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ANNEX A
ARCO CHEMICAL COMPANY
3801 WEST CHESTER PIKE
NEWTOWN SQUARE, PENNSYLVANIA 19073
INFORMATION STATEMENT PURSUANT TO SECTION 14(F) OF THE
SECURITIES EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER
This Information Statement is being mailed on or about June 24, 1998 to the
holders of shares of the Common Stock, par value $1.00 per share (the "Common
Stock" or the "Shares"), of ARCO Chemical Company, a Delaware corporation (the
"Company"), as part of the Company's Solicitation/Recommendation Statement on
Schedule 14D-9, dated as of such date (the "Schedule 14D-9"). The Schedule
14D-9 relates to a tender offer (the "Offer") by Lyondell Acquisition
Corporation, a Delaware corporation ("Purchaser") and a wholly owned
subsidiary of Lyondell Petrochemical Company ("Lyondell"), to purchase all
outstanding Shares, at a price of $57.75 per Share, being made pursuant to an
Agreement and Plan of Merger, dated as of June 18, 1998 (the "Merger
Agreement"), among the Company, Purchaser and Lyondell. This Information
Statement is being distributed in connection with the contemplated election to
the Board of Directors of the Company (the "Board of Directors" or the
"Board") of persons designated by Lyondell as provided for in the Merger
Agreement. Certain terms and conditions of the Merger Agreement, and a Tender
and Voting Agreement, dated June 18, 1998, between Lyondell, Purchaser and
Atlantic Richfield Company ("ARCO"), the record and beneficial owner of
80,000,001 Shares representing approximately 80.1% of the outstanding Shares
on a fully diluted basis, and a Tax Agreement, dated June 18, 1998, between
ARCO, Lyondell and the Company (the "Tax Agreement"), each entered into in
connection with the Merger Agreement, are summarized in Item 3 of the Schedule
14D-9. The summaries of those agreements are incorporated herein by reference.
This Information Statement is required to be filed with the Securities and
Exchange Commission (the "SEC" or the "Commission") and transmitted to all
stockholders of the Company by Section 14(f) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and Rule 14f-1 promulgated thereunder.
Holders of Shares are urged to read this Information Statement carefully, but
are not required to take any action.
The information contained in this Information Statement concerning Purchaser
and Lyondell has been furnished to the Company by such persons, and the
Company assumes no responsibility for the accuracy or completeness of such
information. The principal executive offices of Purchaser and Lyondell are
located at 1221 McKinney, Suite 1600, Houston, Texas 77010.
VOTING SECURITIES OF THE COMPANY
As of June 16, 1998, there were issued and outstanding 97,393,822 shares of
Common Stock, each of which entitles the holder thereof to one vote on all
matters submitted for a vote of the stockholders of the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth persons who were known to the Company to be
beneficial owners, as defined in Section 13(d) of the Exchange Act and the
rules and regulations thereunder, of more than five percent (5%) of the
outstanding shares of Common Stock as of June 8, 1998:
<TABLE>
<CAPTION>
AMOUNT OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OF
BENEFICIAL OWNER OWNERSHIP CLASS
------------------- ---------- -------
<S> <C> <C>
Atlantic Richfield Company....................... 80,000,001(a) 82.1
515 South Flower Street
Los Angeles, California 90071
Archer-Daniels-Midland Company................... 5,783,500(a)(b) 5.9
4666 Faries Parkway
Decatur, Illinois 62526
</TABLE>
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(a) Sole voting power, sole dispositive power.
(b) Based upon information provided by Archer-Daniels-Midland Company.
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SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the number of Shares of the Company and
shares of Common Stock, par value $2.50 per share of ARCO ("ARCO Common
Stock"), beneficially owned (as defined in Section 13(d) of the Exchange Act
and the rules and regulations thereunder) by each director, each executive
officer named in the Summary Compensation Table set forth below in
"COMPENSATION OF EXECUTIVE OFFICERS", and all directors and executive officers
as a group. As of June 15, 1998, the percentage of Shares of the Company and
the percentage of shares of ARCO Common Stock beneficially owned by any
director or any named executive officer, or by all directors and all executive
officers as a group, did not exceed 1% of the Shares of the Company or the
shares of ARCO Common Stock, as applicable. Unless otherwise noted, each
individual has sole voting and investment power. Fractional shares are rounded
to the nearest whole number.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES OF SHARES OF
COMMON STOCK ARCO COMMON
BENEFICIALLY STOCK BENEFICIALLY
NAMES OF BENEFICIAL OWNERS OWNED(A)(B) OWNED(C)(D)
-------------------------- ------------ ------------------
<S> <C> <C>
Walter F. Beran.......................... 9,226 0
Anthony G. Fernandes..................... 1,000 262,935
Morris Gelb.............................. 59,823 6,536
Mark L. Hazelwood........................ 0 63,801
Alan R. Hirsig........................... 224,026 2,360
John H. Kelly............................ 0 42,389
Marie L. Knowles......................... 100 105,270
James A. Middleton....................... 2,997 219,373
Robert J. Millstone...................... 25,147 242
Stephen R. Mut........................... 1,000 97,033
Frank Savage............................. 9,633(e) 0
Marvin O. Schlanger...................... 126,281 1,164
Walter J. Tusinski....................... 60,316(f) 26,508(g)
Donald R. Voelte, Jr..................... 0 42,089
All directors and executive officers as a
group, including those named above...... 549,526(h) 869,700(i)
</TABLE>
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(a) The amounts shown include shares of Common Stock held by the trustees of
the ARCO Chemical Company Capital Accumulation Plan (the "Capital
Accumulation Plan") and the ARCO Chemical Company Savings Plan (the "Savings
Plan") for the accounts of participants. The amounts shown include shares of
restricted Common Stock held under the ARCO Chemical Company Restricted
Stock Plan for Outside Directors as follows: Mr. Beran, 7,226; Mr.
Middleton, 1,997; and Mr. Savage, 9,533. Shares of restricted Common Stock
include the right to vote and receive dividends.
(b) The amounts shown include shares that may be acquired within the 60-day
period following June 15, 1998 through the exercise of stock options
covering Common Stock (calculated without regard to any stock options that
may become vested as a result of the Offer or the Merger) as follows: Mr.
Gelb, 57,200; Mr. Hirsig, 200,200; Mr. Millstone, 22,500; Mr. Schlanger,
117,100; Mr. Tusinski, 45,300; and all directors and all executive officers
as a group (including those just named), 468,800.
(c) The amounts shown include shares of ARCO Common Stock held by the trustees
of the Capital Accumulation Plan, the Savings Plan, and ARCO's Capital
Accumulation and Savings Plan for the accounts of participants. The amounts
shown include shares of restricted ARCO Common Stock granted under ARCO's
1985 Executive Long-Term Incentive Plan as follows: Mr. Fernandes, 9,667;
Mr. Hazelwood, 2,513; Mr. Kelly, 2,887; Mrs. Knowles, 7,251; and Mr. Mut
3,586; Mr. Voelte, 2,761; and all directors and executive officers as a
group, 28,665. Shares of restricted ARCO Common Stock include voting rights
and the right to receive dividends.
(d) The amounts shown include shares of ARCO Common Stock that may be acquired
within the 60-day period following June 15, 1998 through the exercise of
stock options as follows: Mr. Fernandes, 205,902; Mr.
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Hazelwood, 48,249; Mr. Kelly, 33,334; Mrs. Knowles, 81,792; Mr. Middleton,
168,000; Mr. Mut, 73,634; Mr. Tusinski, 16,718; Mr. Voelte, 39,270; and all
directors and executive officers as a group (including those just named),
817,920. The amounts also include the following number of shares of ARCO
Common Stock issuable in respect of the conversion of dividend share credits
allocated to such options: Mr. Fernandes, 42,850; Mr. Hazelwood, 11,711; Mr.
Kelly, 5,253; Mrs. Knowles, 15,146; Mr. Middleton, 51,373; Mr. Mut, 17,654;
Mr. Tusinski, 7,034; and all directors and executive officers as a group,
151,021.
(e) The amount shown includes 100 shares subject to shared voting and
investment power with spouse.
(f) The amount does not include 3,600 shares held by Mr. Tusinski's children,
as to which beneficial ownership is disclaimed.
(g) The amount shown includes 354 shares subject to shared voting and
investment power with spouse.
(h) The amount shown includes 100 shares subject to shared voting and
investment power. The amount does not include 4,972 shares held for or by
family members, as to which beneficial ownership is disclaimed.
(i) The amount shown includes 354 shares of ARCO Common Stock subject to
shared voting and investment power. The amount does not include 10,542
shares held by spouses (two of whom are present and former employees of
ARCO) or adult children, as to which beneficial ownership is disclaimed.
