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LOGO
OF ARCO CHEMICAL COMPANY
ANNUAL REPORT ON FORM 10-K
1997
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1997
FORM 10-K
----------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
[No Fee Required]
For the fiscal year ended December 31, 1997
Commission file number 1-9678
ARCO CHEMICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0104393
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3801 WEST CHESTER PIKE, NEWTOWN SQUARE, PENNSYLVANIA 19073-2387
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (610) 359-2000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH
EXCHANGE
ON WHICH
TITLE OF EACH CLASS REGISTERED
------------------- ------------
COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on February 6, 1998, based on the closing price on the New York
Stock Exchange composite tape on that date, was $813,716,277.
Number of shares of Common Stock, $1.00 par value, outstanding at December 31,
1997: 97,177,230.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997
(incorporated by reference under Part III).
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TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE
ITEM ----
<C> <S> <C>
1. and 2. Business and Properties..................................... 1
General Development of Business........................... 1
Industry Segment and Geographic Disclosure................ 1
Summary Description of Business and Products.............. 1
Sales and Marketing....................................... 4
Joint Ventures and Other Arrangements..................... 5
Research and Development.................................. 5
Raw Materials............................................. 5
Competition............................................... 6
Properties and Production Facilities...................... 7
Patents, Trade Names, and Trademarks...................... 8
Environmental Matters..................................... 8
Human Resources........................................... 9
3. Legal Proceedings........................................... 9
4. Submission of Matters to a Vote of Security Holders......... 11
---------------------------
Executive Officers of the Company........................... 12
PART II
Market for Registrant's Common Stock and Related Stockholder
5. Matters..................................................... 14
6. Selected Financial Data..................................... 15
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 15
8. Financial Statements........................................ 22
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 48
PART III
10. Directors and Executive Officers of the Registrant.......... 48
11. Executive Compensation...................................... 48
Security Ownership of Certain Beneficial Owners and
12. Management.................................................. 48
13. Certain Relationships and Related Transactions.............. 48
PART IV
14. Exhibits and Reports on Form 8-K............................ 48
</TABLE>
(i)
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PART I
ITEMS 1. AND 2.BUSINESS AND PROPERTIES
GENERAL DEVELOPMENT OF BUSINESS
ARCO Chemical Company (the Company) is a Delaware corporation with its
principal executive offices at 3801 West Chester Pike, Newtown Square,
Pennsylvania 19073-2387 (telephone no. 610-359-2000). The Company is the
successor to certain portions of the ARCO Chemical Division of Atlantic
Richfield Company (ARCO), a Delaware corporation. On June 9, 1987, ARCO
transferred substantially all of 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. On October 5, 1987, the
Company completed an initial public offering of 19,550,000 shares of common
stock. As of February 6, 1998, ARCO's 80,000,001 shares represented
approximately 82.3 percent of the outstanding shares of common stock. See Item
13.
Prior to October 5, 1987, the Company and ARCO entered into a number of
agreements for the purpose of defining their ongoing relationship. These
agreements were developed in connection with the establishment of the Company
by ARCO, and, therefore, were not the result of arm's length negotiations
between independent parties. For additional information relating to certain
continuing relationships between the Company and ARCO, including potential
conflicts of interest, see Item 13 and Note 3 of Notes to Consolidated
Financial Statements.
During 1997, the Company initiated a restructuring program to simplify the
Company's organization, streamline operations and reduce costs. The
restructuring efforts are expected to continue through 1998, with the cost
reduction initiatives substantially in place by the end of the year. The
Company expects to realize the full benefits of the program in 1999. Key
elements of the program include the reduction of approximately 900 employee
and contractor positions and the closure of certain production, sales and
administrative facilities. As part of the restructuring program, the Company
reviewed its existing asset base and wrote down the value of certain assets,
principally license agreements, other intangibles and site-specific production
assets, which have decreased utility in light of the restructured operations,
the Company's strategic direction, and the current competitive environment.
See Note 20 of Notes to Consolidated Financial Statements.
INDUSTRY SEGMENT AND GEOGRAPHIC DISCLOSURE
The Company operates in one industry segment. Reference is made to Note 4 of
Notes to Consolidated Financial Statements for disclosure of financial
information by geographic location.
SUMMARY DESCRIPTION OF BUSINESS AND PRODUCTS
The Company, including its subsidiaries, is a leading international
manufacturer and marketer of intermediate chemicals and specialty chemical
products used in a broad range of consumer goods. The Company operates in a
single industry segment and conducts business primarily in the Americas,
Europe, and the Asia Pacific region.
The Company's core product is propylene oxide (PO), which it produces
through two distinct technologies based on indirect oxidation (peroxidation)
processes that yield co-products. One process yields tertiary butyl alcohol
(TBA) as the co-product; the other process yields styrene monomer (SM) as the
co-product. The two technologies are mutually exclusive such that either a
dedicated PO/TBA plant or a dedicated PO/SM plant must be built.
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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. In 1995, the Company began selling TDI obtained under
long-term supply agreements with Rhone-Poulenc. With the 1996 acquisition of
TDI production facilities from Olin Corporation (Olin), the Company also
manufactures TDI. TDI and polyols are combined in the manufacture of
polyurethanes.
Following is a list of certain of the Company's principal products, the
forms in which they are sold, and typical end uses.
<TABLE>
<CAPTION>
PRODUCT FORM TYPICAL USES
- ------- ---- ------------
<S> <C> <C>
Propylene oxide PO Polyether polyols (polyols), propylene
(PO) glycols, ethers, and surfactants
Polyols Combined with isocyanates, such as
TDI, for polyurethane applications
such as flexible foam for seat
cushions, bedding and carpet
underlay; and coatings, adhesives,
sealants, and elastomers
Propylene glycols (PG) Unsaturated polyester resins; food,
cosmetic, and pharmaceutical
applications; automotive coolants and
aircraft deicers
Propylene glycol ethers Coatings and paints, cleaning
(PGE) and PGE acetates compounds, solvents, and inks
Butanediol, Engineering resins, fibers, solvents,
Tetrahydrofuran (THF) and resins, coatings and polyurethanes
N-Methyl
Pyrrolidone (NMP)
Toluene diisocyanate TDI Combined with polyols to manufacture
(TDI) polyurethanes
Tertiary butyl Methyl tertiary butyl Gasoline additives to increase octane
alcohol ether (MTBE) and reduce emissions
(TBA) and ethyl tertiary butyl
ether
(ETBE)
Gasoline-grade TBA (GTBA) Octane additive
Styrene monomer SM Acrylonitrile-butadiene-styrene (ABS)
(SM) resins,
polystyrene, expandable polystyrene
(EPS), rubber components, and
polyester resins
</TABLE>
Propylene Oxide and Derivatives
Propylene oxide is a commodity chemical that the Company consumes directly
or delivers to the merchant market through processing or sales agreements for
further conversion by its customers into derivative products, including
polyols for polyurethane applications, propylene glycols and PGEs, and various
other chemical products. Revenues for PO and derivatives constituted 49
percent, 47 percent, and 45 percent, respectively, of the Company's total
1997, 1996, and 1995 revenues. In the aggregate, the Company consumed
approximately 59 percent of its PO production in 1997 for the production of
derivatives. See Item 7 for additional discussion.
Based on published data, worldwide demand for PO was estimated at
approximately 9.1 billion pounds in 1997. Approximately 90 percent of that
volume was consumed in the manufacture of three families of derivative
products: polyols, PG, and PGE.
The largest of the PO derivative families is polyols, which are used in the
manufacture of polyurethanes. Within the polyurethane industry, the largest
market for polyols is in flexible foams, which are produced when polyols are
reacted with isocyanates, such as TDI. Polyols and isocyanates are also used
in coatings, adhesives, sealants and elastomers.
Propylene glycols are principally used as intermediate chemicals to produce
unsaturated polyester resins. Propylene glycols have low toxicity and are also
used in certain food, cosmetic, and pharmaceutical applications and in
automotive coolants and aircraft deicers. Propylene glycol ethers
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and acetates are low toxicity, high performance solvents. Past studies have
indicated that these materials generally have safer toxicological profiles
than their ethylene oxide-based counterparts.
Butanediol is an intermediate chemical having diverse applications in
engineering resins, elastomers, and solvents. The Company produces butanediol
from allyl alcohol, a PO derivative.
Isocyanates
In January 1995, the Company entered into long-term agreements with Rhone-
Poulenc for the supply of TDI, which the Company markets to customers. On
December 4, 1996, the Company purchased substantially all of the assets of
Olin's TDI and aliphatic diisocyanate (ADI) businesses. The purchase included
Olin's TDI and ADI production facilities at Lake Charles, Louisiana, and
certain related assets, including trademarks, patents and technology. Also,
see Note 21 of Notes to Consolidated Financial Statements. TDI complements the
Company's existing line of polyols products and strengthens its position as a
chemical supplier to the polyurethanes market. ADI is used in coatings,
sealants, adhesives and elastomers. See Item 7 for additional discussion.
Tertiary Butyl Alcohol and Derivatives
Tertiary butyl alcohol is the major co-product of one of the Company's two
PO processes. The Company utilizes most of its TBA, combined with methanol, to
make MTBE, a gasoline blending component that increases octane and reduces
emissions. The Company also has the capability to produce ETBE, an alternative
gasoline blending component. ETBE is manufactured from TBA and ethanol and has
a lower vapor pressure than MTBE or ethanol. Revenues for TBA and derivatives
constituted 26 percent, 29 percent, and 27 percent, respectively, of the
Company's total 1997, 1996, and 1995 revenues. See Item 7 for additional
discussion.
Worldwide demand for MTBE in 1997 was approximately 400 thousand barrels per
day, based on published data. Worldwide MTBE demand has increased dramatically
over the past several years as a result of the U.S. Clean Air Act Amendments
of 1990 (the Amendments), state and local regulations and the need for
incremental octane in gasoline in the U.S. and other countries. In the U.S.,
the Amendments set minimum levels for oxygenates, such as MTBE, in gasoline
sold in areas not meeting specified air quality standards. The Environmental
Protection Agency proposed a reduction in permissible ozone levels in the U.S.
which, if adopted, may create additional demand for MTBE. However, other
federal and local legislative initiatives, challenging the use of MTBE, could
adversely affect demand for MTBE.
Studies by federal and state agencies and other organizations have shown
that MTBE is safe for use in gasoline and is effective in reducing automotive
emissions. However, the presence of MTBE in some water supplies in California
due to gasoline leaking from underground storage tanks and in surface water
from recreational water craft has led to public concern that MTBE may
contaminate drinking water supplies, and thereby result in a possible health
risk. Federal and state programs are in place that require the cleanup of
gasoline leaks. However, heightened public awareness about MTBE has resulted
in certain state and federal legislative initiatives that either seek to
rescind the oxygenate requirement for reformulated gasoline sold in California
or restrict the use of MTBE. Such legislative initiatives, if enacted, could
reduce demand for MTBE in California and may in the longer term adversely
impact oxygenated fuel programs throughout the United States and the world. In
addition, restrictions on the use of MTBE in California could affect the
Company's MTBE sales in California, including sales under a contract with
ARCO, which is the Company's largest MTBE contract. However, with additional
capital investment, the Company has the capability to convert its MTBE
production units to make a lower value product.
3
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Styrene Monomer
Styrene is the major co-product of the second of the Company's two PO
processes. Styrene is a commodity chemical produced and traded worldwide.
Based on published data, worldwide demand in 1997 was approximately 39 billion
pounds. The major markets include commodity and specialty polymer
applications, such as polystyrene, ABS, EPS and polyester resins, as well as
various rubber industry uses. Revenues for SM and derivatives constituted 10
percent, 15 percent, and 20 percent, respectively, of the Company's total
1997, 1996, and 1995 revenues. The Company delivers most of its styrene
production to the U.S. merchant market and to selected export markets through
sales or processing agreements. See Item 7 for additional discussion. The
Company utilized about 12 percent of its styrene production in 1995 for the
manufacture of derivatives. With the sale of the plastics business to NOVA
Chemicals Inc. (NOVA) on September 30, 1996, the Company no longer
manufactures or sells styrene monomer derivatives. The Company has
substantially replaced this volume by entering into a long-term processing
agreement to process approximately the same volume of SM for NOVA that had
been consumed by the plastics business before its sale.
SALES AND MARKETING
In 1997, most of the Company's revenues were derived from sales to, or
processing agreements with, unrelated third parties. Over the past three
years, no single unrelated third-party customer, nor any related party
customer, accounted for more than 10 percent of total revenues in any one
year.
The Company delivers products through sales agreements, processing
agreements, and spot sales. The Company purchases limited amounts of MTBE and
SM for resale to the extent that customer demand for these co-products exceeds
the Company's production. Production levels of co-products are based upon the
demand for PO and the market economics of the co-products.
For several years, the Company has followed the practice of entering into
multi-year PO processing or sales agreements in an effort to mitigate the
adverse impact of competitive factors and economic business cycles on demand
for the Company's PO. The Company has also entered into a number of multi-year
SM sales and processing agreements and MTBE sales agreements.
The SM processing agreements include long-term processing agreements
providing for the delivery of fixed annual quantities of SM--see Joint
Ventures and Other Arrangements below. On September 30, 1996, the Company sold
its plastic business to NOVA. As part of the transaction, the Company entered
into a long-term agreement to process styrene monomer for NOVA.
Prior to 1997, the Company sold a substantial portion of its U.S.-based MTBE
volume under multi-year, fixed-margin MTBE sales contracts. Those contracts
had the effect of reducing the exposure of the MTBE business to market cycles.
Most of those contracts terminated in late 1996 and early 1997. The Company
now sells these volumes under market-based sales agreements and in the spot
market.
The Company's sales are made through its own marketing and sales personnel
and through distributors and independent agents located in the United States,
Europe and the Asia Pacific region. As part of its restructuring and cost-
reduction program, announced in 1997, the Company is centralizing certain
sales functions at its headquarters in Newtown Square, Pennsylvania as well as
in Europe and the Asia Pacific region. This will permit the Company to reduce
its sales office infrastructure around the world, while maintaining service to
its worldwide customer base.
For data relating to foreign operations and export sales, see Note 4 of
Notes to Consolidated Financial Statements.
4
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JOINT VENTURES AND OTHER ARRANGEMENTS
In January 1995, the Company entered into long-term TDI supply agreements
with Rhone-Poulenc. Since January 1, 1995, the Company has been entitled to
the entire TDI output of Rhone-Poulenc's two plants in France, which have a
combined annual capacity of approximately 264 million pounds. The Company
markets this TDI principally in Europe and Asia.
The PO/SM plant at the Channelview, Texas complex that was completed in 1992
(PO/SM II) is owned by the Company together with third-party investors. The
Company sold additional interests to the investors in 1994, 1996 and 1997. In
addition, portions of the pending PO/SM II expansion--see "Properties and
Production Facilities" for additional discussion--are being funded through
third-party investment. The Company retains a majority interest in the PO/SM
II plant. A portion of the current SM output of the PO/SM II plant is
committed, and the increased SM output resulting from the expansion will be
committed, under long-term processing agreements. As of December 31, 1997, 800
million pounds per year of the PO/SM II plant's existing SM capacity was
committed under such agreements.
The Company, through an affiliate, has a fifty percent equity interest in
Nihon Oxirane Co., Ltd. (Nihon Oxirane), a joint venture with Sumitomo
Chemical Co., Ltd. and Showa Denko K.K. Since 1976, Nihon Oxirane has operated
a PO/SM plant in Chiba, Japan.
RESEARCH AND DEVELOPMENT
The Company has its principal research and development facility at Newtown
Square, Pennsylvania and technical centers in South Charleston, West Virginia,
Villers Saint Paul, France and Singapore.
The Company's research and development expenditures for 1997, 1996, and 1995
were $82 million, $81 million, and $79 million, respectively.
RAW MATERIALS
The principal hydrocarbon raw materials purchased by the Company are
propylene, butanes, ethylene, benzene and methanol. The market prices of these
raw materials historically have been related to the price of crude oil and its
principal refinery derivatives and natural gas liquids. These materials are
available in bulk quantities via pipeline or marine vessels. The Company's raw
material requirements are purchased from numerous suppliers in the United
States and Europe, with which the Company has established contractual
relationships, as well as in the spot market. The Company receives a portion
of its methanol requirements under a cost-based supply arrangement with a
third party. See Item 13 and Note 3 of Notes to Consolidated Financial
Statements.
The Company is a large volume consumer of isobutane for chemical production.
The Company has invested in facilities, or entered into processing agreements
with unrelated third parties, to convert the widely available commodity normal
butane to isobutane. The Company is also a large consumer of oxygen for its
PO/TBA plants at Bayport, Texas, Rotterdam, the Netherlands, and Fos-sur-Mer,
France.
In order to assure adequate and reliable sources of supply at competitive
prices and rates, the Company has entered into long-term agreements and other
arrangements with suppliers of raw materials, products, industrial gas and
other utilities. See Note 11 of Notes to Consolidated Financial Statements.
5
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COMPETITION
Competition within the Company's segment of the chemical industry is
significant and is affected by a variety of factors, including quality,
product price, reliability of supply, technical support, customer service, and
potential substitute materials. Capacity share figures for the Company and its
competitors, disclosed below, are based on completed production facilities and
include the full capacity of joint-venture facilities and certain long-term
supply agreements.
The Company's major worldwide PO competitor is Dow Chemical Company (Dow).
Dow's operations are based on chlorohydrin technology, and Dow is integrated
upstream from chlorine and propylene and downstream into a variety of PO
derivatives. Based on published data relating to the PO market, the Company
believes that it has 36 percent and Dow has 34 percent of the total worldwide
capacity for PO. No other producer is believed to have more than 7 percent of
worldwide PO capacity.
