<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1998
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
--------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
ARCO CHEMICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0104393
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3801 WEST CHESTER PIKE
NEWTOWN SQUARE, PENNSYLVANIA
(610) 359-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
ROBERT J. MILLSTONE
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
ARCO CHEMICAL COMPANY
3801 WEST CHESTER PIKE
NEWTOWN SQUARE, PENNSYLVANIA 19073-2387
(610) 359-3255
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
ED KAUFMANN JOHN W. WHITE DIANE A. WARD
HUGHES HUBBARD & CRAVATH, SWAINE & SENIOR COUNSEL, SECURITIES
REED LLP MOORE & FINANCE
ONE BATTERY PARK WORLDWIDE PLAZA ATLANTIC RICHFIELD COMPANY
PLAZA 825 EIGHTH AVENUE 515 SOUTH FLOWER STREET
NEW YORK, NEW YORK NEW YORK, NEW YORK LOS ANGELES, CALIFORNIA
10004 10019 90071
(212) 837-6000 (212) 474-1000 (213) 486-2808
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box: [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SHARES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(1) FEE(2)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par
value per share....... 26,046,037 $55.0625 $1,434,159,913 $424,000
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 2,367,822 shares of Common Stock subject to the U.S.
Underwriters' over-allotment option.
(2) Calculated pursuant to Rule 457(c) based on the average of the high and
low sale price of the Common Stock on the New York Stock Exchange
composite Tape on May 28, 1998.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be used
in connection with an underwritten offering in the United States and Canada
(the "U.S. Prospectus") and one to be used in a concurrent underwritten
offering outside the United States and Canada (the "International
Prospectus"). The U.S. Prospectus and the International Prospectus are
identical except for the front and back cover pages. The form of U.S.
Prospectus is included herein and is followed by the alternate pages to be
used in the International Prospectus. The alternate pages for the
International Prospectus included herein are each labeled "International
Prospectus Alternate Page." Final forms of each prospectus will be filed with
the Securities and Exchange Commission under Rule 424(b) under the Securities
Act.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 2, 1998
PROSPECTUS
23,678,215 SHARES
[LOGO] ARCO CHEMICAL COMPANY
COMMON STOCK
All of the shares of Common Stock, $1.00 par value (the "Common Stock"), of
ARCO Chemical Company (the "Company") being offered hereby are being sold by
Atlantic Richfield Company ("ARCO" or the "Selling Stockholder"). The Company
will not receive any of the proceeds from the sale of shares by the Selling
Stockholder.
Of the 23,678,215 shares being offered, 18,943,000 shares are being offered
in the United States and Canada (the "U.S. Offering") by the U.S. Underwriters
(as defined) and 4,735,215 shares are being offered in a concurrent
international offering (the "International Offering" and, together with the
U.S. Offering, the "Offerings") outside the United States and Canada by the
Managers (as defined). The U.S. Underwriters and the Managers are collectively
referred to as the "Underwriters." The Price to Public and the Underwriting
Discounts and Commissions for each of the Offerings will be identical.
In connection with the Offerings, the Company will repurchase (the "Stock
Repurchase"), from the Selling Stockholder, at the price per share (the
"Repurchase Price") paid by the public in the Offerings, a number of shares of
Common Stock such that, upon completion of the Offerings and the Stock
Repurchase (together, the "Transaction"), the Selling Stockholder will own 50
percent of the then-outstanding shares of Common Stock (whether or not the U.S.
Underwriters' over-allotment option is exercised). Assuming the U.S.
Underwriters' over-allotment option is not exercised, the aggregate amount of
the Stock Repurchase will equal $850 million (or 15,367,232 shares of Common
Stock assuming the Repurchase Price equals the reported last sale price on May
28, 1998). See "Selling Stockholder; Stock Repurchase."
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol "RCM." The reported last sale price of the Company's Common Stock on the
New York Stock Exchange on May 28, 1998 was $55 5/16 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS(1) STOCKHOLDER(2)
- -------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -------------------------------------------------
Total(3) $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $ million payable by the Selling
Stockholder.
(3) The Selling Stockholder has granted the U.S. Underwriters a 30-day option
to purchase up to 2,367,822 additional shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Selling Stockholder will be $ , $ and
$ , respectively.
----------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about ,
1998, at the office of Smith Barney Inc., 333 West 34th Street, New York, New
York 10001 or through the facilities of The Depository Trust Company.
----------
SALOMON SMITH BARNEY
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
, 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information appearing elsewhere in this
Prospectus. Reference is made to, and this summary is qualified in its entirety
by, the more detailed information and financial statements, including the notes
thereto, appearing elsewhere or incorporated by reference in this Prospectus.
As used in this Prospectus, unless the context requires otherwise, the
"Company" refers to ARCO Chemical Company and its subsidiaries and "Common
Stock" refers to the voting Common Stock of ARCO Chemical Company.
THE COMPANY
The Company is a leading international manufacturer and marketer of
intermediate chemicals and specialty chemical products used in a broad range of
consumer and industrial products. The Company conducts its business primarily
in the Americas, Europe and the Asia Pacific region with manufacturing, sales
and operations in each of these regions. In 1997, the Company had net sales of
approximately $4 billion, of which approximately 50 percent represented sales
outside the United States. At March 31, 1998, the Company had total assets of
approximately $4 billion.
The Company is the world's largest producer of propylene oxide ("PO") and has
leading market positions in polyether polyols, propylene glycol ("PG"),
propylene glycol ethers ("PGE"), toluene diisocyanate ("TDI"), styrene monomer
("SM") for the merchant market and methyl tertiary butyl ether ("MTBE"). Key
markets for PO and its derivatives are automotive seating, home furnishings,
and other urethane applications such as coatings, adhesives, sealants and
elastomers ("CASE"), as well as resins, fibers, consumer products, solvents,
automotive coolants and aircraft deicers. TDI is a precursor in the manufacture
of urethanes. MTBE is a key component in reformulated gasoline. SM is used in
plastics, foam cups and packaging products.
BUSINESS STRATEGY
Compete Worldwide Based on Technological Advantages. The Company believes
that it derives a competitive advantage in the production of PO based on its
co-product process technologies and extensive engineering and manufacturing
expertise developed during the Company's more than 30-year history. The Company
believes that this expertise combined with its innovations in PO derivative
technology allows it to maintain lower capital and production costs when
compared to its competitors. The Company has recently developed new patented
technology used in the production of polyols that the Company believes offers
significant benefits, including (i) lower manufacturing and capital costs, (ii)
enhanced product characteristics and performance that are applicable to a
broader range of applications and (iii) higher margins on certain products. In
addition, the Company intends to incorporate its proprietary TDI technology in
future capacity additions. The Company is also the only producer of butanediol
("BDO") from PO, which the Company believes is the lowest cost route to BDO in
the industry.
Concentrate on Core Businesses. The Company's core products are PO and PO
derivatives such as polyols, PG, PGE and BDO. In addition to being a leading
supplier of merchant PO and PG, the Company is the second largest supplier of
commodity polyols and TDI to the urethanes market. The ability to offer both
TDI and polyols to customers is beneficial in expanding the Company's sales,
especially in developing countries. For its core businesses, the Company
intends to continue investing in manufacturing technology, product and process
research, and marketing support to improve its cost and quality positions. The
Company intends to become further integrated by increasing its captive use of
PO for the manufacture of PO derivatives which has increased from 39 percent in
1988 to 59 percent in 1997.
Emphasize Low Cost Position. The Company believes that it has been among the
most efficient chemical producers in the industry and that it is well
positioned to be a low cost global supplier of its products. The large scale of
the Company's PO plants coupled with the use of proprietary PO technology
contributes to capital
3
<PAGE>
efficiencies and cost advantages. In urethanes, the Company expects its new
patented polyols technology to enable significantly more economical capacity
additions than were previously achievable using conventional technology and to
lower manufacturing costs. To further enhance its competitiveness, in 1997 the
Company undertook an aggressive restructuring program designed to simplify its
organization, streamline operations and reduce controllable costs by
approximately $150 million pre-tax annually. The Company expects the
restructuring program to be substantially completed by the end of 1998. In
addition, in 1998 the Company formed a new global supply chain organization
charged with reducing raw material and delivered product costs and improving
service to customers.
Pursue Growth Opportunities. The Company believes that it can capitalize on
the strength of its PO and derivatives businesses to enhance profit growth by
focusing on performance-oriented products which are more technically oriented
and generally have higher gross margins. Over the last ten years, the Company
has demonstrated its ability to develop new uses for PO-based products, such as
in aircraft deicers, automotive coolants, solvents and CASE. The Company's new
polyols technology serves as the cornerstone for future product innovation.
This technology, first used in 1995 with the successful commercialization of
Acclaim(TM) polyols for the CASE market, produces superior quality products and
enhances the Company's ability to capitalize on opportunities in markets such
as athletic footwear and furniture applications. Additionally, the Company
expects to capitalize on low-cost, proprietary PO-based BDO technology to
capture significant growth in expanding markets for BDO and derivatives.
Reduce Co-product Volatility. Each of the Company's two PO process
technologies yields a co-product--either SM or tertiary butyl alcohol ("TBA").
SM is sold primarily to the merchant market, and TBA is combined with methanol
and sold by the Company as MTBE. The SM and MTBE businesses historically have
experienced volatility due to worldwide supply and demand cycles. In response
to these conditions, the Company seeks to continue to reduce its exposure to
earnings volatility in these businesses through capacity divestiture, long-term
sales and processing agreements, non-market supply contracts and equity and
other arrangements. As of May 15, 1998, the Company had committed approximately
1.1 billion pounds of SM capacity, or 30 percent of its capacity, under long-
term processing arrangements. See "Business--Sales and Marketing."
Disciplined Capital Program. The Company is in the first year of a five-year,
$1.6 billion capital program, which was reduced from $2.3 billion in March 1998
following a rigorous review. The largest part of this capital program is for
construction of a worldscale PO/SM plant in Rotterdam, The Netherlands that is
expected to be completed in 2000. The Company will also expand its existing
polyols capacity by 60 percent and add low cost TDI capacity at its facilities
in the United States and Europe. The Company also plans to construct, adjacent
to the new PO/SM plant in Rotterdam, a 250 million pound per year BDO plant
that is expected to be completed in 2001. Finally, the Company plans to invest
an additional $70 million to upgrade its Lake Charles, Louisiana isocyanates
facility.
Focus on Stockholder Return. In 1997 the Company instituted a compensation
program based on a financial measure called Return on Capital Managed ("RCM")
that is designed to link compensation more closely with stockholder return. RCM
measures the Company's earnings in excess of its cost of capital. A large
portion of both short- and long-term executive compensation has been directly
linked to RCM beginning in 1998. To further align management's interests with
those of the Company's stockholders, Company executives are required to own
shares of Common Stock in an amount equal to one to four times their base
salary, depending on their position with the Company. Directors are also
expected to own shares, and directors who are not employees or officers of the
Company or its affiliates are compensated for service on the Board of Directors
in part with shares of restricted Common Stock.
The Company's principal executive offices are located at 3801 West Chester
Pike, Newtown Square, Pennsylvania 19073-2387 (Telephone: (610) 359-2000).
4
<PAGE>
SELLING STOCKHOLDER; STOCK REPURCHASE
As of the date of this Prospectus, Atlantic Richfield Company, a Delaware
corporation ("ARCO" or the "Selling Stockholder"), owns 80,000,001 shares of
Common Stock, representing approximately 82.2 percent of the outstanding shares
of Common Stock. The Selling Stockholder is one of the largest integrated
enterprises in the petroleum industry.
In connection with and following the Offerings, the Company will repurchase
(the "Stock Repurchase") from the Selling Stockholder, at the price per share
(the "Repurchase Price") paid by the public in the Offerings, a number of
shares such that, upon completion of the Offerings and the Stock Repurchase
(collectively, the "Transaction"), the Selling Stockholder will own 50 percent
of the Company's then-outstanding Common Stock (whether or not the U.S.
Underwriters' over-allotment option is exercised). In no event, however, will
the aggregate amount of the Stock Repurchase exceed $850 million. Assuming the
U.S. Underwriters' over-allotment option is not exercised, the Stock Repurchase
will equal $850 million (or 15,367,232 shares of Common Stock assuming the
Repurchase Price equals the reported last sale price on May 28, 1998). The
exercise of the U.S. Underwriters' over-allotment option will decrease the
number of shares of Common Stock included in the Stock Repurchase by a ratio of
two shares for each share purchased by the U.S. Underwriters pursuant to the
over-allotment option, and correspondingly reduce the amount borrowed under the
Bridge Facility to finance the Stock Repurchase. For example, if the U.S.
Underwriters' over-allotment option is exercised in full, the amount of the
Stock Repurchase will equal $588 million (or 10,631,589 shares of Common Stock
assuming the Repurchase Price equals the reported last sale price on May 28,
1998).
The Company and the Selling Stockholder have entered into a Stockholder
Agreement and a Registration Rights Agreement (each as defined herein), whereby
the Selling Stockholder will be granted certain governance, share ownership and
registration rights upon completion of the Transaction. The Selling Stockholder
currently holds six of the twelve seats on the Company's Board of Directors,
and intends, but is not obligated, to maintain representation on the Board
proportional to its stock ownership. The Stockholder Agreement gives the
Selling Stockholder the right, until such time as it owns less than 20 percent
of the Common Stock, to designate a minimum of two nominees to the Board of
Directors. The Selling Stockholder has also agreed to pay all expenses of the
Offerings; in addition, it has agreed to make a payment of $15 million to the
Company, of which $7.5 million will be paid at June 30, 1998 and the remainder
upon completion of the Transaction. See "Risk Factors--Concentration of Stock
Ownership; Control of the Company" and "Selling Stockholder; Stock Repurchase."
The Company plans to finance the Stock Repurchase with borrowings under the
Bridge Facility (as defined herein). In addition, the Company intends to amend
its Existing Credit Agreement (as defined herein) to reflect the effects of the
Stock Repurchase on its capitalization. The Company plans to refinance the
Bridge Facility using a combination of short, medium and long-term financing,
which may include a tranche of non-convertible trust preferred securities. See
"Description of Certain Indebtedness."
5
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock offered by the
Selling Stockholder.............. 23,678,215 shares (1)
U.S. Offering................... 18,943,000 shares
International Offering.......... 4,735,215 shares
Common Stock to be repurchased
from the Selling Stockholder..... 15,367,232 shares (1)
Common Stock to be outstanding
after the Transaction............ 81,909,107 shares (1)(2)
Use of Proceeds................... All of the shares of Common Stock being
offered in the Offerings are being sold by
the Selling Stockholder. The Company will
not receive any of the proceeds from the
sale of shares in the Offerings. See "Use
of Proceeds."
Dividends......................... The Company's current quarterly dividend
equals $0.70 per share of Common Stock. See
"Risk Factors--Significant Increase in
Leverage; Potential Impact on Capital
Expenditures and Dividends" and "--Tax
Treatment of Dividends."
New York Stock Exchange Symbol.... RCM
</TABLE>
- --------
(1) Assumes the Repurchase Price equals the reported last sale price of the
Common Stock on May 28, 1998 and that there is no exercise of the over-
allotment option granted to the U.S. Underwriters. See "Underwriting." If
such option is exercised in full, the Company will repurchase 10,631,589
shares of Common Stock from the Selling Stockholder, and 86,644,750 shares
of Common Stock will be outstanding after the Transaction. See "Selling
Stockholder; Stock Repurchase."
(2) Does not include an aggregate of up to 8,100,000 shares of Common Stock
reserved for issuance upon exercise of outstanding stock options or
available for grant under the Company's incentive stock plans. In the event
the U.S. Underwriters' over-allotment option is not exercised in full, the
Company intends to establish one or more grantor trusts that will
distribute up to 3,000,000 shares of Common Stock in the second through
fourth years following the Transaction to satisfy the Company's obligations
under employee benefit plans and other obligations to employees. See
"Description of Capital Stock."
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
carefully all of the information set forth or incorporated by reference in this
Prospectus, including the information set forth under "Risk Factors," before
making an investment in the Common Stock.
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary historical consolidated financial data set forth below for the
Company for the five years ended and as of December 31, 1997 have been derived
from the audited financial statements of the Company for such periods. The
summary historical consolidated financial data set forth below for the Company
for the three month periods ended March 31, 1997 and 1998 have been derived
from the unaudited interim financial statements of the Company for such
periods. The pro forma data set forth below reflect pro forma adjustments to
the historical consolidated financial data for the following transactions as if
they had occurred on the first day of the period presented (in the case of the
Operating Data and Other Financial Data) and March 31, 1998 (in the case of the
Balance Sheet Data): (a) the repurchase from the Selling Stockholder of $850
million of Common Stock (equal to 15,367,232 shares of Common Stock assuming
the Repurchase Price equals the reported last sale price of the Common Stock on
May 28, 1998) and (b) the borrowing by the Company of approximately $850
million (the "Borrowing") to finance such repurchase. (These amounts assume no
exercise of the over-allotment option granted to the U.S. Underwriters. See
footnote (1) to the following table.) The results for the three months ended
March 31, 1998 are not necessarily indicative of the results to be expected for
the full year. The pro forma information is unaudited and presented for
comparative purposes only, and does not purport to be indicative of what the
Company's results of operations or financial position would have been if the
Stock Repurchase and Borrowing had occurred on the dates indicated. The
selected historical and pro forma financial data set forth below should be read
in conjunction with the Company's historical financial statements (including
the notes thereto), audited by Coopers & Lybrand L.L.P., included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, and
the Company's unaudited historical financial statements (including the notes
thereto) included in the Company's Quarterly Report on Form 10-Q for the three
months ended March 31, 1998, each of which is incorporated herein by reference.
In the opinion of the Company's management, all adjustments have been made that
are necessary to present fairly the pro forma data. The pro forma adjustments
are based upon available information and upon certain assumptions management
believes are reasonable. These adjustments are directly attributable to the
Transaction and are expected to have a continuing impact on the financial
position and results of operations of the Company. The pro forma data, however,
does not reflect any changes in administrative costs that could potentially
result from the transactions described herein. See also "Capitalization,"
"Transactions Between the Company and the Selling Stockholder," "Selected
Historical and Pro Forma Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" which are included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- -------------------------------------------
PRO PRO
FORMA(1) FORMA(1)
1998 1998 1997 1997 1997 1996 1995 1994 1993
-------- ------ ------ -------- ------ ------ ------ ------ ------
($ IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales and other
operating revenues..... $ 934 $ 934 $1,029 $3,995 $3,995 $3,955 $4,282 $3,423 $3,192
Gross profit............ 214 214 185 765 765 888 1,180 837 739
Restructuring and other
charges................ -- -- -- 175 175 -- -- 30 --
Operating income (2).... 145 145 96 256 256 540 823 475 425
Net income (2)(3)....... 84 92 48 79 111 348 508 269 214
Earnings per share--
basic (2)(4)........... 1.03 0.95 0.50 0.97 1.14 3.60 5.28 2.80 2.23
Earnings per share
excluding 1997
restructuring charges--
basic (2)(4)........... -- -- -- 2.39 2.34 -- -- -- --
Cash dividends per share
(5).................... 0.70 0.70 0.70 2.80 2.80 2.80 2.65 2.50 2.50
Weighted average common
shares outstanding--
basic (in thousands)... 81,839 97,206 96,809 81,604 96,971 96,661 96,295 96,059 95,957
OTHER FINANCIAL DATA:
Depreciation and
amortization........... $ 52 $ 52 $ 57 $ 229 $ 229 $ 222 $ 233 $ 235 $ 223
Capital expenditures
(6).................... 44 44 60 263 263 812 195 186 181
EBITDA (2)(7)........... 205 205 152 477 477 795 1,078 736 639
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------
PRO FORMA(1) ACTUAL
------------ ------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ $ 418 $ 418
Total assets............................................... 4,069 4,069
Minority interest (8)...................................... 206 206
Total debt (3)............................................. 1,756 906
Stockholders' equity (9)................................... 952 1,802
</TABLE>
7
<PAGE>
- --------
(1) Assumes the Repurchase Price equals the reported last sale price of the
Common Stock on May 28, 1998 and that there is no exercise of the over-
allotment option granted to the U.S. Underwriters. See "Selling
Stockholder; Stock Repurchase" and "Underwriting." If such option is
exercised in full, then the amounts set forth in the "Pro Forma" column for
certain line items would be as follows (giving effect to the decrease in
the number of shares of Common Stock repurchased by the Company and the
corresponding decrease in the amount of the Borrowing relating thereto):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Earnings per share--basic................. $1.00 $1.02
Earnings per share excluding 1997
restructuring charges--basic............. -- $2.36
Weighted average common shares
outstanding--basic (in thousands)........ 86,574 86,339
Total debt................................ $1,494 million $1,501 million
Stockholders' equity...................... $1,214 million $1,205 million
</TABLE>
The pro forma calculations do not give effect to the expenses the Company
will incur in connection with the Transaction or the $15 million payment by
the Selling Stockholder to the Company. See "Selling Stockholder; Stock
Repurchase--Stock Repurchase."
(2) Excluding 1997 restructuring charges, certain line items for 1997
(historical) would have been as follows:
<TABLE>
<S> <C>
Operating income................................................ $431 million
Net income...................................................... $227 million
Earnings per share--basic....................................... $2.34
EBITDA.......................................................... $652 million
</TABLE>
(3) Assumes that the Company borrows $850 million of short-term, variable-rate
debt under the Bridge Facility to fund the Stock Repurchase. Based on a
spread over six-month LIBOR on May 28, 1998, the interest rate under the
Bridge Facility is estimated at 6.255 percent. Interest expense is
calculated assuming the principal was outstanding for the entire period.
The calculations also give effect to the estimated fees for the Bridge
Facility. The Company plans to refinance the Bridge Facility using a
combination of short, medium and long-term financing, which may include a
tranche of non-convertible trust preferred securities. This permanent
financing may be at a higher weighted-average interest rate than assumed
under the Bridge Facility.
(4) The earnings per share and weighted average share information was prepared
on a basic earnings per share basis calculated in accordance with a new
accounting standard, "Earnings per Share" (SFAS No. 128), which became
effective for periods ending after December 15, 1997. The Company has
restated prior periods.
(5) After giving effect to the Stock Repurchase, the Company's dividend
requirement would have been reduced by $11 million (assuming 15,367,232
shares at $0.70 per share) for the first quarter of 1998 and by $43 million
(assuming 15,367,232 shares at $2.80 per share) for 1997.
(6) Capital expenditures in 1996 include the acquisition of Olin Corporation's
TDI and aliphatic diisocyanate businesses for $568 million.
(7) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation and amortization. EBITDA is not a
calculation based upon generally accepted accounting principles; however,
the amounts included in the EBITDA calculation are derived from amounts
included in the Company's financial statements. In addition, EBITDA should
not be considered as an alternative to net income or operating income as an
indicator of operating performance, or as an alternative to operating cash
flows as a measure of liquidity. EBITDA amounts may not be fully available
for management's discretionary use due to certain requirements to conserve
funds for capital expenditures, debt service and other commitments. Also,
the EBITDA definition used herein may not be comparable to similarly titled
measures reported by other companies.
(8) Minority interest includes equity contributions associated with the
Company's PO/SM II facility. See "Business--Joint Ventures and Other
Arrangements."
(9) As a result of the Stock Repurchase, stockholders' equity will be reduced
by $850 million. The shares repurchased will be classified as treasury
stock.
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RISK FACTORS
In addition to the other information contained or incorporated by reference
in this Prospectus, prospective investors should consider carefully the
following risk factors before making an investment in the Common Stock.
This Prospectus contains or incorporates by reference statements which
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"). All statements contained
in this Prospectus and in the documents incorporated herein by reference
regarding industry prospects and the Company's expected future financial
position, results of operations, cash flows, dividends, business strategy,
capital expenditures, competitive position, growth opportunities and the
intent, belief, objectives or current expectations of the Company and its
management for the future are forward-looking statements. When used in this
Prospectus or the documents incorporated herein by reference, terms such as
"anticipate," "believe," "estimate," "expect," "intend," "indicate," "may be,"
"objective," "plan," "predict," "project," and "will be" are intended to
identify such statements. Prospective purchasers of the shares offered hereby
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward-looking statements.
Forward-looking statements are based upon management's expectations at the
time they are made and are inherently uncertain. Actual results could differ
materially from those projected in the forward-looking statements as a result
of the risk factors set forth below and the other factors set forth in this
Prospectus or the documents incorporated herein by reference generally, many
of which are beyond the control of the Company. These factors include changes
in market prices, market demand, raw material costs or supply arrangements;
the effect of the additional borrowings for the Stock Repurchase on the
Company, including the potential impact on its capital expenditures and
dividends; increased costs of operation; loss of business from major
customers; unanticipated expenses; changes in financial markets, interest
rates, and capital market conditions; changes in general economic, business
and industry conditions; increased competition; the Company's ability to
implement cost reductions; the timing and scope of technological advances by
the Company or its competitors; the Company's ability to complete construction
projects on schedule; adverse developments in foreign markets; environmental
or other regulatory developments; legislative changes; and other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission (the "Commission"), including those risks set forth in the
Company's Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1997. The Company cautions the reader that the factors described herein
may not be exhaustive. The Company assumes no obligation to update any
forward-looking statements contained or incorporated by reference in this
Prospectus.
INDUSTRY CYCLICALITY AND OVERCAPACITY
The Company's historical operating results reflect the cyclical and volatile
nature of the chemical industry. The industry is mature and capital intensive,
and industry margins are sensitive to supply and demand cycles. Due to the
commodity nature of the Company's chemical products in general, the Company is
not necessarily able to protect its market position by product differentiation
and it is not able to pass on cost increases to its customers to the extent
its customers do not pass on such costs or to the extent customer demand is
weak or there is industry overcapacity. Accordingly, increases in raw material
prices and other costs do not necessarily correlate with changes in product
prices, either in the direction of the price change or in absolute magnitude.
As a result, the Company's earnings may be subject to significant
fluctuations. In general, external factors beyond the Company's control, such
as general economic conditions, competitor action, international events and
circumstances, and governmental regulation in the United States and abroad,
can cause volatility in feedstock prices (see "--Raw Material Prices and
Availability"), as well as fluctuations in demand for the Company's products,
product prices, volumes and margins, and can magnify the impact of economic
cycles on the Company's business. A number of the Company's products are
highly dependent on the durable goods markets, such as housing and automotive.
These markets are particularly cyclical.
The chemical industry historically has experienced alternating periods of
tight supply, causing prices and profit margins to increase, followed by
periods of substantial capacity additions resulting in oversupply and
declining prices and profit margins. For example, the styrene industry has
experienced significant profitability
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swings caused by demand/supply cyclicality. The cyclicality of the chemical
industry is responsible in part for the significant variations in the
Company's gross profits during the period from 1993 to 1997. See "Summary
Historical and Pro Forma Financial Data" and "Selected Historical and Pro
Forma Financial Data."
Publicly available information forecasts that there will be significant
industry capacity increases over the next five years. During this period, PO
capacity is expected to increase by a total of 2 billion pounds, or 18 percent
of current worldwide capacity, SM by a total of 16.2 billion pounds, or 34
percent, MTBE by a total of 8.1 billion pounds, or 15 percent, and TDI by a
total of 700 million pounds, or 22 percent. During the same time period, the
Company's major capacity expansions include 625 million pounds of PO, 1,400
million pounds of SM and 800 million pounds of polyols. There can be no
assurance that future growth in demand for these products will be sufficient
to utilize this additional, or even current, capacity. Excess industry
capacity, to the extent it occurs, may depress the Company's volumes and
margins. Furthermore, there can be no assurance that future conditions will
not be aggravated by unanticipated industry capacity additions.
INTENSE COMPETITION
Competition within the Company's segment of the chemical industry is intense
and is affected by a variety of factors, including product price, reliability
of product supply, technical support, customer service, product quality, and
availability to the market of potential substitute materials. The Company's
major competitors are some of the largest chemical companies in the world
including Dow Chemical Company ("Dow"), Bayer AG ("Bayer"), BASF AG ("BASF"),
Shell Chemical ("Shell") and Saudi Basic Industries Corp. ("SABIC"), each of
which has substantially greater resources than the Company. Conventional
technology for SM, MTBE and polyether polyols production is widely available,
and PO indirect oxidation technology is currently available to Shell, Huntsman
Corporation and Repsol Quimica, S.A. ("Repsol Quimica"), and may be more
widely available in the future. On December 15, 1997, the Company settled a
dispute with Repsol Quimica concerning the use by Repsol Quimica of technology
for the production of PO and SM. See "Business--Other Litigation." Several key
competitors operate in an integrated fashion, whereas the Company is a buyer
of its key feedstocks, which generally means that the Company is more affected
by the volatile nature of feedstock prices and supply. Changes in the
competitive environment, including the emergence of new competitors, the rate
of capacity additions by competitors, the intensification of price competition
in the Company's markets, the introductions of new or substitute products by
competitors and technological innovations by competitors, could have a
materially adverse effect on the Company's future results. See "Business--
Competition."
RAW MATERIAL PRICES AND AVAILABILITY
Raw materials and utility costs represent more than half of the Company's
product manufacturing costs. Therefore, an adequate supply of raw materials at
reasonable prices is critical to the success of the Company's business. The
raw materials used by the Company--propylene, butanes, ethylene, benzene,
methanol and toluene--are all commodity petrochemicals and the price of each
can fluctuate widely for a variety of reasons, including changes in
availability because of major capacity additions or significant plant
operating problems. See "--Industry Cyclicality and Overcapacity" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition."
MTBE LEGISLATIVE RISKS; DEPENDENCE ON SELLING STOCKHOLDER FOR PROFITS FROM
MTBE SALES
Pending legislative initiatives may materially adversely affect the
Company's MTBE sales, including under take-or-pay sales contracts with the
Selling Stockholder (collectively, the "ARCO Products Contract") pursuant to
which the Company derived 6.5 percent of total revenues in 1997. The price of
MTBE under the ARCO Products Contract is well above current spot market
levels. Based on domestic spot market prices for MTBE for 1997, the ARCO
Products Contract contributed approximately $70 million of incremental pre-tax
margin above spot prices. The Company derives a significant percentage of its
total revenues (21 percent in 1997) from the sale of MTBE. Sales of MTBE by
the Company, other than under the ARCO Products Contract, were not profitable
in the first quarter of 1998 and were marginally unprofitable in 1997.
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The presence of MTBE in some water supplies in California and other states
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. There have been claims that MTBE travels more rapidly through soil, and
is more soluble in water, than most other gasoline components, and is
therefore more difficult and more costly to remediate. 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 and other states or restrict the use
of MTBE. Such legislative initiatives could materially reduce demand for MTBE
in California and other states and could in the longer term adversely impact
MTBE demand throughout the United States and elsewhere. Recently, there was
filed in California a class action lawsuit against refiners and marketers of
gasoline, including the Selling Stockholder (but not naming the Company), for
allegedly contaminating drinking water and asking for punitive damages. The
Selling Stockholder sells more gasoline in California than in any other state.
If legislative initiatives were enacted, the Selling Stockholder might
attempt to invoke the force majeure provision in the ARCO Products Contract in
order to reduce the quantities of MTBE it purchases under, or to terminate,
the ARCO Products Contract. The force majeure provision in the ARCO Products
Contract provides that if any governmental law or regulation impedes,
restricts or affects either party's ability to manufacture, deliver, receive
or consume MTBE or otherwise perform under the ARCO Products Contract (other
than the Selling Stockholder's ability to pay), then such party has the right
to reduce, in part or in full, delivery or receipt of MTBE under the contract.
A significant reduction in the Company's sales under the ARCO Products
Contract would have a material adverse effect on the Company's results of
operations, given the favorable pricing under the ARCO Products Contract. The
ARCO Products Contract has an initial term expiring December 31, 2002.
SIGNIFICANT INCREASE IN LEVERAGE; POTENTIAL IMPACT ON CAPITAL EXPENDITURES AND
DIVIDENDS
Upon consummation of the Stock Repurchase, the Company will have a
significant amount of debt outstanding and will have significant debt service
requirements. As of March 31, 1998, on a pro forma basis after giving effect
to the Stock Repurchase as if the Stock Repurchase had occurred on such date,
the Company would have had outstanding debt of approximately $1.8 billion and
stockholders' equity of $952 million. The Company is entering into an $850
million credit facility (the "Bridge Facility") in order to fund the Stock
Repurchase. In addition, the Company intends to amend its Existing Credit
Agreement to reflect the effects of the Stock Repurchase on the Company's
capitalization. See "Capitalization" and "Description of Certain
Indebtedness." The Bridge Facility matures 364 days after the execution of
definitive credit agreements (which is expected in June 1998). There can be no
assurances that the Company will be able to refinance the Bridge Facility on
satisfactory terms.
The amount of debt the Company will incur in connection with the Stock
Repurchase, together with its outstanding debt, significantly exceeds the
Company's historical leverage. The Company's historical results and financial
condition do not, accordingly, reflect the potential constraints the increase
in leverage may impose on the Company. The Company's significant increase in
leverage could have the following adverse effects, among others, on the
Company: (i) the leverage may make the Company more vulnerable to industry
cyclicality and increases in raw materials costs and may limit its ability to
withstand competitive pressures and any adverse changes in environmental and
other government regulation, (ii) a portion of cash flow from operations must
be dedicated to the payment of the principal of and interest on debt, (iii)
additional financing may not be available to the Company upon terms as
favorable as those currently available to the Company, which may limit the
Company's business activity, including its ability to effect potential
acquisitions, (iv) the Company may not be able to maintain its current capital
expenditure program or dividend rate and (v) the Company may take further cost
reduction measures which may result in charges to earnings. The Company's
business is capital intensive, with the Company having a five-year capital
expenditure plan equal to $1.6 billion. The Company's ability to continue to
satisfy its capital expenditure requirements may be limited by the significant
increase in the Company's outstanding debt as a result of the Stock
Repurchase. The Existing Credit Agreement does, and the Bridge Facility will,
contain covenants that, among other things, require the Company to satisfy a
minimum net worth test and restrict the Company's ability to: (i) create liens
on its properties; (ii) merge, consolidate or sell substantially all of its
assets; (iii) engage in sale and leaseback transactions; and (iv) engage in
transactions with its affiliates.
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The Company's ability to declare and pay dividends in the future may be
affected by the significant increase in the Company's outstanding debt as a
result of the Stock Repurchase. The declaration and payment of future
dividends and the amount thereof will depend on the Company's results of
operations, debt service and capital expenditure requirements, financial
condition, cash requirements and future prospects, as well as other factors
deemed relevant by the Board of Directors. Since the Company has not
previously operated with the level of debt that will be outstanding after the
Stock Repurchase, there can be no assurance that the Company will maintain its
current dividend rate. See "--Concentration of Stock Ownership; Control of the
Company."
The ability of the Company to meet its debt service obligations and capital
expenditure needs, maintain its dividend and comply with the covenants and
financial requirements in the Bridge Facility and the amended Existing Credit
Agreement will largely depend on the future performance of the Company, which
will be subject to prevailing economic and competitive conditions and to other
factors beyond its control. See "--Industry Cyclicality and Overcapacity" and
"--Raw Material Prices and Availability." The breach of any of the covenants
or financial requirements in the Bridge Facility or the amended Existing
Credit Agreement could result in a default thereunder, which would permit the
lenders to declare all amounts outstanding thereunder to be due and payable
and to terminate future lending commitments.
TAX TREATMENT OF DIVIDENDS
To the extent that the amount of any dividends paid on the Common Stock
exceeds the Company's allocable current or accumulated earnings and profits
for federal income tax purposes, such distributions will be treated as a
nontaxable return of capital (rather than as ordinary dividend income) and
will be applied against and reduce the adjusted basis of the Common Stock for
a holder, thus increasing the amount of gain (or reducing the amount of loss)
which may be realized by such holder upon sale or exchange of such Common
Stock. The amount of any such distribution which exceeds the adjusted basis of
the Common Stock for a holder generally will be taxed as capital gain.
Although the Company does not expect to have accumulated earnings and profits
for tax purposes immediately following and as a result of the Transaction,
current earnings and profits are computed at the close of the taxable year in
which the distribution is paid. As a result, whether any dividends on the
Common Stock will be treated as a return of capital or ordinary income will
depend on the amount of earnings and profits for tax purposes that are
generated by the Company in 1998 and future years. The Company believes that
it is likely that a significant portion of any dividends paid in 1998
following the Transaction will be treated as a return of capital. See "--
Significant Increase in Leverage; Potential Impact on Capital Expenditures and
Dividends" and "--Concentration of Stock Ownership; Control of the Company."
OPERATING HAZARDS
The occurrence of material operating problems, including but not limited to
the events described below, may have a material adverse effect on the
productivity and profitability of a particular manufacturing facility, or on
the Company as a whole, during the period of such operational difficulties.