RIGHT TO DESIGNATE DIRECTORS
The Merger Agreement provides that, promptly upon the acceptance for payment
of, and payment for, the Shares by Purchaser pursuant to the Offer, and from
time to time thereafter, Purchaser will be entitled to designate such number
of directors to the Board of Directors (the "Designees") as will give
Purchaser, subject to compliance with Section 14(f) of the Exchange Act and
subject to the remainder of this paragraph, representation on the Board equal
to Purchaser's percentage ownership of the then-outstanding Shares, and the
Company is obligated to cause the Designees to be so elected or appointed by
the then-existing Board. The Merger Agreement also provides that, if the
Designees are elected to the Board, until the effective time (the "Effective
Time") of the merger contemplated thereby (the "Merger," and together with the
Offer, the "Transaction"), the Board of Directors must have at least two
directors who are directors as of the date of the Merger Agreement and who are
not officers, directors, employees or affiliates of Lyondell or Purchaser and
are not officers or employees of the Company or ARCO (the "Independent
Directors"); provided that, in such event, if the number of Independent
Directors is reduced below two for any reason whatsoever, the Board of
Directors will be required, subject to the approval of the remaining
Independent Director, to designate a person who is neither an officer,
director, employee or affiliate of Lyondell or Purchaser nor an officer or
employee of the Company or ARCO to fill such vacancy. Such person will be
deemed to be an Independent Director for purposes of the Merger Agreement.
Subject to applicable law, the Company is obligated to take all action
requested by Lyondell necessary to effect any election or appointment
described above. In connection with the foregoing, the Company has agreed that
it will promptly, at the option of Lyondell, either increase the size of the
Board of Directors and/or use commercially reasonable efforts to obtain the
resignation of such number of its current directors as is necessary to enable
the Designees to be elected or appointed to the Board. In addition, subject to
applicable law, at all times during which Purchaser has the right to designate
Designees, the Company is obligated, if requested by Lyondell, to cause to be
elected or appointed to each committee of the Board, the board of directors of
each subsidiary of the Company and each committee of each such board of
directors such number of designees of Purchaser that is equal to Purchaser's
percentage ownership of the then-outstanding Shares.
Following the election or appointment of the Designees pursuant to the terms
of the Merger Agreement and prior to the Effective Time, the affirmative vote
of a majority of the Independent Directors then in office will be required for
the Company to take any action relating to the Merger Agreement, the Offer or
any of the transactions contemplated thereby, including (i) amending or
terminating the Merger Agreement, (ii) exercising or waiving any of its or the
Company's stockholders' or employees' rights or remedies under the Merger
Agreement, (iii) extending the time for performance of Lyondell's and
Purchaser's respective obligations under the Merger Agreement, (iv) approving
any other action by the Board of Directors with respect to the Merger
Agreement, and (v) amending or otherwise modifying the Company's Certificate
of Incorporation or By-Laws.
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INFORMATION WITH RESPECT TO LYONDELL DESIGNEES
Set forth below is the name, age, business address and principal occupation
or employment of, and the material positions held during the past five years
by, persons who may be designated by Purchaser to be appointed or elected to
the Board. Such information was furnished by Lyondell and Purchaser. The
business address of all persons listed below is Lyondell Petrochemical
Company, 1221 McKinney, Suite 1600, Houston, Texas 77010.
None of the persons listed below or their associates is a director of, or
holds any position with, the Company. To the best of the Company's knowledge,
none of the persons listed below or their associates beneficially owns any
equity securities, or rights to acquire any equity securities, of the Company
or has been involved in any transaction with the Company or any of its
directors or executive officers that is required to be disclosed pursuant to
the rules and regulations of the SEC. Purchaser has informed the Company that
each of the persons listed below has consented to act as a director of the
Company.
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
NAME AND AGE MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
- ------------ --------------------------------------------------
<S> <C>
Dan F. Smith, 51............ Chief Executive Officer of Lyondell since December 1996,
President of Lyondell since August 1994 and director of
Lyondell since October 1988. Chief Executive Officer of
Equistar Chemicals, LP ("Equistar"), a petrochemicals and
polymers joint venture owned 57 percent by Lyondell, since
December 1, 1997. Chief Operating Officer of Lyondell from
May 1993 to December 1996.
T. Kevin DeNicola, 44....... Vice President, Corporate Development of Lyondell since May
1998. Director Investor Relations of Lyondell from March
1996 until May 1998. Product Manager of Lyondell from March
1993 until March 1996.
Kerry A. Galvin, 37......... Chief Corporate Counsel and Corporate Secretary of Lyondell
since December 1997. Finance and Securities Counsel and
Assistant Secretary of Lyondell prior thereto.
Allen C. Holmes, 50......... Vice President, Tax and Business Systems of Lyondell since
May 1998. Vice President and General Tax Officer of ARCO
from March 1991 through December 1997.
Jeffrey R. Pendergraft, 50.. Senior Vice President and Chief Administrative Officer of
Lyondell since December 1997. Senior Vice President of
Lyondell since May 1993. Vice President, General Counsel and
Secretary of Lyondell since 1988.
Edward W. Rich, 48.......... Vice President, Finance and Treasurer of Lyondell since
February 1998. Treasurer of Dow Corning Corporation from
February 1993 to January 1998.
</TABLE>
4
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DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth certain information regarding the members of the
Board of Directors and the Company's executive officers as of June 24, 1998.
The By-Laws of the Company provide that each officer shall hold office until
his successor is elected or appointed and qualified, or until his death or
resignation, or his removal by the Board of Directors.
Pursuant to the Company's Certificate of Incorporation and its By-Laws, the
members of the Board of Directors serve for one-year terms. The Board of
Directors has fixed the number of directors constituting the whole Board at
twelve.
<TABLE>
<CAPTION>
NAME AND AGE POSITION
------------ --------
<C> <S>
Walter F. Beran, 72......... Director
Van Billet, 43.............. Vice President and Controller
Anthony G. Fernandes, 52.... Chairman of the Board and Director
Morris Gelb, 51............. Senior Vice President, Manufacturing, Research,
Engineering, and Environmental, Health and
Safety
Mark L. Hazelwood, 48....... Director
Alan R. Hirsig, 58.......... Vice Chairman of the Board and Director
John H. Kelly, 43........... Director
Marie L. Knowles, 51........ Director
James A. Middleton, 62...... Director
Robert J. Millstone, 54..... Vice President, General Counsel and Secretary
Stephen R. Mut, 47.......... Director
Frank Savage, 59............ Director
Marvin O. Schlanger, 50..... President and Chief Executive Officer and
Director
Walter J. Tusinski, 51...... Senior Vice President, Chief Financial Officer
and Director
Francis W. Welsh, 54........ Vice President, Human Resources
Donald R. Voelte, Jr., 45... Director
</TABLE>
WALTER F. BERAN has been a director of the Company since September 1, 1987.
Mr. Beran is Chairman of Pacific Alliance Group (a financial services firm).
Previously, he served as Vice Chairman and Western Region Managing Partner of
Ernst & Whinney (accountants), a predecessor to Ernst & Young. Mr. Beran is
also a director of Fleetwood Enterprises, Inc., Pacific Scientific Company and
Vencor, Inc.
VAN BILLET was elected Vice President and Controller of the Company
effective as of March 1, 1997. He was Manager of Planning and Analysis for
Performance Chemicals and Business Development from January 1995 to March
1997, Corporate Controller from July 1993 to January 1995, Associate General
Tax Officer from May 1991 to July 1993, and Manager, European Tax Operations
from February 1988 to May 1991.
ANTHONY G. FERNANDES has been a director of the Company since May 10, 1996
and was elected Chairman of the Board on July 17, 1997. Mr. Fernandes has been
an Executive Vice President of ARCO since September 1994 and served as a
director of the Company from September 1994 to May 1998. He was Senior Vice
President of ARCO and President of ARCO Coal Company from July 1990 to
September 1994 and Vice President and Controller of ARCO from July 1987 to
July 1990.
MORRIS GELB has been an officer of the Company since June 22, 1987. He
assumed his current position as Senior Vice President, Manufacturing,
Research, Engineering and Environmental Health and Safety in August 1997. He
was Vice President, Environmental, Engineering and Manufacturing Programs from
October 1991 to August 1997 and Vice President, Research and Engineering from
September 1986 to September 1991.
MARK L. HAZELWOOD was elected as a director of the Company on May 14, 1998
and has been a Senior Vice President of External Affairs of ARCO since July
1997. He served as President of ARCO Alaska Transportation, Inc. (September
1996--July 1997), Senior Vice President of NGC Corp. (April 1996 to August
1996), President of ARCO Pipe Line Company (January 1994--April 1996), Senior
Vice President of Marketing ARCO Oil and Gas Company (April 1991--January
1994), and Vice President and General Tax Officer of ARCO (August 1988--March
1991).
