election by the Participant on file on such date
shall govern the time and form of the Retirement Distribution for all
amounts in the Participant's Account, whether attributable to deferrals
before or after such date.
(b) A Participant may request, by application to the Administrative
Committee, approval of a change of the prior election at any time prior to
retirement or commencement of benefits, or in the case of installment
payments, following commencement of payments, (i) without any reduction in,
or imposition of any penalty on, the Participant's Account, provided that
the Administrative Committee determines, upon application of the
Participant, that the Participant has experienced a Financial Hardship
justifying the request for a change of election; or (ii) the Administrative
Committee, in its sole discretion, determines that it is appropriate to
grant the Participant's request. Absent an election by the Participant of
the form and/or commencement date of the Retirement Distribution, payment
will be made in a lump sum immediately following the Participant's date of
retirement."
4
<PAGE>
10. Article IV, Section 4 of the Plan is amended to read as follows:
"Section 4. Survivor Benefits
4.1 (a) Death Prior to Termination of Service. If the Participant dies
--------------------------------------
prior to Termination of Service, the Survivor Benefit shall be paid to the
Participant's Beneficiaries in a lump sum or in monthly installments, as
elected by the Participant, and shall be the sum of the Participant's
Account Balance plus one hundred percent (100%) of the Participant's
unfulfilled Deferral Commitment, if any.
(b) Death After Termination of Service. If the Participant dies after
-----------------------------------
Termination of Service, the Participant's Account balance, if any, shall
be paid to the Participant's Beneficiary by continuation of the form of
benefit which was payable to the Participant for the remaining payments
which would have been made to the Participant if the Participant had
lived, increased by the applicable Interest Rate credited on unpaid
Account balances of deceased Participants during each year of the payment
period to the Beneficiary."
11. Article IV, Section 5 of the Plan is amended to read as follows:
"Section 5. In-Service Distributions
5.1 A Participant may elect to receive an In-Service Distribution
from the Participant's Account subject to the following restrictions:
(a) Timing of Election. The election to take an In-Service
Distribution from an Account must be made at the same time the Participant
makes the annual Deferral Commitment.
(b) Amount of Withdrawal. The amount which a Participant can elect
to receive as an In-Service Distribution with respect to an Account shall
be such
5
<PAGE>
portions of the Participant's Account balance, as prescribed by the
Administrative Committee in advance of the Deferral Period. If a
previously elected amount exceeds the Account balance when an In-Service
Distribution is to be made, only the Account balance will be paid.
(c) Timing and Form of In-Service Distribution. The In-Service
Distribution shall commence at the time and in the form elected by the
Participant on the Participation Agreement at the time of the Deferral
Commitment; provided, however, that if the Participant terminates service,
the In-Service Distribution election will be canceled and distribution
will be made pursuant to Section 3 of this Article, and provided, further,
that if the Participant commences retirement, the In-Service Distribution
election will be canceled and distribution will be made pursuant to
Section 2 of this Article."
12. Sections 7 and 8 of Article IV of the Plan are amended to read as follows:
"Section 7. Valuation and Settlement
7.1 The date on which a lump sum is paid or the date on which
installment payments commence shall be the "Settlement Date." The
Settlement Date shall be no more than thirty (30) days after the last day
of the month in which the Participant or his Beneficiary becomes entitled
to payments on account of retirement, other Termination of Service or
death, unless the Participant elects to defer commencement of payments
following retirement to a later date in the Participation Agreement. The
Settlement Date for an In-Service Distribution or delayed payments
following retirement shall be the month which the Participant elects for
commencement of such payments in the election form for designation of form
of payment. The amount of a lump sum and the initial amount of installment
payments shall be based on the value of the Participant's Account as of
the Valuation Date at the end of the immediately preceding month
6
<PAGE>
before the Settlement Date. For example, the Valuation Date at the end
of December shall be used to determine lump sum or the initial amount of
installment payments which will be made in the following January.
Section 8. Small Benefit
8.1 Notwithstanding any election made by the Participant, the
Administrative Committee, in its sole discretion, may pay any benefit in
the form of a lump sum payment to the Participant or any Beneficiary, if
the lump sum amount of the Account balance which remains in the Account
following a distribution for any reason, or which is payable to the
Participant or Beneficiary when payments to such Participant or
Beneficiary would otherwise commence is less than $2,000."
13. Article V of the Plan is amendment to read as follows:
"ARTICLE V
DESIGNATION OF BENEFICIARY
Section 1. Designation of Beneficiary
1.1 Each Participant shall have the right to designate a
Beneficiary or Beneficiaries to receive Participant's interest in
Participant's Account upon the Participant's death. Such designation
shall be made on a form prescribed by and delivered to the
Administrative Committee. The Participant shall have the right to change
or revoke any such designation from time to time by filing a new
designation or notice of revocation with the Company, and no notice to
any Beneficiary nor consent by any Beneficiary shall be required to
effect any such change or revocation.
7
<PAGE>
Section 2. Failure to Designate Beneficiary
2.1 If a Participant shall fail to designate a Beneficiary before
the Participant's death, or if no designated Beneficiary survives the
Participant, the Administrative Committee shall direct the Company to pay
the balance in Participant's Account in a lump sum to the executor or
administrator for Participant's estate."
Executed This 22nd day of November, 1996.
ATTEST: ARCO CHEMICAL COMPANY
BY: /s/ John G. Chou BY: /s/ Frank W. Welsh
------------------------ ---------------------------
FRANK W. WELSH
Vice President
Human Resources
8
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<PAGE>
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<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 54
<SECURITIES> 0
<RECEIVABLES> 649
<ALLOWANCES> 0
<INVENTORY> 534
<CURRENT-ASSETS> 1,284
<PP&E> 4,102
<DEPRECIATION> 1,532
<TOTAL-ASSETS> 4,363
<CURRENT-LIABILITIES> 797
<BONDS> 828
0
0
<COMMON> 100
<OTHER-SE> 1,859
<TOTAL-LIABILITY-AND-EQUITY> 4,363
<SALES> 1,029
<TOTAL-REVENUES> 1,029
<CGS> 844
<TOTAL-COSTS> 844
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> 73
<INCOME-TAX> 25
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<NET-INCOME> 48
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