The Company's revenues are dependent on the continued operation of its various
production facilities (including the ability to complete construction projects
on schedule). The Company's operations are subject to the usual hazards
associated with chemical manufacturing and the related storage and
transportation of feedstocks, products and wastes, including pipeline leaks
and ruptures, explosions, fires, inclement weather and natural disasters,
mechanical failure, unscheduled downtime, transportation interruptions,
remediation complications, chemical spills, discharges or releases of toxic or
hazardous substances or gases, storage tank leaks, and other environmental
risks. These hazards can cause personal injury and loss of life, severe damage
to or destruction of property and equipment and environmental damage, and may
result in suspension of operations and the imposition of civil or criminal
penalties. Furthermore, the Company is also subject to present and future
claims with respect to workplace exposure, workers' compensation and other
matters arising from events both prior to and after the Offerings. The Company
maintains property, business interruption and casualty insurance which it
believes is in accordance with customary industry practices, but it is not
fully insured against all potential hazards incident to its business.
ENVIRONMENTAL CONSIDERATIONS
The Company is subject to federal, state, local, and foreign environmental
laws and regulations concerning emissions to the air, discharges to surface
and subsurface waters, and other releases into the environment, and
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the generation, handling, storage, transportation, treatment and disposal of
waste materials. The Company is 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.
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. 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 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. The Company also incurs remediation
and pollution control and disposition expenses. 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. In addition to the anticipated capital expenditures identified above,
at March 31, 1998, the Company's accrued environmental liability totaled $43
million, which reflected the Company's latest assessment of potential future
remediation costs associated with known existing sites. 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 liability. The Company estimates that the upper range of those possible
loss contingencies should not exceed the amount accrued by more than $65
million. The Company's estimates of its possible loss contingencies do not
include any amounts for remediation that would be required if new sites are
discovered or if past or future operations or waste disposal practices result
in claims of injury by employees or the public related to exposure to
hazardous materials. Accordingly, there can be no assurance that remediation
costs for such new sites or damages claims related to employee or public
exposure to hazardous materials will not, individually or in the aggregate,
result in a material adverse effect on the Company. In addition, a
catastrophic event at the Company's facilities could result in liabilities to
the Company substantially in excess of its insurance coverage. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Environmental."
FOREIGN OPERATIONS, COUNTRY RISKS AND EXCHANGE RATE FLUCTUATIONS
Approximately 50 percent of the Company's fiscal 1997 revenues were derived
from sales outside the U.S. and export sales. International operations and
exports to foreign markets are subject to a number of risks, including
currency exchange rate fluctuations, trade barriers, exchange controls,
national and regional labor strikes, political risks and risks of increases in
duties and taxes, as well as changes in laws and policies governing operations
of foreign-based companies. Although the Company uses various types of foreign
currency forward, option and swap contracts to reduce foreign exchange
exposures with respect to revenues, capital commitments and other expenses
denominated in foreign currencies, there can be no assurance that such hedging
techniques will protect the Company's reported results against such risks or
that the Company will not incur material losses on such contracts. In
addition, earnings of foreign subsidiaries and intercompany payments may be
subject to foreign income tax rules that may reduce cash flow available to
meet required debt service and other obligations of the Company. For a
discussion of the impact of the Asian economic crisis on the Company, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Years Ended December 31, 1997, 1996 and
1995--Other." See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition--Risk Management."
CONCENTRATION OF STOCK OWNERSHIP; CONTROL OF THE COMPANY
Upon completion of the Transaction, the Selling Stockholder will own 50
percent of the shares of Common Stock then-outstanding. The Selling
Stockholder currently holds six of the twelve seats on the Company's Board
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of Directors, and intends, but is not obligated, to maintain representation on
the Board proportional to its stock ownership. See "Selling Stockholder; Stock
Repurchase." The Selling Stockholder will continue to be deemed to be a
controlling stockholder for corporate and securities law purposes, with the
ability (should it determine to do so) to exercise control over the Company's
corporate policies, the persons constituting its management and Board of
Directors and the outcome of corporate actions requiring stockholder approval.
The Selling Stockholder's 50 percent ownership position will effectively
prevent a change of control of the Company without the Selling Stockholder's
consent.
In conjunction with the establishment of the Company by the Selling
Stockholder in 1987, the Company and the Selling Stockholder entered into a
number of agreements for the purpose of defining the ongoing relationship
between them. These agreements were developed in connection with the
establishment of the Company by the Selling Stockholder and, therefore, were
not the result of arms-length negotiations between independent parties.
Thereafter, additional or modified agreements, arrangements, and transactions
were negotiated and entered into by the Company, the Selling Stockholder and
their respective subsidiaries.
In connection with the Transaction, the Company and the Selling Stockholder
have entered into the Stockholder Agreement and the Registration Rights
Agreement, which will become effective simultaneously with the consummation of
the Offerings. Under the Stockholders Agreement, (i) the Selling Stockholder
will have the right to designate a minimum of two individuals to be nominated
by the Company for election to the Board of Directors until such time as the
Selling Stockholder owns less than 20 percent of the Common Stock; (ii) the
Selling Stockholder will have rights to maintain its ownership at exactly 50
percent of the Common Stock for the first year following the Transaction, to
prevent its ownership from exceeding 50 percent thereafter and to require the
Company to obtain majority stockholder approval prior to issuing equity, other
than pursuant to stockholder approved employee benefit plans, until such time
as the Selling Stockholder owns less than 30 percent of the Common Stock; and
(iii) the Company has agreed to restrictions on amendments of its By-Laws
adversely affecting stockholder rights and on its ability to effect a dilutive
recapitalization (which rights are assignable to a transferee of the Selling
Stockholder of shares representing 20 percent or more of the Common Stock) and
to certain restrictions on its ability to enter into agreements with change of
control provisions. See "Selling Stockholder; Stock Repurchase--Other
Agreements." Pursuant to the Registration Rights Agreement, the Company will
grant the Selling Stockholder the right to seven "demand registrations" (as
defined) and unlimited "piggyback registrations" (as defined) and will
covenant to take certain actions, provide certain indemnities and pay certain
expenses in connection therewith.
As part of the Transaction, the Board of Directors has adopted a new
stockholder rights agreement (the "Rights Agreement"), effective upon the
consummation of the Offerings, which may have the effect of discouraging
unsolicited acquisition proposals. The Rights Agreement exempts the Selling
Stockholder and any transferee that acquires from the Selling Stockholder
shares representing 20 percent or more of the Common Stock from its operation
(subject to certain conditions and limitations) until such time as the Selling
Stockholder or such transferee owns less than 20 percent of the Company's
then-outstanding Common Stock. The Rights Agreement includes a provision
permitting a "Qualifying Offer" to be made without prior Board approval. A
"Qualifying Offer" means a tender offer by an eligible purchaser of Common
Stock that, for the first two years after a purchase from the Selling
Stockholder, offers the same consideration to all stockholders as it paid to
the Selling Stockholder, subject to certain limitations. See "Selling
Stockholder; Stock Repurchase--Other Agreements," "Transactions Between the
Company and the Selling Stockholder--Agreements with the Selling Stockholder"
and "Description of Capital Stock--Rights Agreement."
SHARES ELIGIBLE FOR FUTURE SALE
Following the Transaction, the sale of a substantial number of shares of
Common Stock by the Selling Stockholder, the Company or the Company's
executive officers and directors could adversely affect the market price of
the Common Stock. See "Shares Eligible for Future Sale."
The Company, its executive officers and directors and the Selling
Stockholder have agreed that, subject to certain exceptions, for a period of
150 days from the date of this Prospectus for the Company and the Selling
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Stockholder and 90 days for executive officers and directors of the Company
(the "Lock-up Period"), they will not, without the prior written consent of
Smith Barney Inc., offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, or announce the offering of, or register, cause to
be registered or announce the intended registration of, any other shares of
Common Stock or any securities convertible into, or exercisable or
exchangeable for, Common Stock. See "Underwriting." After expiration of the
Lock-up Period, the Company, its executive officers and directors and the
Selling Stockholder may offer and sell shares of Common Stock without regard
to the foregoing limitations (subject, in the case of sales in the public
market, to compliance with the registration requirements of the Securities Act
or, with respect to the Company's executive officers and directors and the
Selling Stockholder, Rule 144 under the Securities Act).
Pursuant to the Registration Rights Agreement, the Selling Stockholder has
the right to seven demand registrations at its expense and unlimited piggyback
registrations. The Company is responsible for certain expenses of the Selling
Stockholder incurred in connection with any such piggyback registration. The
Selling Stockholder's registration rights are assignable to third parties,
subject to certain limitations. See "Selling Stockholder; Stock Repurchase--
Other Agreements--Registration Rights Agreement."
YEAR 2000
The equipment, plant operations, business systems and other computer-based
activities of the Company and its suppliers and customers may be affected by
Year 2000 problems. The Company has substantially completed an assessment of
its needs and the related costs associated with modifying its computer
software and other information systems to recognize the Year 2000 in various
production and business applications. Year 2000 problems result from computer
applications written with date fields of two digits, rather than four digits,
thus resulting in the inability of such applications to distinguish between
the year 1900 and 2000. The Company intends to complete most of its required
system modifications by the first quarter of 1999; however, certain efforts
involving plant process controls may be scheduled to occur with plant
turnarounds in 1999.
The Company has begun the process of dealing with its significant suppliers
and customers to determine the extent to which the Company is vulnerable to
those third parties' failure to remedy their own Year 2000 compliance
problems. However, there can be no assurance that the Company will identify
all Year 2000 problems of its suppliers or customers in advance of their
occurrence, or that the Company will be able to successfully remedy problems
that are discovered.
The Company does not expect Year 2000 compliance to have a material adverse
effect on its financial condition and results of operations. However, there
can be no assurance that the required modifications will be successfully
completed or that additional expenditures, which could be material, will not
be necessary.
ANTI-TAKEOVER DEFENSES
General. Certain provisions of the Restated Certificate of Incorporation and
By-Laws could make it more difficult for a third party to acquire, and could
discourage a third party from attempting to acquire, control of the Company.
Certain of these provisions allow the Company to issue preferred stock with
rights senior to those of the Common Stock without any further vote or action
by the stockholders and other requirements which could make it more difficult
for stockholders to effect certain corporate actions. The issuance of
preferred stock could decrease the amount of earnings and assets available for
distribution to the holders of Common Stock or could adversely affect the
rights and powers of the holders of the Common Stock. The Company also has a
Change of Control Plan (the "Plan") which provides for the acceleration of
certain benefits and the payment of compensation and other allowances upon a
change of control of the Company and subsequent termination of employment
(including constructive termination) of executives, senior managers and
employees. See "Description of Capital Stock--Change of Control Matters." The
Company's Restated Certificate of Incorporation, By-Laws and the Plan could
limit the price that certain investors might be willing to pay in the future
for shares of the Common Stock and may have the effect of delaying or
preventing a change in control of the Company.
15
<PAGE>
New Rights Agreement. As part of the Transaction, prior to the consummation
of the Offerings, the Board of Directors of the Company adopted a Rights
Agreement, to be effective upon the consummation of the Offerings, that may
have the effect of discouraging, delaying or preventing a change in control of
the Company or unsolicited acquisition proposals. See "--Concentration of
Stock Ownership; Control of the Company" and "Description of Capital Stock--
Rights Agreement."
SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly results may vary significantly depending on various
factors, most of which are beyond the Company's control, including changes in
product prices, product demand, raw material costs or supply arrangements;
regional business activities, including a lower level of economic activity in
Europe during the summer; adverse developments in foreign markets;
fluctuations in shipments to customers; foreign exchange fluctuations;
unanticipated expenses; changes in interest rates; and the scheduling of plant
turnarounds which are expensed when incurred. The Company's historical
quarterly earnings fluctuated significantly in each of 1997 and 1996. See Note
23 to the Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, which is
incorporated by reference herein.
16
<PAGE>
MARKET FOR THE COMPANY'S COMMON STOCK
The Common Stock is listed on the New York Stock Exchange. The reported high
and low sales prices per share of the Common Stock on the New York Stock
Exchange from January 1, 1996 through May 28, 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......................................... 50 9/16 46 3/16
Second Quarter (through May 28)....................... 58 1/4 47 3/16
</TABLE>
On May 28, 1998, the closing price of the Common Stock was $55 5/16 per
share.
DIVIDENDS
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 0.70(1)
</TABLE>
- --------
(1) On April 16, 1998, the Company declared a dividend of $0.70 per share of
Common Stock, payable on June 5, 1998 to stockholders of record on May 8,
1998.
The declaration and payment of future dividends and the amount thereof will
be dependent on the Company's results of operations, debt service and capital
expenditure requirements, financial condition, cash requirements and future
prospects, as well as on other factors deemed relevant by the Board of
Directors. It is the intention of the Company to declare and pay quarterly
cash dividends on its Common Stock at its current level. See "Risk Factors--
Significant Increase in Leverage; Potential Impact on Capital Expenditures and
Dividends" and "--Tax Treatment of Dividends."
USE OF PROCEEDS
All of the shares of Common Stock being sold in the Offerings are being sold
by the Selling Stockholder. The Company will not receive any proceeds from the
sale of shares of Common Stock by the Selling Stockholder in the Offerings.
17
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1998, and as adjusted for the Stock Repurchase and the
incurrence of indebtedness by the Company to finance the Stock Repurchase. See
"Description of Certain Indebtedness." This table should be read in
conjunction with the Company's financial statements (including the notes
thereto), audited by Coopers & Lybrand L.L.P., included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, and the
Company's unaudited financial statements (including the notes thereto)
included in the Company's Quarterly Report on Form 10-Q for the three months
ended March 31, 1998, each of which is incorporated herein by reference. See
"Selected Historical and Pro Forma Financial Data."
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED(5)
------ --------------
($ IN MILLIONS)
<S> <C> <C>
Notes payable (1)....................................... $ 110 $ 110
Existing Credit Agreement............................... -- --
Bridge Facility (2)..................................... -- 850
Long-term debt: (3)
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...................................... 144 144
French bank loans..................................... 19 19
Other................................................. 9 9
------ ------
Total debt (2)...................................... 906 1,756
------ ------
Minority interest (4)................................... 206 206
------ ------
Stockholders' equity: (5)(6)
Common Stock, $1 par value; authorized: 250,000,000
shares; issued: 99,550,001 shares; outstanding:
97,242,729 shares (actual); 81,875,497 shares (as
adjusted)............................................ 100 100
Additional paid-in capital............................ 881 881
Retained earnings..................................... 926 926
Foreign currency translation.......................... (33) (33)
Treasury stock, at cost: 2,307,272 shares (actual);
17,674,504 shares (as adjusted)...................... (72) (922)
------ ------
Total stockholders' equity.......................... 1,802 952
------ ------
Total capitalization.............................. 2,914 2,914
====== ======
</TABLE>
- --------
(1) At March 31, 1998, notes payable consisted principally of commercial
paper, net of unamortized discount.
(2) The Company plans to refinance the Bridge Facility using a combination of
short, medium and long-term financing, which may include a tranche of non-
convertible trust preferred securities.
(3) Includes current maturities.
(4) Minority interest includes equity contributions associated with the
Company's PO/SM II facility. See "Business--Joint Ventures and Other
Arrangements."
(5) Assumes the Repurchase Price equals the reported last sale price of the
Common Stock on May 28, 1998 and that there is no exercise of the over-
allotment option granted to the U.S. Underwriters. See "Selling
Stockholder; Stock Repurchase" and "Underwriting." If such option is
exercised in full, then the amounts set forth in the "As Adjusted" column
for total debt and total stockholders' equity (giving effect to the
decrease in the number of shares of Common Stock repurchased by the
Company and the corresponding decrease in the amount of the Borrowing
relating thereto) would be $1,494 million and $1,214 million,
respectively.
(6) Upon the consummation of the Transaction, the Company's Restated
Certificate of Incorporation, as amended, will authorize the Company to
issue 510,000,000 shares consisting of (i) 250,000,000 shares of Common
Stock, (ii) 5,000,000 shares of Non-Voting Common Stock, (iii) 5,000,000
shares of Class A Preferred Stock, and (iv) 250,000,000 shares of Class B
Preferred Stock. This table does not include an aggregate of up to
8,100,000 shares of Common Stock reserved for issuance upon exercise of
outstanding stock options or available for grant under the Company's
incentive stock plans. In the event the U.S. Underwriters' over-allotment
option is not exercised in full, the Company intends to establish one or
more grantor trusts that will distribute up to 3,000,000 shares of Common
Stock in the second through fourth years following the Transaction to
satisfy the Company's obligations under employee benefit plans and other
obligations to employees. See "Description of Capital Stock."
18
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The selected historical consolidated financial data set forth below for the
Company for the five years ended and as of December 31, 1997 have been derived
from the audited financial statements of the Company for such periods. The
summary historical consolidated financial data set forth below for the Company
for the three month periods ended March 31, 1997 and 1998 have been derived
from the unaudited interim financial statements of the Company for such
periods. The selected pro forma data set forth below reflect adjustments to
the historical consolidated financial data for the following transactions as
if they had occurred on the first day of the period presented (in the case of
the Operating Data and Other Financial Data) and March 31, 1998 or December
31, 1997 (in the case of the Balance Sheet Data): (a) the repurchase from the
Selling Stockholder of $850 million of Common Stock (equal to 15,367,232
shares of Common Stock assuming the Repurchase Price equals the reported last
sale price of the Common Stock on May 28, 1998) and (b) the Borrowing. (These
amounts assume no exercise of the over-allotment option granted to the U.S.
Underwriters. See footnote (1) to the following table.) The results for the
three months ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full year. The pro forma information is
unaudited and presented for comparative purposes only, and does not purport to
be indicative of what the Company's results of operations or financial
position would have been if the Stock Repurchase and Borrowing had occurred on
the dates indicated. The selected historical and pro forma financial data set
forth below should be read in conjunction with the Company's historical
financial statements (including the notes thereto), audited by Coopers &
Lybrand L.L.P., included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and the Company's unaudited historical financial
statements (including the notes thereto) included in the Company's Quarterly
Report on Form 10-Q for the three months ended March 31, 1998, each of which
is incorporated herein by reference. In the opinion of the Company's
management, all adjustments have been made that are necessary to present
fairly the pro forma data. The pro forma adjustments are based upon available
information and upon certain assumptions management believes are reasonable.
These adjustments are directly attributable to the Transaction and are
expected to have a continuing impact on the financial position and results of
operations of the Company. The pro forma data, however, does not reflect any
changes in administrative costs that could potentially result from the
transactions described herein. See also "Capitalization," "Transactions
Between the Company and the Selling Stockholder" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" which are
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------- ---------------------------------------------------
PRO PRO
FORMA(1) FORMA(1)
1998 1998 1997 1997 1997 1996 1995 1994 1993
-------- ------- ------- -------- ------- ------- ------- ------- -------
($ IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales and other
operating revenues..... $ 934 $ 934 $ 1,029 $ 3,995 $ 3,995 $ 3,955 $ 4,282 $ 3,423 $ 3,192
Gross profit............ 214 214 185 765 765 888 1,180 837 739
Selling, general and
administrative
expenses............... 52 52 68 252 252 267 278 256 242
Research and
development............ 17 17 21 82 82 81 79 76 72
Restructuring and other
charges................ -- -- -- 175 175 -- -- 30 --
Operating income (2).... 145 145 96 256 256 540 823 475 425
Interest expense (5).... 31 18 22 133 80 86 89 85 105
Other expense (income),
net (3)................ (8) (8) 1 8 8 (33) (22) (26) 9
Income before income
taxes.................. 122 135 73 115 168 487 756 416 311
Provision for income
taxes (4).............. 38 43 25 36 57 139 248 147 97
Net income (2)(5)....... 84 92 48 79 111 348 508 269 214
Earnings per share: (6)
Basic (2).............. 1.03 0.95 0.50 0.97 1.14 3.60 5.28 2.80 2.23
Diluted (2)............ 1.02 0.95 0.50 0.96 1.14 3.59 5.26 2.80 2.23
Earnings per share
excluding 1997
restructuring charges:
(6)
Basic (2).............. -- -- -- 2.39 2.34 -- -- -- --
Diluted (2)............ -- -- -- 2.39 2.34 -- -- -- --
Cash dividends per share
(7).................... 0.70 0.70 0.70 2.80 2.80 2.80 2.65 2.50 2.50
Weighted average common
shares outstanding--
basic (in thousands)... 81,839 97,206 96,809 81,604 96,971 96,661 96,295 96,059 95,957
--diluted........... 81,979 97,346 96,942 81,715 97,082 96,897 96,458 96,219 96,071
OTHER FINANCIAL DATA:
Depreciation and
amortization........... $ 52 $ 52 $ 57 $ 229 $ 229 $ 222 $ 233 $ 235 $ 223
Capital expenditures
(8).................... 44 44 60 263 263 812 195 186 181
EBITDA (2)(9)........... 205 205 152 477 477 795 1,078 736 639
BALANCE SHEET DATA:
Working capital......... $ 418 $ 418 $ 487 $ 387 $ 387 $ 500 $ 793 $ 579 $ 456
Total assets............ 4,069 4,069 4,363 4,116 4,116 4,394 4,135 3,737 3,502
Minority interest (10).. 206 206 213 219 219 185 123 124 123
Total debt (5)(11)...... 1,756 906 1,024 1,763 913 1,019 912 936 959
Stockholders' equity
(12)................... 952 1,802 1,959 943 1,793 2,014 1,969 1,659 1,576
</TABLE>
19
<PAGE>
- --------
(1) Assumes the Repurchase Price equals the reported last sale price of the
Common Stock on May 28, 1998 and that there is no exercise of the over-
allotment option granted to the U.S. Underwriters. See "Selling
Stockholder; Stock Repurchase" and "Underwriting." If such option is
exercised in full, then the amounts set forth in the "Pro Forma" column
for certain line items would be as follows (giving effect to the decrease
in the number of shares of Common Stock repurchased by the Company and the
corresponding decrease in the amount of the Borrowing relating thereto):
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, 1998 DECEMBER 31, 1997
-------------------- -----------------
<S> <C> <C>
Earnings per share
Basic.............................. $ 1.00 $ 1.02
Diluted............................ $ 1.00 $ 1.02
Weighted average common shares
outstanding
--basic (in thousands)............ 86,574 86,339
--diluted.......................... 86,714 86,450
Total debt........................... $1,494 million $1,501 million
Stockholders' equity................. $1,214 million $1,205 million
</TABLE>
The pro forma calculations do not give effect to the expenses the Company
will incur in connection with the Transaction or the $15 million payment by
the Selling Stockholder to the Company. See "Selling Stockholder; Stock
Repurchase--Stock Repurchase."
(2) Excluding 1997 restructuring charges, certain line items for 1997
(historical) would have been as follows:
<TABLE>
<S> <C>
Operating income............................................. $431 million
Net income................................................... $227 million
Earnings per share--basic.................................... $2.34
Earnings per share--diluted.................................. $2.34
EBITDA....................................................... $652 million
</TABLE>
(3) Primarily interest income, earnings from investment in affiliates, and
foreign exchange gains and losses.
(4) The tax benefit on the interest expense per (5) below is calculated using
an incremental tax rate of 39 percent.
(5) Assumes that the Company borrows $850 million of short-term, variable-rate
debt under the Bridge Facility to fund the Stock Repurchase. Based on a
spread over the six-month LIBOR on May 28, 1998, the interest rate under
the Bridge Facility is estimated at 6.255 percent. Interest expense is
calculated assuming the principal was outstanding for the entire period.
The calculations also give effect to the estimated fees for the Bridge
Facility. The Company plans to refinance the Bridge Facility using a
combination of short, medium and long-term financing, which may include a
tranche of non-convertible trust preferred securities. This permanent
financing may be at a higher weighted-average interest rate than assumed
under the Bridge Facility.
(6) The earnings per share and weighted average share information was prepared
on a basic and diluted earnings per share basis calculated in accordance
with a new accounting standard, "Earnings per Share" (SFAS No. 128), which
became effective for periods ending after December 15, 1997. The Company
has restated prior periods.
(7) After giving effect to the Stock Repurchase, the Company's dividend
requirement would have been reduced by $11 million (assuming 15,367,232
shares at $0.70 per share) for the first quarter of 1998 and by $43
million (assuming 15,367,232 shares at $2.80 per share) for 1997.
(8) Capital expenditures in 1996 include the acquisition of Olin Corporation's
TDI and aliphatic diisocyanate businesses for $568 million.
(9) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation and amortization. EBITDA is not a
calculation based upon generally accepted accounting principles; however,
the amounts included in the EBITDA calculation are derived from amounts
included in the Company's financial statements. In addition, EBITDA should
not be considered as an alternative to net income or operating income as
an indicator of operating performance, or as an alternative to operating
cash flows as a measure of liquidity. EBITDA amounts may not be fully
available for management's discretionary use due to certain requirements
to conserve funds for capital expenditures, debt service and other
commitments. Also, the EBITDA definition used herein may not be comparable
to similarly titled measures reported by other companies.
(10) Minority interest includes equity contributions associated with the
Company's PO/SM II facility. See "Business--Joint Ventures and Other
Arrangements."
(11) Includes current maturities and notes payable which at March 31, 1998
consisted principally of commercial paper, net of unamortized discount.
(12) As a result of the Stock Repurchase, stockholders' equity will be reduced
by $850 million. The shares repurchased will be classified as treasury
stock.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the Company's financial
statements (including the notes thereto), audited by Coopers & Lybrand L.L.P.,
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, and the Company's unaudited financial statements (including
the notes thereto) included in the Company's Quarterly Report on Form 10-Q for
the three months ended March 31, 1998, each of which is incorporated herein by
reference, and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in such Annual and Quarterly
Reports.
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, PO, and one of two co-products, SM or tertiary butyl alcohol ("TBA").
The Company also manufactures numerous derivatives of PO. The most important
of these is polyols. TBA is combined with methanol and sold as MTBE, a
gasoline additive. The Company also manufactures and markets TDI. Polyols and
TDI are combined in the manufacture of urethanes.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 VERSUS MARCH 31, 1997
Net income for the first quarter 1998 was $92 million compared with $48
million in the first quarter 1997. The $44 million improvement was primarily
attributable to higher core product volumes and the Company's cost reduction
program. First quarter 1998 core product margins also improved as lower
feedstock costs were only partly offset by lower sales prices.
Product Volumes
Sales and other operating revenues included the sales and processing volumes
of the Company's core products and co-products for the first quarter 1998 and
1997 as set forth below. Core products included PO, PO derivatives, and TDI.
<TABLE>
<CAPTION>
1998 1997
----- -----
(MILLIONS)
<S> <C> <C>
Core Products (pounds)......................................... 1,071 1,002
Co-products:
SM (pounds).................................................. 699 708
TBA and derivatives (gallons)................................ 250 260
</TABLE>
The reported SM volumes included quantities processed for PO/SM II equity
partners ("SM equity volumes") under long-term processing arrangements. See
"Business--Joint Ventures and Other Arrangements." The SM equity volumes were
216 million and 200 million pounds in the 1998 and 1997 periods, respectively.
Revenues
Revenues of $934 million in the first quarter 1998 decreased nine percent
compared to revenues of $1,029 million in the first quarter 1997, reflecting
lower average sales prices and lower co-product volumes, partly offset by
higher core product volumes. Average sales prices were generally lower in
1998, reflecting a combination of lower feedstock costs, ongoing competition
in PO derivatives and TDI markets, the negative effects of a stronger U.S.
dollar on foreign sales, lower prices in Asian markets, and lower prices for
co-products, MTBE and SM.
21
<PAGE>
MTBE prices were affected by significantly lower gasoline prices in the 1998
period, while SM prices were affected by industry capacity increases in the
face of weaker demand, primarily in Asia. Core product volumes increased seven
percent in the first quarter 1998 versus the prior year period, reflecting
higher PO volumes and stronger demand for certain PO derivatives in the United
States and Western Europe, partly offset by lower volumes in Asian markets.
Weaker demand in Asian markets also affected SM export volumes. As a result,
total SM volumes declined slightly versus the 1997 period. TBA and derivatives
volumes decreased four percent, mainly due to lower contractual MTBE sales.
Gross Profit
Gross profit of $214 million in the first quarter 1998 increased $29 million
compared to gross profit of $185 million in the 1997 first quarter, primarily
due to higher core product volumes and, to a lesser extent, fixed cost
reductions. First quarter 1998 core product margins also improved as feedstock
costs decreased more than sales prices. However, a significant portion of the
margin improvement in core products was offset by margin decreases in co-
products. Gross profit as a percent of sales increased to 22.9 percent in the
first quarter 1998 compared to 18.0 percent in the 1997 period.
Plant turnaround costs in the first quarter of 1998 were $2 million compared
to $13 million in the fourth quarter of 1997. The Company anticipates
turnaround costs to be approximately $10-$12 million in the second quarter of
1998 and in the $20-$22 million range for the full year ending December 31,
1998.
Other
In total, selling, general and administrative and research and development
expense decreased $20 million, primarily due to the Company's cost reduction
program. Other income of $8 million in 1998 compared to expense of $1 million
in 1997. The $9 million improvement is primarily due to lower foreign exchange
losses in the 1998 period.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Net income for 1997 was $111 million compared with $348 million in 1996 and
$508 million in 1995. Net income for 1997 decreased versus 1996 primarily 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.
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 under long-term processing arrangements. See "Business--Joint
Ventures and Other Arrangements." The SM equity volumes were 800 million, 748
million and 609 million pounds in 1997, 1996 and 1995, respectively. The 1996
and 1995
22
<PAGE>
data include SM derivatives sales volumes for periods prior to the September
30, 1996 date of sale of the plastics business. See "Business--Sales and
Marketing."
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.
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
23
<PAGE>
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 will
be 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. 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 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. See "Business--Joint Ventures and
Other Arrangements."
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 due to gasoline leaking from underground storage tanks
and in surface water from recreational water craft has lead 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 and other states or restrict the use of MTBE. Such legislative
initiatives, if enacted, could reduce demand for MTBE in California and such
other states and may in the longer term adversely impact MTBE demand
throughout the United States and the world. In addition, restrictions on the
use of MTBE could adversely affect the Company's MTBE sales, including sales
under the ARCO Products Contract, which is the Company's largest and most
profitable MTBE contract. With additional capital investment, the Company has
the capability to convert its MTBE production units to make a lower value
product. For a more detailed discussion of the risks associated with the
Company's MTBE sales, see "Risk Factors--MTBE Legislative Risks; Dependence on
Selling Stockholder for Profits From MTBE Sales," "Business--Summary
Description of Business and Products--Tertiary Butyl Alcohol and Derivatives"
and "Transactions Between the Company and the Selling Stockholder--Agreements
with the Selling Stockholder."
The effect of the 1997 Asian economic crisis on the Company's 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 has substantially completed an assessment of its needs and the
related costs associated with modifying its computer software and other
information systems to recognize the Year 2000 in various production and
business applications. Year 2000 problems result from computer applications
written with date fields of two digits, rather than four digits, thus
resulting in the inability of such applications to distinguish between the
year 1900 and 2000. The Company intends to complete most of its required
system modifications by the first quarter of 1999; however, certain efforts
involving plant process controls may be scheduled to occur with plant
turnarounds later in 1999. The Company has begun the process of dealing with
its significant suppliers and customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remedy
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<PAGE>
their own Year 2000 compliance problems. The Company does not expect Year 2000
compliance to have a material adverse effect on its financial condition and
results of operations. See "Risk Factors--Year 2000."
Income Taxes
The Company's effective income tax rate was 34 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 the Selling
Stockholder.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of March 31, 1998, the Company had $39 million in cash and cash
equivalents compared with $29 million at December 31, 1997. The Consolidated
Statement of Cash Flows for the quarter ended March 31, 1998 incorporated by
reference in this Prospectus shows that net cash flows provided by operating
activities were $118 million, whereas net cash flows used by investment and
financing activities were $40 million and $68 million, respectively. 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 incorporated by reference in
this Prospectus shows that net cash flows provided by operating activities
were $523 million, whereas net cash flows used by investment and financing
activities were $220 million and $338 million, respectively.
Investment activities for the first quarter 1998 included capital
expenditures of $44 million. On March 2, 1998, the Company's Board of
Directors approved moving forward with a new world-scale BDO plant (BDO II) in
Rotterdam, The Netherlands, with an annual capacity of 250 million pounds. The
BDO II plant, in addition to the new PO 11 PO/SM plant in Rotterdam and a
number of capacity additions at existing facilities, are part of the Company's
five-year capacity expansion program. The Company has revised estimates of the
cost of this program from $2.3 billion to $1.6 billion, reflecting expected
cost savings and efficiencies in the execution of the program as well as
elimination of non-strategic projects. Investment activities for 1997 included
capital expenditures of $263 million.
Financing activities for the first quarter 1998 included the payment of
dividends totaling $68 million. After giving effect to the Stock Repurchase,
such dividends would have been reduced by $11 million. On April 16, 1998, the
Board of Directors declared a dividend of $0.70 per share on the Company's
Common Stock, payable June 5, 1998.
In April 1998, the Company entered into foreign currency forward and "zero-
cost" range forward option contracts, with maturities ranging from 1998
through 2001, in order to minimize its foreign exchange exposure relating to
the planned BDO II plant construction in Rotterdam, The Netherlands. The total
notional amount of foreign currency contracts outstanding, including such
contracts, is approximately $580 million. The hypothetical loss in future cash
flows of these new derivative instruments as of the date of their acquisition,
assuming a change of 10 percent versus the contractual exchange rates, was $17
million. Sensitivity analysis was used for this purpose, and assumed
strengthening of the U.S. dollar versus the Dutch guilder.
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 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
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<PAGE>
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 the Existing Credit Agreement,
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. The Existing Credit Agreement replaces the previous $300
million revolving credit agreement. The Existing Credit Agreement 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. In
connection with the Stock Repurchase, the Existing Credit Agreement will be
amended to reset the minimum net worth requirements at a level that reflects
the effects of the Stock Repurchase on the Company's capitalization. The
Company has no outstanding borrowing against the Existing Credit Agreement,
which is used to back up the Company's commercial paper borrowing. See
"Description of Certain Indebtedness."
During the second quarter 1997, the Company filed a registration statement
on Form S-3 with the SEC providing for the issuance of up to $350 million of
debt securities. In the first quarter 1997, the Company's wholly owned
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.
In connection with the Stock Repurchase, the Company received a commitment
from First National Bank of Chicago, as an agent for a syndicate of lenders,
for the Bridge Facility in the amount of $850 million. The Bridge Facility
will bear a floating interest rate at either the agent's base rate or the
applicable LIBOR plus a margin based on the Company's public debt rating and
will mature 364 days after the execution of definitive credit agreements
(which is expected in June 1998). The Bridge Facility will contain covenants
that, among other things: (a) restrict the Company's ability to (i) create
liens on its properties; (ii) merge, consolidate or sell substantially all of
its assets; (iii) engage in sale and leaseback transactions; and (iv) engage
in transactions with its affiliates; and (b) require the Company to (i)
maintain minimum consolidated net worth of $750 million; (ii) furnish to the
lenders the Company's annual audited and quarterly unaudited financial
statements; and (iii) use the proceeds of the loans for the Stock Repurchase
and other general corporate purposes. See "Description of Certain
Indebtedness." Based on the Bridge Facility, the incremental interest expense
is estimated at $53 million annually (or $32 million after tax) using an
interest rate of 6.255 percent which is based on a spread over six-month LIBOR
on May 28, 1998. This increased expense will have an adverse impact on the
Company's cash flow generated by operating activities. The Company plans to
refinance the Bridge Facility using a combination of short, medium and long-
term financing, which may include a tranche of non-convertible trust preferred
securities. This permanent financing may be at a higher weighted-average
interest rate than under the Bridge Facility. In conjunction with this
refinancing, the Company may borrow an additional $150 million to fund a
portion of its capital program.
The Company paid dividends totaling $271 million in 1997. After giving
effect to the Stock Repurchase, such dividends would have been reduced by $43
million.
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. However, for a discussion of the
potential adverse affects on those cash requirements of the additional
leverage the Company will incur in connection with the Stock Repurchase, see
"Risk Factors--Significant Increase in Leverage; Potential Impact on Capital
Expenditures and Dividends." The amount of debt the Company will incur in
connection with the Stock Repurchase, together with its outstanding debt,
significantly exceeds the Company's historical leverage. The Company's
historical results and financial condition do not, accordingly, reflect the
potential constraints the increase in leverage may impose on the Company.
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
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<PAGE>
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, option 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 forwards, option and
swap contracts primarily hedge capital commitments and future cash flows,
primarily denominated in Dutch guilders. In addition, the Company had
approximately $182 million of financial instruments, consisting of long-term
debt, denominated in Dutch guilders and French francs. The hypothetical loss
in future cash flows of the combined foreign-exchange positions, both
derivative 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 Dutch 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 effect 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. See "Risk Factors--Foreign
Operations, Country Risks and Exchange Rate Fluctuations."
Feedstock Costs
The principal hydrocarbon raw materials purchased by the Company are
propylene, butanes, ethylene, benzene, methanol and toluene. 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 a diversified portfolio
of 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.
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 more 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 "Risk Factors--Raw Material Prices and Availability."
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
27
<PAGE>
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 ("PRPs"). No adjustment was made to the accrued liability in 1997.
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 March 31, 1998, the Company's accrued environmental liability for
remediation totaled $43 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,
another PRP 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 another PRP whereby that PRP has agreed to pay for
approximately 50 percent of the Beaver Valley plant site remediation costs.