5
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ALAN R. HIRSIG has been a director of the Company since November 14, 1989
and was elected Vice-Chairman of the Board of Directors on May 14, 1998. Mr.
Hirsig was President and Chief Executive Officer of the Company from January
1, 1991 to May 31, 1998 and was elected as an officer of the Company on June
22, 1987. Mr. Hirsig was President of the Company's European operations from
July 1984 to December 1990 and a Senior Vice President of the Company from
July 1988 to December 1990. Mr. Hirsig is also a director of BetzDearborn,
Inc. and Philadelphia Suburban Corporation.
JOHN H. KELLY was elected to the Board of Directors on May 14, 1998 and has
been a Senior Vice President, Human Resources of ARCO since January 1997. He
was Vice President, Corporate Human Resources of ARCO (June 1993-January 1997)
and Vice President, Human Resources of ARCO Oil and Gas Company (July 1991-
June 1993).
MARIE L. KNOWLES has been a director of the Company since September 16, 1996
and had previously served as a director of the Company from July 1991 to May
1996. Mrs. Knowles has been an Executive Vice President, Chief Financial
Officer and a director of ARCO since July 1996. She was Senior Vice President
of ARCO and President of ARCO Transportation Company from June 1993 to July
1996, Vice President and Controller of ARCO from July 1990 to May 1993, and
Vice President of Finance, Control, and Planning of ARCO International Oil and
Gas Company from July 1988 to July 1990. Mrs. Knowles is also a director of
Vastar Resources, Inc. and Phelps Dodge Corporation.
JAMES A. MIDDLETON has been a director of the Company since February 15,
1989 and has been Chairman and Chief Executive Officer of Crown Energy Corp.
(oil sand projects and oil and gas operations) since February 1996. He was an
Executive Vice President and a director of ARCO from October 1987 until he
resigned from those positions in September 1994. Mr. Middleton retired as an
employee of ARCO in January 1995. He served as President of ARCO Oil and Gas
Company from January 1985 to September 1990. Mr. Middleton is also a director
of Berry Petroleum Co., Crown Energy Corp., and Texas Utilities Company.
ROBERT J. MILLSTONE has been Vice President and General Counsel of the
Company since January 1, 1995. He was Associate General Counsel from January
1989 to December 1994 and has been Secretary of the Company since October
1990.
STEPHEN R. MUT has been a director of the Company since January 1, 1997 and
has been Senior Vice President of ARCO since September 1994. He was President
of ARCO Global Energy Ventures from August 1996 to March 1998, President of
ARCO Coal Company from September 1994 to August 1996, Senior Vice President of
Operations of ARCO International Oil and Gas Company from December 1991 to
September 1994, and Managing Director of ARCO British, Ltd. from 1989 to
December 1991.
FRANK SAVAGE has been a director of the Company since July 22, 1993. Mr.
Savage is Chairman of Alliance Capital Management International and Chairman
of Alliance Corporate Finance Group, Inc. (financial services). He was Senior
Vice President of The Equitable Life Assurance Society of the United States
(financial services) from 1988 to 1996, Chairman of Equitable Capital
Management Corporation (which was merged into Alliance Capital Management
Corporation) from April 1992 to July 1993, and Vice Chairman and Head of
International Operations, Equitable Capital Management Corporation from
November 1986 to April 1992 and from June 1986 to April 1992, respectively.
Mr. Savage is also a director of Alliance Capital Management Corporation,
Lockheed Martin Corporation, QUALCOMM Incorporated, and Southern Africa Fund.
MARVIN O. SCHLANGER has been President and Chief Executive Officer of the
Company since May 14, 1998, and has been a director of the Company since
November 14, 1994. He was Executive Vice President and Chief Operating Officer
from November 1994 to May 13, 1998, Senior Vice President of the Company and
President of ARCO Chemical Americas Company from August 1992 to November 1994,
Senior Vice President and Chief Financial Officer from October 1989 to August
1992 and Vice President of Worldwide Business Management from September 1988
to September 1989. Mr. Schlanger is also a director of UGI Corporation.
6
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WALTER J. TUSINSKI has been a director of the Company and Senior Vice
President and Chief Financial Officer since September 1, 1992. He served as
Vice President, New Business Ventures of ARCO International Oil and Gas
Company from September 1990 to August 1992 and Vice President, Planning and
Control of ARCO Products Company from October 1986 to August 1990.
DONALD R. VOELTE, JR. was elected to the Board of Directors on May 14, 1998
and has been a Senior Vice President of ARCO since April 1997. He previously
worked for the Mobil Corporation for 22 years. His most recent position was
Executive Vice President of Mobil Corporation and President of Mobil's New
Exploration and Producing Ventures and Global Exploration from January 1994 to
April 1997. He served as Vice President and General Manager, U.S. Marketing
and Supply/Logistics of Mobil Corporation from January 1992 to January 1994.
FRANCIS W. WELSH was elected as an officer of the Company on June 22, 1987.
He has held his current position of Vice President, Human Resources since
August 1983. He was Manager of Compensation and Management of Personnel
Resources and Development, Corporate Employee Relations of ARCO from September
1980 to May 1983.
COMMITTEES AND MEETINGS OF THE BOARD
AUDIT COMMITTEE
The Audit Committee of the Board of Directors reviews the integrity of the
Company's accounting and financial reporting standards and practices,
maintains communications between the Board and external and internal auditors,
and initiates special investigations as deemed necessary. The Audit Committee
also reviews at least once a year all agreements between the Company and ARCO
(including their subsidiaries and affiliates) to assure that such agreements
are fair to the Company and all its stockholders. The Audit Committee reviews
prior to execution any proposed related party agreement that requires payments
by or to the Company in excess of $35 million. The independent accountants and
the internal auditors have full and free access to the Audit Committee and
meet with it, with and without management present, to discuss all appropriate
matters. No member of the Audit Committee is an officer or employee of the
Company or ARCO (including any of their subsidiaries and affiliates). The
Audit Committee met three times during 1997.
The Audit Committee is currently comprised of Messrs. Beran (Chairman) and
Savage.
COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors reviews and approves
employee compensation plans and such other benefits as it deems advisable,
makes recommendations to the Board of Directors as to management succession
plans, and administers the Company's Annual Incentive Plan. No member of the
Compensation Committee is an employee of the Company, no member is eligible to
participate in any benefit plan of the Company that is administered by the
Compensation Committee, and no member is eligible or will be eligible to
participate in any benefit plan of the Company other than, as described below
in "Compensation of Directors", the Company's Restricted Stock Plan for
Outside Directors and the Deferral Plan for Outside Directors. The
Compensation Committee met two times during 1997. A special subcommittee of
the Compensation Committee, the Long-Term Incentive Plan Administration
Subcommittee (the "Subcommittee"), administers the Company's long-term
incentive plans. The Subcommittee consists of those members of the
Compensation Committee who are "outside directors" within the meaning of
Section 162(m) of the Internal Revenue Code. The Subcommittee met once during
1997.
The Compensation Committee is currently comprised of Messrs. Beran,
Fernandes, Middleton and Savage. The Subcommittee currently consists of
Messrs. Beran and Savage.
CONTRIBUTIONS COMMITTEE
The Contributions Committee of the Board of Directors reviews and approves
the Company's charitable contributions budget, approves contributions
involving multi-year commitments, and assures accountability for charitable
contributions and activities. The Contributions Committee met once during
1997.
The Contributions Committee is currently comprised of Messrs. Hirsig, Savage
(Chairman), and Tusinski.
7
<PAGE>
ENVIRONMENT, HEALTH AND SAFETY COMMITTEE
The Environment, Health, and Safety Committee of the Board of Directors
reviews and assesses the Company's policies, procedures, and practices
relating to (i) the protection of the environment and the health and safety of
employees, customers, contractors, and the public, (ii) compliance with
applicable laws and regulations, (iii) cleanup or remediation of waste sites
or excursions, and (iv) the development of the Company's environmental,
health, and safety goals and objectives, and makes recommendations to the
Board as to such policies, procedures, and practices. The Environment, Health,
and Safety Committee met three times during 1997.
The Environment, Health, and Safety Committee is currently comprised of
Messrs. Hirsig, Middleton, Mut, and Savage (Chairman).
EXECUTIVE COMMITTEE
The Executive Committee of the Board of Directors has and may exercise all
the authority of the Board of Directors in the management of the Company
between meetings of the Board. The Executive Committee did not meet during
1997.
The Executive Committee is currently comprised of Messrs. Fernandes
(Chairman), Hirsig, and Savage.