In 1996, the Company's Board of Directors approved the expansion of the
PO/SM complex in Channelview, Texas, and the construction of a new world-scale
PO/SM plant in Rotterdam, the Netherlands. The Channelview PO/SM expansion
will add annual PO and SM capacity of 110 million and 248 million pounds,
respectively, in the first quarter 1998. The new PO/SM plant is expected to be
completed in the year 2000, adding annual PO and SM capacity of 625 million
and 1,400 million pounds, respectively, upon start up.
Based on published data, Dow has completed expansions of annual PO capacity
at existing facilities during 1996 and 1997, which, in total, are equivalent
to the addition of a new PO plant. In late 1994, Texaco Chemical Company
completed a PO/MTBE plant in Texas. In 1997, Huntsman Corporation purchased
Texaco Chemical's PO/MTBE plant, including the right to license the underlying
technology. Also in 1997, Shell completed the construction of a PO/SM plant in
Singapore. In 1996, Shell and BASF AG (BASF) announced plans for a joint
venture to construct a PO/SM plant in Europe, using Shell technology, with a
target completion date in the 1999 time frame. In addition, Repsol Quimica,
S.A. announced plans to build a PO/SM plant in Tarragona, Spain, using
technology for the production of PO and SM originally licensed from the
Company. See Item 3, "Legal Proceedings--Other Litigation". Several other
companies have been attempting to develop or license commercial PO processes,
and additional PO plants may be built by competitors.
The Company competes with many polyols producers worldwide, including Dow,
Bayer AG (Bayer), and BASF. Based on published data, Dow is believed to have
27 percent of worldwide polyols capacity while the Company is believed to have
15 percent. Bayer and BASF are each believed to have 10 percent. No other
polyols producer is believed to have more than 6 percent of worldwide polyols
capacity.
The Company manufactures and has long-term supply agreements for TDI, an
isocyanate, which is reacted with polyols to produce flexible foams. TDI
enables the Company to compete more effectively with other suppliers to the
flexible foam market who offer both polyols and TDI to customers. In the
majority of flexible foam applications, such as furniture, bedding and
automotive seating, there is some competition for foams from substitute
materials. The Company competes with many TDI producers worldwide including
Bayer. Based on published data, Bayer is believed to have 24 percent of
worldwide TDI capacity while the Company is believed to have 19 percent. No
other TDI producer is believed to have more than 11 percent of worldwide TDI
capacity.
The Company competes with many MTBE producers worldwide, the most
significant is Saudi Basic Industries Corp. (SABIC). Based on published data,
SABIC is believed to have 12 percent of the total worldwide capacity for MTBE
while the Company believes that it has 11 percent. No other producer is
believed to have more than 7 percent of worldwide MTBE capacity. MTBE also
faces competition from substitute products such as ethanol as well as other
octane components.
The Company competes with several SM producers worldwide; among them are
Shell and Dow. Based on published data, Shell is believed to have 10 percent
of the total worldwide SM capacity while
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Dow and the Company are believed to have 9 percent and 8 percent,
respectively. No other producer is believed to have more than 6 percent of
worldwide SM capacity.
There can be no assurance that the Company will not face additional
competition in the future.
PROPERTIES AND PRODUCTION FACILITIES
The Company's corporate and executive headquarters and its principal
research operations are located at Newtown Square, Pennsylvania. The Company
leases the Newtown Square property from ARCO. See Item 13. The Company's
European headquarters are located in leased facilities in Maidenhead, England,
and the Company's Asia Pacific headquarters are located in leased facilities
in Hong Kong. As part of its restructuring program, the Company will be
reducing staff at the Newtown Square, European and Asian Pacific headquarters
with appropriate reductions in the size of the leased facilities. The Company
is establishing regional service centers at leased facilities in Rotterdam,
the Netherlands, and Singapore. The Company owns the regional service center
in Channelview, Texas.
Depending on location and market needs, the Company's production facilities
can receive primary raw materials by pipeline, rail car, truck, barge, or ship
and can deliver finished products in drums or by pipeline, rail car, truck,
barge, isotank or ship. The Company charters ships, owns and charters barges,
and leases isotanks and rail cars for the dedicated movement of products
between plants, products to customers or terminals, or raw materials to
plants, as necessary. The Company leases liquid and bulk storage and warehouse
facilities at terminals in the Americas, Europe, and the Asia Pacific region.
In the Rotterdam outer harbor area, the Company operates an on-site butane
storage tank, propylene spheres, pipeline connections, and a jetty that
accommodates deep-draft vessels.
In the United States, the Company produces PO, TBA, PG, and PGE at the
Bayport, Texas plant and PO, SM, MTBE, polyols, and butanediol at the
Channelview, Texas plant. The Channelview plant has the capability to produce
either MTBE or ETBE. Polyols are also produced at the Company's plants in
South Charleston and Institute, West Virginia, which are situated on leased
land. The Company has isocyanate production facilities in Lake Charles,
Louisiana.
In Europe, the Company produces PO, TBA, MTBE, and PG at plants located in
Rotterdam, the Netherlands and Fos-sur-Mer, France. In addition, polyols are
produced at plants located in Rieme, Belgium and Fos-sur-Mer, France. The
Rotterdam plant also produces PGE.
In the Asia Pacific region, the Company's PO/SM plant, owned by Nihon
Oxirane, is located in Chiba, Japan. Polyols plants are located in Kaohsiung,
Taiwan and Anyer, West Java, Indonesia. The Anyer plant is owned by P.T. ARCO
Chemical Indonesia, an Indonesian joint venture with P.T. Gema Supra Abadi.
The Company, through a subsidiary, has a majority interest in the joint
venture.
The following table shows the Company's worldwide production capacity (in
millions of pounds per year, except where otherwise noted) for certain key
products. Capacities shown are the production capacities that the Company
believes could be obtained, as of December 31, 1997, based upon plant design
and subject to certain on-stream factors, product mix, and other variable
factors. Capacities shown include the full capacity of joint-venture
facilities. Plants can and have exceeded these capacities for extended periods
of time.
<TABLE>
<CAPTION>
PRODUCT DOMESTIC FOREIGN TOTAL
------- -------- ------- ------
<S> <C> <C> <C>
PO 2,335 1,395 3,730
Polyols 740 610 1,350
PG 565 345 910
PGE 120 155 275
Butanediol 90 -- 90
TDI 250 -- 250
MTBE-Bbls/day 30,000 28,500 58,500
SM 2,570 830 3,400
</TABLE>
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The Company has committed 800 million pounds of the indicated domestic SM
capacity through long-term processing arrangements. See Item 7 for additional
discussion. The Company is completing an expansion of its PO/SM complex in
Channelview, Texas which will add annual PO and SM capacity of 110 million and
248 million pounds, respectively. The increased SM capacity is committed under
long-term processing agreements.
From time to time the Company also contracts for the manufacture of certain
of its products at third party facilities under supply and processing
agreements. The Company has long-term supply agreements with Rhone-Poulenc for
TDI. These agreements entitle the Company to all of the TDI output of the
supplier's two plants in France with a combined capacity of approximately 264
million pounds per year.
PATENTS, TRADE NAMES, AND TRADEMARKS
ARCO has granted the Company a license to use "ARCO" in its name and the
ARCO spark design as a logo. This license by ARCO has been granted on a
royalty-free basis, which is consistent with ARCO's practice of licensing its
name and design to its subsidiaries and affiliates. The Company owns and has
licensed from ARCO various domestic and foreign trademarks.
The Company possesses a body of patented and unpatented technology and trade
secrets relating to its products, processes and the design and operation of
its plants, all of which are valuable to the Company. The Company does not
believe that the loss of any individual patent or trade secret would have a
material adverse effect on its business. The basic patents relating to the
Company's PO/SM and PO/TBA process technologies have expired.
ENVIRONMENTAL MATTERS
The Company (together with the industry in which it operates) is subject to
federal, state, local, and foreign environmental laws and regulations
concerning emissions to the air, discharges to surface and subsurface waters,
and the generation, handling, storage, transportation, treatment, and disposal
of waste materials. The Company and the industry are also subject to other
federal, state, local, and foreign environmental laws and regulations,
including those that require the Company to remove or mitigate the effects of
the disposal or release of certain chemical substances at various sites. It is
impossible to predict precisely what effect these laws and regulations will
have on the Company in the future. Compliance with environmental laws and
regulations could result in significant capital expenditure requirements as
well as other costs and liabilities. Management believes, based upon its past
experience and best assessment of future events, that these environmental
liabilities and costs will be determined and incurred over an extended period
of time, allowing the Company to fund such liabilities and costs in the
ordinary course of business. See Item 3, "Legal Proceedings" and Note 11 of
Notes to Consolidated Financial Statements.
It is the Company's policy to comply with all environmental laws and
regulations. In some cases, compliance can be achieved only by incurring
capital expenditures. The Company's annual environmental-related capital
expenditures for 1997, 1996, and 1995 were $21 million, $24 million, and $27
million, respectively. For the years 1998 and 1999, the Company anticipates
annual environmental-related capital expenditures to range from $20 million to
$25 million per year. These figures do not include any environmental-related
capital expenditures associated with the construction of new facilities.
Environmental-related capital expenditures include the cost of projects to
reduce and/or eliminate pollution and contamination in the future and the cost
of modifications to the Company's manufacturing facilities necessary to comply
with environmental laws and regulations.
8
<PAGE>
In 1997, the Company made no provisions for estimated future expenses for
remediation while in 1996 and 1995 such provisions were $4 million and $12
million, respectively. Actual expenditures for the past three years have
averaged $7 million per year. The Company's operating expenses also include
the ongoing costs of controlling or disposing of pollutants. The Company
estimates that its operating expenses related to these ongoing costs averaged
approximately $34 million per year for the past three years.
HUMAN RESOURCES
At December 31, 1997, the Company employed approximately 4,200 people
exclusive of employees of unconsolidated joint ventures. The Company believes
its relationships with its employees are satisfactory. Approximately 23
percent of the Company's domestic employees are represented by labor unions.
ITEM 3. LEGAL PROCEEDINGS
ENVIRONMENTAL MATTERS AND RELATED LITIGATION
In December 1993, the U.S. Environmental Protection Agency (the EPA) issued
a Unilateral Administrative Order (the Order) to the Company and other
potentially responsible parties requiring implementation of a remedial
design/remedial action for the Turtle Bayou, Texas site under the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended (Superfund). The Company has raised certain legal defenses against the
enforcement of the Order. In January 1994, the EPA filed a complaint against
the Company and certain other defendants, including ARCO, in the United States
District Court for the Eastern District of Texas seeking recovery of costs of
removal and/or remedial action allegedly incurred or to be incurred by the
federal government. In 1994, the Company reached an agreement in principle
with the EPA to settle the cost recovery lawsuit under which the Company and
ARCO agreed (i) to pay $1.1 million in reimbursement of past costs incurred by
the federal government and (ii) to perform remedial activities with respect to
a portion of the site. In late 1996, the agreement in principle was modified
to provide that the Company and ARCO will perform remedial activities with
respect to certain additional portions of the site in lieu of reimbursing the
federal government for past costs. Site remediation is expected to take at
least five years. The parties have agreed to the terms of a consent decree to
embody the settlement. After the consent decree becomes effective, it is
expected that the Order will be rescinded with respect to the Company.
The Company is currently involved in administrative proceedings or lawsuits
relating to a minimal number of other Superfund sites. Based on currently
available information, the Company does not believe that the potential cost
associated with these sites, individually or in the aggregate, will be
significant. The Company may in the future be involved in additional
assessments and cleanups under environmental laws. The future costs in
connection with such matters will be affected by such factors as the unknown
magnitude of cleanup costs, the unknown timing and extent of the remedial
actions that may be required, the determination of the Company's liability in
proportion to other potentially responsible parties, and the extent, if any,
to which such costs are recoverable from insurance.
Certain substances are present in the soil and ground water at the site of
the Company's former plant located in Monaca, Pennsylvania (Beaver Valley). In
1994, the Company entered into a Consent Order and Agreement (First Consent
Agreement) with the Pennsylvania Department of Environmental Protection
(PADEP) pursuant to which the Company and PADEP agreed upon a work plan for
testing and remedial process design with regard to the conditions at the
Beaver Valley site (Site). That work plan has been completed. Under the terms
of the First Consent Agreement, the Company paid civil penalties totaling
$363,000 in 1994. In addition, the First Consent Agreement provided for a
penalty of $63,000 each year until the commencement of active remediation at
the Beaver Valley plant, after
9
<PAGE>
which the amount of such annual penalty would be reduced based on the extent
of remediation commenced at the Site.
On October 20, 1997, the Company, Beazer East, Inc. (Beazer) and PADEP
entered into a subsequent Consent Order and Agreement (Second Consent
Agreement), which provides for the remediation of certain areas at the Beaver
Valley Site in compliance with the Pennsylvania Land Recycling and
Environmental Remediation Standards Act (the Act). The Second Consent
Agreement carries forward in a limited fashion the monetary penalties
contained in the First Consent Agreement, which will be imposed only if the
Company fails to meet certain deadlines for submitting risk assessment studies
to PADEP for review and approval. In the Second Consent Agreement, PADEP
approved the Site characterization information previously submitted by the
Company for all areas of the Site. PADEP also conditionally approved the
Company's Site-specific remedies and found that they complied with the Act.
Final approval of the Site-specific remedies is subject to PADEP's approval of
the risk assessment studies to be submitted by the Company. Upon receiving
final approval, the Company will commence remediation of the Site. Remediation
is expected to last approximately two years.
The Company sold the Beaver Valley plant assets to NOVA Chemicals Inc.
(NOVA) as of September 30, 1996, but retained ownership of the Beaver Valley
land. The land was subdivided and certain portions were leased to NOVA. NOVA
agreed to take title to such portions of the Beaver Valley land after the
occurrence of certain defined events. On November 21, 1997, after signing the
Second Consent Agreement, the Company transferred to NOVA the leased portion
of the Beaver Valley land. The Company has retained responsibility for
remediation of certain portions of the Beaver Valley land that may be required
by PADEP pursuant to the Act.
The Company has an agreement with Beazer, the successor to Koppers Inc. (the
previous owner of the Beaver Valley Site), whereby Beazer agreed to pay for
approximately 50 percent of the cost of the remediation. The Company and
Beazer have reached an agreement with the U.S. government pursuant to which
the government will pay 28.5 percent of the costs incurred by the Company and
Beazer for remediation of substantial portions of the Beaver Valley site.
In addition to the matters reported herein, from time to time the Company
and its subsidiaries become aware of compliance matters relating to, or
receive notices from federal, state or local governmental entities of alleged
violations of, environmental, health and/or safety laws and regulations
pertaining to, among other things, the disposal or discharge of chemical
substances (including hazardous wastes). In some instances, these matters may
become the subject of administrative proceedings or lawsuits and may involve
monetary sanctions of $100,000 or more (exclusive of interest and costs). See
Items 1 and 2, "Business and Properties--Environmental Matters" and Note 11 of
Notes to Consolidated Financial Statements.
OTHER LITIGATION
On December 15, 1997, the Company announced the conditional settlement of a
dispute with Repsol Quimica, S.A. (Quimica) concerning the use in Spain of
technology for the production of PO and SM. The Company had licensed the
technology to Quimica's predecessors under agreements entered into in
connection with the operation and eventual dissolution of a Spanish joint
venture called Montoro. In October, 1996, the Company commenced an arbitration
in Paris, France under the rules of the International Chamber of Commerce
against Repsol, S.A. (Repsol), Quimica, and Repsol Petroleo, S.A. in which the
Company sought to enforce its rights under the 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.
(Repsol was subsequently permitted to withdraw as a party to the arbitration
pursuant to an agreement among the parties.) The dispute had also given rise
to
10
<PAGE>
proceedings by the Directorate-General for Competition of the European
Commission and the Spanish Bureau for the Defense of Competition (Spanish
Bureau). The settlement was conditional in that it was subject to clearance by
these two competition authorities.
Under the terms of the settlement, Quimica will be able to carry out its
plans to build a PO/SM plant in Spain. The remaining terms of the settlement
are confidential. The Company does not believe that such terms will have a
material adverse effect on the consolidated financial statements of the
Company. On January 7, 1998, the Spanish Bureau approved the settlement and
subsequently closed its file on the matter. On January 29, 1998, the European
Commission approved the settlement at which time the settlement became final
and effective. Pursuant to the settlement, the arbitration has come to an end.
It has not been determined, however, whether the competition proceedings begun
against the Company by the European Commission will terminate.
In addition, 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 the foregoing matters, but
does not believe that the ultimate resolution of such matters will have a
material adverse effect on the consolidated financial statements of the
Company.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
11
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are the executive officers of the Company as of February 1,
1998.
<TABLE>
<CAPTION>
NAME, AGE, AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH THE COMPANY FIVE YEARS AND PERIOD SERVED AS OFFICER(A)
------------------------- ------------------------------------------
<S> <C>
Alan R. Hirsig, 58 Mr. Hirsig was elected President and Chief Executive Officer
President, Chief on January 1, 1991. He was elected an officer of the Company
Executive Officer, and on June 22, 1987 and a Director of the Company on November
Director 14, 1989. Previously, 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.
Van Billet, 43 Mr. Billet was elected Vice President and Controller of the
Vice President and Company effective as of March 1, 1997. Previously, he was
Controller 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, Associ-
ate General Tax Officer from May 1991 to July 1993, and Man-
ager, European Tax Operations from February 1988 to May 1991.
Morris Gelb, 51 Mr. Gelb was elected an officer of the Company on June 22,
Senior Vice President, 1987. He assumed his current position in August 1997. Previ-
Manufacturing, Research, ously, he was Vice President, Environmental, Engineering and
Engineering, and Manufacturing Programs from October 1991 to August 1997 and
Environmental, Health Vice President, Research and Engineering from September 1986
and Safety to September 1991.
Robert J. Millstone, 54 Mr. Millstone was elected Vice President and General Counsel
Vice President, General of the Company, effective January 1, 1995. Previously, he was
Counsel, and Secretary Associate General Counsel from January 1989 to December 1994.
He has been Secretary of the Company since October 1990.