The Company and the PRP have reached an agreement with the U.S. government
whereby the government will pay 28.5 percent of the costs incurred by the
Company and the PRP 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 other Superfund sites. The Company estimates, based on currently
available information, that potential loss contingencies associated with these
other Superfund 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 reserved 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. See "Risk Factors--
Environmental Considerations" and "Business--Environmental Matters and Related
Litigation."
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
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<PAGE>
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.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1
established criteria for determining which costs of developing or obtaining
internal-use computer software should be charged to expense and which should
be capitalized. In April 1998, the AICPA issued SOP 98-5, "Reporting on the
Costs of Start-Up Activities." SOP 98-5 requires costs of start-up activities
and organization costs to be charged to expense as incurred. SOP 98-1 and 98-5
will affect the Company beginning in calendar year 1999; the Company does not
plan to adopt them earlier. The Company does not anticipate that adoption of
SOP 98-1 will have a material effect on its consolidated financial statements.
The Company is currently reassessing the impact of the adoption of the new SOP
98-5 on the Company's consolidated financial statements.
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<PAGE>
BUSINESS
The Company is a leading international manufacturer and marketer of
intermediate chemicals and specialty chemical products used in a broad range
of consumer and industrial products. The Company conducts its business
primarily in the Americas, Europe and the Asia Pacific region with
manufacturing, sales and operations in each of these regions.
The Company is the successor to certain portions of the ARCO Chemical
Division of the Selling Stockholder. On June 9, 1987, the Selling Stockholder
transferred substantially all of the assets and liabilities of the oxygenates
and polystyrenics business of the then ARCO Chemical Division to the Company
in exchange for 80,000,001 shares of the Company's Common Stock. On October 5,
1987, the Company completed an initial public offering of 19,550,000
additional shares of Common Stock. As of the date of this Prospectus, the
Selling Stockholder's ownership of 80,000,001 shares represents approximately
82.2 percent of the outstanding shares of Common Stock. Upon completion of the
Transaction, the Selling Stockholder will beneficially own 50 percent of the
then-outstanding shares of Common Stock. See "Selling Stockholder; Stock
Repurchase."
SUMMARY DESCRIPTION OF BUSINESS AND PRODUCTS
The Company's core product is PO, which it produces through two distinct
process technologies based on indirect oxidation (peroxidation) processes that
yield co-products. One process yields TBA as the co-product; the other process
yields 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.
The Company sells PO and SM to the merchant market and sells TBA to the
merchant market in the form of MTBE. MTBE is used in oxygenated fuels and as
an octane additive. The Company also manufactures numerous derivatives of PO.
The most important of these are polyols. 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, the
Company also manufactures TDI. TDI and polyols are combined in the manufacture
of urethanes.
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 APPLICATIONS AND MARKETS
------- ---------------------------- ----------------------------------------
<C> <C> <S>
PO PO Polyether polyols, propylene glycols,
ethers, and surfactants (See below)
Polyols Combined with isocyanates, such as TDI,
for urethane applications such as
flexible foam for seat cushions,
bedding and carpet underlay; and
coatings, adhesives, sealants and
elastomers
PG Unsaturated polyester resins; food,
cosmetic and pharmaceutical
applications; automotive coolants and
aircraft deicers
PGE and PGE acetates Coatings and paints, cleaning compounds,
solvents, and inks
BDO, Tetrahydrofuran and Engineering resins, fibers, solvents and
N-Methyl Pyrrolidone coatings
TDI TDI Combined with polyols to manufacture
urethanes (see above)
TBA TBA, MTBE and ethyl tertiary Gasoline additives to enhance octane
butylether ("ETBE") value and reduce emissions
Gasoline-grade TBA Octane additive
SM SM Acrylonitrile-butadiene-styrene ("ABS")
resins, polystyrene, expandable
polystyrene ("EPS"), rubber components,
and polyester resins
</TABLE>
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<PAGE>
Propylene Oxide and Derivatives
PO 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
urethane applications, PG and PGE, 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 compared with 39 percent
of its PO production in 1988. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 urethanes. Within the urethane 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 CASE.
PG is principally used as intermediate chemicals to produce unsaturated
polyester resins. PGs have low toxicity and are also used in certain food,
cosmetic, and pharmaceutical applications and in automotive coolants and
aircraft deicers. PGE 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.
BDO is an intermediate chemical having diverse applications in engineering
resins, elastomers, and solvents. The Company produces BDO 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. TDI
complements the Company's existing line of polyols products and strengthens
its position as a chemical supplier to the urethanes market. ADI is used in
CASE products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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.
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 amendments in 1990 (the
"Amendments") to the Air Pollution Control Act of 1955 (popularly known as the
Clean Air Act), 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 EPA has 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.
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<PAGE>
Pending legislative initiatives may materially adversely affect the
Company's MTBE sales, including under the ARCO Products Contract pursuant to
which the Company derived 6.5 percent of revenues in 1997. The Company derives
a significant percentage of its total revenues (21 percent in 1997) from the
sale of MTBE, a component used in gasoline to increase octane and reduce
emissions. The price of MTBE under the ARCO Products Contract is well above
current spot market levels. Based on domestic spot market prices for MTBE for
1997, the ARCO Products Contract contributed approximately $70 million of
incremental pre-tax margin above spot prices. The presence of MTBE in some
water supplies in California and other states 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. There have been claims that MTBE
travels more rapidly through soil, and is more soluble in water, than most
other gasoline components, and is therefore more difficult and more costly to
remediate. Heightened public awareness about MTBE has resulted in certain
state and federal initiatives that either seek to rescind the oxygenate
requirement for reformulated gasoline sold in California and other states or
restrict the use of MTBE. Such legislative initiatives could materially reduce
demand for MTBE in California and other states and could in the longer term
adversely impact MTBE demand throughout the United States and elsewhere. The
Selling Stockholder sells more gasoline in California than in any other state.
Recently, there was filed in California a class action lawsuit against
refiners and marketers of gasoline, including the Selling Stockholder (but not
naming the Company), for allegedly contaminating drinking water and asking for
punitive damages. With additional capital investment, the Company has the
capability to convert its MTBE production units to make a lower value product.
See "Risk Factors--MTBE Legislative Risks; Dependence on Selling Stockholder
for Profits from MTBE Sales," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Transactions Between the
Company and the Selling Stockholder--Agreements with the Selling Stockholder."
Styrene Monomer
SM is the major co-product of the second of the Company's two PO processes.
SM 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 SM production to the U.S. merchant
market and to selected export markets through sales or tolling agreements. The
Company utilized about 12 percent of its SM 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 SM derivatives. The Company has substantially replaced
this volume by entering into a long-term agreement to process and deliver to
NOVA approximately the same volume of SM as had been consumed by the plastics
business before its sale. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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." On September 30, 1996, the
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<PAGE>
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 remaining significant MTBE sales contracts are with the
Selling Stockholder. See "Risk Factors--MTBE Legislative Risks; Dependence on
Selling Stockholder for Profits from MTBE Sales."
The Company's sales are made through its own marketing and sales personnel
and through distributors and independent agents located in the Americas,
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.
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 the Asia Pacific region.
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 PO/SM II expansion completed in March 1998 were
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 May 15, 1998,
1.1 billion 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 50 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, methanol and toluene. 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.
33
<PAGE>
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 "Risk Factors--Raw Material Prices and Availability" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Feedstock Costs."
COMPETITION
Competition within the Company's segment of the chemical industry is intense
and is affected by a variety of factors, including product price, reliability
of supply, technical support, customer service, quality, 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. 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 seven 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
adds 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition."
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
("Texaco Chemical") 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 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 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 "--Other Litigation." Several other companies have been
attempting to develop or license commercial PO processes, and additional PO
plants may be built by competitors. See "Risk Factors--Intense Competition."
The Company competes with many polyols producers worldwide, including Dow,
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 urethanes. TDI enables
the Company to compete more effectively with other suppliers to the urethane
market who offer both polyols and TDI to customers. 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.
34
<PAGE>
The Company competes with many MTBE producers worldwide; the most
significant is 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 seven
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 numerous 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 Dow and the Company are believed to
have nine percent and eight percent, respectively. No other producer is
believed to have more than six percent of worldwide SM capacity.
For a discussion of the planned industry capacity increases for the
production of TDI, MTBE and SM, see "Risk Factors--Industry Cyclicality and
Overcapacity." There can be no assurance that the Company will not face
additional competition in the future. See "Risk Factors--Intense Competition."
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, Pennsylvania property from the Selling Stockholder.
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 has been reducing staff at the Newtown Square, Pennsylvania, 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 and at Company-
owned facilities 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 a raw material
handling facility including a 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 BDO at the Channelview,
Texas plant. 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 March 31, 1998, 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.
35
<PAGE>
<TABLE>
<CAPTION>
PRODUCT DOMESTIC FOREIGN
------- -------- -------
<S> <C> <C>
PO........................................................ 2,445 1,395
Polyols................................................... 740 610
PG........................................................ 565 345
PGE....................................................... 120 155
BDO....................................................... 120 --
TDI....................................................... 250 --
MTBE--Bbls/day............................................ 30,000 28,500
SM........................................................ 2,820 830
</TABLE>
The Company has committed 1.1 billion pounds of the indicated domestic SM
capacity through long-term processing arrangements. The Company completed an
expansion of its PO/SM complex in Channelview, Texas in March 1998 which added
annual PO and SM capacity of 110 million and 248 million pounds, respectively.
The increased SM capacity is included in the committed capacity noted above.
The Company is also building a new world-scale PO/SM plant in Rotterdam, the
Netherlands, which will add annual PO and SM capacity of 625 million and 1,400
million pounds, respectively, upon start-up. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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
The Selling Stockholder has granted the Company a license to use "ARCO" in
its name and the Selling Stockholder's spark design as a logo. This license by
the Selling Stockholder has been granted on a royalty-free basis, which is
consistent with the Selling Stockholder's practice of licensing its name and
design to its subsidiaries and affiliates. The Company owns and has licensed
from the Selling Stockholder various domestic and foreign trademarks. Under
the Stockholder Agreement, the Company has agreed to cease using the Selling
Stockholder's name and spark design upon six months written notice from the
Selling Stockholder.
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. The Company has
approximately 50 U.S. patents covering its new polyols technology and has
filed applications for several dozen patents. These patents are significant to
the Company's future business prospects, but the Company does not believe that
the loss of any one of these patents would have a material adverse affect on
its business. A successful challenge to the Company's new polyols technology
or to the patents relating thereto in general would, however, have a material
adverse effect on the Company's future business prospects.
ENVIRONMENTAL MATTERS AND RELATED LITIGATION
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.
36
<PAGE>
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 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.
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.
In December 1993, the EPA issued a Unilateral Administrative Order (the
"Order") to the Company, the Selling Stockholder 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 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 the Selling Stockholder, 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 the
Selling Stockholder 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 the Selling
Stockholder 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 substantially 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 other Superfund sites. Based on currently available information,
the Company does not believe that the potential cost associated with these
other Superfund sites, individually and in the aggregate, will be significant.
The Company may in the future be involved in additional assessments and clean-
ups under environmental laws. The future costs in connection with such matters
will be affected by such factors as the unknown magnitude of clean-up 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 groundwater 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 (the "First
Consent Agreement") with 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 (the "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 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 (the "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
37
<PAGE>
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 the remediation of the Site. Remediation is expected to
last approximately two years.
The Company sold the Beaver Valley plant assets to 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
"Risk Factors--Environmental Considerations."
OTHER LITIGATION
On December 15, 1997, the Company settled a dispute with Repsol Quimica
concerning the use of technology for the production of PO and SM. The Company
had licensed the technology to Repsol 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"), 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 Repsol 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. The dispute also gave rise to proceedings
by the Directorate-General for Competition of the European Union and the
Spanish Bureau for the Defense of Competition (the "Spanish Bureau"). The
settlement was conditional in that it was subject to clearance by these two
competition authorities. On January 7, 1998, the Spanish Bureau approved the
settlement. 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 finally
determined, however, whether the competition proceedings begun against the
Company by the European Commission will terminate.
Under the terms of the settlement, Repsol Quimica will be able to carry out
its plans to build a PO/SM plant in Spain. The Company does not believe that
such terms will have a material adverse effect on the consolidated financial
statements of the Company.
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.
38
<PAGE>
The Company is unable to predict the outcome of the foregoing 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.
HUMAN RESOURCES
At March 31, 1998, the Company employed approximately 4,300 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.
39
<PAGE>
MANAGEMENT
Set forth below is certain information concerning each of the Company's
executive officers and directors as of May 14, 1998. The By-Laws of the
Company provide that each officer shall hold office until his successor is
elected or appointed and qualified, or until his death or resignation, or his
removal by the Board of Directors.
Pursuant to the Company's Certificate of Incorporation and its By-Laws, the
members of the Board of Directors serve for one-year terms. The Board of
Directors has fixed the number of directors constituting the whole Board at
twelve. At the Annual Meeting of Stockholders held on May 14, 1998, six
officers of the Selling Stockholder were elected to the Board. Following the
completion of the Transaction, the Selling Stockholder intends to maintain
representation on the Board proportional to its stock ownership. In addition,
the Stockholder Agreement provides that, until such time as the Selling
Stockholder does not own at least 20 percent of the outstanding shares of
Common Stock, (i) the Selling Stockholder is entitled to designate not fewer
than two individuals to be nominated for election to the Board of Directors
and (ii) after January 1, 1999, the Company will cause a majority of the
individuals whom the Company nominates for election to the Board of Directors
who are not officers or employees of the Selling Stockholder or Stockholder
Nominees (as defined herein) to be independent directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ------------------------------------------------
<S> <C> <C>
Marvin O. Schlanger......... 50 President, Chief Executive Officer and Director
Van Billet.................. 43 Vice President and Controller
Morris Gelb................. 51 Senior Vice President, Manufacturing, Research,
Engineering, and Environmental, Health and
Safety
Robert J. Millstone......... 54 Vice President, General Counsel and Secretary
Walter J. Tusinski.......... 50 Senior Vice President, Chief Financial Officer
and Director
Francis W. Welsh............ 54 Vice President, Human Resources
Walter F. Beran............. 72 Director
Anthony G. Fernandes........ 52 Chairman of the Board and Director
Mark L. Hazelwood........... 48 Director
Alan R. Hirsig.............. 58 Vice Chairman of the Board and Director
John H. Kelly............... 43 Director
Marie L. Knowles............ 51 Director
James A. Middleton.......... 62 Director
Stephen R. Mut.............. 47 Director
Frank Savage................ 59 Director
Donald R. Voelte, Jr........ 45 Director
</TABLE>
WALTER F. BERAN, 72. Mr. Beran was elected a Director of the Company on
September 1, 1987. Mr. Beran is Chairman of Pacific Alliance Group (a
financial services firm). Previously, he served as Vice Chairman and Western
Region Managing Partner of Ernst & Whinney (accountants), a predecessor to
Ernst & Young. Mr. Beran is also a Director of Fleetwood Enterprises, Inc.,
Pacific Scientific Company and Vencor, Inc.
VAN BILLET, 43. Mr. Billet was elected Vice President and Controller of the
Company effective as of March 1, 1997. Previously, he was Manager of Planning
and Analysis for Performance Chemicals and Business Development from January
1995 to March 1997, Corporate Controller from July 1993 to January 1995,
Associate General Tax Officer from May 1991 to July 1993, and Manager,
European Tax Operations from February 1988 to May 1991.
ANTHONY G. FERNANDES, 52. Mr. Fernandes was elected a Director of the
Company on May 10, 1996 and Chairman of the Board on July 17, 1997. Mr.
Fernandes has been an Executive Vice President of the Selling Stockholder
since September 1994 and served as a Director from September 1994 to May 1998.
Previously, he was Senior Vice President of the Selling Stockholder and
President of ARCO Coal Company from July 1990 to September 1994 and Vice
President and Controller of the Selling Stockholder from July 1987 to July
1990.
40
<PAGE>
MORRIS GELB, 51. Mr. Gelb was elected an officer of the Company on June 22,
1987. He assumed his current position in August 1997. Previously, he was Vice
President, Environmental, Engineering and Manufacturing Programs from October
1991 to August 1997 and Vice President, Research and Engineering from
September 1986 to September 1991.
MARK L. HAZELWOOD, 48. Mr. Hazelwood has been a Senior Vice President of
External Affairs of the Selling Stockholder since July 1997. He served as
President of ARCO Alaska Transportation, Inc. (September 1996-July 1997),
Senior Vice President of NGC Corp. (April 1996 to August 1996), President of
ARCO Pipe Line Company (January 1994-April 1996), Senior Vice President of
Marketing ARCO Oil and Gas Company (April 1991-January 1994), and Vice
President and General Tax Officer of the Selling Stockholder (August 1998-
March 1991).
ALAN R. HIRSIG, 58. Mr. Hirsig was elected Vice-Chairman of the Board of
Directors effective May 14, 1998. He was elected an officer of the Company on
June 22, 1987 and a Director of the Company on November 14, 1989. Previously,
Mr. Hirsig was President and Chief Executive Officer of the Company from
January 1, 1991 to May 13, 1998, President of the Company's European
operations from July 1984 to December 1990 and a Senior Vice President of the
Company from July 1988 to December 1990. Mr. Hirsig is also a Director of
BetzDearborn Inc. and Philadelphia Suburban Corporation.
JOHN H. KELLY, 43. Mr. Kelly has been a Senior Vice President, Human
Resources of the Selling Stockholder since January 1997. He was Vice
President, Corporate Human Resources of the Selling Stockholder (June 1993-
January 1997) and Vice President, Human Resources of ARCO Oil and Gas Company
(July 1991-June 1993).
MARIE L. KNOWLES, 51. Mrs. Knowles was elected a Director of the Company on
September 16, 1996. Mrs. Knowles previously served as a Director of the
Company from July 1991 to May 1996. Mrs. Knowles has been an Executive Vice
President and Chief Financial Officer of the Selling Stockholder since July
1996 and served as a Director from July 1996 to May 1998. Previously, she was
Senior Vice President of the Selling Stockholder and President of ARCO
Transportation Company from June 1993 to July 1996, Vice President and
Controller of the Selling Stockholder from July 1990 to May 1993, and Vice
President of Finance, Control, and Planning of ARCO International Oil and Gas
Company from July 1988 to July 1990. Mrs. Knowles is also a Director of Vastar
Resources, Inc. and Phelps Dodge Corporation.
JAMES A. MIDDLETON, 62. Mr. Middleton was elected a Director of the Company
on February 15, 1989. Mr. Middleton has been Chairman and Chief Executive
Officer of Crown Energy Corp. (oil sand projects and oil and gas operations)
since February 1996. Mr. Middleton was an Executive Vice President and a
Director of the Selling Stockholder from October 1987 until he resigned from
those positions in September 1994. Mr. Middleton retired as an employee of the
Selling Stockholder in January 1995. Previously, he served as President of
ARCO Oil and Gas Company from January 1985 to September 1990. Mr. Middleton is
also a Director of Berry Petroleum Co., Crown Energy Corp. and Texas Utilities
Company.
ROBERT J. MILLSTONE, 54. Mr. Millstone was elected Vice President and
General Counsel of the Company, effective January 1, 1995. Previously, he was
Associate General Counsel from January 1989 to December 1994. He has been
Secretary of the Company since October 1990.
STEPHEN R. MUT, 47. Mr. Mut was elected a Director of the Company on January
1, 1997. Mr. Mut has been Senior Vice President of the Selling Stockholder
since September 1994. Previously, he was President of ARCO Global Energy
Ventures from August 1996 to March 1998, President of ARCO Coal Company from
September 1994 to August 1996, Senior Vice President of Operations of ARCO
International Oil and Gas Company from December 1991 to September 1994, and
Managing Director of ARCO British, Ltd. from 1989 to December 1991.
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FRANK SAVAGE, 59. Mr. Savage was elected a Director of the Company on July
22, 1993. Mr. Savage is Chairman of Alliance Capital Management International
and Chairman of Alliance Corporate Finance Group, Inc. (financial services).
Previously, he was Senior Vice President of The Equitable Life Assurance
Society of the United States (financial services) from 1988 to 1996, Chairman
of Equitable Capital Management Corporation (which was merged into Alliance
Capital Management Corporation) from April 1992 to July 1993, and Vice
Chairman and Head of International Operations, Equitable Capital Management
Corporation from November 1986 to April 1992 and from June 1986 to April 1992,
respectively. Mr. Savage is also a director of Alliance Capital Management
Corporation, Lockheed Martin Corporation, QUALCOMM Incorporated, and Southern
Africa Fund.
MARVIN O. SCHLANGER, 50. Mr. Schlanger was elected President and Chief
Executive Officer of the Company, effective May 14, 1998 and a Director of the
Company on November 14, 1989. Previously, he was Executive Vice President and
Chief Operating Officer of the Company from November 1994 to May 13, 1998,
Senior Vice President of the Company and President of ARCO Chemical Americas
Company from August 1992 to November 1994, Senior Vice President and Chief
Financial Officer from October 1989 to August 1992 and Vice President,
Worldwide Business Management from September 1988 to September 1989. Mr.
Schlanger is also a Director of UGI Corporation.
WALTER J. TUSINSKI, 50. Mr. Tusinski was elected Senior Vice President and
Chief Financial Officer and a Director of the Company on September 1, 1992.
Previously, he served as Vice President, New Business Ventures of ARCO
International Oil and Gas Company from September 1990 to August 1992 and Vice
President, Planning and Control of ARCO Products Company from October 1986 to
August 1990.
FRANCIS W. WELSH, 54. Mr. Welsh was elected an officer of the Company on
June 22, 1987. He has held his current position since August 1983. Previously,
he was Manager of Compensation and Manager of Personnel Resources and
Development, Corporate Employee Relations of the Selling Stockholder from
September 1980 to May 1983.
DONALD R. VOELTE, JR., 45. Mr. Voelte has been a Senior Vice President of
the Selling Stockholder since April 1997. He previously worked for the Mobil
Corporation for 22 years. His most recent position was Executive Vice
President of Mobil Corporation and President of Mobil's New Exploration and
Producing Ventures and Global Exploration (January 1994-April 1997).
Previously, he served as Vice President and General Manager, U.S. Marketing
and Supply/Logistics of Mobil Corporation (January 1992-January 1994).
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<PAGE>
SELLING STOCKHOLDER; STOCK REPURCHASE
The Selling Stockholder is one of the largest integrated enterprises in the
petroleum industry. The Selling Stockholder's exploration and production
segment includes the worldwide exploration, development, production and
transportation of petroleum, which includes petroleum liquids (crude oil,
condensate and natural gas liquids) and natural gas, and the purchase and sale
of petroleum liquids and natural gas. The Selling Stockholder's refining and
marketing segment includes the refining and transportation of petroleum and
petroleum products and the marketing of petroleum products on the U.S. West
Coast. The Selling Stockholder's chemicals segment includes the worldwide
manufacture and sale of chemical products.
As of the date of this Prospectus, the Selling Stockholder owns 80,000,001
shares of Common Stock, representing approximately 82.2 percent of the
outstanding shares of Common Stock. Upon completion of the Transaction, the
Selling Stockholder will beneficially own 50 percent of the Company's then-
outstanding shares of Common Stock. See "--Stock Repurchase."
Upon completion of the Transaction, the Selling Stockholder will own 50
percent of the shares of Common Stock then-outstanding. The Selling
Stockholder currently holds six of the twelve seats on the Company's Board of
Directors, and intends, but is not obligated, to maintain representation on
the Board proportional to its stock ownership. See "--Stock Repurchase." The
Selling Stockholder will continue to be deemed to be a controlling stockholder
for corporate and securities law purposes, with the ability (should it
determine to do so) to exercise control over the Company's corporate policies,
the persons constituting its management and Board of Directors and the outcome
of corporate actions requiring stockholder approval. The Selling Stockholder's
50 percent ownership position will effectively prevent a change of the control
of the Company without the Selling Stockholder's consent. The Company and the
Selling Stockholder have entered into agreements in connection with the
Transaction setting forth certain rights of the Selling Stockholder upon
completion of the Transaction. See "--Other Agreements" and "Risk Factors--
Concentration of Stock Ownership; Control of the Company."
STOCK REPURCHASE
On January 29, 1998, the Company's Board of Directors established a special
committee (the "Special Committee") consisting of two independent directors,
Frank Savage and Walter F. Beran. The Special Committee was formed to evaluate
any transaction proposed by the Selling Stockholder pursuant to which the
Selling Stockholder would reduce its interest in the Company to 50 percent or
less of the outstanding shares of the Common Stock, to negotiate with the
Selling Stockholder regarding the terms thereof and to determine whether or
not to enter a transaction with the Selling Stockholder and the terms thereof.
The Special Committee approved the Transaction at a meeting held on June 2,
1998. The members of the Special Committee received compensation in the amount
of $15,000 in addition to their normal director's fees, which include $1,000
per board or committee meeting attended.
The Company and the Selling Stockholder have entered into a Stock Repurchase
Agreement, dated as of June 2, 1998 (the "Stock Repurchase Agreement"),
pursuant to which the Company will repurchase from the Selling Stockholder a
number of shares at a price per share (the "Repurchase Price") equal to the
price paid in connection with the Offerings such that, upon completion of the
Transaction, the Selling Stockholder will beneficially own 50 percent of the
Company's then-outstanding Common Stock. In no event, however, will the
aggregate amount of the Stock Repurchase exceed $850 million. The Stock
Repurchase Agreement provides that, on the business day following the initial
closing of the Offerings, the Company will repurchase (the "Initial
Repurchase") from the Selling Stockholder a number of shares sufficient to
reduce the Seller Stockholder's beneficial ownership to 50 percent of the
Company's outstanding stock upon completion of the Initial Repurchase and the
Offerings, assuming the U.S. Underwriters exercise their over-allotment option
in full (or 10,631,589 shares for $588 million assuming the Repurchase Price
equals the reported last sale price of the Common Stock on May 28, 1998).
Unless the U.S. Underwriters' over-allotment option is exercised in full, the
Company will also repurchase two additional shares of Common Stock for each
share of Common Stock included in the U.S. Underwriters' over-allotment option
and not purchased by the U.S. Underwriters (the "Adjustment Repurchase"
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<PAGE>
and, together with the Initial Repurchase, the "Stock Repurchase") such that,
immediately following the Transaction, the Selling Stockholder will
beneficially own 50 percent of the then-outstanding shares of Common Stock.
For example, if the U.S. Underwriters' over-allotment option is not exercised,
the Company will repurchase an additional 4,735,643 shares of Common Stock for
$262 million (assuming the Repurchase Price equals the reported last sale
price on May 28, 1998). The Adjustment Repurchase will occur (i) if the over-
allotment option is exercised in part, on the business day following the
closing of the over-allotment option and (ii) if the over-allotment option is
not exercised or terminates, on the third business day following such
expiration or termination. Upon completion of the Stock Repurchase (whether or
not the U.S. Underwriters' over-allotment option is exercised in whole or in
part), the Selling Stockholder will beneficially own 50 percent of the then-
outstanding shares of Common Stock.
The Selling Stockholder has agreed to pay all expenses of the Offerings; in
addition, it has agreed to make a payment of $15 million to the Company, of
which $7.5 million will be paid at June 30, 1998 and the remainder upon
completion of the Transaction. See "Risk Factors--Concentration of Stock
Ownership; Control of the Company" and "Selling Stockholder; Stock
Repurchase."
The Company plans to finance the Stock Repurchase with borrowings under the
Bridge Facility. In addition, the Company intends to amend its Existing Credit
Facility to reflect the effects of the Stock Repurchase on its capitalization.
See "Description of Certain Indebtedness."
OTHER AGREEMENTS
Stockholder Agreement
The Selling Stockholder currently holds six of the twelve seats on the
Company's Board of Directors, and intends, but is not obligated, to maintain
representation on the Board proportional to its stock ownership. The Company
and the Selling Stockholder are parties to a Stockholder Agreement, dated as
of June 2, 1998 (the "Stockholder Agreement"), pursuant to which (i) the
Selling Stockholder will have the right to designate a minimum of two
individuals to be nominated by the Company for election to the Board of
Directors ("Stockholder Nominees") until such time as the Selling Stockholder
owns less than 20 percent of the Common Stock; (ii) the Selling Stockholder
will have the right to maintain its ownership at exactly 50 percent of the
Common Stock for the first year following the Transaction, to prevent its
ownership from exceeding 50 percent thereafter and to require the Company to
obtain majority stockholder approval prior to issuing equity, other than
pursuant to stockholder approved employee benefit plans, until such time as
the Selling Stockholder owns less than 30 percent of the Common Stock; and
(iii) the Company has agreed to restrictions on amendments of its By-Laws
adversely affecting stockholder rights and on its ability to effect a dilutive
recapitalization (which rights are assignable to a transferee of the Selling
Stockholder of shares representing 20 percent or more of the Common Stock),
and to certain restrictions on its ability to enter into agreements with
change of control provisions. See "Selling Stockholder; Stock Repurchase--
Other Agreements." The Company also agreed to implement the Rights Agreement
promptly after the closing of the Offerings. See "Description of Capital
Stock--Rights Agreement."
Until such time as the Selling Stockholder is the owner of less than 30
percent of the then outstanding Common Stock, the Company may not issue any
shares of Common Stock, or any options, warrants, or other securities
convertible into Common Stock without the approval of the Selling Stockholder
or majority stockholder approval, other than issuances pursuant to stockholder
approved employee benefit plans.
During the period beginning on the closing date of the Offerings and ending
on the first anniversary of the Adjustment Repurchase, in order to enable the
Selling Stockholder to maintain an ownership of at least 50 percent of the
then outstanding Common Stock, the Company will be required to repurchase from
the public one share of Common Stock for each share issued pursuant to
employee benefits plans. Commencing on the first anniversary of the Adjustment
Repurchase and until such time as the Selling Stockholder owns less than 30
percent of the then outstanding shares of Common Stock, the Stockholder
Agreement also requires that the
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Company purchase, to the extent there are any issuances of shares of Common
Stock above a certain threshold pursuant to any employee benefit plan or
otherwise to provide employee benefits, an equivalent number of shares of
Common Stock on the open market or in privately negotiated transactions. This
purchase obligation is triggered for issuances that exceed (i) with respect to
the first three twelve-month periods immediately following the first
anniversary of the Adjustment Repurchase, 1,000,000 shares of Common Stock or
other equity securities of the Company and (ii) with respect to the first 48-
month period immediately following the first anniversary of the Adjustment
Repurchase, 3,000,000 shares of Common Stock or other equity securities of the
Company.
The Selling Shareholder also has certain rights to participate in
repurchases by the Company of shares of Common Stock that would cause the
Selling Stockholder's percentage ownership of the Company to exceed 50 percent
and cause the Selling Stockholder to report the Company on a consolidated
financial basis. In such case, the Selling Stockholder has the right to
require the Company to repurchase from the Selling Stockholder such number of
shares of Common Stock as, in the reasonable judgment of the Selling
Stockholder, will prevent the Selling Stockholder from owning more than 50
percent of the then outstanding shares of Common Stock.
The Stockholder Agreement provides that, until such time as the Selling
Stockholder owns less than 20 percent of the then-outstanding shares of Common
Stock, the Company shall cause a majority of the individuals whom the Company
nominates for election to the Board of Directors who are not officers or
employees of the Selling Stockholder or Stockholder Nominees to be independent
directors.
In addition, the Stockholder Agreement provides that, until such time that
the Selling Stockholder owns less than 30 percent of the then-outstanding
shares of Common Stock, the Company shall not, without the Selling
Stockholder's prior written approval, (i) enter into any material agreement
containing a change of control provision, other than employment or severance
agreements and plans and debt agreements that contain change of control
provisions consistent in all material respects with then prevailing market
practice for substantially comparable borrowers and debt or (ii) enter into
any material agreement granting any party thereto or holder thereunder the
right to vote for the election of directors of the Company. Any such change in
control agreements must be submitted to the Company's Board of Directors for
approval whether or not approved by the Selling Stockholder.
The Stockholder Agreement also provides that until such time as the Selling
Stockholder owns less than 20 percent of the then-outstanding shares of Common
Stock, the Company will not, without majority shareholder approval or the
approval of the Selling Stockholder (i) engage in any recapitalization or
other change in capital structure of the Company that would reduce the Selling
Stockholder's percentage of ownership of Common Stock or the Selling
Stockholder's percentage of voting power in the election of the Board of
Directors or (ii) amend the Company's By-Laws in any manner which diminishes
the rights of any holder of Common Stock. The Selling Stockholder may assign
these rights to a transferee that acquires shares from the Selling
Stockholder, representing 20 percent or more of the then-outstanding shares of
Common Stock.
Registration Rights Agreement
The Company and the Selling Stockholder have entered into a Registration
Rights Agreement, dated as of June 2, 1998 (the "Registration Rights
Agreement"), pursuant to which the Selling Stockholder has the right to cause
the Company to file a registration statement to register the sale of the
Selling Stockholder's Common Stock (a "demand registration"). The Selling
Stockholder has been granted seven demand registrations. A demand registration
must cover shares of Common Stock with a minimum offering price of $200
million (or $100 million in the case of a registration not involving a widely
distributed, underwritten offering). Demand registration rights do not entitle
the Selling Stockholder to "shelf registrations" under Rule 415 of the
Securities Act.
In addition, subject to certain exceptions, at any time the Company is
registering Common Stock or other equity securities, the Selling Stockholder,
has the right to cause the Company to include Common Stock of the Selling
Stockholder in such registration (a "piggyback registration"). The Selling
Stockholder is entitled to an unlimited number of piggyback registrations.
Securities offered by the Company in any such registration will
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<PAGE>
have priority over shares of Common Stock owned by the Selling Stockholder in
the event that any cutback is requested by the managing underwriter.
The Selling Stockholder is responsible for all reasonable expenses incurred
by the Company and the Selling Stockholder in connection with the exercise of
the Selling Stockholder's demand registration rights (other than certain
expenses relating to the inclusion of shares for the Company's own account).
The Company is responsible for all reasonable expenses incurred by the Company
and the Selling Stockholder in connection with any piggyback registration
(other than the fees of any counsel, accountants or advisors retained by the
Selling Stockholder and other than underwriting discounts, fees and
commissions and stock transfer taxes relating to the Selling Stockholder's
Common Stock). The Registration Rights Agreement provides that the Company may
not grant any registration rights to any other stockholder of the Company that
will interfere with (or have priority over) the demand registration rights or
piggyback registration rights of the Selling Stockholder.
Subject to the following sentence, the Selling Stockholder may assign its
rights with respect to two demand registrations and may assign without
limitation its rights with respect to piggyback registration rights. However,
the Selling Stockholder may assign its rights under the Registration Rights
Agreement to not more than three assignees, and each such assignment must
occur in connection with the sale to such assignee of at least 15 percent of
the shares of Common Stock of the Company then outstanding. In addition, the
Selling Stockholder may assign all its rights to demand registrations to a
person that acquires all the Common Stock then owned by the Selling
Stockholder if it has made no prior assignments of such rights.
Pursuant to the Registration Rights Agreement, the Company, its executive
officers and directors and the Selling Stockholder have agreed to certain
"lock-up" restrictions. The Company has also agreed in the Registration Rights
Agreement to indemnify the Selling Stockholder, any underwriters on behalf of
the Selling Stockholder and certain other persons against certain liabilities,
including liabilities under the Securities Act.
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<PAGE>
TRANSACTIONS BETWEEN THE COMPANY AND THE SELLING STOCKHOLDER
In conjunction with the establishment of the Company by the Selling
Stockholder in 1987, the Company and the Selling Stockholder entered into a
number of agreements for the purpose of defining the ongoing relationship
between them. These agreements were developed in connection with the
establishment of the Company by the Selling Stockholder and, therefore, were
not the result of arms-length negotiations between independent parties. It was
the intention of the Company and the Selling Stockholder that the 1987
agreements and the transactions provided for therein, taken as a whole, should
accommodate the parties' interests in a manner that was fair to both parties,
while continuing certain mutually beneficial joint arrangements.
Subsequent to 1987, additional or modified agreements, arrangements, and
transactions have been entered into by the Company, the Selling Stockholder
and their respective subsidiaries, and other such agreements, arrangements,
and transactions may be entered into in the future. Any future agreements,
arrangements, and transactions will be determined through negotiation between
the Company and the Selling Stockholder or their respective subsidiaries. In
addition, certain of the existing agreements will be modified or terminated
upon consummation of the Transaction.
The following is a summary of the material existing agreements that will be
in effect between the Company and the Selling Stockholder following
consummation of the Transaction (other than the Stockholder Agreement and the
Registration Rights Agreement, which are described under "Selling Stockholder;
Stock Repurchase"). See also Note 3 to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, which is incorporated by reference herein.
AGREEMENTS WITH THE SELLING STOCKHOLDER
Product Sales
The Company sold to the Selling Stockholder and its subsidiaries
approximately $263 million of products during the year ended December 31,
1997. Sales of MTBE to the Selling Stockholder under the ARCO Products
Contract accounted for 6.5 percent of the Company's revenues in 1997. The ARCO
Products Contract has an initial term expiring December 31, 2002, and will
continue thereafter from year to year unless and until terminated by either
party in accordance with its terms. The price of MTBE under the ARCO Products
Contract is well above current spot market levels. Based on domestic spot
market prices for MTBE for 1997, the ARCO Products Contract contributed
approximately $70 million of incremental pre-tax margin above spot prices.