FINANCE COMMITTEE
The Finance Committee of the Board of Directors reviews and makes
recommendations to the Board regarding proposals for the issuance of
securities to the public, proposed loans, borrowings and credit agreements,
proposed capital projects over $25 million, proposed business acquisitions and
divestitures, mergers and joint ventures, all budgets and long range plans,
dividend policy and the capital structure of the Company. The Finance
Committee met four times during 1997.
The Finance Committee is currently comprised of Ms. Knowles (Chairman) and
Messrs. Hirsig, Mut, and Tusinski.
NOMINATING COMMITTEE
The Nominating Committee of the Board of Directors considers and makes
recommendations to the Board as to persons who it believes should be
considered for Board membership, and makes recommendations relating to the
selection, tenure, and retirement of directors. The Nominating Committee met
once during 1997. The Nominating Committee will consider nominees recommended
by stockholders. Such recommendations should be submitted to the Secretary of
the Company.
The Nominating Committee is currently comprised of Messrs. Fernandes,
Hirsig, and Savage (Chairman).
DIRECTORS' MEETINGS
The Board of Directors met five times during 1997. All of the directors of
the Company in office in 1997 attended 75% or more of the aggregate of all
meetings of the Board of Directors and committees on which they served during
1997. Special meetings may be called by the Chairman of the Board, the
President, or a majority of directors in office. The By-Laws permit action to
be taken by the Board without a meeting if all members of the Board consent to
such action in writing.
8
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
Mike R. Bowlin and Anthony G. Fernandes served on the Compensation Committee
during 1997. Mr. Bowlin is Chairman of the Board and Chief Executive Officer
of ARCO. Mr. Fernandes replaced Mr. Bowlin as Chairman of the Board and
Chairman of the Compensation Committee on July 17, 1997. The Chairman of the
Board is ex officio an officer of the Company under its By-Laws. The Chairman
of the Board receives no compensation from the Company and is not eligible to
participate in any Company benefit plan.
CERTAIN TRANSACTIONS
TRANSACTIONS WITH ARCO
GENERAL
In June 1987, ARCO transferred substantially all the assets and liabilities
of the oxygenates and polystyrenics businesses of the then ARCO Chemical
Division to the Company in exchange for 80,000,001 shares of Common Stock,
representing all of the issued and outstanding Common Stock of the Company
prior to October 5, 1987 (the date of the initial public offering of the
Common Stock) and approximately 80.1% of the outstanding shares of Common
Stock on a fully diluted basis as of June 16, 1998.
In conjunction therewith, the Company and ARCO entered into a number of
agreements for the purpose of defining the ongoing relationship between them.
These agreements were developed in connection with the establishment of the
Company by ARCO and, therefore, were not the result of arms-length
negotiations between independent parties. It was the intention of the Company
and ARCO that the 1987 agreements and the transactions provided for therein,
taken as a whole, should accommodate the parties' interests in a manner that
was fair to both parties, while continuing certain mutually beneficial joint
arrangements.
Subsequent to 1987, additional or modified agreements, arrangements and
transactions have been entered into by the Company, ARCO and their respective
subsidiaries. In addition, certain of the existing agreements will be modified
or terminated in connection with the Transaction.
The following is a summary of the material existing agreements between the
Company and ARCO.
PRODUCT SALES
The Company sold to ARCO and its subsidiaries approximately $263 million of
products during the year ended December 31, 1997. Sales of methyl tertiary
butyl ether ("MTBE") to ARCO accounted for 6.5 percent of the Company's
revenues in 1997. The Company is party to certain contracts with ARCO for the
sale of MTBE (collectively the "ARCO Products Contract") which have an initial
term expiring December 31, 2002, and will continue thereafter from year to
year unless and until terminated by either party in accordance with their
terms. The price of MTBE under the ARCO Products Contract is well above
current spot market levels.
ADMINISTRATIVE SERVICES AGREEMENT
The Company and ARCO are parties to an agreement (the "Administrative
Services Agreement") under which ARCO has provided various services to the
Company, and the Company has provided various services to ARCO since October
1, 1987. The services that ARCO currently provides thereunder to the Company
include insurance, telecommunications, payroll and employee benefits
administration, employee assistance program services, certain tax and legal
services, and services relating to the insurance of commercial paper and the
investment of excess cash. The services that the Company currently provides
thereunder to ARCO include environmental technical services, research and
development assistance, information and communication systems support, and
certain legal services. The Administrative Services Agreement continues in
effect from year to year unless terminated by either party upon 12 months
prior notice. Either party may terminate any type of service that it receives
under the Administrative Services Agreement at any time upon 90 days' prior
notice. For the
9
<PAGE>
year ended December 31, 1997, the Company paid ARCO a total of approximately
$27 million under the Administrative Services Agreement and other such
agreements (including the lease described below). ARCO paid the Company a
total of approximately $1 million.
The Merger Agreement provides that the Company and ARCO will, promptly after
the execution of the Merger Agreement, enter into an agreement providing that,
effective upon the purchase of the Shares pursuant to the Offer, all
administrative service agreements and arrangements between ARCO and the
Company relating to the Company's employee benefit plans and payroll services
are to continue in effect until the end of 1999, subject to certain
conditions.
LEASES
The Company leases its facility in Newtown Square, Pennsylvania from ARCO.
In 1997, the Company renewed the lease for an additional term of five years,
ending in 2002, but reduced the portion of the premises it leases. The annual
rent paid by the Company to ARCO during the renewal term for the remainder of
the leased premises was reduced to $5 million. During 1997, the Company made
lease payments to ARCO of $6 million, representing a combination of old and
new rental rates for the Newtown Square, Pennsylvania premises.
CROSS-INDEMNIFICATION AGREEMENT
The Company and ARCO are parties to a cross-indemnification agreement (the
"Cross-Indemnification Agreement") that obligates the Company to indemnify
ARCO against substantially all claims relating to the oxygenates and
polystyrenics businesses transferred to the Company and certain assets
relating thereto, including liabilities under certain laws relating to the
protection of the environment and safety in the workplace and liabilities
arising out of certain litigation. Conversely, the Cross-Indemnification
Agreement obligates ARCO to indemnify the Company against claims not relating
to the assets, subsidiaries, or business operations transferred to the
Company.
TAX SHARING ARRANGEMENTS
The Company and its subsidiaries are members of an affiliated group of
corporations which files a consolidated federal income tax return with ARCO
(the "ARCO Group"). The Company and ARCO are parties to an Amended and
Restated Tax Sharing Agreement, effective as of January 1, 1995 (the "Tax
Sharing Agreement"), which applies to all taxable years in which the Company
and its subsidiaries are included in the ARCO Group's consolidated return and,
for limited computational purposes, the five taxable years thereafter. As a
result of the Transaction, the Company will cease being included in the ARCO
Group's consolidated returns. The Company, ARCO and Lyondell entered into the
Tax Agreement in order to address certain tax matters and liabilities arising
out of the Transaction. The Tax Agreement provides that the Tax Sharing
Agreement generally will continue to apply to matters relating to taxable
years ending on or before the date of the Transaction but will no longer be
applicable, for computational purposes, to the first five taxable years
following the Transaction, and the Tax Sharing Agreement provisions allowing
the Company to utilize certain of ARCO's tax attributes will not be applicable
to taxable years beginning on or after January 1, 1998. Under the Tax Sharing
Agreement and the Tax Agreement, the Company is liable for tax liabilities
that may be triggered as a result of the Transaction (other than 338(h)(10)
election tax liabilities) or otherwise arising out of any governmental tax
audit of the ARCO Group relating to tax periods ending on or prior to the
Transaction to the extent that such liability is attributable to adjustments
to tax items of the Company.
INTELLECTUAL PROPERTY
ARCO has assigned to the Company various United States and foreign
trademarks, together with the registrations and applications therefor, and has
granted the Company a non-exclusive license to use other trademarks which
contain the word "ARCO" and to use ARCO's spark design as a logo. Under the
Merger Agreement, Lyondell has agreed to cause the Company to cease using
ARCO's name and spark design on any printed or consumable materials that are
distributed to third parties within 180 days of the consummation of the
10
<PAGE>
Merger. Lyondell has also agreed to cause the Company to remove ARCO's name
and spark design from all durable materials such as signage, vehicles and
railcars within two years of the consummation of the Merger.
STOCK REPURCHASE
On June 2, 1998, ARCO and the Company entered into a Stock Repurchase
Agreement (the "Stock Repurchase Agreement") pursuant to which the Company
agreed that, upon the completion by ARCO of a public offering of at least
20,000,000 of its Shares, the Company would repurchase from ARCO up to $850
million of ARCO's Shares. In connection with such agreement, on June 2, 1998,
the Company and ARCO entered into a Stockholder Agreement and a Registration
Rights Agreement pursuant to which the Company granted certain governance,
share ownership and registration rights upon completion of the stock
repurchase pursuant to the Stock Repurchase Agreement. Each of the foregoing
agreements will be terminated in connection with the Transaction.