Marvin O. Schlanger, 49 Mr. Schlanger was elected an officer of the Company on Septem-
Executive Vice ber 1, 1987 and a Director of the Company on November 14,
President, Chief 1989. He assumed his current position in November 1994. Pre-
Operating Officer, and viously, he was Senior Vice President of the Company and
Director 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,
Worldwide Business Management from September 1988 to Septem-
ber 1989.
Walter J. Tusinski, 50 Mr. Tusinski was elected an officer and a Director of the Com-
Senior Vice President, pany on September 1, 1992. He assumed his current position on
Chief Financial Officer, that date. Previously, he served as Vice President, New Busi-
and Director ness 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 Au-
gust 1990.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH THE COMPANY FIVE YEARS AND PERIOD SERVED AS OFFICER(A)
------------------------- ------------------------------------------
<S> <C>
Francis W. Welsh, 54 Mr. Welsh was elected an officer of the Company on June 22,
Vice President, Human 1987. He has held his current position since August 1983.
Resources Previously, he was Manager of Compensation and Manager of
Personnel Resources and Development, Corporate Employee Rela-
tions of ARCO from September 1980 to May 1983.
</TABLE>
- --------
(a) 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.
13
<PAGE>
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock is listed on the New York Stock Exchange. The reported high
and low sales prices of the common stock on the New York Stock Exchange (New
York Stock Exchange Composite Tape) from January 1, 1996 through February 6,
1998, inclusive, were:
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ---- ---
<S> <C> <C>
1996
First Quarter.............................. 52 7/8 48 1/2
Second Quarter............................. 54 50 1/2
Third Quarter.............................. 52 1/2 47 1/8
Fourth Quarter............................. 50 3/4 47 1/2
1997
First Quarter.............................. 50 1/2 43 1/2
Second Quarter............................. 47 7/8 40 7/8
Third Quarter.............................. 47 3/4 42 13/16
Fourth Quarter............................. 51 1/4 43 1/4
1998
First Quarter (through February 6, 1998)... 50 9/16 46 3/16
</TABLE>
On February 6, 1998, the closing price of the common stock was $47 1/2.
As of December 31, 1997, the number of holders of record of common stock of
the Company was 2,030.
The Company has paid quarterly cash dividends as follows:
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996............................ $0.70 $0.70 $0.70 $0.70
1997............................ $0.70 $0.70 $0.70 $0.70
1998............................ $0.70*
</TABLE>
- --------
* On January 22, 1998, a dividend of $0.70 per share was declared on the
common stock, payable on March 6, 1998 to stockholders of record on February
13, 1998.
The current quarterly dividend rate for the common stock is $0.70 per share.
The declaration and payment of future dividends and the amount thereof will be
dependent on the Company's results of operations, financial condition, cash
requirements, and future prospects as well as on other factors deemed relevant
by the Board of Directors. It is the current intention of the Company to
declare and pay quarterly cash dividends on its common stock.
14
<PAGE>
ITEM 6.SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the
Company:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Sales and other operating
revenues........................ $ 3,995 $ 3,955 $ 4,282 $ 3,423 $ 3,192
Costs and other operating
expenses........................ 3,230 3,067 3,102 2,586 2,453
Net income(1).................... 111 348 508 269 214
Total assets..................... 4,116 4,394 4,135 3,737 3,502
Long-term debt, including current
portion......................... 815 869 912 913 905
Dividends per common share....... 2.80 2.80 2.65 2.50 2.50
Earnings per share:(1)(2)
Basic.......................... 1.14 3.60 5.28 2.80 2.23
Diluted........................ 1.14 3.59 5.26 2.80 2.23
</TABLE>
- --------
(1) Net income in 1997 includes a charge of $116 million, or $1.20 per share,
for costs related to a restructuring program and asset reviews.
(2) Earnings per share for prior years have been restated in accordance with
the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share."
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in connection with the information contained
in the Consolidated Financial Statements and the Notes thereto.
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. The
Company also manufactures and markets toluene diisocyanate (TDI). TDI and
polyols are combined in the manufacture of polyurethanes. MTBE is used in
gasoline as an oxygenate and as an octane additive.
Net income for 1997 was $111 million compared with $348 million in 1996 and
$508 million in 1995. Net income in 1997 decreased versus 1996 partly due to
the $116 million after-tax charge in the third quarter 1997 for the
restructuring and asset review programs. The remaining $121 million decrease
primarily reflected lower product margins in 1997 as well as higher charges
related to scheduled plant maintenance. Net income in 1997 also reflected
higher foreign exchange charges, lower interest income and a higher tax rate.
Net income in 1996 decreased versus 1995 primarily due to significantly lower
SM margins and, to a lesser extent, lower PO and derivatives volumes and lower
MTBE margins.
15
<PAGE>
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 periods indicated
below. Core products include PO, PO derivatives, and TDI.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
Core products (pounds)............................ 4,135 3,570 3,684
Co-products:
SM and derivatives (pounds)..................... 2,577 2,647 2,579
TBA and derivatives (gallons)................... 1,054 1,107 1,140
</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 800 million, 748 million and 609 million pounds in 1997,
1996 and 1995, respectively. The 1996 and 1995 data include SM derivatives
sales volumes for periods prior to the September 30, 1996 date of sale of the
plastics business.
Revenues
Revenues of $3,995 million in 1997 were essentially flat compared to
revenues of $3,955 million in 1996, as higher net volumes were substantially
offset by lower average sales prices. Volumes for core products increased 16
percent in 1997 versus 1996. The increase reflected higher volumes for PO
derivatives, which benefited from improved demand and temporary industry
supply shortages for certain products, partially offset by lower PO volumes.
Core product sales also reflected higher TDI volumes due to the December 1996
Olin acquisition and the increased availability of TDI from a plant in France.
The French plant operated at lower rates in the 1996 period. SM and
derivatives volumes decreased three percent. The loss of SM derivatives
volumes through the sale of the plastics business was substantially offset by
increased SM volumes processed for the buyer of the plastics business. TBA and
derivative volumes decreased five percent on lower MTBE volumes. Average sales
prices were generally lower in the 1997 period versus 1996. Contributing to
the lower 1997 prices were the effects of a stronger U.S. dollar, stronger
competition in PO derivatives and TDI markets, the expiration of most of the
Company's long-term, fixed-fee MTBE contracts, excess SM capacity in the
industry, and the replacement of divested plastics business sales revenue with
lower per unit SM processing fees.
Revenues decreased eight percent to $3,955 million in 1996 from $4,282
million in 1995 primarily reflecting lower SM prices and, to a lesser extent,
lower volumes for PO and derivatives. SM sales prices decreased significantly
versus the 1995 period as increased industry capacity depressed SM market
prices. PO and derivatives volumes in 1996 decreased four percent compared to
1995 due to increased competition and slower growth in demand. PO industry
capacity increased in 1996, following the addition of a new competitive
facility in 1994, which operated at reduced rates in 1995, and a significant
competitor's debottleneck in 1995. Conversely, the Company estimates that
worldwide market demand for PO, in 1996 and 1995, slowed to less than half of
its historical five percent long-term annual rate of growth. SM and
derivatives volumes increased three percent, primarily due to increased SM
equity volumes, as noted above.
16
<PAGE>
Gross Profit
Gross profit of $765 million in 1997 decreased $123 million from $888
million in 1996, reflecting lower margins for most products, the effects of a
stronger U.S. dollar, and increased plant maintenance costs. Gross profit was
19.1 percent of sales in 1997 compared to 22.5 percent in 1996. The gross
profit margin decline was due to the combined effect of lower average sales
prices and higher average feedstock costs in 1997. A stronger U.S. dollar in
1997 resulted in lower reported sales and gross profits for foreign sales
activity, primarily in Europe. Maintenance costs were $20 million higher due
to an increase in the number of scheduled plant maintenance turnarounds in
1997.
Gross profit decreased 25 percent to $888 million in 1996 from $1,180
million in 1995. The gross profit decrease was primarily attributable to lower
SM margins and, to a lesser extent, lower PO and derivatives volumes and lower
MTBE margins. These were partly offset by higher PO and derivatives margins.
Overall gross profit was 22.5 percent of sales in 1996 compared to 27.6
percent in 1995. SM margins were significantly lower versus 1995 as prices
decreased substantially more than raw material costs. MTBE margins decreased
primarily due to increases in feedstock and other costs as MTBE prices were
relatively flat year to year.
Other
During the third quarter 1997, the Company recorded a pretax charge of $175
million to cover the costs of its restructuring program, including personnel-
related costs and costs related to exit activities, as well as charges for
asset valuation write downs and liabilities related to certain assets. The
restructuring program seeks to simplify the organization and streamline
operations. The restructuring efforts are expected to continue through the end
of 1998, with the cost reduction initiatives substantially in place by the end
of the year. The Company expects to realize the full benefits of the program
in 1999. A key element of the program is the reduction of approximately 900
employee and contractor positions. The Company has accrued $75 million for
involuntary terminations covering 630 employee positions. The balance of the
head count reductions have been achieved through voluntary employee
resignations and elimination of contractor positions. The Company also accrued
$23 million for exit costs related to the restructuring and $77 million in
connection with the other actions taken. See Note 20 of Notes to Consolidated
Financial Statements. Selling, general and administrative expenses decreased
$15 million in 1997 versus 1996 due, in part, to initial benefits of the
program.
Other expense (income), net, was $8 million in 1997, $(33) million in 1996
and $(22) million in 1995. The $8 million of expense in 1997, versus $33
million of income in 1996, reflected charges associated with changes in the
Company's foreign exchange hedging strategy during 1997, higher 1997
unrealized foreign exchange losses in Asia, lower interest income as a result
of lower levels of cash and cash equivalents in 1997, and the benefit of an
insurance settlement included in the 1996 period. The increase in 1996 income
versus 1995 primarily reflected the benefit from the insurance settlement and
higher interest income in 1996, partly offset by lower equity earnings from
the Company's PO/SM joint venture in Japan.
The Company manufactures MTBE, which is used as a component in gasoline to
increase octane and reduce emissions. Studies by federal and state agencies
and other organizations have shown that MTBE is safe for use in gasoline and
is effective in reducing automotive emissions. However, the presence of MTBE
in some water supplies in California due to gasoline leaking from underground
storage tanks and in surface water from recreational water craft has led to
public concern that MTBE may contaminate drinking water supplies, and thereby
result in a possible health risk. Federal and state programs are in place that
require the cleanup of gasoline leaks. However, heightened public awareness
about MTBE has resulted in certain state and federal legislative initiatives
that either seek to rescind the oxygenate requirement for reformulated
gasoline sold in California or restrict the use of MTBE. Such legislative
initiatives, if enacted, could reduce demand for MTBE in California and may in
17
<PAGE>
the longer term adversely impact oxygenated fuel programs throughout the
United States and the world. In addition, restrictions on the use of MTBE in
California could affect the Company's MTBE sales in California, including
sales under a contract with ARCO, which is the Company's largest MTBE
contract. However, with additional capital investment, the Company has the
capability to convert its MTBE production units to make a lower value product.
The effect of the 1997 Asian financial crisis on the Company's 1997 losses
from bad debts and foreign exchange was not material. Asia Pacific sales,
including exports to the region, represent approximately twelve percent of
consolidated revenues, while Asia Pacific assets comprise six percent of
consolidated total assets. Revenues and assets in Indonesia, which has
experienced the most significant economic and political turmoil, are less than
one percent of consolidated revenues and assets. The Company has taken steps
to mitigate the effects of falling exchange rates, credit risk and inventory
exposure in the region. Given the uncertainty about the potential
repercussions of the developments in Asia on other world economies, management
cannot, at the present time, predict the impact on future consolidated
operating results or cash flows.
The Company is in the process of completing its assessment of the needs and
related costs associated with modifying its computer software and other
information systems to recognize the year 2000 in various production and
business applications. Plans call for most of the systems modifications to be
completed by the end of 1998. However, certain efforts involving plant process
control systems may be scheduled to coincide with plant turnarounds and could
occur during 1999. Based upon these assessments, management does not expect
year 2000 compliance to have a material effect on the Company's consolidated
financial statements.
Income Taxes
The Company's effective income tax rate was 34.0 percent in 1997, 28.5
percent in 1996, and 32.8 percent in 1995. The lower 1996 rate versus 1997 and
1995 reflected utilization of capital loss carryforwards and utilization of
foreign tax credits pursuant to the tax sharing agreement with ARCO.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of December 31, 1997, the Company had $29 million in cash and cash
equivalents compared with $70 million at December 31, 1996. The Consolidated
Statement of Cash Flows for the year ended December 31, 1997 shows that net
cash flows provided by operating activities were $523 million, whereas net
cash flows used by investing and financing activities were $220 million and
$338 million, respectively.
Investment activities for 1997 included capital expenditures of $263
million. The Company's 1998 capital spending budget is $565 million and is
part of a five-year, $2.3 billion program primarily devoted to capacity
expansion. Minority interest includes equity contributions designated for
specific capital projects. At December 31, 1997, the unexpended amounts were
classified as deferred charges and other assets in the consolidated balance
sheet.
During the third 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 stronger U.S. dollar
and to recognize the greater certainty of the project's cash flows, the
Company effectively terminated purchased option contracts entered into in the
first quarter 1997 in the notional amount of $119 million, and entered into
forward contracts in the notional amount of $209 million. Additionally, the
Company effectively terminated purchased option contracts entered into in 1995
in the notional amount of $99 million, and entered into purchased option
contracts in the notional
18
<PAGE>
amount of $81 million. Unamortized option premiums associated with the
terminated option contracts were charged to expense in the third quarter 1997.
During November 1997, the Company signed a lump-sum contract for the
engineering, procurement and construction of the new Rotterdam PO/SM plant.
Accordingly, gains and losses on the forward contracts and the purchased
options will be deferred and included as part of the plant's construction
costs. Deferred hedging losses as of December 31, 1997 were not material.
During July 1997, the Company negotiated a new revolving credit facility,
which comprised a $200 million credit agreement and a $300 million credit
agreement, for a total commitment of $500 million. The $200 million credit
agreement is renewable annually; the $300 million credit agreement has a term
of five years. This facility replaces the previous $300 million revolving
credit agreement. The new facility has a restrictive financial covenant that
requires the Company to maintain a minimum consolidated net worth, as defined
in the agreements, of $1.5 billion. The Company has no outstanding borrowing
against the facility, which is used to back up the Company's commercial paper
borrowing.
During the second quarter 1997, the Company filed a registration statement
on Form S-3 with the Securities and Exchange Commission providing for the
issuance of up to $350 million of debt securities. In the first quarter 1997,
the Company's subsidiary, ARCO Chemie Nederland, Ltd., executed an agreement
to refinance two Dutch bank loans, which had a combined principal balance of
300 million Dutch guilders ($149 million). As part of the agreement, one loan
due in 2002 replaced the two loans due in 1997.
The Company paid dividends totaling $271 million during 1997, including a
dividend of $.70 per share, totaling $68 million, during the quarter ended
December 31, 1997. On January 22, 1998, the Board of Directors declared a
dividend of $.70 per share on the Company's common stock, payable March 6,
1998.
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.
Effects of Inflation
Based on the age of the Company's fixed assets, it is estimated that the
replacement cost of those assets is greater than the historical cost reflected
in the Company's financial statements. Accordingly, the Company's depreciation
and amortization expense for the three years ended December 31, 1997, would be
greater if the expense were stated on a current cost basis.
Risk Management
The Company uses derivative financial instruments to reduce certain types of
financial risk. Specifically, (1) foreign currency forward contracts, option
contracts, and swap contracts are employed to reduce the risk of foreign
currency fluctuations on future cash flows, and, (2) to a lesser extent,
interest rate swaps are employed to effectively convert the Company's
outstanding floating rate debt to fixed rate debt. Hedging strategies and
transactions are reviewed and approved by management before being implemented.
Use of derivatives is limited to simple, non-leveraged instruments. Monthly
market valuations and sensitivity analyses are performed to monitor the
effectiveness of the Company's risk management program.
At December 31, 1997, the Company's foreign currency forward, option and
swap contracts hedged foreign currency commitments and future cash flows,
primarily denominated in Netherlands guilders. See Note 19 of Notes to
Consolidated Financial Statements. In addition, the Company had approximately
$182 million of financial instruments, consisting of long-term debt,
denominated in Netherlands guilders and French francs. See Note 10 of Notes to
Consolidated Financial Statements. The hypothetical loss in future cash flows
of the combined foreign-exchange positions, both derivative
19
<PAGE>
and financial instruments, at year end was not material. Sensitivity analysis
was used for this purpose. The analysis assumed a hypothetical change of 10
percent in year-end exchange rates - principally strengthening of the U.S.
dollar versus the Netherlands guilder. The Company's market risk associated
with interest rate swap contracts is not material to either future earnings,
the fair value of assets or liabilities, or cash flow. The quantitative
information about market risk is necessarily limited because it does not take
into account the effects of the underlying operating transactions.
Derivative instruments are placed with major financial institutions whose
creditworthiness is monitored. Company policy provides restrictions on
concentrating credit risk in any one institution.
Feedstock Costs
See "Raw Materials" included in Items 1 and 2.
Environmental
The Company is subject to 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 accrued
liability 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. No adjustment was made to the accrued liability in 1997, whereas
provisions of $4 million and $12 million were made in 1996 and 1995,
respectively. These provisions do not reflect any potential benefit from
insurance proceeds.