Sales of MTBE by the Company, other than under the ARCO Products Contract,
were not profitable in the first quarter of 1998 and were marginally
unprofitable in 1997. If legislative initiatives were enacted, the Selling
Stockholder might attempt to invoke the force majeure provision in the ARCO
Products Contract in order to reduce the quantities of MTBE it purchases
under, or to terminate, the ARCO Products Contract. The force majeure
provision in the ARCO Products Contract provides that if any governmental law
or regulation impedes, restricts or affects either party's ability to
manufacture, deliver, receive or consume MTBE or otherwise perform under the
ARCO Products Contract (other than the Selling Stockholder's ability to pay),
then such party has the right to reduce, in part or in full, delivery or
receipt of MTBE under the contract. A significant reduction in the Company's
sales under the ARCO Products Contract would have a material adverse effect on
the Company's results of operations, given the favorable pricing under the
ARCO Products Contract. The Selling Stockholder sells more gasoline in
California than in any other state. See "Risk Factors--MTBE Legislative Risks;
Dependence on Selling Stockholder for Profits from MTBE Sales."
Administrative Services Agreement
The Company and the Selling Stockholder are parties to an agreement (the
"Administrative Services Agreement") under which the Selling Stockholder has
provided various services to the Company and the Company has provided various
services to the Selling Stockholder since October 1, 1987. The services that
the Selling Stockholder currently provides thereunder to the Company include
insurance, telecommunications,
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<PAGE>
payroll and employee benefits administration, employee assistance program
services, certain tax and legal services, and services relating to the
issuance of commercial paper and the investment of excess cash. The services
that the Company currently provides thereunder to the Selling Stockholder
include environmental technical services, research and development assistance,
information and communication systems support, and certain legal services. The
Administrative Services Agreement continues in effect from year to year unless
terminated by either party upon 12 months prior notice. Either party may
terminate any type of service that it receives under the Administrative
Services Agreement at any time upon 90 days' prior notice. For the year ended
December 31, 1997, the Company paid the Selling Stockholder a total of
approximately $27 million under the Administrative Services Agreement and
other such agreements (including the lease described below). The Selling
Stockholder paid the Company a total of approximately $1 million.
Leases
The Company leases its facility in Newtown Square, Pennsylvania from the
Selling Stockholder. In 1997, the Company renewed the lease for an additional
term of five years, ending in 2002, but reduced the portion of the premises it
leases. The annual rent paid by the Company to the Selling Stockholder during
the renewal term for the remainder of the leased premises was reduced to $5
million. During 1997, the Company made lease payments to the Selling
Stockholder of $6 million, representing a combination of old and new rental
rates for the Newtown Square, Pennsylvania premises.
Cross-Indemnification Agreement
The Company and the Selling Stockholder are parties to a cross-
indemnification agreement (the "Cross-Indemnification Agreement") that
obligates the Company to indemnify the Selling Stockholder against
substantially all claims relating to the oxygenates and polystyrenics
businesses transferred to the Company and certain assets relating thereto,
including liabilities under certain laws relating to the protection of the
environment and safety in the workplace and liabilities arising out of certain
litigation. Conversely, the Cross-Indemnification Agreement obligates the
Selling Stockholder to indemnify the Company against claims not relating to
the assets, subsidiaries, or business operations transferred to the Company.
Tax Sharing Agreement
The Company and its subsidiaries are members of an affiliated group of
corporations which files a consolidated federal income tax return with the
Selling Stockholder (the "Selling Stockholder Group"). The Company and the
Selling Stockholder are parties to a Tax Sharing Agreement, which applies to
all taxable years in which the Company and its subsidiaries are included in
the Selling Stockholder Group's consolidated return and the five taxable years
thereafter. Following the Transaction, the Company will not be included in the
Selling Stockholder Group's consolidated returns (such cessation, the
"Deconsolidation"). The Company and the Selling Stockholder entered into a Tax
Deconsolidation Agreement, dated May 15, 1998, in order to address certain tax
matters and liabilities arising out of Deconsolidation. The Tax
Deconsolidation Agreement provides that the Tax Sharing Agreement generally
will continue to apply. Under the Tax Sharing Agreement and the Tax
Deconsolidation Agreement, the Company is liable for certain tax liabilities,
which are not expected to be material, that may be triggered as a result of
Deconsolidation, and for the first five taxable years following
Deconsolidation, the Company generally is entitled to receive payments from,
or is required to make payments to, the Selling Stockholder to the extent that
the tax liability of the Company and its subsidiaries is greater or less than
what it would have been if they had never been included in the Selling
Stockholder Group's consolidated returns. The Company will also be responsible
for certain tax liabilities arising out of a governmental tax audit of the
Selling Stockholder Group relating to tax periods ending on or prior to the
Transaction to the extent that such liability is attributable to adjustments
to tax items of the Company. Any liabilities arising out of audit by
governmental tax authorities of taxable periods ending on or before
Deconsolidation will be settled with the Selling Stockholder under the terms
of the Tax Sharing Agreement. The Company's indemnity obligations with respect
to the matters described in the prior two sentences are not expected to be
material.
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<PAGE>
Intellectual Property
The Selling Stockholder has assigned to the Company various United States
and foreign trademarks, together with the registrations and applications
therefor, and has granted the Company a non-exclusive license to use other
trademarks which contain the word "ARCO" and to use the Selling Stockholder's
spark design as a logo. Under the Stockholder Agreement, the Company has
agreed to cease using the Selling Stockholder's name and spark design upon six
months written notice from the Selling Stockholder.
REVIEW BY AUDIT COMMITTEE
Periodically, and at least annually, the Audit Committee of the Board of
Directors reviews the foregoing agreements to assure that such agreements are
fair to the Company and its stockholders. The Audit Committee of the Board of
Directors reviews the integrity of the Company's accounting and financial
reporting standards and practices, maintains communications between the Board
of Directors and external and internal auditors, and initiates special
investigations as deemed necessary. The Audit Committee also reviews at least
once a year all agreements between the Company and the Selling Stockholder
(including their subsidiaries and affiliates) to assure that such agreements
are fair to the Company and all its stockholders. In addition, the Audit
Committee must review prior to execution any proposed related party agreement
that requires payments by or to the Company in excess of $35 million. The
independent accountants and the internal auditors have full and free access to
the Audit Committee and meet with it, with and without management being
present, to discuss all appropriate matters. No member of the Audit Committee
is an officer or employee of the Company or of the Selling Stockholder
(including their subsidiaries and affiliates). The Audit Committee met three
times during 1997. The Audit Committee currently consists of Messrs. Beran
(Chairman) and Savage. Nevertheless, there can be no assurance that each of
such agreements, or the transactions provided for therein, was, or will be in
the future, on terms at least as favorable to the Company as could have been
obtained from unaffiliated third parties.
CERTIFICATE OF INCORPORATION PROVISIONS RELATING TO CORPORATE OPPORTUNITIES
In order to address certain potential conflicts of interest between the
Company and the Selling Stockholder, the Company's Certificate of
Incorporation contains provisions regulating and defining the conduct of
certain affairs of the Company as they may involve the Selling Stockholder and
its officers and directors, and the powers, rights, duties, and liabilities of
the Company and its officers, directors, and stockholders in connection
therewith. In general, these provisions recognize that from time to time the
Company and the Selling Stockholder may engage in the same or similar
activities or lines of business and have an interest in the same areas of
corporate opportunity. The Certificate of Incorporation provides that the
Selling Stockholder shall have no duty to refrain from (1) engaging in
business activities or lines of business the same as or similar to those of
the Company, (2) doing business with any customer of the Company, or (3)
employing any officer or employee of the Company, and neither the Selling
Stockholder nor any officer or director of the Selling Stockholder will be
liable to the Company or to its stockholders for breach of any fiduciary duty
by reason of any such activities of the Selling Stockholder or of such
person's participation therein. The Certificate of Incorporation provides
certain directives as to how a corporate opportunity is to be handled when
presented to an officer or director of either company. It also provides that
the Selling Stockholder is not under any duty to present any corporate
opportunity to the Company that may be a corporate opportunity for both the
Selling Stockholder and the Company, and the Selling Stockholder will not be
liable to the Company or its stockholders for breach of any fiduciary duty as
a stockholder of the Company by reason of the fact that the Selling
Stockholder pursues or acquires such corporate opportunity for itself, directs
such corporate opportunity to another person, or does not present the
corporate opportunity to the Company.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Selling Stockholder is the only person known by the Company to own
beneficially more than five percent of any class of the Company's voting
securities as of the date of this Prospectus. Based upon information contained
in a Schedule 13D filed with the Commission by Archer-Daniels-Midland Company
("ADM"), dated June 13, 1991 (the "Schedule 13D"), ADM owns beneficially
approximately five percent of the Common Stock as of the date of this
Prospectus. The following table sets forth the respective Common Stock
ownership of the Selling Stockholder and ADM based on the Schedule 13D and as
adjusted for the Transaction:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF CURRENT PERCENT PERCENT OF COMMON
NAME AND ADDRESS BENEFICIAL OWNERSHIP OF COMMON STOCK STOCK AS ADJUSTED(1)
---------------- -------------------- --------------- --------------------
<S> <C> <C> <C>
Atlantic Richfield
Company................ 80,000,001 shares(2) 82.2% 50.0%
515 South Flower Street
Los Angeles, California
90071
Archer-Daniels-Midland
Company................ 4,815,300 shares(3)(4) 5.0(5) 5.9(6)(7)
4666 Faries Parkway
Decatur, Illinois 62526
</TABLE>
- --------
(1) See "Selling Stockholder; Stock Repurchase."
(2) Sole voting power, sole dispositive power.
(3) According to the Schedule 13D, ADM has sole voting power and sole
dispositive power.
(4) In addition, according to the Schedule 13D, M. L. Andreas, Senior Vice
President of ADM, owns 17 percent of a corporation that owns 75,000 shares
of Common Stock. Mr. Andreas also is reported as owning 600 shares of
Common Stock in his own name.
(5) ADM's actual holdings of Common Stock may exceed slightly five percent of
the Common Stock.
(6) Assumes that ADM does not purchase any shares of Common Stock in the
Offerings.
(7) Assumes no exercise of the over-allotment option granted to the U.S.
Underwriters. See "Underwriting." If such option is exercised in full,
then the "Percent of Common Stock As Adjusted" would be 5.6 percent.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares of Common Stock owned
beneficially as of February 1, 1998 by each director, each of the four most
highly compensated executive officers in 1997 named in "Management" and all
directors and executive officers as a group. Other than as disclosed in the
following table and accompanying footnotes, the directors, the named executive
officers, and the directors and executive officers as a group did not own any
equity securities of the Company. As of February 1, 1998, the percentage of
shares of any class of equity securities of the Company beneficially owned by
any director or any named executive officer, or by all directors and all
executive officers as a group, did not exceed 1% of the class so owned. Unless
otherwise noted, each individual has sole voting and investment power.
Fractional shares are rounded to the nearest whole number.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
OWNED BENEFICIALLY AS OF
NAME FEBRUARY 1, 1998(1)(2)
---- ------------------------
<S> <C>
Walter F. Beran.................................... 8,453
Anthony G. Fernandes............................... 1,000
Morris Gelb........................................ 59,751
Mark L. Hazelwood.................................. 0
Alan R. Hirsig..................................... 223,804
John H. Kelly...................................... 0
Marie L. Knowles................................... 100
James A. Middleton................................. 2,485
Robert J. Millstone................................ 25,002
Stephen R. Mut..................................... 1,000
Frank Savage....................................... 8,739(3)
Marvin O. Schlanger................................ 126,216
Robert H. Stewart, III............................. 1,000(4)
Walter J. Tusinski................................. 60,095
Donald R. Voelte, Jr. ............................. 0
All directors and all executive officers as a
group,
including those named above....................... 547,571(5)
</TABLE>
- --------
(1) The amounts shown include shares of Common Stock held by the trustees of
the ARCO Chemical Company Capital Accumulation Plan (the "Capital
Accumulation Plan") and the ARCO Chemical Company Savings Plan (the
"Savings Plan") for the accounts of participants. The amounts shown
include shares of restricted Common Stock held under the ARCO Chemical
Company Restricted Stock Plan for Outside Directors as follows: Mr. Beran,
6,453; Mr. Middleton, 1,485; and Mr. Savage, 8,639; Shares of restricted
Common Stock include the right to vote and receive dividends.
(2) The amounts shown include shares that may be acquired within the 60-day
period following February 1, 1998 through the exercise of stock options
covering Common Stock as follows: Mr. Gelb, 57,200; Mr. Hirsig, 200,200;
Mr. Millstone, 22,500; Mr. Schlanger, 117,100; Mr. Tusinski, 45,300; and
all directors and all executive officers as a group (including those just
named), 468,800.
(3) The amount shown includes 100 shares subject to shared voting and
investment power with spouse.
(4) Mr. Stewart resigned from the Board of Directors effective as of February
19, 1998.
(5) The amount shown includes 100 shares subject to shared voting and
investment power. Does not include 4,963 shares held for or by family
members, as to which beneficial ownership is disclaimed.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
EXISTING CREDIT AGREEMENT
The Company has a $500 million bank facility which includes a $200 million,
364-day revolving credit agreement and a $300 million, 5-year revolving credit
agreement (collectively, the "Existing Credit Agreement"). As of June 2, 1998,
there were no borrowings outstanding pursuant to the Existing Credit
Agreement. As a condition to the sale of commercial paper, the Company agreed
to maintain a back-up credit facility at least equal to the principal amount
of any outstanding commercial paper. The Company uses the Existing Credit
Agreement for this purpose. The Company may also draw down under the Existing
Credit Agreement for general corporate purposes. In connection with the Stock
Repurchase, the Company intends to amend its Existing Credit Agreement to
reset the minimum net worth covenant to reflect the effects of the Stock
Repurchase on the Company's capitalization.
BRIDGE FACILITY
In connection with the Stock Repurchase, the Company has received a
commitment from First National Bank of Chicago, as an agent for a syndicate of
lenders, for the Bridge Facility in the amount of $850 million. The Bridge
Facility will bear a floating interest rate at either the agent's base rate or
the applicable LIBOR plus a margin based on the Company's public debt rating
and will mature 364 days after the execution of definitive credit agreements
(which is expected in June 1998). The Bridge Facility will contain covenants
that, among other things: (a) restrict the Company's ability to (i) create
liens on its properties; (ii) merge, consolidate or sell substantially all of
its assets; (iii) engage in sale and leaseback transactions; and (iv) engage
in transactions with its affiliates; and (b) require the Company to (i)
maintain minimum consolidated net worth of $750 million; (ii) furnish to the
lenders the Company's annual audited and quarterly unaudited financial
statements; and (iii) use the proceeds of the loans for the Stock Repurchase
and other general corporate purposes. The Company plans to refinance the
Bridge Facility using a combination of short, medium and long-term financing,
which may include a tranche of non-convertible trust preferred securities.
This permanent financing may be at a higher weighted-average interest rate
than the Bridge Facility.
CERTAIN OTHER INDEBTEDNESS
The Company's publicly issued unsecured debt consists of (i) $200 million of
9.9% debentures due 2000, (ii) $100 million of 9.375% debentures due 2005,
(iii) $100 million of 10.25% debentures due 2010 and (iv) $224 million of 9.8%
debentures due 2020 (collectively, the "Debentures") issued under an
Indenture, dated as of June 15, 1988 (the "Indenture"), between the Company
and The Bank of New York, as trustee. The Debentures rank equally with all
other unsecured and unsubordinated debt of the Company. The Indenture does not
limit the amount of debt, either secured or unsecured, that may be issued by
the Company under the Indenture or otherwise. The Indenture contains a number
of restrictive covenants limiting the Company's ability to (i) incur liens
securing indebtedness for more than 10 percent of the Company's consolidated
net tangible assets (unless the Debentures are ratably secured by such a
lien), (ii) engage in sale and leaseback transactions and (iii) merge,
consolidate or dispose of all or substantially all of its assets. Failure to
pay principal or interest under the Debentures when due, default for 30 days
in the payment of any sinking fund installment when due, default for 90 days
after appropriate notice in performance of any other covenant in the Indenture
or certain events of bankruptcy, insolvency or reorganization constitute
events of default with respect to a particular series of Debentures.
In the first quarter of 1997, the Company entered into a term loan agreement
(the "Dutch Facility") between the Company's wholly owned affiliate, ARCO
Chemie Nederland, Ltd. (Rotterdam Branch), as borrower, the Company, as
guarantor, and Chase Manhattan International Limited, as an agent for a
syndicate of lenders, to refinance two Dutch bank loans having a combined
principal balance of 300 million Dutch guilders ($158 million at the date of
the refinancing) and due in 1997. As part of the agreement, one loan due in
2002 for 300 million Dutch guilders at an interest rate of 0.175 percent over
LIBOR replaced the two borrowings due in
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<PAGE>
1997. Pursuant to the Dutch Facility, the Company must maintain a consolidated
net worth of not less than $1.5 billion. In addition, the Dutch Facility
limits the Company's ability to (i) incur liens securing indebtedness for more
than 15 percent of the Company's consolidated net tangible assets (unless the
Dutch Facility is ratably secured by such a lien) and (ii) dispose of all or
substantially all of its assets.
The French bank loans totaling $33 million at December 31, 1997 entered into
by the Company's wholly owned affiliate, ARCO Chimie France, SNC mature on
various dates through 2006. The weighted average effective interest rate for
these borrowings was approximately 7.2 percent in 1997.
DESCRIPTION OF CAPITAL STOCK
The Company has the authority to issue up to 250,000,000 shares of Common
Stock, par value $1 per share. At April 14, 1998, the Company had outstanding
97,276,339 shares of Common Stock. As of such date, after giving effect to the
Stock Repurchase, the Company would have had outstanding 81,909,107 shares of
Common Stock (assuming no exercise of the U.S. Underwriters' over-allotment
option described herein under "Underwriting") or 86,644,750 shares of Common
Stock (assuming full exercise of such over-allotment option). See "Selling
Stockholder; Stock Repurchase." The Common Stock is listed on the New York
Stock Exchange under the symbol "RCM."
On the Closing Date (as defined), the Company expects to file an amendment
to its Restated Certificate of Incorporation. The following description of the
Company's capital stock gives effect to such amendment and sets forth certain
general terms and provisions of the capital stock. The statements below
describing the capital stock are in all respects subject to and qualified in
their entirety by reference to the applicable provisions of the Company's
Restated Certificate of Incorporation and By-Laws.
Pursuant to the Company's Restated Certificate of Incorporation, as amended,
the Company's capital stock will consist of 510,000,000 shares, consisting of
(i) 250,000,000 shares of Common Stock, (ii) 5,000,000 shares of non-voting
common stock, par value $.01 per share ("Non-Voting Common Stock"), (iii)
5,000,000 shares of class A preferred stock, $.01 par value per share ("Class
A Preferred Stock"), and (iv) 250,000,000 shares of class B preferred stock,
$.01 par value per share ("Class B Preferred Stock").
Each outstanding share of Common Stock will entitle the holder to one vote
on all matters presented to stockholders for a vote, subject to the provisions
of the Company's Certificate of Incorporation regarding the ownership of
shares of Common Stock. Common Stock will have no preemptive rights or
cumulative voting rights. All shares of Common Stock will, when issued, be
duly authorized, fully paid, and nonassessable. Dividends may be paid to the
holders of shares of Common Stock if and when declared by the Board of
Directors of the Company out of funds legally available therefor.
Under Delaware law, stockholders are generally not liable for the Company's
debts or obligations. If the Company is liquidated, subject to the right of
any holders of preferred stock to receive preferential distribution, each
outstanding share of Common Stock and Non-Voting Common Stock will be entitled
to participate pro rata in the assets remaining after payment of, or adequate
provision for, all known debts and liabilities of the Company.
NON-VOTING COMMON STOCK
The Non-Voting Common Stock may be issued only to grantor trusts established
by the Company for the purpose of funding employee benefit plan obligations or
otherwise providing benefits or compensation to employees of the Company (a
"GSOP"). The Non-Voting Common Stock shall not be entitled to vote on any
matter except as required by law. Shares of Non-Voting Common Stock sold,
transferred or otherwise disposed of by a GSOP immediately and automatically
convert into an equal number of shares of Common Stock, subject to adjustment
for Common Stock dividends, splits, combinations or similar transactions.
Except with respect to
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<PAGE>
the voting rights of the Common Stock and the conversion rights of the Non-
Voting Common Stock, the rights and entitlements of Common Stock and Non-
Voting Common Stock are identical in all respects. In the event the U.S.
Underwriters' over-allotment option is not exercised in full, the Company
intends to establish one or more GSOPs and to issue such GSOPs up to 3,000,000
shares of Non-Voting Common Stock. The GSOPs will distribute such shares (at
which time such shares will convert into shares of Common Stock) in the second
through fourth years following the Transaction to satisfy the Company's
obligations under employee benefit plans and other obligations to employees.
CLASS A PREFERRED STOCK
The Class A Preferred Stock may be issued only pursuant to the exercise of
rights under a stockholder rights plan, duly authorized by the Board of
Directors. It is expected that the Board of Directors will designate 250,000
shares of Class A Preferred Stock as Series A Junior Participating Stock
immediately after the amendment of the Company's Restated Certificate of
Incorporation. See "--Rights Agreement."
CLASS B PREFERRED STOCK
The Board of Directors is authorized to issue Class B Preferred Stock in one
or more series and to fix the designations, powers, preferences and rights of
such stock and any qualifications, limitations or restrictions thereof.
Subject to limited exceptions, the Class B Preferred Stock cannot have any
voting rights nor can it be converted into shares of Common Stock and may not
be authorized unless, in the judgment of the Board of Directors upon the
advice of legal counsel, it would not be treated as "stock" pursuant to
Section 1504(a)(4) of the United States Internal Revenue Code of 1986, as
amended from time to time (the "Code") (or any successor or additional section
of the Code dealing with the treatment of stock for purposes of determining
whether a consolidated return may be filed), and any regulations issued
thereunder.
RIGHTS AGREEMENT
Prior to the consummation of the Offerings, the Board of Directors of the
Company adopted a stockholder rights plan, to be effective upon the initial
closing of the Offerings (the date of such closing, the "Closing Date"). In
connection with the stockholder rights plan, the Board of Directors will
declare a dividend of one preferred share purchase right (a "Right") for each
share of Common Stock outstanding on a date to be determined shortly after the
closing of the Offerings. Each Right, when it becomes exercisable, entitles
the registered holder to purchase from the Company one one-thousandth of a
share of Series A Junior Participating Stock at a price of $250.00 per one
one-thousandth of a share, subject to adjustment (the "Purchase Price"). The
description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and a rights agent to be selected by
the Company.
The Rights may have the effect of discouraging, delaying or preventing a
change of control of the Company or unsolicited acquisition proposals. The
Rights cause substantial dilution to a person or group that attempts to
acquire the Company without conditioning the offer on the Rights being
redeemed or a substantial number of Rights being acquired. The following
summary of the Rights Agreement is not complete and is subject to the detailed
provisions of, and is qualified in its entirety by reference to the Rights
Agreement, a copy of which will be filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Rights Agreement provides, among other things and subject to certain
exceptions that, unless certain actions are taken by the Company's Board of
Directors, upon the acquisition by a person of beneficial ownership of 20
percent or more of the Company's outstanding Common Stock, each Right other
than those Rights owned by the acquiring person, will entitle its holder,
among other things, to purchase Common Stock from the Company at a 50 percent
discount from the market price of Common Stock. In addition, in the event of
certain merger, business combination or asset sale transactions after a person
has acquired beneficial ownership of 20 percent or more of the Company's
outstanding shares of Common Stock, each holder of a Right (except Rights
which have been voided in accordance with the provisions of the Rights
Agreement) shall thereafter have
54
<PAGE>
the right to receive, upon exercise, common shares of the acquiring company
having a value equal to two times the Purchase Price.
Until such time as the Selling Stockholder's ownership of Common Stock
decreases to less than 20 percent of the outstanding Common Stock, purchases
by the Selling Stockholder of Common Stock will not cause the Rights to become
exercisable. No transfer by the Selling Stockholder of Common Stock will cause
the Rights to become exercisable if such transfer is to any person that (i)
acquires from the Selling Stockholder in any one transaction beneficial
ownership of Common Stock constituting at least 20 percent of the then
outstanding Common Stock; (ii) immediately after such acquisition,
beneficially owns no more than 50 percent of the outstanding Common Stock; and
(iii) in the case of a person beneficially owning five percent or more of the
outstanding Common Stock prior to such acquisition, has given the Board of
Directors of the Company 90 days' prior notice of its proposed acquisition of
Common Stock from the Selling Stockholder and the terms thereof and continues
to own five percent or more of the outstanding Common Stock during such 90-day
period (an "ARCO Transferee"). Additionally, the Rights will not become
exercisable as a result of a purchase pursuant to a Qualifying Offer.
"Qualifying Offer" means, generally, a tender or exchange offer by an ARCO
Transferee for all the outstanding Common Stock in connection with which the
ARCO Transferee (i) makes an irrevocable commitment to not consummate any
transactions pursuant to such offer for at least 90 days from the commencement
of such offer or, if the offer price is decreased, subject to certain
exceptions, or any other material change is made to the terms of such offer,
90 days after the date of such change, (ii) has offered the same consideration
to all holders of Common Stock and has obtained firm written commitments
sufficient to fund the cash portion of such offer, (iii) causes a nationally
recognized investment bank to deliver an opinion, as to the fairness of the
consideration to be paid pursuant to the offer, on the date that such offer is
commenced and the date that such offer is consummated, and (iv) pays
consideration per share having, on the date of the completion of the offer, a
fair market value (as determined by the Board of Directors) at least equal to
the greatest amount of consideration paid for any Common Stock purchased by
such ARCO Transferee, its affiliates or associates from the Selling
Stockholder, its affiliates or associates within the two-year period prior to
the commencement of the offer and having a cash component that is no less
(proportionately) than the cash, if any, paid to the Selling Stockholder by
such ARCO Transferee, its affiliates and associates during such two-year
period.
So long as the Selling Stockholder and any ARCO Transferee own 20 percent or
more of the then- outstanding shares of Common Stock, the Rights Agreement may
not be replaced or amended or modified in any material respect, and the
Company may not adopt any other rights plan, in each case without the prior
written approval of the Selling Stockholder or of an ARCO Transferee. The
Selling Stockholder has also agreed not to cause any amendment or modification
to the Rights Agreement that would have a material adverse effect on the
protections afforded to stockholders other than the Selling Stockholder.
The Company may not redeem or amend the Rights Agreement to facilitate any
merger or consolidation with or into, any sale of a material amount of the
Company's assets to, or any offer or other transaction with an ARCO Transferee
unless or until an ARCO Transferee shall have purchased Common Stock pursuant
to a Qualifying Offer. Once an ARCO Transferee has purchased Common Stock
pursuant to a Qualifying Offer, subsequent purchases by such ARCO Transferee
are exempted from the dilutive effects of the Rights Agreement.
RESTRICTED STOCK
On July 17, 1997, the Board of Directors of the Company approved a program
under which outside directors serving on the Company's Board of Directors
would be partly compensated in shares of Common Stock, subject to
transferability and forfeiture restrictions ("Restricted Stock"). The plan is
designed to align more closely outside directors' interests with those of the
Company's stockholders. Only outside directors receive compensation for
service on the Board of Directors. The plan applies generally to "outside
directors," that is directors who are neither directors, officers or employees
of the Selling Stockholder nor officers or employees of the Company.
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<PAGE>
Effective as of October 1, 1997, outside directors receive at least 65
percent of their annual compensation for serving on the Board and as Committee
Chair in shares of Restricted Stock. Outside directors have the right, subject
to prior election, to receive the remaining 35 percent of their aggregate
Board of Directors compensation in cash or shares of Restricted Stock. Outside
directors may also elect to convert certain accrued benefits and deferred
compensation to shares of Restricted Stock. Meeting fees are paid in cash.
The plan provides generally that Restricted Stock remains restricted until
retirement from the Board of Directors in accordance with the Company's By-
Laws, death, disability or a change of control of the Company or resignation
from the Board of Directors with the consent of a majority of the remaining
Board of Directors members (which includes the failure to be nominated for re-
election or the failure to be re-elected to the Board of Directors). If
outside directors end their service on the Board of Directors for any other
reason, shares of Restricted Stock held in their accounts are forfeited.
Directors are entitled to vote shares of Restricted Stock and exercise other
rights incident to ownership, including the right to receive dividends.
Dividends on shares of Restricted Stock are reinvested in additional shares of
Restricted Stock.
1998 LONG-TERM INCENTIVE PLAN
Effective as of February 19, 1998, the Company adopted a new compensation
program designed to link executive compensation more closely with business
performance and stockholder returns. The 1998 Long-Term Incentive Plan (the
"1998 LTIP") provides for grants to executives and other key employees of
stock options covering the Company's Common Stock, which are subject to a
four-year vesting period, and of contingent restricted Common Stock, which may
be earned through subsequent performance. Under the 1998 LTIP, the
participant's awards of contingent restricted Common Stock become shares of
restricted Common Stock in increments over time after the Company attains
certain performance goals measured by the achievement of specified RCM
targets. Once earned, shares of restricted Common Stock vest in two equal
installments on the first and second anniversary of the date of vesting. In
addition, the participants have the ability to receive a supplement of
additional shares of restricted Common Stock based on superior Company
performance. Any awards of contingent restricted Common Stock that are not
earned by the expiration of six years from the date of grant will be
forfeited. An aggregate of 8,100,000 shares of Common Stock are reserved for
issuance upon exercise of outstanding stock options or available for grant
under the Company's incentive stock plans.
CHANGE OF CONTROL MATTERS
Change of Control Plan Effective as of February 19, 1998, the Company adopted
a Change of Control Plan (the "Plan"). The Plan provides for the acceleration
of certain benefits and the payment of severance and other allowances upon a
change of control of the Company and subsequent termination of employment
(including constructive termination for executives and senior managers).
Certain benefits, such as the immediate vesting of stock options and shares of
restricted Common Stock, accrue merely upon the occurrence of a change of
control event. A change of control includes (i) the acquisition by any person
or group (other than the Selling Stockholder) of 25 percent or more of the
outstanding shares of the Common Stock, (ii) the merger, consolidation or sale
of substantially all of the assets of the Company, unless after the
consummation of such a transaction, the stockholders of the Company
immediately prior to such transaction own at least 60 percent of the
outstanding shares of stock of the resulting entity, (iii) the liquidation or
dissolution of the Company, (iv) the incumbent directors of the Company
(directors as of February 19, 1998 or individuals elected by them or with
their recommendation) cease to constitute at least a majority of the Company's
Board of Directors, and (v) a change of control of the Selling Stockholder
under the Selling Stockholder's then current change of control plans or
arrangements.
"Opt Out" of DGCL Section 203 The Selling Stockholder has informed the
Company that it intends to adopt a By-Law amendment, acting by written
consent, that "opts out" of Section 203 of the General Corporation Law of the
State of Delaware ("Section 203"), which amended By-Law may only be amended by
a vote of at least 66 2/3 percent of the outstanding Common Stock. The Selling
Stockholder is causing the adoption
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<PAGE>
of the By-Law amendment because of the potential adverse effect of Section 203
on the marketability of the shares of Common Stock to be owned by it upon
consummation of the Transaction. If, at that time, the Company were still
subject to Section 203, and the Selling Stockholder desired to sell a number
of shares of Common Stock to a proposed purchaser which, after giving effect
to such transaction, would own a number of shares of Common Stock constituting
15 percent or more of the outstanding shares of Common Stock, such proposed
purchaser would become an Interested Stockholder under Section 203 and, unless
the Board of Directors of the Company previously approved the purchase,
Section 203 would prevent such purchaser from engaging in a business
combination with the Company for three years thereafter, unless the business
combination were approved by both the Company's Board of Directors and the
holders of at least 66 2/3 percent of the outstanding Common Stock not owned
by the purchaser. Under such circumstances, the Selling Stockholder believes
that its ability to market its shares of Common Stock in blocks aggregating 15
percent or more of the outstanding shares of Common Stock would be
significantly impaired.
Section 203 provides that if a corporation elects by stockholder action not
to be governed by such statute, the election is not effective until the
expiration of 12 months from the date of such election. As a result, the
adoption of the By-Law amendment will not be effective until 12 months after
the date of adoption, and any business combination between the Company and any
Interested Stockholder of the Company who became such during such 12-month
period would continue to be subject to Section 203.
TRANSFER AGENT
The registrar and transfer agent for the Company's Common Stock is First
Chicago Trust Company of New York.
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon completion of the Transaction, there will be an aggregate of 81,909,107
shares of Common Stock outstanding (if the U.S. Underwriters' over-allotment
option described herein under "Underwriting" is not exercised) or 86,644,750
shares of Common Stock outstanding (if such over-allotment option is exercised
in full), in each case without giving effect to shares issued after April 14,
1998 upon exercise of outstanding stock options. All of the outstanding shares
of Common Stock will be freely transferable without restriction, except those
shares held by the Selling Stockholder, the executive officers of the Company
and any director of the Company who is also an officer or employee of the
Company or the Selling Stockholder. Shares of Common Stock held by the Selling
Stockholder and any such officers and directors will constitute "restricted"
securities, within the meaning of Rule 144 under the Securities Act, and may
not be sold unless they are registered under the Securities Act or unless an
exemption from registration, such as the exemption provided by Rule 144, is
available.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned his or her restricted
shares for at least one year from the date such shares were acquired from the
Company or an affiliate of the Company is entitled to sell within any three-
month period a number of such shares that does not exceed the greater of (i)
one percent of the then-outstanding shares of Common Stock and (ii) the
average weekly trading volume in the Common Stock on the New York Stock
Exchange during the four calendar weeks preceding a sale by such person. Sales
under Rule 144 are also subject to certain manner-of-sale provisions, notice
requirements and the availability of current public information about the
Company. Under Rule 144(k), however, a person who has held shares for a
minimum of two years from the date such shares were acquired from the Company
or an affiliate of the Company and who is not, and for the three months prior
to the sale of such shares has not been, an affiliate of the Company, is free
to sell such shares without regard to the volume, manner-of-sale and certain
other limitations contained in Rule 144.
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Subject to the limitations set forth under "Lock-Up Arrangements" below, all
of the restricted outstanding shares are eligible for sale into the public
market pursuant to Rule 144 under the Securities Act. However, the shares held
by the Selling Stockholder are subject to the volume, manner-of-sale and
certain other limitations contained in Rule 144 since the Selling Stockholder
is an affiliate of the Company.
In addition, the Company has reserved an aggregate of up to 8,100,000 shares
of Common Stock for issuance upon exercise of outstanding stock options or
available for grant under the Company's incentive plans. In the event the U.S.
Underwriters' over-allotment option is not exercised in full, the Company
intends to establish one or more grantor trusts that will distribute up to
3,000,000 shares of Common Stock in the second through fourth years following
the Transaction to satisfy the Company's obligations under employee benefit
plans and other obligations to employees.
Following the Transaction, the sale of a substantial number of shares of
Common Stock by the Selling Stockholder, the Company or the Company's
executive officers and directors could adversely affect the market price of
the Common Stock. See "Risk Factors--Shares Eligible for Future Sale."
LOCK-UP ARRANGEMENTS
The Company, its executive officers and directors and the Selling
Stockholder have agreed that, subject to certain exceptions, during the Lock-
up Period (150 days from the date of this Prospectus for the Company and the
Selling Stockholder and 90 days for the executive officers and directors of
the Company), they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell, pledge or otherwise dispose of, directly
or indirectly, or announce the offering of, or register, cause to be
registered or announce the intended registration of, any other shares of
Common Stock or any securities convertible into, or exercisable or
exchangeable for, Common Stock. After expiration of the Lock-up Period, the
Company, its executive officers and directors and the Selling Stockholder may
offer and sell shares of Common Stock without regard to the foregoing
limitations (subject, in the case of sales in the public market, to compliance
with the registration requirements of the Securities Act or, with respect to
the Company's executive officers and directors and the Selling Stockholder,
Rule 144 under the Securities Act).
Pursuant to the Registration Rights Agreement, the Company, its executive
officers and directors and the Selling Stockholder have agreed to restrict
their sales of shares of Common Stock and other equity securities in
connection with any registration of securities that is subject to the
Registration Rights Agreement. See "Selling Stockholder; Stock Repurchase--
Other Agreements."
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement, the Selling Stockholder has
the right to seven demand registrations and unlimited piggyback registrations.
The Company is responsible for certain expenses of the Selling Stockholder
incurred in connection with any such piggyback registration. The Selling
Stockholder's registration rights are assignable to third parties, subject to
certain limitations. See "Selling Stockholder; Stock Repurchase--Other
Agreements--Registration Rights Agreement."
CERTAIN U.S. TAX CONSIDERATIONS TO NON-U.S. STOCKHOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of a share
of Common Stock by a beneficial owner of such share that is not a U.S. person
for U.S. federal income tax purposes (a "non-U.S. holder"). For purposes of
this discussion, a "U.S. person" means (i) a citizen or resident of the United
States, (ii) a corporation or other entity taxable as a corporation created or
organized in the United States or under the laws of the United States or
political subdivision thereof (including the District of Columbia), (iii) an
estate, the income of which is includible in gross income for U.S. federal
income tax purposes regardless of its source, or (iv) a trust if (a) a court
within the United
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States is able to exercise primary supervision over the administration of the
trust, and (b) one or more United States persons have the authority to control
all substantial decisions of the trust.