CERTIFICATE OF INCORPORATION PROVISIONS RELATING TO CORPORATE OPPORTUNITIES
In order to address certain potential conflicts of interests between the
Company and ARCO, the Company's Certificate of Incorporation contains
provisions regulating and defining the conduct of certain affairs of the
Company as they may involve ARCO and its officers and directors, and the
powers, rights, duties, and liabilities of the Company and its officers,
directors, and stockholders in connection therewith. In general, these
provisions recognize that from time to time the Company and ARCO may engage in
the same or similar activities or lines of business and have an interest in
the same areas of corporate opportunity. The Certificate of Incorporation
provides that ARCO shall have no duty to refrain from (1) engaging in business
activities or lines of business the same as or similar to those of the
Company, (2) doing business with any customer of the Company, or (3) employing
any officer or employee of the Company, and neither ARCO nor any officer or
director of ARCO will be liable to the Company or its stockholders for breach
of any fiduciary duty by reason of any such activities of ARCO or of such
person's participation therein. The Certificate of Incorporation provides
certain directives as to how a corporate opportunity is to be handled when
presented to an officer or director of either company. It also provides that
ARCO is not under any duty to present any corporate opportunity to the Company
that may be a corporate opportunity for both ARCO and the Company, and ARCO
will not be liable to the Company or its stockholders for a breach of any
fiduciary duty as a stockholder of the Company by reason of the fact that ARCO
pursues or acquires such corporate opportunity for itself, directs such
corporate opportunity to another person, or does not present the corporate
opportunity to the Company. It is expected that, after the Merger, the
Company's Certificate of Incorporation will be amended to remove these
provisions.
TRANSACTIONS WITH LYONDELL
Lyondell is a former subsidiary of ARCO. Certain of the manufacturing
facilities of Lyondell and the Company were once operated as part of the same
division of ARCO. The Company's manufacturing facilities in Channelview and
Pasadena, Texas are adjacent to facilities held by Lyondell's 41% owned joint
venture, Equistar.
Lyondell (including Equistar) and the Company are parties to various
commercial contracts pursuant to which Lyondell provides to the Company a
portion of the feedstocks purchased by the Company for its manufacturing
facilities located at Bayport and Channelview, Texas. Lyondell also provides
processing services and products to the Company, as well as certain plant
services at Channelview, Texas. The Company in turn provides certain products
and services to Lyondell. The Company granted Lyondell royalty-free, non-
exclusive licenses for the technology necessary to produce MTBE and isopropyl
alcohol at Lyondell's petrochemical complex in Channelview, Texas. For 1997,
the Company purchased from Lyondell approximately $271 million of feedstocks,
products, and plant services. The Company sold Lyondell certain products and
services at market based prices during the same period.
Lyondell, the Company and ARCO are also parties to a Dispute Resolution
Agreement which specifies a procedure for negotiation and binding arbitration
of significant commercial disputes among any two or more of the parties.
11
<PAGE>
COMPENSATION OF DIRECTORS
DIRECTOR'S FEES
Directors who are employees of the Company or of ARCO are not paid any fees
or additional compensation for service as members of the Board or any
committee thereof. Directors who are not employees of either the Company or
ARCO ("outside directors") receive an annual retainer of $52,000 for serving
on the Board, plus $1,000 for each Board and committee meeting attended.
Meeting fees are paid in cash. Directors are also reimbursed for travel and
other related expenses incurred to attend such meetings. In addition, the
Chairman of the Audit Committee receives $18,000 per year and the Chairman of
the Environment, Health and Safety Committee receives $10,000 per year. The
Chairmen of the Compensation Committee, the Contributions Committee and the
Nominating Committee received $18,000, $5,000, and $5,000 in 1997
respectively. As of May 14, 1997, these committee chair fees were reduced to
$10,000, $3,000, and $3,000 per year, respectively.
In 1997, the Company changed its fee structure for outside directors by
implementing the ARCO Chemical Company Restricted Stock Plan for Outside
Directors described below. With the adoption of the Restricted Stock Plan for
Outside Directors, the annual Board retainer was increased from $40,000 to
$52,000 effective as of October 1, 1997.
Outside directors are not eligible to participate in the Company's stock
option or other benefit plan programs, but may participate in the plans
described below, which, except as otherwise described, are administered by a
committee of three Company officers who are not members of the Board of
Directors.
RESTRICTED STOCK PLAN FOR OUTSIDE DIRECTORS
Under the Restricted Stock Plan for Outside Directors, at least 65% of an
outside directors' annual retainer and committee chair fees are paid in shares
of restricted Common Stock, which are subject to transferability and
forfeiture restrictions. Outside directors may also elect to receive the
remaining 35% of their aggregate Board and committee chair retainer fees in
cash or shares of restricted Common Stock. The shares are deposited in
accounts maintained for the participants by First Chicago Trust Company of New
York. Such shares remain restricted until retirement from the Board in
accordance with the Company's By-Laws, death, disability, a change of control
of the Company, or resignation from the Board with the consent of a majority
of the remaining Board members (which includes the failure to be nominated for
re-election or the failure to be re-elected to the Board). If outside
directors end their service on the Board for any other reason, shares of
restricted Common Stock held in their accounts will be forfeited. Outside
directors may vote their shares of restricted Common Stock and receive
dividends on such shares. Dividends will be reinvested in additional shares of
restricted Common Stock.
When the Restricted Stock Plan for Outside Directors was implemented,
Messrs. Beran, Middleton and Savage also converted the present value of
certain accrued retirement benefits to shares of restricted Common Stock as of
October 1, 1997. Effective as of February 20, 1998, the ARCO Chemical Company
Retirement Plan for Outside Directors ("Retirement Plan") was terminated and
no current or future outside directors will participate in that plan. Benefits
will continue to be paid under the Retirement Plan to former outside directors
who have retired from the Board.
DEFERRAL PLAN FOR OUTSIDE DIRECTORS
The ARCO Chemical Company Deferral Plan for Outside Directors permits
outside directors to defer up to 100% of the cash portion of the annual
retainer and meeting fees and any committee chairmanship and meeting fees to
which they are entitled. The deferral accounts of Messrs. Beran, Middleton,
Savage, and Stewart accrued interest that exceeded 120% of a specified IRS
rate in the amounts of $3,722, $747, $998, and $3,333, respectively, in 1997.
12
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSA-
TION
ANNUAL COMPENSATION AWARDS
--------------------------------- --------- ------------
NAME AND PRINCIPAL OTHER ANNUAL STOCK ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
------------------ ---- ------- ------- ------------ --------- ------------
($) ($) ($) (#) ($)
(A) (B) (C)(D)
<S> <C> <C> <C> <C> <C> <C>
Marvin O. Schlanger.....
President and 1997 457,788 65,000 10,017 30,100 61,030
Chief Executive 1996 421,154 300,000 16,736 30,800 52,793
Officer (e) 1995 400,000 385,000 8,458 24,600 49,954
Alan R. Hirsig.......... 1997 640,385 100,000 35,972 50,200 87,922
Vice Chairman of the
Board (e) 1996 592,308 450,000 71,728 55,900 82,240
1995 542,308 585,000 45,852 44,300 76,571
Morris Gelb............. 1997 283,269 30,000 18,640 13,700 41,807
Senior Vice President 1996 247,846 140,000 29,322 14,500 37,872
1995 234,615 200,000 16,134 12,500 33,554
Robert J. Millstone..... 1997 257,884 25,000 8,241 13,200 41,807
Vice President, 1996 237,692 120,000 10,087 12,600 37,872
General Counsel and
Secretary 1995 224,520 140,000 6,888 8,900 33,554
Walter J. Tusinski...... 1997 332,308 40,000 10,613 16,900 57,020
Senior Vice President 1996 307,692 169,000 13,170 18,200 55,031
and
Chief Financial Officer 1995 292,692 235,000 8,486 17,700 49,256
</TABLE>
- --------
(a) Includes amounts related to tax gross-ups in respect of financial
counseling reimbursements and other miscellaneous items, and incremental
interest accrued under the Key Management Deferral Plan that exceeds 120% of
a specified IRS rate.
(b) These options were granted under the Company's 1990 Long-Term Incentive
Plan. Options granted in 1997, 1996 and 1995 accrue dividend share credits.
For a description of dividend share credits under the 1990 Long-Term
Incentive Plan, see footnote (d) of this Summary Compensation Table.