At December 31, 1997, the Company's environmental liability totaled $44
million, which reflected the Company's latest assessment of potential future
remediation costs associated with existing sites. A significant portion of the
accrual is related to the Beaver Valley plant site, located in Monaca,
Pennsylvania. The Company sold the Beaver Valley plant assets to NOVA
Chemicals Inc. (NOVA) on September 30, 1996, but retained ownership of the
land at the Beaver Valley plant site, substantial portions of which were
leased to NOVA. On October 20, 1997, the Company, Beazer East, Inc. (Beazer)
and the Pennsylvania Department of Environmental Protection (PADEP) entered
into a consent agreement that acknowledged the completion of remedial
investigations and conditionally approved the proposed remediation methods at
the Beaver Valley plant site, all pursuant to a 1994 work plan previously
agreed to by the Company and PADEP. Following execution of the consent
agreement, the Company transferred to NOVA title to the previously leased
portions of the land at the Beaver Valley plant site. The Company continues to
retain responsibility for remediation of the land. Final approval of the
remediation methods is subject to PADEP's approval of risk assessment studies
to be submitted by the Company in the near future. The Company has an
agreement with Beazer whereby Beazer has agreed to pay for approximately 50
percent of the Beaver Valley plant site remediation costs. The Company and
Beazer 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
Beazer for remediation of substantial portions of the Beaver Valley site.
The remainder of the liability is related to four other plant sites and one
federal Superfund site for amounts ranging from $2 million to $13 million per
site. The Company is involved in administrative proceedings or lawsuits
relating to a minimal number of other Superfund sites. 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 accrued are expected to be paid out
over the next five to ten years.
20
<PAGE>
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 accrued to the extent that the scope of remediation
required, the final remediation method selected and the cleanup standard
applied vary from the assumptions used in estimating the accrual. 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 accrued or disclosed above would not have a material adverse
impact on the Company's consolidated financial statements.
Statement of Financial Accounting Standards Not Yet Adopted
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The statement will be effective for
the Company's 1998 annual financial statements. SFAS No. 131 established
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise." The Company currently reports one segment under SFAS No.
14 guidelines; it has not yet determined what effect SFAS No. 131 will have on
its reportable segments. SFAS No. 131 affects disclosure only and will not
affect reported earnings, cash flow or financial position.
Forward-Looking Statements
Except for historical information, this Report contains forward-looking
statements concerning the Company's business outlook and plans, future cash
requirements, capital expenditure program and potential loss contingencies
made pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. These statements are based on certain
assumptions and outcomes are subject to risks and uncertainties. The forward-
looking statements are, therefore, subject to change at any time. Actual
results could differ materially from expected results expressed in any such
forward-looking statements based on numerous factors, including the level of
product demand, the cost and availability of raw materials, changes in the
competitive environment, the Company's ability to achieve cost reductions and
efficiencies, the timing and scope of technological advances, the Company's
ability to complete construction projects on schedule, the economic conditions
in the chemical industry, the effects of legislative and regulatory changes on
product demand and the Company's business, future acquisitions and
divestitures and other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission, including those risks set
forth in the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1997.
21
<PAGE>
ITEM 8.FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ARCO CHEMICAL COMPANY
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants....................................... 23
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996, and 1995......................................................... 24
Consolidated Balance Sheets as of December 31, 1997 and 1996............ 25
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996, and 1995................................................... 26
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996, and 1995...................................... 27
Notes to Consolidated Financial Statements.............................. 28
</TABLE>
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of
Directors of ARCO Chemical Company
We have audited the accompanying consolidated balance sheets of ARCO
Chemical Company and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ARCO Chemical
Company and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 12, 1998
23
<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Sales and other operating revenues:
Unrelated parties..................................... $3,732 $3,775 $4,085
Related parties....................................... 263 180 197
------ ------ ------
Total revenues........................................ 3,995 3,955 4,282
Costs and other operating expenses (includes costs of
$177 in 1997, $132 in 1996, and $134 in 1995, of
related parties sales)................................. 3,230 3,067 3,102
------ ------ ------
Gross profit.......................................... 765 888 1,180
Selling, general and administrative expenses............ 252 267 278
Research and development................................ 82 81 79
Restructuring and other charges......................... 175 -- --
------ ------ ------
Operating income...................................... 256 540 823
Interest expense........................................ 80 86 89
Other expense (income), net............................. 8 (33) (22)
------ ------ ------
Income before income taxes............................ 168 487 756
Provision for income taxes.............................. 57 139 248
------ ------ ------
Net income............................................ $ 111 $ 348 $ 508
====== ====== ======
Earnings per share:
Basic................................................. $ 1.14 $ 3.60 $ 5.28
====== ====== ======
Diluted............................................... $ 1.14 $ 3.59 $ 5.26
====== ====== ======
</TABLE>
See accompanying notes.
24
<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(MILLIONS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 29 $ 70
Accounts receivable, net...................................... 609 623
Accounts receivable--related parties.......................... 3 6
Inventories................................................... 484 536
Prepaid expenses and other current assets..................... 21 37
------ ------
Total current assets.......................................... 1,146 1,272
Investments and long-term receivables........................... 64 71
Property, plant and equipment, net.............................. 2,534 2,622
Deferred charges and other assets (net of accumulated
amortization of $113 in 1997 and $312 in 1996)................. 372 429
------ ------
Total assets.................................................. $4,116 $4,394
====== ======
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Notes payable................................................ $ 98 $ 150
Long-term debt due within one year........................... 23 25
Accounts payable............................................. 288 330
Accounts payable--related parties............................ 16 19
Taxes payable................................................ 56 19
Other accrued liabilities.................................... 278 229
------ ------
Total current liabilities.................................... 759 772
------ ------
Long-term debt................................................. 792 844
Other liabilities and deferred credits......................... 215 171
Deferred income taxes.......................................... 338 408
Minority interest.............................................. 219 185
Stockholders' equity:
Common stock, $1 par value; authorized 250,000,000 shares;
99,550,001 issued; outstanding 97,177,230 (1997), 96,759,317
(1996)...................................................... 100 100
Additional paid-in capital................................... 880 875
Retained earnings............................................ 902 1,062
Foreign currency translation................................. (14) 64
Treasury stock, at cost (shares: 2,372,771, 1997; 2,790,684,
1996)....................................................... (75) (87)
------ ------
Total stockholders' equity................................... 1,793 2,014
------ ------
Total liabilities and stockholders' equity................... $4,116 $4,394
====== ======
</TABLE>
See accompanying notes.
25
<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Cash flows from operating activities
Net income.............................................. $ 111 $ 348 $ 508
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 229 222 233
Restructuring and other charges....................... 175 -- --
Deferred income taxes................................. (20) 50 15
Provision for environmental liabilities............... -- 4 12
Equity in net loss (income) of affiliate.............. 2 1 (14)
Dividends received from affiliate..................... -- 12 17
Changes in working capital accounts................... 20 (39) (76)
Other................................................. 6 (36) (18)
----- ----- -----
Net cash provided by operating activities............... 523 562 677
----- ----- -----
Cash flows from investment activities
Purchase of business.................................... -- (568) --
Capital expenditures.................................... (263) (244) (195)
Proceeds from asset sales............................... 20 179 6
Increase in deferred charges............................ (20) (10) (82)
Net proceeds from (purchases of) short-term
investments............................................ -- 25 (25)
Other................................................... 43 29 (5)
----- ----- -----
Net cash used in investment activities.................. (220) (589) (301)
----- ----- -----
Cash flows from financing activities
Dividends paid.......................................... (271) (271) (255)
Net (repayment of) proceeds from notes payable.......... (60) 149 (24)
Repayment of long-term debt............................. (182) (24) (23)
Proceeds from issuance of long-term debt................ 158 -- --
Other................................................... 17 13 17
----- ----- -----
Net cash used in financing activities................... (338) (133) (285)
----- ----- -----
Effect of exchange rate changes on cash................... (6) (5) --
----- ----- -----
Net (decrease) increase in cash and cash equivalents...... (41) (165) 91
Cash and cash equivalents at beginning of year............ 70 235 144
----- ----- -----
Cash and cash equivalents at end of year.................. $ 29 $ 70 $ 235
===== ===== =====
</TABLE>
See accompanying notes.
26
<PAGE>
ARCO CHEMICAL COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL FOREIGN
--------------- PAID-IN RETAINED CURRENCY
ISSUED TREASURY CAPITAL EARNINGS TRANSLATION
------ -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994
(99,550,001 shares issued;
3,464,800 treasury shares).... $100 $(107) $864 $ 732 $ 70
Net income................... -- -- -- 508 --
Cash dividends ($2.65 per
share)...................... -- -- -- (255) --
Foreign currency
translation................. -- -- -- -- 40
Reissuance of 403,679
treasury shares in
connection with purchases by
employee benefit plan and
upon exercise of stock
options..................... -- 12 5 -- --
---- ----- ---- ------ ----
Balance December 31, 1995
(99,550,001 shares issued;
3,061,121 treasury shares).... 100 (95) 869 985 110
Net income................... -- -- -- 348 --
Cash dividends ($2.80 per
share)...................... -- -- -- (271) --
Foreign currency
translation................. -- -- -- -- (46)
Reissuance of 342,882
treasury shares in
connection with purchases by
employee benefit plan and
upon exercise of stock
options..................... -- 11 6 --
Repurchase of 72,445 shares
from former employees....... -- (3) -- -- --
---- ----- ---- ------ ----
Balance December 31, 1996
(99,550,001 shares issued;
2,790,684 treasury shares).... 100 (87) 875 1,062 64
Net income................... -- -- -- 111 --
Cash dividends ($2.80 per
share)...................... -- -- -- (271) --
Foreign currency
translation................. -- -- -- -- (78)
Reissuance of 472,654
treasury shares in
connection with purchases by
employee benefit plan and
upon exercise of stock
options..................... -- 15 5 -- --
Repurchase of 54,741 shares
from former employees....... -- (3) -- -- --
---- ----- ---- ------ ----
Balance December 31, 1997
(99,550,001 shares issued;
2,372,771 treasury shares).... $100 $ (75) $880 $ 902 $(14)
==== ===== ==== ====== ====
</TABLE>
See accompanying notes.
27
<PAGE>
ARCO CHEMICAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.FORMATION OF THE COMPANY
On June 9, 1987, Atlantic Richfield Company (ARCO) transferred substantially
all the assets and liabilities of the oxygenates and polystyrenics businesses
of the then ARCO Chemical Division to ARCO Chemical Company (the Company) in
exchange for 80,000,001 shares of common stock. On October 5, 1987, the
Company completed an initial public offering of 19,550,000 shares of common
stock. ARCO's 80,000,001 shares represented approximately 82.3 percent of the
outstanding shares of common stock at December 31, 1997.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries and partnerships.
An investment in an affiliate (50 percent owned) is accounted for under the
equity method. All significant intercompany transactions have been eliminated
in consolidation. Certain amounts in 1996 and 1995 have been reclassified for
comparative purposes.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. See
Note 11.
Cash Equivalents; Short-Term Investments--Cash equivalents consist of highly
liquid investments, such as time deposits, certificates of deposit and
marketable securities other than equity securities, maturing within three
months from the date of purchase. Short-term investments consist of similar
investments maturing in more than three months from the date of purchase. Cash
equivalents and short-term investments are carried at cost, which approximates
market.
Property, Plant and Equipment--Property, plant and equipment are carried at
cost and depreciated on a straight-line method over their estimated useful
lives. The principal useful lives used are: plant, 20 years; light equipment,
furniture, and information equipment, 5 to 10 years; administrative buildings,
30 years. Upon disposition, residual cost less salvage is included in current
income. Maintenance and repairs are expensed and betterments are capitalized.
Deferred Charges--Deferred charges are carried at cost and consist primarily
of the value assigned to acquired technology, capacity reservation fees and
other long-term processing rights and costs. These assets are being amortized
on a straight-line method over their estimated useful lives or the term of the
related agreement, if shorter.
Environmental Expenditures--Environmental expenditures that relate to
current operations are expensed or capitalized, depending upon their future
economic benefit. Expenditures that result from the remediation of an existing
condition caused by past operations are expensed. Liabilities are recognized
for remedial activities when remediation is probable and the costs can be
reasonably estimated. Estimated liabilities are not discounted to present
value.
Income Taxes--The Company's results of operations are included in the
consolidated federal income tax return, and certain consolidated, combined, or
unitary state returns of ARCO. The Company's income tax expense in the
consolidated financial statements is computed on a modified stand-alone basis
pursuant to a tax sharing agreement, with any resulting liability or refund
settled with
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
ARCO. The agreement permits the Company to reduce its federal income tax
liability through the use of certain tax attributes that produce a benefit to
the ARCO affiliated group, but would not otherwise benefit the Company on a
stand-alone basis. Income tax expense also reflects the Company's liability
under separate company returns filed with certain states.
Long-Lived Asset Impairment--Effective January 1, 1995, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The provisions of SFAS No. 121 require the Company to review its long-
lived assets for impairment on an exception basis whenever events or changes
in circumstances indicate a potential loss in utility. Impairment losses are
recognized in the income statement.
3.RELATED PARTY TRANSACTIONS AND COST ALLOCATIONS
Effective July 1, 1987, the Company and ARCO (including ARCO subsidiaries)
entered into a series of agreements that included, among other things,
purchase, exchange and processing agreements, product sales agreements,
operational services agreements, and an administrative services agreement.
Certain of these agreements are between the Company and Lyondell
Petrochemical Company (Lyondell). The Company believes that all significant
agreements with Lyondell have been negotiated on an arm's length basis.
However, because ARCO had a 49.9 percent ownership interest in Lyondell, the
Company historically treated Lyondell as a related party. During September
1997, ARCO divested its 49.9 percent ownership interest in Lyondell.
Accordingly, after September 30, 1997, the Company stopped reporting
transactions with Lyondell as related party transactions.
The purchase, exchange, and processing agreements are principally for
methanol, benzene, ethylene, propylene, and MTBE. Other purchases from ARCO
and Lyondell principally include normal butane, isobutane, isobutylene,
nonenes and tetramers, natural gas and certain butanediol feedstocks. Product
sales include sales by the Company to ARCO and Lyondell of MTBE and propane.
The Company has entered into long-term sales agreements with ARCO providing
for delivery of fixed quantities of MTBE. The operational services agreements
are for various plant services performed by ARCO and Lyondell. The
administrative services agreement provides that beginning October 1, 1987,
ARCO provides the Company with certain leased office space, insurance and
other financial, legal, and administrative services, and the Company provides
ARCO with various technical and legal services. These agreements with ARCO
have various durations, ranging from monthly renewals to a term extending to
2017.
An analysis of the aggregate transactions for the years ended December 31,
1997, 1996, and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Purchases........................................... $ 177 $ 274 $ 344
Product sales....................................... 263 180 197
Processing fees and operational services............ 10 10 11
Administrative services:
For ARCO.......................................... 1 1 1
By ARCO........................................... 27 30 32
</TABLE>
Outstanding balances under these agreements with ARCO at December 31, 1997
and 1996, are included in "Accounts receivable--related parties" and "Accounts
payable--related parties."
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4.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 and assets is indicated by the table
below. In addition to total revenues by origin (point of sale), the Company
has also presented total revenues by destination (customer location).
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Total revenues (by destination)
United States................................... $ 2,022 $ 2,112 $ 2,181
Europe.......................................... 1,027 1,058 1,178
Other foreign................................... 946 785 923
------- ------- -------
Total......................................... $ 3,995 $ 3,955 $ 4,282
======= ======= =======
Total revenues (by origin)
United States................................... $ 2,446 $ 2,363 $ 2,505
Europe.......................................... 1,141 1,236 1,465
Other foreign................................... 408 356 312
------- ------- -------
Total......................................... $ 3,995 $ 3,955 $ 4,282
======= ======= =======
Pretax earnings
United States................................... $ 273 $ 480 $ 748
Europe.......................................... (16) 96 76
Other foreign................................... (9) (3) 21
Interest expense................................ (80) (86) (89)
------- ------- -------
Total......................................... $ 168 $ 487 $ 756
======= ======= =======
Total assets
United States................................... $ 3,023 $ 2,985 $ 2,610
Europe.......................................... 1,156 1,393 1,530
Other foreign................................... 276 289 315
Eliminations.................................... (339) (273) (320)
------- ------- -------
Total......................................... $ 4,116 $ 4,394 $ 4,135
======= ======= =======
United States export sales
Asia Pacific.................................... $ 182 $ 189 $ 294
Canada and Latin America........................ 242 127 115
Europe and other foreign........................ 6 5 11
------- ------- -------
Total......................................... $ 430 $ 321 $ 420
======= ======= =======
</TABLE>
Included in pretax earnings are royalty charges made to foreign operations
for the use of Company technology. Pretax earnings in 1997 reflect
restructuring and other charges in the United States, Europe and other foreign
of $124 million, $40 million and $11 million, respectively. Eliminations
principally include intercompany receivables.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4.GEOGRAPHIC INFORMATION--(CONTINUED)
The amounts of intercompany sales that are eliminated from total revenues
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
United States........................................ $ 426 $ 280 $ 373
Europe............................................... 196 117 32
Other foreign........................................ 3 1 1
------- ------- -------
Total.............................................. $ 625 $ 398 $ 406
======= ======= =======
</TABLE>
Intercompany sales are made at prices approximating current market values.
5.INVENTORIES
Inventories are stated at the lower of cost or market. In 1997,
approximately 90 percent of inventories, excluding materials and supplies,
were determined by the last-in, first-out (LIFO) method. Materials and
supplies and other non-LIFO inventories are valued using either the first-in,
first-out (FIFO) or the average cost methods.
Inventories at December 31, 1997 and 1996, comprised the following
categories:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Finished goods........................................ $ 336 $ 392
Work-in-process....................................... 45 38
Raw materials......................................... 58 62
Materials and supplies................................ 45 44
---------- ----------
Total............................................... $ 484 $ 536
========== ==========
If the FIFO inventory valuation method had been used exclusively,
inventories would have been higher than the book value of such inventories by
approximately $27 million and $17 million at December 31, 1997 and 1996,
respectively.