An individual may, subject to certain exceptions, be deemed to be a resident
alien (as opposed to a nonresident alien) by virtue of being present in the
United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year (counting for such purposes all of the days such individual is present in
the current year, one-third of the days such individual was present in the
immediately preceding year, and one-sixth of the days such individual was
present in the second preceding year). Resident aliens are subject to tax as
if they were U.S. citizens.
This discussion does not address all aspects of U.S. federal income and
estate taxation nor any aspects of state, local, or foreign tax laws. The
discussion does not consider any specific facts or circumstances that may
apply to particular non-U.S. holders (including insurance companies, tax-
exempt organizations, financial institutions, broker dealers or certain U.S.
expatriates or former U.S. residents). Furthermore, the following discussion
is based on current provisions of the Code, the regulations promulgated
thereunder and administrative and judicial interpretations thereof as of the
date hereof, all of which are subject to change, possibly with retroactive
effect.
THE FOLLOWING SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY. EACH
PROSPECTIVE INVESTOR IS URGED TO CONSULT ITS OWN TAX ADVISER AS TO ITS
PERSONAL TAX SITUATION WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL
CONSEQUENCES OF OWNING AND DISPOSING OF A SHARE OF COMMON STOCK, AS WELL AS
ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
U.S. INCOME TAX CONSEQUENCES
In general, dividends paid by the Company to a non-U.S. holder will be
subject to U.S. withholding tax at a 30 percent rate, or if applicable, a
lower treaty rate, unless the dividends are either (i) effectively connected
with the conduct of a trade or business in the United States by a non-U.S.
holder, or (ii) if certain income tax treaties apply, attributable to a United
States permanent establishment maintained by such non-U.S. holder. Dividends
that are effectively connected with the conduct of a trade or business in the
United States by the non-U.S. holder or attributable to a United States
permanent establishment maintained by such non-U.S. holder will generally not
be subject to the withholding tax described above and will generally be
subject instead (i) to the U.S. federal income tax on a net income basis and
(ii) with respect to corporate holders under certain circumstances, to a 30
percent (or, if applicable, lower treaty rate) branch profits tax that in
general is imposed on its "effectively connected earnings and profits" (within
the meaning of the Code) that are repatriated during the taxable year.
Under currently applicable U.S. Treasury regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of that
country (unless the payor has actual knowledge to the contrary) for purposes
of the withholding discussed above and for purposes of determining the
applicability of a tax treaty rate. Under recently finalized Treasury
regulations generally effective for payment made after December 31, 1999 (the
"Final Regulations"), however, a non-U.S. holder of Common Stock who wishes to
claim the benefit of an applicable treaty will be required to satisfy
applicable certification and other requirements. In the case of a foreign
partnership, the certification requirement will generally be applied to the
partners of the partnership. In addition, the Final Regulations will require
the partnership to provide certain information, including a United States
taxpayer identification number, and will provide look-through rules for tiered
partnerships. A non-U.S. holder that is eligible for a reduced rate of U.S.
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the "IRS").
Under current law, a non-U.S. holder generally will not be subject to U.S.
federal income tax on any gain recognized on a sale or other disposition of
Common Stock unless (i) the gain is effectively connected with the conduct of
a trade or a business within the United States of the non-U.S. holder and, if
certain tax treaties apply,
59
<PAGE>
is attributable to a United States permanent establishment maintained by the
non-U.S. holder, (ii) the gain is not described in clause (i) above and the
non-U.S. holder is an individual who holds the Common Stock as a capital
asset, is present in the United States for 183 days or more in the taxable
year of the disposition, and either (a) such individual has a "tax home" (as
defined for U.S. federal income tax purposes) in the United States or (b) the
gain is attributable to an office or other fixed place of business maintained
in the United States by such individual, or (iii) the Company is or has been a
United States real property holding corporation (a "USRPHC") for United States
federal income tax purposes (which the Company does not believe that it is or
is likely to become) at any time within the shorter of the five-year period
preceding such disposition or such non-U.S. holder's holding period. If the
Company is or were to become a USRPHC, gains realized upon a disposition of
Common Stock by a non-U.S. holder not described in clause (i) or (ii) above
which did not directly or indirectly own more than 5 percent of the Common
Stock during the shorter of the periods described above generally would not be
subject to United States federal income tax, provided that the Common Stock is
"regularly traded" on an established securities market (which includes the New
York Stock Exchange). Generally, a corporation is a USRPHC if the fair market
value of its "U.S. real property interests" equals or exceeds 50 percent of
the sum of the fair market value of its worldwide real property interests plus
its other assets used or held for use in a trade or business. In the case of a
non-U.S. holder that is described under clause (i) above, its gain will be
subject to the U.S. Federal income tax on net income that applies to U.S.
persons and, in addition, if such non-U.S. holder is a foreign corporation, it
may be subject to the branch profits tax as described in the preceding
paragraph. An individual non-U.S. holder that is described under clause (ii)
above will be subject to a flat 30 percent tax on the gain derived from the
sale, which may be offset by certain U.S. capital losses (notwithstanding the
fact that he or she is not considered a resident of the United States). Thus,
individual non-U.S. holders who have spent 183 days or more in the United
States in the taxable year in which they contemplate a sale of the Common
Stock are urged to consult their tax advisers as to the tax consequences of
such sale.
U.S. ESTATE TAX CONSEQUENCES
Shares of Common Stock owned or treated as owned by an individual non-U.S.
holder at the time of his or her death will be includible in his or her gross
estate for U.S. federal estate tax purposes unless an applicable estate tax
treaty provides otherwise, and therefore may be subject to U.S. federal estate
tax.
BACK-UP WITHHOLDING AND INFORMATION REPORTING
The Company must report annually to the IRS and to each non-U.S. holder the
amount of dividends paid to and the tax withheld with respect to each non-U.S.
holder. These reporting requirements apply regardless of whether withholding
was reduced or eliminated by an applicable income tax treaty. Copies of these
information returns also may be made available to the tax authorities in the
country in which the non-U.S. holder resides under the provisions of a
specific treaty or agreement with such tax authorities.
Under currently applicable U.S. Treasury regulations, United States backup
withholding tax (which generally is imposed at the rate of 31 percent on
certain payments to persons that fail to furnish the information required
under the United States information reporting requirements) and information
reporting requirements (other than those discussed above) generally will not
apply to dividends paid on Common Stock to a non-U.S. holder at an address
outside the United States. Backup withholding and information reporting
generally will apply, however, to dividends paid on shares of Common Stock to
a non-U.S. holder at an address in the United States, if such holder fails to
establish an exemption or to provide certain other information to the payor.
Under the Final Regulations, the payment of dividends or the payment of
proceeds from the disposition of Common Stock to a non-U.S. holder may be
subject to information reporting and backup withholding unless such recipient
certifies as to its status as a non-U.S. holder in accordance with the
requirements of the Final Regulations.
The payment of proceeds from the disposition of Common Stock to or through a
United States office of a broker will be subject to information reporting and
backup withholding at a rate of 31 percent unless the holder, under penalties
of perjury, certifies, among other things, its status as a non-U.S. holder or
otherwise establishes an exemption. The payment of proceeds from the
disposition of Common Stock by a non-U.S. holder to or
60
<PAGE>
through a non-U.S. office of a non-U.S. broker generally will not be subject
to backup withholding and information reporting except as noted below. In the
case of proceeds from a disposition of Common Stock paid to or through a non-
U.S. office of a broker that is (i) a United States person, (ii) a "controlled
foreign corporation" for United States federal income tax purposes, or (iii) a
foreign person 50 percent or more of whose gross income from all sources from
certain periods is effectively connected with a United States trade or
business, information reporting (but not backup withholding) will apply unless
the broker has documentary evidence in its files that the owner is a non-U.S.
holder (and the broker has no actual knowledge to the contrary).
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a non-U.S. holder generally will be
refunded (or credited against the non-U.S. holder's United States federal
income tax liability, if any), provided that the required information is
furnished to the IRS.
61
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions in the U.S. Underwriting
Agreement, dated the date hereof, each of the underwriters of the U.S.
Offering named below (the "U.S. Underwriters"), for whom Smith Barney Inc.,
Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated are acting as the
representatives (the "Representatives"), has severally agreed to purchase, and
the Selling Stockholder has agreed to sell to each U.S. Underwriter, shares of
Common Stock which equal the number of shares set forth opposite the name of
such U.S. Underwriter below:
<TABLE>
<CAPTION>
U.S. UNDERWRITERS NUMBER OF SHARES
----------------- ----------------
<S> <C>
Smith Barney Inc. ..........................................
Goldman, Sachs & Co. .......................................
Morgan Stanley & Co. Incorporated...........................
----------
Total..................................................... 18,943,000
==========
</TABLE>
Under the terms and subject to the conditions contained in the International
Underwriting Agreement, dated the date hereof, each of the managers of the
concurrent International Offering named below (the "Managers"), for whom Smith
Barney Inc., Goldman Sachs International and Morgan Stanley & Co.
International Limited are acting as the lead managers (the "Lead Managers"),
has severally agreed to purchase, and the Selling Stockholder has agreed to
sell to each Manager, shares of Common Stock which equal the number of shares
set forth opposite the name of such Manager below:
<TABLE>
<CAPTION>
MANAGERS NUMBER OF SHARES
-------- ----------------
<S> <C>
Smith Barney Inc. ..........................................
Goldman Sachs International.................................
Morgan Stanley & Co. International Limited..................
---------
Total..................................................... 4,735,215
=========
</TABLE>
The U.S. Underwriters and the Managers (collectively, the "Underwriters")
initially propose to offer part of the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and part to certain dealers at a price that represents a concession
not in excess of $ per share below the public offering price. The U.S.
Underwriters and the Managers may allow, and such dealers may reallow, a
concession not in excess of $ per share to other U.S. Underwriters and
Managers or to certain other dealers. After the initial offering of the shares
of Common Stock offered hereby, the public offering price and other selling
terms may be changed by the U.S. Underwriters and the Managers. Each of the
U.S. Underwriting Agreement and the International Underwriting Agreement
provides that the obligations of the U.S. Underwriters and the Managers to pay
for and accept delivery of the shares of Common Stock offered hereby are
subject to the approval of certain legal matters by counsel and to certain
other conditions. The U.S. Underwriters and the Managers are obligated to take
and pay for all the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
taken.
The Selling Stockholder has granted to the U.S. Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of 2,367,822 additional shares of Common Stock at the price to
public set forth on the cover page of this Prospectus, less underwriting
discounts and commissions. The U.S. Underwriters may exercise such option to
purchase additional shares of Common Stock solely for the purpose of covering
over-allotments, if any, in connection with the sale of the shares of Common
Stock offered hereby. To the extent such option is exercised, the U.S.
Underwriters will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the number of shares of Common Stock set forth opposite the U.S. Underwriters'
names in the preceding table bears to the total number of shares in such
table.
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<PAGE>
The Company and the Selling Stockholder have agreed to indemnify the U.S.
Underwriters and the Managers against certain liabilities, including
liabilities under the Securities Act.
The Company, its executive officers and directors and the Selling
Stockholder have agreed that, for a period of 150 days (or 90 days in the case
of executive officers and directors of the Company) from the date of this
Prospectus, they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell, pledge or otherwise dispose of, directly
or indirectly, or announce the offering of, or register, cause to be
registered or announce the intended registration of, any other shares of
Common Stock or any securities convertible into, or exercisable or
exchangeable for, Common Stock, other than (i) with respect to the Selling
Stockholder, sales to the Company, (ii) with respect to the Company, the
issuance of shares of Common Stock or such other securities pursuant to the
exercise of stock options or pursuant to any existing benefit plan of the
Company and (iii) the Transaction.
The U.S. Underwriters and the Managers have entered into an Agreement
Between U.S. Underwriters and Managers pursuant to which each U.S. Underwriter
has agreed that, as part of the distribution of the 18,943,000 shares of
Common Stock offered in the U.S. Offering, (i) it is not purchasing any such
shares for the account of anyone other than a U.S. or Canadian Person (as
defined below) and (ii) it has not offered or sold, and will not offer, sell,
resell or deliver, directly or indirectly, any of such shares or distribute
any prospectus relating to the U.S. Offering outside the United States or
Canada or to anyone other than a U.S. or Canadian Person. In addition, each
Manager has agreed that as part of the distribution of the 4,735,215 shares of
Common Stock offered in the International Offering, (i) it is not purchasing
any such shares for the account of any U.S. or Canadian Person and (ii) it has
not offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any of such shares or distribute any prospectus relating to the
International Offering in the United States or Canada or to any U.S. or
Canadian Person. Each Manager has also agreed that it will offer to sell
shares only in compliance with all relevant requirements of any applicable
laws.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. Underwriting Agreement, the
International Underwriting Agreement and the Agreement Between U.S.
Underwriters and Managers, including: (i) certain purchases and sales between
the U.S. Underwriters and the Managers; (ii) certain offers, sales, resales,
deliveries or distributions to or through investment advisors or other persons
exercising investment discretion; (iii) purchases, offers or sales by a U.S.
Underwriter who is also acting as a Manager or by a Manager who is also acting
as a U.S. Underwriter; and (iv) other transactions specifically approved by
the Representatives and the Lead Managers. As used herein, "U.S. or Canadian
Person" means any resident or national of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or any estate or trust the income of which
is subject to United States or Canadian income taxation regardless of the
source of its income (other than the foreign branch of any U.S. or Canadian
Person), and includes any United States or Canadian branch of a person other
than a U.S. or Canadian Person.
Any offer of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the relevant province of Canada
in which such offer is made.
Each Manager has represented and agreed during the period of six months from
the date hereof that it (i) has not offered or sold and will not offer or sell
any shares to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (whether as principal or agent) for the purposes of their
businesses or in other circumstances which do not constitute an offer to the
public in the United Kingdom for the purposes of the Public Offers of
Securities Regulation 1995 (the "Regulations"), (ii) has complied and will
comply with all applicable provisions of the Regulations and of the Financial
Services Act 1986 with respect to anything done by it in relation to the
shares in, from or otherwise involving the United Kingdom and (iii) has only
issued or passed on and will only issue or pass on in the United Kingdom any
document received by it in connection with the issue of these shares if that
person is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended) or is a
person to whom such documents may otherwise lawfully be issued or passed on.
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<PAGE>
No action has been or will be taken in any jurisdiction by the Company, the
Selling Stockholder, the U.S. Underwriters or the Managers that would permit
any offering to the general public of the shares of Common Stock offered
hereby in any jurisdiction other than the United States.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the
cover page hereof.
Pursuant to the Agreement Between U.S. Underwriters and Managers, sales may
be made between the U.S. Underwriters and the Managers of such number of
shares of Common Stock as may be mutually agreed. The price of any shares so
sold shall be the public offering price as then in effect for shares being
sold by the U.S. Underwriters and the Managers, less all or any part of the
selling concession, unless otherwise determined by mutual agreement. To the
extent that there are sales between the U.S. Underwriters and the Managers
pursuant to the Agreement Between U.S. Underwriters and Managers, the number
of shares initially available for sale by the U.S. Underwriters and by the
Managers may be more or less than the number of shares appearing on the front
cover of this Prospectus.
In connection with the Offerings and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more Common Stock than the total amount
shown on the list of Underwriters and participations which appears above) and
may effect transactions which stabilize, maintain or otherwise affect the
market price of the Common Stock at levels above those which might otherwise
prevail in the open market. Such transactions may include placing bids for the
Common Stock or effecting purchases of the Common Stock for the purpose of
pegging, fixing or maintaining the price of the Common Stock or for the
purpose of reducing a syndicate short position created in connection with the
Offerings. A syndicate short position may be covered by exercise of the option
described above in lieu of or in addition to open market purchases. In
addition, the contractual arrangements among the Underwriters include a
provision whereby, if the Representatives or Lead Managers purchases Common
Stock in the open market for the account of the underwriting syndicate and the
securities purchased can be traced to a particular U.S. Underwriter, Manager
or syndicate member, the underwriting syndicate may require the U.S.
Underwriter, Manager or syndicate member in question to purchase the Common
Stock in question at the cost price to the syndicate or may recover from (or
decline to pay to) the U.S. Underwriter, Manager or syndicate member in
question the selling concession applicable to the securities in question. The
Underwriters are not required to engage in any of these activities and any
such activities, if commenced, may be discontinued at any time.
The Representatives and their respective affiliates have from time to time
performed various investment banking services for the Company and the Selling
Stockholder, for which the Representatives and their respective affiliates
have received customary compensation. Salomon Brothers Inc advised the Selling
Stockholder in the discussions between the Selling Stockholder and the Special
Committee of the Company regarding the terms of the Transaction.
LEGAL MATTERS
The validity of the Common Stock being offered hereby and certain other
legal matters relating to the Offerings will be passed upon for the Company by
Robert J. Millstone, Esq., Vice President and General Counsel of the Company,
and for the Selling Stockholder by Diane A. Ward, Esq., Senior Counsel,
Securities and Finance of the Selling Stockholder. At May 28, 1998, Mr.
Millstone owned 2,502 shares of Common Stock and options covering 68,900
shares of Common Stock, and Ms. Ward owned 1,824 shares of ARCO Common Stock
and options covering 900 shares of ARCO Common Stock. Certain legal matters
will be passed upon for the Underwriters by Cravath, Swaine & Moore, New York,
New York. Cravath, Swaine & Moore has served in the past as outside counsel to
the Selling Stockholder and is currently advising the Selling Stockholder on a
matter unrelated to the Offerings.
64
<PAGE>
EXPERTS
The consolidated balance sheets as of December 31, 1997 and 1996 and the
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997, incorporated by
reference in this Prospectus, have been incorporated herein in reliance on the
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission relating to its business, financial position,
results of operations and other matters. Such reports, proxy statements and
other information filed by the Company with the Commission pursuant to the
informational requirements of the Exchange Act can be inspected and copied at
the Public Reference Section maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 as well as the Commission's
regional offices located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material can be obtained from the Commission by mail at
prescribed rates. Requests should be directed to the Commission's Public
Reference Section located at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such material may also be accessed electronically at
the Commission's web site on the Internet (http://www.sec.gov). Such reports,
proxy statements and other information can also be inspected at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005, on
which the Company's securities are listed.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act. This Prospectus does not
contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Reference is made to the Registration Statement
and to the exhibits relating thereto for further information with respect to
the Company and the securities offered thereby. Statements contained herein
concerning any document filed as an exhibit are not necessarily complete and,
in each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement. Each such statement is qualified in its
entirety by such reference.
65
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference herein the following documents:
(i) the Company's Annual Report on Form 10-K for the year ended December 31,
1997, (ii) the Company's Quarterly Report on Form 10-Q for the three months
ended March 31, 1998, (iii) the Company's definitive proxy statement for its
Annual Meeting of Stockholders held on May 14, 1998, and (iv) the description
of Common Stock contained in the Company's Current Report on Form 8-K, dated
September 11, 1990, all of which have been or will be filed with the
Commission under File No. 1-9678.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date hereof and prior to the termination
of the Offerings of the Common Stock offered hereby shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of
filing of such documents. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request of such person, a copy of any and all of the information incorporated
herein by reference (not including exhibits to such information, unless such
exhibits are specifically incorporated by reference into such information).
Requests should be directed to: Manager, Investor Relations, ARCO Chemical
Company, 3801 West Chester Pike, Newtown Square, Pennsylvania 19073-2387
(Telephone: (610) 359-2000).
66
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM
IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Summary Historical and Pro Forma Financial Data.......................... 7
Risk Factors............................................................. 9
Market for the Company's Common Stock.................................... 17
Dividends................................................................ 17
Use of Proceeds.......................................................... 17
Capitalization........................................................... 18
Selected Historical and Pro Forma Financial Data......................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 30
Management............................................................... 40
Selling Stockholder; Stock Repurchase.................................... 43
Transactions Between the Company and the Selling Stockholder............. 47
Security Ownership of Certain Beneficial Owners.......................... 50
Security Ownership Of Management......................................... 51
Description of Certain Indebtedness...................................... 52
Description of Capital Stock............................................. 53
Shares Eligible for Future Sale.......................................... 57
Certain U.S. Tax Considerations to Non-U.S. Stockholders................. 58
Underwriting............................................................. 62
Legal Matters............................................................ 64
Experts.................................................................. 65
Available Information.................................................... 65
Incorporation of Certain Documents by Reference.......................... 66
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
23,678,215 SHARES
ARCO CHEMICAL COMPANY
COMMON STOCK
[ISSUER'S LOGOTYPE]
--------
PROSPECTUS
, 1998
--------
SALOMON SMITH BARNEY
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[INTERNATIONAL PROSPECTUS ALTERNATE PAGE]
SUBJECT TO COMPLETION, DATED JUNE 2, 1998
PROSPECTUS
23,678,215 SHARES
[LOGO] ARCO CHEMICAL COMPANY
COMMON STOCK
All of the shares of Common Stock, $1.00 par value (the "Common Stock"), of
ARCO Chemical Company (the "Company") being offered hereby are being sold by
Atlantic Richfield Company ("ARCO" or the "Selling Stockholder"). The Company
will not receive any of the proceeds from the sale of shares by the Selling
Stockholder.
Of the 23,678,215 shares being offered, 4,735,215 shares are being offered
in an international offering outside the United States and Canada (the
"International Offering") by the Managers (as defined) and 18,943,000 shares
are being offered in a concurrent offering (the "U.S. Offering" and, together
with the International Offering, the "Offerings") in the United States and
Canada by the U.S. Underwriters (as defined). The U.S. Underwriters and the
Managers are collectively referred to as the "Underwriters." The Price to
Public and the Underwriting Discounts and Commissions for each of the
Offerings will be identical.
In connection with the Offerings, the Company will repurchase (the "Stock
Repurchase") from the Selling Stockholder, at a price per share (the
"Repurchase Price") paid by the public in the Offerings, a number of shares of
Common Stock such that, upon completion of the Offerings and the Stock
Repurchase (together, the "Transaction"), the Selling Stockholder will own 50
percent of the then-outstanding shares of Common Stock (whether or not the
U.S. Underwriters' over-allotment option is exercised). Assuming the U.S.
Underwriters' over-allotment option is not exercised, the aggregate amount of
the Stock Repurchase will equal $850 million (or 15,367,232 shares of Common
Stock assuming the Repurchase Price equals the reported last sale price on May
28, 1998). See "Selling Stockholder; Stock Repurchase."
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "RCM." The reported last sale price of the Company's Common Stock
on the New York Stock Exchange on May 28, 1998 was $55 5/16 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS(1) STOCKHOLDER(2)
- -------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -------------------------------------------------
Total(3) $ $ $
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $ million payable by the Selling
Stockholder.
(3) The Selling Stockholder has granted the U.S. Underwriters a 30-day option
to purchase up to 2,367,822 additional shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Selling Stockholder will be $ , $ and
$ , respectively.
----------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about ,
1998, at the office of Smith Barney Inc., 333 West 34th Street, New York, New
York 10001 or through the facilities of The Depository Trust Company.
----------------
SALOMON SMITH BARNEY INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
MORGAN STANLEY DEAN WITTER
, 1998
<PAGE>
[INTERNATIONAL PROSPECTUS ALTERNATE PAGE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM
IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Summary Historical and Pro Forma Financial Data.......................... 7
Risk Factors............................................................. 9
Market for the Company's Common Stock.................................... 17
Dividends................................................................ 17
Use of Proceeds.......................................................... 17
Capitalization........................................................... 18
Selected Historical and Pro Forma Financial Data......................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 30
Management............................................................... 40
Selling Stockholder; Stock Repurchase.................................... 43
Transactions Between the Company and the Selling Stockholder............. 47
Security Ownership of Certain Beneficial Owners.......................... 50
Security Ownership Of Management......................................... 51
Description of Certain Indebtedness...................................... 52
Description of Capital Stock............................................. 53
Shares Eligible for Future Sale.......................................... 57
Certain U.S. Tax Considerations to Non-U.S. Stockholders................. 58
Underwriting............................................................. 62
Legal Matters............................................................ 64
Experts.................................................................. 65
Available Information.................................................... 65
Incorporation of Certain Documents by Reference.......................... 66
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
23,678,215 SHARES
ARCO CHEMICAL COMPANY
COMMON STOCK
[ISSUER'S LOGOTYPE]
-------
PROSPECTUS
, 1998
-------
SALOMON SMITH BARNEY INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
MORGAN STANLEY DEAN WITTER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with the
issuance and distribution of the securities being registered hereby, other
than underwriting discounts and commissions. The Selling Stockholder is paying
all of the expenses in connection with the issuance and distribution of the
securities.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 424,000
Accountants' fees and expenses................................... 100,000
Legal fees and expenses.......................................... 2,900,000
Printing, materials and postage.................................. 1,000,000
Transfer agent fee and expenses.................................. 25,000
Miscellaneous.................................................... 551,000
----------
Total.......................................................... $5,000,000
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Section 25 of the By-Laws of the Company and to Section
145 of the General Corporation Law of the State of Delaware as set forth
below.
Section 25 of the By-Laws of the Company provides:
(a) Right to Indemnification. Each person who was or is a party or is
threatened to be made a party to or is involved or is threatened to be
involved (as a witness or otherwise) in or otherwise requires representation
by counsel in connection with any threatened, pending or completed action,
suit or proceeding, or any inquiry that such person in good faith believes
might lead to the institution of any such action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a director or officer of the
Company or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, and the basis of such proceeding is alleged action or inaction
in an official capacity or in any other capacity while serving as such a
director, officer, employee or agent, shall be indemnified and held harmless
by the Company to the fullest extent authorized by the General Corporation Law
of Delaware, as the same exists or may hereafter be amended (but, in the case
of any such amendment with reference to events occurring prior to the
effective date thereof, only to the extent that such amendment permits the
company to provide broader indemnification rights than such law permitted the
Company to provide prior to such amendment), against all costs, charges,
expenses, liabilities and losses (including attorneys fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid in settlement) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director
or officer (or to serve another entity at the request of the Company) and
shall inure to the benefit of such persons heirs, personal representatives and
estate; provided, however, that, except as provided in paragraph (b) hereof,
the Company shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person
against the Company only if such proceeding (or part thereof) was authorized
prior to its initiation by a majority of the disinterested members of the
Board of Directors of the Company. The rights to indemnification conferred in
this Section shall include the right to be paid by the Company any expenses
incurred in defending any such proceeding in advance of its final disposition;
provided, however, that, if the General Corporation Law of Delaware requires,
payment shall be made to or on behalf of a person only upon delivery to the
Company of an undertaking, by or on behalf of such person, to repay all
amounts so advanced if it shall ultimately be determined that such person is
not entitled to be indemnified under this Section or otherwise. The rights to
indemnification conferred in this Section shall be deemed to be a contract
between the Company and each person who serves in the capacities described
II-1
<PAGE>
above at any time while this Section is in effect. Any repeal or modification
of this Section shall not in any way diminish any rights to indemnification of
such person or the obligations of the Company arising hereunder.
(b) Right of Claimant to Appeal and to Bring Suit. If a claim under
paragraph (a) of this Section is not paid in full by the Company within thirty
days after a written claim has been received by the Company, the claimant may
submit a written appeal to the Chairman of the Board. If the claim is not paid
in full by the Company within thirty days after a written appeal has been
received by the Chairman of the Board, the claimant may at any time thereafter
bring suit against the Company to recover the unpaid amount of the claim. If
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting or defending such claim. In any action brought by
the claimant to enforce a right to indemnification hereunder or by the Company
to recover payments by the Company for expenses incurred by a claimant in a
proceeding in advance of its final disposition, the burden of proving that the
claimant is not entitled to be indemnified under this Section or otherwise
shall be on the Company. Neither the failure of the Company (including its
Board of Directors or its independent legal counsel) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because the claimant has met the
applicable standard of conduct set forth in the General Corporation Law of
Delaware, nor an actual determination by the Company (including its Board of
Directors or its independent legal counsel) that the claimant has not met such
applicable standard of conduct, shall create a presumption that the claimant
has not met the applicable standard of conduct or, in the case of such an
action brought by the claimant, be a defense to the action.
(c) Non-Exclusivity of Rights. The right to indemnification and the payment
of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Section shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute, the
Company's Certificate of Incorporation, any By-Law, any agreement, a vote of
Company stockholders or of disinterested Company directors or otherwise, both
as to action in that person's official capacity and as to action in any other
capacity by holding such office, and shall continue after the person ceases to
serve the Company as a director or officer or to serve another entity at the
request of the Company.
(d) Insurance. The Company may maintain insurance, at its expense, to
protect itself and any director or officer of the Company or another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the Company would have the power to
indemnify such person against such expense, liability or loss under the
General Corporation Law of Delaware.
(e) Indemnity Agreements. The Company may from time to time enter into
indemnity agreements with the persons who are members of its Board of
Directors and with such officers or other persons as the Board may designate,
such indemnity agreements to provide in substance that the Company will
indemnify such persons to the fullest extent of the provisions of this Section
25.
(f) Indemnification of Employees and Agents of the Company. The Company may,
under procedures authorized from time to time by the Board of Directors, grant
rights to indemnification, and to be paid by the Company the expenses incurred
in defending any proceeding in advance of its final disposition, to any
employee or agent of the Company to the fullest extent of the provisions of
this Section 25.
Section 145 of the General Corporation Law of the State of Delaware ("DGCL")
provides:
(a) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that the person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in connection with such action,
suit or proceeding if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the
II-2
<PAGE>
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees actually and reasonably incurred
by the person in connection with the defense or settlement of such action or
suit if the person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of
the present or former director, officer, employee or agent is proper in the
circumstances because the person has met the applicable standard of conduct
set forth in subsections (a) and (b) of this section. Such determination shall
be made, with respect to a person who is a director or officer at the time of
such determination, (1) by a majority vote of the directors who are not
parties to such action, suit or proceeding, even though less than a quorum, or
(2) by a committee of such directors designated by majority vote of such
directors, even though less than a quorum, or (3) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion, or (4) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding may be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of such director or officer to repay such amount if it shall
ultimately be determined that such person is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses (including
attorneys' fees) incurred by former directors and officers or other employees
and agents may be so paid upon such terms and conditions, if any, as the
corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
such person's official capacity and as to action in another capacity while
holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise
II-3
<PAGE>
against any liability asserted against such person and incurred by such person
any such capacity, or arising out of such person's status as such, whether or
not the corporation would have the power to indemnify such person against such
liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power
and authority to indemnify its directors, officers, and employees or agents,
so that any person who is or was a director, officer, employee or agent of
such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall
stand in the same position under this section with respect to the resulting or
surviving corporation as such person would have with respect to such
constituent corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee
or agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner such
person reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to
in this section.
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction to
hear and determine all actions for advancement of expenses or indemnification
brought under this section or under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees).
The Company's Restated Certificate of Incorporation provides that the
personal liability of a director for the Company to the Company or to its
stockholders for monetary damages for breach of fiduciary duty as a director
shall be limited or eliminated to the fullest extent permitted by the DGCL, as
amended from time to time. Section 102(b)(7) of the DGCL permits a Delaware
corporation such as the Company to include in its certificate of incorporation
a provision that eliminates or limits the ability of the corporation and its
stockholders to recover monetary damages from a director for breach of
fiduciary duty as a director; but does not permit such a provision to
eliminate or limit the liability of a director for (i) any breach of the duty
of loyalty to the corporation or its stockholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided under certain provisions of Delaware law, or (iv) any
transaction from which the director derived an improper personal benefit.
Under an Administrative Services Agreement between the Selling Stockholder
and the Company, the Selling Stockholder provides the Company with insurance
coverage under the Selling Stockholder's Directors' and Officers' Liability
Insurance, which currently has a limit of $205 million, to the extent
authorized by the By-Laws of the Company and the laws of the State of
Delaware.
Under the Underwriting Agreements to be entered into among the Company, the
Selling Stockholder and the underwriters, the underwriters will agree to
indemnify the Company, its directors and certain of its officers against
certain civil liabilities, including civil liabilities under the Securities
Act.
II-4
<PAGE>
ITEM 16. EXHIBITS
The following exhibits are filed herewith or incorporated by reference:
<TABLE>
<C> <S>
1-1 Form of U.S. Underwriting Agreement among the Registrant, the Selling
Stockholder and Smith Barney Inc., Goldman, Sachs & Co. and Morgan
Stanley & Co. Incorporated as Representatives*
1-2 Form of International Underwriting Agreement among the Registrant, the
Selling Stockholder and Smith Barney Inc., Goldman Sachs International
and Morgan Stanley & Co. International Limited as Lead Managers*
3-1 Restated Certificate of Incorporation of the Registrant*
3-2 By-Laws of the Registrant*
4-1 Registration Rights Agreement dated as of June 2, 1998 between the
Registrant and the Selling Stockholder
4-2 Stockholder Agreement dated as of June 2, 1998 between the Registrant and
the Selling Stockholder
4-3 Stock Repurchase Agreement dated as of June 2, 1998 between the
Registrant and the Selling Stockholder
4-4 Form of Rights Agreement*
4-5 Specimen certificate of shares of Common Stock*
4-6 Tax Deconsolidation Agreement dated as of May 15, 1998 between the
Registrant and the Selling Stockholder*
4-7 Form of Credit Agreement dated as of , 1998 among the Registrant, the
Banks party thereto and the First National Bank of Chicago, as Agent*
4-8 Form of Amendment No. 1 to Credit Agreement B dated as of , 1998
among the Registrant, the Banks party thereto and the First National Bank
of Chicago, as Agent*
5-1 Opinion Robert J. Millstone, Vice President and General Counsel of the
Registrant*
23-1 Consent of Coopers & Lybrand L.L.P.
23-2 Consent of Robert J. Millstone (incorporated in Exhibit 5-1)
24-1 Power of Attorney
</TABLE>
- --------
* To be filed by Amendment.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report, to security holders that is incorporated
by reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification
II-5
<PAGE>
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Newtown Square, Pennsylvania, on the 2nd day of
June, 1998.
Arco Chemical Company
*
By:__________________________________
MARVIN O. SCHLANGER
II-7
<PAGE>
SIGNATURE TITLE DATE
* Chairman of the June 2, 1998
- ------------------------------------- Board and Director
ANTHONY G. FERNANDES
* Vice Chairman and June 2, 1998
- ------------------------------------- Director
ALAN R. HIRSIG
* President, Chief June 2, 1998
- ------------------------------------- Executive Officer
MARVIN O. SCHLANGER and Director
* Senior Vice June 2, 1998
- ------------------------------------- President, Chief
WALTER J. TUSINSKI Financial Officer
and Director
/s/ Van Billet Vice President and June 2, 1998
- ------------------------------------- Controller
VAN BILLET
* Director June 2, 1998
- -------------------------------------
WALTER F. BERAN
* Director June 2, 1998
- -------------------------------------
MARK L. HAZELWOOD
* Director June 2, 1998
- -------------------------------------
JOHN H. KELLY
* Director June 2, 1998
- -------------------------------------
MARIE L. KNOWLES
* Director June 2, 1998
- -------------------------------------
JAMES A. MIDDLETON
* Director June 2, 1998
- -------------------------------------
STEPHEN R. MUT
II-8
<PAGE>
SIGNATURE TITLE DATE
* Director June 2, 1998
- -------------------------------------
FRANK SAVAGE
* Director June 2, 1998
- -------------------------------------
DONALD R. VOELTE, JR.
/s/ Van Billet
*By: ________________________________
ATTORNEY-IN-FACT
II-9
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1-1 Form of U.S. Underwriting Agreement among the Registrant, the Selling
Stockholder and Smith Barney Inc., Goldman, Sachs & Co. and Morgan
Stanley & Co. Incorporated as Representatives*
1-2 Form of International Underwriting Agreement among the Registrant, the
Selling Stockholder and Smith Barney Inc., Goldman Sachs International
and Morgan Stanley & Co. International Limited as Lead Managers*
3-1 Restated Certificate of Incorporation of the Registrant*
3-2 By-Laws of the Registrant*
4-1 Registration Rights Agreement dated as of June 2, 1998 between the
Registrant and the Selling Stockholder
4-2 Stockholder Agreement dated as of June 2, 1998 between the Registrant
and the Selling Stockholder
4-3 Stock Repurchase Agreement dated as of June 2, 1998 between the
Registrant and the Selling Stockholder
4-4 Form of Rights Agreement*
4-5 Specimen certificate of shares of Common Stock*
4-6 Tax Deconsolidation Agreement dated as of May 15, 1998 between the
Registrant and the Selling Stockholder*
4-7 Form of Credit Agreement dated as of , 1998 among the Registrant,
the Banks party thereto and The First National Bank of Chicago, as
Agent*
4-8 Form of Amendment No. 1 to Credit Agreement B dated as of , 1998
among the Registrant, the Banks party thereto and The First National
Bank of Chicago, as Agent*
5-1 Opinion Robert J. Millstone, Vice President and General Counsel of the
Registrant*
23-1 Consent of Coopers & Lybrand L.L.P.