(c) Includes 1997 contributions to the Executive Supplementary Savings Plan,
incremental Executive Medical Insurance Plan (the "Executive Medical Plan")
premiums, financial counseling reimbursements, certain amounts in respect of
the Key Management Life Insurance Plan, employee stock ownership plan
incentive program ("ESOP Incentive") payments, and imputed income in respect
of the Long-Term Disability Plan (the "LTD Plan"), as follows:
<TABLE>
<CAPTION>
MR. MR. MR. MR. MR.
SCHLANGER HIRSIG GELB MILLSTONE TUSINSKI
--------- ------ ------ --------- --------
($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C>
Executive Supplementary Savings
Plan............................ 27,467 38,423 16,996 15,473 19,939
Incremental Executive Medical
Plan premiums................... 4,983 4,983 4,983 4,983 4,983
Financial counseling reimburse-
ments........................... 2,500 2,900 5,000 4,800 7,870
Key Management Life Insurance
Plan............................ 15,099 27,559 9,743 10,294 14,937
ESOP Incentive payments.......... 2,686 3,890 1,661 1,254 229
LTD Plan imputed income.......... 8,295 10,167 3,423 2,652 9,062
</TABLE>
The amounts disclosed in respect of the Key Management Life Insurance Plan
include certain reimbursements of premiums paid by the executive officer as
well as the dollar value of the benefit to the executive officer of the
premium paid by the Company during the fiscal year. The dollar value of the
latter
13
<PAGE>
benefit is calculated by (i) treating the annual premium paid by the
Company, less the portion of the premium attributable to death benefits
payable to the Company and certain policy charges, as a demand loan from the
Company to the executive officer and (ii) imputing interest on the demand
loan at the applicable federal rate. The deemed amount of the benefit to the
executive officer is the amount of interest imputed less the executive
officer's contribution to the policy.
(d) Dividend share credits accrue on options granted under the Company's 1990
Long-Term Incentive Plan. Dividend share credits are allocated to an
optionee's account whenever dividends are declared on shares of Common
Stock. The number of dividend share credits to be allocated on each dividend
record date to an optionee's account is computed by multiplying the dividend
rate per share of Common Stock by the sum of (x) the number of shares
subject to outstanding options and (y) the number of dividend share credits
then credited to the optionee's account and dividing the resulting figure by
the fair market value of a share of Common Stock ("FMV") on such dividend
record date. Upon the exercise, expiration or surrender of an option, an
optionee may receive a cash payment in respect of the dividend share credits
attributable to such option provided that certain performance-based
conditions are satisfied. If FMV on the date of exercise, expiration or
surrender is greater than the exercise price of the option, then the
optionee is entitled to receive a cash payment equal to the number of
dividend share credits attributable to such option multiplied by FMV on such
date. If the option exercise price is greater than FMV on such date (i.e.,
the option is out of the money) and the fair market value of the dividend
share credits (equal to FMV on such date multiplied by the number of
dividend share credits) is equal to or less than the amount by which the
aggregate exercise price of the option exceeds the aggregate FMV of the
shares of Common Stock underlying such option (the "Out-of-the-Money
Spread"), then the optionee is not entitled to receive any cash payment in
respect of the dividend share credits. If the option is out of the money but
the fair market value of the dividend share credits is greater than the Out-
of-the-Money Spread, then the optionee is entitled to receive a cash payment
in respect of the dividend share credits equal to the fair market value of
the dividend share credits less the Out-of-the-Money Spread. The dividend
share credit values realized in the table below and the dividend share
credit values in the table set forth at footnote (c) of the Aggregated
Option Exercises in 1997 and Year-End Option Values table set forth below
reflect the application of the foregoing cash payment formula. Dividend
share credits accrued on Company options during 1995, 1996 and 1997 to the
account of the named executive officers, and the value realized on exercise,
were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------------- ----------------- -----------------
DIVIDEND DIVIDEND DIVIDEND
SHARE VALUE SHARE VALUE SHARE VALUE
NAME CREDITS REALIZED CREDITS REALIZED CREDITS REALIZED
---- -------- -------- -------- -------- -------- --------
# $ # $ # $
<S> <C> <C> <C> <C> <C> <C>
Mr. Schlanger......... 7,807 0 9,855 0 12,827 0
Mr. Hirsig............ 13,761 0 13,951 106,085 21,849 112,228
Mr. Gelb.............. 4,469 0 4,633 0 6,235 224,372
Mr. Millstone......... 1,582 0 2,238 46,117 3,169 0
Mr. Tusinski.......... 2,753 0 3,894 0 5,306 0
</TABLE>
Dividend share credit totals are rounded to the nearest whole number. FMV of
Common Stock on December 31, 1995 was $48.625. FMV of Common Stock on
December 31, 1996 was $49.375. FMV of Common Stock on December 31, 1997 was
$46.875.
Certain officers and employees of the Company also have options for ARCO
Common Stock granted by ARCO for services rendered to ARCO. Dividend share
credits accrue on options for ARCO Common Stock in the same manner that
dividend share credits accrue on options for Common Stock. Upon an ARCO
employee becoming employed by the Company, the Company assumes ARCO's
contingent future cash payment obligation with respect to all dividend share
credits accrued on ARCO options allocated to such employee. Set forth below
are cash payments received by the named individuals with respect to dividend
share credits in connection with the exercise of ARCO options. During 1997:
Mr. Tusinski, $79,422. During 1996: Mr. Schlanger, $106,229; Mr. Gelb,
$89,664; and Mr. Tusinski, $93,435. During 1995: Mr. Gelb, $11,516; and Mr.
Tusinski, $47,727.
14
<PAGE>
(e) Mr. Hirsig was President and Chief Executive Officer of the Company during
1997 and through May 13, 1998. Effective as of May 14, 1998, Mr. Hirsig
resigned as President and Chief Executive Officer and was appointed as the
Vice-Chairman of the Board of Directors. As of May 14, 1998, Mr. Schlanger
became President and Chief Executive Officer of the Company.
STOCK OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZED VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS (A) FOR OPTION TERM (B)
------------------------------------------- ---------------------------
% OF TOTAL
OPTIONS GRANTED
OPTIONS TO EMPLOYEES EXERCISE EXPIRATION
NAME GRANTED IN 1997 PRICE DATE 5% 10%
---- ------- --------------- -------- ---------- ------------- -------------
# ($/SH) ($) ($)
<S> <C> <C> <C> <C> <C> <C>
Marvin O. Schlanger(c).. 30,100 10.85 47.1875 2/19/07 893,247 2,263,662
Alan R. Hirsig.......... 50,200 18.10 47.1875 2/19/07 1,489,733 3,775,277
Morris Gelb............. 13,700 4.94 47.1875 2/19/07 406,561 1,030,305
Robert J. Millstone..... 13,200 4.76 47.1875 2/19/07 391,723 992,702
Walter J. Tusinski...... 16,900 6.09 47.1875 2/19/07 501,524 1,270,960
Stock Price (d)......... 76.8635 122.3922
All Stockholders (d).... 2,883,828,096 7,308,186,600
</TABLE>
- --------
(a) These options were granted under the Company's 1990 Long-Term Incentive
Plan at an exercise price equal to the FMV on the date of grant, become
exercisable on February 20, 2001, and earn dividend share credits. The
options and the dividend share credits associated with such options are
canceled upon an optionee's termination of employment under certain
specified circumstances. For a description of dividend share credits under
the 1990 Long-Term Incentive Plan, see footnote (d) of the Summary
Compensation Table above.
(b) The potential realizable values presented are exclusive of the value, if
any, that might be realized in the future in respect of dividend share
credits.
(c) On May 14, 1998, in connection with his appointment as President and Chief
Executive Officer of the Company, Mr. Schlanger was granted, pursuant to the
Company's 1998 Long-Term Incentive Plan, 13,200 contingent restricted shares
and options to purchase 12,000 Shares at $57.5625 per Share.
(d) Based on total number of shares outstanding on December 31, 1997 of
97,177,230 and assumed purchase price of $47.1875 per share.
15
<PAGE>
AGGREGATED OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF IN-THE-MONEY
NUMBER OF UNEXERCISED UNEXERCISED OPTIONS AT
SHARES OPTIONS AT YEAR-END (A) YEAR-END (B)(C)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
(#) ($) (#) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C>
Marvin O. Schlanger..... 0 0 117,100 60,900 698,344 0
Alan R. Hirsig.......... 3,500 54,688 200,200 106,100 1,109,824 0
Morris Gelb............. 7,000 109,250 57,200 28,200 355,907 0
Robert J. Millstone..... 0 0 22,500 25,800 108,394 0
Walter J. Tusinski...... 0 0 45,300 35,100 115,444 0
</TABLE>
- --------
(a) Each option carries with it the right to dividend share credits, as
described in footnote (d) of the Summary Compensation Table at set forth
above.