6.PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, at cost, and related accumulated depreciation
at December 31, 1997 and 1996, were as follows:
<CAPTION>
1997 1996
---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Land.................................................. $ 25 $ 23
Buildings and equipment............................... 3,860 3,941
Construction in progress.............................. 264 188
---------- ----------
4,149 4,152
Less: Accumulated depreciation........................ 1,615 1,530
---------- ----------
Total............................................... $ 2,534 $ 2,622
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
was $199 million, $184 million, and $192 million, respectively. Expenses for
maintenance and repairs, including costs
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6.PROPERTY, PLANT AND EQUIPMENT, NET--(CONTINUED)
associated with plant maintenance turnarounds, for the years ended December
31, 1997, 1996, and 1995 were $133 million, $113 million, and $97 million,
respectively. Interest cost capitalized as property, plant and equipment for
the years ended December 31, 1997 and 1996 amounted to $9 million and $3
million, respectively.
7.BANK CREDIT FACILITIES
During July 1997, the Company negotiated a new revolving credit facility,
which comprised a $200 million credit agreement and a $300 million credit
agreement, for a total commitment of $500 million. The $200 million credit
agreement is renewable annually; the $300 million credit agreement has a term
of five years. This facility replaces the previous $300 million revolving
credit agreement. The new facility has a restrictive financial covenant that
requires the Company to maintain a minimum consolidated net worth, as defined
in the agreements, of $1.5 billion. The Company has no outstanding borrowing
against the facility as of December 31, 1997.
Notes payable at December 31, 1997 consisted primarily of short-term bank
borrowing and commercial paper issued to a variety of financial investors and
institutions at various interest rates and maturities of up to 270 days. The
weighted average effective interest rate for this borrowing at December 31,
1997 was 6.3 percent. As a condition of the sale of commercial paper, the
Company is required to maintain a back-up credit facility at least equal to
the amount of the outstanding commercial paper. The Company uses the credit
facility for this purpose.
8.OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Payroll and benefits.................................. $ 68 $ 81
Severance and ancillary costs......................... 45 --
Contractual obligations............................... 33 30
Interest.............................................. 18 18
Other................................................. 114 100
---------- ----------
Total............................................... $ 278 $ 229
========== ==========
</TABLE>
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9.TAXES
The components of the provision for income taxes for the years ended
December 31, 1997, 1996, and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Federal:
Current......................................... $ 65 $ 73 $ 202
Deferred........................................ (18) 17 6
------- ------- -------
Total......................................... 47 90 208
------- ------- -------
Foreign:
Current......................................... 10 15 21
Deferred........................................ 12 34 9
------- ------- -------
Total......................................... 22 49 30
------- ------- -------
State:
Current......................................... 2 1 10
Deferred........................................ (14) (1) --
------- ------- -------
Total......................................... (12) -- 10
------- ------- -------
Provision for income taxes........................ $ 57 $ 139 $ 248
======= ======= =======
</TABLE>
Deferred tax liabilities and assets are comprised of the following at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization...................... $ 530 $ 457
Other.............................................. -- 30
---------- ----------
Gross deferred tax liabilities................... 530 487
---------- ----------
Deferred tax assets:
Loss carryforwards................................. 152 162
Tax basis in excess of book........................ -- 10
Provisions for benefit plans and estimated
expenses.......................................... 180 76
---------- ----------
Gross deferred tax assets........................ 332 248
---------- ----------
Deferred tax asset valuation allowance........... 127 140
---------- ----------
Net deferred tax liability........................... $ 325 $ 379
========== ==========
</TABLE>
During 1997 and 1996, the valuation allowance was increased for certain
foreign tax loss carryforwards and reduced with respect to federal capital
loss carryforwards. The valuation allowance was $138 million at December 31,
1995.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9.TAXES--(CONTINUED)
A reconciliation of the federal statutory rate to the effective tax rate for
the years ended December 31, 1997, 1996, and 1995 is as follows:
<TABLE>
<CAPTION>
PERCENT OF PRETAX INCOME
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate....................... 35.0 35.0 35.0
Increase (reduction) in taxes resulting
from:
Research and development tax credit...... (5.5) -- --
Foreign income taxes in excess of
statutory rate.......................... 3.0 -- --
Utilization of capital loss
carryforward............................ -- (3.0) --
Foreign tax credits pursuant to tax
sharing agreement....................... -- (1.6) --
Other.................................... 1.5 (1.9) (2.2)
-------- -------- --------
Effective tax rate........................... 34.0 28.5 32.8
======== ======== ========
</TABLE>
At December 31, 1997, the Company had foreign tax loss carryforwards of $376
million and state tax loss carryforwards of $293 million. These carryforwards
begin expiring in 1998. Existing foreign tax credits are sufficient to offset
any tax on undistributed earnings of foreign subsidiaries.
10.LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996, comprised the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
9.9% debentures due 2000.............................. $ 200 $ 200
9.375% debentures due 2005............................ 100 100
10.25% debentures due 2010............................ 100 100
9.8% debentures due 2020.............................. 224 224
Dutch bank loans...................................... 149 173
French bank loans..................................... 33 55
Other................................................. 9 17
---------- ----------
Total............................................... 815 869
Debt due within one year.............................. 23 25
---------- ----------
Long-term debt...................................... $ 792 $ 844
========== ==========
</TABLE>
In February 1997, the Company executed an agreement to refinance on a long-
term basis the Dutch bank loans previously entered into by the Company's
wholly owned subsidiary, ARCO Chemie Nederland, Ltd. (ACNL), which consisted
of two borrowings totaling 300 million Dutch guilders, both due in 1997. As
part of the agreement, one loan, due in 2002, replaced the two borrowings due
in 1997. Accordingly, the Dutch bank loans were classified as long-term debt
at December 31, 1996. At December 31, 1997, ACNL had outstanding interest rate
swaps on the Dutch bank loan, totaling 300 million Dutch guilders, or
approximately $149 million. The swaps mature in 2002. The swaps effectively
changed the loan's floating rate, which was based on the Amsterdam Interbank
Offer Rate ("AIBOR"), to a fixed rate of 4.8 percent. See Note 19.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10.LONG-TERM DEBT--(CONTINUED)
The French bank loans, entered into by the Company's wholly owned affiliate,
ARCO Chimie France, SNC, mature at various dates through 2006. The weighted
average effective interest rate for these borrowings was approximately 7.2
percent and 7.3 percent in 1997 and 1996, respectively.
Aggregate maturities of all long-term debt during the next five years are
$23 million in 1998, $16 million in 1999, $201 million in 2000, $1 million in
2001, $149 million in 2002 and $425 million thereafter.
11.OTHER COMMITMENTS AND CONTINGENCIES
COMMITMENTS
In January 1995, the Company entered into a long-term supply arrangement for
toluene diisocyanate (TDI). Initial payments of $80 million were made at
closing for capacity reservation fees, related inventory and other rights and
costs. Effective January 1, 1995, the Company was entitled to all of the TDI
output of the supplier's two plants in France, which have a combined rated
capacity of approximately 264 million pounds per year. Under the arrangement,
the Company is required to purchase a minimum of 216 million pounds of TDI per
year for up to 15 years. The aggregate purchase price is a combination of
plant cost and market price. The Company is further obligated to pay
additional capacity reservation fees based upon plant output factors.
To assure itself of reliable, long-term supplies of utilities at favorable
rates for its Rotterdam plant, the Company entered into a 15-year utility
cogeneration joint venture as a limited partner. The joint venture operates a
cogeneration plant, primarily funded through nonrecourse debt. The Company is
obligated to take or pay for minimum quantities of steam and electricity in
support of the joint venture's financing arrangement. The Company pays for
actual quantities of steam and electricity taken based on the joint venture's
actual cost plus a specified return on the partners' investment. The Company
also has a long-term purchase agreement for ethylene which requires the
Company to take or pay for 143 million pounds annually at prevailing market
prices for a remaining term through March 1999. Purchases under the
cogeneration and the ethylene agreements during 1997, 1996 and 1995 were $47
million, $43 million and $50 million, respectively.
The Company has commitments, including those related to capital
expenditures, all made in the normal course of business. At December 31, 1997,
the Company's capital commitments totaled approximately $500 million. These
commitments were primarily for new plant construction and existing plant
capacity expansion and included a lump-sum contract for the engineering,
procurement and construction of a new PO/SM plant in Rotterdam, the
Netherlands, PO and SM capacity expansions and a new ethylbenzene production
unit at the Channelview, Texas facility, a new t-butyl hydroperoxide unit at
the Pasadena, Texas facility, and polyols capacity expansions at the Fos-sur-
Mer facility in France.
CONTINGENCIES
The Company and its subsidiaries are involved in a number of lawsuits,
claims and assessments, 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.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11.OTHER COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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.
At December 31, 1997, the Company's environmental liability totaled $44
million, which reflected the Company's latest assessment of potential future
remediation costs associated with existing sites. A significant portion of the
liability is related to the Beaver Valley plant site, located in Monaca,
Pennsylvania. The Company sold the Beaver Valley plant assets to NOVA
Chemicals Inc. (NOVA) on September 30, 1996, but retained ownership of the
land at the Beaver Valley plant site, substantial portions of which were
leased to NOVA. On October 20, 1997, the Company, Beazer East, Inc. (Beazer)
and the Pennsylvania Department of Environmental Protection (PADEP) entered
into a consent agreement that acknowledged the completion of remedial
investigations and conditionally approved the proposed remediation methods at
the Beaver Valley plant site, all pursuant to a 1994 work plan previously
agreed to by the Company and PADEP. Following execution of the consent
agreement, the Company transferred to NOVA title to the previously leased
portions of the land at the Beaver Valley plant site. The Company continues to
retain responsibility for remediation of the land. Final approval of the
remediation methods is subject to PADEP's approval of risk assessment studies
to be submitted by the Company in the near future. The Company has an
agreement with Beazer whereby Beazer has agreed to pay for approximately 50
percent of the Beaver Valley plant site remediation costs. The Company and
Beazer 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
Beazer for remediation of substantial portions of the Beaver Valley site.
The remainder of the liability is related to four other plant sites and one
federal Superfund site for amounts ranging from $2 million to $13 million per
site. The Company is involved in administrative proceedings or lawsuits
relating to a minimal number of other Superfund sites. 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 accrued 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 accrued to the extent that the scope of remediation
required, the final remediation method selected and the cleanup standard
applied vary from the assumptions used in estimating the accrual. 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
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11.OTHER COMMITMENTS AND CONTINGENCIES--(CONTINUED)
environmental assessments and cleanups. Based upon currently known facts,
management believes that any remediation costs the Company may incur in excess
of the amounts accrued or disclosed above would not have a material adverse
impact on the Company's consolidated financial statements.
The Company and 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.
12.RETIREMENT PLANS
Substantially all employees are covered by various pension plans. The ARCO
Chemical Retirement Plan (ACRP), a defined benefit plan, provides pension
benefits to all of the Company's employees in the United States and certain
employees in foreign countries. In addition to the ACRP, the Company also
maintains defined benefit pension plans for former hourly employees at the
Beaver Valley plant in Monaca, Pennsylvania, as well as several plans covering
certain employees throughout its European and Asia Pacific operations.
Retirement benefits under the ACRP are based on years of participation
service and the employee's compensation primarily during the last three years
of service. Retirement benefits for the Beaver Valley Hourly Retirement Plan
are primarily based on years of service and on the employee's career average
earnings and, accordingly, the final liability was determined as of September
30, 1996, the date of sale of the plastics business to NOVA. European and Asia
Pacific plans vary by country, but are primarily based on years of service and
compensation during the last year of service. The funding policy for these
plans consists of annual contributions as required by applicable regulations.
The Company charges pension costs as accrued, based on an actuarial valuation,
and funds the plans through contributions to separate trust funds that are
kept apart from Company funds.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12.RETIREMENT PLANS--(CONTINUED)
The following tables set forth the plans' funded status and amounts
recognized in the Company's balance sheets at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997
-------------------------------
ASSETS EXCEEDED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEEDED ASSETS
--------------- ---------------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation................ $207 $ 30
==== ====
Accumulated benefit obligation........... $233 $ 32
==== ====
Projected benefit obligation............. $285 $ 39
Plan assets at fair value, primarily stocks
and bonds................................. 343 --
---- ----
Projected benefit obligation less than (in
excess of) plan assets.................... 58 (39)
Unrecognized net (gain) loss............... (11) 11
Prior service cost not yet recognized in
net periodic pension cost................. 5 2
Unrecognized net liability at January 1,
1997...................................... 2 --
Adjustment required to recognize minimum
liability................................. -- (8)
---- ----
Prepaid pension cost (liability) recognized
in the balance sheet...................... $ 54 $(34)
==== ====
<CAPTION>
1996
-------------------------------
ASSETS EXCEEDED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEEDED ASSETS
--------------- ---------------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation................ $161 $ 18
==== ====
Accumulated benefit obligation........... $182 $ 19
==== ====
Projected benefit obligation............. $246 $ 34
Plan assets at fair value, primarily stocks
and bonds................................. 311 --
---- ----
Projected benefit obligation less than (in
excess of) plan assets.................... 65 (34)
Unrecognized net (gain) loss............... (6) 14
Prior service cost not yet recognized in
net periodic pension cost................. 5 2
Unrecognized net liability at January 1,
1996...................................... 3 --
Adjustment required to recognize minimum
liability................................. -- (2)
---- ----
Prepaid pension cost (liability) recognized
in the balance sheet...................... $ 67 $(20)
==== ====
</TABLE>
The above tables for plans with assets exceeding accumulated benefits include
foreign pension plans. These foreign plans constituted approximately 25 percent
and 27 percent of the projected benefit obligation and 23 percent of the plan
assets in the table at December 31, 1997 and 1996, respectively. The plans for
which accumulated benefits exceed assets primarily represent supplemental
retirement benefits for executives and expatriated employees.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12.RETIREMENT PLANS--(CONTINUED)
Components of net pension cost related to Company-sponsored plans for the
years ended December 31, 1997, 1996, and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
Service cost............................................... $ 17 $ 16 $ 13
Interest cost.............................................. 20 19 19
Actual return on plan assets............................... (48) (42) (44)
Net amortization and deferral.............................. 19 18 25
---- ---- ----
Net periodic pension cost................................ $ 8 $ 11 $ 13
==== ==== ====
</TABLE>
In addition to the pension cost above, in 1997 the Company recorded
additional pension expense of $17 million pretax in connection with work force
reductions resulting from the restructuring program.
Foreign pension plans comprised $3 million of net periodic pension cost for
each of the years 1997, 1996 and 1995.
The assumptions used as of December 31, 1997, 1996, and 1995 in determining
the domestic net pension cost and net pension liability were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Discount rate........................................... 7.0% 7.25% 7.0%
Rate of salary progression.............................. 4.0 5.0 5.0
Long-term rate of return on assets...................... 10.25 10.25 10.25
</TABLE>
The assumptions used in determining the net pension cost and pension
liability for foreign pension plans were based on the economic environment of
each applicable country. The range of assumptions used as of December 31, 1997
was as follows: discount rates, 6.0 to 7.6 percent; rate of salary
progression, 4.0 to 6.5 percent; long-term rate of return on assets, 7.0 to
9.0 percent.
13.OTHER POSTRETIREMENT BENEFITS
The Company provides medical and life insurance benefits for retired
employees and covered dependents. Substantially all U.S. employees of the
Company may become eligible for these benefits if they remain employed until
normal retirement age or fulfill other eligibility requirements. Retiree
contribution levels to the medical benefit plan are determined annually by the
Company; the life insurance plan is noncontributory. The underlying plans are
not funded.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13.OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
The following reconciles the unfunded accumulated obligation to the
Company's balance sheet as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Accumulated postretirement benefit obligation
(APBO):
Retirees....................................... $ 23 $ 17
Fully eligible active plan participants........ 8 6
Other active plan participants................. 31 26
---------- ----------
Total APBO................................... 62 49
Unrecognized net gain.......................... 10 12
Unrecognized prior service cost................ (7) (5)
---------- ----------
Accrued postretirement benefit liability......... $ 65 $ 56
========== ==========
</TABLE>
Net periodic postretirement benefit cost for the years ended December 31,
1997, 1996 and 1995 included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Service cost..................................... $ 2 $ 2 $ 2
Interest cost.................................... 4 3 3
------- ------- -------
Net periodic postretirement benefit cost......... $ 6 $ 5 $ 5
======= ======= =======
</TABLE>
The medical cost trend inflation rate assumption was 9 percent annually for
the period 1995 to 1996, 7 percent annually for the period 1997 to 2001, and 5
percent annually thereafter. Increasing the health care cost trend rate by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1997 by $9 million and increase net
periodic postretirement benefit cost for 1997 by $1 million. The discount rate
used was 7.0 percent.
14. STOCK OPTION AND EMPLOYEE BENEFIT PLANS
In November 1989, the Board of Directors adopted the 1990 Long-Term
Incentive Plan (the 1990 Plan). The 1990 Plan, which became effective January
1, 1990, provided, among other things, for the award to officers and other key
management employees of nonqualified stock options for the purchase of up to
two million shares of the Company's common stock. During 1997 and 1996, the
Board of Directors authorized an additional 800,000 and 200,000 shares of
common stock, respectively, for issuance under the 1990 Plan. The option price
per share is fixed by the Long-Term Incentive Plan Administration Subcommittee
(the Subcommittee) of the Board of Directors, which administers the 1990 Plan,
but may not be less than the fair market value of the Company's common stock
on the date the option is granted. The maximum option period is ten years.
Options granted before January 1, 1996 may be exercised after one year of
continuous service with ARCO, the Company, or any of their subsidiaries
immediately following the date of the grant. Options granted after January 1,
1996 may be exercised after four years of continuous service. The Subcommittee
may, at its discretion, establish a longer waiting period.
In July 1987, ARCO, the Company's sole stockholder at the time, approved the
1987 Executive Long-Term Incentive Plan (the 1987 Plan). The 1987 Plan, which
became effective September 1, 1987, provided, among other things, for the
award to officers and other key management employees of nonqualified stock
options for the purchase of up to 290,000 shares of the Company's common
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14.STOCK OPTION AND EMPLOYEE BENEFIT PLANS--(CONTINUED)
stock at $32 per share. The options were exercisable through October 1997 and
all options have been exercised.