23-2 Consent of Robert J. Millstone (incorporated in Exhibit 5-1)
24-1 Power of Attorney
</TABLE>
- --------
* To be filed by Amendment.
<PAGE>
EXHIBIT 4.1
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated as of June 2, 1998 (this "Registration
------------
Rights Agreement"), by and between Atlantic Richfield Company, a Delaware
- ----------------
corporation (the "Stockholder"), and ARCO Chemical Company, a Delaware
-----------
corporation (the "Company").
-------
WHEREAS, contemporaneously with the execution hereof, the Stockholder and
the Company are entering into the Stock Repurchase Agreement, dated as of the
date hereof, which contemplates that the Stockholder will offer to the public in
an underwritten public offering (the "Public Offering") a portion of the shares
---------------
of Common Stock owned by the Stockholder and the Company will repurchase from
the Stockholder a portion of the shares of Common Stock owned by the Stockholder
(the "Stock Repurchase" and, together with the Public Offering, the
----------------
"Transaction");
-----------
WHEREAS, upon consummation of the Transaction, the Stockholder shall own
50.0% of the issued and outstanding shares of Common Stock;
WHEREAS, the Stockholder and the Company desire that, after the
consummation of the Transaction, the Stockholder have the right to have
Registrable Securities (as hereinafter defined) registered under the Securities
Act (as hereinafter defined), upon the terms and subject to the conditions set
forth in this Registration Rights Agreement; and
WHEREAS, the Stockholder and the Company desire that this Registration
Rights Agreement become effective as of the consummation of the Transaction.
NOW THEREFORE, in consideration of the mutual agreements and covenants set
forth in this Registration Rights Agreement, the parties agree as follows:
Section 1. Definitions. For purposes of this Registration Rights
-----------
Agreement, each of the following underlined terms shall have the meaning
specified with respect to such term:
"Action" has the meaning specified in Section 6(c) hereof.
------
"Affiliate", with respect to any specified Person, shall mean any
---------
other Person that, directly or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, such specified
Person. For purposes of this Registration Rights Agreement, the term "control"
(including, with its correlative meanings, "controlled by" and "under common
control with") shall mean possession, directly or indirectly of power to direct
or cause the direction of management or policies (whether through ownership of
securities or partnership or other ownership interests, by contract or
otherwise); provided, however, that neither the Company nor the Stockholder
-------- -------
shall be deemed to be an Affiliate of the other.
<PAGE>
2
"commercially reasonable" as used herein shall be understood to
-----------------------
include a requirement to pay all customary fees and expenses and to take all
other customary actions, in each case with respect to the matter to which it
refers.
"Common Stock" means (i) the common stock, par value $1 per share, of
------------
the Company, (ii) any stock or other securities into which or for which such
common stock may hereafter be changed, converted or exchanged, and (iii) any
other securities (other than rights issued pursuant to any rights plans) issued
to holders of such common stock (or such securities into which or for which such
common stock is so changed, converted or exchanged) upon any reclassification,
share combination, share subdivision, share dividend, merger, consolidation or
similar transaction(s) or event(s).
"Company Indemnified Parties" has the meaning specified in Section
---------------------------
6(b) hereof.
"Company Piggyback Securities" has the meaning specified in Section
----------------------------
2.1(a)
"Company Securities" has the meaning specified in Section 2.2(a)
------------------
hereof.
"Demand Limitation" has the meaning specified in Section 18(a) hereof.
-----------------
"Demand Notice" has the meaning specified in Section 2.1(a) hereof.
-------------
"Demand Registration" has the meaning specified in Section 2.1(a)
-------------------
hereof.
"Distribution Expenses" means all (i) underwriting discounts, fees and
---------------------
commissions, and (ii) stock transfer taxes, if any related to or arising from
the distribution of securities pursuant to a Demand Registration or a Piggyback
Registration.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
or any successor federal statute, and the rules and regulations of the SEC
promulgated thereunder, as they each may from time to time be in effect.
References in this Registration Rights Agreement to a particular section of, or
rule or regulation promulgated under, the Exchange Act means such section, rule
or regulation, as the case may be, as from time to time in effect, or any
successor provision to similar effect.
"Indemnified Party" has the meaning specified in Section 6(c) hereof.
-----------------
"Indemnifying Party" has the meaning specified in Section 6(c) hereof.
------------------
"Losses" has the meaning specified in Section 6(a) hereof.
------
"Other Securities" has the meaning specified in Section 2.2(b) hereof.
----------------
"Person" means any individual, partnership, corporation, limited
------
liability company, trust, unincorporated organization or other legal entity, and
a government or agency or political subdivision thereof.
<PAGE>
3
"Piggyback Registration" has the meaning specified in Section 2.2(a)
----------------------
hereof.
"Piggyback Registration Notice" has the meaning specified in Section
-----------------------------
2.2(a) hereof.
"Prospectus" means the prospectus contained in a Registration
----------
Statement (including each preliminary prospectus and any summary prospectus) and
any other prospectus filed under Rule 424 under the Securities Act in connection
with the disposition of any Registrable Securities covered by such Registration
Statement, in each case as such prospectus may be amended or supplemented from
time to time. The term "Prospectus" shall also include all documents
incorporated by reference in any such prospectus.
"Public Offering" has the meaning specified in the Recitals to this
---------------
Registration Rights Agreement.
"Registrable Securities" means the shares of Common Stock beneficially
----------------------
owned by the Stockholder and/or its Affiliates upon consummation of the
Transaction. As to any particular Registrable Securities, such securities shall
cease to be Registrable Securities when (i) a Registration Statement with
respect to the sale of such securities shall have become effective under the
Securities Act and such securities shall have been disposed of in accordance
with such Registration Statement, (ii) such securities shall have been sold to
the public pursuant to Rule 144 under the Securities Act, or (iii) such
securities shall have ceased to be outstanding. For purposes of this
Registration Rights Agreement, references to "beneficially owned" or "beneficial
ownership" mean such ownership within the meaning of Rule 13d-3 under the
Exchange Act.
"Registration Expenses" has the meaning specified in Section 5(a)
---------------------
hereof.
"Registration Statement" means a registration statement of the Company
----------------------
under the Securities Act of 1933, as it may be amended or supplemented from time
to time. The term "Registration Statement" shall also include all exhibits,
financial statements and schedules to any such registration statement and all
documents incorporated by reference in any such registration statement.
"SEC" means the Securities and Exchange Commission or any other
---
federal agency at the time administering the Securities Act or the Exchange Act.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
successor federal statute, and the rules and regulations of the SEC promulgated
thereunder, as they each may from time to time be in effect. References herein
to a particular section of, or rule or regulation promulgated under, the
Securities Act means such section, rule or regulation, as the case may be, as
from time to time in effect, or any successor provision to similar effect.
"Stock Repurchase" has the meaning specified in the Recitals to this
----------------
Registration Rights Agreement.
<PAGE>
4
"Stockholder Indemnified Parties" has the meaning specified in Section
-------------------------------
6(a) hereof.
"Stockholder Securities" has the meaning specified in Section 2.2(a)
----------------------
hereof.
"Transaction" has the meaning specified in the Recitals to this
-----------
Registration Rights Agreement.
"Transferee" has the meaning specified in Section 18(a) hereof.
----------
"Transferee Securities" has the meaning specified in Section 18(e)
---------------------
hereof.
Section 2. Registration Rights.
-------------------
Section 2.1. Demand Registration
-------------------
(a) Request for Registration.
------------------------
(i) At any time and from time to time after the consummation of
the Transaction, upon the written request of the Stockholder that the
Company effect the registration under the Securities Act of a number
of Registrable Securities that is not less than the lesser of (x)
Registrable Securities having an aggregate market value (based on the
closing share price on the business day immediately preceding the date
of such request) of (A) at least $200 million with respect to any
widely distributed, underwritten offering and (B) $100 million with
respect to all other offerings, or (y) all of the Registrable
Securities beneficially owned by the Stockholder and its Affiliates on
the date of such request, but in no event less than the number of
Registrable Securities having an aggregate market value (based on the
closing share price on the business day immediately preceding the date
of such request) of at least $100 million (a "Demand Notice"), which
-------------
request shall specify the intended method or methods of disposition of
such Registrable Securities (it being understood that the method
specified or intended by the Stockholder with respect to any
registration may not be an offering on a multiple or continuous basis
pursuant to Rule 415 under the Securities Act or otherwise), the
Company shall use its commercially reasonable efforts to effect as
promptly as practicable the registration under the Securities Act of
such Registrable Securities in accordance with the intended method or
methods of disposition specified in such request. A registration
pursuant to this Section 2.1(a)(i) is referred to herein as a "Demand
------
Registration".
------------
(ii) If the Company wishes to include any shares of Common Stock
for its own account in any Demand Registration involving an
underwritten offering of shares of Common Stock, the Company shall
specify the number of such shares of Common Stock (the "Company
-------
Piggyback Securities") in a written request to the Stockholder made
--------------------
within 10 days of the receipt by the Company of a Demand
<PAGE>
5
Notice. If the lead underwriter shall advise the Stockholder in
writing (with a copy to the Company) that, in its opinion, the number
of securities requested by the Company and otherwise proposed to be
included in such Demand Registration exceeds the number that can be
reasonably sold in such offering without materially and adversely
affecting the offering price or otherwise materially and adversely
affecting such offering, the Stockholder shall include in such Demand
Registration (but only to the extent of the number of securities that
the Stockholder is so advised can reasonably be sold in such
offering), first, the Registerable Securities to be offered by the
Stockholder, and second, the Company Piggyback Securities. The
Company shall have withdrawal rights with respect to the Piggyback
Securities comparable to those set forth in Section 2.2(d). Except as
aforesaid, no other Person shall have any right to include any
securities in any registration initiated by the Stockholder as a
Demand Registration.
(b) Limitations on Demand Registrations. Notwithstanding the
-----------------------------------
foregoing and subject to Section 2.3(a) hereof, (i) the Company shall not be
required to effect more than seven registrations pursuant to this Section 2.1,
(ii) more than one registration within any six-month period or (iii) with
respect to registrations that do not involve a widely distributed, underwritten
offering, more than one registration within any 12-month period. For purposes
of this Registration Rights Agreement, a registration shall not be deemed to
have been effected (x) unless a Registration Statement with respect thereto has
become effective and maintained effective in accordance with Section 4(a)(ii)
hereof, (y) if after it has become effective and during the period in which such
Registration Statement is required to be maintained effective in accordance with
Section 4(a)(ii) hereof, such Registration Statement is interfered with by any
stop order, injunction or other order or requirement of the SEC or other
governmental agency or court for any reason not attributable to the Stockholder
(and/or any of its Affiliates) and has not thereafter become effective, or (z)
if the conditions to closing specified in the purchase agreement or underwriting
agreement, if any, entered into in connection with such registration are not
satisfied or waived, other than by reason of a failure on the part of the
Stockholder (and/or any of its Affiliates).
(c) Company's Right to Postpone Registration. Notwithstanding the
----------------------------------------
foregoing, the Company shall be entitled to postpone for a reasonable period of
time (but not exceeding 90 continuous days) the filing (but not the preparation)
of a Registration Statement for a Demand Registration if the Company submits to
the Stockholder a certificate signed by the Secretary of the Company stating
that, in the good faith judgment of the Board of Directors of the Company, such
Demand Registration and offering (including, without limitation, any disclosures
required to be made in connection with such Demand Registration) would
materially interfere with any material financing, acquisition, corporate
reorganization or other material transaction involving the Company; provided,
--------
however, that (i) at all times during such period the Company is in good faith
- -------
using all reasonable efforts to cause such Registration Statement to be filed as
promptly as practicable; (ii) the Company may not exercise the right to postpone
registration pursuant to this Section 2.1(c) within 30 days of the last day of
any other period of
<PAGE>
6
postponement pursuant to this Section 2.1(c); and (iii) the right to postpone
registration pursuant to this Section 2.1(c) may not be exercised by the Company
if such exercise would cause the total number of days of all such periods of
postponement in any 365 day period to exceed 180 days.
(d) Selection of Underwriters. If the Demand Registration involves an
-------------------------
underwritten offering, the Stockholder shall have the right to select one or
more underwriters to act as lead underwriters of such underwritten offering,
subject, in the case of the Transferee, to the approval of the Company which may
not be unreasonably withheld.
(e) Company Registration. After receipt of a Demand Notice , the
--------------------
Company shall not initiate a registration of any of its securities for its own
account (other than a registration on Form S-4 or Form S-8 or any like successor
forms), for the account of any Transferee and/or for the account of any other
Person pursuant to registration rights granted to such Person in compliance with
Section 8(a) hereof until 90 days after the effective date of the Registration
Statement for such Demand Registration.
(f) Withdrawal of Registration. At any time after the Company files
--------------------------
with the SEC the Registration Statement for a Demand Registration and prior to
such Registration Statement being declared effective by the SEC, the Company, if
requested in writing by the Stockholder, shall promptly withdraw such
registration.
Section 2.2. Piggyback Registration.
----------------------
(a) Request for Registration. If the Company at any time proposes to
------------------------
file a Registration Statement under the Securities Act relating to an offering
of shares of Common Stock or other equity securities of the Company, or
securities convertible into or exchangeable or exercisable for shares of Common
Stock or such other securities (other than a Registration Statement on Form S-4
or Form S-8 or any like successor forms), to be offered for its own account (the
"Company Securities"), the Company shall (i) provide prompt written notice of
------------------
the proposed offering to the Stockholder, setting forth the number and type of
securities proposed to be offered and a description of the intended method or
methods of distribution (the "Piggyback Registration Notice"), and (ii) use
-----------------------------
commercially reasonable efforts to effect the registration under the Securities
Act (a "Piggyback Registration") of such number of Registrable Securities as
----------------------
shall be specified in a written request by the Stockholder (the "Stockholder
-----------
Securities") made within 15 days after receipt of such Piggyback Registration
- ----------
Notice from the Company, subject to Section 2.2(b) hereof.
(b) Priority. If a registration pursuant to this Section 2.2 involves
--------
an underwritten offering, and the lead underwriter shall advise the Company in
writing (with a copy to the Stockholder) that, in its opinion, the number of
securities requested and otherwise proposed to be included in such registration
exceeds the number that can be reasonably be sold in such offering without
materially and adversely affecting the offering price or otherwise materially
and adversely affecting such offering, the Company shall include in such
registration (but only to the extent of the number of securities that the
Company is so advised can reasonably
<PAGE>
7
be sold in such offering), first, the Company Securities, second, the
Stockholder Securities, third, any Transferee Securities (as defined in Section
18(e) hereof), determined on a pro rata basis if there is more than one
Transferee, and fourth, if all Company Securities, Stockholder Securities and
Transferee Securities are included in such registration, any shares of Common
Stock or other equity securities of the Company, or securities convertible into
or exchangeable or exercisable for shares of Common Stock or such other
securities to be offered for the account of any other Person pursuant to
registration rights granted to such Person in compliance with Section 8(a)
hereof except if such Person is a Transferee (as defined in Section 18(a)
hereof) (the "Other Securities").
----------------
(c) Company Determination Not to Register. Notwithstanding the
-------------------------------------
foregoing, if, at any time after giving a Piggyback Registration Notice to the
Stockholder pursuant to Section 2.2(a) hereof and prior to the effective date of
the Registration Statement in respect of such Piggyback Registration, the
Company shall determine for any reason not to register the securities proposed
to be covered thereby, the Company may, at its election, give written notice of
such determination to the Stockholder and thereupon shall be relieved of its
obligation to register any Registrable Securities in connection with such
registration (but not from any obligation of the Company to pay the Registration
Expenses in connection therewith, pursuant to Section 5(b) hereof), without
prejudice, however, to the rights of the Stockholder to request that such
registration be effected as a Demand Registration (subject to Section 2.1(a)
hereof). No registration effected under this Section 2.2 shall relieve the
Company of its obligations pursuant to Section 2.1 hereof.
(d) Withdrawal of Registrable Securities. The Stockholder may
------------------------------------
withdraw all or any part of its Registrable Securities from the Piggyback
Registration upon written notice to the Company at any time prior to the later
of (i) the Registration Statement in respect of such Piggyback Registration
being declared effective by the SEC and (ii) the execution of any underwriting
agreement with respect to such Piggyback Registration.
Section 2.3 Underwritten Offerings.
----------------------
(a) Demand Registration. If requested by the underwriters for any
-------------------
underwritten Demand Registration, the Company shall enter into an underwriting
agreement with such underwriters for such offering, such agreement to be
reasonably satisfactory in form and substance to the Company, the Stockholder
and the underwriters and to contain such representation and warranties by the
Company and such other terms as are customarily contained in agreements of that
type, including, without limitation, covenants to keep the Registration
Statement current, indemnities and contribution to the effect and to the extent
provided in Section 6 hereof and the provision of opinions of counsel and
accountants' letters to the effect and to the extent provided in Section 4(a)(x)
hereof. The Stockholder shall cooperate with the Company in the negotiation of
the underwriting agreement and shall be a party to such underwriting agreement.
Notwithstanding the foregoing the Company shall not be required to effect
registrations in connection with more than seven offerings of Registrable
Securities pursuant to Section 2.1(a) of this Registration Rights Agreement.
<PAGE>
8
(b) Piggyback Registration. In connection with each Piggyback
----------------------
Registration, if the Company proposes to distribute any of its securities
through one or more underwriters, the Company shall, subject to Section 2.2(b)
hereof, arrange for such underwriters to include all the Registrable Securities
proposed to be offered and sold by the Stockholder with the other securities of
the Company to be distributed by such underwriters. The Stockholder shall be a
party to the underwriting agreement between the Company and such underwriters.
(c) Underwriting Agreement. In each underwriting agreement referred
----------------------
to in Section 2.3(a) or 2.3(b) hereof, the Stockholder, at its option, may
require that any or all of the representations and warranties by, and the other
agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of the Stockholder, and
that any or all of the conditions precedent to the obligations of such
underwriters under such underwriting agreement shall be conditions precedent to
the obligations of the Stockholder. The Stockholder shall not be required to
make any representations or warranties to or agreements with the Company or the
underwriters other than representations, warranties or agreements regarding the
Stockholder and information provided by the Stockholder to be included in the
applicable Registration Statement, the Registrable Securities and the
Stockholder's intended method or methods or distribution and any other
representation required by law, or to furnish any indemnity or contribution to
any Person which is broader than the indemnity and contribution furnished by the
Stockholder in Section 6 hereof.
Section 3. Preparation of Registration Statement.
-------------------------------------
(a) Demand Registration. Each Registration Statement in respect of a
-------------------
Demand Registration shall be on any form selected by the Company for which the
Company then qualifies; provided, however, that the Company shall use
-------- -------
commercially reasonable efforts to continue to be qualified to register
secondary offerings of its securities under the Securities Act on Form S-3 (or
any like successor form).
(b) Piggyback Registration. Each Registration Statement in respect of
----------------------
a Piggyback Registration shall provide for the offering and sale of Registrable
Securities in a manner consistent with the offering and sale of the other
securities of the Company to which such Registration Statement relates.
(c) Opportunity to Participate. In connection with the preparation of
--------------------------
each Registration Statement in respect of a Demand Registration or a Piggyback
Registration, the Company shall give the Stockholder and its underwriters, if
any, and their respective counsel and accountants the opportunity to participate
in the preparation of such Registration Statement and the related Prospectus,
including each amendment thereof or supplement thereto, and any correspondence
to the SEC (including its staff) responding to comments on the Registration
Statement or Prospectus, and shall give each of them such access to the
financial and other records, corporate documents and properties of the Company
and its subsidiaries and such opportunities to discuss the business of the
Company with its officers and the independent public accountants who have
certified its financial statements as shall be necessary, in the opinion of the
Stockholder, such underwriters or their respective counsel, to conduct a
reasonable investigation
<PAGE>
9
within the meaning of the Securities Act. In the case of a Demand Registration,
the Company shall not file any such Registration Statement or Prospectus,
including any amendment thereof or supplement thereto, or response letter to
which the Stockholder or any such counsel reasonably objects.
(d) The Stockholder's Information. In connection with the preparation
-----------------------------
of each Registration Statement in respect of a Demand Registration or a
Piggyback Registration, the Company may require the Stockholder to furnish the
Company such information regarding the Stockholder and the distribution of the
Registrable Securities to which such Registration Statement relates as the
Company may from time to time reasonably request in writing.
Section 4. Registration Procedures.
-----------------------
(a) Company Obligations. If and whenever the Company is obligated by
-------------------
the provisions of this Registration Rights Agreement to use its best efforts to
effect the registration of any Registrable Securities under the Securities Act,
the Company shall as promptly as practicable:
(i) prepare, and as promptly as practicable, but in any event
within 60 days after the receipt of the Stockholder's Demand Notice
(subject to Section 2.1(c)), file with the SEC a Registration
Statement with respect to the Registrable Securities and thereafter
use commercially reasonable efforts to cause such Registration
Statement to become effective;
(ii) use commercially reasonable efforts to cause the
Registration Statement to remain effective and to prepare and file
with the SEC any amendments and supplements to the Registration
Statement and to the related Prospectus as may be necessary to keep
the Prospectus current until the earlier of (x) such time at which all
Registrable Securities offered thereby have been sold or disposed of
in accordance with the intended method or methods of disposition by
the Stockholder (or are no longer Registrable Securities) and in
compliance with the provisions of the Securities Act and (y) 60 days
after the Registration Statement is first declared effective;
(iii) notify the Stockholder (v) when a Registration Statement
becomes effective, (w) when the filing of a post-effective amendment
to a Registration Statement or supplement to or amendment of the
related Prospectus is required, when the same is filed, and in the
case of a post-effective amendment, when the same becomes effective,
(x) of any request by the SEC for any amendment of or supplement to a
Registration Statement or the related Prospectus or for additional
information, (y) of the entry of any stop order suspending the
effectiveness of such Registration Statement or of the initiation of
any proceedings for that purpose and (z) of the suspension of the
qualification of any Registrable Securities for offering or sale in
any jurisdiction or of the initiation of any proceedings for that
purpose;
<PAGE>
10
(iv) make every reasonable effort (x) to prevent the entry of any
stop order affecting the Registration Statement and (y) to remove any
such stop order, if entered at the earliest possible moment;
(v) furnish to the Stockholder and any underwriters such number
of conformed copies of the Registration Statement as initially filed
with the SEC and of each pre-effective and post-effective amendment or
supplement thereto (in each case including at least one copy of all
exhibits thereto and all documents incorporated by reference therein),
such number of copies of each Prospectus, and such other documents, as
the Stockholder or any underwriter reasonably may request to
facilitate the distribution of the Registrable Securities to which
such Registration Statement relates;
(vi) use commercially reasonable efforts (x) to register or
qualify the Registrable Securities covered by a Registration Statement
under the securities or blue sky laws of such jurisdictions in the
United States as the Stockholder reasonably requests, (y) to keep each
such registration or qualification in effect until the earlier of (A)
the time at which all Registrable Securities covered by such
Registration Statement have been sold or disposed of in accordance
with the intended method or methods of disposition by the Stockholder
(or are no longer Registrable Securities) and in compliance with the
provisions of such securities or blue sky laws and (B) 60 days after
the Registration Statement is first declared effective, and (z) to do
any and all other acts and things which may be reasonably necessary or
advisable to enable the Stockholder to consummate the sale or disposal
in such jurisdictions of such Registrable Securities in accordance
with the intended method or methods of disposition by the Stockholder;
provided, however, that the Company shall not for any such purpose be
-------- -------
required to qualify generally to do business as a foreign corporation
wherein it would not but for the requirements of this Section 4(a)(vi)
be obligated to be so qualified or to consent to general service of
process in any such jurisdiction;
(vii) use commercially reasonable efforts to cause the
Registrable Securities covered by a Registration Statement to be
listed on each national securities exchange on which the Company's
equity securities are then listed at the time of the sale of such
Registrable Securities pursuant to such Registration Statement (or if
no such equity securities are then listed, to qualify as a "national
market system security" with the Nasdaq National Market);
(viii) use its commercially reasonable efforts to cause its
senior management to attend and make presentations regarding the
prospects of the Company at all meetings with prospective purchasers
of shares of Common Stock that are arranged by any underwriter
(provided that senior management has been given two weeks advance
notice of the first of such meetings) in connection with any widely
distributed, underwritten offering of such shares of Common Stock;
<PAGE>
11
(ix) notify the Stockholder, at any time when a Prospectus is
required to be delivered under the Securities Act, upon discovery
that, or upon the happening of any event as a result of which, the
Prospectus (as then in effect) contains any untrue statement of a
material fact or omits to state a material fact necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading, and as promptly as practicable prepare and
furnish to the Stockholder such number of copies of a supplement to or
an amendment of such Prospectus so that, as thereafter delivered to
the purchasers of such Registrable Securities, such Prospectus shall
not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading;
(x) furnish to the Stockholder a signed counterpart, addressed to
the Stockholder of
(x) an opinion of counsel for the Company experienced in
securities law matters, dated the effective date of the
Registration Statement (and, if such registration includes an
underwritten offering, dated the date of the closing under the
underwriting agreement), and
(y) one or more "comfort" letters, (1) dated the effective
date of the Registration Statement and, if different, dated the
date of the closing of any sale of Registrable Securities
thereunder, or (2) if such registration includes an underwritten
offering, dated the date of the underwriting agreement and dated
the date of the closing under the underwriting agreement, in
each such case signed by each of the independent public
accountants who have issued an audit report on the financial
statements included or incorporated by reference in the
Registration Statement,
covering such matters as are customarily covered in opinions of
issuer's counsel and in accountants' letters delivered to the
underwriters in underwritten public offerings of securities and such
other matters as the Stockholder may reasonably request;
(xi) otherwise use commercially reasonable efforts to comply with
all applicable rules and regulations of the SEC, and make available
generally to its shareholders a consolidated earnings statement
satisfying the provisions of Section 11(a) of the Securities Act
covering a period of twelve (12) months beginning within six months
after the effective date of each Registration Statement, which
statements shall cover said twelve (12)-month period; provided,
--------
however that the Company shall be deemed to have complied with this
-------
clause (xii) if it has complied with Rule 158 under the Securities
Act;
<PAGE>
12
(xii) provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities registered pursuant to such
Registration Statement and a CUSIP number for all such Registrable
Securities, in each case from and after a date not later than the
effective date of such Registration Statement, and to instruct such
transfer agent (x) to release any stop transfer orders with respect to
the Registrable Securities being sold and (y) to furnish certificates
without restrictive transfer legends representing ownership of the
Registrable Securities being sold, in such denominations requested by
the Stockholder or the lead underwriter; and
(xiii) enter into such agreements and take such other actions as
the Stockholder or the lead underwriter reasonably request in order to
expedite or facilitate the disposition of such Registrable Securities,
including, without limitation, preparing for and participating in such
number of "road shows" and all such other customary selling efforts as
the lead underwriter may reasonably request in order to expedite or
facilitate such disposition.
(b) The Stockholder's Obligations. The Stockholder, upon receipt of
-----------------------------
any notice from the Company of the happening of any event of the kind described
in Section 4(a)(ix) hereof, shall forthwith discontinue disposition of the
Registrable Securities until the Stockholder's receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 4(a)(ix) hereof or
until it is advised in writing by the Company that the use of the Prospectus may
be resumed and has received copies of any additional or supplemental filings
which are incorporated by reference in the Prospectus. If so directed by the
Company, the Stockholder shall deliver to the Company or destroy all copies,
other than permanent file copies then in the Stockholder's possession, of the
Prospectus required to be supplemented or amended.
Section 5. Expenses of Registration.
------------------------
(a) Demand Registration. The Stockholder shall bear all reasonable
-------------------
out-of-pocket fees, costs and expenses incurred by the Company and the
Stockholder in connection with any Demand Registration (whether or not such
Demand Registration becomes effective) and the distribution of the Registrable
Securities pursuant thereto, including, without limitation, (i) all SEC and
stock exchange registration and filing fees, (ii) stock exchange listing fees,
(iii) fees and expenses of compliance with securities or blue sky laws
(including reasonable fees and disbursements of counsel in connection with blue
sky qualifications of the Registrable Securities), (iv) printing expenses
(including the expense of printing Prospectuses), (v) messenger and delivery
expenses, (vi) marketing expenses (including, without limitation, expenses in
connection with road shows), (vii) reasonable fees and disbursements of counsel
for the Company and the Stockholder and their independent public accountants,
and (viii) all Distribution Expenses (all such expenses being herein referred to
herein as the "Registration Expenses"), provided, however, that the Company
--------------------- -------- -------
shall bear all Registration Expenses (other than those included in clauses (iv),
(v) and (vi) of this Section 5(a)) that are attributable to the inclusion in any
Demand Registration of any Company Piggyback Securities registered pursuant to
Section 2.1(a)(ii) hereof.
<PAGE>
13
(b) Piggyback Registration. The Company shall bear all Registration
----------------------
Expenses of the Company and the Stockholder in connection with any Piggyback
Registration and the distribution of the Registrable Securities pursuant
thereto, except that the Company shall not be responsible for (i) the fees and
disbursements of any counsel, accountant or other advisor retained by the
Stockholder in connection with such Piggyback Registration, and (ii)
Distribution Expenses related to or arising from the sale by the Stockholder of
any Registrable Securities pursuant to such Piggyback Registration.
Section 6. Indemnification.
---------------
(a) Indemnification by the Company. In the event of any registration
------------------------------
of any Registrable Securities pursuant to this Registration Rights Agreement,
the Company shall indemnify and hold harmless (i) the Stockholder, (ii) the
Stockholder's Affiliates, (iii) the Stockholder's and its Affiliates' respective
directors, officers, agents and advisors, (iv) each Person who participates as
an underwriter in the offering or sale of such Registrable Securities and (v)
each Person (if any) who controls the Stockholder or any such underwriter within
the meaning of either the Securities Act or the Exchange Act (collectively, the
"Stockholder Indemnified Parties") from and against any and all losses, claims,
-------------------------------
damages or liabilities (collectively "Losses"), joint or several, to which the
------
Stockholder Indemnified Parties or any of them may become subject, under the
Securities Act or otherwise, insofar as such Losses (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon (x) any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement or Prospectus in respect of such
registration, including any amendment thereof or supplement thereto, or (y) any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; and, subject to
Section 6(c) hereof, the Company shall reimburse the Stockholder Indemnified
Parties for any legal or other out-of-pocket expenses reasonably incurred by
them in connection with investigating or defending any such Loss, action or
proceeding; provided, however, that the foregoing indemnity shall not apply to
-------- -------
the extent that such Loss (or action or proceeding in respect thereof) or
expense arises out of or is based on an untrue statement or alleged untrue
statement or omission or alleged omission made in such Registration Statement or
Prospectus in reliance upon and in conformity with written information furnished
to the Company by or on behalf of the Stockholder expressly for use in the
preparation of such Registration Statement or Prospectus. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of any Stockholder Indemnified Party.
(b) Indemnification by the Stockholder. In the event of any
----------------------------------
registration of any Registrable Securities pursuant to this Registration Rights
Agreement, the Stockholder shall indemnify and hold harmless (i) the Company,
(ii) the Company's directors, officers, agents and advisors, (iii) each Person
who participates as an underwriter in the offering or sale of Registrable
Securities and (iv) each Person (if any) other than the Stockholder who controls
the Company within the meaning of either the Securities Act or the Exchange Act
(the "Company Indemnified Parties"), from and against any and all Losses, joint
---------------------------
or several, to which the
<PAGE>
14
Company Indemnified Parties or any of them may become subject, under the
Securities Act or otherwise, insofar as such Losses (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
on (x) any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement or Prospectus in respect of such
registration, including any amendment thereof or supplement thereto, or (y) any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, if any such case such
statement or alleged statement or omission or alleged omission was made in
reliance on and in conformity with written information furnished to the Company
by or on behalf of the Stockholder expressly for use in the preparation of such
Registration Statement or Prospectus; and, subject to Section 6(c) hereof, the
Stockholder shall reimburse the Company Indemnified Parties for any legal or
other out-of-pocket expenses reasonably incurred by them in connection with
investigating or defending any such Loss, action or proceeding. In no event
shall the liability of the Stockholder hereunder be greater in amount than the
dollar amount of the gross proceeds (net of underwriting discounts and
commissions) received by the Stockholder and/or any of its Affiliates upon the
sale of the Registrable Securities giving rise to such indemnification
obligation. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of any Company Indemnified Party.
(c) Indemnification Procedures. The party seeking indemnification
--------------------------
pursuant to this Section 6 is referred to as the "Indemnified Party" and the
-----------------
party from whom indemnification is sought under this Section 6 is referred to as
the "Indemnifying Party." The Indemnified Party shall give prompt written
------------------
notice to the Indemnifying Party of the commencement of any action or proceeding
involving a matter referred to in Section 6(a) or 6(b) hereof (an "Action"), if
------
an indemnification claim in respect thereof is to be made against the
Indemnifying Party; provided, however, that the failure to give such prompt
-------- -------
notice shall not relieve the Indemnifying Party of its indemnity obligations
hereunder with respect to such Action, except to the extent that the
Indemnifying Party is materially prejudiced by such failure. The Indemnifying
Party shall be entitled to participate in and to assume the defense of such
Action, with counsel selected by the Indemnifying Party and reasonably
satisfactory to the Indemnified Party; provided, however, that (i) the
-------- -------
Indemnifying Party, within a reasonable period of time after the giving of
notice of such indemnification claim by the Indemnified Party, (x) notifies the
Indemnified Party of its intention to assume such defense and (y) appoints such
counsel, and (ii) the Indemnifying Party may not, without the consent of the
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such Action. If the Indemnifying Party so assumes the defense of
any such Action, (A) the Indemnifying Party shall pay all costs associated with,
any damages awarded in, and all expenses arising from the defense or settlement
of such Action, and (B) the Indemnified Party shall have the right to employ
separate counsel and to participate in (but not control) the defense, compromise
or settlement of such Action, but the fees and expenses of such counsel shall be
at the expense of the Indemnified Party unless (x) the Indemnifying Party has
agreed to pay such fees and expenses, (y) the Indemnified Party has been advised
by its counsel that there are likely to be one or more defenses available to it
which are different from or
<PAGE>
15
additional to those available to the Indemnifying Party, and in any such case
that portion of the reasonable fees and expenses of such separate counsel that
are reasonably related to matters covered by the indemnity provided in this
Section 6 shall be paid by the Indemnifying Party or (z) such counsel has been
selected by the Indemnified Party solely due to a conflict of interest which
exists between counsel selected by the Indemnifying Party and the Indemnified
Party. If the Indemnifying Party does not so assume the defense of such Action,
the Indemnified Party shall be entitled to exercise control of the defense,
compromise or settlement of such Action. No Indemnified Party shall settle or
compromise any Action for which it is entitled to indemnification under this
Registration Rights Agreement without the prior written consent of the
Indemnifying Party (which consent may not be unreasonably withheld or delayed).
The other party shall cooperate with the party assuming the defense, compromise
or settlement of any Action in accordance with this Registration Rights
Agreement in any manner that such party reasonably may request and the party
assuming the defense, compromise or settlement of any Action shall keep the
other party fully informed in the defense of such Action.
(d) Contribution. If the indemnification provided for in this Section
------------
6 is unavailable or is insufficient to hold the Indemnified Party harmless under
Section 6(a) or 6(b) hereof with respect to any Losses referred to therein for
any reason other than as specified therein, then the Indemnifying Party shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party on the one hand and the Indemnified Party on the
other hand with respect to the statements or omissions which resulted in such
Losses as well as any other relevant equitable considerations. The relative
fault of such Indemnifying Party and Indemnified Party shall be determined by
reference to, among other things, the untrue or alleged untrue statement or
omission or alleged omission relates to information supplied (or omitted to be
supplied) by the Indemnifying Party on the one hand or the Indemnified Party on
the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by an Indemnified Party as a result of the Losses
referred to above in this Section 6(d) shall be deemed to include any legal or
other out-of-pocket expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such Loss, action or proceeding.
The parties agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation, by reference to the Stockholder's (and/or any of its Affiliate's)
stock ownership in the Company, or by any other method of allocation which does
not take account of the equitable considerations referred to in the immediately
preceding paragraph. Notwithstanding the provisions of this Section 6(d), the
Stockholder shall not be required to contribute any amount in excess of the
amount by which the net proceeds received by the Stockholder (and/or any of its
Affiliates) from the Registrable Securities that were offered to the public
exceed the amount of any damages which the Stockholder (and/or any of its
Affiliates) has otherwise been required to pay by reason of such untrue
statement or omission. No Person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
<PAGE>
16
If indemnification is available under this Section 6, the Indemnifying
Party shall indemnify the Indemnified Party to the full extent provided in
Section 6(a) or 6(b) hereof, as applicable, without regard to the relative fault
of the Indemnifying Party or Indemnified Party or any other equitable
consideration provided for in this Section 6(d).
(e) Other Rights. The provisions of this Section 6 shall be in
------------
addition to any other rights to indemnification or contribution which an
Indemnified Party may have pursuant to law, equity, contract or otherwise.
(f) Periodic Payment. The indemnification and contribution required
----------------
by this Section 6 shall be made by periodic payment of the amount thereof during
the course of the investigation or defense, as and when bills are received or
Loss or expense is incurred.
Section 7. Lock-up Agreements.