(b) FMV of Common Stock on December 31, 1997 was $46.875.
(c) Set forth below are the values of aggregate dividend share credits accrued
with respect to options held at year-end based on FMV of Common Stock on
December 31, 1997 of $46.875. The dividend share credit values have been
calculated based on the cash payment formula described in footnote (d) of
the Summary Compensation Table set forth above, assuming the exercise of the
corresponding options (even if not exercisable in fact) on December 31,
1997, as follows:
YEAR-END DIVIDEND SHARE
CREDIT VALUES
-------------------------
EXERCISABLE UNEXERCISABLE
OPTIONS OPTIONS
----------- -------------
($) ($)
Mr. Schlanger.................................. 1,966,431 244,849
Mr. Hirsig..................................... 3,174,151 434,550
Mr. Gelb....................................... 1,002,847 114,225
Mr. Millstone.................................. 307,286 102,133
Mr. Tusinski................................... 505,196 142,715
16
<PAGE>
PENSION PLAN TABLE
The following table shows estimated annual pension benefits payable to
employees, including executive officers of the Company, upon retirement at age
65 under the provisions of the ARCO Chemical Company Retirement Plan and the
ARCO Chemical Company Supplementary Executive Retirement Plan as in effect on
December 31, 1997.
<TABLE>
<CAPTION>
AVERAGE FINAL EARNINGS
(SALARY PLUS BONUS)
HIGHEST THREE
CONSECUTIVE YEARS
SINCE DECEMBER 31, APPROXIMATE ANNUAL BENEFIT FOR YEARS OF
1978 (A) MEMBERSHIP SERVICE INDICATED (B)(C)
- ---------------------- -----------------------------------------------------
15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 300,000 $ 66,345 $ 89,960 $113,575 $137,190 $160,805 $184,805
400,000 88,845 120,460 152,075 183,690 215,305 347,305
500,000 111,345 150,960 190,575 230,190 269,805 309,805
600,000 133,845 181,460 229,075 276,690 324,305 372,305
700,000 156,345 211,960 267,575 323,190 378,805 434,805
800,000 178,845 242,460 306,075 369,690 433,305 497,305
900,000 201,345 272,960 344,575 416,190 487,805 559,805
1,000,000 223,845 303,460 383,075 462,690 542,305 622,305
1,100,000 146,345 666,960 421,575 509,190 596,805 684,805
1,200,000 268,845 364,460 460,075 555,690 651,305 747,305
</TABLE>
- -------------------------------------------------------------------------------
(a) The Retirement Plan and the Supplementary Executive Retirement Plan cover
the compensation reported as salary and bonus in the Summary Compensation
Table. Retirement benefits are based on years of participation service and
the employee's compensation during the highest three consecutive years of
service since December 31, 1978.
(b) The amounts shown in the above table are necessarily based upon certain
assumptions, including retirement of the employee on December 31, 1997 and
payment of the benefit under the basic form of allowance provided under the
Retirement Plan (payment for the life of the employee only with a guaranteed
minimum payment period of 60 months). The benefits shown are not subject to
deduction for Social Security benefits or other offset amounts.
(c) As of December 31, 1997, the credited years of service under the
Retirement Plan for the five named executive officers were as follows: Mr.
Schlanger, 23 years; Mr. Hirsig, 36 years, 7 months; Mr. Gelb, 28 years, 4
months; Mr. Millstone, 9 years; and Mr. Tusinski, 5 years and 4 months.
17
<PAGE>
PERFORMANCE OF THE COMMON STOCK
The performance graph below compares the cumulative total stockholder return
of the Company with the cumulative total return of the S&P 500 Stock Index and
the S&P Chemicals Index for the five-year period ended December 31, 1997. The
performance graph assumes an initial investment of $100 in the Common Stock
and in each of the comparative indices and assumes the reinvestment of all
dividends.
<TABLE>
<CAPTION>
FIVE-YEAR CUMULATIVE TOTAL RETURN
[GRAPH APPEARS HERE]
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ARCO Chemical $100.00 $104.78 $112.66 $131.44 $139.99 $141.18
S&P 500 Stock Index $100.00 $110.08 $111.53 $153.45 $188.68 $251.63
S&P CHEMICAL INDEX $100.00 $111.83 $129.47 $169.12 $223.42 $274.61
</TABLE>
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SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the Commission initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Executive officers, directors and greater
than 10% stockholders are required by Commission regulations to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely upon review of the copies of such
reports furnished to the Company during the year ended December 31, 1997, no
director, officer or beneficial holder of more than 10% of any class of equity
securities of the Company failed to file on a timely basis reports required by
Section 16(a) of the Exchange Act during the most recent fiscal year.
CHANGE OF CONTROL SEVERANCE AGREEMENTS
The Compensation Committee of the Board of Directors adopted a Change of
Control Plan (the "Change of Control Plan"), effective as of February 19,
1998, that applies generally to employees, including the named executive
officers, and becomes operative upon a change of control of the Company.(/1/)
The Change of Control Plan provides for the acceleration of certain benefits
and the payment of severance and other allowances upon a change of control of
the Company and subsequent termination of employment by the acquiring entity
without cause or by the employee for good reason. The definition of good
reason varies depending on the employee's grade level within the Company. The
consummation of the Offer would constitute a change of control of the Company
under the Change of Control Plan.
Certain benefits accrue upon the occurrence of a change of control. These
benefits include the immediate vesting of stock options and phantom stock
units ("VIP units") as well as the accrued dividend share credits ("DSCs"), if
any, allocated to such options or VIP units. In addition, any DSCs that would
be earned through the remainder of the term of the associated options or VIP
units will be computed and become vested. Shares of unvested restricted Common
Stock, and, subject to certain other conditions, a pro rata portion of
contingent restricted Common Stock awarded under the ARCO Chemical Company
1998 Long-Term Incentive Plan (the "1998 LTIP") will immediately vest upon a
change of control. A portion of a supplemental award of restricted Common
Stock, based on the Company's performance and calculated under the 1998 LTIP
as of the date of the change of control event, may also become vested.
If an eligible employee is terminated under specified circumstances within
two years following a change of control, the employee will be entitled to
receive one times to three times pay, depending upon the employee's grade
level. Severance payments are paid based upon length of service for employees
who are not executives or key managers of the Company. The named executive
officers will receive a payment equal to three times the sum of their current
base salary plus the greater of (i) the average of their bonuses for the last
three years or (ii) their target bonus for the year in which the termination
or change of control occurs. The named executive officers may also receive a
payment equal to a pro rata portion of their target bonus for the year in
which the change of control occurs. Employees will receive additional
specified coverage under the Company's sponsored medical, dental and life
insurance plans, depending on the employee's grade level. The named executive
officers will
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(/1/) Under the Change of Control Plan, a change of control means any one of
the following events: (i) the acquisition by any person or group (other than
ARCO) of 25% or more of the outstanding shares of Common Stock, (ii) the
merger, consolidation or sale of substantially all of the assets of the
Company, unless after the consummation of such a transaction, the
stockholders of the Company immediately prior to such transaction own at
least 60% of the outstanding shares of stock of the resulting entity, (iii)
the liquidation or dissolution of the Company, (iv) the incumbent directors
of the Company (directors as of February 19, 1998 or individuals recommended
or approved by a majority of the then incumbent directors) cease to
constitute at least a majority of the Board of Directors, and (v) a change of
control of ARCO under ARCO's then current change of control plans or
arrangements.
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receive 36 months of coverage. These officers will also receive a gross up
payment from the Company for the amount of the excise tax liability, if any,
imposed pursuant to Internal Revenue Code Section 4999 with respect to any
benefits paid in connection with a change of control.
See Item 3 of the Schedule 14D-9 for a description of the impact of the
Merger under the Change of Control Plan on each of the executive officers and
directors of the Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board approves the design of, assesses the
effectiveness of, and administers the Company's executive compensation
programs in support of, the Company's compensation philosophy. As of December
31, 1997, the Compensation Committee was composed of the individuals listed
below, all of whom are or were non-employee directors. This report describes
the components of the Company's executive officer compensation program,
explains the basis on which fiscal year 1997 compensation determinations were
made by the Compensation Committee and discusses the changes being implemented
in 1998 with respect to the Company's executives.
COMPENSATION PHILOSOPHY
The Company's executive compensation policy is designed to link the elements
of executive pay to company and individual performance. The compensation
program is intended to attract, motivate and retain high caliber executive
talent, and to deliver short- and long-term compensation predicated on the
achievement of financial and strategic objectives and returns to stockholders.