Dividend share credits accrue on options granted under both the 1990 Plan
and the 1987 Plan. Dividend share credits are allocated to officers and other
key management employees holding stock options (optionees) whenever dividends
are declared on shares of common stock. 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.
The following table summarizes the activity relating to the Company's stock
option plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF OPTIONS PRICE
---------- --------
<S> <C> <C>
Balance, December 31, 1994.............................. 1,443,106 $39.31
Granted............................................... 339,200 42.44
Exercised............................................. (100,133) 34.87
Forfeited............................................. (800) 42.44
---------
Balance, December 31, 1995.............................. 1,681,373 40.21
Granted............................................... 292,800 50.63
Exercised............................................. (61,627) 34.83
---------
Balance, December 31, 1996.............................. 1,912,546 41.97
Granted............................................... 277,400 47.19
Exercised............................................. (136,056) 34.40
---------
Balance, December 31, 1997.............................. 2,053,890 43.18
=========
</TABLE>
The Company issues treasury shares upon exercise of stock options.
A summary of the Company's stock options as of December 31, 1997 and 1996 was
as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Shares available for option............................ 703,710 181,110
Options exercisable.................................... 1,483,690 1,619,746
Weighted average exercise price of options
exercisable........................................... $40.96 $40.41
Fair value per share of options granted during the
year.................................................. $22.41 $22.56
Fair value assumptions:
Dividend yield....................................... 5.94 5.53
Expected volatility.................................. 12.44 12.32
Risk-free interest rate.............................. 6.42 5.81
Maturity, in years................................... 10.0 10.0
</TABLE>
At December 31, 1997, exercise prices for options outstanding ranged from
$32.63 to $50.63 and the weighted average remaining option period was 6 years.
The fair value per share of options granted was estimated as of the grant date
using the Black-Scholes option-pricing model and the above assumptions.
Employee stock options are accounted for under the intrinsic-value-based
method prescribed by Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees."
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14.STOCK OPTION AND EMPLOYEE BENEFIT PLANS--(CONTINUED)
Accordingly, no compensation cost has been recognized in connection with stock
option grants under the plans. The pro forma impact on both net income and
earnings per share from calculating compensation expense consistent with SFAS
No. 123, "Accounting for Stock-Based Compensation", in any of the years ended
December 31, 1997, 1996 or 1995 was not more than $5 million, or $0.05 per
share.
Effective January 1, 1995, the Company began issuing treasury shares in
connection with purchases of the Company's common stock made by the ARCO
Chemical Company Capital Accumulation Plan (the CAP Plan), a defined
contribution plan for current and former employees of the Company.
Participants' contributions to the CAP Plan through payroll deductions may be
used to purchase the Company's common stock, among other investment
alternatives. The Company makes matching contributions which are used solely
to purchase the Company's common stock. Prior to January 1, 1995, purchases of
the Company's common stock by the CAP Plan were made on the open market.
In connection with the sale of the plastics business on September 30, 1996,
the Company implemented a stock repurchase program for up to 320,000 shares of
the Company's common stock held in certain employee benefit plans by former
employees associated with the plastics business. The Company repurchased
127,186 shares through October 30, 1997, the date on which the repurchase
program ended.
15.EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." SFAS
No. 128 requires companies to adopt its provisions in financial statements
issued for periods ending after December 15, 1997 and requires restatement of
all prior earnings per share ("EPS") data presented. Basic EPS is based on the
average number of common shares outstanding during each period. Diluted EPS
includes the effect of outstanding stock options issued under the 1987
Executive Long-Term Incentive Plan and the 1990 Long-Term Incentive Plan (see
Note 14).
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ------------
SHARES EPS SHARES EPS SHARES EPS
------ ----- ------ ------ ------ -----
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Earnings per Share:
Basic............................... 97.0 $1.14 96.7 $ 3.60 96.3 $5.28
Dilutive effect of options.......... 0.1 -- 0.2 ( .01) 0.2 (.02)
---- ----- ---- ------ ---- -----
Diluted............................. 97.1 $1.14 96.9 $ 3.59 96.5 $5.26
==== ===== ==== ====== ==== =====
</TABLE>
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16.SUPPLEMENTAL CASH FLOW INFORMATION
Following is supplemental cash flow information provided for the years ended
December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Changes in working capital-increase (decrease) to
cash:
Accounts receivable................................ $ (16) $ (2) $ (43)
Inventories........................................ 32 (50) (64)
Prepaid expense and other current assets........... (1) (3) (4)
Accounts payable................................... (21) 89 (5)
Taxes payable...................................... 40 (77) 28
Other accrued liabilities.......................... (14) 4 12
------- ----- -------
Changes in working capital accounts................ $ 20 $ (39) $ (76)
======= ===== =======
Short-term investments:
Gross proceeds from maturities..................... $ -- $ 139 $ 30
Gross purchases.................................... -- (114) (55)
------- ----- -------
Net proceeds (purchases)........................... $ -- $ 25 $ (25)
======= ===== =======
Notes payable:
Gross proceeds from issuances...................... $ 2,001 $ 382 $ 1,484
Gross repayments................................... (2,061) (233) (1,508)
------- ----- -------
Net (repayments) proceeds.......................... $ (60) $ 149 $ (24)
======= ===== =======
Cash paid during the year for:
Interest (net of amount capitalized)............... $ 80 $ 83 $ 87
Income taxes....................................... 44 165 213
</TABLE>
The above changes exclude the effects of the provisions for restructuring
and other charges (see Note 20), a business acquisition (see Note 21), an
asset sale (see Note 22), and foreign exchange rate changes.
17.LEASE COMMITMENTS
The Company leases various facilities and equipment under noncancelable
lease arrangements for varying periods. At December 31, 1997, future minimum
lease payments for all noncancelable operating leases with lease terms in
excess of one year were as follows:
<TABLE>
<CAPTION>
(MILLIONS OF
DOLLARS)
------------
<S> <C>
1998............................................................ $ 52
1999............................................................ 36
2000............................................................ 32
2001............................................................ 27
2002............................................................ 23
Later years..................................................... 187
----
Total minimum lease payments.................................. $357
====
</TABLE>
Rental expense for the years ended December 31, 1997, 1996, and 1995 was
$108 million, $107 million and $100 million, respectively.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18.FOREIGN CURRENCY TRANSACTIONS
For the years ended December 31, 1997, 1996, and 1995, losses on foreign
exchange transactions, including foreign currency derivative instruments, were
$27 million, $11 million, and $13 million, respectively. See Note 19.
19.FINANCIAL INSTRUMENTS
The Company does not hold or issue financial instruments for speculative
trading purposes.
Various types of foreign currency forward, option and swap contracts are
used to minimize foreign exchange exposures. Foreign exchange exposures result
from cash flows between U.S. and international operations and transactions
denominated in currencies other than the local currency of an operating
entity. Swap contracts are used predominantly to minimize intercompany debt
exposures with maturities exceeding one year, while forward and option
contracts are used for other types of foreign exchange exposures.
During 1995, the Company announced plans for the construction of a new world
scale PO/SM plant in Rotterdam, the Netherlands. In connection with this
project, the Company anticipated that it would be making capital commitments
denominated in a foreign currency for a period extending through 2000. In
1995, the Company entered into foreign currency forward and purchased option
contracts to minimize the foreign exchange exposures associated with these
anticipated commitments. During 1997, the Company revised its hedging strategy
to take advantage of the stronger U.S. dollar and to recognize the greater
certainty of the project's cash outflows. The Company effectively terminated
the forward and purchased option contracts entered into in 1995 and entered
into new forward contracts and purchased option contracts. Unamortized option
premiums associated with the terminated option contracts were charged to
expense in 1997. During November 1997, the Company signed a lump-sum contract
for the engineering, procurement and construction of the new Rotterdam PO/SM
plant. Accordingly, gains on the purchased options and gains and losses on the
forward contracts will be deferred and included as part of the plant's
construction costs. As of December 31, 1997, there were immaterial deferred
hedging losses on the forward contracts. The notional amounts of foreign
currency contracts outstanding, principally involving the Netherlands guilder,
were $390 million at December 31, 1997, with various maturity dates ranging
from 1998 to 2000. At December 31, 1996, the notional amounts of foreign
currency contracts outstanding were $371 million.
Interest rate swap contracts are used to minimize interest rate exposures on
foreign bank loans due in 2002. The interest rate swap contracts mature in
2002.
Gains and losses, realized and unrealized, on foreign currency forward
contracts covering anticipatory cash flows are recognized currently as other
income or expense in the results of operations. Gains and losses on foreign
currency swaps are recognized currently in income to the extent of offsetting
foreign exchange gains and losses on the underlying intercompany loans. Gains
and losses on interest rate swap contracts are accrued for each annual period
to yield an effective fixed rate of interest on the related debt. Net pretax
losses recorded with respect to derivative contracts were $16 million in 1997.
Net gains and losses associated with derivative contracts for 1996 and 1995
were not material.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19.FINANCIAL INSTRUMENTS--(CONTINUED)
The carrying value and the estimated fair value of the Company's derivative
instruments as of December 31, 1997 and 1996 are shown as assets (liabilities)
in the table below. The carrying value of the purchased options represents the
unamortized balance of the option premium.
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ----- -------- ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Nonderivatives:
Investments and long-term receivables........ $ 64 $ 64 $ 71 $ 71
Notes payable................................ 98 98 150 150
Long-term debt (including current
maturities)................................. 815 972 869 1,001
Derivatives:
Foreign currency forwards.................... (3) (3) (14) (14)
Foreign currency options..................... 4 4 6 6
Foreign currency swaps....................... 3 2 (4) (4)
Interest rate swaps.......................... -- -- (1) (3)
</TABLE>
The carrying amounts of nonderivative financial instruments are reported on
the balance sheet under the indicated captions. All derivative instruments are
off-balance-sheet instruments, however net receivable or payable positions
related to derivative instruments are carried on the balance sheet.
Investments and long-term receivables, which consist primarily of equity
investments in affiliated companies, were valued using current financial and
other available information. The fair value of notes payable approximates
carrying value due to the relatively short-term maturities of such
instruments. Long-term debt was valued based on quoted market prices for the
same or similar issues or on the current rates offered to the Company for debt
of the same remaining maturities. The fair value of derivative financial
instruments represents the amount to be exchanged if the existing contracts
were settled at year end and are based on market quotes.
The Company is exposed to credit risk related to its financial instruments
in the event of nonperformance by the counterparties. The Company does not
generally require collateral or other security to support these financial
instruments. However, the counterparties to these transactions are major
institutions deemed creditworthy by the Company; the Company does not
anticipate nonperformance by the counterparties.
20.RESTRUCTURING AND OTHER CHARGES
During the third quarter 1997, the Company recorded a pretax charge of $175
million related to a previously announced restructuring program, which
included a review of all operations and assets. Activities related to the
restructuring program are expected to continue through the end of 1998. The
restructuring charge included $75 million of personnel-related costs and $23
million of exit costs. Other charges included $77 million related to the
review of assets.
Personnel costs included severance, pension enhancements, and other
ancillary costs for the reduction of approximately 630 employees worldwide in
manufacturing, commercial, research, and administrative activities. Severance
payments and other ancillary costs, which will be paid from Company funds,
account for $54 million of the accrued liability. Certain of these payments
can be deferred at the election of employees, and the Company estimates that
such payments will take place over the next two to three years. Pension
enhancements that will be paid from the assets of qualified pension plans,
which the Company funds on a long-term basis, account for $13 million of the
accrued
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20.RESTRUCTURING AND OTHER CHARGES--(CONTINUED)
liability. The remaining $8 million consists of nonqualified pension benefits
and postretirement benefits that will be paid from Company funds after the
retirement of the employee. Exit costs include costs of canceling long-term
contracts and leases related to certain production, sales and administrative
facilities, including $7 million related to the write down of production
assets. Through December 31, 1997, approximately 260 employees have been
terminated and approximately $9 million of severance and ancillary costs have
been paid out and charged against the accrued liability. There were no
payments of exit costs.
As part of the restructuring program, the Company reviewed its existing
asset base. The charge of $77 million, which includes $52 million of valuation
adjustments and $25 million of accruals, relates to certain assets,
principally license agreements, other intangibles and site-specific production
assets, which have decreased ongoing utility in light of the restructured
operations, the Company's strategic direction, and the current competitive
environment.
21.BUSINESS ACQUISITION
On December 4, 1996, the Company purchased substantially all of the assets
of Olin Corporation's (Olin) toluene diisocyanate (TDI) and aliphatic
diisocyanate (ADI) businesses. The purchase included TDI and ADI production
facilities in Lake Charles, Louisiana, and certain related assets, including
trademarks, patents, and technology. Effective December 1, 1996, the Company
has accounted for the acquired business under the purchase method of
accounting and, accordingly, the results of operations of the acquired
business are included in the Company's consolidated results of operations
prospectively from that date. The acquisition cost of approximately $571
million has been allocated to the assets acquired and liabilities assumed,
including approximately $94 million of working capital, based on the fair
value of such assets and liabilities at the date of acquisition. Based on
appraisals, the fair value of the net assets acquired approximates the
acquisition cost, and no goodwill has been recorded. Had the acquired business
been accounted for under the purchase method as of January 1, 1995,
consolidated results of operations for the years 1995 and 1996 would not have
been materially affected.
22.ASSET SALE
On September 30, 1996, the Company sold its plastics business to NOVA. The
sale proceeds were approximately $160 million. As part of the transaction, the
Company entered into a long-term sales agreement to supply NOVA with
approximately the same amount of styrene monomer as had been consumed by the
plastics business. The sale of the plastics business did not have a material
effect on the Company's consolidated financial statements.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
23.SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
----------- --------- ------------- ------------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
1997
----
<S> <C> <C> <C> <C>
Net sales................... $ 1,029 $ 956 $ 1,004 $ 1,006
Gross profit................ 185 161 232 187
Net income (loss)(1)........ 48 35 (37) 65
Earnings (loss) per share
(1)(2)..................... .50 .36 (.38) .67
<CAPTION>
1996
----
<S> <C> <C> <C> <C>
Net sales................... $ 982 $ 959 $ 1,035 $ 979
Gross profit................ 252 216 235 185
Net income.................. 106 81 97 64
Earnings per share(2)....... 1.10 .84 1.00 .66
</TABLE>
- --------
(1) Net loss in the third quarter 1997 includes a charge of $116 million, or
$1.20 per share, for costs related to a restructuring program and asset
reviews.
(2) Earnings per common share calculations for each of the quarters are based
on the weighted average number of shares outstanding for each period
(basic earnings per share). The sum of the quarters may not necessarily be
equal to the full year earnings per share amount.
47
<PAGE>
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.EXECUTIVE COMPENSATION
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding executive officers of the Company is included in Part
I. For the other information called for by Items 10, 11, 12, and 13, reference
is made to the Company's definitive proxy statement for its Annual Meeting of
Stockholders, to be held on May 14, 1998, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997,
and which is incorporated herein by reference.
PART IV
ITEM 14.EXHIBITS AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
<TABLE>
<S> <C>
1. and 2. Financial Statements: These documents are listed in the Index to Consolidated
Financial Statements. See Item 8.
</TABLE>
<TABLE>
<S> <C>
3. Exhibits:
2.1 Asset Purchase Agreement, dated October 9, 1996, between ARCO Chemical Com-
pany and Olin Corporation, filed as Exhibit 2.1 to the Company's Current Re-
port on Form 8-K, dated December 17, 1996, and incorporated herein by refer-
ence.
2.2 Amendment No. 1, dated December 4, 1996, to the Asset Purchase Agreement be-
tween ARCO Chemical Company and Olin Corporation, filed as Exhibit 2.2 to the
Company's Current Report on Form 8-K, dated December 17, 1996, and incorpo-
rated herein by reference.
3.1 Certificate of Amendment and Restated Certificate of Incorporation of ARCO
Chemical Company, filed as an Exhibit bearing the same number to the
Company's Registration Statement on Form S-1 (No. 33-15930), filed on July
28, 1987, and incorporated herein by reference.
3.2 By-Laws of ARCO Chemical Company, filed as an Exhibit bearing the same number
to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on
July 28, 1987, and incorporated herein by reference.
4.1 Indenture, dated as of June 15, 1988, between ARCO Chemical Company and The
Bank of New York as Trustee, filed as Exhibit 4.2 to the Company's Registra-
tion Statement on Form S-3 (No. 33-23340), filed on July 27, 1988, and incor-
porated herein by reference.
</TABLE>
48
<PAGE>
<TABLE>
<S> <C>
4.2 Forms of Debt Securities issuable under the Indenture referred to in Exhibit
4.1, filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3
(No. 33-23340), filed on July 27, 1988, and incorporated herein by reference.
4.3 Form of Debt Security issuable under the Indenture referred to in Exhibit
4.1, filed as Exhibit 4 to the Company's Current Report on Form 8-K, dated
January 30, 1990, and incorporated herein by reference.
4.4 Forms of Debt Securities issuable under the Indenture referred to in Exhibit
4.1, filed as Exhibits 4.1 and 4.2 to the Company's Current Report on Form 8-
K, dated October 31, 1990, and incorporated herein by reference.
4.5 Form of Debt Security issuable under the Indenture referred to in Exhibit
4.1, filed as Exhibit 4 to the Company's Current Report on Form 8-K, dated
December 7, 1990, and incorporated herein by reference.
4.6 Term Loan Agreement, dated as of March 12, 1997, among ARCO Chemie Nederland,
Ltd. (Rotterdam Branch), as Borrower, the Company, as Guarantor, Chase In-
vestment Bank Limited, as Arranger, Chase Manhattan International Limited, as
Agent, and the Banks listed therein, filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997,
and incorporated herein by reference.
4.7 Credit Agreement A, dated as of July 23, 1997, among the Company, the Banks
named therein and The First National Bank of Chicago, as Agent, filed as Ex-
hibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, and incorporated herein by reference.
4.8 Credit Agreement B, dated as of July 23, 1997, among the Company, the Banks
named therein and The First National Bank of Chicago, as Agent, filed as Ex-
hibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, and incorporated herein by reference.