------------------
(a) The Stockholder's Lock-up. If and whenever the Company proposes
-------------------------
to register any shares of Common Stock or other equity securities of the
Company, or any securities convertible into or exchangeable or exercisable for
shares of Common Stock or such other securities, under the Securities Act for
sale for its own account (other than on Form S-4 or S-8 or any like successor
forms) or is required to effect the registration of any Registrable Securities
under the Securities Act pursuant to Section 2 hereof, and, in the case of an
underwritten offering, if requested by the lead underwriter, the Stockholder
agrees, and will cause its executive officers and directors to agree, not to
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or announce the offering of, or register, cause to be registered or
announce the intended registration of, any Registrable Securities, including any
sale pursuant to a brokerage transaction under Rule 144 under the Securities
Act, within seven business days prior to and 90 days (or such shorter period as
may be requested by the lead underwriter in the case of an underwritten
offering) after the effective date of the Registration Statement (or, in the
case of an underwritten offering, the date of the applicable underwriting
agreement) relating to such registration, except (i) as part of such
registration or (ii) in the case of an underwritten offering, with the consent
of the lead underwriter; provided, however, that this Section 7(a) shall in no
-------- -------
way limit or delay the Stockholder's, or its executive officers' and directors',
right to submit a Demand Notice, or the Company's obligations with respect
thereto prior to the filing with the SEC of the Registration Statement in
respect of such Demand Registration (including, without limitation, the
preparation of such Registration Statement in accordance with Section 3 hereof);
or (z) the Stockholder, or its executive officers and directors, may offer and
sell Registrable Securities during such period to the Company.
(b) Company Lock-up. The Company agrees, and will cause its executive
---------------
officers and directors to agree, not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or announce the offering of, or
register, cause to be registered or announce the intended registration of any
shares of Common Stock or other equity securities of the Company, or any
securities convertible into or exchangeable or exercisable for shares of Common
Stock or such other securities, within seven business days prior to and 90 days
(or such shorter period as may be requested by the lead underwriter of an
underwritten offering) after the
<PAGE>
17
effective date of any Registration Statement with respect to its Registrable
Securities, except (i) as part of such registration or pursuant to a
registration on Form S-4 or Form S-8 (or any like successor forms) or (ii) with
the consent of such lead underwriter.
Section 8. Certain Limitations.
--------------------
(a) No Inconsistent Agreements. The Company represents and warrants
--------------------------
to the Stockholder that the Company has not entered, and the Company agrees that
on and after the date hereof the Company shall not enter, into any agreement
with respect to its securities that would in any way interfere, or which is
inconsistent, with the rights granted to the Stockholder in this Registration
Rights Agreement. Without limiting the generality of the foregoing, (i) the
Company has not granted to any Person(s) other than the Stockholder the right to
have registered under the Securities Act (including, without limitation, in a
"piggyback" registration) any shares of Common Stock or other equity securities
of the Company, or any securities convertible into or exchangeable or
exercisable for shares of Common Stock or such other securities, and (ii) on and
after the date hereof the Company shall not grant to any Person(s) other than
the Stockholder any such registration rights, if such registration rights, in
the Stockholder's reasonable judgment, would interfere with, or have priority
over, any of the rights granted to the Stockholder in this Registration Rights
Agreement.
(b) Changes in Common Stock. The Company shall not effect or permit
-----------------------
to occur any merger, combination, reclassification, recapitalization,
reorganization, restructuring or subdivision of its Common Stock which would
materially adversely affect the ability of the Stockholder to include
Registrable Securities in any registration contemplated by this Registration
Rights Agreement or the marketability of such Registrable Securities under any
such registration.
Section 9. Remedies. The Company and the Stockholder each acknowledges and
--------
agrees that the parties' respective remedies at law for a breach or threatened
breach of any of the provisions of this Registration Rights Agreement would be
inadequate and, in recognition of that fact, agrees that, in the event of a
breach or threatened breach by the Company or the Stockholder of the provisions
of this Registration Rights Agreement, in addition to any remedies at law, each
of the Stockholder and the Company, without posting any bond, shall be entitled
to obtain equitable relief in the form of specific performance by the other
party, a temporary restraining order, a temporary or permanent injunction or any
other equitable remedy which may then be available.
Section 10. Rule 144. The Company shall take all actions reasonably necessary
--------
to enable the Stockholder to sell Registrable Securities without registration
under the Securities Act within the limitations of the exemptions provided by
(i) Rule 144 and Rule 144A under the Securities Act or (ii) any similar rule or
regulation hereafter adopted by the SEC, including, without limiting the
generality of the foregoing, filing on a timely basis all reports required to be
filed by the Exchange Act. Upon request of the Stockholder, the Company shall
deliver to the Stockholder a written statement as to whether it has complied
with such requirements.
<PAGE>
18
Section 11. Severability. If any term, provision, covenant or restriction of
------------
this Registration Rights Agreement is held by a court of competent jurisdiction
to be invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Registration Rights Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated,
provided that the parties hereto shall negotiate in good faith to attempt to
place the parties in the same position as they would have been in had such
provision not been held to be invalid, void or unenforceable.
Section 12. Further Assurances. Subject to the specific terms of this
------------------
Registration Rights Agreement, the Stockholder and the Company shall make,
execute, acknowledge and deliver such other instruments and documents, and take
all other actions, as reasonably may be required to effectuate the purposes of
this Registration Rights Agreement and to consummate the transactions
contemplated hereby.
Section 13. Notices. All notices, requests, consents, demands, waivers,
-------
instructions and other communications hereunder shall be in writing and shall be
deemed to have been duly given if delivered personally or sent by telecopier or
overnight mail, as follows:
(a) if to the Stockholder, at:
Atlantic Richfield Company
515 South Flower Street
Los Angeles, CA 90071
Attention: Mr. Terry G. Dallas,
Senior Vice President and Treasurer
Facsimile: (213) 486-3006
(b) if to the Company, at:
ARCO Chemical Company
3801 West Chester Pike
Newton Square, PA 19073
Attention: Robert J. Millstone, Esq.,
Vice President and General Counsel
Facsimile: (610) 359-3344
or to such other Person or address as any party may specify by notice in writing
to the other party. All notices and other communications given to a party in
accordance with the provisions of this Registration Rights Agreement shall be
deemed to have been given three days after being sent or, if earlier, the date
of actual receipt. Notwithstanding the preceding sentence, notice of change of
address shall be effective only upon actual receipt thereof.
Section 14. Effectiveness. Except for this Section 14, this Registration
-------------
Rights Agreement shall become effective as of the initial closing of the Public
Offering.
<PAGE>
19
Section 15. Amendment. Any provision of this Registration Rights
---------
Agreement may be amended or modified in whole or in part at any time by an
agreement in writing between the Company and the Stockholder, executed in the
same manner as this Registration Rights Agreement. No consent, waiver or
similar act shall be effective unless in writing.
Section 16. Counterparts. This Registration Rights Agreement may be
------------
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Registration Rights Agreement shall become effective when each
party hereto shall have received counterparts thereof signed by the other party
hereto.
Section 17. Governing Law. This Registration Rights Agreement shall be
-------------
construed in accordance with and governed by the internal laws of the State of
Delaware, without giving effect to principles of conflicts of laws of the State
of Delaware or any other jurisdiction that, in either case, would call for the
application of the substantive laws of any jurisdiction other than Delaware.
Section 18. Assignment.
----------
(a) This Registration Rights Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns. The Company may not assign this Registration
Rights Agreement or any of its rights or obligations hereunder. The Stockholder
may assign this Registration Rights Agreement, and/or its rights and obligations
hereunder, in whole or in part, to any Person to which the Stockholder transfers
any Registrable Securities (a "Transferee"); provided, however, that (i) such
---------- -------- -------
Transferee enters into a written assumption agreement reasonably satisfactory to
the Company with respect to all such obligations so assumed, (ii) in the case of
any and all Transferees that are not Affiliates of the Stockholder, the
aggregate number of Demand Registrations as to which the Stockholder may assign
its rights hereunder shall be limited to two (the "Demand Limitation"), unless
-----------------
(x) such assignment is effected in connection with the sale or other disposition
of all the Registrable Securities then beneficially owned by the Stockholder and
its Affiliates and (y) the Stockholder has not theretofore assigned any rights
with respect to Demand Registrations to any other Transferee(s) in which event
the Demand Limitation shall not be applicable, and (iii) in the case of any and
all Transferees that are Affiliates of the Stockholder, no such assignment shall
release the Stockholder from any of its obligations hereunder. Notwithstanding
the foregoing, the Stockholder may not assign any right under this Registration
Rights Agreement to more than three Persons, and each such assignment must occur
in connection with the sale to such Person of no less than 15% of the shares of
Common Stock then outstanding.
(b) If the Stockholder (and/or any of its Affiliates) beneficially
owns any Registrable Securities following any assignment hereunder to a
Transferee that is not an Affiliate of the Stockholder, such assignment
(including, without limitation, the Demand Limitation) shall not limit or
otherwise affect the Stockholder's (and/or such Affiliate's) rights, and the
Company's obligations, under this Registration Rights Agreement with respect to
such remaining Registrable Securities, except to the extent rights hereunder
were assigned to the Transferee.
<PAGE>
20
(c) Except as otherwise provided in this Section 18, the provisions of
this Registration Rights Agreement which are for the benefit of the Stockholder
shall be for the benefit of and enforceable by any Transferee(s) (and references
herein to the Stockholder shall be deemed also to refer to such Transferee(s) as
appropriate). Without limiting the generality of the foregoing, if, at the time
the Company is required to deliver a Piggyback Registration Notice to the
Stockholder, one or more Transferees that are not Affiliates of the Stockholder
also have rights with respect to Piggyback Registrations pursuant to an
assignment effected in accordance with Section 18(a) hereof, the Company shall
deliver a copy of the Piggyback Registration Notice to each such Transferee, and
afford each such Transferee the opportunity to participate in such Piggyback
Registration, on the basis set forth in clauses (i) and (ii) of the first
sentence of Section 2.2(a) hereof, subject to Section 2.2(b) hereof.
(d) For purposes of the Demand Limitation, a registration requested by
a Transferee pursuant to Section 2.1 hereof shall not count as a Demand
Registration (i) unless the Registration Statement with respect thereto has
become effective and maintained effective in accordance with Section 4(a)(ii)
hereof, (ii) if after it has become effective, and during the period in which
the Registration Statement is required to be maintained effective in accordance
with Section 4(a)(ii) hereof such Registration Statement is interfered with by
any stop order, injunction or other order requirement of the SEC or other
governmental agency or court for any reason not attributable to such Transferee
and has not thereafter become effective, or (iii) if the conditions to closing
specified in the purchase agreement or underwriting agreement, if any, entered
into in connection with such registration are not satisfied or waived, other
than by reason of a failure on the part of such Transferee.
(e) If the Company at any time proposes to file a Registration
Statement under the Securities Act relating to an offering of shares of Common
Stock or other equity securities of the Company, or securities convertible into
or exchangeable or exercisable for shares of Common Stock or such other
securities, to be offered for the account of any Transferee (the "Transferee
----------
Securities"), the Company shall (i) promptly provide to Stockholder a Piggyback
- ----------
Registration Notice, and (ii) use commercially reasonable efforts to effect a
Piggyback Registration of such number of Stockholder Securities as shall be
specified in a written request by the Stockholder within 15 days after receipt
of such Piggyback Registration Notice from the Company, subject to Section 18(f)
hereof.
(f) If a registration pursuant to Section 18(e) involves an
underwritten offering, and the lead underwriter shall advise the Company in
writing (with a copy to the Stockholder) that, in its opinion, the number of
securities requested and otherwise proposed to be included in such registration
exceeds the number that can reasonably be sold in such offering without
materially and adversely affecting the offering price or otherwise materially
and adversely affecting such offering, the Company shall include in such
registration (but only to the extent of the number of securities that the
Company is so advised can reasonably be sold in such offering), first, the
Transferee Securities, second, the Stockholder Securities, third, any Company
Securities, and fourth, if all Transferee Securities, Stockholder Securities and
Company Securities are included in such registration, any Other Securities.
<PAGE>
21
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Registration Rights Agreement as of the date set forth above.
ATLANTIC RICHFIELD COMPANY
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
ARCO CHEMICAL COMPANY
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
<PAGE>
EXHIBIT 4.2
STOCKHOLDER AGREEMENT
STOCKHOLDER AGREEMENT, dated as of June 2, 1998 ("Stockholder
-----------
Agreement"), by and between ARCO Chemical Company, a Delaware corporation (the
- ---------
"Company"), and Atlantic Richfield Company, a Delaware corporation (the
- --------
"Stockholder").
- ------------
WHEREAS, contemporaneously with the execution hereof, the Stockholder
and the Company are entering into a Stock Repurchase Agreement, dated as of the
date hereof (the "Stock Repurchase Agreement"), which contemplates that the
--------------------------
Stockholder will offer to the public in an underwritten public offering (the
"Public Offering") a portion of the Common Stock owned by the Stockholder and
- ----------------
that the Company will repurchase from the Stockholder a portion of the Common
Stock owned by the Stockholder (the "Stock Repurchase" and, together with the
----------------
Public Offering, the "Transaction");
-----------
WHEREAS, upon consummation of the Transaction, the Stockholder will
own 50.0% of the issued and outstanding shares of Common Stock; and
WHEREAS, the Company and the Stockholder desire to establish in this
Stockholder Agreement certain terms and conditions concerning the Stockholder's
relationship with the Company.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, and intending to be legally bound
hereby, the Company and the Stockholder hereby agree as follows:
ARTICLE I
DEFINITIONS AND EFFECTIVENESS
Section 1.1. Definitions.
-----------
For purposes of this Stockholder Agreement, each of the following
underlined terms shall have the meaning specified with respect to such term:
"Affiliate", with respect to any specified Person, shall mean any
---------
other Person that, directly or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, such specified
Person. For purposes of this Stockholder Agreement, the term "control"
(including, with its correlative meanings, "controlled by" and "under common
control with") shall mean possession, directly or indirectly, of power to direct
or cause the direction of management or policies (whether through ownership of
securities or partnership or other ownership interests, by contract or
otherwise); provided, however, that neither the Company nor the Stockholder
-------- -------
shall be deemed to be an Affiliate of the other.
"Associate" shall have the meaning set forth in Rule 12b-2 under the
---------
Exchange Act as in effect on the date of this Agreement.
<PAGE>
2
"Board of Directors" shall mean the board of directors of the Company.
------------------
"By-Laws" shall mean the by-laws of the Company, as amended from time
-------
to time.
"Certificate of Incorporation" shall mean the Amended and Restated
----------------------------
Certificate of Incorporation of the Company, as amended from time to time.
"Change of Control Provision" shall have the meaning set forth in
---------------------------
Section 4.3 hereof.
"Charter Amendment" shall have the meaning set forth in Section 4.2
-----------------
hereof.
"Class A Preferred Stock" and "Class B Preferred Stock" shall have the
----------------------- -----------------------
meaning set forth in the Charter Amendment.
"Closing" shall mean the initial closing of the Public Offering.
-------
"Common Stock" shall mean (i) the voting common stock, par value $1
------------
per share, of the Company, (ii) any stock or other securities into which or for
which such common stock may hereafter be changed, converted or exchanged, and
(iii) any other securities issued to holders of such common stock (or such
securities into which or for which such common stock is so changed, converted or
exchanged) upon any reclassification, share combination, share subdivision,
share dividend, merger, consolidation or similar transaction(s) or event(s).
"Company" shall have the meaning set forth in the first paragraph of
-------
this Stockholder Agreement, and shall include its successors.
"DGCL" shall have the meaning set forth in Section 4.2 hereof.
----
"Employee Benefit Plans" shall mean all employee benefit plans
----------------------
(including plans that provide benefits for directors) of the Company or any of
its subsidiaries and shall include any such plan that provides for the grant or
issuance of any Common Stock or Stock Obligation.
"Employee Benefit Stock Issuance" shall mean any issuance, sale or
-------------------------------
delivery of shares of Common Stock (whether unissued or treasury shares) or any
Stock Obligations by (i) the Company or any of its subsidiaries in connection
with any Employee Benefit Plan (but not including any issuances, sales or
deliveries of Common Stock by the Company or any of its subsidiaries to an
Employee Benefit Trust) or (ii) any Employee Benefit Trust, provided that an
issuance, sale or delivery of a Stock Obligation shall not be deemed to be an
Employee Benefit Stock Issuance until and to the extent the Common Stock covered
thereby becomes outstanding.. Any reference in this Agreement to the number of
Employee Benefit Stock Issuances shall refer to the number of shares of Common
Stock covered thereby.
"Employee Benefit Trust" shall mean any trust or other entity that
----------------------
holds shares of Common Stock for the purpose of funding Employee Benefit Plan
obligations or otherwise providing benefits to employees of the Company or any
of its subsidiaries.
<PAGE>
3
"Equity Transaction" shall have the meaning set forth in Section
------------------
3.1(a) hereof.
"Exchange Act" shall have the meaning set forth in Section 2.1(b)
------------
hereof.
"Independent Director" shall mean any of (i) any individual
--------------------
independent of and otherwise unaffiliated with the Company or the Stockholder,
and who shall not be an officer or an employee, consultant or advisor
(financial, legal or other) of the Company or the Stockholder, or any Affiliate
thereof, or any individual who shall have served in any such capacity, or who
is, or has been, an officer or employee of any such consultant or advisor or
(ii) each of Walter F. Beran, James D. Middleton and Frank Savage.
"Issuer Tender Offer" shall have the meaning set forth in Rule 13e-4
-------------------
under the Exchange Act.
"Non-Voting Common Stock" shall have the meaning set forth in the
-----------------------
Charter Amendment.
A Person shall be deemed to "own" or be the "owner" of or have
--- -----
"ownership" of all shares of Common Stock which such Person and any of such
- -----------
Person's Affiliates beneficially own within the meaning of Rule 13d-3 under the
Exchange Act (or any successor rule).
"Person" shall mean any individual, corporation, partnership, limited
------
liability company, unincorporated association or any other entity.
"Public Offering" shall have the meaning set forth in the recitals of
---------------
this Stockholder Agreement.
"Registration Rights Agreement" means the Registration Rights
-----------------------------
Agreement, dated as of the date hereof, between the Stockholder and the Company.
"Rights Plan" shall have the meaning set forth in Section 4.1 hereof.
-----------
"Right Termination Time" shall mean such time as the Stockholder is
----------------------
the owner of less than 20% of the then outstanding shares of Common Stock.
"Stockholder" shall have the meaning set forth in the first paragraph
-----------
of this Stockholder Agreement, and shall include its successors and permitted
assigns.
"Stockholder Agreement" shall have the meaning set forth in the first
---------------------
paragraph of this agreement, as this agreement may from time to time be
modified, amended or supplemented in writing.
"Stockholder Director" shall mean any individual designated by the
--------------------
Stockholder to be nominated for election to the Board of Directors of the
Company in accordance with Section 2.1 of this Stockholder Agreement who is
thereafter elected to the Board of Directors.
"Stockholder Nominees" shall have the meaning set forth in Section 2.1
--------------------
hereof.
<PAGE>
4
"Stock Obligations" shall mean options, warrants, convertible
-----------------
securities (including the Non-Voting Common Stock) or other rights, agreements,
commitments or undertakings of any kind obligating the Company to issue or
deliver any shares of Common Stock (whether unissued or treasury).
"Stock Repurchase" shall have the meaning set forth in the recitals to
----------------
this Stockholder Agreement.
"Stock Repurchase Agreement" shall have the meaning set forth in the
--------------------------
recitals of this Stockholder Agreement.
"then outstanding shares of Common Stock" shall mean all shares of
---------------------------------------
Common Stock outstanding at the time as of which the determination is made,
without regard to any shares of Common Stock held in the treasury of the Company
or any shares of Common Stock issuable pursuant to any Stock Obligations.
"Transferee" shall mean any Person to which the Stockholder and\or its
----------
Affiliates shall transfer ownership of 20% or more of the outstanding shares of
Common Stock prior to the Right Termination Time.
Section 1.2. Effectiveness. Except for this Section 1.2 and Sections
-------------
4.1 and 4.2, this Stockholder Agreement shall become effective as of the
Closing.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 Stockholder Nominees. Until the Right Termination Time:
--------------------
(a) The Stockholder shall have the right to designate two individuals
(the "Stockholder Nominees") whom the Company shall cause to be nominated for
--------------------
election to the Board of Directors (x) at each annual meeting of stockholders of
the Company (or any special meeting of stockholders, convened for the purpose
(which need not be the sole purpose) of electing directors), except to the
extent that there are then two Stockholder Directors and/or officers or
employees of the Stockholder on the Board of Directors whose seats on such Board
are not the subject of such election or (y) in connection with any solicitation
of written consents by the Company undertaken for the purpose (which need not be
the sole purpose) of electing directors, except to the extent that there are
then two Stockholder Directors and/or officers or employees of the Stockholder
then on the Board of Directors whose seats on such Board are not the subject of
such consent solicitation. The Company shall solicit proxies (or, if applicable,
written consents) for, and otherwise use its reasonable efforts to secure, the
election of the Stockholder Nominees. Nothing herein shall be construed as
limiting the Company from nominating more than two individuals who are officers
or employees of the Stockholder for election to the Board of Directors (it being
understood that such additional directors would not be Stockholder Directors
hereunder).
<PAGE>
5
(b) Within 20 days of the receipt by the Stockholder of written notice
of any stockholder meeting or solicitation of written consents relating to the
election of directors, the Stockholder shall deliver to the Company a written
notice setting forth (i) the names of the Stockholder Nominees, (ii) such other
information regarding the Stockholder Nominees as would be required to be
included in the Company's proxy statement under the Securities Exchange Act of
1934, as from time to time amended (the "Exchange Act"), and (iii) the consents
------------
of the Stockholder Nominees to serve as directors of the Company if so elected.
(c) If, prior to his or her election to the Board of Directors, any
Stockholder Nominee shall become unable to serve as a director of the Company,
the Stockholder shall be entitled to designate a replacement, who shall then be
a Stockholder Nominee for purposes of Section 2.1(a).
(d) The Company shall use its reasonable efforts (including, without
limitation, proposing such individual for nomination to the Board of Directors)
to ensure that the Stockholder shall have the exclusive right to designate for
election an individual to fill any vacancy created by the removal (with or
without cause) or death of or resignation by a Stockholder Director, except to
the extent that there are then two or more individuals on the Board of Directors
who are either a Stockholder Director or an officer or employee of the
Stockholder.
Section 2.2. Independent Directors. Until the Right Termination
---------------------
Time, the Company shall cause a majority of the individuals whom the Company
nominates for election to the Board of Directors at any meeting of stockholders
who are not officers or employees of the Stockholder or Stockholder Nominees to
be Independent Directors. Commencing on January 1, 1999 and at all times
thereafter prior to the Right Termination Time, the Company shall use its
reasonable efforts to cause a majority of the directors constituting the Board
of Directors who are not officers or employees of the Stockholder or Stockholder
Directors to be Independent Directors, including, if necessary, filling any
vacancy created by the removal (with or without cause) or death of or
resignation by an Independent Director with a new Independent Director.
Section 2.3. By-Laws. The Company has approved an amendment of the
-------
By-Laws, effective as of the Closing, to delete paragraph 8 in its entirety and
replace it with the following provision, and shall cause the By-Laws to be so
amended:
"8. Qualifications. The persons eligible to be nominated for
--------------
election, to be elected and to serve as a director shall be determined
pursuant to the following qualifications:
(a) No person who has reached 72 years of age prior to January 1
of any year shall be elected or re-elected as director in any year.
(b) Until such time as Atlantic Richfield Company is the
beneficial owner of less than 20% of the outstanding shares of common stock
of the Company, two directors shall be designees of Atlantic Richfield
Company provided that the Company
<PAGE>
6
may nominate additional officers or employees of Atlantic Richfield Company
for election as directors if it determines to do so.
(c) Until such time as Atlantic Richfield Company is the
beneficial owner of less than 20% of the outstanding shares of common stock
of the Company, a majority of the directors other than officers or
employees of Atlantic Richfield Company or persons designated by Atlantic
Richfield Company pursuant to paragraph (b) of this Section 8 shall be
individuals independent of and otherwise unaffiliated with the Company or
Atlantic Richfield Company, and who shall not be an officer or an employee,
consultant or advisor (financial, legal or otherwise) of the Company or
Atlantic Richfield Company, or any affiliate thereof, or (other than with
respect to individuals who are directors on June 2, 1998) any individual
who shall have served in any such capacity, or who is, or has been, an
officer or employee of any such consultant or advisor."
Section 2.4. Rights of Stockholder Unimpaired. Nothing contained in
--------------------------------
this Article II shall in any way limit the rights of the Stockholder to nominate
individuals for election to the Board of Directors or to vote (or cause the vote
of) shares of Common Stock owned by the Stockholder for the election of
individuals to the Board of Directors or to take any other lawful action with
respect to the election of directors of the Company, in any such case as the
Stockholder may determine in its sole discretion.
ARTICLE III
CERTAIN AGREEMENTS REGARDING
THE COMMON STOCK
Section 3.1. Issuances of Common Stock. (a) Until such time as the
-------------------------
Stockholder is the owner of less than 30% of the then outstanding shares of
Common Stock, without the prior written approval of the Stockholder or the
approval by a majority of the votes cast at an annual or special meeting of
stockholders of the Company, neither the Company nor any of its subsidiaries
shall issue, sell or deliver any shares of Common Stock (whether unissued or
treasury shares) or issue, sell, deliver, enter into, or otherwise become
obligated under, any Stock Obligation, including issuances, sales or deliveries
of Common Stock or Stock Obligations to an Employee Benefit Trust, (any of the
foregoing, an "Equity Transaction"); provided, however, that the provisions of
------------------ -------- -------
this Section 3.1(a) shall not apply to (i) the adoption of the Rights Plan
pursuant to Section 4.1 and the issuance of rights thereunder or (ii) an Equity
Transaction pursuant to an Employee Benefit Plan that has been approved by the
stockholders of the Company, it being understood that this clause (ii) shall not
include any issuances, sales or deliveries by the Company of Common Stock or
Stock Obligations to an Employee Benefit Trust.
(b) In order to ensure that the Stockholder's ownership of then
outstanding shares of Common Stock during the period beginning on the date of
the Closing and ending on the first anniversary of the Adjustment Closing Date
(as defined in the Stock Repurchase Agreement) (the "First Year") shall not at
----------
any time be less than exactly half of the then
<PAGE>
7
outstanding shares of Common Stock, with respect to each Employee Benefit Stock
Issuance during the First Year, the Company shall purchase a number of then
outstanding shares of Common Stock equal to the number of such Employee Benefit
Stock Issuances. Such purchases shall be made by the Company on the open market
or in privately negotiated transactions on the same day as the shares of Common
Stock covered by such Employee Benefit Stock Issuance become outstanding (or, if
for reasons not within the control of the Company it is not possible to purchase
such shares on such day, such shares shall be purchased on first trading day
following such day on which it is possible to purchase such shares). During the
First Year, neither the Company nor any of its subsidiaries shall issue, sell or
deliver any shares of Common Stock to an Employee Benefit Trust. The Company
shall report to the Stockholder quarterly detailing its compliance with this
Section 3.1(b).
(c) Commencing at the end of the First Year and continuing until such
time as the Stockholder owns less than 30% of the then outstanding shares of
Common Stock, (i) with respect to each of the first three twelve month periods
immediately following the end of the First Year (each such period a "Twelve
Month Period"), if there are aggregate Employee Benefit Stock Issuances during
such Twelve Month Period that are in excess of 1,000,000 shares (such excess
being referred to as "Twelve Month Excess Shares"), the Company shall during
such Twelve Month Period purchase from time to time (and, in any event, by the
end of such Twelve Month Period), on the open market or in privately negotiated
transactions, a number of outstanding shares of Common Stock equal to the number
of such Twelve Month Excess Shares, and (ii) with respect to the first 48 month
period immediately following the end of the First Year (the "Forty-Eight Month
Period"), if there are aggregate Employee Benefit Stock Issuances during such
Forty-Eight Month Period that are in excess of 3,000,000 shares (such excess
being referred to as "Forty-Eight Month Excess Shares"), the Company shall
during such Forty-Eight Month Period purchase from time to time (and, in any
event, by the end of each Twelve Month Period in which such Forty-Eight Month
Excess Shares occur), on the open market or in privately negotiated
transactions, a number of outstanding shares of Common Stock equal to the number
of such Forty-Eight Month Excess Shares less the number of Forty-Eight Month
Excess Shares previously purchased pursuant to this sentence.
Section 3.2. Acquisitions of Common Stock. (a) Neither the Company
----------------------------
nor any of its subsidiaries shall purchase or otherwise acquire any outstanding
shares of Common Stock in any transaction or series of transactions (other than
purchases contemplated by Section 3.1(b)) unless (i) the Company has reasonably
determined, based on public filings by the Stockholder and any written advice
received from the Stockholder regarding its ownership of Common Stock, that such
transaction or series of transactions could not result in the Stockholder
becoming the owner of 45% or more of the outstanding shares of Common Stock, or
(ii) at least 10 days prior to any such transaction or the commencement of such
series of transactions, the Company shall have delivered to the Stockholder a
notice setting forth the anticipated acquisition price per share of Common Stock
(if such acquisition is anticipated to be made other than on the New York Stock
Exchange (or other securities exchange on which the Common Stock then trades)),
the number of shares of Common Stock intended to be acquired by the Company, the
number of shares of Common Stock then outstanding, and any other material terms
and conditions of the proposed acquisition. If upon receipt of such notice the
Stockholder determines, in its sole
<PAGE>
8
discretion, that the Company's proposed transaction or series of transactions
might result in the Stockholder owning in the aggregate more than exactly half
of the Company's then outstanding shares of Common Stock and could compel the
Stockholder to report the Company on a consolidated basis in its consolidated
financial statements in accordance with generally accepted accounting
principles, the Stockholder shall give written notice of such determination to
the Company within 5 days after receipt of the Company's notice of the proposed
transaction or, series of transactions. In such event: (1) with respect to open
market purchases, (i) the Company shall notify the Stockholder of each such
purchase on the day it is made and of any other changes in the number of then
outstanding shares of Common Stock, (ii) the Stockholder shall have two business
days to notify the Company that it elects to require the Company to purchase
from the Stockholder for cash such number of shares as, in the reasonable
judgment of the Stockholder, will prevent the Stockholder from owning more than
exactly half of the outstanding shares of Common Stock, (iii) the price per
share for such purchase shall be the average of the high and low trading prices
of the Common Stock on the New York Stock Exchange (or, if not traded on the New
York Stock Exchange, on the principal national securities exchange or quotation
system on which the Common Stock is traded) on the date of such notification,
and (iv) the acquisition of such number of shares from the Stockholder shall
occur on the settlement date for the shares purchased by the Company in the open
market; and (2) with respect to privately negotiated purchases, (i) the Company
shall notify the Stockholder of the proposed purchase and any changes in the
number of then outstanding shares of Common Stock at least three business days
prior to such purchase, (ii) the Stockholder shall have two business days to
notify the Company that it elects to require the Company to purchase from the
Stockholder for cash such number of shares as, in the reasonable judgment of the
Stockholder, will prevent the Stockholder from owning more than exactly half of
the outstanding shares of Common Stock, and (iii) such purchase from the
Stockholder shall be on the same day, and at the same price (or value) per
share, as the privately negotiated purchase. This Section 3.2(a) shall not apply
to an Issuer Tender Offer.
(b) If the Company intends to commence an Issuer Tender Offer, it
shall so notify the Stockholder not less than 10 days in advance of such
proposed Issuer Tender Offer and the proposed terms thereof, and the Company
shall not commence any Issuer Tender Offer unless the Company and the
Stockholder have agreed on procedures, reasonably satisfactory to the
Stockholder, that will prevent the Stockholder from owning more than exactly
half of the outstanding shares of Common Stock as a result of such Issuer Tender
Offer.
(c) If the Stockholder gives written notice to the Company that it
intends to purchase an estimated number of shares of Common Stock, (i) for a
six-month period commencing on the earlier of (x) the date the Stockholder gives
notice to the Company that it has completed such purchases of Common Stock and
(y) the 45th day after the date of such notice to the Company, the Company shall
not repurchase any shares of Common Stock if such repurchase would cause the
Stockholder's percentage ownership (after giving effect to the estimated
purchases by the Stockholder set forth in such notice) of then outstanding
shares of Common Stock to be greater than half and (ii) the Stockholder shall
give written notice to the Company after it completes the repurchases referred
to in its initial notice with respect to such purchases.
<PAGE>
9
Section 3.3. Diminution of Rights. Until such time as neither the
--------------------
Stockholder nor any Transferee is the owner of 20% or more of the then
outstanding shares of Common Stock, the Company shall not, without (x) the prior
written approval of the Stockholder, if the Stockholder owns 20% or more of the
then outstanding shares of Common Stock, and any Transferee that owns 20% or
more of the then outstanding shares of Common Stock or (y) the approval by a
majority of the votes cast at an annual or special meeting of stockholders of
the Company (together, with any other approval required by law, the Certificate
of Incorporation or the By-Laws):
(a) engage in any recapitalization or other change in the capital
structure of the Company that would reduce the Stockholder's or any such
Transferee's percentage ownership of the then outstanding shares of Common Stock
or the Stockholder's or any such Transferee's percentage of voting power in the
election of directors to the Board of Directors; or
(b) amend the By-Laws in any manner which diminishes the rights of any
holder or holders of Common Stock, including, without limitation, any amendment
that would (i) limit or regulate the right of holders of Common Stock to
nominate directors or propose new business at a meeting of stockholders, to call
special meetings of stockholders, to act by written consent (including any
provision permitting the Board of Directors to fix a record date for any actions
by written consent initiated by a stockholder) or to remove directors, (ii)
increase the vote or quorum required for any stockholder action, or (iii)
restrict or adversely affect in any material way the ability to buy, sell,
transfer or hold shares of Common Stock.
Section 3.4 Employer Benefit Trust Mirror Voting. If the Company
------------------------------------
determines to establish an Employee Benefit Trust, the Company shall take such
action as necessary (including making appropriate provision in the trust
agreement of the Employee Benefit Trust) to cause any shares of voting Common
Stock held by the Employee Benefit Trust to have "mirror voting/tender"
obligations that require such shares to be voted (including not voting or
abstaining) and tendered with respect to any matter in the same proportion as
all other shares of Common Stock are voted (including not voting or abstaining)
or tendered with respect to such matter.
ARTICLE IV
CERTAIN CORPORATE ACTION
Section 4.1. Rights Plan. (a) The Company represents and warrants
-----------
that the Board of Directors has approved the adoption, effective as of the
Closing, of a Rights Agreement between the Company and a Rights Agent to be
designated, in the form of Exhibit A hereto (the "Rights Plan"). The Company
agrees to cause the distribution to holders of Common Stock of rights pursuant
to the Rights Plan as promptly as practicable after the Closing and, between the
date hereof and the Closing, the Company and the Board of Directors shall take
no action that would conflict with the implementation of the Rights Plan as
aforesaid. Until such time as neither the Stockholder nor any Transferee is the
owner of 20% or more of the then outstanding shares of Common Stock, (x) the
Rights Plan may not be replaced or amended or modified in any material respect
and (y) the Company may not adopt any other such rights plan, in each case
<PAGE>
10
without the prior written approval of the Stockholder, if the Stockholder owns
20% or more of the then outstanding shares of Common Stock, and any Transferee
that owns 20% or more of the then outstanding shares of Common Stock; provided,
--------
however, that, without the approval of the Stockholder or any Transferee, the
- -------
Company may amend the Rights Plan to (i) extend the expiration date, (ii) change
the exercise price as necessary to establish a relationship between the exercise
price and the market price of the Common Stock comparable to such relationship
as in effect on the date of adoption of the Rights Plan or (iii) cure any
ambiguity or correct or supplement any provision of the Rights Plan which is
defective or inconsistent with any other provisions of the Rights Plan provided,
that, in any such case, such amendment would not have a material adverse effect
(x) on the rights of the Stockholder or any Transferee (and their respective
Affiliates and Associates) or (y) on the ability of the Stockholder or any
Transferee (and their respective Affiliates and Associates) to purchase Common
Stock or on their ability to consummate any merger, consolidation or purchase of
assets involving the Company; provided, further, however, that, notwithstanding
-------- ------- -------
the foregoing provisions of this Section 4.1(a), no change may be made in the
definitions of "Qualifying Offer" and "ARCO Transferee" contained in the Rights
Plan or in any provisions thereof relating to Qualifying Offers.
(b) The Stockholder shall not take any action to cause (i) any
amendment or modification of the Rights Plan that would have a material adverse
effect on the protections afforded by the Rights Plan to the stockholders of the
Company other than the Stockholder or (ii) a redemption of the rights issued
under the Rights Plan to facilitate any merger or consolidation with or into,
any sale of a material amount of the Company's assets to, or any offer of or
other transaction with (x) a Transferee unless and until such Transferee shall
have purchased shares of Common Stock pursuant to a Qualifying Offer (as defined
in the Rights Plan) or (y) any other Person unless and until such merger,
consolidation, sale, offer or other transaction shall have been approved by a
majority of the Independent Directors.