Each year, the Compensation Committee reviews the Company's performance and
executive compensation. The evaluation of company performance historically has
been based on an assessment of financial performance as compared to the S&P
Chemicals group and the achievement of the Company's financial and other
business objectives. Financial performance comparisons to the S&P Chemicals
group included such factors as relative net income, net income growth, return
on sales, return on capital employed, return on stockholders' equity, and
total return to stockholders. The Compensation Committee did not, however,
apply any specific quantitative formulas in arriving at its compensation
decisions.
COMPONENTS OF EXECUTIVE COMPENSATION FOR 1997
For 1997, the Company's executive compensation program was designed to
emphasize incentive compensation through the use of annual cash bonuses and
equity-based long-term incentives. These incentive opportunities represent a
variable component of pay which, when combined with base pay, provide total
compensation that should closely correlate with both company and individual
performance. Total compensation levels are measured against other chemical
companies whose size and character are similar to the Company. The universe of
companies used for compensation comparisons is broader than those that
comprise the S&P Chemicals Index (used in the performance graph set forth
above) because the Company competes for executive talent beyond the group of
companies included in the S&P Chemicals Index.
The Company's 1997 full-year performance, measured on the relative bases
noted above, did not meet either its financial objectives or attain
satisfactory annual performance relative to the competitor group.
Additionally, the Company's longer-term performance through 1997 was below the
median of the competitor group on several key measures, including total return
to stockholders. Although the Company also established specific internal non-
financial goals and objectives for 1997 and met or made substantial progress
in achieving them, the Compensation Committee determined that, overall, the
Company's performance was less than satisfactory. The Compensation Committee
has, therefore, approved total compensation below the level paid last year and
below the expected competitor average for the current year.
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During 1997, the following components of executive compensation each played
a specific role in the achievement of the desired total compensation position.
Base Pay
The Company maintains a target executive base pay structure at approximately
the average of the competitor group. Base pay levels are reviewed regularly,
and individual pay adjustments are considered based on individual performance,
the executive's contribution to corporate results, and relative position to
peers both within and outside the Company. The Compensation Committee
determined that no increases to base pay levels should be granted in 1998, as
prevailing base pay levels are considered to approximate the average of the
competitor group.
Annual Incentive Plan
The Annual Incentive Plan provides for cash payments based on company and
individual performance. Target annual incentive levels as a percent of base
pay are based upon competitive comparisons, and actual payout levels are
determined based on the Company performance criteria described above, which
are the same measures used for the broad-based incentive plan applicable to
the majority of the Company's employees worldwide. Individual awards under the
plan vary based on differences in individual performance. The Compensation
Committee assessed company performance to be below that of the competitor
group. Annual incentive payouts for plan year 1997 will be well below target
levels and are expected to be below competitor payout levels.
1990 Long-Term Incentive Plan
The ARCO Chemical Company 1990 Long-Term Incentive Plan (the "1990 LTIP")
has been a key component in positioning total compensation at levels
reflecting Company performance. The 1990 LTIP provided for grants of non-
qualified stock options, which carry the right to receive dividend share
credits, or DSCs. The DSCs are calculated based on Common Stock dividend
payments. Based on an assessment of annual and longer-term Company
performance, a target level of total compensation as measured against the
competitor group was established for awards under the 1990 LTIP. Stock option
grant guidelines for each executive grade were set at levels which, when
combined with base pay and target annual incentives, resulted in total
compensation approximating the target level. Variations in individual awards
were based on differences in contributions and performance. No additional
awards will be made under the 1990 LTIP after 1997. Long-term incentive awards
granted in 1998 were made under the 1998 LTIP, subject to stockholder
approval.
REVISED EXECUTIVE COMPENSATION PROGRAM
During 1997, the Compensation Committee and senior management initiated a
comprehensive examination of the Company's executive compensation program with
the assistance of an independent consulting firm. As a result, the Company
introduced a redesigned compensation program commencing with plan year 1998.
This program is largely predicated upon economic value-based measures and
provides rewards that are intended to further focus executives' attention upon
sustained business performance and creation of stockholder value. In 1998, the
executive compensation program will be administered as described below.
1998 Base Pay
The Company intends to continue its practice of setting executive base pay
levels at approximately the average of its peer group.
1998 Annual Incentive Plan
Beginning in 1998, the 1998 Annual Incentive Plan will include an economic
value-based approach to measure the financial performance of the Company.
Designated as Return on Capital Managed ("RCM") the measure
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calculates after-tax operating profit minus a charge for the use of the
capital employed in the business. This primary financial measure, together
with other strategic performance measures, will form the basis for determining
annual cash incentive compensation for plan years 1998 and beyond. The
Compensation Committee believes the redesigned 1998 Annual Incentive Plan more
closely aligns executive compensation with value creation for stockholders.
1998 Long-Term Incentive Plan
Beginning in 1998, long-term executive compensation will be delivered in two
components under the 1998 LTIP: (i) through awards of non-qualified stock
options, granted with an exercise price at fair market value on the date of
award (but without DSCs, which have been discontinued for all stock option
grants after 1997); and (ii) through awards of contingent restricted Common
Stock earned by subsequent performance.
Contingent restricted Common Stock is a new element of compensation that
allows executives to earn shares of performance-based restricted Common Stock
by achieving RCM objectives established by the Long-Term Incentive Plan
Administration Subcommittee at the start of the plan period. Contingent
restricted Common Stock is awarded at the beginning of each performance
period. For the performance period beginning in 1998, compensation depends
upon the Company's attainment of four successive, cumulative RCM objectives
(set at levels consistent with stockholder expectations over a four-year time
period). As each of the four RCM performance objectives is achieved, 25% of
the contingent restricted Common Stock awards will be converted to shares of
performance-based restricted Common Stock. Once all four objectives are
achieved or at the end of six years, whichever occurs first, the current plan
cycle ends and a new plan cycle begins. Contingent restricted Common Stock
awards not earned through the attainment of RCM objectives are forfeited at
the end of six years. A supplemental award of additional shares of restricted
Common Stock will be received by participants if the total RCM performance
goal is met within four years or less and the Company's total stockholder
return ("TSR"), relative to the S&P Chemicals group, for the performance
period is above the median. The supplemental performance award is graduated
such that participants may receive up to a maximum of 50% of the number of the
contingent restricted Common Stock awards made at the beginning of the
performance period, if the Company is at the top ranked TSR position.
Performance-based restricted Common Stock granted during the current plan
cycle will vest half on the first anniversary and half on the second
anniversary of its conversion from contingent restricted Common Stock.
The Compensation Committee believes that, in linking executive compensation
directly with RCM and performance, the 1998 LTIP will be effective in focusing
management's attention on the primary factors driving stockholder value
creation and total return to stockholders.
EXECUTIVE STOCK OWNERSHIP GUIDELINES
In order to further align the interests of executives with the Company's
stockholders, the Committee has established stock ownership guidelines that
encourage the accumulation and retention of the Company's Common Stock by
executives. The guidelines suggest that, within the next two years, executives
(depending on responsibility level) hold shares of the Common Stock valued at
approximately one to four times base salary (not including unexercised stock
options).
CEO COMPENSATION
The compensation level for the CEO is set based on Company performance and
on competitive pay levels. CEO compensation is measured against the average of
similar positions reported in the proxy statements of competitor companies
whose size and character are similar to the Company.
DEDUCTIBILITY OF COMPENSATION UNDER INTERNAL REVENUE CODE SECTION 162(M)
Section 162(m) of the Internal Revenue Code limits the deductibility of
annual compensation in excess of $1,000,000 paid to the Company's CEO or any
one of the four other most highly compensated officers, unless
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such compensation qualifies as "performance-based" within the meaning of
Section 162(m). In 1997, no officer of the Company realized qualifying
compensation in excess of $1,000,000. Consistent with Section 162(m), the
Board of Directors is recommending stockholder approval of the 1998 LTIP to
qualify awards under the plan as "performance-based" compensation.
SUMMARY
The Compensation Committee believes that compensation levels of the
Company's executives clearly and appropriately reflect Company and individual
performance. Base pay levels recognize principally competitive pay for
comparable positions in the peer group but are also reflective of sustained
individual performance. Awards under the Annual Incentive Plan have been based
on several measures of company performance relative to its peers (and in
future years will be predicated more strongly upon RCM value creation) and
against internally established strategic performance measures. Grants of stock
options and contingent restricted Common Stock under the 1998 LTIP are
designed to achieve a total compensation target that reflects both annual and
longer-term company performance that is consistent with performance of the
Company's stock and total returns to the stockholders.
By: Walter F. Beran
Anthony G. Fernandes
James A. Middleton
Frank Savage
Robert H. Stewart III, Chairman
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