4.9 Instruments defining the rights of holders of long-term debt not registered
under the Securities Exchange Act of 1934 (other than long-term debt issued
pursuant to the Term Loan Agreement and the Credit Agreements) are not filed
because the total amount of securities authorized under any such instrument
does not exceed 10 percent of the consolidated total assets of the Company.
The Company agrees to furnish a copy of any such instrument to the Securities
and Exchange Commission upon request.
10.1 ARCO Chemical Company Annual Incentive Plan, effective January 1, 1988, filed
as an Exhibit bearing the same number to the Company's Annual Report on Form
10-K for 1993, and incorporated herein by reference.
10.2 Resolutions relating to Amendment No. 1 to ARCO Chemical Company Annual In-
centive Plan, as adopted February 15, 1989, filed as an Exhibit bearing the
same number to the Company's Annual Report on Form 10-K for 1990, and incor-
porated herein by reference.
10.3 Resolutions relating to Amendment No. 2 to ARCO Chemical Company Annual In-
centive Plan, as adopted July 17, 1990, effective September 1, 1990, filed as
an Exhibit bearing the same number to the Company's Annual Report on Form
10-K for 1990, and incorporated herein by reference.
10.4 Amendment and Restatement of ARCO Chemical Company Executive Supplementary
Savings Plan, effective January 1, 1995, filed as an Exhibit bearing the same
number, to the Company's Annual Report on Form 10-K for 1996, and incorpo-
rated herein by reference.
10.5 ARCO Chemical Company 1990 Long-Term Incentive Plan, restated as amended
through July 20, 1995, filed as Exhibit 10.7 to the Company's Annual Report
on Form 10-K for 1995, and incorporated herein by reference.
</TABLE>
49
<PAGE>
<TABLE>
<S> <C>
10.6 Amendment No. 5 to the ARCO Chemical Company 1990 Long-Term Incentive Plan,
filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996, and incorporated herein by reference.
10.7 Amendment No. 6 to the ARCO Chemical Company 1990 Long-Term Incentive Plan,
filed as Exhibit 4 to the Company's Registration Statement on Form S-8 (No.
333-28473), filed on June 4, 1997, and incorporated herein by reference.
10.8 Amendment No. 7 to the ARCO Chemical Company 1990 Long-Term Incentive Plan,
filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997, and incorporated herein by reference.
10.9 ARCO Chemical Company Supplementary Executive Retirement Plan, effective Oc-
tober 1, 1990, filed as Exhibit 10.12 to the Company's Annual Report on Form
10-K for 1992, and incorporated herein by reference.
10.10 Amendment No. 1 to the ARCO Chemical Company Supplementary Executive Retire-
ment Plan, effective as of May 13, 1993.
10.11 ARCO Chemical Company Financial Counseling Policy, effective January 1, 1988,
filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for 1993,
and incorporated herein by reference.
10.12 ARCO Chemical Company Executive Medical Insurance Plan (Summary Plan Descrip-
tion), effective January 1, 1988, filed as Exhibit 10.14 to the Company's An-
nual Report on Form 10-K for 1993, and incorporated herein by reference.
10.13 ARCO Chemical Company Key Management Deferral Plan, effective October 1,
1990, filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for
1990, and incorporated herein by reference.
10.14 Amendment No. 1 to the ARCO Chemical Company Key Management Deferral Plan,
effective as of October 22, 1992, filed as Exhibit 10.14 to the Company's An-
nual Report on Form 10-K for 1995, and incorporated herein by reference.
10.15 Amendment No. 2 to the ARCO Chemical Company Key Management Deferral Plan,
effective as of January 1, 1997, filed as Exhibit 10.1 to the Company's Quar-
terly Report on Form 10-Q for the quarterly period ended March 31, 1997, and
incorporated herein by reference.
10.16 ARCO Chemical Company Key Management Long-Term Disability Plan, effective Oc-
tober 1, 1990, filed as Exhibit 10.16 to the Company's Annual Report on Form
10-K for 1992, and incorporated herein by reference.
10.17 Resolutions relating to ARCO Chemical Company Key Management Life Insurance
Plan, as adopted July 17, 1990, effective August 1, 1990, filed as Exhibit
10.21 to the Company's Annual Report on Form 10-K for 1990, and incorporated
herein by reference.
10.18 ARCO Chemical Company Retirement Plan for Outside Directors, as amended and
restated effective October 1, 1990, filed as Exhibit 10.18 to the Company's
Annual Report on Form 10-K for 1992, and incorporated herein by reference.
10.19 Amendment No. 1 to the ARCO Chemical Company Retirement Plan for Outside Di-
rectors, effective as of May 13, 1993.
10.20 ARCO Chemical Company Restricted Stock Plan for Outside Directors, filed as
Exhibit 4 to the Company's Registration Statement on Form S-8 (No. 333-
36239), filed on September 24, 1997, and incorporated herein by reference.
10.21 ARCO Chemical Company Deferral Plan for Outside Directors, effective October
1, 1990, filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K
for 1992, and incorporated herein by reference.
</TABLE>
50
<PAGE>
<TABLE>
<S> <C>
10.22 Amendment No. 1 to the ARCO Chemical Company Deferral Plan for Outside Direc-
tors, effective as of October 22, 1992.
10.23 Amendment No. 2 to the ARCO Chemical Company Deferral Plan for Outside Direc-
tors, effective as of January 1, 1997, filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997,
and incorporated herein by reference.
10.24 Cross-Indemnification Agreement, dated as of June 1, 1987, between ARCO Chem-
ical Company and Atlantic Richfield Company, filed as Exhibit 10.2(a) to the
Company's Registration Statement on Form S-1 (No. 33-15930), filed on July
28, 1987, and incorporated herein by reference.
10.25 Amendment No. 1 to Cross-Indemnification Agreement, dated as of June 30,
1987, between ARCO Chemical Company and Atlantic Richfield Company, filed as
Exhibit 10.2(b) to the Company's Registration Statement on Form S-1 (No. 33-
15930), filed on July 28, 1987, and incorporated herein by reference.
10.26 Amendment No. 2 to Cross-Indemnification Agreement, dated as of July 1, 1987,
between ARCO Chemical Company and Atlantic Richfield Company, filed as Ex-
hibit 10.2(c) to Amendment No. 1 to the Company's Registration Statement on
Form S-1 (No. 33-15930), filed on August 21, 1987, and incorporated herein by
reference.
10.27 Amended and Restated Tax Sharing Agreement, effective as of January 1, 1995,
between ARCO Chemical Company and Atlantic Richfield Company, filed as Ex-
hibit 10 to the Company's Quarterly Report on Form 10-Q for the quarterly pe-
riod ended June 30, 1995, and incorporated herein by reference.
10.28 LPC/ACC Services Agreement, dated as of June 30, 1987, between ARCO Chemical
Company and Lyondell Petrochemical Company, filed as Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (No. 33-15930), filed on July
28, 1987, and incorporated herein by reference.
10.29 Services Agreement, dated as of July 18, 1987, between ARCO Chemical Company
and Atlantic Richfield Company, filed as Exhibit 10.5 to the Company's Regis-
tration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and in-
corporated herein by reference.
10.30 Amendment No. 1 to Services Agreement, dated as of March 30, 1990, between
ARCO Chemical Company and Atlantic Richfield Company, filed as Exhibit 10.29
to the Company's Annual Report on Form 10-K for 1990, and incorporated herein
by reference.
10.31 Shareholder Agreement, dated as of June 30, 1987, between ARCO Chemical Com-
pany and Atlantic Richfield Company, filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987,
and incorporated herein by reference.
10.32 Form of ARCO Chemical Company Indemnity Agreement with officers and direc-
tors, filed as Exhibit 10.8 to the Company's Registration Statement on Form
S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by refer-
ence.
12 Statement re computation of the ratio of earnings to fixed charges.
21 Subsidiaries of ARCO Chemical Company.
23 Consent of Independent Accountants.
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>
All documents incorporated herein by reference to any Annual Report on Form
10-K, Quarterly Report on Form 10-Q or Current Report on Form 8-K previously
filed by the Company relate to Commission File No. 1-9678.
51
<PAGE>
Copies of exhibits will be furnished upon prepayment of 25 cents per page.
Requests should be addressed to the Corporate Secretary.
(B) REPORTS ON FORM 8-K:
The Company filed a Current Report on Form 8-K, dated October 7, 1997, which
contained a press release, dated October 7, 1997, announcing the Company's
recognition of a $175 million charge related to restructuring and other costs.
The Company filed a Current Report on Form 8-K, dated December 15, 1997,
which contained a press release, dated December 15, 1997, announcing the
settlement of certain proceedings between the Company and Repsol, S.A.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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, in Newtown Square, Commonwealth of
Pennsylvania, on March 13, 1998.
ARCO Chemical Company
ALAN R. HIRSIG
By: _________________________________
Alan R. Hirsig
President and Chief Executive
Officer
----------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
Chairman of the
ANTHONY G. FERNANDES* Board and Director
- -------------------------------------
Anthony G. Fernandes
ALAN R. HIRSIG President, Chief
- ------------------------------------- Executive Officer
Alan R. Hirsig and Director
MARVIN O. SCHLANGER* Executive Vice
- ------------------------------------- President, Chief
Marvin O. Schlanger Operating Officer
and Director
WALTER J. TUSINSKI* Senior Vice
- ------------------------------------- President, Chief
Walter J. Tusinski Financial Officer
and Director
WALTER F. BERAN*
- ------------------------------------- Director
Walter F. Beran
MARIE L. KNOWLES* Director
- ------------------------------------- March 13, 1998
Marie L. Knowles
JAMES A. MIDDLETON* Director
- -------------------------------------
James A. Middleton
STEPHEN R. MUT*
- ------------------------------------- Director
Stephen R. Mut
FRANK SAVAGE* Director
- -------------------------------------
Frank Savage
VAN BILLET Vice President and
- ------------------------------------- Controller
Van Billet (principal
accounting officer)
VAN BILLET
*By: ________________________________
Van Billet
(Attorney in fact)
53
<PAGE>
EXHIBITS
TO
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 Commission file number 1-9678
ARCO Chemical Company
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No.
--
<S> <C>
2.1 Asset Purchase Agreement, dated October 9, 1996, between ARCO Chemical
Company and Olin Corporation, filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated December 17, 1996, and incorporated
herein by reference................................................
2.2 Amendment No. 1, dated December 4, 1996, to the Asset Purchase
Agreement between ARCO Chemical Company and Olin Corporation, filed as
Exhibit 2.2 to the Company's Current Report on Form 8-K, dated December
17, 1996, and incorporated herein by reference.....................
3.1 Certificate of Amendment and Restated Certificate of Incorporation of
ARCO Chemical Company, filed as an Exhibit bearing the same number to
the Company's Registration Statement on Form S-1 (No. 33-15930), filed
on July 28, 1987, and incorporated herein by reference.............
3.2 By-Laws of ARCO Chemical Company, filed as an Exhibit bearing the same
number to the Company's Registration Statement on Form S-1 (No. 33-
15930), filed on July 28, 1987, and incorporated herein by
reference..........................................................
4.1 Indenture, dated as of June 15, 1988, between ARCO Chemical Company and
The Bank of New York as Trustee, filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-3 (No. 33-23340), filed on July 27,
1988, and incorporated herein by reference.........................
4.2 Forms of Debt Securities issuable under the Indenture referred to in
Exhibit 4.1, filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-3 (No. 33-23340), filed on July 27, 1988, and
incorporated herein by reference...................................
4.3 Form of Debt Security issuable under the Indenture referred to in
Exhibit 4.1, filed as Exhibit 4 to the Company's Current Report on Form
8-K, dated January 30, 1990, and incorporated herein by
reference..........................................................
4.4 Forms of Debt Securities issuable under the Indenture referred to in
Exhibit 4.1, filed as Exhibits 4.1 and 4.2 to the Company's Current
Report on Form 8-K, dated October 31, 1990, and incorporated herein by
reference..........................................................
4.5 Form of Debt Security issuable under the Indenture referred to in
Exhibit 4.1, filed as Exhibit 4 to the Company's Current Report on Form
8-K, dated December 7, 1990, and incorporated herein by
reference..........................................................
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
4.6 Term Loan Agreement, dated as of March 12, 1997, among ARCO Chemie
Nederland, Ltd. (Rotterdam Branch), as Borrower, the Company, as
Guarantor, Chase Investment Bank Limited, as Arranger, Chase Manhattan
International Limited, as Agent, and the Banks listed therein, filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997, and incorporated herein by
reference..........................................................
4.7 Credit Agreement A, dated as of July 23, 1997, among the Company, the
Banks named therein and The First National Bank of Chicago, as Agent,
filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997, and incorporated herein
by reference.......................................................
4.8 Credit Agreement B, dated as of July 23, 1997, among the Company, the
Banks named therein and The First National Bank of Chicago, as Agent,
filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997, and incorporated herein
by reference.......................................................
4.9 Instruments defining the rights of holders of long-term debt not
registered under the Securities Exchange Act of 1934 (other than long-
term debt issued pursuant to the Term Loan Agreement and Credit
Agreements) are not filed because the total amount of securities
authorized under any such instrument does not exceed 10 percent of the
consolidated total assets of the Company. The Company agrees to furnish
a copy of any such instrument to the Securities and Exchange Commission
upon request.......................................................
10.1 ARCO Chemical Company Annual Incentive Plan, effective January 1, 1988,
filed as an Exhibit bearing the same number to the Company's Annual
Report on Form 10-K for 1993, and incorporated herein by reference.
10.2 Resolutions relating to Amendment No. 1 to ARCO Chemical Company Annual
Incentive Plan, as adopted February 15, 1989, filed as an Exhibit
bearing the same number to the Company's Annual Report on Form 10-K for
1990, and incorporated herein by reference.........................
10.3 Resolutions relating to Amendment No. 2 to ARCO Chemical Company Annual
Incentive Plan, as adopted July 17, 1990, effective September 1, 1990,
filed as an Exhibit bearing the same number to the Company's Annual
Report on Form 10-K for 1990, and incorporated herein by
reference..........................................................
10.4 Amendment and Restatement of ARCO Chemical Company Executive
Supplementary Savings Plan, effective January 1, 1995, filed as an
Exhibit bearing the same number, to the Company's Annual Report on
Form 10-K for 1996, and incorporated herein by reference...........
10.5 ARCO Chemical Company 1990 Long-Term Incentive Plan, restated as
amended through July 20, 1995, filed as Exhibit 10.7 to the Company's
Annual Report on Form 10-K for 1995, and incorporated herein by
reference..........................................................
10.6 Amendment No. 5 to the ARCO Chemical Company 1990 Long-Term Incentive
Plan, filed as Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1996, and incorporated
herein by reference................................................
10.7 Amendment No. 6 to the ARCO Chemical Company 1990 Long-Term Incentive
Plan, filed as Exhibit 4 to the Company's Registration Statement on
Form S-8 (No. 333-28473), filed on June 4, 1997, and incorporated
herein by reference................................................
10.8 Amendment No. 7 to the ARCO Chemical Company 1990 Long-Term Incentive
Plan, filed as Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997, and incorporated
herein by reference................................................
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
10.9 ARCO Chemical Company Supplementary Executive Retirement Plan,
effective October 1, 1990, filed as Exhibit 10.12 to the Company's
Annual Report on Form 10-K for 1992, and incorporated herein by
reference..........................................................
10.10 Amendment No. 1 to the ARCO Chemical Company Supplementary Executive
Retirement Plan, effective as of May 13, 1993......................
10.11 ARCO Chemical Company Financial Counseling Policy, effective January 1,
1988, filed as Exhibit 10.13 to the Company's Annual Report on Form
10-K for 1993, and incorporated herein by reference................
10.12 ARCO Chemical Company Executive Medical Insurance Plan (Summary Plan
Description), effective January 1, 1988, filed as Exhibit 10.14 to the
Company's Annual Report on Form 10-K for 1993, and incorporated herein
by reference.......................................................
10.13 ARCO Chemical Company Key Management Deferral Plan, effective October
1, 1990, filed as Exhibit 10.19 to the Company's Annual Report on Form
10-K for 1990, and incorporated herein by reference................
10.14 Amendment No. 1 to the ARCO Chemical Company Key Management Deferral
Plan, effective as of October 22, 1992, filed as Exhibit 10.14 to the
Company's Annual Report on Form 10-K for 1995, and incorporated herein
by reference.......................................................
10.15 Amendment No. 2 to the ARCO Chemical Company Key Management Deferral
Plan, effective as of January 1, 1997, filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997, and incorporated herein by reference...............
10.16 ARCO Chemical Company Key Management Long-Term Disability Plan,
effective October 1, 1990, filed as Exhibit 10.16 to the Company's
Annual Report on Form 10-K for 1992, and incorporated herein by
reference..........................................................
10.17 Resolutions relating to ARCO Chemical Company Key Management Life
Insurance Plan, as adopted July 17, 1990, effective August 1, 1990,
filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K for
1990, and incorporated herein by reference.........................
10.18 ARCO Chemical Company Retirement Plan for Outside Directors, as amended
and restated effective October 1, 1990, filed as Exhibit 10.18 to the
Company's Annual Report on Form 10-K for 1992, and incorporated herein
by reference.......................................................
10.19 Amendment No. 1 to the ARCO Chemical Company Retirement Plan for
Outside Directors, effective as of May 13, 1993....................
10.20 ARCO Chemical Company Restricted Stock Plan for Outside Directors,
filed as Exhibit 4 to the Company's Registration Statement on Form S-8
(No. 333-36239), filed on September 24, 1997, and incorporated herein
by reference.......................................................
10.21 ARCO Chemical Company Deferral Plan for Outside Directors, effective
October 1, 1990, filed as Exhibit 10.19 to the Company's Annual Report
on Form 10-K for 1992, and incorporated herein by reference........
10.22 Amendment No. 1 to the ARCO Chemical Company Deferral Plan for Outside
Directors, effective as of October 22, 1992........................