(c) At the Closing, the Board of Directors shall approve and adopt the
resolutions attached hereto as Exhibit B setting forth the designations,
preferences and rights of the Series A Junior Participating Preferred Stock.
Section 4.2. Amendment to Certificate of Incorporation. (a) The
-----------------------------------------
Company represents and warrants that the Board of Directors has adopted
resolutions (i) approving an amendment to the Certificate of Incorporation in
the form set forth in Exhibit C hereto (the "Charter Amendment") and declaring
its advisability, (ii) directing that consents be solicited from the
stockholders of the Company to approve the Charter Amendment as promptly as
practicable, (iii) directing that solicitation materials be filed with the
Securities and Exchange Commission as promptly as practicable after the
execution and delivery of this Stockholder Agreement and (iv) directing the
officers of the Company to file the Charter Amendment in accordance with Section
103 of the General Corporation Law of the State of Delaware (the "DGCL")
immediately prior to the Closing. The Company agrees to take the actions
contemplated by clauses (ii) - (iv) of the preceding sentence.
<PAGE>
11
(b) The Stockholder agrees to execute a written consent (or to cause
the execution of a written consent) with respect to the shares of Common Stock
owned by it in favor of the adoption of the Charter Amendment.
Section 4.3. Change of Control Provisions. Until such time as the
----------------------------
Stockholder owns less than 30% of the then outstanding shares of Common Stock,
without the express written consent of the Stockholder, neither the Company nor
any subsidiary of the Company shall enter into or otherwise permit itself or any
of its properties to become bound by or subject to any material agreement,
instrument or other commitment (including, but not limited to joint venture or
partnership agreements, contracts with customers, suppliers or labor unions,
loan, indemnity or guaranty agreements, indentures, notes, leases or licenses,
mortgages and security agreements) (i) containing a Change of Control Provision
other than (x) an employment or employee severance agreement or plan or (y) an
indenture, loan guaranty, lease or note agreement or other agreement relating to
the incurrence or assumption of indebtedness (a "Debt Agreement") that contains
--------------
a Change of Control Provision that is consistent in all material respects with
the form of Change of Control Provision that then prevailing market practice
would require be included in a Debt Agreement for a substantially comparable
borrower covering indebtedness substantially similar to that being incurred by
the Company pursuant to such Debt Agreement or (ii) granting to any party
thereto or holder thereof any right to vote for the election of directors of the
Company, except for voting rights of the Class A Preferred Stock and (to the
extent required by the rules of any United States national securities exchange
on which such shares may be admitted for listing or trading) the Class B
Preferred Stock. The Company agrees that all material agreements, instruments
or other commitments that would contain a Change of Control Provision (whether
or not approved by or requiring the approval of the Stockholder and without
regard to the exception in the definition of Change of Control Provision) shall
be submitted to the Board of Directors for approval and shall have been approved
by the Board of Directors prior to the Company entering into any such agreement.
As used herein, a "Change of Control Provision" shall mean any provision which
---------------------------
would give rise to any actual or potential (A) event of default under a Debt
Agreement or (B) restriction on, requirement of (including, without limitation,
any requirement relating to any put right of security holders), or other adverse
effect on the Company or any of its subsidiaries as the result of the happening
of a "change of control" of the Company however defined, but including without
limitation any provision relating to (i) ownership by any Person of more or less
than a specified percentage of outstanding Common Stock, (ii) a change in the
Board of Directors not approved by the previously incumbent directors or (iii) a
merger, sale of all or substantially all the Company's assets or other business
combinations involving the Company or any of its subsidiaries, except that
Change of Control Provision shall not include a provision as to which the
Stockholder notifies the Company in writing before the Company enters into any
agreement, instrument or other commitment containing such provision that, in the
reasonable judgment of the Stockholder, such provision would not have a material
adverse effect on the Stockholder's ability to sell the shares of Common Stock
then owned by the Stockholder.
<PAGE>
12
ARTICLE V
CERTAIN OTHER AGREEMENTS
Section 5.1. Name and Logo. The Stockholder will have the right,
-------------
exercisable in its sole discretion, to require the Company and its subsidiaries
to cease using the name "ARCO" and the Stockholder's spark design. Within six
months after receipt of written notice of the exercise of such right by the
Stockholder, the Company and its subsidiaries shall no longer use such name or
design and shall cause such name or design to be removed from any existing
packaging materials, signs, product literature and stationery.
Section 5.2. No Conflict. The Company shall use reasonable efforts
-----------
to ensure that the Certificate of Incorporation and By-Laws do not and will not
at any time conflict with the provisions of this Stockholder Agreement as then
in effect. In the event any such conflict should nevertheless exist, the
provisions of this Stockholder Agreement shall control to the extent permitted
by applicable law.
Section 5.3. Access to Information. The Company shall from time to
---------------------
time furnish to the Stockholder information known or reasonably available to the
Company which is requested by the Stockholder for purposes of exercising its
rights under this Stockholder Agreement.
ARTICLE VI
MISCELLANEOUS
Section 6.1. Notices. All notices, requests, consents, demands,
-------
waivers, instructions and other communications hereunder shall be in writing and
shall be deemed to have been duly given if delivered personally or by overnight
mail, or sent by telecopier, as follows;
(a) if to the Stockholder, at:
Atlantic Richfield Company
515 South Flower Street
Los Angeles, CA 90071
Attention: Mr. Terry G. Dallas,
Senior Vice President and Treasurer
Facsimile: (213) 486-3006
<PAGE>
13
(b) if to the Company, at:
ARCO Chemical Company
3801 West Chester Pike
Newton Square, PA 19073
Attention: Robert J. Millstone, Esq.,
Vice President and General Counsel
Facsimile: (610) 359-3344
or to such other Person or address as any party may specify by notice in writing
to the other party. All notices and other communications given to a party in
accordance with the provisions of this Stockholder Agreement shall be deemed to
have been given on the date of actual receipt. Notwithstanding the preceding
sentence, notice of change of address shall be effective only upon actual
receipt thereof.
Section 6.2. Amendments. Any provision of this Stockholder Agreement
----------
may be amended or modified in whole or in part at any time by an agreement in
writing between the Company and the Stockholder, executed in the same manner as
this Stockholder Agreement. No consent, waiver or similar act shall be
effective unless in writing.
Section 6.3. Assignment. This Stockholder Agreement shall be binding
----------
upon and inure to the benefit of and be enforceable by the parties hereto and
their respective successors and permitted assigns. Neither party may assign
this Stockholder Agreement or any of its rights or obligations hereunder, except
that the Stockholder may assign its rights under Sections 3.3, 4.1 and (to the
extent applicable to Sections 3.3 and 4.1 hereof) Section 6.8 hereof to any
Transferee.
Section 6.4. Governing Law. This Stockholder Agreement shall be
-------------
construed in accordance with and governed by the internal laws of the State of
Delaware, without giving effect to principles of conflicts of laws of the State
of Delaware or any other jurisdiction that, in either case, would call for the
application of the substantive laws of any jurisdiction other than Delaware.
Section 6.5. Counterparts. This Stockholder Agreement may be signed
------------
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Stockholder Agreement shall become effective when each party hereto shall
have received counterparts thereof signed by the other party hereto.
Section 6.6. Specific Performance. The Company and the Stockholder
--------------------
each acknowledges and agrees that the parties' respective remedies at law for a
breach or threatened breach of any of the provisions of this Stockholder
Agreement would be inadequate and, in recognition of that fact, agrees that, in
the event of a breach or threatened breach by the Company or the Stockholder of
the provisions of this Stockholder Agreement, in addition to any remedies at
law, each of the Stockholder and the Company, without posting any bond, shall be
entitled to obtain equitable relief in the form of specific performance by the
other party, a temporary
<PAGE>
14
restraining order, a temporary or permanent in injunction or any other equitable
remedy which may then be available.
Section 6.7. Severability. If any term, provision, covenant or
------------
restriction of this Stockholder Agreement is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Stockholder Agreement shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated, provided that the parties hereto shall negotiate in good faith to
attempt to place the parties in the same position as they would have been in had
such provision not been held to be invalid, void or unenforceable.
Section 6.8. Stockholder Discretion. The Company agrees and
----------------------
acknowledges that any consent of the Stockholder contemplated by any provision
of this Stockholder Agreement (including, without limitation, Sections 3.1(a),
3.3, 4.1 and 4.3) would be sought solely in the Stockholder's capacity as a
stockholder of the Company and that the Stockholder has the right to give or
withhold such consent for any reason in its sole discretion, including, without
limitation, its desire to retain the level of its ownership percentage of the
then outstanding shares of Common Stock and/or to preserve the marketability of
the shares of Common Stock owned by it.
<PAGE>
15
IN WITNESS WHEREOF, the parties have caused this Stockholder Agreement
to be executed as of the date first referred to above.
ARCO CHEMICAL COMPANY
By: ___________________________________
Name:
Title:
ATLANTIC RICHFIELD COMPANY
By: ___________________________________
Name:
Title:
<PAGE>
EXHIBIT 4.3
STOCK REPURCHASE AGREEMENT
--------------------------
STOCK REPURCHASE AGREEMENT (this "AGREEMENT"), dated as of June 2, 1998, by
and between Atlantic Richfield Company, a Delaware corporation (the
"STOCKHOLDER"), and ARCO Chemical Company, a Delaware corporation (the
"COMPANY").
WHEREAS the Stockholder currently owns 80,000,001 shares of Common Stock
(as hereinafter defined), constituting approximately 82.2% of the issued and
outstanding shares of Common Stock, and the Stockholder has determined to offer
to the public in an underwritten public offering (the "PUBLIC OFFERING") a
portion of the Common Stock owned by the Stockholder;
WHEREAS the Stockholder and the Company contemplate that the Stockholder
will grant to the underwriters in the underwriting agreements relating to the
Public Offering (the "UNDERWRITING AGREEMENTS") an option to purchase from the
Stockholder additional shares solely to cover over-allotments, if any (the
"OVER-ALLOTMENT OPTION");
WHEREAS, in connection with the Public Offering, the Stockholder and the
Company desire that the Company repurchase from the Stockholder, upon the terms
and subject to the conditions set forth in this Agreement, a portion of the
Common Stock owned by the Stockholder (the "REPURCHASE" and, together with the
Public Offering, the "TRANSACTION"); and
WHEREAS the Stockholder and the Company desire that, upon consummation of
the Transaction, the Stockholder shall own 50.0% of the issued and outstanding
shares of Common Stock.
NOW THEREFORE, in consideration of the mutual agreements and covenants set
forth in this Agreement, the parties agree as follows:
Section 1. DEFINITIONS. Each of the following terms shall have the
meaning set forth below.
"ADJUSTMENT CLOSING" has the meaning specified in Section 3(b) hereof.
"ADJUSTMENT CLOSING DATE" has the meaning specified in Section 3(b)
hereof.
"ADJUSTMENT REPURCHASE" has the meaning specified in Section 2(d)
hereof.
"ADJUSTMENT REPURCHASE SHARES" has the meaning specified in Section
2(d) hereof.
"AGREEMENT" has the meaning specified in the Recitals hereof.
"APPLICABLE LAW" has the meaning specified in Section 5.1(c) hereof.
"BLUE SKY LAWS" has the meaning specified in Section 5.1(c) hereof.
<PAGE>
2
"CHARTER AMENDMENT" has the meaning specified in the Stockholder
Agreement.
"CHARTER FILING" has the meaning specified in Section 5.1(c) hereof.
"CLOSING DATE" means the Initial Closing Date or the Adjustment
Closing Date, as applicable.
"COMMON STOCK" means the Common Stock, par value $1.00 per share, of
the Company.
"COMPANY" has the meaning specified in the Recitals to this Agreement.
"CONSENT" has the meaning specified in Section 5.1(c) hereof.
"CONTRACT" has the meaning specified in Section 5.1(c) hereof.
"DGCL" has the meaning specified in Section 5.1(b) hereof.
"EXCHANGE ACT" has the meaning specified in Section 5.1(c) hereof.
"GOVERNMENTAL ENTITY" has the meaning specified in Section 5.1(c)
hereof.
"INITIAL CLOSING" has the meaning specified in Section 3(a) hereof.
"INITIAL CLOSING DATE" has the meaning specified in Section 3(a)
hereof.
"INITIAL REPURCHASE" has the meaning specified in Section 2(b) hereof.
"INITIAL REPURCHASE SHARES" has the meaning specified in Section 2(b)
hereof.
"JUDGMENT" has the meaning specified in Section 5.1(c) hereof.
"LOCK-UP" has the meaning specified in Section 7 hereof.
"OVER-ALLOTMENT OPTION" has the meaning specified in the Recitals to
this Agreement.
"PO CLOSING" has the meaning specified in Section 2(c) hereof.
"PROSPECTIVE PUBLIC OFFERING SHARES" has the meaning specified in
Section 2(a) hereof.
"PUBLIC OFFERING" has the meaning specified in the Recitals to this
Agreement.
"PUBLIC OFFERING SHARES" has the meaning specified in Section 2(c)
hereof.
<PAGE>
3
"REGISTRATION RIGHTS AGREEMENT" has the meaning specified in Section
4(a) hereof.
"REPURCHASE" has the meaning specified in the Recitals hereof.
"REPURCHASE Price" has the meaning specified in Section 2(b) hereof.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" has the meaning specified in Section 5.1(c) hereof.
"STOCKHOLDER" has the meaning specified in the Recitals to this
Agreement.
"STOCKHOLDER AGREEMENT" means the Stockholder Agreement, dated as of
the date hereof, between the Stockholder and the Company.
"TRANSACTION" has the meaning specified in the Recitals to this
Agreement.
"TRANSACTION AGREEMENTS" means this Agreement, the Registration Rights
Agreement and the Stockholder Agreement.
"TRANSACTION DOCUMENTS" means this Agreement, the Registration Rights
Agreement, the Stockholder Agreement, the Charter Amendment and the Rights Plan
(as defined in the Stockholder Agreement).
"UNDERWRITING AGREEMENTS" has the meaning specified in the Recitals to
this Agreement.
Section 2. THE TRANSACTION.
(a) PUBLIC OFFERING. In accordance with Section 4 hereof, the Company
shall promptly file a registration statement with the SEC to register, and use
its reasonable best efforts to effect the registration, for sale to the public
by the Stockholder in the Public Offering a number of shares of Common Stock
which the Stockholder determines to sell pursuant to the Public Offering,
including any shares of Common Stock which the Stockholder would be committed to
sell upon an exercise in full of the Over-allotment Option (collectively, the
"PROSPECTIVE PUBLIC OFFERING SHARES"). The Company shall not include in such
registration any securities other than the Prospective Public Offering Shares.
Notwithstanding any other provision of this Agreement, in no event shall the
Public Offering Shares (excluding any shares which the Stockholder would be
committed to sell pursuant to the exercise of the Over-allotment Option) consist
of less than 20,000,000 shares.
(b) INITIAL REPURCHASE BY THE COMPANY; Repurchase Price. At the
Initial Closing, the Company shall repurchase from the Stockholder, and the
Stockholder shall sell to the Company, the Initial Repurchase Shares (the
"INITIAL REPURCHASE"), at a price per share equal to the price per share paid by
the public in the Public Offering (the "REPURCHASE PRICE"). As used herein, the
"INITIAL REPURCHASE SHARES" means a number of shares of Common Stock equal to
the excess of (i) 160,000,002 over (ii) the sum of
<PAGE>
4
(x) two times the number of Public Offering Shares and (y) the total number of
shares of Common Stock issued and outstanding immediately prior to the Initial
Closing.
(c) PUBLIC OFFERING SHARES. As used herein, the "PUBLIC OFFERING
SHARES" means a number of shares of Common Stock equal to the sum of (i) the
number of shares of Common Stock sold by the Stockholder at the initial closing
(the " PO CLOSING") of the Public Offering (excluding shares of Common Stock
sold at the PO Closing pursuant to any exercise of the Over-allotment Option)
and (ii) the total number of shares which the Stockholder would be committed to
sell upon an exercise in full of the Over-allotment Option.
(d) ADJUSTMENT REPURCHASE BY THE COMPANY. At the Adjustment Closing,
the Company shall repurchase from the Stockholder, and the Stockholder shall
sell to the Company, the Adjustment Repurchase Shares, if any (the "ADJUSTMENT
REPURCHASE"), at a price per share equal to the Repurchase Price. As used
herein, the "ADJUSTMENT REPURCHASE SHARES" means a number of shares of Common
Stock equal to the excess of (i) 160,000,002 over (ii) the sum of (x) two times
the sum of (1) the number of shares of Common Stock sold by the Stockholder at
the PO Closing (excluding shares of Common Stock sold at such closing pursuant
to any exercise of the Over-allotment Option), (2) the number of shares of
Common Stock sold by the Stockholder pursuant to the exercise, if any, of the
Over-allotment Option and (3) the Initial Repurchase Shares and (y) the total
number shares of Common Stock issued and outstanding immediately prior to the
Adjustment Closing. The parties shall make any modifications as are necessary
in connection with the Adjustment Repurchase so that (A) no fractional shares
are included in the number of Adjustment Repurchase Shares and (B) immediately
following the Adjustment Closing, the Stockholder shall own exactly half of the
issued and outstanding shares of Common Stock entitled to vote.
(e) LIMITATION ON DOLLAR AMOUNT OF REPURCHASE. Notwithstanding the
foregoing, the Company shall in no event be obligated to repurchase pursuant to
this Agreement a number of shares of Common Stock in excess of the number
determined by dividing $850,000,000 by the Repurchase Price.
Section 3. THE CLOSINGS.
(a) INITIAL CLOSING; PAYMENT. The closing of the Initial Repurchase
(the "INITIAL CLOSING") shall occur on the business day (the "INITIAL CLOSING
DATE") immediately following, and at the same place as, the PO Closing. At the
Initial Closing, the Stockholder shall deliver to the Company certificates
representing the Initial Repurchase Shares duly endorsed and in proper form for
transfer to the Company, and the Company shall pay to the Stockholder an amount
equal to the Repurchase Price multiplied by the number of the Initial Repurchase
Shares by wire transfer of immediately available funds to an account designated
by the Stockholder not less than two business days prior to the Initial Closing
Date.
(b) ADJUSTMENT CLOSING; PAYMENT. The closing of the Adjustment
Repurchase (the "ADJUSTMENT CLOSING") shall occur at the same place at which
the Initial Closing occurred on the third business day following the expiration,
termination or exercise of the Over-allotment Option (the "ADJUSTMENT CLOSING
DATE"); PROVIDED, HOWEVER, that if the Over-allotment Option is exercised, the
Adjustment Closing shall
<PAGE>
5
occur on the business day immediately following the closing for the Over-
allotment Option. At the Adjustment Closing, the Stockholder shall deliver to
the Company certificates representing the Adjustment Repurchase Shares duly
endorsed and in proper form for transfer to the Company, and the Company shall
pay to the Stockholder an amount equal to the Repurchase Price multiplied by the
number of the Adjustment Repurchase Shares by wire transfer of immediately
available funds to an account designated by the Stockholder not less than two
business days prior to the Adjustment Closing Date.
(c) SIMULTANEOUS CLOSINGS. If the closing for any exercise of the
Over-allotment Option shall occur concurrently with the PO Closing, then the
Adjustment Closing shall occur concurrently with the Initial Closing.
(d) STOCK CERTIFICATES. Since the Stockholder does not hold stock
certificates in denominations equal to the amount of Initial Repurchase Shares
and Adjustment Repurchase Shares, the Company shall cooperate with the
Stockholder in making the necessary stock certificate arrangements, prior to and
in connection with each of the Initial Closing and the Adjustment Closing, so
that the Stockholder transfers only the Initial Repurchase Shares and the
Adjustment Repurchase Shares, as the case may be, to the Company and retains
ownership of the other shares of Common Stock held by the Stockholder.
Section 4. COVENANTS.
(a) REGISTRATION PROCEDURES. In connection with the Public Offering,
the Company and the Stockholder shall comply with Sections 2.1(f), 2.3, 3, 4,
5(a), 6 and 8 of the Registration Rights Agreement, dated as of the date hereof,
between the Stockholder and the Company (the "REGISTRATION RIGHTS AGREEMENT"),
in each case in the same manner as if the Public Offering were a Demand
Registration (as such term is defined in Section 2.1 of the Registration Rights
Agreement). Notwithstanding the foregoing, in no event shall the Public
Offering be considered a Demand Registration under the Registration Rights
Agreement or, for purposes of the last sentence of Section 2.3(a) of the
Registration Rights Agreement, an underwritten offering of shares pursuant to
Section 2.1(a) of Registration Rights Agreement. The Company and the
Stockholder shall begin compliance with such Sections, as applicable,
notwithstanding the fact that the number of Prospective Public Offering Shares
has not been finally determined by the Stockholder.
(b) APPOINTMENT OF LEAD UNDERWRITER. Each of the parties hereto
agrees to appoint and concur in the appointment of Salomon Smith Barney as lead
managing underwriter of the Public Offering.
(c) SIZE OF OVER-ALLOTMENT OPTION. The number of shares subject to
the Over-allotment Option shall be equal to 10% of the number of shares of
Common Stock sold by the Stockholder at the PO Closing (excluding shares of
Common Stock sold at the PO Closing pursuant to any exercise of the Over-
allotment Option).
(d) FUNDING. At the time of the PO Closing, the Company shall borrow
sufficient money to have cash on hand equal to the payment expected to be due
from the Company at the Initial Closing.
<PAGE>
6
(e) PAYMENTS.
(i) On or before June 30, 1998, the Stockholder shall pay to the
Company $7,500,000 by wire transfer of immediately available funds. If
this Agreement is terminated pursuant to Section 19 prior to the PO
Closing, the Company shall repay such amount to the Stockholder within
two business days after such termination.
(ii) In addition to the payment contemplated in paragraph (i)
above, the Stockholder shall pay to the Company, immediately prior to
the PO Closing, $7,500,000 by wire transfer of immediately available
funds.
(f) TERMINATION OF OTHER AGREEMENT. Effective at the PO Closing, the
Shareholder Agreement dated June 30, 1987 between the Company and the
Stockholder shall automatically terminate.
(g) TAX TREATMENT. The parties shall treat the Initial Repurchase and
any Adjustment Repurchase for Federal income tax purposes as distributions
subject to Section 301 of the Internal Revenue Code of 1986, as amended, and not
as intercompany distributions under Treasury Regulations Section 1.1502-13(f).
Section 5. REPRESENTATIONS AND WARRANTIES.
Section 5.1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Stockholder as follows:
(a) ORGANIZATION, STANDING AND POWER. The Company is duly organized,
validly existing and in good standing under the laws of Delaware and has full
corporate power and authority to conduct its businesses as presently conducted.
The Company is duly qualified to do business in each jurisdiction where the
nature of its business or the ownership or leasing of its properties makes such
qualification necessary, except where the failure to be so qualified would not
subject the Company to any material liability or disability.
(b) AUTHORITY; EXECUTION AND DELIVERY; ENFORCEABILITY. The Company
has all requisite corporate power and authority to execute the Transaction
Documents and to consummate the Transaction and the other transactions
contemplated by the Transaction Documents. The execution and delivery by the
Company of each of the Transaction Documents and the consummation by the Company
of the Transaction and the other transactions contemplated thereby have been
duly authorized by all necessary corporate action on the part of the Company,
subject, in the case of the Charter Amendment, to the approval thereof by the
Company's stockholders in accordance with the General Corporation Law of the
State of Delaware (the "DGCL"). The Company has duly executed and delivered
each of the Transaction Agreements, and each of the Transaction Agreements
constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms, subject to the effect of any applicable bankruptcy,
reorganization, insolvency, moratorium or similar laws affecting creditors'
rights generally and the effect of general principles of equity.
(c) NO CONFLICTS; CONSENTS. Except as set forth in Schedule 5.1(c)
<PAGE>
7
hereto, the execution and delivery by the Company of each of the Transaction
Agreements do not, the execution and delivery by the Company of each of the
other Transaction Documents will not, and compliance with the terms hereof and
thereof and the consummation of the Transaction and the other transactions
contemplated thereby will not, conflict with or violate the terms, conditions or
provisions of (i) the Company's Certificate of Incorporation or By-laws, (ii)
any material contract, lease, license, indenture, note, bond, agreement, permit,
concession, franchise or other instrument (a "CONTRACT") to which the Company or
any of its subsidiaries is a party or by which it is bound or (iii) subject to
the filings and other matters referred to in the following sentence, any
material judgment, order or decree ("JUDGMENT") or statute, law, ordinance, rule
or regulation ("APPLICABLE LAW") applicable to the Company or by which it is
bound. No material consent, approval, license, permit, order or authorization
("CONSENT") of, or registration, declaration or filing with, any Federal, state,
local or foreign government or any court of competent jurisdiction,
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign (a "GOVERNMENTAL ENTITY") is required to be
obtained or made by or with respect to the Company in connection with the
execution, delivery and performance of the Transaction Documents or the
consummation of the Transaction and the other transactions contemplated thereby,
other than applicable requirements, if any, of the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), the Securities Act of 1933, as amended
(the "SECURITIES ACT"), or state or foreign securities or "blue sky" laws ("BLUE
SKY LAWS") and the filing of the Charter Amendment with the Secretary of State
of the State of Delaware (the "CHARTER FILING").
Section 5.2. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER. The
Stockholder represents and warrants to the Company as follows:
(a) GOOD TITLE TO COMMON STOCK. The Stockholder is the lawful owner
of the shares of Common Stock to be sold by the Stockholder to the Company
hereunder, and upon sale and delivery of, and payment for, such shares as
provided herein, the Stockholder will convey to the Company good and marketable
title to such shares, free and clear of all Liens.
(b) ORGANIZATION, STANDING AND POWER. The Stockholder is duly
organized, validly existing and in good standing under the laws of Delaware and
has full corporate power and authority to conduct its businesses as presently
conducted. The Stockholder is duly qualified to do business in each
jurisdiction where the nature of its business or the ownership or leasing of its
properties makes such qualification necessary, except where the failure to be so
qualified would not subject the Stockholder to any material liability or
disability.
(c) AUTHORITY; EXECUTION AND DELIVERY; ENFORCEABILITY. The
Stockholder has all requisite corporate power and authority to execute each of
the Transaction Documents and to consummate the Transaction and the other
transactions contemplated by the Transaction Documents. The execution and
delivery by the Stockholder of each of the Transaction Documents to which it is
a party and the consummation by the Stockholder of the Transaction and the other
transactions contemplated by the Transaction Documents have been duly authorized
by all necessary corporate action on the part of the Stockholder. The
Stockholder has duly executed and delivered each of the Transaction Agreements,
and each of the Transaction Agreements
<PAGE>
8
constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms, subject to the effect of any applicable bankruptcy,
reorganization, insolvency, moratorium or similar laws affecting creditors'
rights generally and the effect of general principles of equity.
(d) NO CONFLICTS; CONSENTS. The execution and delivery by the
Stockholder of each of the Transaction Agreements do not, the execution and
delivery by the Stockholder of each of the other Transaction Documents to which
it is a party will not, and compliance with the terms hereof and thereof and the
consummation of the Transaction and the other transactions contemplated thereby
will not, conflict with or violate the terms, conditions or provisions of (i)
the Stockholder's Certificate of Incorporation or By-laws, (ii) any Contract to
which the Stockholder is a party or by which it is bound or (iii) subject to the
filings and other matters referred to in the following sentence, any Judgment or
Applicable Law applicable to the Stockholder or by which it is bound. No
material Consent of, or registration, declaration or filing with, any
Governmental Entity is required to be obtained or made by or with respect to the
Stockholder in connection with the execution, delivery and performance of the
Transaction Documents or the consummation of the Transaction and the other
transactions contemplated thereby, other than applicable requirements, if any,
of the Exchange Act, the Securities Act or Blue Sky Laws and the Charter Filing.
Section 6. PUBLIC ANNOUNCEMENTS. The parties shall consult with each
other before issuing or making, provide each other the opportunity to review and
comment upon, and give good faith consideration to any such comments with
respect to, any press release or other public statements with respect to the
Transaction and shall not issue any press release or make any such public
statement prior to such consultation and consideration, except as may be
required by applicable law, by court process or by obligations pursuant to any
listing agreement with any national securities exchange. Subject to the
foregoing, the parties shall coordinate the issuance of press releases regarding
the Transaction promptly following the execution and delivery of this Agreement,
and shall not issue any press release or make any other public statement prior
to such time.
Section 7. LOCK-UP. Each of the Stockholder and the Company shall
covenant in the Underwriting Agreements for the benefit of the underwriters
named therein not to, for a period of 150 days from the date of the Underwriting
Agreements, without the prior written consent of Salomon Smith Barney, offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
or announce the offering of, or register, cause to be registered or announce the
intended registration of any shares of Common Stock, or any securities
convertible into or exchangeable or exercisable for Common Stock, other than (i)
with respect to the Stockholder, sales to the Company, (ii) with respect to the
Company, the issuance of shares of Common Stock or such other securities
pursuant to the exercise of stock options or pursuant to any existing benefit
plan of the Company and (iii) the Transaction (the foregoing agreement being
referred to collectively as the "LOCK-UP"). The Company shall also covenant in
the Underwriting Agreements for the benefit of the underwriters named therein to
cause each of its executive officers and directors to agree for the benefit of
such underwriters to the Lock-up with respect to shares of Common Stock or other
securities owned by such officers and directors; PROVIDED, HOWEVER, that (x) the
Lock-up of executive officers and directors shall be for a period of 90 days
from the date of the Underwriting Agreements, (y) any
<PAGE>
9
shares of Common Stock or other equity securities received upon the exercise of
stock options or pursuant to any existing or future benefit plan of the Company
shall be held by such officers and directors subject to the Lock-up and (z) the
Lock-up shall not prevent the exercise of stock options.
Section 8. EXPENSES. Except as contemplated by Section 4(a) hereof
with respect to the Registration Expenses (as defined in the Registration Rights
Agreement) relating to the Public Offering, the Stockholder and the Company
shall be responsible for their own respective costs and expenses relating to the
Transaction. The parties confirm that none of the fees, costs and expenses of
Merrill Lynch & Co. will be included in Registration Expenses.
Section 9. CONDITIONS PRECEDENT. The obligation of the parties hereto
to complete each of the Initial Repurchase and the Adjustment Repurchase is
subject to the following conditions:
(a) PUBLIC OFFERING. (i) In the case of the Initial Repurchase and
the Adjustment Repurchase, the PO Closing shall have occurred and at least
20,000,000 shares of Common Stock (excluding any shares which the Stockholder
sold pursuant to an exercise of the Over-allotment Option) shall have been sold
at the PO Closing and (ii) in the case of the Adjustment Repurchase, the
exercise of and closing for the Over-allotment Option shall have occurred or the
Over-allotment Option shall have expired or been terminated, as the case may be.
(b) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Transaction shall be in effect; PROVIDED, HOWEVER, that each
of the parties shall have used commercially reasonable efforts to prevent the
entry of any such injunction or other order and to appeal as promptly as
possible any such injunction or other order that may be entered.
(c) OBLIGATIONS. The other party shall have complied in all material
respects with its obligations set forth in the Transaction Documents to be
complied with prior to the applicable Closing Date (including, without
limitation, the payment in full by the Stockholder of the amount referred to in
Section 4(e) hereof).
Section 10. REMEDIES. In addition to being entitled to exercise all
rights granted by law, including recovery of damages, each of the Stockholder
and the Company shall be entitled to specific performance of its rights under
this Agreement. Each of the Stockholder and the Company agree that monetary
damages shall not be adequate compensation for any loss incurred by reason of a
breach by it of the provisions of this Agreement and hereby agrees to waive the
defense in any action for specific performance that a remedy at law would be
adequate.
Section 11. SEVERABILITY. If any one or more of the provisions of this
Agreement are held to be invalid, illegal or unenforceable, the validity,
legality or enforceability of the remaining provisions of this Agreement shall
not be affected thereby. To the extent permitted by applicable law, each party
waives any provision of
<PAGE>
10
law which renders any provision of this Agreement invalid, illegal or
unenforceable in any respect.
Section 12. FURTHER ASSURANCES. Subject to the specific terms of this
Agreement, the Stockholder and the Company shall make, execute, acknowledge and
deliver such other instruments and documents, and take all other actions, as
reasonably may be required to effectuate the purposes of this Agreement and to
consummate the transactions contemplated hereby.
Section 13. NOTICES. All notices, requests, consents, demands, waivers,
instructions and other communications hereunder shall be in writing and shall be
deemed to have been duly given if delivered personally or sent by telecopier or
overnight mail, as follows:
(a) if to the Stockholder, at:
Atlantic Richfield Company
515 South Flower Street
Los Angeles, CA 90071
Attention: Mr. Terry G. Dallas,
Senior Vice President and Treasurer
Facsimile: (213) 486-3006
(b) if to the Company, at:
ARCO Chemical Company
3801 West Chester Pike
Newton Square, PA 19073
Attention: Robert J. Millstone, Esq.,
Vice President and General Counsel
Facsimile: (610) 359-3344
or to such other person or entity or address as any party may specify by notice
in writing to the other party. All notices and other communications given to a
party in accordance with the provisions of this Agreement shall be deemed to
have been given on the date of actual receipt. Notwithstanding the preceding
sentence, notice of change of address shall be effective only upon actual
receipt thereof.
Section 14. AMENDMENT. Any provision of this Agreement may be amended
or modified in whole or in part at any time by an agreement in writing between
the Company and the Stockholder, executed in the same manner as this Agreement.
No consent, waiver or similar act shall be effective unless in writing.
Section 15. DISPUTE RESOLUTION AGREEMENT. The Dispute Resolution
Agreement dated April 15, 1993 among the Company, the Stockholder and Lyondell
Petrochemical Company shall not apply to any of the Transaction Agreements or to
any dispute arising thereunder.
Section 16. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same agreement.
<PAGE>
11
Section 17. GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the internal laws of the State of Delaware,
without giving effect to principles of conflicts of laws.
Section 18. ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns. Notwithstanding the foregoing, the parties
hereto may not assign this Agreement or any of their rights or obligations
hereunder.
Section 19. TERMINATION. Notwithstanding anything in this Agreement to
the contrary, this Agreement may be terminated as follows:
(i) by the mutual consent of the parties;
(ii) by the Company or the Stockholder, if the Initial Closing has
not occurred prior to 11:59 p.m. on December 31, 1998;
(iii) by the Company or the Stockholder, if any court of competent
jurisdiction shall have issued an order, decree or injunction prohibiting
the consummation of the Transaction and such order, decree or injunction
shall have become final and non-appealable; PROVIDED, HOWEVER, that no
party may terminate this Agreement pursuant to this clause (iii) unless
such party shall have used commercially reasonable efforts to prevent the
entry of any such order, decree or injunction and to appeal as promptly as
possible any such order, decree or injunction that may have been issued.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date set forth above.
ATLANTIC RICHFIELD COMPANY
By: _________________________________________________
Name: ____________________________________________
Title: ______________________________________________
ARCO CHEMICAL COMPANY
By: _________________________________________________
Name: ____________________________________________
Title: ______________________________________________
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement
on Form S-3 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 ARCO Chemical Company's
Annual Report on Form 10-K for the year ended December 31, 1997. We also
consent to the reference to our Firm under the caption "Experts".
/s/ Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
June 3, 1998
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Van Billet, Robert J. Millstone, Marvin O. Schlanger, 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 (including amendments)
required or permitted to be filed under the Securities Exchange Act of
1934, as amended, including specifically any amendments to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and
the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998; 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 Committee, Compensation Committee, or Long-Term Incentive Plan
Administration Subcommittee 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 1933, 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;
(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.
<PAGE>
Each person whose signature appears below may at any time revoke this Power
of Attorney, as to himself for 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 or 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.
SIGNATURE TITLE DATE
/s/ Anthony G. Fernandes Chairman of the May 14, 1998
- ------------------------------------- Board and Director
ANTHONY G. FERNANDES
/s/ Alan R. Hirsig Vice Chairman and May 14, 1998
- ------------------------------------- Director
ALAN R. HIRSIG
/s/ Marvin O. Schlanger President, Chief May 14, 1998
- ------------------------------------- Executive Officer
MARVIN O. SCHLANGER and Director
/s/ Walter J. Tusinski Senior Vice May 14, 1998
- ------------------------------------- President, Chief
WALTER J. TUSINSKI Financial Officer
and Director
/s/ Walter F. Beran Director May 14, 1998
- -------------------------------------
WALTER F. BERAN
/s/ Mark L. Hazelwood Director May 14, 1998
- -------------------------------------
MARK L. HAZELWOOD
/s/ John H. Kelly Director May 14, 1998
- -------------------------------------
JOHN H. KELLY
/s/ Marie L. Knowles Director May 14, 1998
- -------------------------------------
MARIE L. KNOWLES
2
<PAGE>
SIGNATURE TITLE DATE
/s/ James A. Middleton Director May 14, 1998
- -------------------------------------
JAMES A. MIDDLETON
/s/ Stephen R. Mut Director May 14, 1998
- -------------------------------------
STEPHEN R. MUT
/s/ Frank Savage Director May 14, 1998
- -------------------------------------
FRANK SAVAGE
/s/ Donald R. Voelte, Jr. Director May 14, 1998
- -------------------------------------
DONALD R. VOELTE, JR.
3