10.23 Amendment No. 2 to the ARCO Chemical Company Deferral Plan for Outside
Directors, effective as of January 1, 1997, filed as Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1997, and incorporated herein by reference.........
10.24 Cross-Indemnification Agreement, dated as of June 1, 1987, between ARCO
Chemical Company and Atlantic Richfield Company, filed as Exhibit
10.2(a) to the Company's Registration Statement on Form S-1 (No.
33-15930), filed on July 28, 1987, and incorporated herein by
reference..........................................................
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
10.25 Amendment No. 1 to Cross-Indemnification Agreement, dated as of June
30, 1987, between ARCO Chemical Company and Atlantic Richfield Company,
filed as Exhibit 10.2(b) to the Company's Registration Statement on
Form S-1 (No. 33-15930), filed on July 28, 1987, and incorporated
herein by reference................................................
10.26 Amendment No. 2 to Cross-Indemnification Agreement, dated as of July 1,
1987, between ARCO Chemical Company and Atlantic Richfield Company,
filed as Exhibit 10.2(c) to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (No. 33-15930), filed on August 21,
1987, and incorporated herein by reference.........................
10.27 Amended and Restated Tax Sharing Agreement, effective as of January 1,
1995, between ARCO Chemical Company and Atlantic Richfield Company,
filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1995, and incorporated herein by
reference..........................................................
10.28 LPC/ACC Services Agreement, dated as of June 30, 1987, between ARCO
Chemical Company and Lyondell Petrochemical Company, filed as Exhibit
10.4 to the Company's Registration Statement on Form S-1 (No.
33-15930), filed on July 28, 1987, and incorporated herein by
reference..........................................................
10.29 Services Agreement, dated as of July 18, 1987, between ARCO Chemical
Company and Atlantic Richfield Company, filed as Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (No. 33-15930), filed on
July 28, 1987, and incorporated herein by reference................
10.30 Amendment No. 1 to Services Agreement, dated as of March 30, 1990,
between ARCO Chemical Company and Atlantic Richfield Company, filed as
Exhibit 10.29 to the Company's Annual Report on Form 10-K for 1990, and
incorporated herein by reference...................................
10.31 Shareholder Agreement, dated as of June 30, 1987, between ARCO Chemical
Company and Atlantic Richfield Company, filed as Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (No. 33-15930), filed on
July 28, 1987, and incorporated herein by reference................
10.32 Form of ARCO Chemical Company Indemnity Agreement with officers and
directors, filed as Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and
incorporated herein by reference...................................
12 Statement re computation of the ratio of earnings to fixed charges
21 Subsidiaries of ARCO Chemical Company
23 Consent of Independent Accountants
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
4
<PAGE>
Exhibit 10.10
AMENDMENT NO. 1
TO
ARCO CHEMICAL COMPANY
SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN
---------------------------
Pursuant to the power of amendment reserved therein, the following amendment is
hereby made to the ARCO Chemical Company Supplementary Executive Retirement Plan
(the "Plan") effective as of May 13, 1993.
1. Article V, Section 1.2(c) of the Plan is amended to read as follows:
"(c) If the Participant or former Participant makes an election of the
form of payment of his or her benefit within the time frame
designated by the Administrative Committee and subsequently wishes
to change this election prior to commencement of the benefit or, in
the case of an annuity form of payment under which payments have
commenced, to receive the remaining monthly payments in a Lump Sum
which is the Actuarial Equivalent of the remaining annuity
installments, then he or she may request, by application to the
Administrative Committee, to change the form of payment previously
elected, (i) without any reduction in, or imposition of any penalty
on, the Participant's Account, provided that the Administrative
Committee determines 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."
2. Article V, Section 1.2(d) of the Plan is amended to read as follows:
"(d) The Participant may elect the form of payment of the Survivor
Benefit in the event of the Participant's death prior to
commencement of his or her benefit. If the Participant fails to
make the election, payment to the Beneficiary will be in the form
1
<PAGE>
of an annuity. However, the Beneficiary may request the
Administrative Committee to change the Participant's prior election
provided that the Administrative Committee makes a finding
described under either Section 1.2(c)(i) or (ii) of this Article."
Executed this 18th day of April, 1997.
ATTEST ARCO CHEMICAL COMPANY
BY: /s/ Valerie H. Perry BY: /s/ Frank W. Welsh
----------------------- ------------------------------
Frank W. Welsh
Vice President
Human Resources
2
<PAGE>
Exhibit 10.19
AMENDMENT NO. 1
TO
ARCO CHEMICAL COMPANY
RETIREMENT PLAN FOR OUTSIDE DIRECTORS
---------------------------
Pursuant to the power of amendment reserved therein, the following amendment is
hereby made to the ARCO Chemical Company Retirement Plan For Outside Directors
(the "Plan") effective as of May 13, 1993.
1. Article III, Section 3.3(c) of the Plan is amended to read as follows:
"(c) If the Director or former Director makes an election of the form of
payment of his or her benefit within the time frame designated by the
Administrative Committee and subsequently wishes to change this election
prior to commencement of the benefit or, in the case of an annuity form of
payment under which payments have commenced, to receive the remaining
monthly payments in a Lump Sum which is the Actuarial Equivalent of the
remaining annuity installments, then he or she may request, by application
to the Administrative Committee, to change the form of payment previously
elected, (i) without any reduction in, or imposition of any penalty on,
the Director's Account, provided that the Administrative Committee
determines that the Director 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 Director's request."
2. Article III, Section 3.3(d) of the Plan is amended to read as follows:
"(d) The Director may elect the form of payment of the Death Benefit in
the event of the Director's death prior to commencement of his or her
benefit. If the Director fails to make the election, payment to the
Beneficiary will be in monthly installments for the applicable
1
<PAGE>
Payment Period. However, the Beneficiary may request the Administrative
Committee to change the Director's prior election provided that the
Administrative Committee makes a finding described under either Section
3.3(c)(i) or (ii) of this Article."
Executed this 18th day of April, 1997.
ATTEST ARCO CHEMICAL COMPANY
BY: /s/ Valerie H. Perry BY: /s/ Frank W. Welsh
---------------------- -----------------------------
FRANK W. WELSH
Vice President
Human Resources
2
<PAGE>
Exhibit 10.22
AMENDMENT NO. 1
TO
ARCO CHEMICAL COMPANY
DEFERRAL PLAN FOR OUTSIDE DIRECTORS
---------------
Pursuant to the power of amendment reserved therein, the following amendment is
hereby made to the ARCO Chemical Company Deferral Plan For Outside Directors
(the "Plan") effective as of October 22, 1992.
1. Article IV, Section 2 of the Plan is amended to read as follows:
"Section 2. Form and Time of Retirement Distribution
2.1 Retirement Distributions shall be paid at the time and in the form of
benefit elected by the Participant for each Deferral Unit, at the time of
the Deferral Commitment establishing such Deferral Unit, on the
Participation Agreement. A Participant's election shall be irrevocable,
except that 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, for any Deferral Unit, (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.
<PAGE>
2.2 The available forms and times of payment upon retirement are as
follows:
(a) Lump Sum. A single payment at retirement.
(b) Installment Payments. Monthly installment payments in substantially
equal payments of principal and interest over payment periods prescribed
and communicated by the Administrative Committee in advance of the
applicable Deferral Period. The amount of each of the monthly installments
shall be redetermined effective as of January 1 of each year based on the
remaining Account balance and the remaining number of installment payments.
(c) Deferred Payments. A lump sum or installment payments commencing
subsequent to retirement at one of the optional deferral times prescribed
and communicated by the Administrative Committee in advance of the
applicable Deferral Period."
2. Article IV, Section 5(c) of the Plan is amended to read as follows:
"(c) Timing and Form of In-Service Distribution. The In-Service
Distribution shall commence at a time prescribed by the Administrative
Committee and in the form elected by the Participant on the Participant
Agreement at the time of the Deferral Commitment; provided, however, that
if the Participant terminates employment 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
<PAGE>
retirement allowance, the In-Service Distribution election will be canceled
and distribution will be made pursuant to Section 2 of this Article."
3. Article IV, Section 6 of the Plan is amended to read as follows:
"Section 6. Unscheduled Distributions
6.1 Upon a finding that a Participant has suffered a Financial Hardship,
following submission of an application by the Participant, the
Administrative Committee shall make a distribution of all or a portion of
the Participant's Account, consistent with the finding of Financial Hardship
but in no event exceeding the amount of the Participant's request, without
any reduction in, or imposition of any penalty on, the Participant's
Account. The distribution shall be made as soon as administratively
practical following the finding of Financial Hardship.
6.2 A Participant may apply for a distribution of all or part of his
Account, without regard to any condition of Financial Hardship. Such
distribution shall be made as soon as practical following the Participant's
application and shall be subject to whatever penalty, in the form of a
forfeiture of a percentage of the amount requested and/or a suspension of
participation as determined by the Administrative Committee upon the advice
of Counsel for the Plan as is deemed necessary to preclude the constructive
receipt of taxable income by any Participant in the Plan.
6.3 Counsel for the Plan shall review legal and tax developments to assure
continuous compliance with the relevant authorities governing plan design to
prevent constructive receipt and shall advise the Administrative Committee
in writing in advance of any change in its most recent written advice
<PAGE>
on the penalty which is to be imposed.
6.4 The Company shall notify Participants in writing of this amendment and
of the specific, currently effective penalty as described under Section 6.2,
and shall update this written notification periodically and in advance of
any subsequent change of which it is notified under Section 6.3, unless
administratively impossible to do so, in which case such notification shall
be provided no later than 30 days following the effective date of the
change."
4. Article IV, Section 9(b) of the Plan is deleted.
Executed this 18th day of April, 1997.
ATTEST ARCO CHEMICAL COMPANY
BY: /s/ Valerie H. Perry BY: /s/ Frank W. Welsh
---------------------------- -----------------------------
FRANK W. WELSH
Vice President
Human Resources
<PAGE>
Exhibit 12
ARCO CHEMICAL COMPANY AND CONSOLIDATED SUBSIDIARIES
Computation of the Ratio of Earnings to Fixed Charges
(Million of Dollars)
Years Ended December 31,
---------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
Pretax income from continuing operations $ 311 $ 416 $ 756 $ 487 $ 168
Add:
Interest expense....................... 105 85 89 86 80
Rental expense factor.................. 20 22 25 27 27
----- ----- ----- ----- -----
Earnings available for fixed charges...... $ 436 $ 523 $ 870 $ 600 $ 275
===== ===== ===== ===== =====
Interest expense.......................... $ 105 $ 85 $ 89 $ 86 $ 80
Add capitalized interest.................. - 3 1 3 9
Rental expense factor..................... 20 22 25 27 27
----- ----- ----- ----- -----
Fixed charges............................. $ 125 $ 110 $ 115 $ 116 $ 116
===== ===== ===== ===== =====
Ratio of earnings to fixed charges........ 3.5 4.8 7.6 5.2 2.4
===== ===== ===== ===== =====
<PAGE>
Exhibit 21
ARCO CHEMICAL COMPANY
SUBSIDIARIES
Jurisdiction
of
Name Entity Formation
---- ------------------- ------------
ARCO Chemie Nederland, Ltd. corporation Delaware
ARCO Chimie France SNC partnership France
POSM II Limited Partnership, L.P. limited partnership Delaware
ARCO Chemical Delaware Company corporation Delaware
ARCO Chemical Technology, L.P. limited partnership Delaware
The Meadows Corporation corporation Delaware
The subsidiaries whose names are not listed above, if considered in the
aggregate as a single subsidiary, would not constitute a significant subsidiary
of the Company.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following registration
statements of ARCO Chemical Company and Subsidiaries: Registration statement on
Form S-8 (No. 33-17707), Registration Statement on Form S-8 (No. 33-23867),
Registration Statement on Form S-8 (No. 33-38062), Registration Statement on
Form S-8 (No. 33-23241), Registration Statement on Form S-8 (No. 333-16395),
Registration on Form S-8 (No. 333-19023), Registration Statement on Form S-8
(No. 333-36239), Registration Statement on Form S-3 (No. 333-27099), and
Registration Statement on Form S-8 (333-28473) of our report dated February 12,
1998 on our audits of the consolidated financial statements of ARCO Chemical
Company and Subsidiaries as of December 31, 1997 and 1996 and for each of the
three years in the period ended December 31, 1997 which report is included in
this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
March 13, 1998
<PAGE>
Exhibit 24
ARCO CHEMICAL COMPANY
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Van Billet, Alan R. Hirsig, Robert J. Millstone, and Walter J. Tusinski, and
each of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to effect the following acts as
necessary or appropriate for the conduct of the business and affairs of ARCO
Chemical Company (the "Company"):
I. In connection with any outstanding security of the Company
registered pursuant to Section 12 of the Securities Exchange Act of 1934,
as amended
(1) to execute any singular or periodic report required or
permitted to be filed under the Securities Exchange Act of 1934, as
amended, including specifically the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997; and
(2) to file or cause to be filed such report with the Securities
and Exchange Commission (the "Commission"), any national or foreign
securities exchange, any securities industry self-regulatory
organization, any state or other jurisdiction of the United States,
and any jurisdiction outside the United States, in each case as
required or permitted by applicable law;
II. In connection with the issuance, offering, or sale of any
securities authorized by the Board of Directors of the Company or by the
Executive Committee thereof pursuant to due authorization by such Board,
or in connection with the issuance, offering or sale of any security,
participation or interest in any employee or executive compensation or
benefit plan authorized and approved by the Board of Directors of the
Company or by the Executive or Compensation Committees thereof pursuant to
due authorization by such Board.
(1) to execute and file, or cause to be filed, with the
Commission, (A) Registration Statements and any and all amendments
(including post-effective amendments) thereto, and to file, or cause
to be filed, all exhibits thereto and other documents in connection
therewith as required or permitted by the Commission in connection
with such registration under the Securities Act of 1993, as amended,
and (B) any singular or periodic report or other document required or
permitted to be filed by the Company with the Commission pursuant to
the Securities Exchange Act of 1934, as amended;
1
<PAGE>
(2) to execute and file, or cause to be filed, any application
for registration or exemption therefrom, or any report or any other
document required or permitted to be filed by the Company under the
Blue Sky or securities laws of any state or other jurisdiction of the
United States, and to furnish any other information required in
connection therewith, including any reports or other documents
required or permitted to be filed subsequent to the issuance of such
securities;
(3) to execute and file, or cause to be filed, any application
for registration or exemption therefrom under the securities laws of
any jurisdiction outside the United States, including any reports or
other documents required or permitted to be filed subsequent to the
issuance of such securities; and
(4) to execute and file, or cause to be filed, any application
for listing such securities on any national or foreign securities
exchange;
granting to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act required to be done as he or she
might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, and each of them, may lawfully do or cause to be
done by virtue of this Power of Attorney.
Each such attorney-in-fact and agent shall have the right to
indemnification for any action taken or omitted pursuant to this Power of
Attorney provided in the By-Laws of the Company to officers and directors for
service as such, including, but not limited to, the non-exclusivity provisions
of such By-Laws.
Each person whose signature appears below may at any time revoke this
Power of Attorney, as to himself or herself only, by an instrument in writing
specifying that this Power of Attorney is revoked as to him or her as of the
date of delivery of such revocation to the Secretary of the Company or at a
subsequent specified date. This Power of Attorney shall be revoked
automatically with respect to any person whose signature appears below effective
on the date he or she ceases to be a member of the Board of Directors, or in the
case of Mr. Billet, on the date he ceases to be the principal accounting officer
of the Company, or in the case of Mr. Millstone, on the date he ceases to be
Vice President, General Counsel and Secretary. Any revocation shall not void or
otherwise affect any acts performed by any attorney-in-fact and agent named
herein pursuant to this Power of Attorney prior to the effective date of such
revocation.
This instrument may be executed in multiple counterparts each of which
shall be deemed an original and all of which together shall be deemed one
instrument.
2
<PAGE>
Signature Title Date
--------- ----- ----
/s/ Anthony G. Fernandes Chairman of the Board February 19, 1998
- -------------------------------- and Director
Anthony G. Fernandes
/s/ Alan R. Hirsig President, February 19, 1998
- -------------------------------- Chief Executive Officer
Alan R. Hirsig and Director
/s/ Marvin O. Schlanger Executive Vice President, February 19, 1998
- --------------------------------- Chief Operating Officer
Marvin O. Schlanger and Director
/s/ Walter J. Tusinski Senior Vice President, February 19, 1998
- -------------------------------- Chief Financial Officer
Walter J. Tusinski and Director
/s/ Walter F. Beran Director February 19, 1998
- -------------------------------
Walter F. Beran
/s/ Marie L. Knowles Director February 19, 1998
- --------------------------------
Marie L. Knowles
/s/ James A. Middleton Director February 19, 1998
- ---------------------------------
James A. Middleton
/s/ Stephen R. Mut Director February 19, 1998
- -------------------------------
Stephen R. Mut
3
<PAGE>
Signature Title Date
--------- ----- ----
/s/ Frank Savage Director February 19, 1998
- -------------------------------
Frank Savage
/s/ Robert H. Stewart, III Director February 19, 1998
- ------------------------------------
Robert H. Stewart, III
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 29
<SECURITIES> 0
<RECEIVABLES> 612
<ALLOWANCES> 0
<INVENTORY> 484
<CURRENT-ASSETS> 1,146
<PP&E> 4,149
<DEPRECIATION> 1,615
<TOTAL-ASSETS> 4,116
<CURRENT-LIABILITIES> 759
<BONDS> 792
0
0
<COMMON> 100
<OTHER-SE> 1,693
<TOTAL-LIABILITY-AND-EQUITY> 4,116
<SALES> 3,995
<TOTAL-REVENUES> 3,995
<CGS> 3,230
<TOTAL-COSTS> 3,230
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80
<INCOME-PRETAX> 168
<INCOME-TAX> 57
<INCOME-CONTINUING> 111
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 111
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
</TABLE>
